Bustos Law Firm

Archive for March, 2011|Monthly archive page

Arbitration Agreement Unconscionable? “See You in Court”

In Arbitration, Dispute Resolution, Federal Law, Litigation on March 16, 2011 at 1:12 PM

Have you made a significant purchase lately? Or perhaps agreed to “terms and conditions” to access web services? Maybe you’ve recently signed an employment agreement. If so, there is a good chance you have waived your right to an in-court trial with respect to any disputes that may arise out of your transaction.

It’s called an arbitration clause. Arbitration clauses find their way into all sorts of settings: consumer purchases, work contracts, high-dollar corporate transactions, you name it. They are agreements to resolve disputes before a private arbitrator rather than a judge or jury. By signing them, a person may be agreeing to vindicate rights arising out of the transaction in front of arbitrators sympathetic to the interests of the other party—and maybe even in a forum many hundreds of miles away! It is not surprising that folks often sign arbitration clauses without any knowledge of their meaning or effect.  Because of the Federal Arbitration Act (FAA), once signed, arbitration clauses are not easily avoided.


Congress passed the FAA with the specific intent of keeping courts and state governments from voiding arbitration clauses. Section 2 of the FAA states 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.” In other words, arbitration agreements must be treated the same as any other contract under state law.

Texas courts may void arbitration agreements for unconscionability because the doctrine of unconscionability applies to all contracts.

Applying Unconscionability to Arbitration

The general standard for unconscionability is a bit nebulous (not to mention extraordinarily difficult to establish). Fortunately, courts have further explicated this doctrine as it applies to arbitration clauses.

If a claimant’s substantive rights cannot be successfully vindicated in the arbitral forum, there is a healthy possibility a Texas court will find the arbitration clause unconscionable. See In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883, 893 (Tex. 2010). A key issue related to a claimant’s “substantive rights” is whether the arbitration proceeding will be an “adequate and accessible substitute to litigation.” Id. at 894.

The Texas Supreme Court has identified a number of factors for determining whether  an arbitration proceeding is “an adequate and accessible substitute.” These include the actual cost of arbitration compared to the total amount of damages the plaintiff is seeking and the claimant’s ability to pay the arbitration fees and costs. Id. at 895. In addition, the Texas Supreme Court has stated that the most important factor is a comparison of the costs of the arbitral and the traditional litigation forums. Id. at 894-95. An important inquiry related thereto is whether such cost differential will “deter individuals from bringing valid claims.” See Id. at 893.  

If a claimant can present substantive evidence in support of these factors, evidence that goes beyond “merely speculat[ing] about the risk of possible cost,” Id. at 895, the chances of blowing up the arbitration agreement and enforcing the claim in a court of law rather than an arbitral forum greatly improve.

Hey now, you stole my employee!!

In Employment, Legal, Texas Law on March 15, 2011 at 1:45 PM

Texas is known as a “right to work” state, and Texas’ laws generally promote the free practice of a trade or the ability to work.  Emergent under Texas law, however, is a body of law devoted to covenants not to compete.  Businesses want to protect those things it finds critical to its success—including its employees.  Texas law is beginning to recognize the importance of human capital to business. As this law has grown, some employers have sought to put their current employees under a covenant not to compete.  Some, however, have run into a huge roadblock in enforcement of their agreement: consideration.

 Under Texas law, an existing employee who signs a covenant not to compete must be given new confidential information as consideration.  Powerhouse Productions v. Scott, 260 S.W.3d 693, 697 (Tex. App.—Dallas 2008, no pet.); see also, Alex Shesnunoff Management Services, L.P. v. Johnson, 209 S.W.3d 644, 651 (Tex. 2006).  This new confidential information serves as consideration for the agreement.  Of course, for any agreement to be binding, there needs to be consideration. This is a really tricky area. It is tough to give an existing employee—one that may be in the employ of the business for years something new and confidential.  Texas law, however, is not sympathetic.  Some new and unique information must be given.

