Court Opinion

ID: 9958088
Source: CourtListenerOpinion
Date Created: 2024-04-07 14:08:14.778497+00
Date Added: 2024-06-11T08:17:45.315877
License: Public Domain

Supreme Court of Texas
                            ══════════
                             No. 22-0830
                            ══════════

 Lennar Homes of Texas Inc.; Lennar Homes of Texas Land and
     Construction, Ltd.; Lennar Homes of Texas Sales and
                       Marketing, Ltd.,
                              Petitioners,

                                   v.

                          Mohammad Rafiei,
                              Respondent

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

                            PER CURIAM

      An agreement to arbitrate may be unenforceable if pursuing a
claim in arbitration is so cost prohibitive that it prevents a party from
vindicating its rights. Like other kinds of formation issues that arise in
disputes in which a party invokes arbitration, a court ordinarily decides
this threshold issue. In some arbitration agreements, however, the
parties agree to submit these “arbitrability” questions to an arbitrator,
not a court. In such cases, it is the arbitrator who decides whether the
cost of arbitration forecloses an adjudication of the claim in arbitration.
If so, the claims are then returned to court.
      This case involves such an “arbitrability” clause in a residential
construction contract. A homeowner sued his builder, alleging personal
injuries attributable to a construction defect. The builder moved to
compel arbitration, and the trial court denied the motion. A divided
court of appeals affirmed, holding that the homeowner sufficiently
demonstrated that the cost to arbitrate was excessive and thus an
arbitral forum was inadequate to vindicate the homeowner’s rights. 652
S.W.3d 532, 535 (Tex. App.—Houston [14th Dist.] 2022).
      A claim that the arbitral forum is wholly inadequate to decide
whether the costs of arbitration are unconscionable requires evidence of
(1) the cost for an arbitrator to decide arbitrability, (2) the cost for a
court to decide arbitrability, and (3) a party’s ability to afford one but
not the other. See Hous. AN USA, LLC v. Shattenkirk, 669 S.W.3d 392,
397 (Tex. 2023). The trial court had no evidence before it from which to
conclude that the plaintiff could not afford a hearing in arbitration to
determine whether the agreement overall is cost prohibitive. Without
such evidence, it could not conclude that the arbitral forum is an
inadequate and inaccessible substitute to litigation such that the
delegation provision is unconscionable and unenforceable. We therefore
reverse the judgment of the court of appeals.
                                    I
      Mohammad Rafiei and his wife bought a house from Lennar
Homes. Rafiei alleges that, approximately three years after purchasing
the home, “there was a sudden and unexpected explosion” of the garbage

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disposal when he turned it on, injuring him. Rafiei sued Lennar for
premises liability and negligence, alleging that Lennar had improperly
installed the garbage disposal. He seeks compensatory damages in
excess of $1 million and punitive damages.
       The purchase contract that Rafiei and Lennar executed contains
an agreement to submit disputes between them to arbitration under the
Federal Arbitration Act. “Disputes” includes any claims related to the
home, claims related to personal injury, and notably, “issues of
formation, validity or enforceability of [the arbitration agreement].” The
delegation clause provides: “All decisions respecting the arbitrability of
any Dispute shall be decided by the arbitrator(s).”
       The agreement also sets forth particular arbitration procedures.
Arbitration must be “administered by the AAA in accordance with the
AAA’s Construction Industry Arbitration Rules.”              If the claimed
damages exceed $250,000 or the claimant demands punitive damages,
then the agreement requires that three arbitrators resolve the dispute,
unless the parties agree to use only one. Finally, the agreement requires
that each party “bear its own costs and expenses.”
       Lennar moved to compel arbitration. 1 Rafiei opposed the motion,
arguing that the arbitration agreement and its delegation provision are
unconscionable because arbitration was prohibitively costly and would
prevent him from pursuing his claims. In support of his response, Rafiei
provided (1) the AAA Construction Industry Arbitration Rules

       1 The arbitration agreement also requires that the parties mediate their

dispute. Neither party has raised this as an issue in these proceedings.

