Guest blogger, Rick Freeman, wrote yesterday about a recent San Antonio Court of Appeals case upholding a finding that the AAA‘s estimate of costs and fees was so high as to make the requirement of arbitration unconscionable. Today the U.S. District Court for the Western District of Missouri found an arbitration procedure developed by Amway and JAMS was substantively unconscionable. Judge Dorr could not accept (see p.24) the defendants “choosing the arbitrators in a hand-picked selection process, training them and then requiring the arbitration process with no exceptions”. He also found the program procedurally unconscionable and spent 26 pages in a judicious, detailed, careful trashing of the entire compulsory arbitration system. Interestingly, Judge Dorr cited Hooters of America v. Phillips, 39 F.Supp.2d 582 (S.C. 1198) as authority in the detailed analysis of substantive unconscionability. The connection between scantilly clad waitresses and household products is not immediately apparent but surely there is a lesson here. For a fairly recent discussion of unconscionability as a means of avoiding the enforcement of arbitral awards in Texas, please see a paper we did for the State Bar. Commenting on Judge Dorr’s opinion lawdawg writes: On “procedural unconscionability”: In this case, the Amway arbitration provision was offered in a take it or leave it manner. The hallmark of unequal bargaining position is clear –to continue to be an Amway distributor, the agreement must be accepted. While Defendants contend that distributors had ample time to review the arbitration provisions before renewing or allowing the automatic renewal to occur, they do not refute that the arbitration provisions were given in a manner that required the distributors to accept the arbitration agreement as written or to quit the business all together. There was no other entity with which Plaintiffs could contract to participate in a similar business. Moreover, negotiation of the arbitration clause was unheard of. Defendants admit that a distributor could not sign the distribution agreement without the arbitration provision. Defendants’ position is that there was only one contract with all of its distributors . . . The above discussion concerns the procedural unconscionability based on the take it or leave it option presented to Amway distributors. The plaintiff tools businesses are one step removed from this procedure as their involvement is vicarious at best. Thus, if Plaintiffs were held to be bound by Amway’s arbitration agreement, it would be the result of a procedure where Plaintiffs never had a choice. Accordingly, the arbitration requirement is procedurally unconscionable. On “substantive unconscionability”: Plaintiffs in this case have raised grave doubts as to the fairness of the hearing they would receive if in arbitration with JAMS and the neutrality of the arbitrators that would be chosen. Mainly, Plaintiffs oppose the selection of the arbitrators by Defendants and the training Defendants provide to the arbitrators. Plaintiffs have submitted videos and DVD’s of Defendants’ training sessions with the arbitrators and these exhibits show Defendants counseling the arbitrators on the nature of their business. It is this Court’s opinion that the procedure utilized by Defendants to screen, train and ultimately hand-pick their panel of arbitrators does not come close to passing any reasonable test of fairness and neutrality required for a legitimate arbitration proceeding. Amway’s training covered a two day period and then a third day of interviews. The training covered subjects including profiles of the people who started and now run Amway, the benevolent and independent culture of Amway, procedures to the utilized in arbitration, and a summary of various complaints the arbitrators could anticipate. The arbitrator candidates even participated in some role playing as successful Amway distributors. Also included throughout the two days were assurances that Amway was not a pyramid scheme and that the business was legitimate. Defendants claim, however, that the training was not out of the ordinary nor improper as the panel was not specifically told how to resolve possible issues they would see. On the videos, the Defendants state they will not discuss the meaning of the Rules of Conduct that are not absolutely black and white. It was most interesting that the issue presently before this court was included in a particular training discussion at one point, complete with diagrams from Defendants’ counsel regarding what was appropriate and inappropriate in the scenario. The videos run almost ten (10) hours, but suffice it to say that it appears clear to this court that the training atmosphere and content of the discussions was designed to produce a very favorable view of Defendants. Coupled with the training session was the selection process being utilized by Defendants, both to select its initial group for training, then after personal interviews, to pick the final panel of arbitrators from which all arbitrators for Amway disputes would be chosen. While there can be basic education of arbitrators regarding specialized subject matter, there is a point where basic education can be extended to subtle manipulation on issues which could be expected to be considered by the arbitrators. This limit has been passed by Amway’s preparation of the arbitrators at JAMS. While JAMS may be a respected organization, the Defendants have called the neutrality of this particular arbitration arrangement into question. Also telling is the fact that Defendants have never lost in arbitration, with the exception of a few counterclaims. . . While the parties are allowed to choose their own arbitrators, the pool of candidates for this choice is limited by Defendants to those arbitrators whom Defendants have already pre-selected in a process that involves an initial screening, then training with a heavy dose of goodwill for Defendants and their manner of operation, then after personal interviews, being hand-picked to be on the list of arbitrators (so long as Defendants deem them to be acceptable). Arbitrators are to be neutral, and allowing such training and influence over the arbitrators as Defendants have in this situation is both unreasonable and unfair. Although this court has found that none of the Plaintiffs have submitted to arbitration, the court also finds that, in the alternative, arbitration […]

