This morning, the Texas Supreme Court made vague reference to the possibility that the Federal Arbitration Act can be reverse pre-empted by the McCarran-Ferguson Act. Since this is the sort of thing we find fascinating, I poked around a bit. As readers of this blog know, certain language (in 10-point boldface type no less) must be present in any arbitration agreement that would require a patient or prospective patient to arbitrate a medical liability claim. See Tex. Civ. Prac. & Rem. Code Section 74.451. This requirement emphasizes the Texas General Arbitration Act’s requirement that a personal injury claim may only be subject to arbitration if each party and each party’s attorney signs the arbitration agreement. See Tex. Civ. Prac. & Rem. Code Section 171.002(a)(3) and (c). However, the Federal Arbitration Act has been held to preempt the Section 171.002(c) of the Texas Arbitration Act, so if the FAA governs, both parties’ attorneys do not need to sign an arbitration agreement for it to be valid in a personal injury claim. Given the breadth with which courts have found the FAA to apply, this preemption has served to markedly limit the protection the Texas Legislature tried to give Texans in both statutes referenced above. On July 28, 2005, however, the First Court of Appeals in Houston issued a fascinating opinion in a case involving a nursing home’s attempt to enforce an arbitration clause which did not contain the language required by the former Article 4590i (which is the same language currently required by Section 74.451 of the CPRC). Since the arbitration agreement in question specified that the FAA, and not the TAA, governed its application, the nursing home argued that the FAA preempted article 4590i and that the arbitration clause was valid and enforceable. Wait just a minute, said the plaintiff in that case. Another federal statute, the McCarran-Ferguson Act, provides that Federal statutes cannot preempt state laws enacted for the purpose of regulating the business of insurance, unless the federal statute in question specifically relates to the business of insurance. Since the FAA does not specifically relate to the business of insurance, and since 4590i states that it was passed in response to a “medical malpractice insurance crisis in the State of Texas,” the First Court of Appeals held that the McCarran-Ferguson Act reverse-preempts the Federal Arbitration Act. Put another way, it prevents the FAA from preempting the requirements Article 4590i places on arbitration clauses. What does all this mean? I do not know. The problem, of course, is that the recent re-codification of Texas medical liability law eliminated the language about the statute’s being enacted in response to a liability insurance crisis. While the Legislature certainly made reference to an insurance crisis when it passed the 2003 tort reform legislation, it did not keep the statutory language on which the Kepka court relies. It will be interesting to see if McCarran-Ferguson reverse preemption continues as a valid doctrine in Texas in a “new-law” medical malpractice case. Back on May 27, by the way, the Texas Supreme Court issued a mandamus opinion (in the same case linked-to above which started all this) requiring arbitration in a case where it held the FAA preempted the TAA’s attorney-signature requirement. It was a medical case in which the Supreme Court found that since the medical provider in question received federal funds, the FAA applied to a medical negligence case filed in Texas by Texans against Texans alleging Texas negligence. That mandamus opinion no longer seems available on the Court’s website or I’d link to it; its Westlaw citation is 2005 WL 1252271 for those so inclined. Technorati Tags: arbitration, ADR, Texas Supreme Court, law

This morning, the Third Court of Appeals affirmed a Travis County Trial Court’s granting of a no-evidence motion for summary judgment in favor of a hospital in a medical malpractice case. According to the Court, where a medical malpractice plaintiff filed a proper expert report under the former article 4590i but failed to designate any expert in response to a Request for Disclosure by the Level 3 Discovery Plan designation deadline, the Defendant Hospital was entitled to no-evidence summary judgment, as without expert testimony the plaintiff could not prevail. Even though the Plaintiff here had offered an adequate report, the failure to designate shifted the burden to the Plaintiff to establish good cause for the failure or lack of unfair surprise or prejudice to the Defendant. Cause No. 03-04-00711-CV, Cunningham v. South Austin Hospital The Court also issued memorandum opinions in a juvenile case and a case involving termination of parental rights.

