Yesterday, the Fifth Circuit handed down an opinion stemming from a Mississippi case (link is to .pdf file) weighing in on the notion that prohibitive expense of arbitration can be a basis for a court’s refusal to compel arbitration on unconscionability grounds. The Court reversed the district court refusal to compel arbitration in this case, finding that the party seeking to avoid arbitration (a chicken farmer named Gertrude Overstreet) proved that she was destitute now, but did not offer evidence of her financial condition back at the time she entered into the contract that contained the arbitration clause. The legal question at issue all started with a U.S. Supreme Court case from 2000 where that Court noted that “the existence of large arbitration costs could preclude a litigant . . . from vindicating her federal statutory rights in the arbitral forum.” Green Tree Fin. Corp. – Alabama v. Randolph, 531 U.S. 79, 90, 121 S.Ct. 513, 522 (2000) (otherwise known as ‘the other Green Tree case, so as not to confuse it with the more famous Green Tree opinion where the Supreme Court wrote about class actions in arbitration). While the Supreme Court did not allow that Green Tree plaintiff to avoid arbitration, it held that avoidance was theoretically possible if the unconscionable costs could be properly proven. Typically, this has since been done by focusing on how much the arbitration in question would cost. The Texas Supreme Court has subsequently acknowledged that substantial costs and fees associated with the arbitral forum can render an arbitration agreement unconscionable. In re: FirstMerit Bank, NA, 52 S.W.3d 749, 756 (Tex. 2001). Guest blogger Rick Freeman has blogged about this issue before on this blog. Rick’s post discussed the Johnny Luna case out of Houston, where the Texas First Court of Appeals held that arbitration would be unconscionable because of its extreme costs, especially considering the amount of money at stake. That case has now been argued before the Texas Supreme Court, so we should get a ruling from that court at some point on this very issue. The Fifth Circuit, however, beat the Texas Supreme Court to the punch yesterday. Applying Georgia law, the Circuit found that unconscionability analysis must consider the conditions between the parties as they existed at the time of the contract, and not at the time of the potential arbitration. The Circuit glossed over the evidence that Ms. Overstreet’s arbitration would cost $29,000.00 and that Ms. Overstreet had no income or property and subsisted on food stamps; instead, the Court noted that Ms. Overstreet provided no evidence that she was poor back in 2001, when she entered into the contract with the arbitration clause, and thus she had not met her burden to establish unconscionability. Texas law on unconscionability seems similar to Geogia law (as qupted by the Fifth Circuit) on this question of when in the parties’ economic relationship unconscionability must be evaluated: In any event, the basic test for unconscionability is whether, given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is to one-sided that it is unconscionable under the circumstances existing when the parties made the contract. The principle is one of preventing oppression and unfair surprise and not of disturbing allocation of risks because of superior bargaining power. In re: FirstMerit Bank, NA, 52 S.W.3d 749, 757 (Tex. 2001) (emphasis added). Therefore, it seems clear that Texas practitioners asserting the high cost of arbitration as a basis for avoiding arbitration must now prove up their clients’ economic status at the time of the contract’s execution, as opposed to at the time of the arbitration. Finally, a curious thought: all of this is an issue because arbitration is terribly expensive. Suppose, in the future, the AAA cuts its fees dramatically and makes arbitration as inexpensive as the court system. Could a future litigant still urge that 2006 arbitration clauses should be avoidable on cost grounds, since back at the time of execution arbitration was still expensive? Based on today’s Fifth Circuit analysis, I would think the answer should be yes. Overstreet v. Contigroup Companies, Inc., ___ F.3d ___ (5th Cir. 2006) (Cause No. 05-60953) Technorati Tags: arbitration, ADR, Fifth Circuit, law

The Third Court of Appeals issued an interesting memorandum opinion this morning affirming a trial court’s default judgment in a case where a registered agent refused to accept service of process in a premises case. In the underlying case, the plaintiff hired two separate process servers who tried unsuccessfully to serve a restaurant’s registered agent, both personally and via certified mail (the certified mailings were returned marked “refused,” and an employee of the agent apparently told the process server that the agent would not come out and accept service). When all that failed, the plaintiff served via the Secretary of State, who sent the petition to the registered agent via registered mail. When that mailing was also returned marked “refused,” and when the Defendant restaurant never answered, the plaintiff took the Secretary of State’s certificate to the courthouse and got a default judgment. In a motion for new trial, the agent argued that he did not instruct an employee to refuse service, and that he had to refuse certified mail since his employees kept losing it when he accepted it. The Third Court of Appeals found that the trial judge was absolutely correct in noting that a registered agent in Texas ought not refuse to accept certified mail. The opinion provides a good example of how to serve a recalcitrant registered agent, as well as how to prove up the recalcitrance in support of a default judgment. It’s also probably a nice cautionary tale in the event a client calls and says (in a whisper) “there’s a process server in my reception area.” Finally, I’d like to take a moment to plug the process server we use. We switched to Professional Civil Process about six months ago and have been completely impressed with their work. Don’t hesitate to email me if you’d like their contact information. Katin v. Loesch, Cause No. 03-05-00412 (Tex. App. – Austin 2006) (mem. opinion). Technorati Tags: litigation, Third Court of Appeals, law

