Académique Documents
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16-0854
4/20/2017 8:14:03 AM
tex-16556230
SUPREME COURT OF TEXAS
BLAKE A. HAWTHORNE, CLERK
NO. 16-0854
v.
CASH BIZ, LP, CASH ZONE, LLC D/B/A CASH BIZ and REDWOOD
FINANCIALS, LLC
Respondent
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I. IDENTITY OF PARTIES AND COUNSEL
Respondents agree with and will defer to the “Identity of Parties and Counsel”
Additionally, in both the Court of Appeals and this Court, the same Amicus
Curiae, Texas Appleseed, filed briefs in support of the Petition. Though not
representing a party to this suit, counsel for Texas Appleseed sought to participate
in the oral argument before the Court of Appeals. The Court of Appeals denied the
request at the start of oral argument. Although Respondents would oppose any
this Court, Respondents will treat Texas Appleseed as so closely aligned with
i
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II. TABLE OF CONTENTS
PAGE
I. IDENTITY OF PARTIES AND COUNSEL .................................................. i
II. TABLE OF CONTENTS ............................................................................... ii
X. ARGUMENT .................................................................................................23
A. Respondents met their burden of proof to enforce the arbitration
provision ..............................................................................................23
ii
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1. A valid and enforceable arbitration agreement exists...............24
XI. PRAYER........................................................................................................52
XII. CERTIFICATE OF COMPLIANCE ............................................................53
iii
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III. INDEX OF AUTHORITIES
Page(s)
Cases
Alvarez v. Anesthesiology Associates,
967 S.W.2d 871 (Tex. App.—Corpus Christi 1998, no writ) ............................ 34
Amalgamated Local No. 55, United Automobile, Aerospace &
Agricultural Implement Workers of Am. v. Metal and Alloy Div. of
Silver Creek Precision Corp.,
396 F.Supp. 667 (W.D. N.Y. 1975) .................................................................... 37
Cantella & Co., Inc. v. Goodwin, 924 S.W.2d 943 (Tex. 1996) ............................. 18
Capital Income Properties v. Blackmon,
843 S.W.2d 22 (Tex. 1992)................................................................................. 15
iv
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Community Financial Services Assoc. of Am., Ltd. v. FDIC,
132 F.Supp.3d 98 (D.C. D. 2015) ......................................................................... 7
Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (Tex. 2008) ....................22, 23, 32, 45
Fridl v. Cook,
908 S.W.2d 507 (Tex. App.—El Paso 1995, writ dism’d w.o.j.) ....................... 20
Garcia v. Huerta,
340 S.W.3d 864 (Tex. App.—San Antonio 2011, pet. denied) .......................... 20
v
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Gatlin v. P.O.A. Criscione Star #16195,
2008 WL 2745956 (N.D. Ill. 2008) ..............................................................31, 37
In re D. Wilson Constr. Co., 196 S.W.3d 774 (Tex. 2006) .........................19, 36, 45
In re FirstMerit Bank, N.A.,
52 S.W.3d 749 (Tex. 2001)...........................................................................14, 28
vi
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In re Fleetwood Homes, 257 S.W.3d 692 (Tex. 2008) ............................................ 19
In re Jeffory Blackard,
2016 WL 1756786 (Tex. App.—Dallas 2016, orig. proceeding) ....................... 35
In re Kaplan Higher Educ. Corp., 235 S.W.3d 206 (Tex. 2007) ......................23, 32
In re Labatt Food Serv., L.P., 279 S.W.3d 640 (Tex. 2009) .................14, 17, 20, 25
In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571 (Tex. 1999) ...................22, 25
In re Ruefer,
1999 WL 371568, 1999 Tex. App. LEXIS 4275 (Tex. App.—
Amarillo 1999, pet. dism’d. want of jurisdiction) ........................................18, 21
In re Service Corp. Int’l, 85 S.W.3d 171 (Tex. 2002) ............................................. 38
In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (Tex. 2006) ..................................... 30
In re Weekley Homes, L.P., 180 S.W.3d 127 (Tex. 2005) ...........................15, 16, 17
In re Wingfield,
171 S.W.3d 374 (Tex. App.—Tyler 2005, orig. proceeding) ......................34, 48
Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (Tex. 1992) .......................16, 18
vii
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J.M. Davidson, Inc. v. Webster,
128 S.W.3d 223 (Tex. 2003) ................................... 14, 17, 19, 21, 22, 27, 31, 41
Kroger Tex. L.P. v. Suberu, 216 S.W.3d 788 (Tex. 2006) ...................................... 30
Lovick v. Ritemoney, 378 F.3d 433 (5th Cir. 2004) ................................................... 4
McReynolds v. Elston,
222 S.W.3d 731 (Tex. App.—Houston [14th Dist.] 2007, orig.
proceeding) ...................................................................................................28, 42
Mendelsohn v. A&D Catering Corp.,
119 Misc.2d 581, 464 N.Y.S.2d 331 (N.Y. 1983) .............................................. 37
Monotype Imaging, Inc. v. Bitstream, Inc.,
376 F.Supp.2d 877 (N.D. Ill. 2005) .................................................................... 42
viii
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Pilot Travel Ctrs., LLC v. McCray,
416 S.W.3d 168 (Tex. App.—Dallas 2013, no pet.) ..................21, 22, 33, 36, 42
Prudential Securities, Inc. v. Marshall, 909 S.W.2d 896 (Tex. 1995) ........14, 18, 22
Randol Mill Pharm. v. Miller, 465 S.W.3d 612 (Tex. 2015) .................................xiv
Ranzy v. Extra Cash of Texas, Inc.,
2011 WL 6719881 (S.D. Tex. 2011) ........................................................6, 10, 11
Reed v. Lindley,
240 S.W. 348 (Tex.Civ.App. Fort Worth 1922, no writ) ................................... 35
ix
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Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc.,
468 F.3d 523 (8th Cir. 2006) ........................................................................40, 41
Taft v. Burttram, 254 Ga. 687, 333 S.E.2d 585 (1985) .....................................37, 38
Taylor v. Gately,
870 S.W.2d 204 (Tex. App.—Waco 1994, writ dism’d.) .................................. 34
Thomas v. Cisneros,
596 S.W.2d 313 (Tex.Civ.App.—Austin 1980, writ ref’d n.r.e.)....................... 35
Willis v. Donnelly,
199 S.W.3d 262 (Tex. 2006) .............................................................................. 27
x
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Statutes
Federal Arbitration Act, 9 USCA §§ 1-16
...................................... xv, 1, 6, 14, 15, 17, 18, 20, 21, 33, 37, 38, 40, 42, 47, 51
xi
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Other Authorities
Federal Rules of Civil Procedure Rule 12(b).........................................40, 41, 43, 47
xii
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IV. STATEMENT OF THE CASE
The “Statement of the Case” contained in Petitioner’s Brief on the Merits is
generally correct. However, it fails to identify the “nature of the case,” as required
Nature of the case: The underlying suit seeks class certification, and
recovery of damages and equitable relief under the Texas Finance Code, the Texas
Deceptive Trade Practices Act, and tort law, arising from allegations that
Petitioner.
xiii
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V. STATEMENT OF JURISDICTION
question of law material to the decision. TEX. GOV’T. CODE §§ 22.001(a)(1) and
22.225(c); TEX. R. APP. P 56.1(a)(1); Suarez v. City of Tex. City, 465 S.W.3d 623,
621 (Tex. 2015); Randol Mill Pharm. v. Miller, 465 S.W.3d 612, 615 n.2 (Tex.
2015).
no true conflict between the majority opinion of the Fourth Court of Appeals in
this case and the rulings of any other federal or state court.
xiv
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VI. ISSUES PRESENTED FOR REVIEW
In addition to, or in further explanation of, the issues presented for review by
Petitioners, Respondents present the following issues that will be addressed in this
Brief:
1. The Court of Appeals correctly construed and applied the substantive law of
arbitrability under the Federal Arbitration Act (“FAA”), consistent with
cases construing the FAA issued by the United States Supreme Court, this
Court, and other state and federal courts.
2. The Court of Appeals correctly construed and applied the evidentiary
standards and burdens of proof applicable to the elements of arbitrability,
including the elements of the defense of waiver, applicable to the FAA.
3. The Court of Appeals correctly determined that Respondents met their
burden of proof to show that the parties had agreed to valid, written, broad-
form agreements to arbitrate, and that Petitioners’ claims fell within the
scope of the agreements.
xv
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d. evidence supporting the alleged merit of the substantive allegations
giving rise to a plaintiff’s claim cannot, as a matter of law, be
considered as evidence of waiver to defeat enforcement of a valid,
broad-form arbitration and class-action waiver provision.
xvi
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TO THE HONORABLE SUPREME COURT OF TEXAS:
After clearing away the pretext presented by Petitioners and Amicus, this is the
central question before this Court. And, the answer to this question is “yes.”
governing arbitrability under the Federal Arbitration Act (“FAA”) in the context of
when the defense of waiver arises from alleged acts of the movant occurring
before the pending litigation was filed, and in the context of separate
criminal proceedings;
when the earlier criminal proceedings and the underlying suit do not involve
the same dispute or the same parties; and
when the alleged acts of the movant that form the basis of the waiver and
prejudice defenses also form the basis for the plaintiff’s substantive claims
of liability and damages.
Although these circumstances are atypical when compared to most cases in which
the defense of waiver arises from litigation conduct of the movant in the
underlying case after its filing, such circumstances do not require courts to deviate
1
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When all of Petitioners’ allegations and arguments are fully distilled, what
arbitrability, including:
lowering of the burden of proof on for the defense of waiver from a “high
hurdle” based on the submission of independent relevant evidence, to merely
reliance on the allegations in a petition; and
reliance on the alleged merit of the factual allegations giving rise to the
plaintiff’s substantive claims as evidence of waiver.
asserted the merit of the factual allegations contained in their pleading; and
2
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This is not legally sufficient evidence of the elements of waiver. In lieu of
allegations of damages prove prejudice. However, these arguments ignore the rule
that courts are prohibited from considering the underlying merits of the substantive
unconscionability defense—that is, given all of the allegations they have made
individually arbitrate their claims. But, this argument fails, too, because courts
When all is said and done, the Majority Opinion of the Fourth Court of
Appeals, which was upheld by 5 of the 7 justices on the entire court, correctly
stated and applied the well-established law governing arbitrability to this case.
3
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VIII. STATEMENT OF FACTS
A. Contextual Background
In order to fully address the arguments presented in the Petition, it is
important to provide some background facts that place this case in a proper
context. These contextual facts relate to the nature and regulation of Respondents’
business, and the parallel case filed by Petitioners’ counsel now pending before the
The business of brokering loans for a fee (separate from the interest and fees
charged by the ultimate lender) has been legal in Texas for many years. See, e.g.,
Greever v. Persky, 165 S.W.2d 709, 769 (Tex. 1935); see generally, Lovick v.
Ritemoney, 378 F.3d 433, 439-41 (5th Cir. 2004). Texas licenses and regulates the
activities of brokers who facilitate short-term loans for consumers, including the
written terms of their contracts and disclosure statements, and the collection of
debts created by the loans, pursuant to Chapters 341 and 393 of the Texas Finance
Code.1
1
The debt-collection activity of such brokers also is regulated by federal law. See, e.g., 15 USC
§ 1692e (2006). Also, the Dodd-Frank Act gave the Consumer Financial Protection Bureau
(“CFPB”) authority to supervise and regulate aspects of these activities. 12 USC § 5491(a).
4
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(“CAB”), which is a type of Credit Service Organization (“CSO”). TEX. FIN. CODE
that Respondents are licensed and regulated CAB/CSOs that engage in the business
term loans facilitated by Respondents include loans defined in the Finance Code as
arrange and assist with extensions of short-term credit for consumers through a
the lender. TEX. FIN. CODE §§ 393.001(3), 393.221 (1). The terms of the written
contracts between Respondents and their customers, and the disclosure statements
that Respondents must provide to their customers, are known as credit services
5
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(“Disclosure Statements”), certain terms of which are proscribed and regulated by
the Finance Code. TEX. FIN. CODE §§ 393.105, 393.201-223. The CSO
393 of the Finance Code, which subjects a CAB/CSO to a claim by the consumer
for actual damages in an amount not less than the amount the consumer paid the
CAB/CSO, reasonable attorney’s fees, court costs, and punitive damages. TEX.
FIN. CODE §§ 393.204, 393.503; see, e.g., Ranzy v. Extra Cash of Texas, Inc., 2011
CAB/CSO lending industry has come under increasing political criticism in recent
years, ranging from efforts at local levels to impede the operation of CAB/CSOs
from doing business with lending institutions. See, e.g., Consumer Service
Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (Tex. App.—Dallas
2
The Finance Code does not prohibit the inclusion of arbitration provisions, or class-action
waiver provisions, in the contracts between a CAB/CSO and a consumer. In fact, such
provisions have been enforced in a CAB/CSO contract by a Texas Court applying the FAA. See
NCP Finance Ltd. Partnership v. Escatiola, 350 S.W.3d 152, 155 (Tex. App.—San Antonio, no
pet.).
6
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2014, no pet.) (describing recent zoning regulations); Community Financial
Services Assoc. of Am., Ltd. v. FDIC, 132 F.Supp.3d 98 (D.C. D. 2015) (describing
promulgated by the CFPB, and that the constitutionality of the CFPB and its
structure are currently under judicial review. See PHH Corp. v. CFPB, 839 F.3d 1
(D.C. Cir. 2016) (en banc review granted, op. withdrawn, February 6, 2017).
political climate engulfing the entire CAB/CSO industry provides a significant pre-
In fact, this case, and the parallel case of Vine v. PLS Financial Services,
Inc., ___ F. Supp.3d ___, 2016 WL 8138800 (W.D. Tex. [El Paso Division] June
(W.D. Tex. [El Paso Division] August 11, 2016)3, are part of a concerted effort by
3
Vine is currently pending on appeal before the United States Fifth Circuit Court of Appeals as
Cause No. 16-50847, which was orally argued on March 8, 2017 (See Appendix 1 to
Respondents’ Brief on the Merits).
7
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on the enforcement of arbitration and class-action-waiver provisions in the written
Petitioners’ counsel is also counsel of record for the Plaintiffs in Vine, and
Amicus, Texas Appleseed, filed amicus briefs in the Fourth Court of Appeals in
this case and also appeared in the District Court in Vine (and has attempted to
appear before the Fifth Circuit in Vine).4 (See Appendix 2 to Respondents’ Brief
on the Merits). As will be discussed below, the trial court’s order issued in this
case denying arbitration was written by Petitioners’ counsel, was submitted at the
close of the hearing, and was signed by the trial court without any changes. (R.R.
33:16-19; C.R. 246-47, 257-58). Then, that order was submitted to the District
Court in Vine to support Petitioners’ counsel’s argument that courts support their
District Court’s opinion in Vine was presented to the Fourth Court of Appeals (and
to this Court) to support Petitioners’ arguments in this case, and the District Court
4
Texas Appleseed’s motion to submit its Amicus Brief was denied by the Fifth Circuit. (See
Appendix 3 to Respondents’ Brief on the Merits).
8
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in Vine ultimately issued a second opinion in which it disagreed with the Fourth
the following uncontested facts, which are relevant to the issue of arbitrability
the arbitration provision contained the following specific terms outlining its
breadth: “the words “dispute” and “disputes” are given the broadest possible
meaning and include, without limitation … (d) all common law claims,
based on contract, tort, fraud, or intentional torts; (e) all claims based on a
violation of any state or federal constitution, statute or regulation; … (g) all
claims asserted by you individually against us …, including claims for
money damages and/or equitable or injunctive relief; … (i) all claims
asserted by you as a private attorney general, as a representative and member
of a class of persons, or in any other representative capacity, against us …;
and/or (j) all claims arising from or relating directly or indirectly to the
5
The decision of the Fourth Court of Appeals in this case was issued between the two
memorandum opinions issued in Vine. Compare Vine, 2016 WL 8138800, Vine, 2016 WL
8138799, and Cash Biz, LP v. Henry, 2016 WL 4013894 (Tex. App.—San Antonio, 2016, pet.
filed). This cycle of self-reinforcing arguments and orders has been mirrored in out-of-court
statements to the press by Petitioners’ counsel about this case, and all of these arguments and
orders were cited to support the granting of the Petition by this Court. (See, e.g., Petition for
Review, p.3 and App. B). In fact, much of the efficacy of the underlying allegations in this suit
rely on information collected and published by Amicus, which it, and Petitioners, now cite as
authority to support Petitioners’ defense to arbitrability. These efforts are churning the political
debate surrounding “pay day” loans into potential class-action litigation, but they should have
nothing to do with whether Respondents waived their right to arbitrate Petitioners’ claims.
9
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disclosure by us … of any non-public personal information about you.”
(C.R. 81-82, 85-86, 89-91, 93-94, 97-98, 101-03, 105-06, 109-110, 113-15,
117-18, 122-23, 126-28);
Petitioners’ opposed the motion to compel on two grounds: their claims did
not fall within the scope of the broad-form provision; and that the alleged
conduct of Respondents giving rise to Petitioners’ claims—the submission
of information to law enforcement agencies—constituted evidence of waiver
that would prohibit the enforcement of the arbitration and class-action-
waiver provisions (C.R. 136-247); and
and responses filed by the parties pertaining to the enforcement of the contractual
10
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arbitration and class-action waiver provision in the Loan Contracts; the materials
attached to those filings; the transcript of the oral hearing; and the trial court’s
Petitioners filed the present suit claiming that Respondents committed the
torts of malicious prosecution and fraud, and violated certain Texas statutes, by
“using the criminal justice system to collect a civil debt” created by the Loan
Contracts. (C.R. 1-11, 15-26, 147-48, 257-58).6 They sought monetary damages,
including statutory damages, related to criminal fines, jail time, loss of reputation
related to criminal convictions, as well as equitable and injunctive relief, which are
provided under Chapter 393 of the Finance Code as remedies for breach of
CAB/CSO contracts. (C.R. 3, 257-58); see TEX. FIN. CODE §§ 393.204, 393.503;
see, e.g., Ranzy v. Extra Cash of Texas, Inc., 2011 WL 6719881, *4 (S.D. Tex.
2011).
(C.R. 52-133). Prior to the hearing on the motion to compel held on July 9, 2015,
Respondents submitted the Loan Contracts, and the affidavits of David Flanagan,
6
In fact, the Petitioners stipulated to the existence of such debts owed under the Loan Contracts,
and that their suit related to the collection of those debts. (R.R. 21:11-13).
11
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transactions, and swore to the limited involvement of Respondents in the process
the affidavits. Instead, they filed a response that quoted interviews and papers
Respondents and other CAB/CSOs of improperly using the criminal justice system
to collect debts owed on “pay day” loans; provided copies of criminal court
the merit of the factual allegations contained in their pleading; and offered
conclusory and inferential arguments about what other evidence would show in
the motion to compel. However, during the hearing the trial judge made several
observations and asked questions based on her stated knowledge of and experience
the trial court were based on any evidence submitted in support of, or in opposition
12
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At the end of the hearing, the trial judge denied the motion and received a
The pre-prepared written order contained specific findings, and the trial court
signed the order at the close of the hearing without making any edits. (C.R. 246-
Petitioners’ claims arose from Respondents’ use of the “the criminal justice
system to enforce a civil debt;”
action provision of the Loan Contracts. Cash Biz, LP v. Henry, 2016 WL 4013794
(Tex. App.—San Antonio 2016, pet. filed). The Majority Opinion cited and
7
The docket sheet does not reflect any specific findings or conclusions made by the trial court to
support the denial of the motion. (C.R. 256).
13
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applied Texas case law interpreting and applying the FAA, including the following
Id., at *3-9. The Majority Opinion found that the scope of the broad-form
provision included the claims made by Petitioners, and found that Petitioners failed
to submit legally sufficient evidence to meet their burden of proof on the defenses
Petitioners and Amicus sought both a motion for rehearing, and en banc
review by the entire Fourth Court of Appeals. The motion for rehearing was
denied, and en banc review was denied by 5 of the 7 members of the Fourth Court
14
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IX. GOVERNING LAW, STANDARD OF REVIEW, AND BURDENS OF
PROOF
The Loan Contracts specifically stated that the arbitration provision “is made
the FAA,” and both parties have threated the FAA as the governing law in this
case.8 When applicable to a case, the FAA pre-empts the TAA, and state courts
must recognize and apply the federal substantive law of arbitrability. Preston v.
Ferrer, 552 U.S 346, 349 (2008); see Southland Corp. v. Keating, 465 U.S. 1
(1984). In recognition of this form of pre-emption, Texas courts treat the federal
substantive law under the FAA as being part of the substantive law of this state.
As part of the incorporation of the FAA into Texas substantive law, this
Court has stressed the importance of “keeping federal and state arbitration law
consistent.” Perry Homes, 258 S.W.3d at 594; In re Weekley Homes, L.P., 180
8
Because the same provision expressly states that the Texas Arbitration Act (“TAA”) would
apply in the event the FAA was found not to apply for any reason to the Loan Contracts,
Respondents moved to enforce the arbitration agreement containing the waiver-of-class-action
provision under both the TAA and the FAA, and have based their right to interlocutory appeal on
both laws. TEX. CIV. PRAC. & REM. CODE §§ 51.016, 171.098(a)(1); 9 USCA §§ 1-16. Neither
the trial court, nor the Fourth Court of Appeals found the FAA to be inapplicable to the Loan
Contracts.
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S.W.3d 127, 130-31 (Tex. 2005); In re Kellogg Brown & Root, Inc., 166 S.W.3d
732, 739 (Tex.2005); see Moses H. Cone Mem’l Hosp. v. Mecury Constr. Corp.,
460 U.S. 1, 25 (1983). Applying this principle, this Court has agreed with the
federal Fifth Circuit Court of Appeals that the determination of whether state or
federal law of arbitrability applies “is often an uncertain question.” Perry Homes,
258 S.W.3d at 594 n.86 (quoting Wash. Mut. Fin. Group, LLC v. Bailey, 364 F.3d
260, 267 n.6 (5th Cir. 2004)). In the absence of a clear directive from the United
States Supreme Court, Texas courts should lean toward applying state law while
Maintaining consistency between federal and state law requires Texas trial
courts to harmonize and apply the procedural rules of Texas law and the
Weekley Homes, L.P., 180 S.W.3d at 130; Cooper Indus., LLC v. Pepsi-Cola
Metro. Bottling Co., Inc., 475 S.W.3d 436 (Tex. App.—Houston [14th Dist.] 2015,
similar to a summary judgment proceeding. TEX. CIV. PRAC. & REM. CODE
§ 171.021(b); Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266, 268–69 (Tex.
1992); Cooper Indus., LLC, 475 S.W.3d at 441-442. In such a proceeding, the
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preliminary questions as to whether a valid arbitration agreement exists, and
whether the dispute come within the scope of the arbitration provision are legal
with the pleadings and any supporting affidavits or discovery. TEX. CIV. PRAC. &
REM. CODE § 171.021(b); J.M. Davidson, Inc., 128 S.W.3d at 227. Appellate
courts defer to a trial court’s factual determinations that are supported by sufficient
evidence, but appellate courts are to review legal determinations de novo. Cooper
requires courts to apply state law to the resolution of whether a valid and
enforceable arbitration provision exists, and federal law as to whether the dispute
comes within the scope of the arbitration provision. In re Weekley Homes, L.P.,
180 S.W.3d at 130; In re Kellogg Brown & Root, Inc., 166 S.W.3d at 738; Doctor's
Assocs. Inc. v. Casarotto, 517 U.S. 681, 686–87 (1996); First Options of Chi., Inc.
v. Kaplan, 514 U.S. 938, 944, (1995); Perry v. Thomas, 482 U.S. 483, 492 n.9
(1987). Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24, 103
S.Ct. 927, 74 L.Ed.2d 765 (1983). For the defense of waiver, this Court adopted
Homes, 258 S.W.3d at 593-600. As a result, the legal standard applied to evaluate
the defense of waiver is similar under both the FAA and the TAA. See, e.g., In re
17
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Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009); In re AdvancePCS
Health, L.P., 172 S.W.3d 603, 605-06 (Tex. 2005) (orig. proceeding); In re Ruefer,
1999 WL 371568, 1999 Tex. App. LEXIS 4275, *8-10 (Tex. App.—Amarillo
arbitration and class-action waiver provisions. Cantella & Co., Inc. v. Goodwin,
924 S.W.2d 943, 944 (Tex. 1996); Prudential Securities, Inc., 909 S.W.2d at 898-
99; Tipps, 842 S.W.2d at 268; see, e.g., In re Universal Underwriters of Texas Ins.
Co., 345 S.W.3d 404 (Tex. 2011) (contractual appraisal clause); Perry Homes,
provisions). Consistent with federal law and this shared public policy, Texas courts
applying the FAA are generally required to enforce broad-form arbitration and
U.S. ___, 136 S.Ct. 463 (2015); AT&T Mobility v. Concepcion, 563 U.S. 333
(2011); see also, NCP Finance Ltd. Partnership, 350 S.W.3d at 155.
18
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which will be reviewed under the de novo standard by the appellate court. See J.M.
