In re Luna

• Decision Date: 09 September 2004
• Docket Number: No. 01-03-01055-CV.,01-03-01055-CV.
• Citation: 175 S.W.3d 315
• Parties: In re Johnny LUNA, Relator.
• Court: Texas Supreme Court

175 S.W.3d 315

In re Johnny LUNA, Relator.

No. 01-03-01055-CV.

Court of Appeals of Texas, Houston (1st Dist.).

September 9, 2004.

Rehearing Overruled November 5, 2004.

COPYRIGHT MATERIAL OMITTED

G. Scott Fiddler, Law Office of G. Scott Fiddler, P.C., Houston, TX, for Relator.

Erica Harris, Susman Godfrey, L.L.P., Houston, TX, Real Party In Interest.

Panel consists of Justices TAFT, KEYES, and BLAND.

OPINION

TIM TAFT, Justice.

This appeal concerns the substantive unconscionability of a binding arbitration agreement between an employer and an at-will employee. Relator, Johnny Luna, seeks mandamus relief from the trial court's order granting the motion to compel arbitration and to stay litigation of real parties in interest, Poly-America, L.P. d/b/a Pol-Tex International and Poly-America GP, L.L.C. (collectively, Poly-America).¹ In one issue, Luna challenges several provisions contained in the arbitration agreement. We determine whether the following provisions contained in the arbitration agreement are substantively unconscionable: those (1) splitting arbitration fees, with a cap on the employee's cost at the highest month's salary of the preceding year, (2) limiting available remedies, (3) limiting discovery, (4) disallowing an arbitrator's application of a "good cause" standard to employment claims, and (5) making the arbitration agreements binding as to any future claims that the employee could bring, even for disputes arising after the employer-employee relationship had terminated. We also determine whether all of the above-mentioned provisions, as a whole, render the arbitration agreement substantively unconscionable. We conditionally grant mandamus relief.

Background

Poly-America hired Luna on October 21, 1998 to work as an operator in Poly-America's plant in Mont Belvieu, Texas. When he was hired, Luna signed an arbitration agreement. Luna continued to work for Poly-America, and, on July 18, 2002, Luna signed another document acknowledging that he had received the June 2002 employee handbook. The handbook contained another arbitration agreement with substantively similar provisions. Luna was injured, and he filed a worker's compensation claim on December 7, 2002. On February 11, 2003, Poly-America terminated Luna's employment, and Luna subsequently sued Poly-America under the Texas Labor Code, alleging wrongful discharge and retaliation. See TEX. LAB.CODE ANN. § 451.001 (Vernon Supp.2004-2005). The trial court granted Poly-America's motion to compel arbitration and to stay litigation on September 19, 2003.

Burden of Proof and Standard of Review

Mandamus is the proper means to review an order compelling arbitration under the Federal Arbitration Act (FAA).² In re Am. Homestar of Lancaster, Inc., 50 S.W.3d 480, 483 (Tex.2001). Mandamus will lie when a trial court has clearly abused its discretion. In re MHI P'ship, Ltd., 7 S.W.3d 918, 921 (Tex.App.-Houston [1st Dist.] 1999, orig. proceeding).

In determining the validity of arbitration agreements, courts should apply state-law principles governing the formation of contracts. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 1924, 131 L.Ed.2d 985 (1995). Arbitration agreements are strongly favored under Texas law. Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896, 898 (Tex.1995). Thus, the burden of proving unconscionability is on the party opposing arbitration. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 756 (Tex.2001). An agreement to arbitrate is valid unless grounds, such as fraud or unconscionability, exist at law or in equity for its revocation, as with any contract. Emerald Tex., Inc. v. Peel, 920 S.W.2d 398, 402 (Tex.App.-Houston [1st Dist.] 1996, no writ).

Unconscionability

Luna asserts that the arbitration agreement is unenforceable because several of its provisions are substantively unconscionable.

The purpose of arbitration is to streamline the dispute-resolution process and to minimize costs. Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 269 (Tex.1992); see Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31, 111 S.Ct. 1647, 1655, 114 L.Ed.2d 26 (1991) (recognizing that parties who agree to arbitrate trade the opportunity for review and procedures of the courtroom for the simplicity, informality, and expedition of arbitration). As a result, the fact that arbitration does not afford parties all the rights that litigation offers is built into the nature of the process, and the parties presumably realize that they may be waiving some litigation rights in order to gain the convenience and savings associated with arbitration.