On Thursday, the Fifth Circuit handed down an opinion in a complicated case (link is to .pdf of opinion) which implicates, in part, the Federal Arbitration Act, to the extent it codifies the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (we blogged on the New York Convention and its roots back in June). In any event, while Thursday’s case is not really about arbitration, an international arbitration is at its root, and it provides a detailed discussion of a complicated procedural situation involving removal and the res judicata effect of a prior arbitral award. The case itself is an insurance coverage dispute, I think. The web of related disputes began with a CompUSA policy to contract with a third party, Warrantech, to administer the warranties it sells along with the consumer electronics it retails (someone’s probably tried to pressure you into buying one of these). Pursuant to that contract, Warrantech was required to obtain an insurance policy to cover the potential claims; Warrantech did so through a carrier called Houston General. Houston General, in turn, reinsured a portion of the risk with Certain Underwriters at Lloyds, London (“Underwriters”). Anyhoo, after about a year, the Underwriters decided that Warrantech was paying unauthorized claims, and they told Houston General that they would not reinsure the claims. Houston General did not take that lying down, and it fired up an international arbitration against the Underwriters pursuant to the New York Convention. The arbitration took five weeks, the panel eventually awarded Houston General $39 Million, and a federal court in New York confirmed the award. A month after the award, Underwriters filed a Texas state court lawsuit directly against Warrantech, asserting as damages the reinsurance award that Houston General had won in the arbitration. Underwriters made claims for fraud and misrepresentation, via its right to subrogate for claims it had to pay Houston General. Warrantech asserted counterclaims against Underwriters and removed the case to federal court pursuant to Section 205 of the Federal Arbitration Act (our prior blog post we linked to earlier is all about Section 205 removal, for those so inclined). Warrantech argued that res judicata and collateral estoppel barred the Underwriters’ claims. Underwriters moved for summary judgment on Warrantech’s counterclaims, got them dismissed, and then moved for remand, saying that with the counterclaims’ dismissal the link to the foreign arbitration award (and hence the basis for the Section 205 removal) was severed. The district court remanded, Warrantech appealed to the Fifth Circuit, and Underwriters moved to dismiss the appeal for lack of appellate jurisdiction. We’ll leave it to you to read the opinion and watch the Fifth Circuit sort it all out. The opinion really does not have much to do with arbitration, ultimately, but it is an excellent example of the FAA and the interplay between courts and arbitrators and foreign countries and warranties and insurance carriers and reinsurers. Certain Underwriters at Lloyd’s vs. Warrantech, ___ F.3d ___ (5th Cir. 2006) (Cause No. 04-11168). Technorati Tags: arbitration, litigation, Fifth Circuit, law, international law

Robert Scoble (self-decribed as a “Tech Geek Blogger”) is one of my absolute favorite bloggers on technical subjects. He’s a recently-former Microsoft employee who blogs about technical and business issues surrounding the internet and blogs and the phenomena folks call Web 2.0 and the like. He also writes well and, at times, beautifully and powerfully. At any rate, his blog is one we read all the time. At any rate, Mr. Scoble made an interesting post the other day about lawyers and intellectual property and the role of cease and desist letters. His point, which is in response to a discussion about some letters sent by Google’s legal team, is that there are often important reasons us lawyers do things that may not always be apparent. The comments to the post are also helpful, and Scoble sums up his perspective in one of his responses to a commenter: one reason I survived at Microsoft is I made friends with the lawyers and they explained their world to me and why they do seemingly stupid and lame things. But in their world those seemingly stupid and lame things will save your ass. . There’s no particularly deep point here, but I thought some of the folks who read this blog to delve into the minutia of arbitration procedure might be interested in a glimpse at how folks on the other side see us and what we do. I’d also, again, recommend Scoble’s blog to anyone. Even if you don’t care about the technical substance (and much of what he blogs about is way over my head), his writing is excellent and his perspective is wise, and frankly that makes it worth reading in and of itself. Technorati Tags: litigation, law