Davidson, Inc., 128 S.W.3d at 227; Valero Energy Corp. v. Teco Pipeline Co., 2
S.W.3d 576, 581 (Tex. App.—Houston [14th Dist.] 1999, no pet.); see also In re
D. Wilson Constr. Co., 196 S.W.3d 774, 778–81 (Tex. 2006). The de novo
scope of the arbitration provision includes the dispute at issue, and whether the
(Tex. 2008) (citing Perry Homes, 258 S.W.3d at 590, 598); J.M. Davidson, Inc.,
128 S.W.3d at 227; G.T. Leach, Builders L.L.C. v. Sapphire VP, L.P., 458 S.W.3d
502, 511 (Tex. 2015); Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542, 545
by the trial court, or where there are no findings of fact entered by the trial court as
to such issues, the de novo standard of review will apply to such issues. G.T.
Leach, Builders L.L.C., 458 S.W.3d at 511; Kennedy Hodges, L.L.P., 433 S.W.3d
To the extent any of the decisions of the trial court involve findings of fact,
applying the legal sufficiency or “no evidence” standard of review. Valero Energy
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Corp., 2 S.W.3d at 581; Fridl v. Cook, 908 S.W.2d 507, 511 (Tex. App.—El Paso
1995, writ dism’d w.o.j.); Hearthshire Braeswood Plaza Ltd. Partnership v. Bill
Kelly Co., 849 S.W.2d 380, 384 (Tex. App.—Houston [14th Dist.] 1993, writ
denied); Cooper Indus., LLC, 475 S.W.3d at 442. When applying this standard, an
appellate court must defer to the trial court’s findings, but such deference is limited
to only those findings that are supported by the record. In re Labatt Food Serv.,
L.P., 279 S.W.3d at 643; Bonded Builders Home Wty Ass’n of Texas, Inc. v. Smith,
2016 WL 1612916, *3 (Tex. App.—Dallas 2016, no pet. h.); Garcia v. Huerta, 340
Federal law governing the FAA further limits appellate deference to a trial
court by prohibiting courts from considering the merits of the underlying action
when making findings of fact and resolving questions of law. AT&T Technologies,
Inc. v. Communications Workers of Am., 475 U.S. 643, 649 (1986); Primerica Life
Ins. Co. v. Brown, 304 F.3d 469, 471 (5th Cir. 2002); Snap-On Tools Corp. v.
Mason, 18 F.3d 1261, 1267 (5th Cir. 1994); Municipal Energy Agency of
Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338, 342 (5th Cir. 1986); Horizon
Health Corp. v. Tyler-Holmes Memorial Hosp., 284 F. Supp. 2d 439, 441 (N.D.
Miss. 2003); Smith Barney Shearson, Inc. v. Boone, 838 F. Supp. 1156, 1158 (N.D.
Tex. 1993).
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C. The Burdens of Proof
Under both the TAA and the FAA, the movant seeking to compel has the
initial burden to prove, and the court must initially decide, only two issues:
In re Rubiola, 334 S.W.3d at 223; In re Kellogg Brown & Root, 166 S.W.3d at
737; J.M. Davidson, Inc., 128 S.W.3d at 227. Once the movant meets its burden
on these two elements, the burden shifts to the non-movants to prove defenses to
arbitrability, including waiver. Venture Cotton Co-op, 435 S.W.3d at 227; J.M.
Davidson, Inc., 128 S.W.3d at 227; In re AdvancePCS Health, L.P., 172 S.W.3d at
607; Pilot Travel Ctrs., LLC v. McCray, 416 S.W.3d 168, 177 (Tex. App.—Dallas
2013, no pet.) (citing to In re Kellogg Brown & Root, 166 S.W.3d at 737); see In re
Online Travel Co. (OTC) Hotel Booking Antitrust Litigation, 953 F.Supp.2d 713,
717 (N.D. Tex. 2013); In re Ruefer, 1999 Tex. App. LEXIS 4275, *8-10.
whether the dispute comes within the scope of the arbitration provision, are
questions of law. J.M. Davidson, Inc., 128 S.W.3d at 227; G.T. Leach Builders,
9
Federal Courts also recognize another step, which requires the trial court to determine whether
arbitration of the dispute would be prohibited by another law. Primerica Life Ins. Co., 304 F.3d
at 471; Horizon Health Corp., 284 F. Supp. 2d at 441. The Petitioners did not raise this issue in
either the trial court, or to the Court of Appeals, and they have not presented any such law to this
Court. Though they mention statements made by the CFPB, no federal law or regulation exists
that prohibits the inclusion or enforcement of arbitration or class-action waiver provisions in the
Loan Contracts at issue.
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LLC, L.P., 458 S.W.3d at 519-20; Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 55
& n.9 (Tex. 2008). In answering these questions, the court must apply a
In re Kellogg Brown & Root, 166 S.W.3d at 737. If the trial court has to make
findings of fact in order to resolve the questions of law, the trial court makes those
findings by comparing the arbitration provision with the pleadings and any
If the movant meets its burden, the trial court has no discretion but to compel
arbitration, unless the non-movant can show that it has a defense to the
waiver. J.M. Davidson, Inc., 128 S.W.3d at 227; In re Oakwood Mobile Homes,
Inc., 987 S.W.2d 571, 573 n.3 (Tex. 1999); Prudential Securities, Inc., 909 S.W.2d
at 898-99. Whether waiver occurs depends on the specific facts and circumstances
of each case. Pilot Travel Ctrs., LLC, 416 S.W.3d at 183. Waiver may be express
or implied. G.T. Leach, Builders L.L.C., 458 S.W.3d at 511; Cooper Indus., LLC,
475 S.W.3d at 447. An implied waiver may be proved if the non-movant can show
prejudice. G.T. Leach, Builders L.L.C., 458 S.W.3d at 511-12; Kennedy Hodges,
L.L.P., 433 S.W.3d at 543; Richmont Holdings, Inc. v. Superior Recharge Sys.,
22
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L.L.C., 455 S.W.3d 573, 574-75 (Tex. 2014); Perry Homes, 258 S.W.3d at 589-93.
The non-movant has the burden of proof and persuasion on the issue of
waiver. Forest Oil Corp., 268 S.W.3d at 56; Perry Homes, 258 S.W.3d at 589; In
re Kaplan Higher Educ. Corp., 235 S.W.3d 206, 208–09 (Tex. 2007); Cooper
Indus., LLC, 475 S.W.3d at 447. Because of the strong presumption against waiver
of arbitration, “this hurdle is a high one.” Kennedy Hodges, L.L.P., 433 S.W.3d at
543; Richmont Holdings, Inc., 455 S.W.3d at 574-75; Perry Homes, 258 S.W.3d at
589-90.
If the non-movant does not meet its burden on the issue of waiver, the trial
court has no discretion but to compel arbitration. Forest Oil Corp., 268 S.W.3d at
56, 61. Resolution of the issue as to whether an implied waiver has occurred is
also a question of law for the court to decide. Perry Homes, 258 S.W.3d at 598;
X. ARGUMENT
Respondents met this burden by proffering the Loan Contracts and the affidavits of
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David Flanagan, together with the motion to compel and reply.
arbitration and class-action waiver provision in the trial court, and the trial court
did not base its ruling on this element of Respondents’ burden. However, because
this Court is to apply the de novo standard of review, and Petitioners appear to now
ask this Court to “punish” the Respondents with a denial of enforcement of this
The Loan Contracts provided the prima facie evidence of the existence of
valid and enforceable arbitration provisions binding each of the Petitioners. Each
Petitioner executed the Loan Contracts containing the arbitration and class-action
waiver provision that referred all disputes between the parties to binding arbitration
the Loan Contracts and obtained benefits or funds based on, and arising out of, the
Loan Contracts. Each Petitioner agreed to be bound by the arbitration and class-
action waiver provision, and none of the Appellees opted out of the provision. The
provision is binding, because the agreement states that it is binding and a court
may enter judgment on the arbitration award. See Porter & Clements, LLP v.
Stone, 935 S.W.2d 217, 220-21 (Tex. App.—Houston [1st Dist.] 1996, no writ);
24
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Based on the foregoing, Respondents met their burden as a matter of law to
prove the first element of arbitrability. However, Petitioners and Amicus now
facto unconscionability defense—that is, given all of the allegations they have
individually arbitrate their claims. Not only have Petitioners failed to properly
raise such a defense, but Texas and federal courts have been clear that
agreement, but is instead a matter for the arbitrator to address. In re Labatt Food
Serv., L.P., 279 S.W.3d 647-48; In re AdvancePCS Health, L.P., 172 S.W.3d at
Finance Servicing Corp., 19 S.W.3d 562, 569-70 (Tex. App.—Waco 2000, orig.
proceeding); see Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006).
Therefore, the provision at issue is valid and enforceable as a matter of law at this
trial court concluded that the arbitration and waiver-of-class-action provision was
system to enforce a civil debt,” and to damage claims “related to criminal fines, jail
25
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time, and loss of reputation related to [Petitioners’] criminal convictions.” As the
Majority Opinion of the Fourth Court of Appeals properly determined, the trial
court abused its discretion as a matter of law in reaching this conclusion, because it
is inconsistent with the law and is unsupported by any evidence presented by either
party.
Petitioners pled tort and statutory causes of action, and a contractual defense
improper “use of the criminal justice system to enforce a civil debt.” (CR, 6-9, 21-
contract under Section 393.504 of the Finance Code. (CR, 10, 11, 17, 24, 25);
TEX. FIN. CODE § 393.504. These claims fall squarely within the four corners of
arbitration of all disputes between the parties to the Loan Contracts, including the
following:
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(CR, 81-82, 85-86, 89-91, 93-94, 97-98, 101-03, 105-06, 109-110, 113-15, 117-18,
122-23, 126-28). Therefore, the tort and statutory causes of action (and the
contractual defense) are covered by the referrals under Paragraph 1(d) and (e) of
the provision. Moreover, the damages sought by the Petitioners are covered by the
Arbitration agreements, like other contracts, are subject to the legal rules of
contract construction. In re Olshan Foundation Repair Co., Inc., 328 S.W.3d 883,
889 (Tex. 2010). No party claimed the Loan Contracts were ambiguous, so the
trial court was required to interpret the arbitration provision as a matter of law.
Willis v. Donnelly, 199 S.W.3d 262, 275 (Tex. 2006); Seagull Energy E & P, Inc.
v. Eland Energy, Inc., 207 S.W.3d 342, 345 (Tex. 2006); see generally, Coker v.
Coker, 650 S.W.2d 391, 393-94 (Tex. 1983). In construing a contract, courts must
ascertain and give effect to the parties’ intentions as expressed in the document.
Frost Nat’l Bank v. L&F Distributors, Ltd., 165 S.W.3d 310 (Tex. 2005); J.M.
written, therefore the language of the arbitration provision is the best evidence as
to whether the Appellees’ claims fall within the scope of the arbitration provision.
Heritage Res. v. Nationsbank, 939 S.W.2d 118, 121 (Tex. 1996); see, e.g.,NCP
Finance Ltd. Partnership, 350 S.W.3d at 155. The conduct of the parties is
27
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contract. East Montgomery Cty. Mun. Utility Dist. No. 1 v. Roman Forest Consol.
Applying these rules of construction, courts must resolve any doubts about
claims, disputes, and other matters arising out of or relating to the contract, creates
McReynolds v. Elston, 222 S.W.3d 731, 740-41 (Tex. App.—Houston [14th Dist.]
2007, orig. proceeding); Williams Indus. v. Earth Dev. Sys. Corp., 110 S.W.3d 131,
covered by the contractual provision at issue. Therefore, under the proper rules of
Even if this Court feels it needs to look deeper into the basis for Petitioners’
claims to resolve this element of arbitrability, it is clear that the underlying dispute
justice system to enforce a civil debt”—fall within the scope of the arbitration
provision. Efforts to collect debts owed under a contract are covered under broad-
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form arbitration clauses. See In re Conseco Finance Servicing Corp., 19 S.W.3d at
570. In Conseco, the Court of Appeals specifically found as such and stated:
Although true that the claim raised by [Plaintiff] is not based on the
formation or the terms of the contract, the arbitration clause is not so
limited. Rather, the clause provides for arbitration of any claims
“arising from or relating to” the contract. [Plaintiff’s] complaint
arises from Conseco’s alleged efforts to collect the amounts due under
the terms of the agreement. Absent the contract, there would be no
relationship between [Plaintiff] and Conseco, and there would have
been no debt the collection of which caused the difficulty between
them. See American Employers’ Ins. Co. v. Aiken, 942 S.W.2d 156,
160 (Tex. App.—Fort Worth 1997, no writ). Therefore, we conclude
that [Plaintiff’s] claims based on Conseco’s acts in collecting the debt
owed on the contract arise from or relate to the contract and so are
within the scope of the arbitration clause. Furthermore, the Texas
Supreme Court has held that claims under the DTPA fall within the
scope of an arbitration agreement. Jack B. Anglin Co., Inc. v. Tipps,
842 S.W.2d 266, 270-71 (Tex. 1992).
Id. In the present case, the “civil debt” arises from and directly relates to the
obligations created by the Loan Contracts. Therefore, the dispute falls squarely
Even if the trial court could look beyond the express language of the
debt,” the malicious prosecution and fraud claims are torts that fall within the
scope of a broad arbitration provision. Typically, the test for applying a broad-
form arbitration provision to a tort claim is whether the liability arises from the
contract that contains the arbitration provision, or whether the liability arises from
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general obligations imposed by law. In re Vesta Ins. Group, Inc., 192 S.W.3d 759,
In the present case, the malicious prosecution and fraud claims arise from
contractual debt, and failed to disclose this alleged method to Petitioners before the
Loan Contracts were signed and the money was loaned. Without the formation
and performance of the Loan Contracts containing the arbitration provisions, there
conduct in incurring their debts under the Loan Contracts, as well as what they
understood at the time they entered into the contracts, will be at issue in this case.10
Therefore, liability arises from and/or relates to the formation and performance of
the Loan Contracts, so that the malicious prosecution and fraud claims fall within
the scope of the arbitration provisions. In re Vesta Ins. Group, Inc., 192 S.W.3d at
10
Although the merits of Petitioners’ malicious prosecution claim should not have been
considered by the trial court, much of the argument made by Petitioners in their filings, and
during the trial court hearing, focused on what they believed they could prove in support of their
tort claim. (C.R. 137-43; RR, 13:20-14:9, 19:12-21:21, 22:7-10, 24:2-25:10, 29:16-23:10, 32:17-
33:14). It is important to remember in evaluating these arguments that malicious prosecution
claims generally are disfavored, because they tend to discourage the reporting of crimes.
Browning-Ferris Indus. v. Lieck, 881 S.W.2d 288, 290-94 (Tex. 1994). Moreover, such a claim
cannot be proven unless the plaintiff was innocent of the charge and the prosecution was
terminated in the plaintiff’s favor. Kroger Tex. L.P. v. Suberu, 216 S.W.3d 788, 792 n.3 (Tex.
2006). In the order at issue, which was written and submitted by Petitioners, the court found that
Petitioners’ damage claims arise, in part, from their “criminal convictions.” If that finding is
correct, there is no substance to the tort claims as a matter of law. In any event, any issue as to
whether a malicious prosecution claim is a tort or intentional tort that can survive and be litigated
is a question for the arbitrator to decide. G.T. Leach, Builders L.L.C., 458 S.W.3d at 520-23; BG
Group, PLC v. Republic of Argentina, 572 U.S. ____, 134 S. Ct. 1198, 1206-07 (2014); Howsam
v. Dean Witter Reynolds, Inc., 537 U.S. 79, 81 (2002).
30
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761; accord, Gatlin v. P.O.A. Criscione Star #16195, 2008 WL 2745956, *3 (N.D.
Ill. 2008).
Petitioners strenuously argue that their claims do not fall within the scope of
the arbitration and class-action waiver provision because they have not sued for
breach of contract. However, even if this argument carried legal validity, it is not
completely accurate. Petitioners have based their claims for class certification, and
for liability and damages, in part, on violations of Chapter 393 of the Finance Code
and the damages recoverable under that Chapter. The violations alleged by
violation of the Finance Code allowing for recovery of statutory damages. TEX.
FIN. CODE §§ 393.203, 393.504. Therefore, even their statutory claims are
intertwined with the Loan Contracts containing the arbitration and class-action
waiver provision.11
So, under any way to look at the issue of the scope of the arbitration clause
in this case, Petitioners’ claims fall within that scope as a matter of law. Therefore,
because Respondents met their burden on the two threshold elements to support its
motion to compel, the trial court erred in making its conclusions contained in its
order, and abused its discretion when it denied Respondents’ motion to compel.
J.M. Davidson, Inc., 128 S.W.3d at 227. The Fourth Court of Appeals, in turn,
11
Moreover, Petitioners pled the defense of first material breach of the Loan Contracts against
Respondents. (C.R. 138).
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correctly applied the law to find that Respondents met their burden of proof on
waiver. Kennedy Hodges, L.L.P., 433 S.W.3d at 543; Richmont Holdings, Inc., 455
S.W.3d at 574-75; Forest Oil Corp., 268 S.W.3d at 56; Perry Homes, 258 S.W.3d
Indus., LLC, 475 S.W.3d at 449. Because they failed to meet this burden, the trial
Oil Corp., 268 S.W.3d at 56, 61; Perry Homes, 258 S.W.3d at 598; Cooper Indus.,
claims tort and statutory claims for damages when Respondents sought the support
As the Fourth Court of Appeals noted, this argument presents an atypical scenario
for application of the waiver defense, which normally arises when the movant has
taken action in the underlying litigation that is inconsistent with later seeking to
enforce the arbitration provision. Cash Biz, LP, 2016 WL 4013794, at *6, 8; see
32
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Pilot Travel Ctrs., LLC, 416 S.W.3d at 183; In re Christus Spohn Health System
Corp., 231 S.W.3d 475, 481 (Tex. App.—Corpus Christi-Edinburg 2007, orig.
indicative of waiver.”); see also Principal Investments v. Harrison, 366 P.3d 688,
proceedings before the court being asked to compel arbitration.”). In this case, no
such allegation is made. Instead, the Petitioners are relying on actions that
occurred outside of the civil court system and prior to the underlying litigation, and
that form the operative facts of their substantive claims for liability and damages.
The leading federal case under the FAA to look closely at both the definition
of “invoke” related to the waiver defense, and to a claim of waiver arising from
Equip. Leasing Corp. v. Forte, 169 F.3d 324, 328 (5th Cir. 1999). In Subway, the
Fifth Circuit explained the meaning of “invoke” in the context of the waiver
defense as follows:
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In this context, we regard the judicial process as a mechanism:
to invoke it is to implement it.
Subway Equip. Leasing Corp., 169 F.3d at 328 (emphasis added). This description
enforcing the judicial process;” and an “overt act in court that evinces a desire to
resolve the arbitrable dispute through litigation rather than arbitration.” Id.
Applying these elements to the facts of the case before it, the Fifth Circuit found
that the filing of a separate bankruptcy proceeding did not meet the definition of
“invoke” to support a claim that arbitration of the dispute at issue had been waived.
Id.
Under Texas law, the civil judicial process and the criminal judicial process
are different remedial systems that do not merge. See TEX. PENAL CODE § 1.03(c);
see, e.g., TEX. PENAL CODE § 9.06. Consistent with this separateness, a private
party cannot implement or enforce the criminal judicial process under Texas law;
the acceptance of a criminal complaint, and the filing of a criminal charge are
871 (Tex. App.—Corpus Christi 1998, no writ); Taylor v. Gately, 870 S.W.2d 204,
prohibited from intervening in, or being a party to a criminal case. See In re Amos,
397 S.W.3d 309, 314 (Tex. App.—Dallas 2013, orig. proceeding) (following Bell
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v. State, 2006 WL 3628916, at *5 (Tex. App.—Houston [1st Dist.] 2006, no pet.),
and In re Wingfield, 171 S.W.3d 374, 381 (Tex. App.—Tyler 2005, orig.
orig. proceeding). Moreover, criminal law disputes are not arbitrable. See
(N.D.Ill.3/7/86).
feels a crime has been committed—a private party cannot, as a matter of law,
law, could not “substantially invoke the judicial process” by providing affidavits or
matter of law, provide both the basis for the present suit and the basis for the
12
Although, as will be discussed below, there is no evidence of Respondents further participation
in any criminal proceeding involving Petitioners, participation as a complaining witness during
trial still would not constitute “implementation or enforcement” of a criminal proceeding. Such
a finding would violate the public policy of this state that encourages reporting facts to
prosecuting authorities. See Diamond Shamrock Corp. v. Ortiz, 753 S.W.2d 238, 241
(Tex.App.—Corpus Christi 1988, writ denied); Thomas v. Cisneros, 596 S.W.2d 313, 316
(Tex.Civ.App.—Austin 1980, writ ref'd n.r.e.); Reed v. Lindley, 240 S.W. 348 (Tex.Civ.App.
Fort Worth 1922, no writ); see generally, Browning-Ferris Industries, Inc., 881 S.W.2d at 290-
94.
35
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waiver defense to arbitration, because the earlier criminal proceedings and the
underlying suit do not involve the same “arbitrable dispute.” See generally, Pilot
Travel Ctrs., LLC, 416 S.W.3d at 183. Subway requires that the movant engage in
an overt act to litigate the same “arbitable dispute,” and a criminal case cannot be
the same “arbitrable dispute,” because criminal disputes are subject to a different
judicial process and are not arbitrable.13 Therefore, Petitioners’ waiver defense
is more analogous to the filing of initial pleadings in a civil case. As the Fourth
uniformly hold that the mere filing of pleadings in a civil case is not the type of
the judicial process.” G.T. Leach, Builders L.L.C., 458 S.W.3d at 512; Richmont
Holdings, Inc., 455 S.W.3d at 574-75; In re D. Wilson Constr. Co., 196 S.W.3d at
783; Cooper Indus., LLC, 475 S.W.3d at 449. Consistent with this rule, one
federal court found that the mere filing of a criminal complaint in Mexico parallel
13
In support of its finding of waiver, the dissenting opinion in the appellate court notes that both
the earlier criminal proceedings and the underlying case arise from the same civil debt. Cash
Biz, LP, 2016 WL 4013894, at *10. Although this point is relevant to the issue of whether the
subject matter of the dispute comes within the scope of the arbitration agreement consistent with
In re Conseco Finance Servicing Corp., 19 S.W.3d at 570, it should not, as a matter of law, be
used to conflate a criminal case that is not arbitrable, with a civil case that is arbitrable, just
because the circumstances giving rise to each case may arise from the same transaction.
36
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to an ongoing arbitration did not constitute a substantial invocation of the judicial
process. See Consorcio Rive, S.A. De C.V. v. Briggs of Cancun, Inc., 134
Like the court in Consorcio Rive, the vast majority of courts that have
looked at this issue under the FAA, or another federal or state arbitration statute,
have followed the reasoning of Subway and found that a private party’s filing of a
criminal complaint cannot and does not waive arbitration of a civil dispute. See,
e.g., Griffin v. Burlington Volkswagen, Inc., 411 N.J.Super. 515, 988 A.2d 101,
104 (NJ. App. Div. 2010); Gatlin v. P.O.A. Criscione Star #16195, 2008 WL
Myers, 1986 WL 3329, at *2; Amalgamated Local No. 55, United Automobile,
Aerospace & Agricultural Implement Workers of Am. v. Metal and Alloy Div. of
Silver Creek Precision Corp., 396 F.Supp. 667, (W.D. N.Y. 1975); c.f.,
Mendelsohn v. A&D Catering Corp., 119 Misc.2d 581, 464 N.Y.S.2d 331 (N.Y.
1983); but see, Taft v. Burttram, 254 Ga. 687, 333 S.E.2d 585, 586 (1985)
(analyzing the facts in the context of the rules of the National Association of
Securities Dealers, rather than the FAA); Vine, supra.14 Petitioners even admitted
14
To date, Respondents have found only one, 30-year-old court ruling (other than the PLS
Opinion) that is consistent with Petitioners’ argument and the trial court’s order. See Taft v.
Burttram, 254 Ga. 687, 333 S.E.2d 585, 586 (1985). In Taft, the Georgia Supreme Court was
looking at the issue in the context of an arbitration pursuant to the rules of the National
Association of Securities Dealers (“NASD”). In that case, the court found that the swearing out
of criminal complaints instead of seeking to arbitrate their disputes, constituted a waiver of their
37
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during the hearing on the motion to compel (and prior to the District Court’s
opinion in Vine) that they could not cite to any case law supporting their argument
(R.R. 17:3-6).
proceedings to constitute the type of conduct that constitutes waiver. See Subway
Equip. Leasing Corp., 169 F.3d at 328; In re Christus Spohn Health Sys. Corp.,
231 S.W.3d at 481. The totality of circumstances test described in Perry Homes
focuses on factors that involve litigation and delay in the same (or directly related)
S.W.3d at 589-92; see G.T. Leach, Builders L.L.C., 458 S.W.3d at 511-14;
Richmont Holdings, Inc., 455 S.W.3d at 575 n.1; see also, In re Service Corp. Int’l,
85 S.W.3d 171, 174-76 (Tex. 2002); In re Christus Spohn Health Sys. Corp., 231
S.W.3d at 481 (courts “ordinarily would not consider actions in a separate cause to
Court, let alone the cases from other jurisdictions that have looked at the specific
issue, that give any support for the determination made by the trial court that
process so as to waive arbitration in a later civil dispute. Therefore, the trial court
right to arbitrate the dispute under the NASD rules. Id. Although the court in Taft based its
ruling on the breadth of the NASD arbitration rule that required “all disputes” to be arbitrated,
this interpretation appears to be at odds with those cases interpreting the FAA, which have found
that criminal activity cannot be arbitrated under the FAA. Prescott-Follett & Assocs., Inc., 2002
WL 31528463, *5; Myers v. Rosenberg, 1986 WL 3329, *2.
