Court Opinion

ID: 9398020
Source: CourtListenerOpinion
Date Created: 2023-05-28 14:07:08.977278+00
Date Added: 2024-06-11T17:19:30.038239
License: Public Domain

Supreme Court of Texas
                           ══════════
                            No. 22-0214
                           ══════════

     Houston AN USA, LLC d/b/a AutoNation USA Houston,
                              Petitioner,

                                   v.

                        Walter Shattenkirk,
                             Respondent

   ═══════════════════════════════════════
               On Petition for Review from the
     Court of Appeals for the Fourteenth District of Texas
   ═══════════════════════════════════════

                     Argued February 21, 2023

      JUSTICE LEHRMANN delivered the opinion of the Court.

      The issue in this employment-discrimination suit is whether an
arbitration agreement is unconscionable, and thus unenforceable, on the
ground that the costs associated with arbitration are so excessive they
would foreclose the employee from pursuing his claims. The court of
appeals held that the agreement is unconscionable and affirmed the
trial court’s order denying the employer’s motion to compel arbitration.
Because the burden is on the party resisting arbitration to prove
unconscionability, and because the evidence does not rise above the
speculative “risk” that the employee will actually incur prohibitive costs,
we reverse the court of appeals’ judgment.

                             I. Background

      Petitioner Houston AN USA, LLC d/b/a AutoNation USA
Houston, which owns a car dealership in Houston, hired Respondent
Walter Shattenkirk in May 2017 to be the dealership’s general manager.
According to AutoNation, as part of the onboarding process Shattenkirk
electronically signed and accepted an arbitration agreement requiring
arbitration of all claims and disputes arising from, related to, or
connected with Shattenkirk’s employment, including termination and
discrimination claims. The agreement, which AutoNation attached to
its motion to compel arbitration in this suit, states that any arbitration
conducted thereunder will be governed by the Federal Arbitration Act
(FAA) and “in conformity with the Federal Rules of Evidence, the
Federal Rules of Civil Procedure, and the substantive law governing the
claims pled.” The agreement provides for a single arbitrator who “shall
be a retired judge or licensed attorney with experience serving as an
arbitrator, as mutually agreed to by the parties.”           Notably, the
agreement does not: specify any arbitration rules—such as American
Arbitration Association (AAA) or JAMS rules—that would apply to a
proceeding; designate a particular arbitration organization to conduct
the arbitration; or discuss arbitration costs or how they would be
allocated between the parties.
      Shattenkirk alleges that in August 2017, he heard one of his
superiors make racist comments and reported the incident to a senior
director. The following month, AutoNation placed Shattenkirk on a

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Performance Improvement Plan. On November 6, 2017, AutoNation
terminated Shattenkirk’s employment.            Shattenkirk claims his
termination was due to discrimination and in retaliation for his
reporting the racist comments.          AutoNation’s position is that it
terminated Shattenkirk for poor performance.
      After Shattenkirk obtained a right-to-sue letter from the Equal
Employment      Opportunity    Commission,      the   parties’   attorneys
corresponded about arbitration logistics.       The discussions largely
involved attempts to agree on an arbitrator, though the attorneys also
communicated about the arbitration agreement’s silence on costs and
governing rules.     AutoNation’s attorney noted in one email that
“AutoNation and the Claimant usually agree to split the arbitration
costs,” but no further discussion ensued on that topic.
      When additional efforts to agree on an arbitrator proved
unsuccessful, Shattenkirk sued AutoNation for race discrimination and
retaliation under federal and state law. AutoNation moved to compel
arbitration and to stay or dismiss the lawsuit. Shattenkirk opposed the
motion on the grounds that (1) AutoNation failed to present sufficient
evidence that he signed the arbitration agreement or, alternatively,
(2) the agreement is unconscionable, and thus invalid, because excessive
arbitration costs will likely preclude him from effectively vindicating his
statutory rights. To support his unconscionability defense, Shattenkirk
submitted his own affidavit, his attorney’s affidavit, and an invoice from
an unrelated employment arbitration conducted by the AAA. The trial
court denied the motion to compel, and AutoNation appealed the order.
See TEX. CIV. PRAC. & REM. CODE § 51.016; 9 U.S.C. § 16.

