Texas courts favor arbitration and generally enforce arbitration provisions. But, what if a party cannot afford the arbitration fees?  Are the costs of arbitration grounds for a court to hold that provision unenforceable? The Texas Supreme Court recently answered these questions.

In Houston AN USA, LLC d/b/a AutoNation USA Houston v. Walter Shattenkirk, an employee filed suit against his former employer alleging he was terminated due to discrimination and retaliation. The employer moved to compel arbitration arguing that the employee entered into a binding arbitration agreement when he accepted employment. The arbitration agreement was silent as to how arbitration fees and costs would be paid. In response, the employee claimed that the arbitration agreement was unconscionable and therefore not enforceable. Specifically, the employee argued that the excessive cost of arbitration would pose a “significant hardship” on his family’s finances and would effectively prevent him from asserting his claims.

As evidence to support his claim, the employee included an invoice from a separate arbitration for an unrelated employment-discrimination case, and two affidavits, one from the employee himself and the other from his attorney. In his affidavit, the employee stated that following his termination, he remained unemployed for over 2 years before finding employment where he earned significantly less, and had incurred significant debt since his termination. According to his attorney, the arbitration fees could be as high as $45,000 whereas litigation costs would be approximately $400.

The trial court agreed with the employee, denying the employer’s motion to compel arbitration. On appeal, the Houston (14th) Court of Appeals upheld the trial court’s ruling, finding that the arbitration provision in an employment contract was “substantively unconscionable” because the cost of arbitration would be so excessive as to prevent the employee from asserting his claims.

The Supreme Court reversed that ruling and remanded the matter back to trial court for further ruling. Why the reversal?

Overcoming the enforceability of a written arbitration agreement is a high burden to meet. Texas courts determine whether arbitration costs are excessive on a case-by-case basis, focusing on these factors:

1. The party’s ability to pay arbitration fees and costs;

2. The actual amount of fees compared to the amount of the underlying claim(s);

3. The expected cost differential between arbitration and litigation; and

4. Whether that cost differential is so substantial that it would deter a party from bringing a claim.

In applying these factors, the Texas Supreme Court ruled that “the burden is on the party resisting arbitration to prove unconscionability, and because the evidence does not rise above the speculative ‘risk’ that the employee will actually incur prohibitive costs.”  The arbitration invoice, together with the attorney’s affidavit, while arguably providing a reasonable estimate of fees was not sufficient evidence of the fees that would actually be incurred. The employee did not provide the Court with sufficient evidence to know how those amounts relate to the overall expense of litigating versus arbitrating and his ability to afford the former but not the latter.

Second, the employee did not present evidence that the employee would actually incur any alleged costs. The employee recognized that arbitration organizations have typical rules in employment cases requiring the employer pay all costs except the initial filing fees. The employee in Shattenkirk sought to have the Court read this language into the arbitration provision because it was silent on who pays those fees. Finding the issue of who bears the costs too speculative, the Court held, “a court may not nullify an otherwise valid agreement to arbitrate based on purely speculative assumptions about the burdens of compelling arbitration”.

Interestingly, the Court provided a warning to all employers:  “[The Court’s] holding should not be understood to encourage silence in arbitration agreements regarding payment terms, much less to imply that such silence entails no consequences.” The Court also give an equally stern warning to employees: Assuming the employee signed the agreement, he clearly agreed to arbitrate and cannot leverage the contractual silence about who would pay to summarily avoid the arbitration agreement he made.

How to compel and avoid arbitration and who decides those issues remains a highly litigated issue.  Dispute resolution clauses can be critical components of managing risk, but must be drafted in way that allows them to be enforced and not held unconscionable. Our attorneys in Dallas and Austin have significant addressing issues impacting arbitration and arbitrability, and are available to answer any questions. Please contact us at info@gstexlaw.com with any questions you may have.

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