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holding that a fee-splitting provision rendered an arbitration agreement unconscionable where there was no cap on the amount the claimant would be required to pay, no allowance for the arbitrator to modify the percentage of compensation owed by either party, and some evidence that paying the likely cost would prevent the claimant from enforcing his statutory rights
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NUMBER 13-14-00641-CV
03-24-2016
AOF SERVICES, LLC, Appellant, v. RONALD SANTORSOLA, Appellee.
On appeal from the 25th District Court of Gonzales County, Texas.
MEMORANDUM OPINION
Before Justices Garza, Benavides, and Longoria
Memorandum Opinion by Justice Benavides
By three issues, appellant AOF Services, LLC ("AOF") argues that the trial court erred by: (1) ruling that its arbitration agreement with appellee Ronald Santorsola was unconscionable and unenforceable, and (2) denying AOF's combined plea in abatement and motion to compel arbitration. We affirm.
I. BACKGROUND
In 2013, Santorsola was an employee of AOF. As part of his employment agreement, Santorsola signed and agreed to settle disputes pursuant to the AOF Dispute Resolution Policy ("policy"). The policy stated that:
ANY CLAIM, CONTROVERSY OR OTHER DISPUTE RELATING TO YOUR EMPLOYMENT, SEPARATION FROM THE COMPANY, OR FOLLOWING SEPARATION FROM THE COMPANY, SHALL BE RESOLVED BY ARBITRATION, IN LIEU OF A JURY TRIAL OR ANY OTHER LEGAL PROCEEDING, PURSUANT TO THE FEDERAL ARBITRATION ACT (TITLE 9, UNITED STATES CODE), AND IN ACCORDANCE WITH THIS DISPUTE RESOLUTION POLICY.
. . . .
Exclusions from Arbitration - The following claims are excluded from the requirements of mandatory arbitration: 1) workers compensation claims administered by a state agency in accordance with procedures provided by state law (claims alleging workers compensation retaliation will be arbitrated pursuant to this Policy); 2) administrative procedures required by state or federal law for the determination of unemployment compensation claims; 3) Employment benefit claims for which administrative procedures are provided by the company's ERISA plan; 4) claims by the company for injunctive relief to protect company personnel or property rights, or to enjoin the breach of an legal or contractual duty owed by a current or former Team Member to the company; and 5) claims not arbitrable under applicable law. Claims related to the subject matter of exclusions 1 through 3, that are not subject to administrative remedies, will remain subject to arbitration (e.g., a claim following exhaustion of administrative remedies, or a claim for which there is no administrative remedy).
Initiation of Arbitration - To initiate arbitration, the initiating party must give the other party written notice of a demand for arbitration prior to the expiration of the statute of limitations applicable to the claim and must also contact AAA . . . . An initiating Team Member will pay the first $100 in filing fees to the AAA and the Company will pay the portion of the filing fees that exceed $100, plus any other administrative fees or costs (other than the arbitrator's compensation). The arbitrator's compensation will be paid 20% by the Team Member and 80% by the Company.
About two months after his employment began, Santorsola was injured on the job and filed a claim for workers' compensation. A month after his injury, AOF terminated Santorsola. Santorsola filed suit in the trial court for wrongful termination under section 451.001 of the Texas Labor Code, which prohibits an employer from terminating an employee because the employee has filed a workers' compensation claim in good faith. See TEX. LABOR CODE ANN. § 451.001 (West, Westlaw through 2015 R.S.). AOF filed its original answer, plea in abatement, and motion to compel arbitration based on the arbitration clause in the employment agreement. The trial court held a hearing on the motion to compel arbitration and denied the motion, finding that the arbitration agreement was unconscionable and unenforceable. AOF filed this interlocutory appeal following the ruling. See TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (West, Westlaw through 2015 R.S.) (permitting interlocutory appeals of orders denying arbitration under the FAA).
II. DISCUSSION
By its three issues, which we address as one, AOF complains that the trial court erred by denying its motion to compel arbitration, after finding the arbitration agreement unconscionable.