38
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erred as a matter of law by concluding that Respondents’ submission of
litigation process so as to waive the contractual right to arbitrate the present civil
prejudice, other than the allegations contained in their pleadings and copies of
unverified articles and dockets sheets from websites. All of these materials
submitted to the trial court, at most, show what is uncontested in this case:
Despite this lack of evidence, the trial court signed the pre-written order
finding that Respondents “filed criminal charges against the Plaintiffs, participated
together with the unverified materials attached to their pleadings and response to
the motion to compel, fill the gap in evidence, either directly or by inference, to
15
A significant portion of the hearing on the motion to compel dealt with the trial judge’s
personal observations and experiences with the process followed by some prosecutors to pursue
bad-check criminal charges. None of what was discussed by the trial court was supported by
evidence in the record, nor would it have been appropriate for the trial court to take judicial
notice of such personal observations and experiences. See Ex parte Rains, 555 S.W.2d 478, 481
(Tex. Crim. App. 1977). To the extent the trial court’s observations and experiences formed the
39
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wrongdoing to prove “substantial invocation,” and on their substantive allegations
of damages to prove prejudice. The Fourth Court of Appeals correctly found that
such allegations and materials were legally insufficient to meet Petitioners’ burden
to prove the elements of waiver. Cash Biz, LP, 2016 WL 4013794, at *6- 8.
and motion for en banc review, and now argue before this Court, that cases
interpreting and applying Rule 12(b) of the Federal Rules of Civil Procedure to
federal substantive law under the FAA in order to show that they met their burden
of proof.
arbitration as a form of motion to dismiss under Rule 12(b) of the Federal Rules of
Civil Procedure. When considering motions under 12(b), federal courts treat the
non-movants factual pleadings as true when reviewing the motion to compel. See
Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc., 468 F.3d 523, 525
(8th Cir. 2006). But, the case law applying Federal Rule 12(b) is neither a
substantive rule of law under the FAA, nor is it used by federal courts to change
basis of the findings and conclusions in the order, those findings and conclusions were based on,
and constitute no evidence. See Kenny v. Portfolio Recovery Assocs., LLC, 464 S.W.3d 29,34
(Tex. App.—Houston [1st Dist.] 2015, no pet.); Guyton v. Monteau, 332 S.W.3d 687, 693 (Tex.
App.—Houston [14th Dist.] 2011, no pet.).
40
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the relevant evidence and burden of proof on the defense of waiver and prejudice.
In fact, federal courts limit the application of the procedural rule that the
factual pleadings are to be taken as true in the arbitration context to the legal
determination as to whether the nature of the dispute falls within the scope of the
arbitration provision. Primerica Life Ins. Co., 304 F.3d at 471; Municipal Energy
Agency of Mississippi, 804 F.2d at 342; Horizon Health Corp., 284 F.Supp.2d at
441; Smith Barney Shearson, Inc., 838 F. Supp. at 1158; see, e.g., Suburban
Leisure Center, Inc., 468 F.3d at 525-27. In making that determination, the federal
courts focus only on the nature of the dispute as pled and are prohibited from
analyzing the merits of the underlying action. AT&T Technologies, Inc., 475 U.S.
at 649; Primerica Life Ins. Co., 304 F.3d at 471; Snap-On Tools Corp., 18 F.3d at
1267; Municipal Energy Agency of Mississippi, 804 F.2d at 342; Horizon Health
Corp., 284 F.Supp.2d at 441; Smith Barney Shearson, Inc., 838 F. Supp. at 1158.
This application of the pleading rule under Federal Rule 12(b) is consistent
with the burdens each party has during the summary proceeding on arbitrability in
Texas courts. The two initial elements for which the movant has the burden
typically are satisfied by a review of the pleadings and the arbitration provision.
TEX. CIV. PRAC. & REM. CODE § 171.021(b); J.M. Davidson, Inc., 128 S.W.3d at
227. Once the movant’s burden is met, however, the non-movant has the burden to
41
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present evidence of “substantial invocation” and prejudice to defeat enforcement of
the arbitration provision, and the standard for determining waiver is the same under
both the FAA and the TAA. Tuscan Builders, L.P. v. 1437 SH6 L.L.C., 438
S.W.3d 717, 720 (Tex. App.—Houston [1st Dist.] 2014, pet. denied); Pilot Travel
Ctrs., LLC, 416 S.W.3d at 182-83; McReynolds, 222 S.W.3d at 741; Southwind
Group, Inc. v. Landwehr, 188 S.W.3d 730, 735 (Tex. App.—Eastland 2006, orig.
proceeding).
Courts are to determine whether the non-movant met its burden using the
512; Perry Homes, 258 S.W.3d 589-90. Because this portion of the proceeding
inapplicable to determining whether the burden has been met by the non-movant.16
16
Confusion can arise from the type of “evidence” courts typically consider. Because the typical
waiver defense arises from litigation activity in a lawsuit after it is filed, evidence of the
movant’s litigation activity (e.g., discovery filings, depositions, motions for summary judgment)
is normally found in the trial court’s file, or can be submitted as attachments to the non-movant’s
response to the motion to compel. Depending on the type of evidence submitted from the
underlying litigation, it can be verified by the non-movant’s counsel, or a trial court can take
judicial notice of it. However, in the atypical situation posed by this case, Petitioners had the
burden to proffer evidence from outside the trial court’s file and litigation record of the pending
case to support findings that Respondents “filed criminal charges against the Plaintiffs,
participated in criminal trials, obtained criminal judgments, and attempted to collect from
Plaintiffs.” Petitioners failed to proffer any such evidence, and failed to controvert the evidence
submitted in David Flanagan’s affidavit. Instead, Petitioners vociferously argue that their
allegations of wrongdoing, together with interviews and inferences contained in unverified
articles posted on Internet websites, constitute sufficient “evidence” to meet the totality of
circumstances test. See Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877, 885 n. 6
(N.D. Ill. 2005) (“…printouts from websites should be closely scrutinized for reliability.”); cf., D
42
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So, even assuming that a rule of pleading similar to the rule under Federal
Rule 12(b) applies to the summary proceeding in a Texas state court, it does not
admissible relevant evidence on the issues of waiver and prejudice. Again, the
only relevant evidence presented in the trial court by Petitioners to meet their high
burden on the elements of waiver was a compilation of online records showing that
could proffer to support the alleged merit of their underlying claims; such materials
pleadings and supporting materials still do not provide legally sufficient evidence
Magazine Partners, L.P. v. Rosenthal, ___ S.W.3d ___, 2017 WL 1041234 (Tex., March 17,
2017) (majority and concurring opinions).
43
010725.000005\4820-6817-9523.v1
operative allegations underlying the Petitioners’ claims for liability and damages,
and federal law prohibits courts from considering the merits of the underlying
action when making findings of fact and resolving questions of law. AT&T
Technologies, Inc., 475 U.S. at 649; Primerica Life Ins. Co., 304 F.3d at 471;
804 F.2d at 342; Horizon Health Corp., 284 F.Supp.2d at 441; Smith Barney
Petitioners failed to proffer any legally sufficient evidence under the totality of
circumstances test to overcome the presumptions of the law and to meet their high
burden on the issue of waiver and prejudice. There was no evidence in the record
criminal trials.” There was no evidence in the record that Respondents “obtained
Plaintiffs”—they were not parties to the criminal actions and they had not filed any
44
010725.000005\4820-6817-9523.v1
The only evidence submitted to the trial court by either party showed that the
websites.17 Without more, the only evidence before the court was evidence of the
mere filing of a complaint in a separate proceeding, which the courts of this state
have found not to rise to the level of waiver. G.T. Leach, Builders L.L.C., 458
S.W.3d at 511-12; Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C., 455
S.W.3d 573, 574-75 (Tex. 2014); Kennedy Hodges, L.L.P., 433 S.W.3d at 543;;
Forest Oil Corp., 268 S.W.3d at 56; Perry Homes, 258 S.W.3d at 589-93; In re D.
Wilson Constr. Co., 196 S.W.3d at 783; Cooper Indus., LLC, 475 S.W.3d at 450-
451. Because Petitioners did not proffer legally sufficient evidence to meet their
burden, and all doubts are to be resolved in favor of arbitration, the trial court had
no discretion to deny arbitration. Forest Oil Corp., 268 S.W.3d at 56, 61; Valero
Energy Corp., 2 S.W.3d at 581; In re Bruce Terminix Co., 988 S.W.2d 702, 705
(Tex.1998); Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
24-25 (1983).
Based on this record from the trial court, the Majority Opinion below
correctly applied the law pertaining to waiver and prejudice to find that being the
17
Recognizing this problem, Petitioners try to construe statements made by Respondents counsel
during the trial court hearing as stipulations that they were more than a complainant in the
criminal proceedings, but these statements are neither stipulations, nor do they describe any
activity other than that of being the initial complainant. (R.R. 26:3-14, 28:15-29:12).
45
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complainant in criminal proceedings pre-dating Petitioners’ current suit does not
waiver, the appellate court would have had to analyze and pre-judge the merit of
the Petitioners’ underlying action, and the legal sufficiency of the proffered
materials to support such claims, which it is legally prohibited from doing under
review the trial court’s order, and this Petition for Review should be denied of the
provision also is wrong as a matter of law, and ignores this Court’s ruling in NCP
Finance. See generally, See DirectTV, Inc., supra; AT&T Mobility, supra.
action waivers of the type contained in the Loan Contracts. In fact, the San
46
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agreements at issue in this case. See NCP Finance Ltd. Partnership, 350 S.W.3d at
155.
sister-state courts when construing and applying the FAA, they are not bound by
find that the Majority Opinion conflicts with the decisions of one federal district
court and one sister-state court, when those opinions are clearly distinguishable
and when both courts impermissibly analyzed and pre-judged the merits of the
First, the district court broadly applied the federal rule of pleading under
Rule 12(b) beyond a review of the movant’s initial burden on the two elements of
arbitrability, to find that the non-movants met their burden of proof on the
reaching its decision in this way, the district court relied on a federal procedural
rule, rather than the federal substantive law embodied in the FAA. Moreover, by
18
Because the dissenting opinion in the Fourth Court of Appeals largely followed the reasoning
of the District Court in Vine, this part of the Response Brief also addresses the dissent below.
47
010725.000005\4820-6817-9523.v1
using the procedural rule in this way, the district court arguably misapplied the
waiver and impermissibly analyzed and pre-judged the merit of the underlying
action. In fact, the district court even delved into an analysis of the elements of the
Spohn Health System Corp., which was briefed and argued extensively to the
Fourth Court of Appeals by both parties. The circumstances that gave rise to the
ruling in Christus Spohn are extraordinarily unique, because a private party was
when Texas law prohibits such an intervention by a private party. See In re Amos,
397 S.W.3d at 314; Bell v. State, 2006 WL 3628916, at *5; In re Wingfield, 171
S.W.3d at 381; In re Flores, 2016 WL 890969, at *1. This factor alone makes the
Christus Spohn opinion an outlier with little or no precedential value beyond its
unique facts.
However, the court in Vine also ignores the fact that the court in Christus
Spohn narrowed the application of its ruling by stating that the civil litigant’s
intervention in the criminal case would not alone establish waiver of the right to
arbitration. Id., at 481-82. Instead, the court in Vine read Christus Spohn as
broadly concluding “that a party can invoke the judicial process by strategically
48
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filing a contempt motion in a related criminal matter.” Vine, 2016 WL 8138800, at
*5. That conclusion is a misreading of Christus Spohn. So, to the extent Vine
ignores Texas and federal law by assuming that a private party can implement or
attorney, and by failing to address the many analogous cases (cited in the Majority
Opinion) that have found that the mere filing of pleadings in a civil case does not
ignores the majority of courts (cited above) that have applied the reasoning of
Subway to conclude that the filing of a criminal complaint does not constitute
dispute.
For these reasons, Vine is distinguishable from the present case, and it
should not be given weight by this Court in determining whether to grant the
Petition.
49
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F. The Harrison Opinion
In Principal Investments v. Harrison, the Nevada Supreme Court was not
dealing with a criminal case, and the movant had been the plaintiff in the prior civil
actions at issue.
proceed in a justice court or arbitration, and the movant chose to pursue claims in
justice court and obtained default judgments. Principal Investments, 366 P.3d at
692. The underlying action involved a judicial proceeding to set aside those
judgments, analogous to a Bill of Review proceeding under Texas law. Id., at 697-
98.
So, unlike the present case, but consistent with a proper application of the
two elements of Subway, the Court in Harrison found that the lender had invoked
the judicial process in a civil proceeding within the scope of the arbitration
19
Finally, the Fourth Court’s prior decision in NCP Finance Ltd. Partnership is itself evidence
that there is no real split of authority in Texas on how to apply the broad-form provision at issue
in this case.
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CONCLUSION
Although the allegations involving prior criminal proceedings make the
underlying factual dispute in this case somewhat unique, the law to be applied to
the question of arbitrability is well-settled, and was correctly analyzed and applied
The Majority Opinion of the Fourth Court of Appeals carefully and correctly
avoided pre-judging the merits of the Petitioners’ underlying action, and was
subject to further review and sustained by 5 of the 7 members of the appellate court
when it denied rehearing and en banc review. The lower court correctly applied
Texas and Federal law construing and applying the FAA to the relevant evidence
new exception to the law, governing arbitrability of “pay day” loan contracts based
on the nature of the allegations giving rise to their underlying action. However,
federal and Texas law is clear that the consideration of the merits is for the ultimate
to determine arbitrability.
Any rule or exception that would deny enforcement of the arbitration and
of the merits of Petitioners’ and Amicus’ allegations, lower the “high hurdle” of
51
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proof required to sustain the defense of waiver, treat submission of information to
role for private parties in the criminal legal process that is contrary to law and
public policy. No matter what concerns this Court may have about the allegations
made by the Petitioners and Amicus, there are two sides to every dispute, and the
parties agreed to have that dispute decided in individual arbitrations. This Court
Petitioners seek.
Therefore, this Petition for Review should be denied, or the judgment of the
XI. PRAYER
WHEREFORE, PREMISES CONSIDERED, Respondents request that the
Petition for Review be denied, or that the opinion and judgment of the Fourth
Court of Appeals be affirmed; and that they receive such other and further relief to
Respectfully submitted,
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010725.000005\4820-6817-9523.v1
Texas Bar No. 07562790
pgaas@coatsrose.com
9 Greenway Plaza, Suite 1100
Houston, Texas 77046-0307
(713) 651-0111
(713) 651-0220 facsimile
Procedure, the undersigned certifies that this Response complies with the Rule’s
word limits. The word count of pages 1 through 52 is 13,241 words, excluding the
parts of the brief exempted by Rule 9(i)(1). This word court is based on the count
provided by the “word count” function of Microsoft Word 2010, which is the
53
010725.000005\4820-6817-9523.v1
XIII. CERTIFICATE OF SERVICE
I hereby certified that a true and correct copy of the foregoing instrument has
been served upon all counsel of record, listed below, by certified mail, return
receipt requested, or by facsimile, or by electronic transmission of same on the 20th
day of April, 2017.
Daniel R. Dutko
Hanszen LaPorte, L.L.P.
11767 Katy Freeway, Suite 850
Houston, Texas 77079
Ricardo G. Cedillo
Davis, Cedillo & Mendoza, Inc.
755 E. Mulberry, Suite 500
San Antonio, Texas 78212
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XIV. APPENDIX
NO.
1 Letter from Fifth Circuit setting oral argument schedule for March 8, 2017
2 Copy of Docket Sheets from the PACER System for the District Court and
Fifth Circuit proceedings in Vine
3 Motion for Leave to File Amicus Brief, and Order denying the Motion by
the Fifth Circuit
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010725.000005\4820-6817-9523.v1
Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)
medical advice, and was the only person criminal law and the individual's interest in
present when the child suffered his attacks. freedom from unjustifiable and oppressive
criminal prosecution.
Cases that cite this headnote
Cases that cite this headnote
[11] Damages
[7] Malicious Prosecution Elements in General
Presumptions and Burden of Proof A plaintiff establishes intentional infliction
There is an initial presumption in malicious of emotional distress if he can show: (1) the
prosecution cases that the defendant acted defendant acted intentionally or recklessly;
in good faith and had probable cause to (2) the conduct was extreme and outrageous;
initiate or procure the prosecution, but (3) defendant's conduct caused the plaintiff
that presumption disappears once a plaintiff emotional distress; and (4) the emotional
produces evidence that the motives, grounds, distress was severe.
beliefs, and other evidence upon which the
defendant acted did not constitute probable Cases that cite this headnote
cause.
[12] Judgment
2 Cases that cite this headnote
Matters of Fact or Conclusions
Doctors' affidavits providing merely legal
[8] Malicious Prosecution conclusions that mother did not experience
Nature and Form of Remedy emotional distress, and that doctors' actions
Cause of action for malicious prosecution did not cause emotional distress, were wholly
involves a delicate balance between society's insufficient to negate cause of action for
interest in the efficient enforcement of the
[14] Judgment
Tort Cases in General [18] Health
Standard of Practice and Departure
Genuine issue of material fact existed as
Therefrom
to whether doctors conspired to cover up
evidence of medical malpractice by accusing The threshold question in a medical
mother of abuse, precluding summary malpractice case is the standard of care, which
judgment for them on mother's civil must be established by expert testimony.
conspiracy claim.
1 Cases that cite this headnote
Cases that cite this headnote
[19] Judgment
[15] Conspiracy Torts
Nature and Elements in General Testimony from an interested expert, such
To prove civil conspiracy, the plaintiff must as the defendant doctor, can establish the
show the following elements: (1) two or more standard of care and support summary
persons; (2) an object to be accomplished; (3) judgment in medical malpractice case, if
a meeting of the minds on the object to be the testimony is clear, direct, positive,
accomplished; (4) one or more unlawful, overt otherwise credible, free of contradictions and
acts; and (5) damages as the proximate result. inconsistencies, and capable of being readily
controverted.
Cases that cite this headnote
3 Cases that cite this headnote
[16] Judgment
Matters of Fact or Conclusions [20] New Trial
Time of Discovery
Doctor's affidavit stating merely that he was
familiar with the definition of gross negligence New Trial
and negligence per se, and denying that he Nature of Action or Issue and Character
was negligent in any way, did not sufficiently of Evidence
negate negligence claim to warrant grant of Doctors' failure to disclose their “manual of
summary judgment. strategies to avoid litigation” did not warrant
new trial in suit by mother arising from
Cases that cite this headnote treatment of child and report of child abuse,
where mother was aware of manual and of
[17] Judgment doctors' failure to produce, but did not file
motion to compel, and she made no showing
that content of manual was not cumulative of intentional infliction of *874 emotional distress, civil
other evidence. conspiracy, and negligence resulting from appellees'
medical treatment of Michael Harwood. We affirm in part
Cases that cite this headnote and reverse and remand in part.
On January 27, 1993, Alvarez found Michael turning blue, Alvarez was ultimately indicted, but on April 14, 1994,
and she rushed him to Driscoll for treatment. On the 28th, the indictment was dismissed. Alvarez and her parents
Michael again turned blue and Alvarez ran to the nurses' filed suit against appellees 2 asserting claims for malicious
station screaming for help. A nurse found Michael to be prosecution, intentional infliction of emotional distress,
cyanotic and unresponsive. He was revived and ultimately civil conspiracy, and negligence. The appellees filed
discharged on February 3, 1993. motions for summary judgment, which the court granted.
left to the discretion of another, Gen. Laws 1466 (repealed 1995)) (current version at TEX.
including a law enforcement official FAM.CODE ANN. § 261.106(a), (c) (Vernon 1996)).
or the grand jury, unless the person
provides information which he knows [2] Appellants counter with the argument that if a jury
is false. determines any of the doctors were negligent and sought
to cover up their negligence through the prosecution of
Lieck, 881 S.W.2d at 293 (emphasis added). Alvarez, they will have shown the requisite bad faith or
malice that exempts the doctors from immunity. Bad faith
Appellants alleged appellees knew that any injury to and malice are elements that are not properly disposed of
Michael was the result of their own negligence in failing by summary judgment because they entail the evaluation
to adequately treat him. Appellants contended appellees of intent. Villacana v. Campbell, 929 S.W.2d 69, 73
engaged in a cover-up of the doctors' and the hospital's (Tex.App.—Corpus Christi 1996, writ denied); Wofford
liability by accusing Alvarez of injuring her own child; that v. Blomquist, 865 S.W.2d 612, 614 (Tex.App.—Corpus
Alvarez's prosecution was procured and propelled in bad Christi 1993, writ denied).
faith or maliciously in an effort to deflect attention from
the negligent medical care given to Michael.
A. McNeil and Dirksen
All appellees claimed immunity from malicious [3] In their motions for summary judgment, McNeil and
prosecution under the mandatory child abuse reporting Dirksen attached their affidavits, each stating
provisions of the Texas Family Code. At the time of the
incidents in question, the family code provided: I deny that I had any conversations
whatsoever with anyone from Child
A person having cause to believe Protective Services or any other
that a child's physical or mental department or investigating agency
health or welfare has been or may for which the Plaintiffs' claims seem
be adversely affected by abuse or to be based. I had no contact with
neglect by any person shall report them whatsoever in any manner
in accordance with Section 34.02 of with respect to the case of Michael
this code. Harwood.... I simply did not in any
way whatsoever, speak with, write,
TEX. FAM.CODE ANN. § 34.01 (Vernon 1989) (Act talk to, or otherwise communicate
of June 16, 1989, 71st Leg., R.S., ch. 1265, § 2, 1989 with Child Protective Services or any
Tex. Gen. Laws 5849 (repealed 1995)) (current version at other investigation agency in this
TEX. FAM.CODE ANN. § 261.101(a) (Vernon 1996)). matter.
The code further provided:
(a) Except as provided by Subsection (b) of this section, Appellants did not refute these affidavits by providing any
a person reporting or assisting in the investigation competent summary judgment evidence that McNeil and
of a report pursuant to this chapter is immune Dirksen were involved in any way with the reporting of the
from liability, civil or criminal, *876 that might incident to CPS or with CPS's subsequent investigation.
otherwise be incurred or imposed. Immunity extends
to participation in any judicial proceedings resulting McNeil's and Dirksen's affidavits established as a matter
from the report. of law that they neither initiated nor procured the criminal
prosecution of Alvarez. Having negated one element of
(b) Persons who report their own conduct or who appellants' cause of action, the trial court did not err
otherwise report in bad faith or malice, or assist in the in granting summary judgment on this cause of action.
investigation of a report in bad faith or malice, are Points of error three and four are overruled.
not protected by this section.
1. Pulmonary arrest was suspicious because Michael's 2. Alvarez's deposition, in which she states:
lungs were “working well.”
(a) at least one of Michael's apneic attacks occurred in
2. Upon review of the medical records, she observed the January 1993 when Michael was in his room directly
apnea attacks occurred only in Alvarez's presence, and across from the nurses' station.
she appeared to be sleeping, although monitors were
(b) other than on one occasion in which she propped
going off during one incident.
up Michael's bottle, and after she was instructed
3. Alvarez persistently fed Michael by propping up his not to do so, Alvarez did not feed Michael by the
bottle while Michael was laying down, a practice she bottle propping method; she always held him upright
had been instructed not to do. because of his reflux problem.
4. A review of the medical records indicated neither (c) she did not withhold information from the doctors
the admitting physician, resident, *877 or nurse and/or hospital staff. To the contrary, in her
were informed by Alvarez that Michael had been deposition, Alvarez related an incident with the
hospitalized previously for apnea or gastro-esophegeal nursing staff in which she insisted Michael have a
reflux, that he was on medication to control the reflux, breathing monitor, that he had had one during his
and that he had been on an apnea monitor. previous admissions and that the nurses refused to
give Michael a monitor because he did not need one
5. When Peterson interviewed Alvarez, she (Alvarez) and no doctor had prescribed it.
contradicted herself regarding whether she had
informed admitting personnel about Michael's medical 3. Police photographs, taken on April 15, 1993, which did
history; and not indicate the presence of any bruises on Michael's
head or neck.
6. She noticed red marks on the back of the child's neck
that looked like fingerprints, which she did not believe 4. The deposition of Dr. Joseph Anzaldua, plaintiff's
to have been caused by resuscitation efforts. expert, in which he testified he could not tell from
looking at the blurry Polaroid pictures taken by the adversely affected by abuse or neglect to orally report their
hospital staff on April 13, 1993, whether there were any suspicions within forty-eight hours.
bruises on Michael. He specifically declined to say the
marks were bruises. [8] [9] There are important policy considerations which
favor affirming the summary judgment with respect to
5. The deposition of Dr. Steve Oshman, Michael's treating Peterson as well. It has often been stated generally that
physician, in which he described one of the steps in “actions for malicious prosecution are not favored in
administering CPR to an infant as placing the thumbs the law.” Lieck, 881 S.W.2d at 291 and cases cited
behind the back of the baby's head to tilt the head therein. This cause of action involves “a delicate balance
backwards and clear the airway. between society's interest in the efficient enforcement of
the criminal law and the individual's interest in freedom
Alvarez did not produce any evidence which suggested from unjustifiable and oppressive criminal prosecution.”
