Opinions Released October 6, 2016

In this weekly blog, the Law Offices of Brandy Wingate Voss, PLLC will summarize recent decisions from the Thirteenth Court of Appeals and provide links to decisions on the court’s website.

Henry & Sons Construction Co., Inc. v. Campos, No. 13-16-00204-CV (Opinion by Justice Rodriguez, joined by Justice Benavides; Dissent by Justice Perkes)

In this appeal from a trial court’s order denying a motion to compel arbitration, the Thirteenth Court adopted the Fifth Circuit’s three-prong test to determine whether an arbitration agreement that allows unilateral modification or termination by the employer is illusory. 

Pablo Campos worked for Henry & Sons Construction (“HSC”), and incurred work-related personal injuries in 2014. HSC had a dispute resolution policy (“Policy”) in effect that sent all work-related disputes between HSC and its employees to arbitration under the Federal Arbitration Act (“FAA”). All HSC employees were required to sign an employee acknowledgement form agreeing to the Policy, in exchange for continued employment and HSC’s mutual promise to abide by the Policy’s terms in settling disputes. Campos signed an acknowledgment form in 2013, prior to being injured the following year.

Campos filed suit in 2015, and HSC responded with a motion to compel arbitration. Campos challenged the motion, pointing to a clause in the Policy which allowed HSC to unilaterally terminate or modify the contract. In light of this clause, HSC’s consideration for the arbitration agreement—it’s promise to abide by the Policy—was “illusory.” After a hearing, the trial court denied HSC’s motion to compel arbitration.  

HSC appealed, claiming that (1) the Policy’s arbitration agreement was enforceable and not illusory; (2) even if the agreement were illusory, Campos ratified and accepted alternate consideration for the arbitration agreement by receiving benefits under the Benefit Plan, which referenced the arbitration agreement; and (3) the trial court erred by determining the issue of arbitrability, rather than referring the question to an arbitrator.

Held: The arbitration agreement permitted unilateral modification of the agreement by HSC without sufficient notice protections for the employee, and was thus illusory and not mutually binding. The trial court’s order denying HSC’s motion to compel arbitration was affirmed.

The existence and validity of an FAA arbitration agreement is governed by ordinary contract law. Ordinary contract law holds that both parties must offer consideration, whether in the form of a promise or otherwise. Illusory promises however, are avoidable and unenforceable, and therefore do not constitute consideration.

The primary case on illusory employer arbitration agreements is In re Halliburton Co., 80 S.W.3d 566 (Tex. 2002) (orig. proceeding). There, the Texas Supreme Court upheld an arbitration agreement that could be unilaterally modified or terminated by the employer because the employer’s power to terminate and /or modify required reasonable notice to the employee, and only applied to disputes of which the employer did not have notice at the time the power was invoked.

The Thirteenth Court noted that if both Halliburton guarantees are missing, the arbitration agreement is illusory. However, if only one guarantee—notice or prospective application—is missing, the result is less clear. Some courts—including the Dallas Court of Appeals, the Fifth Circuit applying Texas law, and the California Court of Appeals applying Texas law—have held that the employer’s promise is illusory if the guarantee against retrospective application is missing. The El Paso Court of Appeals has held that the agreement is illusory if the notice requirement is missing.

The Thirteenth Court of Appeals then adopted a three-prong test proposed by the Fifth Circuit to determine whether an employer’s unilateral termination right makes an agreement illusory. Applying Texas law, the Fifth Circuit stated that an employer can have unilateral modification/termination rights to an agreement without making such agreement illusory if the employer’s power “(1) extends only to prospective claims, (2) applies equally to both the employer's and employee's claims, and (3) so long as advance notice to the employee is required before termination is effective.” Nelson v. Watch House Intern., L.L.C., 815 F.3d 190, 194 (5th Cir. 2016). If these three prongs are satisfied, the arbitration agreement is mutually binding, even though it is not identical in its application to each party.

Applying this new test, the Thirteenth Court held that HSC’s agreement was illusory.

Beginning with the last prong, HSC was required to give thirty days’ notice of termination, but had the power to modify the agreement based on only contemporaneous or retroactive notice of the effective date. The court noted that such a lack of notice regarding modifications could be saved by a strong protection from retroactive application. Although such a sliding-scale approach is inconsistent with Nelson’s formulation of the test, it turned out to be of no consequence in HSC’s case.

The protection against retroactive application of HSC’s power was no stronger than that present in Halliburton. While the Policy provided that modifications only applied to future “acts or events,” it was unclear whether the phrase “acts or events” referred to injuries or filed claims. Thus—as in Halliburton—the term was interpreted to guarantee that unilateral modifications or terminations of the Policy would apply only to prospective claims rather than injuries.

Considering the notice and prospective application terms together then, the Thirteenth Court held that the promise was not mutually binding. When a claim arose, the need for arbitration was determined by a race between the parties, rather than a binding contract clause.