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      The court of appeals affirmed, holding that the agreement was
unconscionable because Shattenkirk produced uncontroverted evidence
that he would likely be required to incur prohibitive arbitration costs.
657 S.W.3d 331, 336–37 (Tex. App.—Houston [14th Dist.] 2022). The
court did not address whether Shattenkirk signed the agreement. Id. at
337 n.3. We granted AutoNation’s petition for review.

                             II. Discussion

      Under the FAA, a party seeking to compel arbitration must
establish the existence of a valid arbitration agreement and
demonstrate that the disputed claims fall within the scope of that
agreement. Wagner v. Apache Corp., 627 S.W.3d 277, 282 (Tex. 2021).
As the court of appeals noted, the parties agree that the FAA applies
and that, if the parties entered into a valid arbitration agreement,
Shattenkirk’s claims fall within its scope.

       A. Applicable Law on Prohibitive Arbitration Costs

      We apply Texas law to determine the validity of an agreement to
arbitrate under the FAA. In re Poly-Am., L.P., 262 S.W.3d 337, 347 (Tex.
2008). Under Texas law, an unconscionable contract is unenforceable.
Id. at 348. “[T]he 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.” In re Olshan Found. Repair Co., 328
S.W.3d 883, 892 (Tex. 2010) (citing RESTATEMENT (SECOND)               OF

CONTRACTS § 208 cmt. b (AM. L. INST. 1981)). In limited circumstances,
the cost of arbitration can render an agreement to arbitrate

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unconscionable.     See Poly-Am., 262 S.W.3d at 356 (holding that
arbitration provisions in an employment agreement “that operate to
prohibit an employee from fully and effectively vindicating statutory
rights are not enforceable”).
       A party opposing arbitration on the ground that the prohibitive
cost of arbitrating renders the agreement to do so unconscionable has
the burden of proof. Olshan, 328 S.W.3d at 893 (citing Green Tree Fin.
Corp.–Ala. v. Randolph, 531 U.S. 79, 90 (2000)). To meet that burden,
the party must present “some evidence” that it “will likely incur
arbitration costs in such an amount as to deter enforcement of statutory
rights in the arbitral forum.” Id. (quoting Poly-Am., 262 S.W.3d at 356)
(emphasis omitted). Pertinent factors include whether “the total cost of
arbitration is comparable to the total cost of litigation” and “the
claimant’s overall ability to pay the arbitration fees and costs.” Id. at
894–95. 1   Further, making the required showing entails presenting
more than evidence of the “risk” of incurring excessive costs; it requires
“specific evidence that a party will actually be charged excessive
arbitration fees.” In re U.S. Home Corp., 236 S.W.3d 761, 764 (Tex.
2007) (citing Green Tree, 531 U.S. at 90–91); see also Olshan, 328 S.W.3d
at 895 (“While we do not mandate that claimants actually incur the cost
of arbitration before they can show its excessiveness, parties must at
least provide evidence of the likely cost of their particular arbitration,

       1  In Olshan, we explained that if the costs of proceeding in the two
forums are comparable, that effectively ends the inquiry because it renders the
arbitral forum “equally accessible.” 328 S.W.3d at 894–95.

