[Update: Lee Keller King currently works at this firm.] The July 2009 Edition of Texas Bar Journal titled “The Electronic Lawyer,” features the following letter to the editor written by Texas attorney Lee Keller King. Mr. King writes in response to a Texas Bar Journal article published in May 2009 (blogged here). We welcome your commentary about this post! I am one of those critics who believe that the trend in mandatory arbitration has gone too far (“The Future of Arbitration,” May, p. 352). Regarding the comment that “an advocate for less arbitration … is likely to omit that the consumer fails to even appear in the majority” of credit card arbitrations is correct, as far as it goes, but does not give the reason for the high rate of defaults. Most credit card arbitration agreements that I have reviewed (and fought on behalf of my clients) have included onerous choice of venue provisions. Is it any wonder that a consumer in Texas, who took out his credit card in Texas and used it in Texas, will be hard pressed to appear for arbitration in New Jersey? Or in New York? I think not, and I doubt if any such consumer would —in the real world — knowingly consent to such a venue provision. However, in the world of consumer arbitration, she is presumed to have consented because she is presumed to have read all the fine print in the consumer credit application she signed to get the credit card. I am not saying that arbitration does not have its place, but is it fair to impose binding arbitration on consumers who are not educated regarding the court system, much less the arbitration system? I would say that it is not, and many agree with me. I would, however, support a form of arbitration that our sister state of Arizona has found useful. In Arizona, all civil cases (except family law cases) with an amount in controversy under a certain amount ($65,000, I believe) are sent to an arbitration conducted by an attorney picked at random from the attorneys practicing in that county. If a party is dissatisfied with the result of the arbitration, that party may appeal for a trial de novo in the Superior (district) Court. Should the party that appeals the arbitration not be successful in obtaining a 23 percent more favorable result at trial, then it is liable to the nonappealing party for attorney’s fees of the defendant against the appeal, reasonable expert witnesses necessitated by the appeal, and for costs. This is something I think would also work in Texas and would allow for fair resolution of many disputes, while nonetheless reducing the case load on the courts. Lee Keller King Technorati tags: arbitration, ADR, law, Arbitration Fairness Act of 2009

Via the ADR Prof Blog, we learned that the Minnesota Attorney General, Lori Swanson, has filed a lawsuit against the National Arbitration Forum (“NAF”). The Complaint (Minnesota vs. National Arbitration Forum) alleges consumer fraud, deceptive trade practices, and false advertisement. On July 14, the AG’s office issued a press release about the lawsuit (Attorney General Swanson Sues National Arbitration Company for Deceptive Practices) and the NAF responded with a media announcement on its website (National Arbitration Forum Media Statement Regarding Lawsuit). Related Posts: Minnesota AG Files Suit Against Leading Arbitration Firm, Wall Street Journal, July 15, 2009. Minnesota lawsuit claims credit card arbitration firm has ties to industry, USA Today, July 15, 2009. Minnesota AG Sues Arbitration Company, Alleging Ties to Collection Industry, The National Law Journal, July 15, 2009. As some of our readers may know, in the past, Karl Bayer has arbitrated cases administered by the NAF.

Professor Alan Scott Rau has forwarded us the following comments relating to our post of yesterday, in which we summarized the recent Texas Supreme Court case of In re Morgan Stanley & Co., Inc., __ S.W.3d __ (Texas 2009) (No. 07-0665). The Texas Supreme Court gets it absolutely right [and totally without regard to the fact that they quote me.] How could it be otherwise? Compare Justice Hecht’s dissent: “A raving lunatic in a strait-jacket “agrees” to a contract, including an arbitration clause. Her guardian later seeks to avoid it, but the question of the contract’s validity must be submitted to the arbitrators for a final and binding decision. But where do the arbitrators get such authoritative decisionmaking power? Why, where they always get their power—from the agreement of the parties! Now, just what agreement of the parties is that? Well, there is something written and signed—it “exists,” doesn’t it? “It happened,” didn’t it? That the signatory was out of her head is just an inconvenient detail.” Such an approach could only make sense if one is living in some world of words and labels totally divorced from reality. “The law” rarely permits such silly results—and it never, ever, absolutely requires them. All of this is reasonably obvious. What I find more interesting here is Justice Hecht’s argument that the result should be different because the Texas courts need to align themselves with the Fifth Circuit. This is really rather striking when you think about it: As a matter of constitutional law the Texas courts have an equal claim with the lower federal courts to interpret the dictates of federal law; I can’t believe that it’s better to acquiesce in foolish Fifth Circuit opinions than to try to get the Fifth Circuit to reconsider. Now it may well be, as Justice Brister points out, that even if the plaintiff’s incapacity is ultimately confirmed by a court, she [or her guardian] may still be bound to arbitrate; where “estoppel” kicks in, arbitration is no longer consensual and becomes irrelevant anyway. But this is a different point, and the case hadn’t been argued on that basis—which just reflects the fact that the lawyering was inadequate and that we’re in a messy state on appeal. Alan Scott Rau Burg Family Professor of Law University of Texas at Austin School of Law http://ssrn.com/author=55273 Technorati Tags: arbitration, ADR, law, Texas Supreme Court, In re Morgan Stanley

