Reversing the Houston [14th] Court of Appeals, the Texas Supreme Court returned a case involving the enforceability of an arbitration agreement where the terminated employee claims that the costs of arbitration would be so excessive as to deprive him of a statutory remedy.
Houston AN USA, LLC d/b/a AutoNation USA Houston v. Walter Shattenkirk (No. 22-0214; delivered May 26, 2023) arose from the termination of AutoNation’s employment following the employee’s report to a senior manager of racist comments. The employee claimed that his termination resulted from discrimination and wrongful retaliation for filing a report. After receiving a right to sue letter from the EEOC, the parties’ attorneys discussed the logistics of the arbitration process called for in the employment agreement signed by the employee when accepting employment. The parties subsequently disagreed on the appointment of an arbitrator, and the employee filed suit. AutoNation moved to compel arbitration. The employee objected, asserting that the agreement was unconscionable and unenforceable “because excessive arbitration costs will likely preclude him from effectively vindicating his statutory response.” In support of his argument, the employee presented his own and his attorney’s affidavits, as well as an invoice from an unrelated employment arbitration conducted by AAA. (Incidentally, the arbitration agreement at issue in this case did not specific AAA arbitration). The trial denied the motion to compel. The Houston [14th] Court of Appeals affirmed.
In an opinion by Justice Lehrmann, SCOTX reversed. Beginning with relevant SCOTUS and SCOTX authority regarding the excessiveness of arbitration costs, the Court noted that the party opposing arbitration “must present ‘some evidence’ that it ‘will likely incur arbitration costs in such an amount as to deter enforcement of statutory rights in the arbitral forum” (citation omitted). It is not enough for the evidence merely to show a “risk” of excessive costs; “specific evidence that a party will actually be charged excessive arbitration fees” is necessary (citations omitted). This can be shown through “invoices, expert testimony, reliable cost estimates, or other comparable evidence.” Courts must also “consider how the agreement addresses the allocation of those costs,” but Justice Lehrmann noted that even if the agreement is silent, as this one was, that does not relieve the evidentiary burden of the party opposing arbitration.
Turning to the employee’s evidence, the Court found it too scanty to meet the burden of proof. The plaintiff’s attorney opined that a court proceeding would only cost a few hundred dollars and that arbitrating the case would ta ke longer and cost more. Plaintiff argued that he made less money in his current job, had debts to pay and a family to support, and that arbitration would exacerbate those problems. Finally, the invoice from an AAA arbitration was insufficient for the Court to “assess whether those fees are what would prohibit [plaintiff] from pursuing his rights without knowing (1) how that amount relates to the overall expense of litigating versus arbitrating and (2) [plaintiff’s] ability to afford the former but not the latter.” In his estimate of litigation costs, the plaintiff’s attorney “summarily stated that litigation ‘would likely be a few hundred dollars,’ but that statement appears to take no litigation costs into account other than filing fees associated with initiating the suit.” Without “some concrete evidence that the increased cost associated with arbitration, compared to litigation, is what forecloses a party from pursuing his claims, the party cannot show that those costs are what make the expense of arbitrating ‘prohibitive.’’
The Court observed further that although the agreement did not specific the allocation of arbitration costs and AutoNation’s counsel told plaintiff they “usually” split the costs, plaintiff could not show that he would incur any costs, half or otherwise. Moreover, AAA and JAMS have rules for employment arbitration that allocate costs to the employer, not the employee. “A court may not nullify an otherwise valid agreement to arbitrate,” Justice Lehrmann wrote, “based on purely speculative assumptions about the burdens of arbitration”—even if the agreement is silent as to allocation of costs. Justice Lehrmann, however, cautioned against reading the opinion as “encourg[ing] silence in arbitration agreements regarding payment terms.” Indeed, the Court concluded that based on the evidence it could not fully assess whether the agreement was unconscionable until AutoNation showed “some basis in a contract or other binding law to compel the other party, like the [plaintiff], not only to submit to arbitration but also to pay some particular amount toward the costs of that arbitration.” The Court thus remanded to the court of appeals to determine whether (1) plaintiff signed the arbitration agreement, and (2) if so, whether AutoNation is demanding some amount of payment to arbitrate. As Justice Lehrmann put it, “only then will the court have to address the legal basis for [plaintiff’s] obligation to pay and, if so, what amount. And only once that question is answered would an assessment of unconscionability be ripe for judicial consideration.”
This is an interesting decision that begs the question: if plaintiff cannot afford arbitration, how can he afford litigating unconscionability all the way to SCOTX, with every possibility that the case might end up there again following the court of appeals’ reconsideration on remand?