 What is considered confidential information is not fully defined.  The Texas Supreme Court in In re Bass, 113 S.W.3d 735, 739 (Tex. 2003), however, gave us some indications of what may qualify.  The Texas Supreme Court gave six non-exclusive factors to determine if a trade secret, or confidential information, exists:

 (1) the extent to which the information is known outside of his business;

(2) the extent to which it is known by employees and others involved in his business;

 (3) the extent of the measures taken by him to guard the secrecy of the information;

 (4) the value of the information to him and to his competitors;

 (5) the amount of effort or money expended by him in developing the information; and

 (6) the ease or difficulty with which the information could be properly acquired or duplicated by others. 

In re Bass, 113 S.W.3d at 739. 

 Employers need to be careful if they want their existing employees to sign covenants not to compete. Signature alone does not mean there is a valid and enforceable contract. New confidential consideration must be given—otherwise, all you have is just a piece of paper. 

Why is it so hard to do good? The non-profit battlefield

In Federal Law, Legal, non-profits on March 10, 2011 at 8:53 PM

Non-profits play a critical role in our communities. They provide us educational, artistic, religious, and athletic enjoyment. The laws governing non-profit organizations are complex and interesting — to say they are a battlefield is an understatement. Particularly complex are the Internal Revenue Service (“IRS”) regulations and rules. Section 501(c)(3) of the tax code provides tax exemption for non-profit organizations that perform an exempt function. Section 501(c)(3) organizations include churches, schools, hospitals, arts and environmental groups, and other organizations that are considered charitable. To obtain exempt status under Section 501(c)(3), an organization must meet the following tests:

(1) Organized as a nonprofit corporation, or as a “community chest, fund, or foundation.”

(2) Organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educational purposes, to foster national or international amateur sports competition, or to prevent cruelty to children or animals.

(3) No part of its “net earnings” may inure to the benefit of any private shareholder or individual.

(4) No “substantial part” of the organization’s activities may consist of certain lobbying activities.

(5) The organization may not participate or intervene in any political campaign on behalf of or in opposition to any candidate for public office.


The IRS presumes that any organization formed after October 9, 1969, is a private foundation. An organization must notify the IRS if it is not a private foundation. This “notification” process requires the completion of an intensive and complex IRS form.  Most non-profits are not private foundations. Private foundations are organizations that receive most of their income from a small group of people – usually an individual, family, or corporation. A public charity, however, receives a bulk of their money from gifts or fees. There are substantial tax consequences associated with each and any forming organization should seek legal and financial counsel before filing with the IRS.

In order to satisfy the IRS that an organization is not a private foundation, an organization must, among other things, show that it meets the requirements of Section 509(a)(1)-(4). For example, Section 509(a)(1) organizations include churches, schools, hospitals, and other organizations that receive their public support primarily from gifts, grants and contributions from a broad group of people. In addition, Section 509(a)(2) covers organizations that receive their support from a combination of gifts, grants and contributions and fees for their exempt services. Organizations that are identified or described in 509(a)(1)-(4) are considered public charities.

For the sake of example, Section 509(a)(2) organizations encompass organizations that normally receive more than 1/3 of their support from a combination of:

(1) Gifts;

(2) Grants;

(3) Contributions;

(4) Membership fees; and

(5) Gross receipts from performing exempt function activities.

In addition, a Section 509(a)(2) organization must not receive more than 1/3 of its support from investment income and/or unrelated taxable income. The major difference between this type of organization and other public charities is that a 509(a)(2) organization receives support from gross receipts from an exempt function activity – such as ticket proceeds from a museum, opera or symphony.

Non-profits really are important for our communities. The services and entertainment they provide are invaluable. People want to provide these charitable services and to also associate with them both with time and resources. But, it is a battlefield.  There are mine fields and launched grenades to watch for when filing with the IRS.  While the end result may be a very successful and beneficial non-profit, anyone contemplating forming a non-profit should be prepared for all that comes their way.