Texas Appellate Court Enforces Attorney-Client Arbitration Agreement

The Fourteenth Court of Appeals of Texas held that a trial court abused its discretion in denying a motion to compel arbitration.

I. Background

In Pham v. Letney, no. 14-09-00387-CV (Tex.App.-Houston [14th Dist.] March 4, 2010) Shelly Letney hired the law firm of Smith & Garg, L.L.C. to pursue her personal injury claims she allegedly suffered in an automobile accident. Sarita Garg is a named partner in the firm and Steven Tuan Pham, an associate with the firm, was at least partially responsible for handling Letney’s case. The attorney-client representation agreement between Letney and Smith & Garg, L.L.C. contained the following arbitration provision:

ARBITRATION

Any and all disputes, controversies, claims or demands arising out of or relating to this Agreement or any provision hereof, whether in contract, tort or otherwise, at law or in equity, for damages or any other relief, shall be resolved by binding arbitration pursuant to the Federal Arbitration Act in accordance with the Commercial Arbitration Rules then in effect with the American Arbitration Association. Any such arbitration proceeding shall be conducted in Harris County, Texas pursuant to the substantive federal laws established by the Federal Arbitration Act. Any party to any ward [sic] rendered in such arbitration proceeding may seek a judgment upon the award and that judgment may be entered by any federal or state court in Montgomery County, Texas [sic] having jurisdiction.

Letney sued Pham, Garg, and Smith & Garg, L.L.C., alleging legal malpractice and other claims based on a failure to timely file suit for Letney’s alleged personal injuries. The defendants filed a motion to compel arbitration pursuant to the attorney-client agreement and the trial court denied the motion without stating the basis for the holding.

II. Majority Opinion

The Fourteenth Court of Appeals first determined whether the issues are properly raised in a direct interlocutory appeal or in a petition for writ of mandamus. The court explained that “[i]t is well-settled that when a trial court denies arbitration under the Texas Arbitration Act (“TAA”), the order is subject to interlocutory appeal, whereas when a court denies arbitration under the FAA, relief must be sought in a petition for writ of mandamus.” Because the arbitration provision in the contract explicitly designated arbitration pursuant to the Federal Arbitration Act (“FAA”), the court dismissed Phan’s interlocutory appeal and considered his petition for writ of mandamus.

Then, the court stated the test a party seeking to compel arbitration must establish: (a) the existence of an agreement to arbitrate and (b) that the claims fall within the scope of that agreement. The court noted that Letney acknowledged that she had signed the representation agreement and does not contest that the allegations are within the scope of that provision. Then, the court began discussing Letney’s four defenses against enforcement of the arbitration provision.

(1) Letney cites TAA section 171.002, which prohibits arbitration agreements in respect to claims for personal injuries unless each party to the agreement receives advice of counsel and the agreement is in writing and signed by each party and each party’s attorney. Tex. Civ. Prac. & Rem. Code § 171.002(a)(3), (c). However, the court stated that “[e]ven assuming that the TAA section in question can apply to an arbitration agreement selecting FAA procedures, it would not apply in the circumstances presented by this case because Letney has alleged legal malpractice in this lawsuit and not personal injury.”

(2) Letney argues that “arbitration pursuant to the FAA would be improper, despite the selection of FAA arbitration in the arbitration clause, because the contract in question, for legal services in Texas concerning a Texas-based claim, had no impact on interstate commerce.” But the court was not persuaded because here, the arbitration provision clearly specified arbitration under the FAA. The court said that “the majority of courts that have examined this issue have upheld the right of the parties to an arbitration agreement to choose a particular arbitration scheme (state or federal) to govern any resulting arbitration under the agreement.”

(3) Letney claims that the arbitration provision was unconscionable and therefore, invalid. Letney cited Chief Justice Hardberger’s dissent in Henry v. Gonzalez, 18 S.W.3d 684 (Tex. App.—San Antonio 2000, pet. dism’d by agr.). In Henry, Justice Hardberge argued that “arbitration clauses between attorney and client should be held against public policy in the absence of additional protections for the client.” However, the court said that “we believe that such policy arguments are better directed to the legislature.”

Letney also cites an opinion by the Texas Ethics Commission in which the Commission suggested that it would be permissible under the Texas Disciplinary Rules of Professional Conduct to include an arbitration clause in an attorney-client contract only 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. See Op. Tex. Ethics Comm’n No. 586 (2008). However, the court responded that “Opinion No. 586 did not impose any restrictions on attorney-client arbitration clauses because (1) such opinions are advisory at best, (2) the commission expressly declined in the opinion to opine on the substantive law concerning arbitration clause enforceability, and (3) substantive law does not include any such restrictions.”

(4) Finally, Letney cites the Texas Disciplinary Rule of Professional Conduct 1.08(g), which provides that “[a] lawyer shall not make an agreement prospectively limiting the lawyer’s liability to a client for malpractice unless permitted by law and the client is independently represented in making the agreement . . . .” The court, however, stated that an agreement to arbitrate does not limit a party’s liability, but “it merely denominates a procedure for determining that liability.”

The court concluded that none Letney’s arguments have merit, dismissed the interlocutory appeal, and conditionally granted the writ of mandamus.

III. Dissenting Opinion

Justice Charles Seymore filed a dissenting opinion on this case (pdf). In the opinion, Justice Seymore expressed his concern for mandatory arbitration provisions in attorney-client agreements stating that:

I have no disagreement with the majority’s analysis and disposition of all issues with the exception of Shelly Letney’s claim that the method or means of inducing her signature on the agreement renders enforcement procedurally unconscionable. I adopt former Fourth Court of Appeals Chief Justice Phil Hardberger’s concern that special public-policy considerations are implicated when an attorney imposes an arbitration provision on his or her client. See Henry v. Gonzalez, 18 S.W.3d 684, 692 (Tex. App.—San Antonio 2000, pet. dism’d) (Hardberger, C.J., dissenting). Accordingly, I disagree with the majority’s decision to “decline to impose a requirement that attorneys must, in all cases, fully inform prospective clients regarding implications of an arbitration clause in an attorney-client contract.”

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