A. Standard of Review
"We apply an abuse of discretion standard of review respecting interlocutory appeals under section 51.016 of the Texas Civil Practice and Remedies Code." Weekley Homes, L.P. v. Rao, 336 S.W.3d 413, 418 (Tex. App.—Dallas 2011, review denied). "Under this standard, 'we defer to the trial court's factual determinations if they are supported by evidence, but we review the trial court's legal determinations de novo.'" Id. (quoting In re Labatt Food Services, L.P., 279 S.W.3d 640, 643 (Tex. 2009)). "'Whether an arbitration agreement is enforceable is subject to de novo review.'" Id. (quoting In re Labatt, 279 S.W.3d at 643).
B. Unconscionability of Arbitration Agreements
"In general, a party seeking to compel arbitration under the FAA must establish (1) the existence of a valid, enforceable arbitration agreement and (2) that the claims at issue fall within that agreement's scope." Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168, 177 (Tex. App.—Dallas 2013, no pet.). "A court has no discretion and must compel arbitration if it is established that there is a valid arbitration agreement and the claims raised fall within the scope of that agreement." Id. "Under the FAA, ordinary principles of state contract law determine whether there is a valid agreement to arbitrate." In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 738 (Tex. 2005) (orig. proceeding).
Santorsola argued to the trial court that the arbitration agreement was unconscionable and therefore invalid, because it was one-sided in favor of AOF, it unreasonably limited discovery, and the fee-splitting agreement would prevent him from arbitrating his claim. Because Texas law "favors arbitration, the party opposing arbitration bears the burden to prove unconscionability." Pilot Travel, 416 S.W.3d at 180.
"Arbitration agreements may be either substantively or procedurally unconscionable, or both." Royston, Rayzor, Vickery, & Williams, LLP v. Lopez, 467 S.W.3d 494, 499 (Tex. 2015). "'Substantive unconscionability refers to the fairness of the arbitration provision itself, whereas procedural unconscionability refers to the circumstances surrounding the adoption of the arbitration provision.'" Id. (quoting In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 677 (Tex. 2006) (orig. proceeding)). "The test for substantive unconscionability is whether, 'given the parties' general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.'" In re Weeks Marine, Inc., 242 S.W.3d 849, 859 (Tex. App.—Houston [14th Dist.], 2007, orig. proceeding [mand. denied]) (quoting In re Firstmerit Bank, N.A., 52 S.W.3d 749, 757 (Tex. 2001) (orig. proceeding)). Here, because the one-sidedness of the arbitration agreement is at issue, we will address its substantive unconscionability. See Royston, Rayzor, 467 S.W.3d at 499.
1. Fee-Splitting Agreement
"An arbitration agreement may render a contract unconscionable if 'the existence of large arbitration costs could preclude a litigant. . . from effectively vindicating [his or her] federal statutory right in the arbitral forum.'" In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883, 892 (Tex. 2010) (orig. proceeding) (quoting Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 90 (2000)). Arbitration is "intended as a lower cost, efficient alternative to litigation." Id. at 893; see In re Poly-Am., LLP, 262 S.W.3d 337, 347 (Tex. 2008) (orig. proceeding) ("Arbitration is intended to provide a lower-cost, expedited means to resolve disputes."). "Where these justifications are vanquished by excessive arbitration costs that deter individuals from bringing valid claims, the unconscionability doctrine may protect unfairly disadvantaged consumers." In re Olshan, 328 S.W.3d at 893.
"The party opposing arbitration bears the burden to show that the costs of arbitration render it unconscionable." Id. When "a party seeks to invalidate an arbitration agreement on the ground that arbitration would be prohibitively expensive, that party bears the burden of showing the likelihood of incurring such costs." Id. (quoting Green Tree, 531 U.S. at 92). The Texas Supreme Court requires "some evidence that a complaining party will likely incur arbitration costs in such an amount as to deter enforcement of statutory rights in the arbitral forum." Id. (quoting In re Poly-Am., 262 S.W.3d at 356) (emphasis added). "Once met, the burden shifts to 'the party seeking arbitration [who] must come forward with contrary evidence.'" Id. at 895 (quoting Green Tree, 531 U.S. at 92).
The party opposing arbitration is not required to incur the costs of arbitration in order to show excessive fees, but "must at least provide evidence of the likely cost of their particular arbitration, through invoices, expert testimony, reliable cost estimates, or other comparable evidence." Id. "An agreement that provides for fee-splitting is not, by itself, unconscionable." Pilot Travel, 416 S.W.3d at 181.
