The Austin Court of Appeals has reversed a trial court judgment on the basis that the parties’ agreement contained an arbitration clause that, by adopting AAA commercial rules, delegated arbitrability to the arbitrator.
AutoLotto, Inc. v. Paychex, Inc. (No. 03-24-00116-CV; January 16, 2026) arose from a dispute over a payroll services contract. The parties contracted for Paychex to handle AutoLotto’s payroll. Problems cropped up when AutoLotto incurred a balance but had insufficient funds to satisfy Paychex’ EFT. When after receiving notice of the problem AutoLotto didn’t pay, Paychex filed suit for breach of contract/sworn account, among other theories. Paychex filed a motion for summary judgment on its breach of contract claim, attaching the Paychex Flex Pro Services Agreement, cash requirements request, and affidavits of Paychex’s counsel (regarding attorney’s fees) and its authorized representative (regarding breach of contract). AutoLotto responded in its first amended answer, asserting a Rule 92 general denial and a Rule 93 verified plea denying the execution of the services agreement. Paychex returned fire, asserting that Paychex failed to demonstrate how AutoLotto had benefited from its services and that AutoLotto’s VP never had the authority to execute the agreement on AutoLotto’s behalf. As evidence of the third assertion, AutoLotto offered a declaration by its outside counsel, to which Paychex objected as hearsay, inconclusive, and unsupported by evidence. Further, Paychex argued that AutoLotto failed to provide any competent evidence to dispute that Paychex established a breach of contract. Paychex submitted for the first time the services agreement, which contained the client default clause, as well as the governing law and arbitration clause. Paychex also submitted evidence that it provided over $13 million in the period between the agreement’s inception and AutoLotto’s default, and that at no point in the 5-year period the agreement was in effect was Ohannesian’s authority called into question.
AutoLotto moved to stay or dismiss the case based on the agreement’s arbitration clause. It maintained that the AAA rules applied and that the arbitrator should determine arbitrability and the merits. Paychex countered, maintaining that AutoLotto did not raise an issue about the “formation, interpretation, applicability, or enforceability” in a way that would trigger the arbitration clause. Instead, Paychex maintained that the only issue was AutoLotto’s default. Following a hearing, the trial court signed an order denying the motion to stay, finding as a matter of law that the client default clause controlled over the arbitration provision. It entered judgment awarding Paychex $238,849.46, as well as pre and postjudgment interest, $3,380 in attorney’s fees, and the costs of the suit. AutoLotto appealed.
In an opinion by Justice Kelly, the court of appeals reversed. As an initial matter, the court observed that “[t]his appeal presents the anomalous situation where the party suing on the contract containing an arbitration clause (Paychex) resisted arbitration, and the defendant (AutoLotto) denies the existence of the contract, but nevertheless moved to compel it.” Though arguing that the Paychex’s VP had no authority to enter into the agreement, AutoLotto nevertheless contended that an arbitration agreement existed and that it delegated arbitrability to the arbitrator. But did a contract with an arbitration clause ever come into being in the first place? This was an issue for the court, not the arbitrator, and here the court found that there was no fact issue on the element of the existence of a contract between the parties (the opinion of AutoLotto’s outside counsel was conclusory and not evidence).
As noted above, the parties didn’t dispute that the agreement contained an arbitration provision but disagreed as to whether the Paychex’s claim fell within that agreement’s scope. By virtue of AAA rules, the court found that it did. As Justice Busby wrote in his dissenting opinion in TotalEnergies E&P USA, Inc. v. MP Gulf of Mexico, LLC, 667 S.W.3d 694 (Tex. 2023), “Like glitter, the AAA rules cannot be constrained if the parties use them to any extent.” Indeed, Total Energies was dispositive here because an agreement to arbitrate under the AAA commercial rules evidenced a clear and unmistakable agreement that the arbitrator must decide the arbitrability of the dispute. Paychex protested that arbitrability was for the court to decide because the agreement left it with only two options following a client default: file a lawsuit or commence arbitration. In TotalEnergies, however, SCOTX concluded that when the parties elect to be governed by AAA rules, those rules delegate the question to the arbitratory (unless expressly agreed otherwise). Paychex pointed out that it would be a waste of the time and money to send the arbitrability question to an arbitrator if the argument for arbitrability is without merit. The court responded declined to recognize such an exception.
TotalEnergies thus obligated to issue an order compelling arbitration, despite the claim being for “monies due and owing,” which arguably fit the carve-out provision for the event of client default. AutoLotto’s first issue on appeal was sustained, and the court concluded the trial court erred by denying its order to compel arbitration. It reversed and remanded the case for further proceedings.
TCJL Legal Intern Satchel Williams researched and prepared the first draft of this article.