HSC next argued that, even if the Policy was illusory, the Policy and the Employee Injury Benefit Plan—under which Campos accepted benefits for his injury—referenced one another. Accepting benefits pursuant to the Benefit Plan thus (a) ratified the Policy; and (b) such benefits served as consideration for the Policy’s arbitration clause.

The Thirteenth Court rejected these arguments, noting that the arbitration agreement was a separate document from the Benefit Plan, did not rely on the Benefit Plan for consideration, and explicitly stated that HSC’s promise to resolve disputes under the Policy’s arbitration clause was proffered a consideration.  HSC’s contract was thus distinguishable from those in the cases cited by HSC such as Mission Petroleum, 449 S.W.3d 550 (Tex. App.—Houston [14th Dist.] 2014, no pet.) and In re Weeks Marine, Inc., No. 14–09–00580–CV, 2009 WL 3231570 (Tex. App.—Houston [14th Dist.] Oct. 8, 2009, orig. proceeding) (mem. op.), and instead more parallel to Big Bass Towing Company v. Akin, 409 S.W.3d 835 (Tex. App.—Dallas 2013, no pet.). In Big Bass Towing, the Dallas Court of Appeals rejected the argument that an employee’s acceptance of benefits under an Employee Benefit Plan that referenced a separate arbitration agreement served as consideration for such arbitration agreement. Similarly here, the limited relationship between HSC’s Policy and Benefit Plan led the Thirteenth Court to hold that Campos’ acceptance of benefits neither ratified nor served as consideration for the arbitration agreement.

Finally, HSC argued that the question of arbitrability should have been decided by an arbitrator rather than a court. However, this argument was not raised below and therefore waived.

Read the Full Opinion Here

In a dissent, Justice Perkes did not adopt the Fifth Circuit’s three-prong test, and instead emphasized a different standard: whether the employer can avoid their promise to arbitrate.

Justice Perkes noted that the Texas Supreme Court has used the employer’s ability to avoid arbitration as the primary consideration in discussing arbitration agreements since Halliburton. In both In re AdvancePCS Health LP, 172 S.W.3d 603 (Tex. 2005) and In re Polymerica, LLC, 296 S.W.3d 74 (Tex. 2009), the Court upheld arbitration agreements in which the employer retained the right to unilaterally modify or terminate with prospective effect, provided the employee was given notice. Each time, the Court reasoned that if the employee chose to arbitrate, the employer avoid its promise by modifying or terminating the agreement.

Here, although HSC was not required to provide advanced notice of modification, such lack of prior notice did not render the contract illusory. If HSC had sued and Campos filed a motion to compel arbitration, HSC could not have avoided its promise to arbitrate by modifying or terminating the agreement. Thus, the agreement was not illusory, and Justice Perkes would have reversed the trial court’s denial of HSC’s motion to compel arbitration.

Read the Dissenting Opinion Here

Saldana v. Texas, No. 13-16-00152-CR (Memorandum Opinion by Justice Benavides; Panel Members: Justices Rodriguez and Perkes)

In this direct appeal, Saldana challenges a nunc pro tunc that increased the fine and added restitution to the terms imposed as a condition of his probation.

Wally Saldana was charged with tampering with evidence, and placed on deferred adjudication for three years. The terms of such deferred adjudication included a $1,500 fine as well as $140 in restitution. On March 10, 2016, the trial court revoked Saldana’s deferred adjudication and sentenced him to ten years’ confinement, probated for five years. The trial court did not mention a fine or restitution in the oral pronouncement, but orally adopted the State’s revocation report, which was admitted into evidence. Following the hearing, Saldana signed probation documents stating that he would pay a $1,000 fine, and referencing payment of restitution.

On March 21, 2016, both Saldana and the trial court signed documents increasing the fine from $1,000 to $1,500, and stating that Saldana would pay court costs.  On March 24, the trial court issued a nunc pro tunc, reflecting a $1,500 fine and $140 restitution.

Saldana filed an unsuccessful motion for a new trial before appealing, arguing that the nunc pro tunc imposed a fine and restitution not included in the actual judgment.

Held: The restitution amount was within the orally-adopted revocation report and thus validly included in the nunc pro tunc. Furthermore, Saldana agreed to the fine. Thus, the trial court’s judgment and nunc pro tunc are affirmed.

The Thirteenth Court first outlined the applicable law, noting that a criminal defendant must have his sentence orally pronounced, and that the oral pronouncement controls over a conflicting written judgment. A nunc pro tunc is only appropriate when the written judgment is inconsistent with the actual judgment; it cannot be used to enact what a judge wishes he had done.

Here, the trial court orally sentenced Saldana to five years’ probation with all the terms and conditions set forth in the State’s attached revocation report. Such report stated the $140 restitution amount. Thus, the nunc pro tunc was valid with respect to restitution.

However, the State’s revocation report did not include Saldana’s $1,500 fine. Yet, Saldana signed an Order Amending Conditions of Community Supervision on March 21, agreeing to the $1,500 fine. By signing the Order, Saldana waived the issue for appeal.

Consequently, both the restitution and fine were validly included in the trial court’s nunc pro tunc.

Read the Full Opinion Here