Supreme Court of Texas Rules on Four FAA Preemption Cases

The Supreme Court of Texas has held that the Federal Arbitration Act (FAA) preempted the Texas General Arbitration Act (TAA) in three related general arbitration clauses, but that a similar, more specific clause was unenforceable under the TAA.

In In re Olshan Foundation Repair Company, LLC, Nos. 09-0432, 09-0433, 09-0474, 09-0703, (Tex. December 3, 2010), Olshan was sued by four different customers (Waggoner, Kilpatrick, Tisdale and Tingdale) who alleged the company performed faulty foundation repair work on their respective homes. Each repair contract was in writing and contained an arbitration clause. None of the agreements were signed by the parties’ attorneys or exceeded $50,000 in consideration.

Olshan filed a plea of abatement in each of the four cases and sought to compel the disputes to arbitration under the FAA. A trial court denied Olshan’s plea in Waggoner by stating the TAA applied to the dispute and held that the arbitration clause was unenforceable pursuant to Chapter 171 of the Texas Civil Practice and Remedies Code. The trial court also held the arbitration agreement was unconscionable due to the costs which would be associated with an arbitral proceeding. In the remaining three cases, trial courts also denied Olshan’s pleas of abatement. Olshan next filed four writs of mandamus at the appellate level. After an appellate court consolidated two of the cases, all four writs were denied. In response, Olshan filed writs of mandamus to the Supreme Court of Texas, who consolidated all of the cases for argument.

The arbitration clauses in Kilpatrick, Tisdale and Tingdale provided:

Notwithstanding, any provision in this agreement to the contrary, any dispute, controversy, or lawsuit between any of the parties to this agreement about any matter arising out of this agreement, shall be resolved by mandatory and binding arbitration administered by the American Arbitration Association (“AAA”) pursuant to the arbitration laws in your state and in accordance with this arbitration agreement and the commercial arbitration rules of the AAA . . . . (emphasis added).

According to the Court,

The arbitration clause in the Waggoner (No. 09-0474) agreement is identical except for the language in bold, which states “pursuant to the Texas General Arbitration Act.” (emphasis added).

After the Court examined FAA preemption and choice of law jurisprudence, the Texas Supreme Court discussed the Kilpatrick, Tisdale and Tingdale cases:

Courts rarely read such general choice-of-law provisions to choose state law to the exclusion of federal law. See Mastrobuono, 514 U.S. at 59; L & L Kempwood, 9 S.W.3d at 127 n.16. Further, just as the FAA is part of the substantive law of Texas, the FAA would be part of the arbitration laws in Texas. See L & L Kempwood, 9 S.W.3d at 127 n.15 (quoting Capital Income Props., 843 S.W.2d at 23). The language of the arbitration clause designating arbitration pursuant to “the arbitrations laws in your state” includes the FAA. See id. at 127–28. Thus, the FAA applies to the three agreements that include the “arbitration laws in your state” language, and the FAA preempts the provisions of section 171.002(a)(2) of the TAA that would otherwise render the agreements unenforceable. The trial courts abused their discretion in denying Olshan’s requests to compel arbitration based on the unenforceability of the arbitration under section 171.002(a)(2) in the Kilpatrick, Tisdale and Tingdale cases.

In contrast, the Court denied Olshan’s writ of mandamus in the Waggoner case:

This is not the same general choice-of-law provision. This provision chooses a state’s substantive law, specifically the TAA, to govern disputes under the agreement. A valid choice-of-law provision makes a conflicts-of-law analysis unnecessary; this provision expresses a preference between federal and state law. [L & L Kempwood at 127–28] The FAA is part of the arbitration laws of Texas and can be applied to arbitration administered pursuant to the laws of Texas. However, the FAA is not part of the TAA, at least to the extent the two are inconsistent.

According to the Court, the plain language of the Waggoner agreement indicated the parties’ intent that the TAA govern the scope of the arbitration agreement. The court also held that Section 171.002(a)(2) of the TAA “would render the Waggoners’ arbitration agreement unenforceable.”

The TAA renders arbitration agreements unenforceable if the agreements containing the arbitration clauses are agreements for services “in which the total consideration to be furnished by the individual is not more than $50,000” and the agreements are not in writing, signed by each party, and each party’s attorney. TEX. CIV. PRAC. & REM. CODE § 171.002(a)(2).

The Texas Supreme Court next addressed Kilpatrick, Tisdale and Tingdale’s contention that arbitration in accordance with the agreements would be cost prohibitive, which rendered the arbitration provisions unconscionable and thus unenforceable:

The homeowners bear the burden to show the likelihood of incurring excessive costs, yet no homeowners provided any concrete idea of the amount of their claims. It is impossible to know how much they will be charged under the AAA rules, even if the fees charged by AAA were excessive.

In refusing to hold the arbitration agreements unenforceable, the Court stated:

The record contains no specific evidence that the homeowners will actually be charged excessive arbitration fees, and thus there is no legally sufficient evidence that such fees prevent the homeowners from effectively pursuing their claim in the arbitral forum.

Finally, the Supreme Court addressed Kilpatrick, Tisdale and Tingdale’s contention that their contracts with Olshan violated the Texas Home Solicitation Act (THSA) because Olshan failed “to include in the agreements certain language regarding cancellation in at least 10-point boldfaced type, where the transactions occurred by personal solicitation outside Olshan’s place of business. TEX. BUS. & COM. CODE §§ 601.002(a), .052, .053, .201.” The Court refused to allow a trial court to determine whether the contract was valid and held the issue was for an arbitrator to decide:

As the U.S. Supreme Court stated in Prima Paint Corp. v. Flood & Conklin Manufacturing Co., when the parties have contracted for arbitration of their disputes, a trial court “may consider only issues relating to the making and performance of the agreement to arbitrate.” 388 U.S. 395, 404 (1967); see also Rent-A-Ctr., W., Inc. v. Jackson, 130 S. Ct. 2772, 2778 (2010); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445–46 (2006) (“[U]nless the challenge is to the arbitration clause itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.”). There is no way to fashion a standard to determine whether arbitration is unnecessary without giving the trial court some discretion over issues relating to the making and performance of the contract generally—exactly what Prima Paint, and later Buckeye and Rent-A-Center, sought to avoid. Allowing courts to make this determination under an unconscionability analysis would provide an end run around the rule.

The Supreme Court of Texas held that the trial court did not err in denying Olshan’s plea of abatement in the Waggoner case because the TAA applied to the arbitration agreement and rendered it unenforceable. The Court conditionally granted Olshan’s writs of mandamus in the Kilpatrick, Tisdale and Tingdale cases because the FAA preempted the TAA, the homeowners offered no evidence that arbitration would be cost prohibitive and whether the contracts violated the THSA was an issue for an arbitrator to decide.

In a concurring opinion, Justice Hecht, joined by Justice Medina, noted that if an arbitrator finds the contract void due to THSA violations, “Olshan and its counsel are subject to being sanctioned by the trial court for filing a groundless motion to compel arbitration.”

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