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through invoices, expert testimony, reliable cost estimates, or other
comparable evidence.”). 2
       In analyzing claims of excessive arbitration costs, courts must
consider how the agreement addresses the allocation of those costs. In
In re FirstMerit Bank, the agreement, like the one at issue here, did not
mention arbitration costs at all. 52 S.W.3d 749, 757 (Tex. 2001). The
plaintiffs, who asserted numerous claims premised on their purchase of
an allegedly defective mobile home, presented evidence of the AAA’s
general filing and administrative fees but “no evidence that the AAA
would actually conduct the arbitration or charge the specified fees.” Id.
We also noted that the AAA’s commercial arbitration rules gave the AAA
discretion to defer or reduce administrative fees in cases of extreme
hardship. Id. For those reasons, we held that the plaintiffs failed to
present legally sufficient evidence that they “would be denied access to
arbitration based on excessive costs.” Id.; see also U.S. Home Corp., 236
S.W.3d at 763–64 (holding that a schedule of the AAA’s usual fees was
“not enough” to invalidate an agreement to arbitrate “in accordance with
the [AAA’s] Commercial or Construction Industry Arbitration Rules, as
appropriate”).

       2 AutoNation broadly asks us to revisit our jurisprudence on the
unconscionability defense to contract enforcement, arguing that “most courts
of appeals have [erroneously] made it easier to prove that an arbitration
agreement is unconscionable than any other type of contract.” We need not do
so here, however, because Shattenkirk’s evidence falls short of the evidence
necessary to hold an arbitration agreement unenforceable under our existing
unconscionability precedent. We express no opinion on the applicability of the
unconscionability defense beyond the facts and circumstances presented.

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      Our analysis of arbitration costs in In re Poly-America, an
employment-retaliation case, is also instructive. The agreement in that
case provided that the costs would be split, with the employee’s share
capped at an amount tied to his earnings. 262 S.W.3d at 344. We
explained that the claimant “has not demonstrated that the ability to
pursue his claim in the arbitral forum hinges upon his payment of the
estimated costs; to the contrary, depending upon the circumstances, [the
claimant] may not have to bear any cost at all.” Id. at 356. Further, we
saw “nothing that would prevent arbitrators from fairly adjusting
employee cost provisions when necessary to allow full vindication of
statutory rights in the arbitral forum,” particularly in light of the
agreement’s provision that “the arbitrator may modify unconscionable
terms.” Id. at 357.
      Finally, we find guidance in Olshan, in which homeowners who
sued Olshan for improper foundation repairs had signed contracts
requiring arbitration of disputes to be administered by the AAA and in
accordance with the AAA’s commercial arbitration rules. 328 S.W.3d at
886–87. In arguing that the prohibitive cost of arbitration rendered the
agreement unenforceable, the homeowners provided AAA invoices for
other arbitrations in allegedly similar cases. Id. at 897. We held that a
showing of the arbitration costs incurred by other claimants “falls well
short of specific evidence that these particular parties will be charged
excessive fees” given the absence of evidence that the homeowners’
claims were similar in amount or difficulty or that the homeowners had
“made any effort to reduce the likely charges” through, for example,
requests for fee waivers or pro bono arbitrators.     Id.   Further, the

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homeowners provided no evidence of the comparison of arbitration and
litigation costs or their ability to pay. Id.

                                B. Analysis

       With this guidance in mind, we turn to the evidence Shattenkirk
presented to support his assertion that excessive arbitration costs
prevent him from effectively pursuing his discrimination and retaliation
claims in the arbitral forum. First, Shattenkirk presented an invoice
from the AAA charging $34,104 for an unrelated employment-
discrimination case that included a three-day hearing.                In an
accompanying      affidavit,   Shattenkirk’s    attorney    averred    that
Shattenkirk’s case is more complicated and the trial will likely be longer.
By contrast, the attorney attested that the cost to litigate in court “would
likely be a few hundred dollars.” He further averred that conducting the
arbitration in conformity with the Federal Rules of Civil Procedure and
the Federal Rules of Evidence, as the agreement requires, will make the
arbitration even more costly. Finally, Shattenkirk presented his own
affidavit in which he stated that he was unemployed from November
2017 until February 2020, that he currently earns significantly less than
when he worked for AutoNation, that he has incurred significant debt,
and that incurring costs “above what it would cost me to litigate in Court
will pose even further significant hardship on my family and will push
my finances further into debt.”           AutoNation did not object to
Shattenkirk’s evidence or present any responsive evidence regarding
arbitration costs.
       As in FirstMerit Bank, Poly-America, and Olshan, this evidence
falls short of demonstrating that Shattenkirk will actually be charged

