June 26, 2015

June 26, 2015:

Texas Supreme Court finds that an arbitration provision in an attorney-client employment contract is enforceable, concluding that the provision is not unconscionable, does not violate public policy, and is not illusory.  Royston, Rayzor, Vickery & Williams, LLP v. Francisco "Frank" Lopez, 467 S.W.3d 494 (Tex. 2015).

Francisco Lopez’s claimed common-law wife won $11 million in the lottery.  Lopez hired Royston, Rayzor to represent him in a divorce action against the wife.  The employment agreement between Lopez and Royston, Rayzor contained an arbitration provision that mandated arbitration of all claims arising out of the agreement, except that any claim by the firm to recover its fees or expenses would not be subject to arbitration.  Lopez settled the divorce suit.  He later sued Royston, Rayzor, alleging that the firm caused him to settle for an inadequate amount.  The trial court denied Royston, Rayzor’s motion to compel arbitration, and the court of appeals affirmed, finding that the arbitration provision was so one-sided that it was substantively unconscionable, and therefore, unenforceable.  The Texas Supreme Court reversed, finding that the arbitration provision was enforceable.  The court rejected Lopez’s claims that the provision was unconscionable, against public policy, and illusory.

After noting that a party asserting a defense to an arbitration provision bears the burden of proving that defense, the Texas Supreme Court focused on the three contract provisions relied on by the court of appeals in concluding that the arbitration provision was so one-sided as to be substantively unconscionable.  Two of these contract provisions – Royston, Rayzor could withdraw at any time for any reason and Lopez was responsible for all costs and expenses associated with the divorce suit no matter what the outcome – were not a part of the arbitration provision.  As such, they “relate[d] to the contract at as whole.”  467 S.W.3d at 501.  “And challenges relating to an entire contract will not invalidate an arbitration provision in the contract; rather, challenges to an arbitration provision in a contract must be directed specifically to that provision.”  Id. 

The third contract provision relied on by the court of appeals was the language in the arbitration provision itself saying that the arbitration provision “does not apply to any claims made by the firm for the recovery of its fees and expenses.”  Id. at 498.  Lopez argued that this language rendered the arbitration provision “oppressive and grossly one-sided because it required him to arbitrate all his claims against Royston, Rayzor, while allowing the firm to choose whether to litigate or arbitrate the only claim it realistically would have against him.”  Id. at 501.  The Texas Supreme Court disagreed.  The arbitration provision did not give Royston, Rayzor a choice whether to litigate or arbitrate a claim for its fees and expenses.  Instead, the provision said that such claims were not subject to the arbitration provision, and would therefore would have to be litigated, absent a new agreement to arbitrate.  “[A]n arbitration agreement that requires arbitration of one party’s claims but does not require arbitration of the other party’s claims is not so one-sided as to be unconscionable.”  Id.  “The fact that Lopez was a prospective client of the firm until he entered into the employment contract does not change the principle.”  Id. at 502.  

The court then considered Lopez’s two other challenges to the arbitration provision – that the provision was against public policy and that it was illusory.  With respect to the public policy challenge, Texas Disciplinary Rule 1.03(b) provides that “[a] lawyer shall explain a matter to the extent reasonably necessary to permit the client to make informed decisions regarding the representation.”  Opinion 586 of the Professional Ethics Committee concluded that this rule applies when a lawyer asks a prospective client to agree to an arbitration provision, requiring an explanation of the provision to the prospective client.  But the Texas Supreme Court held that “[t]he Disciplinary Rules are not binding as the substantive law regarding attorneys, although they inform the law,” and that “[o]pinions of the Professional Ethics Committee carry less weight than do the Disciplinary Rules.”  Id. at 503.  “[L]egislative enactments generally establish public policy.”  Id. at 504.  Citing the Texas Arbitration Act, the court reasoned that “as relates to arbitration, the Legislature has clearly and directly indicated its intent that arbitration agreements be treated the same as other contracts.”  Id.  “Accordingly, we decline to impose, as a matter of public policy, a legal requirement that attorneys explain to prospective clients, either orally or in writing, arbitration provisions in attorney-client employment agreements.”  Id.  

With respect to Lopez’s contention that the arbitration provision is illusory, the court noted that a promise is illusory if it “fail[s] to bind the promisor.”  Id. at 505.  “An arbitration agreement is illusory if it binds one party to arbitrate, while allowing the other to choose whether to arbitrate.”  Id.  That was simply not the case here.  “The provision here binds Royston, Rayzor and Lopez as to their claims other than those specifically excluded.  It does not allow either party to unilaterally escape or modify the obligation to arbitrate covered claims.”  Id. at 505-06.  Even as to the excluded claims (claims for the firm’s fees and expenses), Royston, Rayzor did not have the choice whether to arbitrate or litigate.  Instead, it was required to litigate such claims absent a new agreement to arbitrate between the parties.  Id. at 506.     

 

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