Unconscionable Arbitration Agreement: A First for Texas

In a surprising decision (that almost went unnoticed because of the Holidays and warm Texas weather) arbitration provisions in an employment agreement were found unconscionable by the Texas Supreme Court. In re Poly-America, L.P., 262 S.W.3d 337 (Tex. 2008) involves a retaliatory-discharge claim under the Texas Worker’s Compensation Act (the “Act”) . Justice Brister filed a dissenting opinion.

The facts of the case are as follows. In 1998, Johnny Luna entered into an employment contract with Poly-America, LP. This agreement contained an arbitration clause governed by the FAA which provided, among other things, that Luna split arbitration costs with his employer, limited discovery, and eliminated remedies under the Act. In 2002, Luna suffered a severe injury at work and filed a worker’s compensation claim. He returned to work but was fired shortly thereafter. Luna sued for unlawful retaliatory discharge under the section 451.001 of the Act seeking reinstatement and punitive damages and claiming that the arbitration agreement was unconscionable.

The trial court granted Poly-America’s motion to compel arbitration and Luna sought a writ of mandamus in the court of appeals. The appellate court found the arbitration agreement unconscionable as a whole. In re Luna, 175 S.W.3d 315 (Tex. App.-Houston [1st Dist.] 2004, no pet.). At Disputing, we have blogged about this opinion. See also Donald R. Philbin Jr. and Audrey Lynn Maness, Fifth Circuit Survey: Alternative Dispute Resolution, 40 Tex. Tech L. Rev. 445 (2008) (discussing unconscionability).

The Texas Supreme Court first analyzed unconscionability under the FAA, citing section 2, which provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.“ The court reasoned that state contract law should be applied to decide whether the agreement to arbitrate is valid. Next, it analyzed the issue of unconscionability under Texas law and the purpose of the Act’s anti-retaliatory provisions. Finally, the court addressed the individual arbitration provisions: limitation of remedies, fee-splitting, discovery limitations, prohibition on inquiry, one-year limitations period, lifetime application, and severability.

The court concluded that fee-splitting schemes in an arbitration agreement that “operate to prohibit from fully and effectively vindicating statutory rights are not enforceable.” It held that the agreement’s provisions precluding Luna’s remedies under the Act were substantively unconscionable and void under Texas law. However, the court compelled arbitration of the retaliatory-discharge claim.