                                      3
Administrative Fee Schedules; (2) his affidavit; and (3) an affidavit from
an attorney. The trial court denied Lennar’s motion.
      A divided court of appeals affirmed. 652 S.W.3d at 535. The
majority held that the trial court could have concluded that the
delegation provision and the arbitration agreement as a whole were both
unconscionable because arbitrating the threshold issue of arbitrability
would cost $8,025. If Rafiei were required to pay more than $6,000, it
held, he would be precluded from pursuing his claims. Id. at 540.
      The dissenting justice observed that Rafiei had failed to present
evidence of the actual costs he is likely to incur to have arbitrability
decided by an arbitrator and that he could not afford them. Id. at 541,
544 (Jewell, J., dissenting).    The dissent further noted that the
majority’s opinion created a conflict between the courts of appeals
regarding the standard for determining whether a delegation of
arbitrability is unconscionable based on cost. Id. at 543; see Taylor
Morrison of Tex., Inc. v. Skufca, 650 S.W.3d 660, 681-82 (Tex. App.—
Houston [1st Dist.] 2021, no pet.) (holding that homeowners failed to
show unconscionability of a delegation provision where they presented
evidence regarding the cost of arbitrating the merits, not arbitrability,
and offered no evidence of their ability to pay). Lennar petitioned this
Court for review.
                                    II
                                    A
      When no factual disputes exist, we review de novo the denial of a
motion to compel arbitration on the basis of unconscionability. Royston,
Rayzor, Vickery, & Williams, LLP v. Lopez, 467 S.W.3d 494, 499 (Tex.

                                    4
2015) (citing J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex.
2003)). Lennar did not controvert the facts in the affidavits opposing
arbitration, so we accept them as true for evaluating unconscionability.
      Arbitration costs that are so excessive that they make the arbitral
forum unavailable to a party seeking to vindicate his rights may render
an agreement to arbitrate unconscionable. In re Olshan Found. Repair
Co., 328 S.W.3d 883, 893 (Tex. 2010).             “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.” Shattenkirk, 669 S.W.3d at 395 (quoting Olshan, 328 S.W.3d
at 892).   The party opposing arbitration bears the burden to show
unconscionability. Id. (citing Olshan, 328 S.W.3d at 893). When a court
“appl[ies] the unconscionability standard, the crucial inquiry is whether
the arbitral forum in a particular case is an adequate and accessible
substitute to litigation, a forum where the litigant can effectively
vindicate his or her rights.” Olshan, 328 S.W.3d at 894.
      When an agreement delegates arbitrability issues to an arbitrator
like this one does, it is for the arbitrator—not a court—to determine
whether the arbitration agreement as a whole is unconscionable due to
excessive costs. In that circumstance, an unconscionability challenge
presents one narrow question for a court to decide: whether the party
opposing arbitration has proven that the cost of arbitrating this
delegated threshold issue of unconscionability is excessive, standing
alone, and prevents the party from enforcing its rights. In other words,
Rafiei must show that the delegation provision itself is unconscionable.

                                   5
See RSL Funding, LLC v. Newsome, 569 S.W.3d 116, 121 (Tex. 2018)
(“When faced with [a delegation clause], courts have no discretion but to
compel arbitration unless the clause’s validity is challenged on legal or
public policy grounds.”); see also Rent-A-Center, W., Inc. v. Jackson, 561
U.S. 63, 68-71, 73-74 (2010) (holding that under the FAA, when an
arbitration      agreement     contains      a    delegation      provision,
unconscionability is for the arbitrator to decide unless the delegation
provision itself is specifically challenged as unconscionable).
                                     B
      To determine unconscionability, a court must first consider “a
comparison of the total costs of the two forums” and decide “whether
that cost differential is so substantial as to deter the bringing of claims.”
Olshan, 328 S.W.3d at 893-94 (quoting Bradford v. Rockwell
Semiconductor Sys., Inc., 238 F.3d 549, 556 (4th Cir. 2001)). As evidence
of these costs, Rafiei provided an attorney’s affidavit and the AAA
Administrative Fee Schedules. In his affidavit, the attorney discusses
the cost to arbitrate the overall dispute based on the agreement and the
fee schedules.    He does not, however, address the relevant issue—
whether the cost to arbitrate the arbitrability question presents an
insurmountable obstacle to bringing this claim such that the delegation
clause is itself unconscionable.
      The AAA Administrative Fee Schedules provide that a claimant
instituting an action with damages of over $1 million must pay a filing
fee of either $7,000 under the Standard Fee Schedule or $3,500 under
the Flexible Fee Schedule.      Under the Standard Fee Schedule, the
parties owe an additional $7,700 if the case proceeds to a hearing.