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fees that would prevent him from effectively vindicating his statutory
rights in the arbitral forum.
       First, as we recognized in Olshan, “the crucial inquiry is whether
the arbitral forum in a particular case is an adequate and accessible
substitute to litigation.” 328 S.W.3d at 894. The AAA invoice submitted
by Shattenkirk, together with the attorney’s affidavit, arguably provides
a reasonable estimate of the fees associated with the arbitration itself.
However, we cannot assess whether those fees are what would prohibit
Shattenkirk from pursuing his rights without knowing (1) how that
amount relates to the overall expense of litigating versus arbitrating
and (2) Shattenkirk’s ability to afford the former but not the latter. On
those points, the evidence is quite vague and conclusory. Shattenkirk
broadly attested that paying “anything above” the cost to litigate would
cause him financial hardship, but the anticipated cost to litigate, which
Shattenkirk indicates he can afford, is itself unclear. Shattenkirk’s
attorney summarily stated that litigation “would likely be a few hundred
dollars,” but that statement appears to take no litigation costs into
account other than filing fees associated with initiating the suit. Again,
absent concrete evidence that the increased cost associated with
arbitration, compared to litigation, is what forecloses a party from
pursuing his claims, the party cannot show that those costs are what
make the expense of arbitrating “prohibitive.” 3

       3  Perhaps Shattenkirk and his attorney have entered into a
contingency-fee agreement pursuant to which the attorney will cover litigation
costs and Shattenkirk will owe no costs or attorney’s fees unless and until he
recovers damages from AutoNation. But no evidence of such an agreement is
in the record.

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      Second, to the extent Shattenkirk has demonstrated that paying
even half the anticipated arbitration fees would prohibit him from
pursuing claims that he could otherwise afford to litigate, nothing in the
record indicates that Shattenkirk will actually incur those costs. See
Poly-Am., 262 S.W.3d at 356 (noting that the claimant “has not
demonstrated that the ability to pursue his claim in the arbitral forum
hinges upon his payment of the estimated costs”).        As Shattenkirk
recognizes, arbitration organizations like the AAA and JAMS have
“standard and customary [employment arbitration] rules” requiring the
employer to pay all costs except an initial filing fee. Shattenkirk argues
that because the arbitration agreement at issue fails to similarly
allocate arbitration fees to the employer, the agreement on its face
renders the arbitral forum inaccessible.       As discussed below, that
assertion misstates the burden of proof and reads language into the
agreement that simply is not there. A court may not nullify an otherwise
valid agreement to arbitrate based on purely speculative assumptions
about the burdens of compelling arbitration.
      Again, the agreement is silent on arbitration costs. Shattenkirk’s
reliance on case law invalidating agreements that affirmatively split
such costs, assuming those cases were correctly decided, is thus
misplaced, at least at this stage.      See, e.g., AOF Servs., LLC v.
Santorsola, No. 13-14-00641-CV, 2016 WL 1165829, at *3–4 (Tex.
App.—Corpus Christi–Edinburg Mar. 24, 2016, no pet.) (holding that a
fee-splitting   provision    rendered    an     arbitration   agreement
unconscionable where there was no cap on the amount the claimant
would be required to pay, no allowance for the arbitrator to modify the

