Opinion ID: 2829241
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Heading: Unconscionability of Arbitration Agreements

Text: Section 2 of the FAA states 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.” 9 U.S.C. § 2. A central purpose of the FAA is “to reverse the longstanding judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts.” Gilmer v. Interstate/Johnson Lane Corp. , 500 U.S. 20, 24 (1991) (citations omitted). Such agreements are enforceable only if they meet “the requirements of the general contract law of the applicable state.” In re Poly-America, L.P. , 262 S.W.3d 337, 347 (Tex. 2008) (citation omitted). When determining whether an agreement to arbitrate is valid, “state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity, revocability, and enforceability of contracts generally.” Perry v. Thomas , 482 U.S. 483, 493 n.9 (1987) . Texas law renders unconscionable contracts unenforceable. Poly-America , 262 S.W.3d at 348 . Texas further recognizes both substantive and procedural unconscionability . “Substantive unconscionability refers to the fairness of the arbitration provision itself, whereas procedural unconscionability refers to the circumstances surrounding adoption of the arbitration provision.” In re Palm Harbor Homes, Inc. , 195 S.W.3d 672, 677 (Tex. 2006). Because the homeowners complain of the prohibitive cost of arbitration, their claim is grounded in substantive unconscionability . Generally, a contract is unconscionable if, “given the parties’ general commercial background and the commercial needs of the particular trade or case, the clause involved is so one-sided that it is unconscionable under the circumstances existing when the parties made the contract.” FirstMerit Bank , 52 S.W.3d at 757 (citing Tex. Bus. & Com. Code § 2.302 cmt . 1). “The principle is one of the prevention of oppression and unfair surprise and not of disturbance of allocation of risks because of superior bargaining power.” Tex. Bus. & Com. Code § 2.302 cmt . 1 (internal citation omitted). The U.S. Supreme Court has held that statutory claims may be arbitrated “so long as the prospective litigant effectively may vindicate [his or her] statutory cause of action in the arbitral forum.” Green Tree Fin. Corp.-Ala. v. Randolph , 531 U.S. 79, 90 (2000) (citing Gilmer , 500 U.S. at 28). Conversely, an arbitration agreement may render a contract unconscionable if “the existence of large arbitration costs could preclude a litigant . . . from effectively vindicating [his or her] federal statutory rights in the arbitral forum.” Id. ; see also Poly-America, 262 S.W.3d at 355–57; FirstMerit Bank , 52 S.W.3d at 756 (citing Green Tree , 531 U.S. at 91). We should be wary of setting the bar for holding arbitration clauses unconscionable too low. First, arbitration is favored in both federal and Texas law, and to conclude that an arbitration agreement is unconscionable based merely on the “‘risk’ that [the claimant] will be saddled with prohibitive costs” would undermine the “‘liberal federal policy favoring arbitration agreements.’” Green Tree , 531 U.S. at 91 (quoting Moses H. Cone Mem . Hosp. v. Mercury Constr. Corp. , 460 U.S. 1, 24 (1983)); FirstMerit Bank , 52 S.W.3d at 756. Second, the theory behind unconscionability in contract law is that courts should not enforce a transaction so one-sided, with so gross a disparity in the values exchanged, that no rational contracting party would have entered the contract. Restatement (Second) of Contracts § 208 cmt . b (1981). But as we have recognized previously, there is nothing per se unconscionable about arbitration agreements. In fact, historically, Texas law favors settling disputes by arbitration. Arbitration agreements, like the one here, offer a permissible choice to traditional litigation that does not favor either party. Moreover, assuming unequal bargaining power between [the parties] exists does not establish grounds for defeating an agreement to arbitrate under the FAA. EZ Pawn Corp. v. Mancias , 934 S.W.2d 87, 90–91 (Tex. 1996) (per curiam ) (citations omitted). Furthermore, arbitration clauses in consumer contracts reduce merchants’ operating costs and produce savings passed on to the consumer in the form of lower prices. Thus, a fairly administered arbitration should not create a gross disparity in the values exchanged. Stephen J. Ware, Paying the Price of Process: Judicial Regulation of Consumer Arbitration Agreements , 2001 J. Disp. Resol . 89, 89 (2001); see generally Steven Shavell , Alternative Dispute Resolution: An Economic Analysis , 24 J. Legal Stud. 1 (1995). However, we also recognize that arbitration is intended as a lower cost, efficient alternative to litigation. See Poly-America , 262 S.W.3d at 347 (“[A] rbitration is intended to provide a lower-cost, expedited means to resolve disputes . . . .”). Where these justifications are vanquished by excessive arbitration costs that deter individuals from bringing valid claims, the unconscionability doctrine may protect unfairly disadvantaged consumers. We agree, as in Green Tree , that excessive costs imposed by an arbitration agreement render a contract unconscionable if the costs prevent a litigant from effectively vindicating his or her rights in the arbitral forum. See Green Tree , 531 U.S. at 90.