                                     6
Under the Flexible Fee Schedule, the parties owe an additional $5,700
as a “Proceed Fee” and $7,700 if the case continues to a hearing. 2 These
schedules provide some evidence regarding the fee for arbitrating the
threshold issue of unconscionability.
       In addition to owing his share of these fees, Rafiei would owe half
the cost of the arbitrators’ hourly rates and associated expenses under
the parties’ agreement. 3 Although price lists are evidence of what Rafiei
could be expected to pay, our Court has held that this falls short of
“specific evidence that th[is] particular part[y] will be charged excessive
fees.” Shattenkirk, 669 S.W.3d at 396 (quoting Olshan, 328 S.W.3d at
897). Rather, a party must adduce some evidence of a fee schedule as it
is applied to resolve an arbitrability issue in his particular case.
       In In re Olshan, a foundation repair company and the
homeowners who sued it had agreed to arbitrate their claims. 328
S.W.3d at 886-87. In concluding that the evidence was insufficient to
establish unconscionability, we noted that “there is no evidence that the
homeowners have made any effort to reduce the likely charges through
requests for fee waivers, pro bono arbitrators, or even simply requesting
a one arbitrator panel.” Id. at 897; see also In re FirstMerit Bank, N.A.,
52 S.W.3d 749, 757 (Tex. 2001) (holding that the plaintiffs failed to

       2 For non-monetary claims, the initial filing fee is $3,250 or $2,000,

depending on the fee schedule. The fee schedules provide that “[t]he
non-monetary filing fee is the minimum filing fee for any case requesting
non-monetary relief. Where a party seeks both monetary damages and
non-monetary relief, the higher of the two filing fees will apply.”
       3 The arbitration agreement provides that “each party shall bear its own

costs and expenses, including attorneys’ fees and paraprofessional fees, for any
mediation and arbitration.”

                                       7
present legally sufficient evidence of unconscionability and noting that
the AAA may defer or reduce fees in cases of extreme hardship).
      Similar to the plaintiffs in Olshan and FirstMerit Bank, in this
case, Rafiei did not adduce evidence of how the fee schedule would be
applied to resolve the unconscionability issue. Construction Industry
Arbitration Rule 56 provides that “[t]he AAA may, in the event of
extreme hardship on the part of any party, defer or reduce the
administrative fees.”     AAA, CONSTRUCTION INDUSTRY ARBITRATION
RULES AND MEDIATION PROCEDURES Rule 56, at 35 (2024) (previously at
Rule 55 (2015)). Like the homeowners in Olshan, Rafiei has presented
no evidence that he sought a deferral or reduction of the administrative
fees or an agreement to proceed with a single arbitrator.           Without
evidence that Rafiei sought to estimate the actual costs associated with
arbitrating the arbitrability question, it is speculative to conclude that
the delegation provision is itself unconscionable. “[M]aking 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.’” Shattenkirk, 669 S.W.3d at 395
(quoting In re U.S. Home Corp., 236 S.W.3d 761, 764 (Tex. 2007)). One
may not “assume the most expensive possible scenario.” Olshan, 328
S.W.3d at 897 (citation omitted).
      A    proper   unconscionability     analysis   further    requires   a
comparison of the relevant costs between litigating in court and in
arbitration and of the claimant’s ability to pay the difference in such
costs. “[W]e cannot assess whether [estimated arbitration] fees are what
would prohibit [a claimant] from pursuing his rights without knowing