Peterson knew the information provided to CPS was false. Richey, 952 S.W.2d at 517. Doctors and other health care
While Alvarez's summary judgment evidence creates a fact professionals have an affirmative duty to report suspected
question with respect to whether she caused Michael's abuse. The law does not require them to be certain abuse
injuries, it does not controvert Peterson's evidence that has occurred before they report, but merely “to have
she acted in good faith. Peterson simply offered her
cause to believe.” 3 Given the language in the statute and
opinion, based on facts as provided to her by the other
the burden imposed by it, we believe physicians should
doctors and the medical records. Unlike the other doctors,
be afforded deference in reporting such matters. The
who are business associates, Peterson was not alleged
life threatening injury was sustained by Michael before
to have committed any act of malpractice, not having
Peterson treated him. She set out an objectively reasonable
seen Michael until he was already comatose and on a
basis for her belief Alvarez had abused Michael, and
ventilator.
therefore, the immunity afforded by the family code is
extended to her.
The critical facts relied on by Peterson were not disputed.
She was faced with an infant who had suddenly lapsed
Point of error one is overruled. Based on this same
into a life-threatening coma and concluded the child's
analysis, we also overrule point of error five (the trial
lungs appeared healthy and would not explain respiratory
court erred in granting Peterson's motion for summary
failure. She was told by other doctors that, in their
judgment on Alvarez's claim of intentional infliction of
opinion, the circumstances *878 of the child's infirmity
emotional distress), and point of error nine (the trial
were suspicious. She was apprised that Cortes had indeed
court erred in granting Peterson's motion for summary
contacted CPS, based on his apparent suspicions. She
judgment on Alvarez's claim of conspiracy).
observed the medical records which, as described above,
suggested Alvarez was not forthcoming with information,
had disregarded prior medical advice concerning her C. Cortes
child's well-being, and was the only person present when [10] Cortes delineated his probable cause to notify CPS
the child suffered his attacks. Based on the records relied as follows:
upon by Peterson, as well as her conferring with other
doctors, together with Alvarez's inability to refute the Following Michael's cardio-
veracity of Peterson's statements (i.e. that these items were respiratory arrest, it was noted by
in records which she relied on to form her conclusions), we myself and other treating physicians,
find Alvarez failed to rebut the presumption that Peterson that the recurrent episodes of
had probable cause to suspect abuse. respiratory arrest and near arrest
occurred only in the presence of
Peterson's discussions with the other doctors, review the mother and never when another
of the medical records, and her cooperation with CPS person was present. This, coupled
investigation were apparently based on nothing more with the fact that shortly after this
than sound medical practice. Indeed, the Texas Family final episode, Michael developed
Code compels doctors having cause to believe that a some suspicious bruising on the
child's physical and mental health or welfare has been back of his head and neck, lead the
health care providers to suspect that those allegations are the people that are named in
there may have been or may be in this lawsuit are turning right around and accusing the
the future some intentional harm to mother of injury to the child. I really in good conscience
Michael by the mother.... cannot agree to that. In this particular case, I couldn't
do it.”
In their response, appellants questioned whether Cortes
5. Dr. Oshman's deposition testimony outlining the
“honestly and reasonably, or actually, believe[d] that
procedure for infant CPR.
Michael Harwood had suffered a failed suffocation
attempt by his mother.” They provided the following 6. Police photographs, taken on April 15, 1993, that do not
summary judgment evidence: indicate the presence of any bruises on Michael's head
or neck.
1. Michael's medical records. In addition to describing his
previous admissions and treatments, the records stated
We conclude appellants' summary judgment evidence
Michael suffered a cardio/pulmonary arrest that was the
created fact questions with respect to not only the origin
“possible result of regurgitation and aspirating.”
and cause of any marks on Michael's head, but more
2. Peterson's deposition in which she admitted (1) importantly, whether Cortes reasonably believed Alvarez
Michael's condition, including the apnea, aspiration had injured Michael.
and reflux problems could have caused his respiratory
arrest; and (2) she is not a forensic pathologist *879 Appellants' theory of the case must be kept in mind—
and is not qualified to determine the cause of Michael's that the entire story of Alvarez's abuse was fabricated by
cardio/pulmonary arrest, nor is she qualified to assess appellees, acting in concert, as a cover-up for their medical
the cause of any red marks or bruises that may have negligence. In light of this unique framework, we disagree
been visible on Michael's body. Peterson said she would with appellees' prophecy that our holding will have a
not have notified CPS. chilling effect on the mandatory reporting of suspected
child abuse or neglect. Our opinion is limited to the facts
3. The records from the CPS investigation. Ms. Bonneau of this case, that being those situations where the plaintiff
noted she had called Cortes on April 13, 1993 at claims the defendant fabricated the existence of abuse or
approximately 2:30 to question him about the incident. neglect or fabricated the existence of probable cause to
“I asked Dr. Cortes, ‘Can you tell me about the monitor cover up his own negligent conduct in causing injury to
the child had in the past?’ Dr. Cortes did not respond to the child.
the question,” but instead continued to assert Alvarez
had pushed Michael's face into the mattress. Point of error two is sustained.
not aware Michael had vomited, nor was he aware that negligence. During oral argument, appellants informed
the medical records contained notations that Michael had the Court they were waiving this point of error.
vomited. The following transpired: Accordingly, it is not necessary to address it. TEX.R.APP.
P. 47.1.
Q: Would you like to read them [the medical records]
now if you've never read them before?
B. Cortes
A: Yes, please. [16] [17] In point of error fourteen, appellants complain
the trial court erred in granting summary judgment in
Q: Don't you think before you start speculating that a
favor of Cortes on their claims of negligence and gross
mother might have intended harm to her—
negligence. In a medical malpractice suit, because the trier
A: I, sir— of fact must be guided by the opinion testimony of experts,
Hart v. Van Zandt, 399 S.W.2d 791, 792 (Tex.1965),
Q: —own child that you might read the medical records a defendant physician can obtain summary judgment
— based on his uncontroverted testimonial evidence if he
establishes, as a matter of law, that no genuine issue of
A: I— material fact exists as to one or more elements of the
plaintiff's cause of action. TEX.R. CIV. P. 166a(c); Davis
Q: —sir?
v. Manning, 847 S.W.2d 446, 449 (Tex.App.—Houston
A: I, sir, did not—I have a—I have a legal responsibility [14th Dist.] 1993, no writ).
that if I think that a child has been abused that I need
to report it. Dr. Cortes and I discussed it. He did in [18] [19] [20] The threshold question in a medical
fact report it. If he hadn't, I would have. malpractice case is the standard of care, which must
be established by expert testimony. Hall v. Tomball
Also attached to appellants' response to both McNeil's Nursing Center, Inc., 926 S.W.2d 617, 620 (Tex.App.—
and Dirksen's motions were excerpts from Cortes's Houston [14th Dist.] 1996, no writ); Chopra v. Hawryluk,
deposition in which he stated “it was now the consensus 892 S.W.2d 229, 233 (Tex.App.—El Paso 1995, writ
of the doctors who were caring for [Michael] that he denied); Armbruster v. Memorial Southwest Hosp., 857
might have been the victim of abuse.” (Emphasis added). S.W.2d 938, 941 (Tex.App.—Houston [1st Dist.] 1993,
Cortes stated he was sure all the doctors discussed the case no writ). Testimony from an interested expert, such
and before he called CPS, Cortes talked to McNeil and as the defendant doctor, can establish the standard of
Dirksen. care and support summary judgment if the testimony
is clear, direct, positive, otherwise credible, free of
Appellees included the foregoing testimony of Cortes in contradictions and inconsistencies, and capable of being
their response to his motion for summary judgment as readily controverted. Hall, 926 S.W.2d at 620; Chopra, 892
well. S.W.2d at 233. It is not sufficient for an expert to simply
state he knew the standard of care and conclude it was
Appellants' summary judgment proof creates a fact met. Rather, the expert must state what the standard is and
question regarding elements one, two, and three set out in explain how the defendant's acts met it. Hall, 926 S.W.2d
Rileyand Massey. Points of error ten, eleven, and twelve at 620; Nicholson v. Naficy, 747 S.W.2d 3, 4–5 (Tex.App.
are sustained. —Houston [1st Dist.] 1987, no writ).
was the result or actual conscious indifference to the so throughout the entire remainder
rights, welfare, or safety of the persons affected by it. of his hospital stay at Driscoll.
I specifically deny the allegations of gross negligence
made by the Plaintiffs pertaining to me. As appellants noted in their response to Cortes's motion,
Cortes's affidavit lacked factual detail to the extent they
I am familiar with the definition of negligence per se,
would have had great difficulty controverting it. Hall, 926
that being explained to me as conduct, whether of action
S.W.2d at 620. We conclude Cortes's affidavit does not set
or omission, which may be declared and treated as
out the applicable standard of care and does not negate
negligence without any argument or proof as to the
appellants' claim of negligence as a matter of law.
particular surrounding circumstances, either because it
is in violation of a statute or valid municipal ordinance,
Point of error fourteen is sustained.
or because it is so palpably opposed to the dictates of
common prudence that it can be said without hesitation
By point of error fifteen, appellants complain of the
or doubt that no careful person would have been guilty
trial court's failure to grant their motion for new trial.
of it. I specifically deny the allegations of negligence per
The motion was based on two factors: (1) that they had
se made by the Plaintiffs pertaining to me.
acquired new evidence—what they term the “defendants'
I have reviewed the Plaintiffs' Third Amended Petition manual of strategies for avoiding litigation” 5 and (2)
in this case. I deny that any act or omission on my part a new trial should be granted in the interest of justice.
as specifically stated therein was in any way negligent Neither point has merit.
or grossly negligent or in any way adversely affected the
health and safety of Michael Harwood. [21] [22] We review denials of motions for new trial
based on newly discovered evidence under an abuse of
Further, it is my expert opinion, based on a reasonable discretion standard. Jackson v. Van Winkle, 660 S.W.2d
degree of medical probability, that none of the damages 807, 809 (Tex.1983). In order to obtain a new trial, a
[P]laintiff claims in Plaintiffs' latest Petition were in any plaintiff must show that (1) the evidence has come to
way caused by any negligent act or omission on my part. their attention since the trial; (2) it was not discovered
earlier due to the lack of diligence; (3) the evidence is not
Cortes' affidavit falls far short of the requirements set out cumulative; and (4) it is so material that it would produce
in Hall. Nowhere in this affidavit did Cortes delineate the a different result if a new trial were granted. Id. at 809.
standard of care, state he was familiar with the standard
of care, or how his conduct complied with that standard. After reviewing the statement of facts from the hearing
As in Hall, although Cortes's affidavit stated that no act on the motion for new trial, we conclude appellants failed
or omission on his part caused damage to Michael, we to establish the second and third prongs of the Jackson
find the statement conclusory because we do not know test. After hearing the argument of counsel, the trial court
what actions were taken by Cortes in treating Michael. He concluded that, although appellants did request appellees
merely stated: produce the manual and any incident reports, when the
information was not forthcoming, appellants did not file
The next time I saw Michael
a motion to compel. The court stated:
was on April 13, 1993. He had
been admitted to the hospital on *883 Those were matters that could
April 10, 1992[sic] by my associate, have been brought up pre-trial so
Dr. Tom McNeil for treatment of to speak. You did have the right
symptomatic asthma. At the time to compel the other side to deliver
that I saw Michael, he had already documents and answer questions
experienced the cardio-pulmonary and so forth .... and I think you
arrest made the basis of this missed your opportunity.
lawsuit, and had been transferred to
the Pediatric Intensive Care Unit.
Moreover, appellants failed to put on any evidence that
Michael was in a coma and remained
the manual would not be cumulative of other evidence
already before the court via the motions for summary for malicious prosecution. The judgment is REVERSED
and REMANDED on all causes of action with respect
judgment.
to Cortes and with respect to McNeil and Dirksen on
Alvarez's causes of action for conspiracy and intentional
Finding that the trial court did not abuse its discretion
infliction of emotional distress.
in denying the motion for new trial, we overrule point of
error number fifteen.
All Citations
The judgment of the trial court is AFFIRMED with
respect to Peterson on all causes of action and with respect 967 S.W.2d 871
to McNeil and Dirksen on Alvarez's cause of action
Footnotes
1 Michael remained in a coma and died after several months.
2 She also sued Driscoll Foundation Children's Hospital; Driscoll Children's Hospital; The Children's Clinic; Steve Oshman,
M.D.; Odent Youssef, M.D.; and Norma Gonzales, R.T. They are not before the Court in this appeal.
3 The code indicates the report “should reflect the reporter's belief that a child has been or may be abused or neglected.”
TEX. FAM.CODE ANN. § 261.102 (Vernon 1996).
4 The new “no evidence” summary judgment rule was not in effect when appellees filed their motions. See Order of April
16, 1997, 60 TEX. B.J. 534 (amending TEX.R. CIV. P. 166a, eff. Sept. 1, 1997).
5 What was obtained was Driscoll's Risk Management Policy and Procedure Manual.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Union brought action to compel arbitration under 3 Cases that cite this headnote
collective bargaining agreement. On union's motion for
summary judgment, the District Court, Curtin, Chief
[3] Labor and Employment
Judge, held that arbitration clause applied to dispute as
Waiver and Estoppel
to whether there were arrearages in payments to union
welfare fund required by the contract; and that union had Union did not waive arbitration under
not waived arbitration either by filing a criminal charge collective bargaining agreement by filing
against one of the employer's officers or by filing unfair criminal charge against one of employer's
labor practice charge with the NLRB. officers under state labor law with respect to
the subject matter of the dispute, particularly
Plaintiff's motion for summary judgment granted. where union had already informed employer
of intention to arbitrate, or by filing unfair
labor practice charge with the NLRB,
particularly where the NLRB dismissed the
West Headnotes (3) charge because union's remedy was deemed
to be under contract arbitration provision.
Labor Law N.Y. § 198–c.
[1] Labor and Employment
Arbitration Favored; Presumption of 2 Cases that cite this headnote
Arbitrability
Labor and Employment
Scope of Inquiry; Merits of Controversy
Where party seeks to compel arbitration Attorneys and Law Firms
under a collective bargaining agreement,
court's role is narrowly limited to a *667 Lipsitz, Green, Fahringer, Roll, Schuller & James,
consideration whether the reluctant party did Buffalo, N.Y. (Richard Lipsitz, and Stuart M. Pohl,
agree to arbitrate the grievance, and order Buffalo, N.Y., of counsel), for plaintiff.
to arbitrate particular grievance should not
Moot, Sprague, Marcy, Landy, Fernbach & Smythe,
be denied unless it may be said with positive
Buffalo, N.Y. (John J. Phelan, Buffalo N.Y., of counsel),
assurance that the arbitration clause is not
for defendant.
susceptible of an interpretation that covers
the asserted dispute. Labor Management Opinion
Relations Act, 1947, § 301, 29 U.S.C.A. § 185.
CURTIN, Chief Judge.
be submitted to arbitration. Since defendant has not given dispute between the parties; nor could it have served that
purpose since it was a criminal complaint based upon
the court any positive assurance that the insurance issue
different issues than those before this court and brought
is not covered by the arbitration clause, it is clear that
against an individual, Manuel Llop, not the defendant
the company has agreed to arbitrate disputes such as this.
corporation. The criminal court action was brought
John Wiley & Sons, Inc. v. Livingston, supra.
after plaintiff had informed defendant of its intention
to arbitrate the dispute if the amount was not paid
[3] Defendant has argued that plaintiff's motion for
to the welfare fund, clearly indicating that the criminal
summary judgment directing defendant to submit to
action was not brought in lieu of arbitration. Nor can
arbitration should not be granted because plaintiff has
plaintiff's action in filing a charge with the National Labor
repudiated its right to arbitration. This repudiation
Relations Board be construed as a waiver of their contract
occurred, according to defendant, through plaintiff's filing
rights to arbitration, Glass Bottle Blowers Association
of a criminal information *670 in the City Court
of the United States and Canada, AFL-CIO, et al. v.
of Buffalo on December 12, 1973, charging one of
Arkansas Glass Container Corp., 183 F.Supp. 829, 830-31
defendant's officers with a violation of § 198-c of the New
(E.D.Ark.1960), especially since the N.L.R.B. dismissed
York State Labor Law, 7 and through plaintiff's filing
the charge because defendant's remedy was deemed to be
an unfair labor practice charge with the National Labor
under the contract provision for arbitration. 9
Relations Board on April 18, 1974. 8 The court finds no
merit to defendant's argument that plaintiff has waived
arbitration. Only one circuit court of appeals has found Therefore, since it appears from the record that there is a
that a union's action in bringing suit in a federal district valid collective bargaining agreement between the parties
court against their employer for back wages, instead of which provides for arbitration of the present dispute,
seeking arbitration, was a waiver of the union's right to summary judgment *671 is granted for the plaintiff
compel arbitration. Morales Rivera v. Sea Land of Puerto against the defendant directing the defendant to submit to
Rico, Inc., 418 F.2d 725 (1st Cir. 1969). However, the arbitration. Plaintiff shall prepare judgment and present it
Morales Rivera case differs from the instant case in that to the court after notice to defendant.
the union had decided to file suit in the district court
instead of compelling arbitration under the collective So ordered.
bargaining agreement. In this case the action in City Court
All Citations
was not brought instead of arbitration. To the contrary,
plaintiff had informed defendant of the arrearage at the 396 F.Supp. 667, 89 L.R.R.M. (BNA) 2922, 77 Lab.Cas.
time the complaint was filed. The action instituted in P 11,051
City Court was not instituted to resolve the merits of the
Footnotes
1 Article VI, § 4 of the collective bargaining agreement, as amended, provides:
4. If the third step should fail to secure satisfactory settlement, the grievance may be submitted to the office of the New
York State Board of Mediation for a panel of nine (9) names.
(a) In the event that an arbitrator is required, he shall be selected from the arbitration panel provided either by mutual
agreement or by each party alternately striking off a name from the panel. The remaining name shall be the arbitrator
who shall arbitrate the grievance or grievances pending.
(b) The arbitrator shall fix and notify the parties of the time and place for arbitration of the grievance.
(c) Any issue involving the interpretation or application of any term of this agreement shall be initiated by the Union directly
at step 3. Upon the failure of the parties to agree, the Union may then appeal the issue to arbitration for a decision.
(d) The decision of the arbitrator shall be final and binding upon both parties, but he shall have no power either to
add to, subtract from or modify any of the terms, conditions or limitations of this agreement or any agreement made
supplementary hereto . . ..
2 Article XI, § 5 of the collective bargaining agreement, as amended, provides:
5. INSURANCE:
(a) Effective February 1, 1972, the Company shall continue as a contributing employer to Local 55, UAW Welfare
Fund which has been established under an Agreement and Declaration of Trust dated September 1, 1958 which said
Agreement and Declaration of Trust the Company hereby ratifies and is deemed to be a part of this Agreement. The
Company will contribute the cost of $26.46 for each single, active working employee and $52.62 for each married, active
working employee to the Local 55, UAW Welfare Fund including employees on sick leave not to exceed twelve (12)
months for any one sick leave with an initial master list and subsequent monthly supplemental list for those for whom
premiums have been paid by the fifth (5th) day of each calendar mont . . ..
3 Defendant, in P6 of his answer, filed October 8, 1974, denies that the plaintiff's employee members were laid off.
4 For the third case in the famous Steelworkers' trilogy, see United States Steelworkers of America v. Enterprise Wheel
and Car Corp., 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.2d 1424 (1960). The Second Circuit has applied the standard set
in the Steelworkers' trilogy, stating:
Only the most forceful evidence of a purpose to exclude the claim from arbitration can prevail. Strauss v. Silvercup Bakers,
353 F.2d 555, 557 (2d Cir. 1965). See also Publishers Association of New York City v. New York Mailers Union No. 6,
317 F.2d 624 (2d Cir. 1963).
5 Supra, nn. 1 and 2.
6 Plaintiff has stated that there have been arrearages in payments to the welfare fund, while defendant has denied the
allegation. Although it is not within the province of this court to pass on the merits of the allegation, it is clear that a
dispute does exist.
7 N.Y. Labor Law § 198-c (McKinney's Supp.1975) states:
1. In addition to any other penalty or punishment otherwise prescribed by law, any employer who is party to an agreement
to pay or provide benefits or wage supplements to employees or to a third party or fund for the benefit of employees
and who fails, neglects or refuses to pay the amount or amounts necessary to provide such benefits or furnish such
supplements within thirty days after such payments are required quired to be made, shall be guilty of a misdemeanor, and
upon conviction shall be punished as provided in section one hundred ninety-eight-a this article. Where such employer
is a corporation, the president, secretary, treasurer or officers exercising corresponding functions shall each be guilty
of a misdemeanor. 2. As used in this section, the term ‘benefits or wage supplements' includes, but is not limited to,
reimbursement for expenses; health, welfare and retirement benefits; and vacation, separation or holiday pay.
This charge was dismissed on February 24, 1974 because the court felt that plaintiff should seek other means of collecting
the monies due.
8 This charge was dismissed on May 24, 1974.
9 The reasons for the dismissal of the unfair labor charge by the National Labor Relations Board, similar to the reasons
of the City Court judge, did not go to the merits. According to a letter of the National Labor Relations Board dated May
24, 1974, the reasons for dismissal were as follows:
As a result of the investigation, it does not appear that further proceedings on the charge are warranted inasmuch as the
investigation revealed that all employees represented by the Charging Party were terminated more than eight months
ago as the Respondent closed its business for economic reasons. Furthermore, there was no successor to take over
and honor the collective bargaining agreement negotiated on behalf of the predecessor. It is also noted that the Union's
remedy for an enforcement of a contract in the circumstances herein is not within the jurisdiction of this Agency. I am,
therefore, refusing to issue complaint in this matter.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
irrevocable, and enforceable, save upon such For a class-action money judgment to bind
grounds as exist at law or in equity for absentees in litigation, class representatives
the revocation of any contract, preserves must at all times adequately represent absent
generally applicable contract defenses, class members, and absent members must be
nothing in it suggests an intent to preserve afforded notice, an opportunity to be heard,
state-law rules that stand as an obstacle to and a right to opt out of the class.
the accomplishment of the FAA's objectives.
9 U.S.C.A. § 2. 16 Cases that cite this headnote
268 Cases that cite this headnote The cellular telephone contract between respondents
(Concepcions) and petitioner (AT & T) provided for
[11] Alternative Dispute Resolution arbitration of all disputes, but did not permit classwide
Nature, purpose, and right to arbitration arbitration. After the Concepcions were charged sales
in general tax on the retail value of phones provided free
under their service contract, they sued AT & T in
In bilateral arbitration, parties forgo the
a California Federal District Court. Their suit was
procedural rigor and appellate review of the
consolidated with a class action alleging, inter alia,
courts in order to realize the benefits of
that AT & T had engaged in false advertising and
private dispute resolution: lower costs, greater
fraud by charging sales tax on “free” phones. The
efficiency and speed, and the ability to choose
District Court denied AT & T's motion to compel
expert adjudicators to resolve specialized
arbitration under the Concepcions' contract. Relying on
disputes.
the California Supreme Court's Discover Bank decision,
8 Cases that cite this headnote it found the arbitration provision unconscionable because
it disallowed classwide proceedings. The Ninth Circuit
agreed that the provision was unconscionable under
[12] Judgment California law and held that the Federal Arbitration
Persons represented by parties Act (FAA), which makes arbitration agreements “valid,
irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any U.S. 861, 872, 120 S.Ct. 1913, 146 L.Ed.2d 914. The
contract,” 9 U.S.C. § 2, did not preempt its ruling. FAA's overarching purpose is to ensure the enforcement
of arbitration agreements according to their terms so as to
Held: Because it “stands as an obstacle to the facilitate informal, streamlined proceedings. Parties may
accomplishment and execution of the full purposes and agree to limit the issues subject to arbitration, Mitsubishi
objectives of Congress,” Hines v. Davidowitz, 312 U.S. 52, Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S.
67, 61 S.Ct. 399, 85 L.Ed. 581, California's Discover Bank 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444, to arbitrate
rule is pre-empted by the FAA. Pp. 1745 – 1753. according to specific rules, Volt, supra, at 479, 109 S.Ct.
1248, and to limit with whom they will arbitrate, Stolt–
(a) Section 2 reflects a “liberal federal policy favoring Nielsen, supra, at ––––. Pp. 1746 – 1750.
arbitration,” Moses H. Cone Memorial Hospital v.
Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, (d) Class arbitration, to the extent it is manufactured
74 L.Ed.2d 765, and the “fundamental principle that by Discover Bank rather than consensual, interferes
arbitration is a matter of contract,” Rent–A–Center, West, with fundamental attributes of arbitration. The switch
Inc. v. Jackson, 561 U.S. ––––, ––––, 130 S.Ct. 2772, 177 from bilateral to class arbitration sacrifices arbitration's
L.Ed.2d 403 (2010). Thus, courts must place arbitration informality and makes the process slower, more costly,
agreements on an equal footing with other contracts, and more likely to generate procedural morass than
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, final judgment. And class arbitration greatly increases
443, 126 S.Ct. 1204, 163 L.Ed.2d 1038, and enforce them risks to defendants. The absence of multilayered review
according to their terms, Volt Information Sciences, Inc. makes it more likely that errors will go uncorrected. That
v. Board of Trustees of Leland Stanford Junior Univ., 489 risk of error may become unacceptable when damages
U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488. Section allegedly owed to thousands of claimants are aggregated
2's saving clause permits agreements to be invalidated and decided at once. Arbitration is poorly suited to these
by “generally applicable contract defenses,” but not by higher stakes. In litigation, a defendant may appeal a
defenses that apply **1743 only to arbitration or derive certification decision and a final judgment, but 9 U.S.C. §
their meaning from the fact that an agreement to arbitrate 10 limits the grounds on which courts can vacate arbitral
is at issue. Doctor's Associates, Inc. v. Casarotto, 517 U.S. awards. Pp. 1750 – 1753.
