Rick Freeman Commentary Following up on my article last week regarding the Olshan case – in which the San Antonio Court of Appeals found that the high cost of the required arbitration to be “shocking” and unconscionable and therefore the arbitration provision was unenforceable – I want to examine two appellate cases decided in 2004 that discuss substantive unconscionablity. In the first case, Pine Ridge Homes, Inc. v. Stone, the Dallas Court of Appeals evaluated the fairness of an arbitration provision in a contract involving the purchase of a house. In this case, the home purchasers, the Stones, paid $5,000 in earnest money and signed a contract to purchase a house from Pine Ridge Homes. The contract included an arbitration provision. Pine Ridge Homes refused to agree with the proposed mortgage company to include the statutorily required retainage provision. Because of this refusal the mortgage company refused to provide financing for the house. The Stones canceled the contract to purchase the house and requested that their $5,000 earnest money be returned. Pine Ridge Homes refused to return the money. The arbitration provision in question provided that the party who demanded arbitration had to pay all arbitration fees for both parties. The court examined the contract provisions and determined that Pine Ridge Homes had a remedy that did not require arbitration — keeping the earnest money. The Stones, on the other hand, had no remedy without going through arbitration. So the Stones would be required to pay the arbitration fees for both sides in any dispute they brought while Pine Ridge Homes could retain the earnest money and never pay any arbitration fees. Based on this one-sidedness, the appellate court ruled that the arbitration provision was so unfair and one-sided that it was unconscionable and therefore unenforceable. In the second case, In Re Johnny Luna, the Houston 1st Court of Appeals ruled that the arbitration provision in this employment setting was substantively unconscionable. In this case, Johnny Luna, the employee was required to sign an arbitration agreement in order to go to work for Poly America. The arbitration provision required that any and all job-related disputes be arbitrated. Luna was injured on the job and filed a workers compensation claim. Poly America then fired Luna. Luna filed suit alleging wrongful discharge and retaliation due to his filing a workers compensation claim. Poly America demanded arbitration. Luna objected on the basis that the cost to him of the arbitration was so high that it effectively prevented him from asserting his legal rights. In addition, Luna alleged that the arbitration agreement limited the remedies that he should have had under the Labor Code wrongful discharge and retaliation statute. First, the Court evaluated the substantive effect of each of Luna’s allegations individually. I recommend that you read the Court’s opinion for its discussion of the substantive effect of each of Luna’s individual allegations. The Court then evaluated the arbitration provisions when taken as a whole. The Court ruled that the arbitration agreement, when taken as a whole, was substantively unconscionable and therefore unenforceable because of the combination of its high costs to Luna and its limitation on the statutorily available remedies available to Luna. These two cases along with Olshan, when read together, provide a “road map” to those drafting arbitration agreements. Arbitration cannot be so expensive that it effectively defeats the ability of a party to litigate its claim. Arbitration costs cannot be placed completely on one party while allowing the other party a remedy that does not require arbitration. The arbitration provision should not significantly eliminate statutorily provided rights or remedies of a party, especially if some of the other “unfair” provisions are also contained in the arbitration provision. In other words, when considered as a whole, there needs to be some indicia of fairness and lack of one-sidedness in the arbitration provision. If there is some fairness in the arbitration provision, it is unlikely that the arbitration provision will be declared substantively unconscionable.
