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Texas Supreme Court Is At It Again — Arbitration Clause

The Texas Supreme Court has once again rejected the claims of an individual plaintiff in favor of a corporate defendant. This time, the opinion involved an arbitration agreement.

It has long been held that arbitration agreements are not enforceable if they are unconscionable, if they were signed under duress, or if they were the result of a fraudulent inducement. In the June 2001 opinion of In Re FirstMerit Bank, the Supreme Court held that an arbitration clause could only be avoided if the defense applied to the arbitration clause itself — that is, if the arbitration clause was unconscionable or was signed under duress or the result of fraudulent inducement. Thus, the Court required arbitration in a case where a plaintiff was fraudulently induced to sign a contract, but there was no evidence that there was any fraudulent representations specifically relating to the arbitration clause in the contract.

While that decision may have wounded the defenses, today, the Court killed them. In In Re RLS Legal Solutions, the employee claimed that she was forced to sign an agreement, which contained an arbitration clause among other things, when her employer threatened to withhold her paycheck. The employee (and the court of appeals) thought she had complied with the requirements of Firstmerit because she had specific conversations with her employer where the arbitration clause was discussed. Her employer told her that the arbitration clause was required, that there was no exception to the clause, that there was nothing up for debate, and that she would not be paid unless she signed the arbitration clause. The employee also had disputes with other parts of the agreement.

The Court held that this was not enough.

The Court agreed that the court of appeals correctly concluded that “[t]he economic duress defense and [the employee’s] objection specifically related to the arbitration agreement itself,” which was the test under FirstMerit. However, the Court held that the duress defense was unavailable because there was no evidence that the arbitration provision was the only provision to which she objected. In essence, the Court created a new test: Now, the duress or fraud must not only go to the arbitration clause itself, but now, the arbitration clause must be the only part of the agreement that the party objects to. To support this conclusion, the Court argues that the employee’s “argument, carried to its logical conclusion, would defeat the rule in FirstMerit in any case where the arbitration provision is only a clause in a larger agreement, since duress to force execution of an agreement containing an arbitration provision also forces consent to arbitration. Unless the arbitration provision alone was singled out from the other provisions, the claim of duress goes to the agreement generally and must be decided in arbitration.”

The Court is simply wrong on both grounds. In this instance, where there are representations and attempted negotiations about the arbitration agreement itself, then FirstMerit, where there were no particular discussions about the arbitration agreement, can be distinguished. Moreover, the Court’s new rule swallows the defenses. It is extremely unlikely to find any case where the arbitration agreement is not part of another agreement and where there is no objection to any other part of an agreement. Except in the extremely rare case, the Court has abolished the defenses.

The Court was also wrong in its assertion that the arbitration provision was not singled out from the other provisions. There was ample testimony about negotiations and representations that related only to the arbitration agreement.

Unfortunately, this is merely another case where it appears that the Court attempted to obtain a result rather than have an opinion based on good reason and good law.

Having said all that, we are not always opposed to arbitration.  We have successfully arbitrated several consumer disputes (even successfully prevailing at a hearing this week to send a homeowner’s dispute against his contractor to arbitration).  We have also agreed to arbitration more frequently for some of our Austin car wreck cases.  But arbitration is not a panacea and comes with many pitfalls.  Whether arbitration is appropriate is a decision that ought to be examined on a case by case basis.

For more of our posts on arbitration, click here, here or here.

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