681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902. Pp. 1745 – 1746.
584 F.3d 849, reversed and remanded.
(b) In Discover Bank, the California Supreme Court held
that class waivers in consumer arbitration agreements are SCALIA, J., delivered the opinion of the Court, in which
unconscionable if the *334 agreement is in an adhesion ROBERTS, C. J., and KENNEDY, THOMAS, and
contract, disputes between the parties are likely to involve ALITO, JJ., joined. THOMAS, J., filed a concurring
small amounts of damages, and the party with inferior opinion. BREYER, J., filed a dissenting opinion, in which
bargaining power alleges a deliberate scheme to defraud. GINSBURG, SOTOMAYOR, and KAGAN, JJ., joined.
Pp. 1745 – 1747.
(c) The Concepcions claim that the Discover Bank rule is a Attorneys and Law Firms
ground that “exist[s] at law or in equity for the revocation
Andrew J. Pincus, Washington, DC, for Petitioner.
of any contract” under FAA § 2. When state law prohibits
outright the arbitration of a particular type of claim, Deepak Gupta, for Respondents.
the FAA displaces the conflicting rule. But the inquiry
is more complex when a generally applicable doctrine is Donald M. Falk, Mayer Brown LLP, Palo Alto, CA,
alleged to have been applied in a fashion that disfavors Neal Berinhout, Atlanta, GA, Kenneth S. Geller, Andrew
or interferes with arbitration. Although § 2's saving clause J. Pincus, Evan M. Tager, Archis A. Parasharami,
preserves generally applicable contract defenses, it does Kevin Ranlett, Mayer Brown LLP, Washington, DC, for
not suggest an intent to preserve state-law rules that Petitioner.
stand as an obstacle to the accomplishment of the FAA's
objectives. Cf. Geier v. American Honda Motor Co., 529
*339 II
[5] Under California law, courts may refuse to enforce
[1] [2] The FAA was enacted in 1925 in response to any contract found “to have been unconscionable at
widespread judicial hostility to arbitration agreements. the time it was made,” or may “limit the application
See Hall Street Associates, L.L.C. v. Mattel, Inc., 552 U.S. of any unconscionable clause.” Cal. Civ.Code Ann. §
576, 581, 128 S.Ct. 1396, 170 L.Ed.2d 254 (2008). Section 1670.5(a) (West 1985). A finding of unconscionability
2, the “primary substantive provision of the Act,” Moses requires “a ‘procedural’ and a ‘substantive’ element, the
H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 former focusing on ‘oppression’ or ‘surprise’ due to
U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983), provides, unequal bargaining power, the latter on ‘overly harsh’
in relevant part, as follows: or ‘one-sided’ results.” Armendariz v. Foundation Health
Pyschcare Servs., Inc., 24 Cal.4th 83, 114, 99 Cal.Rptr.2d
“A written provision in any maritime transaction or a 745, 6 P.3d 669, 690 (2000); accord, Discover Bank, 36
contract evidencing a transaction involving commerce Cal.4th, at 159–161, 30 Cal.Rptr.3d 76, 113 P.3d, at 1108.
to settle by arbitration a controversy thereafter arising
out of such contract or transaction ... shall be valid, In Discover Bank, the California Supreme Court applied
irrevocable, and enforceable, save upon such grounds this framework to class-action waivers in arbitration
as exist at law or in equity for the revocation of any agreements and held as follows:
contract.” 9 U.S.C. § 2.
“[W]hen the waiver is found in a consumer contract
We have described this provision as reflecting both a of adhesion in a setting in which disputes between the
“liberal federal policy favoring arbitration,” Moses H. contracting parties predictably involve small amounts
Cone, supra, at 24, 103 S.Ct. 927, and the “fundamental of damages, and when it is alleged that the party with
principle that arbitration is a matter of contract,” Rent– the superior bargaining power has carried out a scheme
A–Center, West, Inc. v. Jackson, 561 U.S. ––––, ––––, 130 to deliberately cheat large numbers of consumers out
S.Ct. 2772, 2776, 177 L.Ed.2d 403 (2010). In line with of individually small sums of money, then ... the waiver
these principles, courts must place arbitration agreements becomes in practice the exemption of the party ‘from
on an equal footing with other contracts, Buckeye Check responsibility for [its] own fraud, or willful injury
Cashing, Inc. v. Cardegna, 546 U.S. 440, 443, 126 to the person or property of another.’ Under these
S.Ct. 1204, 163 L.Ed.2d 1038 (2006), and enforce them circumstances, such waivers are unconscionable under
according to their terms, Volt Information Sciences, Inc. California law and should not be enforced.” Id., at
v. **1746 Board of Trustees of Leland Stanford Junior 162, 30 Cal.Rptr.3d 76, 113 P.3d, at 1110 (quoting Cal.
Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 Civ.Code Ann. § 1668).
(1989).
incompatible with arbitration,” they concede, **1748 S.Ct. 1248; see also Stolt–Nielsen S.A. v. AnimalFeeds Int'l
“would be preempted by the FAA because they Corp., 559 U.S. ––––, ––––, 130 S.Ct. 1758, 1763, 176
cannot sensibly be reconciled with Section 2.” Brief for L.Ed.2d 605 (2010). This purpose is readily apparent from
Respondents 32. The “grounds” available under § 2's the FAA's text. Section 2 makes arbitration agreements
saving clause, they admit, “should not be construed to “valid, irrevocable, and enforceable” as written (subject,
include a State's mere preference for procedures that of course, to the saving clause); § 3 requires courts
are incompatible with arbitration and ‘would wholly to stay litigation of arbitral claims pending arbitration
eviscerate arbitration agreements.’ ” Id., at 33 (quoting of those claims “in accordance with the terms of the
Carter v. SSC Odin Operating Co., LLC, 237 Ill.2d 30, 50, agreement”; and § 4 requires courts to compel arbitration
340 Ill.Dec. 196, 927 N.E.2d 1207, 1220 (2010)). 4 “in accordance with the terms of the agreement” upon the
motion of either party to the agreement (assuming that
[8] [9] We largely agree. Although § 2's saving clause the “making of the arbitration agreement or the failure ...
preserves generally applicable contract defenses, nothing to perform the same” is not at issue). In light of these
in it suggests an intent to preserve state-law rules that provisions, we have held that parties may agree to limit
stand as an obstacle to the accomplishment of the FAA's the issues subject to arbitration, Mitsubishi Motors Corp.
objectives. Cf. Geier v. American Honda Motor Co., 529 v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 628, 105
U.S. 861, 872, 120 S.Ct. 1913, 146 L.Ed.2d 914 (2000); S.Ct. 3346, 87 L.Ed.2d 444 (1985), **1749 to arbitrate
Crosby v. National Foreign Trade Council, 530 U.S. 363, according to specific rules, Volt, supra, at 479, 109 S.Ct.
372–373, 120 S.Ct. 2288, 147 L.Ed.2d 352 (2000). As we 1248, and to limit with whom a party will arbitrate its
have said, a federal statute's saving clause “ ‘cannot in disputes, Stolt–Nielsen, supra, at ––––, 130 S.Ct. at 1773.
reason be construed as [allowing] a common law right,
the continued existence of which would be absolutely The point of affording parties discretion in designing
inconsistent with the provisions of the act. In other words, arbitration processes is to allow for efficient, streamlined
the act cannot be held to destroy itself.’ ” American procedures tailored to the type of dispute. It can be
Telephone & Telegraph Co. v. Central Office Telephone, specified, *345 for example, that the decisionmaker be a
Inc., 524 U.S. 214, 227–228, 118 S.Ct. 1956, 141 L.Ed.2d specialist in the relevant field, or that proceedings be kept
222 (1998) (quoting Texas & Pacific R. Co. v. Abilene confidential to protect trade secrets. And the informality
Cotton Oil Co., 204 U.S. 426, 446, 27 S.Ct. 350, 51 L.Ed. of arbitral proceedings is itself desirable, reducing the cost
553 (1907)). and increasing the speed of dispute resolution. 14 Penn
Plaza LLC v. Pyett, 556 U.S. 247, ––––, 129 S.Ct. 1456,
*344 We differ with the Concepcions only in the 1460, 173 L.Ed.2d 398 (2009); Mitsubishi Motors Corp.,
application of this analysis to the matter before us. We supra, at 628, 105 S.Ct. 3346.
do not agree that rules requiring judicially monitored
discovery or adherence to the Federal Rules of Evidence The dissent quotes Dean Witter Reynolds Inc. v. Byrd,
are “a far cry from this case.” Brief for Respondents 470 U.S. 213, 219, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985),
32. The overarching purpose of the FAA, evident in as “ ‘reject[ing] the suggestion that the overriding goal
the text of §§ 2, 3, and 4, is to ensure the enforcement of the Arbitration Act was to promote the expeditious
of arbitration agreements according to their terms resolution of claims.’ ” Post, at 4 (opinion of BREYER,
so as to facilitate streamlined proceedings. Requiring J.). That is greatly misleading. After saying (accurately
the availability of classwide arbitration interferes with enough) that “the overriding goal of the Arbitration Act
fundamental attributes of arbitration and thus creates a was [not] to promote the expeditious resolution of claims,”
scheme inconsistent with the FAA. but to “ensure judicial enforcement of privately made
agreements to arbitrate,” 470 U.S., at 219, 105 S.Ct.
1238, Dean Witter went on to explain: “This is not to
say that Congress was blind to the potential benefit of
B the legislation for expedited resolution of disputes. Far
from it ....” Id., at 220, 105 S.Ct. 1238. It then quotes a
[10] The “principal purpose” of the FAA is to
House Report saying that “the costliness and delays of
“ensur[e] that private arbitration agreements are enforced
litigation ... can be largely eliminated by agreements for
according to their terms.” Volt, 489 U.S., at 478, 109
arbitration.” Ibid. (quoting H.R.Rep. No. 96, 68th Cong., (the Ninth Circuit has held that damages of $4,000 are
1st Sess., 2 (1924)). The concluding paragraph of this part sufficiently small, see Oestreicher v. Alienware Corp., 322
of its discussion begins as follows: Fed.Appx. 489, 492 (2009) (unpublished)), and the latter
has no limiting effect, as all that is required is an allegation.
“We therefore are not persuaded by the argument that Consumers remain free to bring and resolve their disputes
the conflict between two goals of the Arbitration Act— on a bilateral basis under Discover Bank, and some may
enforcement of private agreements and encouragement well do so; but there is little incentive for lawyers to
of efficient and speedy dispute resolution—must be arbitrate on behalf of individuals when they may do so for
resolved in favor of the latter in order to realize the a class and reap far higher fees in the process. And faced
intent of the drafters.” 470 U.S., at 221, 105 S.Ct. 1238. with inevitable class arbitration, companies would have
less incentive to continue resolving potentially duplicative
In the present case, of course, those “two goals” do not
claims on an individual basis.
conflict—and it is the dissent's view that would frustrate
both of them.
Although we have had little occasion to examine
classwide arbitration, our decision in Stolt–Nielsen is
Contrary to the dissent's view, our cases place it
instructive. In that case we held that an arbitration panel
beyond dispute that the FAA was designed to promote
exceeded its power under § 10(a)(4) of the FAA by
arbitration. *346 They have repeatedly described the Act
imposing class procedures based on policy judgments
as “embod[ying] [a] national policy favoring arbitration,”
rather than the arbitration agreement itself or some
Buckeye Check Cashing, 546 U.S., at 443, 126 S.Ct.
background principle of contract law that would affect
1204, and “a liberal federal policy favoring arbitration
its interpretation. 559 U.S., at ––––, 130 S.Ct. at 1773–
agreements, notwithstanding any state substantive or
1776. We then held that the agreement at issue, which
procedural policies to the contrary,” Moses H. Cone, 460
was silent on the question of class procedures, could
U.S., at 24, 103 S.Ct. 927; see also Hall Street Assocs., 552
not be interpreted to allow them because the “changes
U.S., at 581, 128 S.Ct. 1396. Thus, in Preston v. Ferrer,
brought about by the shift from bilateral arbitration
holding preempted a state-law rule requiring exhaustion
to class-action arbitration” are “fundamental.” Id., at
of administrative remedies before arbitration, we said: “A
––––, 130 S.Ct. at 1776. This is obvious as a *348
prime objective of an agreement to arbitrate is to achieve
structural matter: Classwide arbitration includes absent
‘streamlined proceedings and expeditious results,’ ” which
parties, necessitating additional and different procedures
objective would be “frustrated” by requiring a dispute to
and involving higher stakes. Confidentiality becomes
be heard by an agency first. 552 U.S., at 357–358, 128 S.Ct.
more difficult. And while it is theoretically possible to
978. That rule, we said, would “at the least, hinder speedy
select an arbitrator with some expertise relevant to the
resolution of the controversy.” Id., at 358, 128 S.Ct. 978. 5 class-certification question, arbitrators are not generally
knowledgeable in the often-dominant procedural aspects
**1750 California's Discover Bank rule similarly of certification, such as the protection of absent parties.
interferes with arbitration. Although the rule does not The conclusion follows that **1751 class arbitration, to
require classwide arbitration, it allows any party to a the extent it is manufactured by Discover Bank rather than
consumer contract to demand it ex post. The rule is consensual, is inconsistent with the FAA.
limited to adhesion contracts, Discover Bank, 36 Cal.4th,
at 162–163, 30 Cal.Rptr.3d 76, 113 P.3d, at 1110, but [11] First, the switch from bilateral to class arbitration
the times in which consumer contracts were anything sacrifices the principal advantage of arbitration—its
*347 other than adhesive are long past. 6 Carbajal v. informality—and makes the process slower, more costly,
H & R Block Tax Servs., Inc., 372 F.3d 903, 906 (7th and more likely to generate procedural morass than
Cir.2004); see also Hill v. Gateway 2000, Inc., 105 F.3d final judgment. “In bilateral arbitration, parties forgo the
1147, 1149 (C.A.7 1997). The rule also requires that procedural rigor and appellate review of the courts in
damages be predictably small, and that the consumer order to realize the benefits of private dispute resolution:
allege a scheme to cheat consumers. Discover Bank, supra, lower costs, greater efficiency and speed, and the ability
at 162–163, 30 Cal.Rptr.3d 76, 113 P.3d, at 1110. The to choose expert adjudicators to resolve specialized
former requirement, however, is toothless and malleable disputes.” 559 U.S., at ––––, 130 S.Ct. at 1775. But
before an arbitrator may decide the merits of a claim in in Discover Bank, class arbitration is a “relatively recent
classwide procedures, he must first decide, for example, development.” 36 Cal.4th, at 163, 30 Cal.Rptr.3d 76, 113
whether the class itself may be certified, whether the P.3d, at 1110. And it **1752 is at the very *350 least
named parties are sufficiently representative and typical, odd to think that an arbitrator would be entrusted with
and how discovery for the class should be conducted. ensuring that third parties' due process rights are satisfied.
A cursory comparison of bilateral and class arbitration
illustrates the difference. According to the American Third, class arbitration greatly increases risks to
Arbitration Association (AAA), the average consumer defendants. Informal procedures do of course have a
arbitration between January and August 2007 resulted in cost: The absence of multilayered review makes it more
a disposition on the merits in six months, four months if likely that errors will go uncorrected. Defendants are
the arbitration was conducted by documents only. AAA, willing to accept the costs of these errors in arbitration,
Analysis of the AAA's Consumer Arbitration Caseload, since their impact is limited to the size of individual
online at http://www.adr.org/ si.asp?id=5027 (all Internet disputes, and presumably outweighed by savings from
materials as visited Apr. 25, 2011, and available in Clerk avoiding the courts. But when damages allegedly owed to
of Court's case file). As of September 2009, the AAA tens of thousands of potential claimants are aggregated
had opened 283 class arbitrations. Of those, 121 remained and decided at once, the risk of an error will often
active, and 162 had been settled, withdrawn, or dismissed. become unacceptable. Faced with even a small chance of a
Not a single one, however, had *349 resulted in a final devastating loss, defendants will be pressured into settling
award on the merits. Brief for AAA as Amicus Curiae questionable claims. Other courts have noted the risk of
in Stolt–Nielsen, O.T.2009, No. 08–1198, pp. 22–24. For “in terrorem” settlements that class actions entail, see, e.g.,
those cases that were no longer active, the median time Kohen v. Pacific Inv. Management Co. LLC, 571 F.3d 672,
from filing to settlement, withdrawal, or dismissal—not 677–678 (C.A.7 2009), and class arbitration would be no
judgment on the merits—was 583 days, and the mean was different.
630 days. Id., at 24. 7
Arbitration is poorly suited to the higher stakes of
[12] Second, class arbitration requires procedural class litigation. In litigation, a defendant may appeal a
formality. The AAA's rules governing class arbitrations certification decision on an interlocutory basis and, if
mimic the Federal Rules of Civil Procedure for class unsuccessful, may appeal from a final judgment as well.
litigation. Compare AAA, Supplementary Rules for Class Questions of law are reviewed de novo and questions of
Arbitrations (effective Oct. 8, 2003), online at http:// fact for clear error. In contrast, 9 U.S.C. § 10 allows a court
www.adr.org/ sp.asp? id=21936, with Fed. Rule Civ. Proc. to vacate an arbitral award only where the award “was
23. And while parties can alter those procedures by procured by corruption, fraud, or undue means”; “there
contract, an alternative is not obvious. If procedures are was evident partiality or corruption in the arbitrators”;
too informal, absent class members would not be bound “the arbitrators were guilty of misconduct in refusing to
by the arbitration. For a class-action money judgment to postpone the hearing ... or in refusing to hear evidence
bind absentees in litigation, class representatives must at pertinent and material to the controversy[,] or of any
all times adequately represent absent class members, and other misbehavior by which the rights of any party
absent members must be afforded notice, an opportunity have been prejudiced”; or if the “arbitrators exceeded
to be heard, and a right to opt out of the class. Phillips their powers, or so imperfectly executed them that a
Petroleum Co. v. Shutts, 472 U.S. 797, 811–812, 105 S.Ct. mutual, final, and definite award ... was not made.” The
2965, 86 L.Ed.2d 628 (1985). At least this amount of AAA rules do authorize judicial review of certification
process would presumably be required for absent parties decisions, but this review is unlikely to have much effect
to be bound by the results of arbitration. given these limitations; review under § 10 focuses on
misconduct *351 rather than mistake. And parties may
We find it unlikely that in passing the FAA Congress not contractually expand the grounds or nature of judicial
meant to leave the disposition of these procedural review. Hall Street Assocs., 552 U.S., at 578, 128 S.Ct.
requirements to an arbitrator. Indeed, class arbitration 1396. We find it hard to believe that defendants would bet
was not even envisioned by Congress when it passed the the company with no effective means of review, and even
FAA in 1925; as the California Supreme Court admitted
harder to believe that Congress would have intended to Circuit is reversed, and the case is remanded for further
allow state courts to force such a decision. 8 proceedings consistent with this opinion.
to my views on purposes-and-objectives pre-emption, see a substantive effect that is compatible with the rest of
Wyeth v. Levine, 555 U.S. 555, ––––, 129 S.Ct. 1187, 173 the law.” United Sav. Assn. of Tex. v. Timbers of Inwood
L.Ed.2d 51 (2009) (opinion concurring in judgment), I Forest Associates, Ltd., 484 U.S. 365, 371, 108 S.Ct. 626,
reluctantly join the Court's opinion. 98 L.Ed.2d 740 (1988).
v. Diamond Foods, Inc., 187 Cal.App.4th 634, 647–650, arbitration, for example by refusing to order specific
114 Cal.Rptr.3d 449, 459–462 (2010); Arguelles–Romero performance of agreements to arbitrate. See S.Rep. No.
v. Superior Ct., 184 Cal.App.4th 825, 843–845, 109 536, 68th Cong., 1st Sess., 2 (1924). The Act sought to
Cal.Rptr.3d 289, 305–307 (2010); Smith v. Americredit eliminate that hostility by placing agreements to arbitrate
Financial Servs., Inc., No. 09cv1076, 2009 WL 4895280 “ ‘upon the same footing as other contracts.’ ” Scherk v.
(S.D.Cal., Dec.11, 2009); cf. Provencher, supra, at 1201 Alberto–Culver Co., 417 U.S. 506, 511, 94 S.Ct. 2449,
(considering Discover Bank in choice-of-law inquiry). And 41 L.Ed.2d 270 (1974) (quoting H.R.Rep. No. 96, at 2;
even when they fail, the parties remain free to devise other emphasis added).
dispute mechanisms, including informal mechanisms,
that, in context, will not prove unconscionable. See Volt Congress was fully aware that arbitration could provide
Information Sciences, Inc. v. Board of Trustees of Leland procedural and cost advantages. The House Report
Stanford Junior Univ., 489 U.S. 468, 479, 109 S.Ct. 1248, emphasized the “appropriate[ness]” of making arbitration
103 L.Ed.2d 488 (1989). **1758 agreements enforceable “at this time when there
is so much agitation against the costliness and delays of
litigation.” Id., at 2. And this Court has acknowledged
that parties may enter into arbitration agreements in
II
order to expedite the resolution of disputes. See Preston
v. Ferrer, 552 U.S. 346, 357, 128 S.Ct. 978, 169 L.Ed.2d
A 917 (2008) (discussing “prime objective of an agreement
to arbitrate”). See also Mitsubishi Motors Corp. v. Soler
The Discover Bank rule is consistent with the federal Act's Chrysler–Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct.
language. It “applies equally to class action litigation 3346, 87 L.Ed.2d 444 (1985).
waivers in contracts without arbitration agreements as it
does to class arbitration waivers in contracts with such But we have also cautioned against thinking that
agreements.” 36 Cal.4th, at 165–166, 30 Cal.Rptr.3d 76, Congress' primary objective was to guarantee these
113 P.3d, at 1112. Linguistically speaking, it falls directly particular procedural advantages. Rather, that primary
within the scope of the Act's exception permitting courts to objective was to secure the “enforcement” of agreements
refuse to enforce arbitration agreements on grounds that to arbitrate. Dean Witter, 470 U.S., at 221, 105 S.Ct.
exist “for the revocation of any contract.” 9 U.S.C. § 2 1238. See also id., at 219, 105 S.Ct. 1238 (we “reject the
(emphasis added). The majority agrees. Ante, at 9. suggestion that the overriding goal of the Arbitration Act
was to promote the expeditious resolution of claims”);
id., at 219, 217–218, 105 S.Ct. 1238 (“[T]he intent of
B Congress” requires us to apply the terms of the Act
without regard to whether the result would be “possibly
The Discover Bank rule is also consistent with the inefficient”); cf. id., at 220, 105 S.Ct. 1238 (acknowledging
basic “purpose behind” the Act. Dean Witter Reynolds that “expedited resolution of disputes” might lead parties
Inc. v. Byrd, 470 U.S. 213, 219, 105 S.Ct. 1238, 84 to prefer arbitration). The relevant Senate Report points
L.Ed.2d 158 (1985). We have described that purpose as to the Act's basic purpose when it says that “[t]he purpose
one of “ensur[ing] judicial enforcement” of arbitration of the [Act] is clearly set forth in section 2,” S.Rep. No.
agreements. Ibid.; see also Marine Transit Corp. v. 536, at 2 (emphasis added), namely, the section that says
Dreyfus, 284 U.S. 263, 274, n. 2, 52 S.Ct. 166, 76 L.Ed. that an arbitration agreement “shall be valid, irrevocable,
282 (1932) (“ ‘The purpose of this bill is to make valid *362 and enforceable, save upon such grounds as exist
and enforceable agreements for arbitration’ ” (quoting at law or in equity for the revocation of any contract,” 9
H.R.Rep. No. 96, 68th Cong., 1st Sess., 1 (1924); emphasis U.S.C. § 2.
added)); 65 Cong. Rec.1931 (1924) ( “It creates no new
legislation, grants no new rights, except a remedy to Thus, insofar as we seek to implement Congress' intent,
enforce an agreement in commercial contracts and in we should think more than twice before invalidating a
*360 admiralty contracts”). As is well known, prior state law that does just what § 2 requires, namely, puts
to the federal Act, many courts expressed hostility to
agreements to arbitrate and agreements to litigate “upon have thought that arbitration would be used primarily
the same footing.” where merchants sought to resolve disputes of fact, not
law, under the customs of their industries, where the
parties possessed roughly equivalent bargaining power.