Continue reading...Today, a divided panel of the Third Court of Appeals issued an opinion in a case involving the deregulation of Texas’ retail electricity market. Justice Pemberton wrote for the majority, he and Justice Patterson; Justice Smith issued a dissenting opinion. Rather than try to summarize a detailed pair of opinions on a complex regulatory issue, I will simply quote Justice Pemberton’s summary of the case and the majority’s position: This case presents three sets of issues arising from Texas’s transition from a wholly regulated retail electricity market. First, we will consider the extent to which the Public Utility Commission had power to order electric utilities to refund alleged “over-mitigation” of their stranded costs, as determined from interim computer models, before the final 2004 true-up proceedings. Second, we will determine whether substantial evidence supports the Commission’s characterization of Nuclear Electric Insurance Limited (NEIL) account balances as generation-related rather than transmission-related. Third, we will address whether the Commission may set demand charges for large commercial customers greater than those it set before deregulation. Because we determine that the Commission exceeded its statutory authority in ordering refunds of “over-mitigated” stranded costs determined before the 2004 true-ups, we will reverse the portion of the district court’s judgment compelling such refunds and remand to the Commission for further proceedings. However, we will affirm the district court’s judgment affirming the Commission’s disposition of the issues concerning NEIL member accounts and demand charges. Justice Smith, in her dissent, summarizes as follows: While I join the majority in affirming the Commission’s handling of the member account balances with Nuclear Electric Insurance Limited and the demand charge issues, I strongly disagree that prior to 2004 the Commission lacked the authority to require AEP Texas Central Company to refund the excess earnings it had retained to accelerate the recovery of stranded costs when changed market circumstances eliminated the prospect of any stranded costs. I would hold that the Commission’s action is entitled to deference because (1) it was a reasonable method of meeting its statutory obligations of encouraging “full and fair competition among all providers of electricity” and preventing the overrecovery of stranded costs, see Tex. Util. Code Ann. §§ 39.001(b)(1), .262(a) (West Supp. 2004-05); and (2) it did not conflict with any express provision, or the overall intent, of PURA Chapter 39. See City of Austin v. Southwestern Bell Tel. Co., 92 S.W.3d 434, 441-42 (Tex. 2002) (we give weight to Commission’s interpretation of its own powers if it is reasonable and not inconsistent with statute); Southwestern Bell Telephone Co. v. Public Util. Comm’n, 863 S.W.2d 754, 758 (Tex. App.–Austin 1993, writ denied) (we defer to agency’s construction of statute that agency is charged with enforcing). Cause No. 03-03-00428-CV Cities of Corpus Christi, et al. v. Public Utility Commission of Texas, et al. The Court also issued a memorandum opinion in a juvenile delinquency case.
Continue reading...The collision of the right to contract, arbitration, substantive civil law, separation of church and state, and civil rights embodied in Canada’s (now seemingly interminable) struggle with faith-based arbitration must have created the Rorshach test of all inkblots for liberals and conservatives alike. Heads and hearts must be about to explode everywhere in Ontario. Although we are puzzled with (1)why this debate lingers, (2) the cognitive dissonance it seems to have created, and (3) why the US media has failed give it the attention it deserves, we are convinced the conflict is something BIG and FUNDAMENTAL. We are also convinced that the debate will fester until whatever mysteries are (ultimately) driving the fuss have been identified. We also warn the discussion will be fruitless unless all of us plumb some dark depths about our own beliefs, civil and religious. The posts are now in the the hundreds and spread over weeks. I am including a few links and quotes from other sources merely to get you up to speed if you haven’t been following this (with no particular agreement or disagreement expressed). Also, we recently presented a paper (p.13, col. 2) that reported the Fifth Circuit’s review of an employment arbitration in which the arbitrator was required to decide based in part on a particular passage from Christian scripture. The protests about the use of Muslim practice to do faith-based arbitration under a 1991 Canadian Law were on Ontario’s radar screen by September 4, 2005. The government fired off the nuclear option of ending all faith-based arbitrations in hopes of killing the dispute, but succeeded only in upsetting everyone — Muslim, Jew and Christian. More tempered approaches have been suggested and the debate just won’t go away. Victor Davis Hanson writes : The debate over the 1991 Ontario Arbitrator Act and Sharia Law goes and on, and on, and on, and on, and on. The debate is like a slow moving train wreck that never runs seems to run out of rail. Strangely enough my position on the Arbitrator Act leaves me standing in a corner somewhat all by my blogsome. Lucky for me, I learned early in life that I can take a few shots to the head and still rise to my feet for a few more. The 1991 Ontario Arbitrator Act was a piece of horrendously bad legislation and violated the