                                     8
(1) how that amount relates to the overall expense of litigating versus
arbitrating and (2) [the claimant’s] ability to afford the former but not
the latter.” Shattenkirk, 669 S.W.3d at 397; see also Olshan, 328 S.W.3d
at 897.
       In Shattenkirk, a former employee opposed arbitration of a claim
against his employer on the ground that excessive costs rendered any
agreement to arbitrate unconscionable.            669 S.W.3d at 394.   The
employee averred that paying “anything above” the cost to litigate would
cause him financial hardship. Id. at 397. Noting the evidence about
costs and ability to pay was “quite vague and conclusory,” we held it
insufficient to demonstrate unconscionability. Id.
       The evidence in this case is similarly vague. While the attorney’s
supporting affidavit says that the cost of arbitration is “astronomically
higher” than litigation, that the out-of-pocket expenses in litigation are
“minimal,” and that hearings and trial are “free,” he does not quantify
these differences with an estimate related to a hearing on the delegation
clause in the arbitral forum.        “[A]bsent 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.’”
Id.; see also Olshan, 328 S.W.3d at 897 (“Even if we took these invoices
as evidence of the likely arbitration charges to the [plaintiffs], they have
provided no comparison of these charges to the expected cost of
litigation . . . or their ability to pay these costs.”).
       More important, Rafiei’s affidavit fails to establish that he can
afford litigation but not arbitration. Though he avers that he cannot

                                        9
afford more than $6,000 in “upfront costs,” he does not detail his
available resources or lack of ability to pay. Rather, he notes that he
has $6,000 in surplus income each month; he does not explain why this
surplus is unavailable to pay for fees associated with arbitration of the
unconscionability issue. 4     Unconscionability cannot be established
absent evidence of “the claimant’s overall ability to pay the arbitration
fees and costs.” Shattenkirk, 669 S.W.3d at 395 (quoting Olshan, 328
S.W.3d at 895). Even assuming that the evidence was sufficient to
conclude that it would cost $8,025 to arbitrate the unconscionability
issue, Rafiei’s affidavit fails to show that he cannot afford it.
       Rafiei responds that the limitless fee exposure in the parties’
agreement, coupled with a provision in the schedule that permits the
arbitrator to allocate administrative fees, makes the cost of arbitrating
unpredictable and favors Lennar, as a corporate defendant with more
resources.   In In re Poly-America, L.P., we noted that “fee-splitting
provisions that operate to prohibit an employee from fully and
effectively vindicating statutory rights are not enforceable.” 262 S.W.3d
337, 356 (Tex. 2008) (citing In re Halliburton Co., 80 S.W.3d 566, 572
(Tex. 2002)). This much is true, and cost caps mitigate against a finding
of unconscionability. See id. at 356-57 (noting that the cost cap in the
arbitration agreement may benefit the plaintiff). The lack of a cap,
however, does not entirely remove the burden to show that a party likely
will incur arbitration costs “in such an amount as to deter enforcement

       4 Rafiei states, “My average net income every month (i.e., the amount of

disposable income I have after deducting all necessary living expenses for
myself and my family from my average monthly gross income) is $6,000.”

                                      10
of statutory rights in the arbitral forum.” Id. at 356. Rafiei has not
presented evidence that he will likely incur arbitration costs in an
amount that would deter enforcement of his rights due to his inability
to pay them.    The principle behind unconscionability “is one of the
prevention of oppression and unfair surprise and not of disturbance of
allocation of risks because of superior bargaining power.” Olshan, 328
S.W.3d at 892 (quoting TEX. BUS. & COM. CODE § 2.302 cmt. 1). Unequal
bargaining power alone “does not establish grounds for defeating an
agreement to arbitrate.” Id. (quoting EZ Pawn Corp. v. Mancias, 934
S.W.2d 87, 90 (Tex. 1996)).
                              *     *      *
      We hold that the record fails to support a finding that the parties’
delegation clause is itself unconscionable due to prohibitive costs to
adjudicate this threshold issue in arbitration.      We do not address
whether the arbitration agreement as a whole is unconscionable, as that
issue is reserved for the arbitrator under the parties’ delegation
agreement.
      Without hearing oral argument, see TEX. R. APP. P. 59.1, we grant
the petition for review, reverse the judgment of the court of appeals, and
remand the case to the trial court for further proceedings consistent with
this opinion.

OPINION DELIVERED: April 5, 2024

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