See Mitsubishi Motors, supra, at 646, 105 S.Ct. 3346
III
(Stevens, J., dissenting); Joint Hearings on S. 1005 and
The majority's contrary view (that Discover Bank stands as H.R. 646 before the Subcommittees of the Committees on
an “obstacle” to the accomplishment of the federal law's the Judiciary, 68th Cong., 1st Sess., 15 (1924); Hearing
objective, ante, at 9–18) rests primarily upon its claims on S. 4213 and S. 4214 before a Subcommittee of
that the Discover Bank rule increases the complexity the Senate Committee on the Judiciary, 67th Cong.,
of arbitration procedures, thereby discouraging parties 4th Sess., 9–10 (1923); Dept. of Commerce, Secretary
from entering into arbitration agreements, and to that Hoover Favors Arbitration—Press Release (Dec. 28,
extent discriminating in practice against arbitration. 1925), Herbert Hoover Papers—Articles, Addresses, and
These claims are not well founded. Public Statements File—No. 536, p. 2 (Herbert Hoover
Presidential Library); Cohen & Dayton, The New Federal
For one thing, a state rule of law that would sometimes Arbitration Law, 12 Va. L.Rev. 265, 281 (1926); AAA,
set aside as unconscionable a contract term that forbids Year Book on Commercial Arbitration in the United
class arbitration is not (as the majority claims) like a rule States (1927). This last mentioned feature of the history
that would require “ultimate disposition by a jury” or —roughly equivalent bargaining power—suggests, if
“judicially monitored discovery” or use of “the Federal anything, that California's statute is consistent with, and
Rules of Evidence.” Ante, at 8, 9. Unlike the majority's indeed may help to further, the objectives that Congress
examples, class arbitration is consistent with the use of had in mind.
arbitration. It is a form of arbitration that is well known
in California and followed elsewhere. See, e.g., Keating Regardless, if neither the history nor present practice
v. Superior Ct., 109 Cal.App.3d 784, 167 Cal.Rptr. 481, suggests that class arbitration is fundamentally
492 (1980) (officially depublished); American Arbitration incompatible with arbitration itself, then on what basis
Association (AAA), Supplementary Rules for Class can the majority hold California's law pre-empted?
Arbitrations (2003), http://www.adr.org/sp.asp?id=21936
(as visited Apr. 25, 2011, and available in Clerk of Court's *363 For another thing, the majority's argument that
case file); JAMS, The Resolution Experts, Class Action the Discover Bank rule will discourage arbitration rests
Procedures (2009). Indeed, the AAA has told us that it critically upon the wrong comparison. The majority
has found class arbitration to be “a fair, balanced, and compares the complexity of class arbitration with that
efficient means of resolving class disputes.” Brief for AAA of bilateral arbitration. See ante, at 14. And it finds the
as Amicus Curiae in Stolt–Nielsen S.A. v. AnimalFeeds former more complex. See ibid. But, if incentives are at
Int'l Corp., O.T.2009, No. 08–1198, p. 25 (hereinafter issue, the relevant comparison is not “arbitration with
AAA Amicus Brief). And unlike the majority's examples, arbitration” but a comparison between class arbitration
the Discover Bank rule imposes equivalent limitations on and judicial class actions. After all, in respect to the
litigation; hence it cannot **1759 fairly be characterized relevant set of contracts, the Discover Bank rule similarly
as a targeted attack on arbitration. and equally sets aside clauses that forbid class procedures
—whether arbitration procedures or ordinary judicial
Where does the majority get its contrary idea—that procedures are at issue.
individual, rather than class, arbitration is a “fundamental
attribut[e]” of arbitration? Ante, at 9. The majority does Why would a typical defendant (say, a business) prefer a
not explain. And it is unlikely to be able to trace its present judicial class action to class arbitration? AAA statistics
view to the history of the arbitration statute itself. “suggest that class arbitration proceedings take more time
than the average commercial arbitration, but may take less
When Congress enacted the Act, arbitration procedures time than the average class action in court.” AAA Amicus
had not yet been fully developed. Insofar as Congress Brief 24 (emphasis added). Data from California courts
considered detailed forms of arbitration at all, it may well confirm that class arbitrations can take considerably less
time than in-court proceedings in which class certification to arbitration or not—are unenforceable under Texas
is sought. Compare ante, at 14 (providing statistics for law”). The Discover Bank rule amounts to a variation on
class arbitration), with Judicial Council of California, this theme. California is free to define unconscionability
Administrative Office of the Courts, Class Certification as it sees fit, and its common law is of no federal concern
in California: Second Interim Report from the Study of so long as the State does not adopt a special rule that
California Class Action Litigation 18 (2010) (providing disfavors arbitration. Cf. Doctor's Associates, supra, at
statistics for class-action litigation in California courts). 687. See also ante, at 4, n. (THOMAS, J., concurring)
And a single class proceeding is surely more efficient (suggesting that, under certain circumstances, California
than thousands of separate proceedings for identical might remain free to apply its unconscionability doctrine).
claims. Thus, if speedy resolution of disputes were all that
mattered, then the Discover Bank rule would reinforce, *365 Because California applies the same legal principles
**1760 not obstruct, that objective of the Act. to address the unconscionability of class arbitration
waivers as it does to address the unconscionability of
The majority's related claim that the Discover Bank any other contractual provision, the merits of class
rule will discourage the use of arbitration because proceedings should not factor into our decision. If
“[a]rbitration is poorly suited to ... higher stakes” lacks California had applied its law of duress to void an
empirical support. Ante, at 16. Indeed, the majority arbitration agreement, would it matter if the procedures
provides no convincing reason to believe that parties are in the coerced agreement were efficient?
unwilling to submit High-Stake disputes to Arbitration.
and There are numerous counterexamples. Loftus, Rivals Regardless, the majority highlights the disadvantages of
Resolve Dispute Over Drug, Wall Street Journal, Apr. 16, class arbitrations, as it sees them. See ante, at 15–16
2011, p. B2 (discussing $500 million settlement in dispute (referring to the “greatly increase[d] risks to defendants”;
submitted to arbitration); Ziobro, Kraft Seeks Arbitration the “chance of a devastating loss” pressuring defendants
In Fight With Starbucks Over Distribution, Wall Street “into settling questionable claims”). But class proceedings
Journal, Nov. 30, 2010, p. B10 (describing initiation of an have countervailing advantages. In general agreements
arbitration in which the payout “could be higher” than that forbid the consolidation of claims can lead small-
$1.5 billion); Markoff, Software Arbitration Ruling Gives dollar claimants to abandon their claims rather than to
I.B.M. $833 Million From Fujitsu, N.Y. Times, Nov. 30, litigate. I suspect that it is true even here, for as the
1988, p. A1 (describing both companies as “pleased with Court of Appeals recognized, AT & T can avoid the
the ruling” resolving a licensing dispute). $7,500 payout (the payout that supposedly makes the
Concepcions' arbitration worthwhile) simply by paying
Further, even though contract defenses, e.g., duress the claim's face value, such that “the maximum gain to a
and unconscionability, slow down the dispute resolution customer for the hassle of arbitrating a $30.22 dispute is
process, federal arbitration law normally leaves such still just $30.22.” Laster v. AT & T Mobility **1761 LLC,
matters to the States. Rent–A–Center, West, Inc. v. 584 F.3d 849, 855, 856 (C.A.9 2009).
Jackson, 561 U.S. ––––, ––––, 130 S.Ct. 2772, 2775
(2010) (arbitration agreements “may be invalidated What rational lawyer would have signed on to represent
by ‘generally applicable contract defenses' ” (quoting the Concepcions in litigation for the possibility of fees
Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, stemming from a $30.22 claim? See, e.g., Carnegie v.
116 S.Ct. 1652, 134 L.Ed.2d 902 (1996))). A provision in a Household Int'l, Inc., 376 F.3d 656, 661 (C.A.7 2004)
contract of adhesion (for example, requiring a consumer (“The realistic alternative to a class action is not 17
to decide very quickly whether to pursue a claim) might million individual suits, but zero individual suits, as only
increase the speed and efficiency of arbitrating a dispute, a lunatic or a fanatic sues for $30”). In California's
but the State can forbid it. See, e.g., Hayes v. Oakridge perfectly rational view, nonclass arbitration over such
Home, 122 Ohio St.3d 63, 67, 2009–Ohio–2054, ¶ 19, sums will also sometimes have the effect of depriving
908 N.E.2d 408, 412 (“Unconscionability is a ground claimants of their claims (say, for example, where claiming
for revocation of an arbitration agreement”); In re the $30.22 were to involve filling out many forms that
Poly–America, L. P., 262 S.W.3d 337, 348 (Tex.2008) require technical legal knowledge or waiting at great
(“Unconscionable contracts, however—whether relating length while a call is placed on hold). Discover Bank sets
forth circumstances in which the California courts believe C.J.) (“Courts are not at liberty to shirk the process of
[contractual] construction under the empire of a belief that
that the terms of consumer contracts can be manipulated
arbitration is beneficent any more than they may shirk
to *366 insulate an agreement's author from liability for
it if their belief happens to be the contrary”); Cohen &
its own frauds by “deliberately cheat[ing] large numbers of
Dayton, 12 Va. L.Rev., at 276 (the Act “is no infringement
consumers out of individually small sums of money.” 36
upon the right of each State to decide for itself what
Cal.4th, at 162–163, 30 Cal.Rptr.3d 76, 113 P.3d, at 1110.
**1762 contracts shall or shall not exist under its laws”).
Why is this kind of decision—weighing the pros and cons
of all class proceedings alike—not California's to make?
These cases do not concern the merits and demerits of
class actions; they concern equal treatment of arbitration
Finally, the majority can find no meaningful support
contracts and other contracts. Since it is the latter question
for its views in this Court's precedent. The federal Act
that is at issue here, I am not surprised that the majority
has been in force for nearly a century. We have decided
can find no meaningful precedent supporting its decision.
dozens of cases about its requirements. We have reached
results that authorize complex arbitration procedures.
E.g., Mitsubishi Motors, 473 U.S., at 629, 105 S.Ct.
3346 (antitrust claims arising in international transaction IV
are arbitrable). We have upheld nondiscriminatory state
laws that slow down arbitration proceedings. E.g., Volt By using the words “save upon such grounds as exist
Information Sciences, 489 U.S., at 477–479, 109 S.Ct. at law or in equity for the revocation of any contract,”
1248 (California law staying arbitration proceedings until Congress retained for the States an important role incident
completion of related litigation is not pre-empted). But we to agreements to arbitrate. 9 U.S.C. § 2. Through those
have not, to my knowledge, applied the Act to strike down words Congress reiterated a basic federal idea that has
a state statute that treats arbitrations on par with judicial long informed the nature of this Nation's laws. We
and administrative proceedings. Cf. Preston, 552 U.S., at have often expressed this idea in opinions that set forth
355–356, 128 S.Ct. 978 (Act pre-empts state law that vests presumptions. See, e.g., Medtronic, Inc. v. Lohr, 518
primary jurisdiction in state administrative board). U.S. 470, 485, 116 S.Ct. 2240, 135 L.Ed.2d 700 (1996)
(“[B]ecause the States are independent sovereigns in our
At the same time, we have repeatedly referred to the Act's federal system, we have long presumed that Congress does
basic objective as assuring that courts treat arbitration not cavalierly pre-empt state-law causes of action”). But
agreements “like all other contracts.” Buckeye Check federalism is as much a question of deeds as words. It often
Cashing, Inc. v. Cardegna, 546 U.S. 440, 447, 126 S.Ct. takes the form of a concrete decision by this Court that
1204, 163 L.Ed.2d 1038 (2006). See also, e.g., Vaden v. respects the legitimacy of a State's action in an individual
Discover Bank, 556 U.S. 49, ––––, 129 S.Ct. 1262, 1273– case. Here, recognition of that federalist ideal, embodied
1274, 173 L.Ed.2d 206 (2009);; Doctor's Associates, supra, in specific language in this particular statute, should lead
at 687, 116 S.Ct. 1652; Allied–Bruce Terminix Cos. v. us to uphold California's law, not to strike it down. We do
Dobson, 513 U.S. 265, 281, 115 S.Ct. 834, 130 L.Ed.2d 753 not honor federalist principles in their breach.
(1995); Rodriguez de Quijas v. Shearson/American Express,
Inc., 490 U.S. 477, 483–484, 109 S.Ct. 1917, 104 L.Ed.2d With respect, I dissent.
526 (1989); Perry v. Thomas, 482 U.S. 483, 492–493, n. 9,
107 S.Ct. 2520, 96 L.Ed.2d 426 (1987); Mitsubishi Motors, 19 NO. 4 Westlaw Journal Class Action 319 NO. 4
supra, at 627, 105 S.Ct. 3346. And we have recognized Westlaw Journal Class Action 319 NO. 4 Westlaw Journal
that “[t]o immunize an arbitration agreement from judicial Class Action 319 NO. 4 Westlaw Journal Class Action 3
challenge” on grounds applicable to all other contracts
All Citations
“would be to elevate it over other forms of contract.”
*367 Prima Paint Corp. v. Flood & Conklin Mfg. Co., 563 U.S. 333, 131 S.Ct. 1740, 179 L.Ed.2d 742, 79 USLW
388 U.S. 395, 404, n. 12, 87 S.Ct. 1801, 18 L.Ed.2d 1270 4279, 161 Lab.Cas. P 10,368, 11 Cal. Daily Op. Serv. 4842,
(1967); see also Marchant v. Mead–Morrison Mfg. Co., 2011 Daily Journal D.A.R. 5846, 52 Communications
252 N.Y. 284, 299, 169 N.E. 386, 391 (1929) (Cardozo, Reg. (P&F) 1179, 22 Fla. L. Weekly Fed. S 957
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50
L.Ed. 499.
1 The Conceptions' original contract was with Cingular Wireless. AT & T acquired Cingular in 2005 and renamed the
company AT & T Mobility in 2007. Laster v. AT & T Mobility LLC, 584 F.3d 849, 852, n. 1 (C.A.9 2009).
2 That provision further states that “the arbitrator may not consolidate more than one person's claims, and may not otherwise
preside over any form of a representative or class proceeding.” App. to Pet. for Cert. 61a.
3 The guaranteed minimum recovery was increased in 2009 to $10,000. Brief for Petitioner 7.
4 The dissent seeks to fight off even this eminently reasonable concession. It says that to its knowledge “we have not ...
applied the Act to strike down a state statute that treats arbitrations on par with judicial and administrative proceedings,”
post, at 10 (opinion of BREYER, J.), and that “we should think more than twice before invalidating a state law that ... puts
agreements to arbitrate and agreements to litigate ‘upon the same footing’ ” post, at 4–5.
5 Relying upon nothing more indicative of congressional understanding than statements of witnesses in committee hearings
and a press release of Secretary of Commerce Herbert Hoover, the dissent suggests that Congress “thought that
arbitration would be used primarily where merchants sought to resolve disputes of fact ... [and] possessed roughly
equivalent bargaining power.” Post, at 6. Such a limitation appears nowhere in the text of the FAA and has been explicitly
rejected by our cases. “Relationships between securities dealers and investors, for example, may involve unequal
bargaining power, but we [have] nevertheless held ... that agreements to arbitrate in that context are enforceable.” Gilmer
v. Interstate/Johnson Lane Corp., 500 U.S. 20, 33, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991); see also id., at 32–33, 111 S.Ct.
1647 (allowing arbitration of claims arising under the Age Discrimination in Employment Act of 1967 despite allegations of
unequal bargaining power between employers and employees). Of course the dissent's disquisition on legislative history
fails to note that it contains nothing—not even the testimony of a stray witness in committee hearings—that contemplates
the existence of class arbitration.
6 Of course States remain free to take steps addressing the concerns that attend contracts of adhesion—for example,
requiring class-action-waiver provisions in adhesive arbitration agreements to be highlighted. Such steps cannot,
however, conflict with the FAA or frustrate its purpose to ensure that private arbitration agreements are enforced according
to their terms.
7 The dissent claims that class arbitration should be compared to class litigation, not bilateral arbitration. Post, at 6–7.
Whether arbitrating a class is more desirable than litigating one, however, is not relevant. A State cannot defend a rule
requiring arbitration-by-jury by saying that parties will still prefer it to trial-by-jury.
8 The dissent cites three large arbitration awards (none of which stems from classwide arbitration) as evidence that parties
are willing to submit large claims before an arbitrator. Post, at 7–8. Those examples might be in point if it could be
established that the size of the arbitral dispute was predictable when the arbitration agreement was entered. Otherwise, all
the cases prove is that arbitrators can give huge awards—which we have never doubted. The point is that in class-action
arbitration huge awards (with limited judicial review) will be entirely predictable, thus rendering arbitration unattractive. It
is not reasonably deniable that requiring consumer disputes to be arbitrated on a classwide basis will have a substantial
deterrent effect on incentives to arbitrate.
* The interpretation I suggest would be consistent with our precedent. Contract formation is based on the consent of the
parties, and we have emphasized that “[a]rbitration under the Act is a matter of consent.” Volt Information Sciences, Inc.
v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989).
The statement in Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987), suggesting that § 2 preserves
all state-law defenses that “arose to govern issues concerning the validity, revocability, and enforceability of contracts
generally,” id., at 493, n. 9, 107 S.Ct. 2520, is dicta. This statement is found in a footnote concerning a claim that the
Court “decline[d] to address.” Id., at 493, n. 9, 107 S.Ct. 2520. Similarly, to the extent that statements in Rent–A–Center,
West, Inc. v. Jackson, 561 U.S. ––––, –––– n. 1, 130 S.Ct. 2772, 2778 n. 1 (2010), can be read to suggest anything
about the scope of state-law defenses under § 2, those statements are dicta, as well. This Court has never addressed
the question whether the state-law “grounds” referred to in § 2 are narrower than those applicable to any contract.
Moreover, every specific contract defense that the Court has acknowledged is applicable under § 2 relates to contract
formation. In Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996),
this Court said that fraud, duress, and unconscionability “may be applied to invalidate arbitration agreements without
contravening § 2.” All three defenses historically concern the making of an agreement. See Morgan Stanley Capital
Group Inc. v. Public Util. Dist. No. 1 of Snohomish Cty., 554 U.S. 527, 547, 128 S.Ct. 2733, 171 L.Ed.2d 607 (2008)
(describing fraud and duress as “traditional grounds for the abrogation of [a] contract” that speak to “unfair dealing
at the contract formation stage”); Hume v. United States, 132 U.S. 406, 411, 414, 10 S.Ct. 134, 33 L.Ed. 393 (1889)
(describing an unconscionable contract as one “such as no man in his senses and not under delusion would make” and
suggesting that there may be “contracts so extortionate and unconscionable on their face as to raise the presumption
of fraud in their inception” (internal quotation marks omitted)).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
provides for arbitration of differences arising over bargaining agreements and arbitration clauses, or to
interpretation of the agreement. Article 9 provides that consider any other evidence that might demonstrate that
subject to certain limitations, but otherwise not subject to a particular grievance was not subject to arbitration. P.
the arbitration clause, petitioner is free to exercise certain 1420.
management functions, including the hiring, placement,
and termination of employees. Article 20 prescribes the 751 F.2d 203 (CA 7th 1984), vacated and remanded.
order in which employees will be laid off “[w]hen lack of
work necessitates Layoff.” The Union filed a grievance WHITE, J., delivered the opinion for a unanimous Court.
challenging petitioner's decision to lay off 79 installers BRENNAN, J., filed a concurring opinion, in which
from its Chicago location, claiming that there was no BURGER, C.J., and MARSHALL, J., joined, post, p. ---.
lack of work at that location and that therefore the
layoffs would violate Article 20. But petitioner laid off
the installers and refused to submit the grievance to Attorneys and Law Firms
arbitration on the ground that under Article 9 the layoffs
Rex E. Lee argued the cause for petitioner. With him on
were not arbitrable. The Union then sought to compel
the briefs were David W. Carpenter, Gerald D. Skoning,
arbitration by filing suit in Federal District Court, which,
Charles C. Jackson, Howard J. Trienens, Alfred A. Green,
after finding that the Union's interpretation of Article 20
and Joseph Ramirez.
was at least “arguable,” held that it was for the arbitrator,
not the court, to decide whether that interpretation had Laurence Gold argued the cause for respondents. With him
merit, and, accordingly, ordered petitioner to arbitrate. on the brief were Irving M. Friedman, Stanley Eisenstein,
The Court of Appeals affirmed. Harold A. Katz, David Silberman, and James Coppess.*
Held: The issue whether, because of express exclusion or * Briefs of amici curiae urging reversal were filed for the
other evidence, the dispute over interpretation of Article Chamber of Commerce of the United States by John S.
20 was subject to the arbitration clause, **1416 should Irving, Carl L. Taylor, and Stephen A. Bokat; and for
have been decided by the District Court and reviewed by the National Association of Manufacturers by Jan S.
the Court of Appeals, and should not have been referred Admundson and Gary D. Lipkin.
to the arbitrator. Pp. 1418-20.
David E. Feller filed a brief for the National Academy of
Arbitrators as amicus curiae urging affirmance.
(a) Under the principles set forth in the Steelworkers
Trilogy (Steelworkers v. American Mfg. Co., 363 U.S. 564, Opinion
80 S.Ct. 1343, 4 L.Ed.2d 1403; Steelworkers v. Warrior
& Gulf Navigation Co., 363 U.S. 574, 80 S.Ct. 1347, Justice WHITE delivered the opinion of the Court.
4 L.Ed.2d 1409; and Steelworkers v. Enterprise Wheel
& Car Corp., 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.2d The issue presented in this case is whether a court
1424), it was the District Court's duty to interpret the asked to order arbitration of a grievance filed under a
collective-bargaining agreement and to determine whether collective-bargaining agreement must first determine that
the parties intended to arbitrate grievances concerning the parties intended to arbitrate the dispute, or whether
layoffs predicated on a “lack of work” determination that determination is properly left to the arbitrator.
by petitioner. If the court should determine that the
agreement so provides, then it would be for the arbitrator
to determine the relative merits of the parties' substantive I
interpretations of the agreement. Pp. 1418-20.
AT & T Technologies, Inc. (AT & T or the Company), and
*644 (b) This Court will not examine the collective- the Communications Workers of America (the Union)
bargaining agreement for itself and affirm the Court are parties to a collective-bargaining agreement which
of Appeals on the ground that the parties had agreed covers telephone equipment installation workers. Article
to arbitrate the dispute over the layoffs. It is not this 8 of this agreement *645 establishes that “differences
Court's function in the first instance to construe collective- arising with respect to the interpretation of this contract
or the performance of any obligation hereunder” must by a lack of work but only whether the company *647
be referred to a mutually agreeable arbitrator upon the followed the proper order in laying off the employees.”
written demand of either party. This Article expressly does App. to Pet. for Cert. 10A.
not cover disputes “excluded from arbitration by other Finding that “the union's interpretation of Article 20 was
provisions of this contract.” 1 Article 9 provides that, at least ‘arguable,’ ” the court held that it was “for the
“subject to the limitations contained in the provisions arbitrator, not the court to decide whether the union's
of this contract, but otherwise not subject to the interpretation has merit,” and accordingly, ordered the
provisions of the arbitration clause,” AT & T is free Company to arbitrate. Id., at 11A.
to exercise certain management functions, including the
hiring and placement of employees and the termination of The Court of Appeals for the Seventh Circuit affirmed.
Communications Workers of America v. Western Electric
employment. 2 “When lack of work necessitates Layoff,”
Co., 751 F.2d 203 (1984). The Court of Appeals
Article 20 prescribes the order in which employees are to
understood the District Court to have ordered arbitration
be laid off. 3 of the threshold issue of arbitrability. Id., at 205, n. 4. The
court acknowledged the “general rule” that the issue of
**1417 On September 17, 1981, the Union filed a arbitrability is for the courts to decide unless the parties
grievance challenging AT & T's decision to lay off 79 stipulate otherwise, but noted that this Court's decisions
installers from its Chicago base location. The Union in Steelworkers v. Warrior & Gulf Navigation Co., 363
claimed that, because there was no lack of work at the U.S. 574, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960), and
Chicago location, the *646 planned layoffs would violate Steelworkers v. American Mfg. Co., 363 U.S. 564, 80 S.Ct.
Article 20 of the agreement. Eight days later, however, 1343, 4 L.Ed.2d 1403 (1960), caution courts to avoid
AT & T laid off all 79 workers, and soon thereafter, the becoming entangled in the merits of a labor dispute under
Company transferred approximately the same number of the guise of deciding arbitrability. From this observation,
installers from base locations in Indiana and Wisconsin to the court announced an “exception” to the general
the Chicago base. AT & T refused to submit the grievance rule, under which “a court should compel arbitration
to arbitration on the ground that under Article 9 the of the arbitrability issue where the collective bargaining
Company's decision to lay off workers when it determines agreement contains a standard arbitration clause, the
that a lack of work exists in a facility is not arbitrable. parties have not clearly excluded the arbitrability issue
from arbitration, and deciding the issue would entangle
The Union then sought to compel arbitration by filing the court in interpretation of substantive provisions of
suit in federal court pursuant to § 301(a) of the the collective bargaining agreement and thereby involve
Labor Management Relations Act, 29 U.S.C. § 185(a). 4 consideration of the merits of the dispute.” 751 F.2d, at
Communications Workers of America v. Western Electric 206.
Co., No. 82 C 772 (ND Ill., Nov. 18, 1983). Ruling on
cross-motions for summary judgment, the District Court **1418 All of these factors were present in this case.
reviewed the provisions of Articles 8, 9, and 20, and set Article 8 was a “standard arbitration clause,” and there
forth the parties' arguments as follows: was “no clear, unambiguous exclusion from arbitration of
terminations predicated by a lack of work determination.”
