Tennessee court invalidates brokerage firm’s arbitration clause as unconscionable

Yesterday I blogged about stepped-up political pressures on the Securities and Exchange Commission to outlaw mandatory arbitration agreements in customers’ account agreements with their brokerage firms.  The pressures are not coming just from politicians.  Last week, a Tennessee appellate court refused to enforce a pre-dispute arbitration clause in a brokerage firms’ account agreement with a customer on the grounds that the customer did not sign the arbitration agreement, and, in any event, it was unconscionable under Tennessee law.  (See Webb v. First Tenn. Brokerage, Inc., 2013 Tenn. App. LEXIS 276 (Apr. 23, 2013))  The court also affirmed the trial court’s finding that the customer was fraudulently induced to enter into the customer agreement which contained the arbitration clause.

Most courts that have previously considered similar challenges to arbitration agreements in broker-dealers’ customer agreements have rejected claims of unconscionability in part because FINRA’s arbitration rules are subject to regulatory approval.  SEC oversight of the arbitration process helps to ensure that the process is fair to investors.  If courts increase their reliance on the applicable state law of unconscionability to invalidate these clauses, the securities industry will have to rebuff attacks on its arbitration process from several fronts.

Whether the industry can survive this multi-front assault remains to be seen.

(H/T to Ed Pekarek for alerting me to this decision.)

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