Guest blogger Rick Freeman contributes commentary about a recent San Antonio Court of Appeals opinion about the enforceability of arbitration clauses. In my last article I discussed the need for fairness in arbitration agreements. Failure to have fair terms in the arbitration agreement or failure to provide a fair arbitration proceeding will result in a perceived lack of legitimacy in the arbitration result. If arbitration results are not perceived to be legitimate determinations of the disputes, arbitration as a dispute resolution method will ultimately fail. A recently decided case by the San Antonio Court of Appeals highlights one large area of perceived unfairness and illegitimacy. In the recently decided case of Olshan Foundation Repair Company v. Ayala, [No. 04-04-00829-CV], the San Antonio Court of Appeals ruled that an arbitration provision, specifically because of its high cost, was unconscionable and therefore unenforceable. I will leave it to you to read the relatively short opinion and dissent, but I will summarize the facts and arguments. The Ayalas hired Olshan to do repairs on their foundation. The repairs cost $22,000. Arbitration was compelled. The cost of arbitration as required by the contract was estimated by AAA at $63,000. The Ayalas owed $33,000 of that amount. They were invoiced by AAA and the invoice was due and payable upon receipt. At a second hearing, the trial court ruled that the cost of the arbitration (almost 50% of the annual income of Mr. Ayala and almost 3 times the cost of the repairs) was unconscionable. The court denied the arbitration on the basis of the unconscionable cost. The San Antonio Court of Appeals affirmed the trial court’s decision. The Court specifically stated that the cost of the arbitration was “shocking” to them. The dissent argued that unconscionability, as of the time of the making of the contract, was not proved by the Ayalas and that arbitration should be compelled. This type of unfairness is regularly seen in arbitration provisions. Although the high cost of arbitration effectively eliminates the rights of many individuals to litigate their claims, this is the first appellate decision that I am familiar with that has ruled the arbitration provision to be unenforceable, specifically because of the cost. The U.S. Supreme Court case of Green Tree Fin. Corp. and the Texas Supreme Court case of FirstMerit Bank both hold that the cost could make arbitration unconscionable, but in those cases, the Courts ruled that the evidence of cost presented was only of a possibility of unconscionable cost. Both Courts rules that evidence of a possibility is not enough to overturn the arbitration provision. It will be interesting to see if the Texas Supreme Court decides to accept the Olshan case for its determination. Suffice it to say, costs like in Olshan are the kind that cry out to be ruled unconscionable. In addition, any arbitration clause that effectively denies individuals the ability to litigate their claim because of high costs, ought to be declared unconscionable. Otherwise, what we have is a dispute system that is decided by income and not the facts. More and more of the arbitration clauses I am seeing effectively shut off individuals from the right to litigate a claim because of the high cost of the arbitration. If arbitration provisions that price people out of the ability to arbitrate are upheld by the Courts, the legitimacy of an entire dispute resolution system will suffer greatly. And, in my opinion, the system will ultimately fail because of its lack of legitimacy.

The Texas Supreme Court did not hand down any opinions this morning, but it did grant three petitions for review. If time permits, we may offer a bit of discussion as to the cases the Court has decided to review. For now, however, I’ll just post links to the underlying opinions, so that curious readers can stay up to speed. We’re still figuring out the scope of this blog, so we’re not sure if discussion of the granting of Petitions for Review would be useful to readers or practical for us to undertake. Comments are, as always, welcome. The first opinion the Court has decided to review is a bailment case out of Houston involving an agreement to store and sell bull semen. The second case the Court will hear is also from Houston, involving two close corporations organized to run a day spa. The opinion in that case is lengthy, and it contains discussions of numerous legal issues that may arise when a small business fails to turn out the way its principals envisioned. Finally, the Court granted a petition for review in a negligence case from El Paso. In that case, the El Paso Court of Appeals affirmed a trial court’s judgment that a company could be liable when one of its employees, under the influence of methamphetamine, shot an El Paso police officer. According to the Court of Appeals opinion, the testimony at trial indicated that methamphetamine use was common among the members of Defendant’s maintenance crew staying in El Paso while repairing railroad tracks, who used the drug to “stay alert and awake” while working twelve hour shifts, six to seven hours a week. Oral arguments in these three cases will be in late November. Technorati Tags: litigation, Texas Supreme Court, law

They’re in the news again. The National Arbitration Forum has just issued a decision in favor of AARP’s right to its pharmacy web address . Its nice to see an organized, reasoned opinion with references to other opinions ( both within and outside NAF ) and court cases as precedent. And on another happy note, in case there was any doubt, Bill Cosby IS Fat Albert. A panel of World Intellectual Property Organization arbitrators has ruled that Mr. Cosby owns the domain. A growing number of stars (who could turn down Julia Roberts ) have benefitted from arbitrations under ICANN whether done by WIPO, NAF or other authorized arbitrators. But all is not perfect in Domain Name Dispute Resolution World . Some experts debate the pros and cons of our current ICANN system. If STARS keep winning under the current system, however, I doubt we will see much change anytime soon. For more general information about domain name disputes, see a paper we presented in 2001 on the subject (the paper, of course, is a few years old and certainly needs updating). Technorati Tags: arbitration, ADR, law