The FAA allows for arbitration in the employment context. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 113-15, 121 S.Ct. 1302, 1308-09, 149 L.Ed.2d 234 (2001); In re Halliburton Co., 80 S.W.3d 566, 570 (Tex.2002). The advantages of the arbitration process do not disappear in the employment arena. See id. Thus, arbitration agreements in the employment context are valid, irrevocable, and enforceable, save upon such grounds as exist in law or equity for the revocation of any contract. See id.

In Halliburton, the Texas Supreme Court considered substantive unconscionability to be one such potential ground. Id., 80 S.W.3d at 572 ("We therefore clarify that courts may consider both procedural and substantive unconscionability of an arbitration clause in evaluating the validity of an arbitration provision."). Under Texas law, "the basic test for unconscionability is whether, given the parties' general commercial background and the commercial needs of the particular trade or case, the clause is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract." FirstMerit Bank, 52 S.W.3d at 757. This principle is designed to prevent unfair surprise and oppression, not to disturb allocation of risks due to superior bargaining power. Id. Substantive unconscionability refers to the fairness of the arbitration provision itself, as opposed to procedural unconscionability, which refers to the circumstances surrounding the adoption of the arbitration provision. See Halliburton, 80 S.W.3d at 571. As stated above, Luna had the burden to prove that the agreement's provisions were substantively unconscionable. See FirstMerit Bank, 52 S.W.3d at 756.

A. Costs of Arbitration

Luna asserts that the arbitration agreement's cost-allocation provisions are substantively unconscionable because they require him to pay more than a nominal fee for the arbitration. Specifically, the agreement in the employee handbook provides:

All fees charged by the Mediator shall be divided equally between the Parties. All fees associated with the Arbitration (including, but not limited to, the Arbitrator's fee, court reporter fees, and fees to secure a place for the hearing, if any) shall be divided equally between the Parties. However, the total fees incurred by Employee shall not exceed the gross compensation earned by the Employee in Employee's highest earning month in the twelve months prior to the time the arbitrator issues his award.

Luna estimated that his potential cost based on the foregoing provision could be as much as $4,550.³ The affidavit of Peter Costea, an experienced employment lawyer, established that the average cost for an arbitration in Harris County in cases similar to Luna's would be more than $20,000. Luna stated in his affidavit that two attorneys refused to take his case on a contingency basis due to the arbitration agreement, and he also stated that he would be unable to afford the arbitration fees. Luna's evidence as to cost and his inability to pay was uncontroverted. Based on this evidence, Luna argues that the cost was so prohibitive that the cost provision should have been found substantively unconscionable.

Luna argues that the agreement's cost provisions are substantively unconscionable because, in Halliburton, the supreme court found that a cost provision that imposed only a $50 fee on the employee was substantively conscionable, whereas the fees assessed against Luna here are 91 times that amount. See Halliburton, 80 S.W.3d at 572. Luna's argument employs the logical fallacy known as "denying the antecedent."⁴ Applying that logical fallacy, Luna argues that (1) under Halliburton, if a cost provision in an arbitration agreement requires an employee to pay $50 (or less), it is conscionable; (2) Poly-America's cost provision required the employee to pay more than $50; (3) therefore, the provision was unconscionable.

We agree with Poly-America's contention that the Texas Supreme Court did not intend to require every arbitration agreement to provide the same protection as the arbitration agreement in Halliburton. In Halliburton, the Texas Supreme Court reversed the trial court's order denying an employer's motion to compel arbitration. See Halliburton, 80 S.W.3d at 573. The court held that the agreement provided employees with adequate protection for several reasons, one of which was that the employer agreed to pay all of the arbitration expenses except for a $50 filing fee. See id. at 572. The court cited Cole v. Burns International Security Services⁵ as an example of another court that had upheld an arbitration agreement with similar provisions. See Halliburton, 80 S.W.3d at 572. However, we do not think that, by finding the cost provisions in Halliburton to be conscionable, the Texas Supreme Court meant, by implication, that provisions imposing greater costs on the employee were necessarily unconscionable. Indeed, in Texas, an arbitrator's decision requiring an employee to pay more than $50 in arbitration fees has been upheld. See, e.g., Williams v. Cigna Fin. Advisors, Inc., 197 F.3d 752, 763 (5th Cir.1999) (upholding arbitration panel's decision requiring employee to pay half of all forum fees).

Luna argues that, based on the Halliburton court's citation to Cole, we should adopt the position set forth in Cole (and in some other federal...