“Plaintiffs interpret Article 20 to require that there be Id., at 206-207. Moreover, although there were “colorable
an actual lack of work prior to employee layoffs and arguments” on both sides of the exclusion issue, if the
argue that there was no such lack of work in this court were to decide this question it would have to
case. Under plaintiffs' interpretation, Article 20 would interpret not only Article 8, but Articles 9 and 20 as well,
allow the union to take to arbitration the threshold both of which are “substantive *648 provisions of the
issue of whether the layoffs were justified by a lack of Agreement.” The court thus “decline[d] the invitation to
work. Defendant interprets Article 20 as merely providing decide arbitrability,” and ordered AT & T “to arbitrate
a sequence for any layoffs which management, in its the arbitrability issue.” Id., at 207.
exclusive judgment, determines are necessary. Under
defendant's interpretation, Article 20 would not allow for The court admitted that its exception was “difficult to
an arbitrator to decide whether the layoffs were warranted reconcile with the Supreme Court's discussion of a court's
duty to decide arbitrability in [John Wiley & Sons, Inc. clearly and unmistakably provide otherwise, the question
v. Livingston, 376 U.S. 543, 84 S.Ct. 909, 11 L.Ed.2d 898 of whether the parties agreed to arbitrate is to be decided
(1964) ].” The court asserted, however, that the discussion by the court, not the arbitrator. Warrior & Gulf, supra,
was “dicta,” and that this Court had reopened the issue 363 U.S., at 582-583, 80 S.Ct., at 1352-1353. See Operating
in Nolde Brothers, Inc. v. Bakery Workers, 430 U.S. 243, Engineers v. Flair Builders, Inc., 406 U.S. 487, 491, 92 S.Ct.
255, n. 8, 97 S.Ct. 1067, 1074, n. 8, 51 L.Ed.2d 300 (1977). 1710, 1712, 32 L.Ed.2d 248 (1972); Atkinson v. Sinclair
751 F.2d, at 206. Refining Co., 370 U.S. 238, 241, 82 S.Ct. 1318, 1320, 8
L.Ed.2d 462 (1962), overruled in part on other grounds,
We granted certiorari, 474 U.S. 814, 106 S.Ct. 56, 88 Boys Markets, Inc. v. Retail Clerks, 398 U.S. 235, 90 S.Ct.
L.Ed.2d 46 (1985), and now vacate the Seventh Circuit's 1583, 26 L.Ed.2d 199 (1970). Accord, Mitsubishi Motors
decision and remand for a determination of whether the Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 626,
Company is required to arbitrate the Union's grievance. 105 S.Ct. 3346, 3353-3354, 87 L.Ed.2d 444 (1985).
collective-bargaining agreement “is a standard arbitration Gulf, supra, at 582-583, 80 S.Ct., at 1352-1353 (footnote
clause, providing for arbitration of ‘any differences arising omitted).
with respect to the interpretation of this contract or
the performance of any obligation hereunder,’ ” and The Company in Warrior & Gulf relied for its argument
that “there is no clear, unambiguous exclusion [of this that the dispute was not arbitrable on a “Management
dispute] from arbitration,” the Court of Appeals thought Functions” clause which, like Article 9 of the AT &
that “there [were] colorable arguments both for and T/CWA agreement, *654 excluded “matters which are
against exclusion.” Communications Workers of America strictly a function of management,” 363 U.S., at 576,
v. Western Electric Co., 751 F.2d 203, 206-207 (1984). The 80 S.Ct., at 1349, from the arbitration provision. We
“colorable arguments” referred to by the Court of Appeals recognized that such a clause “might be thought to
were the parties' claims concerning the meaning of Articles refer to any practice of management in which, under
9 and 20 of the collective-bargaining agreement: the Court particular circumstances prescribed by the agreement, it
of Appeals thought that if the Union's interpretation of is permitted to indulge.” Id., at 584, 80 S.Ct., at 1353.
Article 20 was correct and management *653 could not However, we also recognized that to read the clause this
order layoffs for reasons other than lack of work, the way would make arbitrability in every case depend upon
dispute was arbitrable; but if AT & T's interpretation of whether management could take the action challenged
Article 20 was correct and management was free to order by the Union; the arbitrability of every dispute would
layoffs for other reasons, the dispute was not arbitrable turn upon a resolution of the merits, and “the arbitration
under Article 9. Id., at 207. Because these were the very clause would be swallowed up by the exception.” Ibid.
issues that would be presented to the arbitrator if the Therefore, we held that, where a collective-bargaining
dispute was held to be arbitrable, the court reasoned that agreement contains a standard arbitration clause and
“determining arbitrability would enmesh a court in the the “exception” found in the Management Functions
merits of th[e] dispute,” ibid., and concluded that the clause is general, “judicial inquiry ... should be limited
arbitrability issue should be submitted to the arbitrator. to the search for an explicit provision which brings the
grievance under the cover of the [Management Functions]
The Court of Appeals was mistaken insofar as it thought clause....” Steelworkers v. American Mfg. Co., 363 U.S.
that determining arbitrability required resolution of the 564, 572, 80 S.Ct. 1343, 1365, 4 L.Ed.2d 1403 (1960)
parties' dispute with respect to the meaning of Articles (BRENNAN, J., concurring); Warrior & Gulf, supra, 363
9 and 20 of the collective-bargaining agreement. This U.S., at 584, 80 S.Ct., at 1353. “In the absence of any
is clear from our opinion in Steelworkers v. Warrior express provision excluding a particular grievance from
& Gulf **1421 Navigation Co., 363 U.S. 574, 80 arbitration, ... only the most forceful evidence of a purpose
S.Ct. 1347, 4 L.Ed.2d 1409 (1960). In Warrior & Gulf, to exclude the claim from arbitration can prevail....” 363
the Union challenged management's contracting out of U.S., at 584-585, 80 S.Ct., at 1353-1354.
labor that had previously been performed by Company
employees. The parties failed to resolve the dispute The Seventh Circuit misunderstood these rules of contract
through grievance procedures, and the Union requested construction and did precisely what we disapproved
arbitration; the Company refused, and the Union sued to of in Warrior & Gulf -it read Article 9, a general
compel arbitration under § 301 of the Labor Management Management Functions clause, to make arbitrability
Relations Act, 29 U.S.C. § 185. The collective-bargaining depend upon the merits of the parties' dispute. As
agreement contained a standard arbitration clause similar Warrior & Gulf makes clear, the judicial inquiry required
to Article 8 of the AT & T/CWA contract, i.e., providing to determine arbitrability is much simpler. The parties'
for arbitration of all differences with respect to the dispute concerns whether Article 20 of the collective-
meaning or application of the contract. We held that, in bargaining agreement limits management's authority to
light of the congressional policy making arbitration the order layoffs for reasons other than lack of work. The
favored method of dispute resolution, such a provision question for the court is “strictly confined,” id., at 582,
requires arbitration “unless it may be said with positive 80 S.Ct., at 1353, to whether the parties agreed to submit
assurance that the arbitration clause is not susceptible of disputes over the meaning of Article 20 to arbitration.
an interpretation that covers the asserted dispute. Doubts Because the collective-bargaining agreement contains a
should be resolved in favor of coverage.” Warrior & standard arbitration *655 clause, the answer must be
affirmative unless the contract contains explicit language bargaining agreement only where there is some special
reason to do so. Thus, it is appropriate for this Court
stating that disputes respecting Article 20 are not subject
to construe a collective-bargaining agreement where-as
to arbitration, or unless the party opposing arbitration-
in the Steelworkers Trilogy -our decision announces a
here AT & T-adduces “the most forceful evidence” to
new principle of law, since applying this principle may
this effect from the bargaining history. Under Warrior &
help to clarify our meaning. There is no such need,
Gulf, determining arbitrability does not require the court
however, where-as here-we simply reaffirm established
even to consider which party is correct with respect to the
principles. Moreover, since the determination left for
meaning of Article 20.
the Court of Appeals on remand is straightforward and
will require little time or effort, concerns for efficient
The Court remands this case so that the court below may
judicial administration do not require us to interpret the
apply the proper standard to determine arbitrability. The
agreement. Finally, because the parties have submitted to
Court **1422 states that “it is usually not our function
us only fragmentary pieces of the bargaining history, we
in the first instance to construe collective-bargaining
are not in a position properly to evaluate whether there
contracts and arbitration clauses, or to consider any other
is “the most forceful evidence” that the parties *656
evidence that might unmistakably demonstrate that a
did not intend for this dispute to be arbitrable. Therefore,
particular grievance was not to be subject to arbitration.”
I join the Court's opinion and concur in the Court's
Ante, at 1420. Of course, we have on numerous occasions
judgment remanding to the Court of Appeals.
construed collective-bargaining agreements “in the first
instance”; we did so, for example, in the three cases
comprising the Steelworkers Trilogy. See also John Wiley
& Sons, Inc. v. Livingston, 376 U.S. 543, 552-555, 84 All Citations
S.Ct. 909, 916-917, 11 L.Ed.2d 898 (1964); Packinghouse
Workers v. Needham Packing Co., 376 U.S. 247, 249-253, 475 U.S. 643, 106 S.Ct. 1415, 89 L.Ed.2d 648, 121
84 S.Ct. 773, 774-777, 11 L.Ed.2d 680 (1964). Nonetheless, L.R.R.M. (BNA) 3329, 54 USLW 4339, 104 Lab.Cas. P
I agree with the Court that we should interpret a collective- 11,758
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
1 Article 8 provides, in pertinent part, as follows:
“If the National and the Company fail to settle by negotiation any differences arising with respect to the interpretation of
this contract or the performance of any obligation hereunder, such differences shall (provided that such dispute is not
excluded from arbitration by other provisions of this contract, and provided that the grievance procedures as to such
dispute have been exhausted) be referred upon written demand of either party to an impartial arbitrator mutually agreeable
to both parties.” App. 21.
2 Article 9 states:
“The Union recognizes the right of the Company (subject to the limitations contained in the provisions of this contract, but
otherwise not subject to the provisions of the arbitration clause) to exercise the functions of managing the business which
involve, among other things, the hiring and placement of Employees, the termination of employment, the assignment of
work, the determination of methods and equipment to be used, and the control of the conduct of work.” Id., at 22.
3 Article 20 provides, in pertinent part, that “[w]hen lack of work necessitates Layoff, Employees shall be Laid-Off in
accordance with Term of Employment and by Layoff groups as set forth in the following [subparagraphs stating the order
of layoff].” Id., at 23. Article 1.11 defines the term “Layoff” to mean “a termination of employment arising out of a reduction
in the force due to lack of work.” Id., at 20.
4 Section 301(a), 61 Stat. 156, 29 U.S.C. § 185(a) states:
“Suits for violation of contracts between an employer and a labor organization representing
employees in an industry affecting commerce as defined in this chapter, or between any such
organizations, may be brought in any district court of the United States having jurisdiction of the
parties, without respect of the amount in controversy or without regard to the citizenship of the
parties.”
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
William J. Delmore III and Charles A. Rosenthal, for The Burnell Gistand, a Harris County Tax Assessor Collector
State of Texas. office manager, testified that on September 7, 2005,
appellant went to Gistand's branch office, was allowed
Panel consists of Justices NUCHIA, JENNINGS, and to enter Gistand's personal office, and handed Gistand a
HIGLEY. renewal notice for her vehicle tags, a blue parking placard,
proof of insurance, a license, and a check. Appellant told
Gistand she needed “to do her renewal.” When Gistand
MEMORANDUM OPINION asked appellant, “is this for you,” appellant said “yes.”
Gistand asked Ingram Mitchem, the next available clerk,
TERRY JENNINGS, Justice. to process appellant's paperwork.
*1 A jury found appellant, Betty Brock Bell, guilty Gistand further testified that on the following morning,
of the state jail felony offense of tampering with a after Mitchem approached Gistand regarding appellant's
governmental record 1 and assessed her punishment at paperwork, Gistand reviewed appellant's disabled parking
confinement for 18 months and a fine of $5,000. The placard application and saw that appellant's mother
trial court, in accordance with the jury's recommendation, was identified as the applicant. Because Gistand had
suspended the confinement portion of the sentence and previously attended the funeral of appellant's mother, she
placed appellant on community supervision for a period realized that appellant had made a false statement on
of two years. In four issues, appellant contends that (1) the application, and she notified her supervisor. Gistand
the trial court “abuse[d] its discretion in denying the would not have processed the application for the parking
motion for new trial on the merits after a hearing which placards had she known appellant was renewing the
preserved errors that had otherwise been waived”; (2) the placards for her deceased mother.
trial court “abuse[d] its discretion in failing to quash the
indictment ... based on a statutory ‘confusion’ “; (3) the Mitchem testified that Gistand asked her to assist
“indictment as a matter of law fail[ed] to charge an offense appellant, and Gistand handed Mitchem the paperwork
that appellant had originally provided Gistand, including appellant was likely referring to an aunt who already had
a vehicle registration renewal, a check, a driver's license, her own disabled parking placards.
insurance, and the disabled parking placards. Mitchem
went back to her office to process the paperwork. Whem
Mitchem discovered that appellant had not completed
Waiver
a renewal application for the disabled parking placards,
she provided appellant with an application. Mitchem In her first issue, appellant argues that the trial court
also referred to a computer database that contained “abuse[d] its discretion in denying the motion for new trial
information concerning the “original paperwork” and on the merits after a hearing which preserved errors that
discovered that the disabled parking placards belonged had otherwise been waived.”
to Mary Lou Brock, appellant's mother. When Mitchem
asked appellant whether the application was for her or At the outset, we note that appellant discusses her first
her mother, appellant responded that the application was three issues together in no particular order and in a
for her mother. Thus, Mitchem believed that appellant single paragraph that spans over seven pages. Specifically,
was renewing her mother's disabled parking placards, and in regard to her first issue, appellant directly mentions
she was unaware at the time that appellant's mother was the trial court's denial of her motion for new trial only
deceased. once and provides scant record references and citations
to legal authority. However, construing the briefing rules
*2 The completed application, which was introduced
liberally, 2 we consider below appellant's first issue as
into evidence during Mitchem's testimony, showed that
an argument that the evidence is legally insufficient to
above the space for the “applicant's name,” appellant
support her conviction.
wrote “Mary Lou Brock,” and above the space for the
applicant's signature, appellant printed “Mary L. Brock.”
Within her first issue, appellant also complains that,
Appellant also wrote her initials “BBB” next to the
during trial, “the State was allowed to again and again
signature line on the application. Mitchem stated that
mention her judicial office” even though appellant was
she told appellant to put her initials on the application
“not charged with any act of official misconduct.”
because appellant was submitting the application on
However, to the extent this complaint concerns the fact
behalf of her mother. Mitchem stated that appellant also
that the jury was informed that appellant was serving
wrote her mother's address on the application. Mitchem
as a justice of the peace at the time she committed the
processed the application and gave appellant two disabled
alleged offense, appellant has not referred us to any place
parking placards. However, after leaving work, Mitchem
in the record where she asserted a timely objection to the
remembered seeing an article at the office stating that
State's reference of this fact, and thus she has waived this
appellant's mother was deceased, and Mitchem notified
Gistand the following morning. Mitchem stated that complaint for our review. 3 See TEX.R.APP. P. 33.1.
appellant deceived her and that she would not have
processed appellant's paperwork had she known that *3 Appellant further complains within her first issue that
appellant was not being truthful. she was “tried by proxy for the offense of aggravated
perjury” and the State used her grand jury testimony
Harris County District Attorney's Office Investigator Jim “to reach around her right not to testify.” However,
Britt testified that he received the complaint that appellant appellant's only record reference to support this claim
had put false information on an application for disabled concerns a question by the State to Britt regarding whether
parking placards. Attached to the complaint he received the grand jury had discretion in indicting appellant.
was a computer printout of two disabled parking placards Appellant did not timely object to this question, and has
and an obituary for appellant's mother. During the course waived this complaint for our review. See id.
of Britt's investigation, he interviewed appellant, who
initially told Britt that the placards were for her, and then To the extent that appellant has attempted to raise any
told Britt that the placards were for her 82-year-old aunt. additional issues, we hold that those issues have been
Although appellant would not provide Britt with the name inadequately briefed. 4 See TEX.R.APP. P. 38.1(h).
of her aunt, Britt determined in his own investigation that
section 681.003 of the Texas Transportation Code. Id. § as Exhibit A and the actions of the
681.003 (Vernon Supp.2006). Chapter 502, under which [appellant] were done with the intent
appellant contends she should have been prosecuted, to defraud and harm another.
is entitled “Registration of Vehicles” and does not
apply to applications for disabled parking placards. The indictment in the clerk's record is followed
Id. § 502.001-502.412 (Vernon 1999 & Supp.2006). immediately by a copy of the application, which is marked
Accordingly, false statements made in an application for Exhibit A, and this application appears identical to the
disabled parking placards are not subject to the criminal copy of the application that was introduced into evidence
at trial. Moreover, at the beginning of trial, the State
penalty provision in section 502.410. 6 Id. § 502.410.
read the indictment to the jury, including the reference
Thus, as the State notes, although the application for
to the application attached as Exhibit A, and the State
the disabled parking placards contains a reference to
noted that Exhibit A was contained on the “reverse
section 502.410 of the Transportation Code, the reference
page” of the indictment. As the State was reading the
is inaccurate, and section 502.410 does not “control”
indictment, appellant requested that the State simply
under these facts. We hold that the trial court did not
refer to the application as the “the Exhibit” and not
abuse its discretion in denying appellant's motion to quash
read the entire application to the jury. Finally, appellant
the indictment on the ground that she should have been
necessarily referred to the application, which was attached
charged under section 502.410.
as Exhibit A to the indictment, in her motion to quash the
indictment. Thus, we can see no defect or irregularity in
We overrule appellant's second issue.
the State's attachment of Exhibit A to the indictment.
corruption and abuse.” The motion alleged that appellant Criminal Appeals or the court of appeals, any party may
file with the clerk of the court a motion stating grounds
was “being prosecuted by a vindictive and racist judicial
why the judge before whom the case is pending should not
system,” and was signed by “Jim Thompson, GYSGT,
sit in the case.” TEX.R. CIV. P. 18a(a) (emphasis added).
USMC, Chief Executive Officer, Intervenor.” The record
Here, the motion to recuse, which was not filed until the
does not indicate that Thompson is a lawyer licensed in
end of the punishment phase of trial, was filed by a non-
the State of Texas or is otherwise authorized to represent
party to the proceedings below and appears to be authored
any party in this case. 7
by a person unauthorized to practice law in the State of
Texas. We hold that the trial court was not required to
“A ‘criminal action,’ such as the underlying proceeding,
refer this motion before proceeding with the punishment
is prosecuted in the name of the State of Texas against
phase of the trial.
the accused and is conducted by some person acting
under the authority of the State, in accordance with its
*6 We overrule appellant's fourth issue.
laws.” In re Wingfield, 171 S.W.3d 374, 381 (Tex.App.-
Tyler 2005, orig. proceeding) (citing TEX.CODE CRIM.
PROC. ANN. art. 3.02 (Vernon 2005)). The Code of
Criminal Procedure makes no provision for a third party Conclusion
to intervene in a “criminal action.” Id. Furthermore, Rule
We affirm the judgment of the trial court.
18a of the Texas Rules of Civil Procedure, which applies
to the recusal of a trial judge in criminal cases 8 and sets
out the prerequisites for a proper motion requesting the All Citations
recusal of the trial judge, specifically states that “[a]t least
ten days before the date set for trial or other hearing in Not Reported in S.W.3d, 2006 WL 3628916
any court other than the Supreme Court, the Court of
Footnotes
1 See TEX. PEN.CODE ANN. § 37.10 (Vernon Supp.2006).
2 See TEX.R.APP. P. 38.9.
3 Our review of the record reveals that both the State and appellant, in their opening statements, made references, without
objection, to the fact that appellant was a justice of the peace. Gistand also testified, without objection, that appellant
was allowed into her personal office as a courtesy to appellant as a public official. Moreover, appellant, in her defense,
presented evidence that Gistand reported appellant in retaliation for appellant's firing of her sister, who worked as a clerk
in appellant's court.
4 In her brief, appellant asserts that she “was impugned repeatedly over her judicial decisions and acts of judicial
discretion” and was “demonized for ruling against the State.” Although appellant does not provide this Court with specific
record references to the allegedly objectionable evidence, the State concedes that, during the punishment phase of
trial, it introduced into evidence “two unadjudicated extraneous offenses demonstrating [appellant's] predilection for
prevarication.” It introduced evidence that appellant tampered with another governmental record when she entered
a contempt order that contained false statements, and the State Commission on Judicial Conduct issued a public
admonition against appellant for this conduct. The State also introduced testimony from two assistant district attorneys
that appellant had previously coerced guilty pleas from pro se defendants. The State asserts that appellant has not
clearly identified in the record a specific, timely objection to the above testimony. However, we need not address the
State's waiver argument on these points because we agree with the State's initial argument that any specific complaints
concerning this testimony have been inadequately briefed. TEX.R.APP. P. 38.1(h).
5 The doctrine of in pari materia is one of statutory construction. See Burke v. State, 28 S.W.3d 545, 546
(Tex.Crim.App.2000). Texas has codified the doctrine in section 311.026 of the Government Code:
(a) If a general provision conflicts with a special or local provision, the provisions shall be construed, if possible, so
that effect is given to both.
(b) If the conflict between the general provision and the special or local provision is irreconcilable, the special or local
provision prevails as an exception to the general provision, unless the general provision is the later enactment and
the manifest intent is that the general provision prevail.
TEX. GOV'T CODE ANN. § 311.026 (Vernon 2005); see also Burke, 28 S.W.3d at 547 n. 2.
6 The criminal penalty provision in section 502.410 also does not apply to a statement or application filed under section
504.201, which concerns license plates for vehicles used by disabled persons. See TEX. TRANSP. CODE ANN. §§
502.410, 504.201 (Vernon Supp.2006).
7 Appellant agrees that Thompson is not a lawyer and that the motion was “patently frivolous.” However, appellant contends
that because the motion was not struck, “it implanted reversible error in the record.”
8 Arnold v. State, 853 S.W.2d 543, 544 (Tex.Crim.App.1993).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
No. 12–138.
Chief Justice Roberts, with whom Justice Kennedy joined,
|
filed opinion dissenting.
Argued Dec. 2, 2013.
|
Decided March 5, 2014.
West Headnotes (12)
Synopsis
Background: Republic of Argentina petitioned under the
Federal Arbitration Act (FAA) to vacate or modify [1] Alternative Dispute Resolution
arbitral award rendered against it and in favor of United Matters to Be Determined by Court
Kingdom company for Argentina's alleged violation of It is up to parties to contract to determine
bilateral investment treaty. Company cross-moved to whether particular matter is primarily for
confirm award. The United States District Court for arbitrators or for courts to decide.
the District of Columbia, Reggie B. Walton, J., denied
petition, 715 F.Supp.2d 108, and confirmed award, 764 30 Cases that cite this headnote
F.Supp.2d 21. The Republic of Argentina appealed.
The United States Court of Appeals for the District of
[2] Alternative Dispute Resolution
Columbia Circuit, Rogers, Circuit Judge, 665 F.3d 1363,
Evidence
reversed. Certiorari was granted.
If contract is silent on matter of who primarily
is to decide threshold questions about
arbitration, courts determine the parties'
Holdings: The Supreme Court, Justice Breyer, held that: intent with help of certain presumptions.
[1] local court litigation requirement in arbitration 23 Cases that cite this headnote
provisions of treaty was procedural condition precedent
to arbitration, whose interpretation and application, if [3] Alternative Dispute Resolution
requirement were found in ordinary contract, would Evidence
presumptively be primarily for arbitrators;
Courts presume that parties to contract intend
for courts, not arbitrators, to decide disputes
[2] ordinary contract-based presumptions applied, despite
about arbitrability, including questions such
fact that arbitration provisions appeared in treaty, and
as whether parties are bound by given
that parties thereto were sovereign nations;
arbitration clause, or whether an arbitration
clause in a concededly binding contract
[3] primary responsibility for interpretation and
applies to particular type of controversy.
application of local court litigation requirement lay with
arbitrators, such that court, on competing motions to 58 Cases that cite this headnote
confirm and vacate arbitration award, had to grant
appropriate deference to arbitrators' decision; and
basis to pesos. MetroGAS' profits soon became losses. determine whether a particular matter is primarily for
Invoking Article 8, BG Group sought arbitration, which arbitrators or for courts to decide. See, e.g., Steelworkers
the parties sited in Washington, D.C. BG Group claimed v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582, 80 S.Ct.
that Argentina's new laws and practices violated the 1347, 4 L.Ed.2d 1409. If the contract is silent on the
Treaty, which forbids the “expropriation” of investments matter of who is to decide a “threshold” question about
and requires each nation to give “fair and equitable arbitration, courts determine the parties' intent using
treatment” to investors from the other. Argentina denied presumptions. That is, courts presume that the parties
those claims, but also argued that the arbitrators lacked intended courts to decide disputes about “arbitrability,”
“jurisdiction” to hear the dispute because, as relevant e.g., Howsam v. Dean Witter Reynolds, Inc., 537 U.S.
here, BG Group had not complied with Article 8's local 79, 84, 123 S.Ct. 588, 154 L.Ed.2d 491, and arbitrators
litigation requirement. The arbitration panel concluded to decide disputes about the meaning and application of
that it had jurisdiction, finding, among other things, procedural preconditions for the use of arbitration, see
that Argentina's conduct (such as also enacting new laws id., at 86, 123 S.Ct. 588, including, e.g., claims of “waiver,
that hindered recourse to its judiciary by firms in BG delay, or a like defense to arbitrability,” Moses H. Cone
Group's situation) had excused BG Group's failure to Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1,
comply with Article 8's requirement. On the merits, the 25, 103 S.Ct. 927, 74 L.Ed.2d 765, and the satisfaction
panel found that Argentina had not expropriated BG of, e.g., “ ‘time limits, notice, laches, [or] estoppel,’ ”
Group's investment but had denied BG Group “fair Howsam, 537 U.S., at 85, 123 S.Ct. 588. The provision at
and equitable treatment.” It awarded damages to BG issue is of the procedural variety. As its text and structure
Group. Both sides sought review in federal district court: make clear, it determines when the contractual duty to
BG Group to confirm the award under the New York arbitrate arises, not whether there is a contractual duty to
Convention and the Federal Arbitration Act (FAA), and arbitrate at all. Neither its language nor other language
Argentina to vacate the award, in part on the ground in Article 8 gives substantive weight to the local court's
that the arbitrators lacked jurisdiction under the FAA. determinations on the matters at issue between the parties.
