Supreme Court of Texas Agrees to Consider Whether Attorney-Client Arbitration Agreement is Unconscionable

Earlier today, the Supreme Court of Texas agreed to consider whether or not an arbitration agreement between a law firm and its former client was one-sided and substantively unconscionable. In the case, In re: Royston Rayzor Vickery & Williams, LLP, No. 14-0109, a man, Lopez, retained a law firm, Royston Rayzor Vickery & Williams, LLP (“Royston”) to represent him in divorce proceedings related to his common law marriage. The man also asked the firm to pursue claims against his purported wife over the $11 million lottery jackpot she recently won.

According to the client agreement that was signed by Royston and Lopez, the law firm would receive a 20 percent contingency fee in return for representing the man. The agreement also stated Lopez was required to pay the costs associated with the lawsuit regardless of the final outcome and provided Royston with the right to withdraw from the case for any reason. In addition, the contract included an arbitration provision which stated all disputes except those related to the firm’s recovery of its legal fees and expenses would be arbitrated in Nueces County, Texas under the Commercial Arbitration Rules of the American Arbitration Association.

After Royston filed a lawsuit on behalf of Lopez, the former couple settled the case during a court-ordered mediation session. After that, Lopez filed a lawsuit against Royston accusing the law firm of malpractice, negligent misrepresentation, gross negligence, and breach of contract. In his complaint, Lopez accused the law firm of providing him with alcohol and encouraging him to accept a meager settlement in light of the evidence available.

In response to Lopez’s lawsuit, Royston filed a motion to compel the dispute to arbitration. Lopez opposed the firm’s request and asserted a number of affirmative defenses. Following a hearing on the matter, the trial court denied Royston’s motion. Next, the law firm filed an appeal with the Thirteenth District Court of Appeals in Corpus Christi.

On appeal, the court said Royston established that a valid agreement to arbitrate existed and Lopez’s claims against the firm fell within the scope of the contract. The court then examined Lopez’s defenses to the parties’ agreement to arbitrate. With regard to Lopez’s assertion that the arbitration agreement was substantively unconscionable, the Thirteenth District said:

Agreements to arbitrate disputes between attorneys and clients are generally enforceable under Texas law; there is nothing per se unconscionable about an agreement to arbitrate such disputes and, in fact, Texas law has historically condoned agreements to resolve such disputes by arbitration. … The Houston Courts of Appeals have issued several opinions regarding attorney-client arbitration agreements and have taken a strong position in favor of such agreements. Pham, 314 S.W.3d at 526; Chambers, 305 S.W.3d at 149; Labidi, 287 S.W.3d at 927–28. Under this line of opinions, a fiduciary relationship between attorney and client does not exist before the client signs the employment contract containing the arbitration agreement, and therefore attorneys are not required to fully explain all implications of the arbitration clause. See, .e.g., Pham, 314 S.W.3d at 526. Further, courts should defer to the Legislature with regard to the imposition of any conditions on arbitration provisions between attorney and client. See id.at 528; Chambers, 305 S.W.3d at 149.

Next, the court analyzed Lopez’s argument that the arbitration agreement was substantively unconscionable because it required the man to arbitrate his malpractice and other claims but allowed Royston “to litigate its claims regarding costs and expenses.” After Royston conceded that the firm was unlikely to have a claim against its former client that was not related to unpaid legal fees, the Corpus Christi court stated:

Applying the basic test for unconscionability to the instant case, and examining the relevant factors, we conclude that the specific agreement before the Court is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract. Significantly, neither In re FirstMerit Bank nor In re Poly-America involved the construction of a one-sided arbitration clause in the context of the creation of an attorney-client relationship. We further note that none of the cases proffered by the parties regarding the enforceability of arbitration clauses in attorney-client contracts concerned a clause allowing the attorneys to litigate but prohibiting their clients from doing so. Given the relationship between attorney and client, the relative expertise of lawyers in understanding the differences between arbitration and litigation and the relative costs thereof as compared to their clients, we find, under the specific facts of this case, that the arbitration agreement, by specifically excepting claims protecting Royston’s fees and costs, is unconscionable. The terms of the arbitration provision are very unusual and, on their face, distinctly favor Royston over its relatively unsophisticated client, Lopez. See Sidley Austin Brown & Wood, LLP v. J.A. Green Dev. Corp., 327 S.W.3d 859, 865 (Tex. App.—Dallas 2010, no pet.). The arbitration agreement is not a “bilateral agreement to arbitrate” and is most definitely one-sided and oppressive. See In re Poly-America, 262 S.W.3d at 348–49; Labidi, 287 S.W.3d 922.

In addition, the appellate court noted that a non-binding and advisory Texas Ethics Commission opinion suggested an arbitration clause that was included in an attorney-client agreement would only be binding “if the client was made aware of the advantages and disadvantages of arbitration and had sufficient information to make an informed decision as to whether to include the clause.” According to the Court of Appeals, “the preceding ethics opinion, the disciplinary rules, and the public policy considerations surrounding the attorney-client relationship are some of the factors that can be considered when determining whether or not a contract is unconscionable.”

Finally, Texas’ Thirteenth District Court of Appeals addressed the arguments made by the dissent before affirming the trial court’s order denying Royston’s motion to compel arbitration.

In today’s orders list, the Supreme Court of Texas agreed to hear oral argument in the case and its related companion petition on March 26, 2015. Stay tuned to Disputing for more on the Texas high court’s forthcoming opinion regarding the enforceability of attorney-client arbitration agreements.

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