Texas law favors settling disputes by arbitration, as it is intended to provide a less expensive, quicker means of resolving a dispute than litigation. However, in some cases, forcing a party to participate in arbitration can have the opposite effect. For example, in Houston ANUSA, LLC v. Shattenkirk, the Houston (14^th) Court of Appeals recently ruled that an arbitration provision in an employment contract was “substantively unconscionable” because the cost of arbitration would be so excessive as to prevent the party from asserting his claims.

In 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. 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.

The party opposing arbitration based on excessive costs bears the burden of showing that the costs of arbitration would be prohibitively expensive. While the Texas Supreme Court has held that the party is not required to actually incur the cost of arbitration, the party must produce “specific evidence” of the likelihood that it will incur such excessive costs for the particular arbitration. This evidence may include invoices, expert testimony, reliable cost estimates or other comparable evidence.

In Shattenkirk, the employee’s evidence included two declarations, one being a declaration from the employee himself and the other a declaration from his attorney, and an invoice from an arbitration in another case. In his declaration, 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 approximately $400.

Although the employer did not present any controverting evidence, it argued that the employee failed to show that he would be required to share arbitration fees and costs under the arbitration agreement. The arbitration agreement remained silent as to how arbitration fees and costs would be paid. However, during negotiations between the parties’ attorneys, the employer stated that it usually splits arbitration costs with the Claimant.

Texas courts determine whether arbitration costs are excessive on a case-by-case basis, focusing on the following 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.

Applying these factors, the Houston Court of Appeals found that, because arbitration costs could be as high as $45,000 compared to approximately $400 in litigations costs, and the employee’s ability to pay even half of the arbitration fees and costs would cause a financial hardship on him and his family, forcing him to participate in arbitration would deter him from asserting his claims. Therefore, the employee met his burden of showing that arbitration would be cost-prohibitive, and the arbitration agreement was unenforceable on the basis of substantive unconscionability.

The Shattenkirk decision echoes a 2005 decision from the San Antonio Court of Appeals in Olshan Foundation Repair Co. v. Ayala.  In Ayala, Olshan sought to compel arbitration for claims brought by homeowners who were unhappy with foundation stabilization work that Olshan had performed. The homeowners provided evidence that their portion of the arbitration costs would exceed $33,000, approximately 28% of their annual household income.  The San Antonio Court of Appeals held that the trial court correctly refused to compel arbitration on the basis of substantive unconscionability.

While courts have historically given deference to arbitration agreements, as the Shattenkirk and Ayaladecisions indicate, that deference has limits.  Parties seeking to enforce arbitration agreements should be mindful of costs and the ability of parties to the proceeding to pay for them.

If you should have any questions regarding arbitration provisions or their enforceability, please contact the attorneys in our Austin or Dallas offices at info@gstexlaw.com.

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