                                   10
percentage of compensation owed by either party, and some evidence
that paying the likely cost would prevent the claimant from enforcing
his statutory rights). Shattenkirk seems to assume that he will be
responsible for half the arbitration fees, and the court of appeals
similarly viewed the evidence as establishing that AutoNation “would
require Shattenkirk to split the costs of arbitration.” 657 S.W.3d at 336.
The only support for that conclusion is an email from AutoNation’s
counsel stating that “AutoNation and the Claimant usually agree to
split the arbitration costs.” That email is a far cry from establishing
that AutoNation even could, let alone would, require Shattenkirk to split
arbitration costs. See FirstMerit Bank, 52 S.W.3d at 756 (noting the
Supreme Court’s holding that “an arbitration agreement’s mere silence
with respect to costs and fees, by itself, is a ‘plainly insufficient’ basis for
invalidating the agreement” (quoting Green Tree, 531 U.S. at 91)).
       We emphasize that our holding should not be understood to
encourage silence in arbitration agreements regarding payment terms,
much less to imply that such silence entails no consequences. Our
holding is far more limited. Assuming that Shattenkirk signed the
agreement (a question on which we express no opinion), he clearly
agreed to arbitrate. He cannot leverage the contractual silence about
who would pay to summarily avoid the arbitration agreement he made.
See Green Tree, 531 U.S. at 91. However, a bare agreement to arbitrate
does not in and of itself necessarily include an agreement about what
Shattenkirk will pay.
       For this reason, it is premature for us, or any court, to assess
unconscionability—or, said differently, why Shattenkirk cannot, at this

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stage, meet his burden to defeat arbitration on that ground. When one
party, like AutoNation, invokes its right to arbitrate a dispute, it must
show some basis grounded in a contract or other binding law to compel
the other party, like Shattenkirk, not only to submit to arbitration but
also to pay some particular amount toward the costs of that arbitration.
Here, if the court of appeals determines on remand that Shattenkirk
signed the arbitration agreement, perhaps AutoNation will decide to pay
for the arbitration itself, thus eliminating any dispute about payment
terms and, in turn, foreclosing unconscionability as a ground for
avoiding arbitration.     If AutoNation insists on some payment from
Shattenkirk, and Shattenkirk resists arbitration on that ground, only
then will the court have to address the legal basis for Shattenkirk’s
obligation to pay and, if so, what amount. And only once that question
is answered would an assessment of unconscionability be ripe for
judicial consideration. 4     In other words, the question Shattenkirk
presents to us today may never even arise, and if it does, it will be
because of how several antecedent questions are resolved. Had the
arbitration agreement not been silent, none of these problems would
have arisen.

       4 If the parties in fact reach this point, the resulting analysis would no
longer depend on speculation but would be grounded on a factual record
regarding Shattenkirk’s actual obligations. For example, if the parties proceed
with “standard” cost allocation as reflected by the AAA and JAMS rules
governing employment arbitrations, the vast majority of the costs will be
allocated to AutoNation, the employer. Based on the evidence presented,
concluding that costs will likely be allocated in such a way as to make
arbitration prohibitively expensive for Shattenkirk would be, at best,
premature now, but further development of the case would convert that
speculation into something more certain.

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      We describe this analytical pathway only to explain why our
decision today is as limited as it is: that, as the party opposing
arbitration, Shattenkirk has not met his burden of proving the
likelihood of incurring prohibitive arbitration costs. See Olshan, 328
S.W.3d at 897. At least at this stage, “the ‘risk’ that [Shattenkirk] will
be saddled with prohibitive costs is too speculative to justify the
invalidation of [the] arbitration agreement.” Poly-Am., 262 S.W.3d at
356 (citation omitted).     As explained, the agreement’s silence on
arbitration costs does not foreclose the “risk” that Shattenkirk will be
saddled with prohibitive costs, but neither does it indicate that he will
actually be charged such costs. The silence cuts both ways, so it is no
evidence of either. Accordingly, we hold that, at this point, the evidence
is legally insufficient to support a finding that excessive arbitration fees
prevent Shattenkirk from effectively pursuing his claims in the arbitral
forum. See id.

                             III. Conclusion

      Because the court of appeals erroneously held that the evidence
supports the trial court’s finding that the arbitration agreement is
unconscionable, we reverse the court of appeals’ judgment. We remand
the case to that court to address in the first instance the parties’ issues
regarding whether Shattenkirk signed the agreement.

                                         Debra H. Lehrmann
                                         Justice

OPINION DELIVERED: May 26, 2023

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