principle of separation of Church and State and equality before the law for all. The Act essentially paid religious tribunals to rule and enforce their judgments utilizing the coercive power of the Secular State (where necessary) in matters of family or civil law providing that both parties were consenting adults and willingly gave up their secular family and civil rights. It made multiple systems of justice in the areas of family and civil law. The initial rationale for this piece of legislation was one of those mushy-feel good multi-cultural moments and much was touted at the time as both a cost and time saving piece of legislation. It was to allegedly going to lighten the load on the overburden Ontario family and civil court system beyond our ken. Marina Jimenz had a rather informative article in the Globe and Mail on Wednesday where she contended that rabbinical courts in Ontario are rarely used, and in fact, in the last year alone only two cases were resolved using the faith-based rabbinical court to settle a dispute. Meredith Cartwright, a lawyer and lecturer in religion, law and sexuality at the University of Toronto, says the small number of family law cases rabbinical courts arbitrate illustrates that most couples resolve disputes over custody and child-support payments in civil court or in private arbitration that is not faith-based.Jewish groups have said they are considering a constitutional challenge to Premier Dalton McGuinty’s recently announced ban on such tribunals. “Proponents of faith-based arbitration are misleading the public in pretending there is widespread use of this mechanism,” Ms. Cartwright said. “On this basis, they are asking for a new incarnation of faith-based arbitrations with government oversight and funding, which completely erodes the distinction between religion and state.” Rabbi Reuven Tradburks, secretary of the Beit Din (rabbinical courts) of the Council of Orthodox Rabbis of Toronto, conceded that the number of cases involving family disputes is small, but would not comment on the exact number. He said the principle underlying the right for Jews to go to rabbinical courts to resolve civil disputes is significant, however, and that settlements should have the imprimatur of the state. But the Rabbi is somewhat misleading. Even before the 1991 Ontario Arbitration Act there was nothing in law that prevented two or more parties of consenting adults from resolving any dispute before a mediator of a faith-based tribunal. Once the law is repealed there still will be no law restricting any consenting adults to seek a resolution to any family or civil dispute using a faith-based tribunal. What will be missing is that after this horrendously bad law is repealed is any ruling from the faith based tribunal will not have the “imprimatur” of the state’s coercive authority nor will the faith-based arbitration be overseen or funded by the state. In simple English, it will be completely an out of pocket expense borne solely by the parties involved. I ask you as a taxpayer, why should you be compelled to fund and oversee multiple religious systems of family and civil courts of justice? For Sharia law to be accepted and have an Islamic religious tribunal funded and overseen by the state with all the coercive power of the state to enforce its judgments would require significant amendments and safeguards added to the 1991 Ontario Arbitration Act. Bad law always means well and always requires constant revision. But, of course, to the critics of McGuinty’s decision to repeal the Act against all faith-based tribunals, all Sharia, is all good, all the time. I would challenge the pro-Sharia fraction to point to one country where Sharia law is the law […]
Continue reading...Guest blogger, Rick Freeman, wrote yesterday about a recent San Antonio Court of Appeals case upholding a finding that the AAA‘s estimate of costs and fees was so high as to make the requirement of arbitration unconscionable. Today the U.S. District Court for the Western District of Missouri found an arbitration procedure developed by Amway and JAMS was substantively unconscionable. Judge Dorr could not accept (see p.24) the defendants “choosing the arbitrators in a hand-picked selection process, training them and then requiring the arbitration process with no exceptions”. He also found the program procedurally unconscionable and spent 26 pages in a judicious, detailed, careful trashing of the entire compulsory arbitration system. Interestingly, Judge Dorr cited Hooters of America v. Phillips, 39 F.Supp.2d 582 (S.C. 1198) as authority in the detailed analysis of substantive unconscionability. The connection between scantilly clad waitresses and household products is not immediately apparent but surely there is a lesson here. For a fairly recent discussion of unconscionability as a means of avoiding the enforcement of arbitral awards in Texas, please see a paper we did for the State Bar. Commenting on Judge Dorr’s opinion lawdawg writes: On “procedural unconscionability”: In this case, the Amway arbitration provision was offered in a take it or leave it manner. The hallmark of unequal bargaining position is clear –to continue to be an Amway distributor, the agreement must be accepted. While Defendants contend that distributors had ample time to review the arbitration provisions before renewing or allowing the automatic renewal to occur, they do not refute that the arbitration provisions were given in a manner that required the distributors to accept