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Under the Federal Arbitration Act (FAA) (9 U.S.C. §§ 1–16), ―arbitration is a
matter of contract.‖ (Steelworkers v. Warrior & Gulf Co. (1960) 363 U.S. 574, 582
[80 S.Ct. 1347]; accord, 9 U.S.C. § 2.) An arbitration contract typically consists of the
parties‘ mutual promises to arbitrate their claims against each other.
In this employment case, an employer and its at-will employees purportedly
entered into a contract requiring the arbitration of claims by both sides. But the contract
contains a modification provision stating that the employer may amend, modify, or
revoke the arbitration contract on 30 days‘ written notice; at the end of the 30-day period,
a contract change applies to any claim that has not been filed with the American
Arbitration Association (AAA). The contract also has a choice-of-law clause stating that
the contract shall be governed by Texas law and the FAA. The employee contends that,
under the choice-of-law clause, the employer‘s unilateral right to make contract changes
renders the contract illusory. We ultimately conclude that the choice-of-law clause is
valid and that the arbitration contract is illusory under Texas law.
In reaching that conclusion, we also examine California law regarding illusory
arbitration contracts. On that subject, we determine that an arbitration contract
containing a modification provision is illusory if an amendment, modification, or
revocation — a contract change — applies to claims that have accrued or are known to
the employer. If a modification provision is restricted — by express language or by
terms implied under the covenant of good faith and fair dealing — so that it exempts all
claims, accrued or known, from a contract change, the arbitration contract is not illusory.
Were it otherwise, the employer could amend the contract in anticipation of a specific
claim, altering the arbitration process to the employee‘s detriment and making it more
likely the employer would prevail. The employer could also terminate the arbitration
contract altogether, opting for a judicial forum if that seemed beneficial to the company.
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