This morning, the Third Court of Appeals issued three memorandum opinions. The first concerns a juvenile adjudication for the offense of assault, and the second affirms a decision by the Texas State Board of Medical Examiners to revoke a physician’s license to practice medicine in Texas. Cause Nos. 03-04-00001-CV and 03-04-00612-CV, respectively. The Court’s third memorandum opinion, in an interlocutory appeal, reverses a Trial Court’s decision to deny a non-Texan defendant’s special appearance, holding that the Defendant in question, a Kansas corporation, did not have adequate contacts with the State of Texas to establish specific personal jurisdiction, even though the corporation in question contributed $25,000.00 to the Texans for a Republican Majority Political Action committee (“TRMPAC”). According to the Court, the contribution was made so the Defendant could lobby Tom DeLay, a U.S. Congressman, to influence the outcome of a federal energy bill pending before the U.S. Congress: By all accounts, Westar’s only motivation in writing the $25,000 check to TRMPAC was to influence federal legislation by meeting with a federal congressman, who is afforded no vote in the Texas legislature. Even considering that DeLay may have a voice in Texas politics, the appellees did not allege or offer any evidence to show that Westar sought to influence the outcome of any Texas election or Texas legislation. For the purpose that Westar sought DeLay’s audience – to gain support for Westar’s position on federal legislation – DeLay could have represented any of the fifty states. And DeLay’s Texas residency is not dispositive of the issue because a nonresident defendant does not establish minimum contacts with Texas simply by interacting with one of its residents outside of Texas, in a manner that is unrelated to any activities within the state. Instead, the jurisdictional inquiry focuses on what contacts the defendant has purposefully established with the forum, so as to enjoy the benefits and protections of its laws. (emphasis in original) Cause No. 03-05-00276-CV, Westar Energy, Inc. v. James Sylvester, Ken Yarborough and Josephine Miller

Rick Freeman Commentary One argument that is regularly made by lawyers who are attempting to compel arbitration is to ask the Court to reform the arbitration clause in some way, if the Court feels that the arbitration clause is so unfair or one-sided that it could be unconscionable. This is generally a difficult argument to rebut if you are the lawyer arguing the effect of the unfairness or one-sidedness of an arbitration provision. You argue: Judge, the cost of the arbitration is too high on my client. Don’t compel arbitration. The other lawyer argues in rebuttal: Judge if you think the cost is too high, my client, in the goodness of his or her heart, will pay the arbitration costs. That takes care of any unfairness. Just compel the arbitration. The same type of argument is made whatever unconscionable provision is alleged. The lawyer defending the arbitration clause tells the judge to remove or revise the offending clause – but to enforce the rest of the arbitration provision. In an interesting 2004 decision by the United States Court of Appeals for the Sixth Circuit, the Court ruled that it was PROPER for the District Court to reject an employer’s offer to pay the employee’s arbitration costs. The case is Tonya Cooper v. MRM Investment Company. Cooper was employed by MRM as a manager of an MRM owned restaurant. She alleged she was sexually harassed and constructively discharged. She filed suit under Title VII. MRM moved to compel arbitration pursuant to a pre-employment agreement. The District Court refused to compel the arbitration on several grounds, including that the cost of the arbitration was unduly high on the employee. The Court of Appeals, in a very detailed opinion, discussed all the grounds cited by the District Court and overturned all of the grounds except for the high cost. The Court of Appeals remanded the case to the District Court for an evidentiary hearing to determine the effect of the costs to be paid by the employee. A very interesting part of the opinion deals with an offer made by MRM to pay the arbitration costs of Cooper. The MRM lawyer told the District Court that, notwithstanding the arbitration provisions, MRM would pay ALL the costs of the arbitration, including the employee’s cost. The MRM lawyer then argued that any unfairness was removed. The Appeals Court ruled that the District Court’s decision to refuse to, in effect, re-write the arbitration provision was sound as a matter of federal public policy. The Court went on to state that: An employer will not be deterred from routinely inserting a deliberately illegal clause into the arbitration agreement it mandates for its employees if it knows that the worst penalty for such illegality is the severance of the clause after the employee has litigated the matter. Further, the Court cited a North Dakota case that refused to consider such an offer saying that accepting the defendant’s offer to pay all arbitration costs, contrary to the contract, would effectively allow the defendant to unilaterally modify the contract. In a footnote, the Appeals Court instructed the District Court, that on rehearing, the employee’s relevant costs were her out-of-pocket costs without reference to the possibility that she might later recoup some of them. The Court stated: Hence, the District Court shall consider neither the arbitrator’s possible award of fees and expenses to Cooper pursuant to the AAA Rules, nor MRM’s offer to pay Cooper’s arbitration costs. In summary, a Court should refuse to consider the argument made by the above lawyer who was attempting to compel arbitration. An arbitration provision cannot be written with unconscionable provisions which can then be waived when they are objected to as unconscionable.