The Texas Supreme Court held that a trial court did not abuse its discretion by declining to submit to the arbitrator the question of whether a party to an arbitration agreement lacks the mental capacity to assent. Justice Medina delivered the opinion of the court, in which Chief Justice Jefferson and Justices Wainwright, Green, Johnson, and Willett joined. Justice Brister filed a concurring opinion, Justice Willett filed a concurring opinion, Justice Hecht filed a dissenting opinion, and Justice O’Neill did not participate. In In re Morgan Stanley & Co., Inc., __ S.W.3d __ (Texas 2009) (No. 07-0665), Helen Taylor was worth several million dollars in 1999. Having been diagnosed with dementia that year, Taylor transferred several accounts to Morgan Stanley & Co. Each account agreement contained an arbitration clause. In 2005, Nathan Griffin, guardian of Taylor’s Estate, sued Taylor’s granddaughters and others for violation of of the Texas Uniform Fraudulent Transfer Act, civil theft, conversion and for imposition of a constructive trust. About a year later, Griffin added Morgan Stanley & Co. as a defendant, claiming breach of fiduciary duty, negligence and malpractice, unsuitability of investments, violations of the Texas Security Act, and breach of contract. When Morgan Stanley moved to compel arbitration, Griffin argued that Taylor lacked capacity to contract when she signed the account agreements containing the arbitration clause. Therefore, according to Griffin, the appropriate forum to resolve the dispute was the court, not arbitration. The trial court agreed with Griffin and denied the order to compel arbitration. The court of appeals also declined to order arbitration. The Texas Supreme Court now considers whether a court or an arbitrator should determine the issue of mental capacity to contract. The court began by highlighting section 2 of the Federal Arbitration Act (“FAA”), “an agreement to arbitrate is valid except on grounds as exist at law or in equity to revoke the contract.” The court continued to say that “[s]ection 2 of the FAA provides that courts shall compel arbitration on issues subject to an arbitration agreement.” However, the court noted that “[s]ection 4 of the FAA provides that a court may consider only issues relating to the making and performance of the agreement to arbitrate.” Next, the court explained that the U.S. Supreme Court rejected the reasoning that “any defense that would render the entire contract unenforceable or void was for the court to decide because if the underlying contract was invalid so too was the agreement to arbitrate.” Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967). The court noted that in Prima Paint, the U.S. Supreme Court created the “separability” doctrine, in which “an arbitration provision was separable from the rest of the contract under section 4 and the issue of the contract’s validity was to be determined by the arbitrator unless the challenge was to the agreement to arbitrate itself.” The court then turned to the question of whether the defense of mental capacity is an attack on the validity of the contract as a whole (therefore a matter for the arbitrator to decide) or specifically aimed to the agreement to arbitrate (a matter for the court to decide). The court pointed out that the Fifth Circuit decided in Primerica Life Insurance Co. v. Brown, 304 F.3d 469 (5th Cir. 2002), that “the arbitrator should decide a defense of mental incapacity because it is not a specific challenge to the arbitration clause but rather goes to the entire agreement.” But the court also noted that the Tenth Circuit reached the opposite result in Spahr v. Secco, 330 F.3d 1266 (10th Cir. 2003), concluding that the “mental incapacity defense naturally goes to both the entire contract and the specific agreement to arbitrate in the contract.” Explaining that the U.S. Supreme Court has not decided the present issue, the court cited Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). It then stated that in Buckeye, “the [U.S. Supreme] Court noted that an illegality defense, raising the issue of the contract’s validity, was different from a formation defense, raising the issue of whether a contract was ever concluded.” Finally, citing Alan Scott Rau’s article Everything You Really Need to Know About “Separability” in Seventeen Simple Propositions, 14 Am. Rev. Int’l Arb. 1, 17 (2003), the court concluded that Primerica misapplies Prima Paint’s separability doctrine: Despite casual assumptions to the contrary, Prima Paint does not merely preserve for the courts challenges that are “restricted” or “limited” to “just” the arbitration clause alone—this would be senseless; it preserves for the courts any claim at all that necessarily calls an agreement to arbitrate into question. To send a dispute to arbitration where “not only” the arbitration clause itself, but “also,” in addition, the “entire” agreement is subject to challenge, is to lose sight of the only important question—which is the existence of a legally enforceable assent to submit to arbitration. Someone lacking the requisite mental capacity to contract cannot, I dare say, assent to arbitrate anything at all. Accordingly, the court denied the petition for writ of mandamus. This opinion is noteworthy for several reasons. First, the U.S. Supreme Court has not ruled on whether the issue of capacity to contract should be decided by a court or by the arbitrator. Second, the Fifth and Tenth Circuits have reached opposite outcomes on this issue. Third, the Texas Supreme Court declined to follow the precedent set by Fifth Circuit case law. Finally, the Texas Supreme Court’s majority opinion agreed with the analysis by Alan Scott Rau, professor at The University of Texas School of Law and contributor to this blog. [Ed note: find professor Alan Scott Rau’s comments about this case here.] Technorati Tags: arbitration, ADR, law, Texas Supreme Court