the arbitration agreement as written or to quit the business all together. There was no other entity with which Plaintiffs could contract to participate in a similar business. Moreover, negotiation of the arbitration clause was unheard of. Defendants admit that a distributor could not sign the distribution agreement without the arbitration provision. Defendants’ position is that there was only one contract with all of its distributors . . . The above discussion concerns the procedural unconscionability based on the take it or leave it option presented to Amway distributors. The plaintiff tools businesses are one step removed from this procedure as their involvement is vicarious at best. Thus, if Plaintiffs were held to be bound by Amway’s arbitration agreement, it would be the result of a procedure where Plaintiffs never had a choice. Accordingly, the arbitration requirement is procedurally unconscionable. On “substantive unconscionability”: Plaintiffs in this case have raised grave doubts as to the fairness of the hearing they would receive if in arbitration with JAMS and the neutrality of the arbitrators that would be chosen. Mainly, Plaintiffs oppose the selection of the arbitrators by Defendants and the training Defendants provide to the arbitrators. Plaintiffs have submitted videos and DVD’s of Defendants’ training sessions with the arbitrators and these exhibits show Defendants counseling the arbitrators on the nature of their business. It is this Court’s opinion that the procedure utilized by Defendants to screen, train and ultimately hand-pick their panel of arbitrators does not come close to passing any reasonable test of fairness and neutrality required for a legitimate arbitration proceeding. Amway’s training covered a two day period and then a third day of interviews. The training covered subjects including profiles of the people who started and now run Amway, the benevolent and independent culture of Amway, procedures to the utilized in arbitration, and a summary of various complaints the arbitrators could anticipate. The arbitrator candidates even participated in some role playing as successful Amway distributors. Also included throughout the two days were assurances that Amway was not a pyramid scheme and that the business was legitimate. Defendants claim, however, that the training was not out of the ordinary nor improper as the panel was not specifically told how to resolve possible issues they would see. On the videos, the Defendants state they will not discuss the meaning of the Rules of Conduct that are not absolutely black and white. It was most interesting that the issue presently before this court was included in a particular training discussion at one point, complete with diagrams from Defendants’ counsel regarding what was appropriate and inappropriate in the scenario. The videos run almost ten (10) hours, but suffice it to say that it appears clear to this court that the training atmosphere and content of the discussions was designed to produce a very favorable view of Defendants. Coupled with the training session was the selection process being utilized by Defendants, both to select its initial group for training, then after personal interviews, to pick the final panel of arbitrators from which all arbitrators for Amway disputes would be chosen. While there can be basic education of arbitrators regarding specialized subject matter, there is a point where basic education can be extended to subtle manipulation on issues which could be expected to be considered by the arbitrators. This limit has been passed by Amway’s preparation of the arbitrators at JAMS. While JAMS may be a respected organization, the Defendants have called the neutrality of this particular arbitration arrangement into question. Also telling is the fact that Defendants have never lost in arbitration, with the exception of a few counterclaims. . . While the parties are allowed to choose their own arbitrators, the pool of candidates for this choice is limited by Defendants to those arbitrators whom Defendants have already pre-selected in a process that involves an initial screening, then training with a heavy dose of goodwill for Defendants and their manner of operation, then after personal interviews, being hand-picked to be on the list of arbitrators (so long as Defendants deem them to be acceptable). Arbitrators are to be neutral, and allowing such training and influence over the arbitrators as Defendants have in this situation is both unreasonable and unfair. Although this court has found that none of the Plaintiffs have submitted to arbitration, the court also finds that, in the alternative, arbitration […]
Continue reading...Disputing is published by Karl Bayer, a dispute resolution expert based in Austin, Texas. Articles published on Disputing aim to provide original insight and commentary around issues related to arbitration, mediation and the alternative dispute resolution industry.
To learn more about Karl and his team, or to schedule a mediation or arbitration with Karl’s live scheduling calendar, visit www.karlbayer.com.
Disputing is published by Karl Bayer, a dispute resolution expert based in Austin, Texas. Articles published on Disputing aim to provide original insight and commentary around issues related to arbitration, mediation and the alternative dispute resolution industry.
To learn more about Karl and his team, or to schedule a mediation or arbitration with Karl’s live scheduling calendar, visit www.karlbayer.com.