Santorsola, as part of his employment agreement, agreed to a fee-splitting arrangement that required him to pay 20 percent of the arbitrator's compensation and AOF to pay the remaining 80 percent. Further, there was no cap on the amount Santorsola would be obligated to pay under this agreement. However, in his affidavit to the trial court, Santorsola stated that he could not reasonably afford to pay more than $5,000.00. Santorsola goes on to state that if the costs of arbitration were over $5,000.00, he would most likely have to abandon his claim against AOF if forced to arbitration. Santorsola's attorney's affidavit states that he is a certified AAA arbitrator and knowledgeable about the amount of money required to arbitrate claims similar to Santorsola's. In addition, Santorsola's attorney attached an invoice from a similar claim he was involved in where the total cost of a one-day arbitration was over $20,000.00. Based on the evidence presented, if Santorsola's case would take even one day, it is unlikely Santorsola could afford the arbitration. Santorsola alleged that proceeding with his case in the trial court would be more economically feasible, because, as his attorney stated, Santorsola would only be responsible for paying a nominal filing fee and hearings in the trial court are in essence free, enabling him to pursue his claim within his financial abilities.
In In re Poly-Am., a fee-splitting arrangement similar to the one Santorsola signed was included in the arbitration provision. See 262 S.W.3d at 354. However, in that case, the fee-splitting arrangement stated all fees associated with the arbitration would be "split equally between the employer and employee, with the employee's contribution capped at an amount equal to '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.'" Id. Each side was also permitted limited discovery, similar to the agreement here. Id. In addition, the provision allowed for the arbitrator to modify unconscionable terms, such as the amount owed by the employee. Id. at 357.
"Courts across the country have universally condemned the use of fee-splitting agreements in employment contracts that have the effect of deterring potential litigants from vindicating their statutory rights in an arbitral forum." Id. at 355; see Green Tree, 531 U.S. at 90-91. However, the Texas Supreme Court, as well as a majority of other courts, "require[s] some evidence that a complaining party will likely incur arbitration costs in such an amount as to deter enforcement of statutory rights in the arbitral forum." In re Poly-Am., 262 S.W.3d at 356.
In In re Poly-Am., the employee, Luna, presented the court with affidavits from himself and an expert. Id. at 354-55. The Texas Supreme Court had previously held that a "trial court may summarily decide whether to compel arbitration on the basis of affidavits, pleadings, discovery, and stipulations." Id. at 354 (quoting Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266, 269 (Tex. 1992)). Additionally, if the "material facts necessary to determine the issue are controverted, by an opposing affidavit or otherwise admissible evidence, the trial court must conduct an evidentiary hearing to determine the disputed material facts." Id. (quoting Anglin, 842 S.W.2d at 269). This is similar to the situation with Santorsola. However, the trial court in In re Poly-America held that the fee-splitting agreement was not unconscionable, and the supreme court agreed, basing its decision on the fact the costs were capped at the employee's highest monthly earnings, and stating that Luna did not demonstrate that the ability to pursue his claim in an arbitral forum hinged on his payment of estimated costs. See id. at 354. Also, because the arbitrator could modify the terms of payment, the supreme court held that Luna might not even be obligated to pay any of the costs of arbitration. Id. at 356-57.
Our case here is distinguishable. Although AOF's contract does have a fee-splitting agreement, there is no cap as to the amount of money Santorsola would be required to pay; thereby limiting his ability to pursue his claim in an arbitral forum. See id. at 356. There is also no provision within the arbitration agreement where by the arbitrator may modify the percentages of compensation owed by either party, unlike the agreement in In re Poly-America. See id. Therefore, we conclude that the trial court did not abuse its discretion by determining the arbitration agreement was unconscionable because the fee-splitting provision deters Santorsola's ability to enforce his statutory rights. See id. at 356. The trial court properly denied AOF's plea in abatement and motion to compel arbitration.
Because we find that the fee-splitting agreement made the arbitration agreement unconscionable, we do not need to address the other reasons the agreement was unconscionable raised by the parties. See TEX. R. APP. P. 47.1.
III. CONCLUSION
We affirm the trial court's judgment.
GINA M. BENAVIDES,
Justice Delivered and filed the 24th day of March, 2016.