The District Court confirmed the award, but the Court The litigation provision is thus a claims-processing rule. It
of Appeals for the District of Columbia Circuit vacated. is analogous to other procedural provisions found to be
It found that the interpretation and application of Article for arbitrators primarily to interpret and apply, see, e.g.,
8's requirement were matters for courts to decide de ibid., and there is nothing in Article 8 or the Treaty to
novo, i.e., without deference to the arbitrators' views; that overcome the ordinary assumption. Pp. 1206 – 1208.
the circumstances did not excuse BG Group's failure to
comply with the requirement; and that BG Group had (b) The fact that the document at issue is a treaty does
to commence a lawsuit in Argentina's courts and wait 18 not make a critical difference to this analysis. A treaty is a
months before seeking arbitration. Thus, the court held, contract between nations, and its interpretation normally
the arbitrators lacked authority to decide the dispute. is a matter of determining the parties' intent. Air France
v. Saks, 470 U.S. 392, 399, 105 S.Ct. 1338, 84 L.Ed.2d
Held : 289. Where, as here, a federal court is asked to interpret
that intent pursuant to a motion to vacate or confirm
1. A court of the United States, in reviewing an arbitration an award made under the Federal Arbitration Act, it
award made under the Treaty, should interpret and apply should normally apply the presumptions supplied by
“threshold” provisions concerning arbitration using the American law. The presence of a condition of “consent” to
framework developed for interpreting similar provisions arbitration in a treaty likely does not warrant abandoning,
in ordinary contracts. Under that framework, the local or increasing the complexity of, the ordinary intent-
litigation requirement is a matter for arbitrators primarily determining framework. See, e.g., Howsam, supra, at 83–
to interpret and apply. *1202 Courts should review their 85, 123 S.Ct. 588 But because this Treaty does notstate
interpretation with deference. Pp. 1206 – 1212. that the local litigation requirement is a condition of
consent, the Court need not resolve what the effect
(a) Were the Treaty an ordinary contract, it would call for of any such language would be. The Court need not
arbitrators primarily to interpret and to apply the local go beyond holding that in the absence of language
litigation provision. In an ordinary contract, the parties in a treaty demonstrating that the parties intended a
In our view, the matter is for the arbitrators, and courts treatment” to investors from the other. Argentina
must review their determinations with deference. denied these claims, while also arguing that the
arbitration tribunal lacked “jurisdiction” to hear the
dispute. App. to Pet. for Cert. 143a–144a, 214a–218a,
224a–232a. According to Argentina, the arbitrators
I
lacked jurisdiction because: (1) BG Group was not a
Treaty-protected “investor”; (2) BG Group's interest in
A MetroGAS was not a Treaty-protected “investment”;
and (3) BG Group initiated arbitration without first
In the early 1990's, the petitioner, BG Group plc, a litigating its claims in Argentina's courts, despite Article
British firm, belonged to a consortium that bought a 8's requirement. Id., at 143a–171a. In Argentina's view,
majority interest in an Argentine entity called MetroGAS. “failure by BG to bring its grievance to Argentine courts
MetroGAS was a gas distribution company created by for 18 months renders its claims in this arbitration
Argentine law in 1992, as a result of the government's inadmissible.” Id., at 162a.
privatization of its state-owned gas utility. Argentina
distributed the utility's assets to new, private companies, In late December 2007, the arbitration panel reached
one of which was MetroGAS. It awarded MetroGAS a final decision. It began by determining that it
a 35–year exclusive license to distribute natural gas in had “jurisdiction” to consider the merits of the
Buenos Aires, and it submitted a controlling interest in
dispute. In support of that determination, the tribunal
the company to international public tender. BG Group's concluded that BG Group was an “investor,” that its
consortium was the successful bidder. interest in MetroGAS amounted to a Treaty-protected
“investment,” and that Argentina's own conduct had
At about the same time, Argentina enacted statutes waived, or excused, BG Group's failure to comply with
providing that its regulators would calculate gas “tariffs” Article 8's local litigation *1205 requirement. Id., at
in U.S. dollars, and that those tariffs would be set at 99a, 145a, 161a, 171a. The panel pointed out that in
levels sufficient to assure gas distribution firms, such as 2002, the President of Argentina had issued a decree
MetroGAS, a reasonable return. staying for 180 days the execution of its courts' final
judgments (and injunctions) in suits claiming harm as a
In 2001 and 2002, Argentina, faced with an economic result of the new economic measures. Id., at 166a–167a.
crisis, enacted new laws. Those laws changed the basis for In addition, Argentina had established a “renegotiation
calculating gas tariffs from dollars to pesos, at a rate of one process” for public service contracts, such as its contract
peso per dollar. The exchange rate at the time was roughly with MetroGAS, to alleviate the negative impact of the
three pesos to the dollar. The result was that MetroGAS' new economic measures. Id., at 129a, 131a. But Argentina
profits were quickly transformed into losses. BG Group had simultaneously barred from participation in that
believed that these changes (and several others) violated “process” firms that were litigating against Argentina in
the Treaty; Argentina believed the contrary. court or in arbitration. Id., at 168a–171a. These measures,
while not making litigation in Argentina's courts literally
impossible, nonetheless “hindered” recourse “to the
B domestic judiciary” to the point where the Treaty
implicitly excused compliance with the local litigation
In 2003, BG Group, invoking Article 8 of the Treaty, requirement. Id., at 165. Requiring a private party in such
sought arbitration. The parties appointed arbitrators; circumstances to seek relief in Argentina's courts for 18
they agreed to site the arbitration in Washington, D.C.; months, the panel concluded, would lead to “absurd and
and between 2004 and 2006, the arbitrators decided unreasonable result[s].” Id., at 166a.
motions, received evidence, and conducted hearings.
BG Group essentially claimed that Argentina's new On the merits, the arbitration panel agreed with Argentina
laws and regulatory practices violated provisions in the that it had not “expropriate[d]” BG Group's investment,
Treaty forbidding the “expropriation” of investments but also found that Argentina had denied BG Group “fair
and requiring that each nation give “fair and equitable
and equitable treatment.” Id., at 222a–223a, 240a–242a. It Investor– *1206 State Arbitration 51–52, 117–120 (2008)
awarded BG Group $185 million in damages. Id., at 297a. (referring to the large number of investment treaties
that provide for arbitration, and explaining that some
also impose prearbitration requirements such as waiting
periods, amicable negotiations, or exhaustion of local
C
remedies).
In March 2008, both sides filed petitions for review in
the District Court for the District of Columbia. BG
Group sought to confirm the award under the New II
York Convention and the Federal Arbitration Act. See
Convention on the Recognition and Enforcement of As we have said, the question before us is who—court or
Foreign Arbitral Awards, Art. IV, June 10, 1958, 21 arbitrator—bears primary responsibility for interpreting
U.S.T. 2519, T.I.A.S. No. 6997 (New York Convention) and applying Article 8's local court litigation provision.
(providing that a party may apply “for recognition Put in terms of standards of judicial review, should a
and enforcement” of an arbitral award subject to the United States court review the arbitrators' interpretation
Convention); 9 U.S.C. §§ 204, 207 (providing that a party and application of the provision de novo, or with the
may move “for an order confirming [an arbitral] award” deference that courts ordinarily show arbitral decisions
in a federal court of the “place designated in the agreement on matters the parties have committed to arbitration?
as the place of arbitration if such place is within the United Compare, e.g., First Options of Chicago, Inc. v. Kaplan,
States”). Argentina sought to vacate the award in part 514 U.S. 938, 942, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)
on the ground that the arbitrators lacked jurisdiction. See (example where a “court makes up its mind about [an
§ 10(a)(4) (a federal court may vacate an arbitral award issue] independently” because the parties did not agree
“where the arbitrators exceeded their powers”). it should be arbitrated), with Oxford Health Plans LLC
v. Sutter, 569 U.S. ––––, ––––, 133 S.Ct. 2064, 2068,
The District Court denied Argentina's claims and 186 L.Ed.2d 113 (2013) (example where a court defers to
confirmed the award. 764 F.Supp.2d 21 (D.D.C.2011); arbitrators because the parties “ ‘bargained for’ ” arbitral
715 F.Supp.2d 108 (D.D.C.2010). But the Court of resolution of the question (quoting Eastern Associated
Appeals for the District of Columbia Circuit reversed. Coal Corp. v. Mine Workers, 531 U.S. 57, 62, 121 S.Ct.
665 F.3d 1363 (2012). In the appeals court's view, the 462, 148 L.Ed.2d 354 (2000))). See also Hall Street
interpretation and application of Article 8's local litigation Associates, L.L.C. v. Mattel, Inc., 552 U.S. 576, 588, 128
requirement was a matter for courts to decide de novo, S.Ct. 1396, 170 L.Ed.2d 254 (2008) (on matters committed
i.e., without deference to the views of the arbitrators. to arbitration, the Federal Arbitration Act provides for
The Court of Appeals then went on to hold that the “just the limited review needed to maintain arbitration's
circumstances did not excuse BG Group's failure to essential virtue of resolving disputes straightaway” and
comply with the requirement. Rather, BG Group must to prevent it from becoming “merely a prelude to a
“commence a lawsuit in Argentina's courts and wait more cumbersome and time-consuming judicial review
eighteen months before filing for arbitration.” Id., at 1373. process” (internal quotation marks omitted)); Eastern
Because BG Group had not done so, the arbitrators lacked Associated Coal Corp., supra, at 62, 121 S.Ct. 462 (where
authority to decide the dispute. And the appeals court parties send a matter to arbitration, a court will set aside
ordered the award vacated. Ibid. the “arbitrator's interpretation of what their agreement
means only in rare instances”).
BG Group filed a petition for certiorari. Given the
importance of the matter for international commercial In answering the question, we shall initially treat the
arbitration, we granted the petition. See, e.g., K. document before us as if it were an ordinary contract
Vandevelde, Bilateral Investment Treaties: History, Policy between private parties. Were that so, we conclude, the
& Interpretation 430–432 (2010) (explaining that dispute- matter would be for the arbitrators. We then ask whether
resolution mechanisms allowing for arbitration are a the fact that the document in question is a treaty makes a
“critical element” of modern day bilateral investment critical difference. We conclude that it does not.
treaties); C. Dugan, D. Wallace, N. Rubins, & B. Sabahi,
[4] On the other hand, courts presume that the parties Moreover, the local litigation requirement is highly
intend arbitrators, not courts, to decide disputes about analogous to procedural provisions that both this Court
the meaning and application of particular procedural and others have found are for arbitrators, not courts,
primarily to interpret and to apply. See *1208 Howsam, matter, a treaty is a contract, though between nations. Its
supra, at 85, 123 S.Ct. 588 (whether a party filed a notice interpretation normally is, like a contract's interpretation,
of arbitration within the time limit provided by the rules a matter of determining the parties' intent. Air France
of the chosen arbitral forum “is a matter presumptively v. Saks, 470 U.S. 392, 399, 105 S.Ct. 1338, 84 L.Ed.2d
for the arbitrator, not for the judge”); John Wiley, supra, 289 (1985) (courts must give “the specific words of the
at 555–557, 84 S.Ct. 909 (same, in respect to a mandatory treaty a meaning consistent with the shared expectations
prearbitration grievance procedure that involved holding of the contracting parties”); Sullivan v. Kidd, 254 U.S.
two conferences). See also Dialysis Access Center, LLC v. 433, 439, 41 S.Ct. 158, 65 L.Ed. 344 (1921) (“[T]reaties
RMS Lifeline, Inc., 638 F.3d 367, 383 (C.A.1 2011) (same, are to be interpreted upon the principles which govern the
in respect to a prearbitration “good faith negotiations” interpretation of contracts in writing between individuals,
requirement); Lumbermens Mut. Cas. Co. v. Broadspire and are to be executed in the utmost good faith, with
Management Servs., Inc., 623 F.3d 476, 481 (C.A.7 a view to making effective the purposes of the high
2010) (same, in respect to a prearbitration filing of a contracting parties”); Wright v. Henkel, 190 U.S. 40,
“Disagreement Notice”). 57, 23 S.Ct. 781, 47 L.Ed. 948 (1903) (“Treaties must
receive a fair interpretation, according to the intention of
Finally, as we later discuss in more detail, see infra, the contracting parties”). And where, as here, a federal
at 1209 – 1210, we can find nothing in Article 8 or court is asked to interpret that intent pursuant to a
elsewhere in the Treaty that might overcome the ordinary motion to vacate or confirm an award made in the
assumption. It nowhere demonstrates a contrary intent as United States under the Federal Arbitration Act, it should
to the delegation of decisional authority between judges normally apply the presumptions supplied by American
and arbitrators. Thus, were the document an ordinary law. See New York Convention, Art. V(1)(e) (award may
contract, it would call for arbitrators primarily to interpret be “set aside or suspended by a competent authority
and to apply the local litigation provision. of the country in which, or under the law of which,
that award was made”); Vandevelde, Bilateral Investment
Treaties, at 446 (arbitral awards pursuant to treaties are
“subject to review under the arbitration law of the state
IV
where the arbitration takes place”); Dugan, Investor–
State Arbitration, at 636 (“[T]he national courts and the
A law of the legal situs of arbitration *1209 control a losing
party's attempt to set aside [an] award”).
We now relax our ordinary contract assumption and
ask whether the fact that the document before us is The Solicitor General does not deny that the presumption
a treaty makes a critical difference to our analysis. discussed in Part III, supra (namely, the presumption
The Solicitor General argues that it should. He says that parties intend procedural preconditions to arbitration
that the local litigation provision may be “a condition to be resolved primarily by arbitrators), applies both to
on the State's consent to enter into an arbitration ordinary contracts and to similar provisions in treaties
agreement.” Brief for United States as Amicus Curiae when those provisions are not also “conditions of
25. He adds that courts should “review de novo the consent.” Brief for United States as Amicus Curiae 25–
arbitral tribunal's resolution of objections based on an 27. And, while we respect the Government's views about
investor's non-compliance” with such a condition. Ibid. the proper interpretation of treaties, e.g., Abbott v. Abbott,
And he recommends that we remand this case to the Court 560 U.S. 1, 15, 130 S.Ct. 1983, 176 L.Ed.2d 789 (2010), we
of Appeals to determine whether the court-exhaustion have been unable to find any other authority or precedent
provision is such a condition. Id., at 31–33. suggesting that the use of the “consent” label in a treaty
should make a critical difference in discerning the parties'
intent about whether courts or arbitrators should interpret
1 and apply the relevant provision.
[6] [7] [8] We do not accept the Solicitor General's We are willing to assume with the Solicitor General
view as applied to the treaty before us. As a general that the appearance of this label in a treaty can
show that the parties, or one of them, thought the press his claim before an “administrative tribunal or
designated matter quite important. But that is unlikely court”), online at www.ustr.gov/trade-agreements/free-
to be conclusive. For parties often submit important trade-agreements/korus-fta/final-text; North American
matters to arbitration. And the word “consent” could Free Trade Agreement, Arts. 1121–1122, Dec. 17, 1992,
be attached to a highly procedural precondition to 32 I. L. M. 643–644 (providing that each party's “[c]onsent
arbitration, such as a waiting period of several months, to [a]rbitration” is conditioned *1210 on fulfillment of
which the parties are unlikely to have intended that certain “procedures,” one of which is a waiver by an
courts apply without saying so. See, e.g., Agreement investor of his right to litigate the claim being arbitrated).
on Encouragement and Reciprocal Protection of See also 2012 U.S. Model Bilateral Investment Treaty,
Investments, Art. 9, Netherlands–Slovenia, Sept. 24, 1996, Art. 26 (entitled “Conditions and limitations on Consent
Netherlands T.S. No. 296 (“Each Contracting Party of Each Party”), online at www.ustr. gov/sites/default/
hereby consents to submit any dispute ... which they files/BIT% 20text% 20for% 220ACIEP% 20Meeting.pdf.
can not [sic ] solve amicably within three months ... And we apply our ordinary presumption that the
to the International Center for Settlement of Disputes interpretation and application of procedural provisions
for settlement by conciliation or arbitration”), online such as the provision before us are primarily for the
at www. rijksoverheid.nl/documenten-en-publicaties/ arbitrators.
besluiten/2006/10/17/slovenia.html (all Internet materials
as visited on Feb. 28, 2014, and available in Clerk of
Court's case file); Agreement for the Promotion and
B
Protection of Investments, Art. 8(1), United Kingdom–
Egypt, June 11, 1975, 14 I.L.M. 1472 (“Each Contracting [10] A treaty may contain evidence that shows the parties
Party hereby consents to submit” a dispute to arbitration had an intent contrary to our ordinary presumptions
if “agreement cannot be reached within three months about who should decide threshold issues related to
between the parties”). While we leave the matter open for arbitration. But the treaty before us does not show
future argument, we do not now see why the presence any such contrary intention. We concede that the local
of the term “consent” in a treaty warrants abandoning, litigation requirement appears in ¶ (1) of Article 8,
or increasing the complexity of, our ordinary intent- while the Article does not mention arbitration until the
determining framework. See Howsam, 537 U.S., at 83–85, subsequent paragraph, ¶ (2). Moreover, a requirement
123 S.Ct. 588; First Options, 514 U.S., at 942–945, 115 that a party exhaust its remedies in a country's domestic
S.Ct. 1920; John Wiley, 376 U.S., at 546–549, 555–559, 84 courts before seeking to arbitrate may seem particularly
S.Ct. 909. important to a country offering protections to foreign
investors. And the placing of an important matter prior
to any mention of arbitration at least arguably suggests
2 an intent by Argentina, the United Kingdom, or both,
to have courts rather than arbitrators apply the litigation
[9] In any event, the treaty before us does not state requirement.
that the local litigation requirement is a “condition
of consent” to arbitration. Thus, we need not, and These considerations, however, are outweighed by others.
do not, go beyond holding that, in the absence of As discussed supra, at 1207 – 1208, the text and structure
explicit language in a treaty demonstrating that the of the litigation requirement set forth in Article 8 make
parties intended a different delegation of authority, our clear that it is a procedural condition precedent to
ordinary interpretive framework applies. We leave for arbitration—a sequential step that a party must follow
another day the question of interpreting treaties that refer before giving notice of arbitration. The Treaty nowhere
to “conditions of consent” explicitly. See, e.g., United says that the provision is to operate as a substantive
States–Korea Free Trade Agreement, Art. 11.18, Feb. condition on the formation of the arbitration contract,
10, 2011 (provision entitled “Conditions and Limitations or that it is a matter of such elevated importance that it
on Consent of Each Party” and providing that “[n]o is to be decided by courts. International arbitrators are
claim may be submitted to arbitration under this Section” likely more familiar than are judges with the expectations
unless the claimant waives in writing “any right” to of foreign investors and recipient nations regarding
the operation of the provision. See Howsam, supra, at While it is possible to read the provision in this way,
85, 123 S.Ct. 588 (comparative institutional expertise doing so is not consistent with our case law interpreting
a factor in determining parties' likely intent). And the similar provisions appearing in ordinary arbitration
Treaty itself authorizes the use of international arbitration contracts. See Part III, supra. Consequently, interpreting
associations, the rules of which provide that arbitrators the provision in such a manner would require us to treat
shall have the authority to interpret provisions of this treaties as warranting a different kind of analysis. And
kind. Art. 8(3) (providing that the parties may refer a the dissent does so without supplying any different set
dispute to the International Centre for the Settlement of of general principles that might guide that analysis. That
Investment Disputes (ICSID) or to arbitrators appointed is a matter of some concern in a world where foreign
pursuant to the arbitration rules of the United Nations investment and related arbitration treaties increasingly
Commission on International Trade Law (UNCITRAL)); matter.
accord, UNCITRAL Arbitration Rules, Art. 23(1) (rev.
2010 ed.) (“[A]rbitral tribunal shall have the power to rule
on its own jurisdiction”); ICSID Convention, Regulations Even were we to ignore our ordinary contract principles,
and Rules, Art. 41(1) (2006 ed.) (“Tribunal shall be the however, we would not take the dissent's view. As we
judge of its own competence”). Cf. Howsam, supra, at 85, have explained, the local litigation provision on its face
123 S.Ct. 588 (giving weight to the parties' incorporation concerns arbitration's timing, not the Treaty's effective
of the National Association of Securities Dealers' Code date; or whom its arbitration clause binds; or whether
of Arbitration into their contract, which provided for that arbitration clause covers a certain kind of dispute.
similar arbitral authority, as evidence that they intended Cf. Granite Rock, 561 U.S., at 296–303, 130 S.Ct. 2847
arbitrators to “interpret and apply the NASD time limit (ratification date); First Options, 514 U.S., at 941, 943–
rule”). 947, 115 S.Ct. 1920 (parties); AT & T Technologies, 475
U.S., at 651, 106 S.Ct. 1415 (kind of dispute). The dissent
The upshot is that our ordinary presumption applies and it points out that Article 8(2)(a) “does not simply require
is not overcome. The interpretation and application of the the parties to wait for 18 months before proceeding
local litigation provision is primarily for the arbitrators. to arbitration,” but instructs them to do something—
Reviewing courts cannot review their decision de novo. to “submit their claims for adjudication.” Post, at 1219.
Rather, they must do so with considerable deference. That is correct. But the something they must do has no
direct impact on the resolution of their dispute, for as
we previously pointed out, Article 8 provides that only
the decision of the arbitrators (who need not give weight
C to the local court's decision) will be “final and binding.”
Art. 8(4). The provision, at base, is a claims-processing
The dissent interprets Article 8's local litigation provision
rule. And the dissent's efforts to imbue it with greater
differently. In its view, *1211 the provision sets forth
significance fall short.
not a condition precedent to arbitration in an already-
The treatises to which the dissent refers also fail to
binding arbitration contract (normally a matter for
support its position. Post, at 1216, 1217 – 1218. Those
arbitrators to interpret), but a substantive condition
authorities primarily describe how an offer to arbitrate
on Argentina's consent to arbitration and thus on the
in an investment treaty can be accepted, such as
contract's formation in the first place (normally something
through an investor's filing of a notice of arbitration.
for courts to interpret). It reads the whole of Article 8 as a
See J. Salacuse, The Law of Investment Treaties 381
“unilateral standing offer” to arbitrate that Argentina and
(2010); Schreuer, Consent to Arbitration, in The Oxford
the United Kingdom each extends to investors of the other
Handbook of International Investment Law 830, 836–
country. Post, at 1219 – 1220 (opinion of ROBERTS, C.
837 (P. Muchlinski, F. Ortino, & C. Schreuer eds. 2008);
J.). And it says that the local litigation requirement is one
Dugan, Investor–State Arbitration, at 221–222. They do
of the essential “ ‘terms in which the offer was made.’ ”
not endorse the dissent's reading of the local litigation
Post, at 1218 (quoting Eliason v. Henshaw, 4 Wheat. 225,
provision or of provisions like it.
228, 4 L.Ed. 556 (1819); emphasis deleted).
AnimalFeeds Int'l Corp., 559 U.S. 662, 671, 130 S.Ct. 1758, 537 U.S. 79, 84, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002).
176 L.Ed.2d 605 (2010) (providing that it is only when And a party plainly cannot be bound by an arbitration
an arbitrator engages in such activity that “ ‘his decision clause to which it does not consent. See Granite Rock Co. v.
may be unenforceable’ ” (quoting Major League Baseball Teamsters, 561 U.S. 287, 299, 130 S.Ct. 2847, 177 L.Ed.2d
Players Assn. v. Garvey, 532 U.S. 504, 509, 121 S.Ct. 1724, 567 (2010) (“Arbitration is strictly ‘a matter of consent’
149 L.Ed.2d 740 (2001) (per curiam ))). ” (quoting Volt Information Sciences, Inc. v. Board of
Trustees of Leland Stanford Junior Univ., 489 U.S. 468,
Consequently, we conclude that the arbitrators' 479, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989))).
jurisdictional determinations are lawful. The judgment of
the Court of Appeals to the contrary is reversed. Consent is especially salient in the context of a
bilateral investment treaty, where the treaty is not
It is so ordered. an already agreed-upon arbitration provision between
known parties, but rather a nation state's standing
offer to arbitrate with an amorphous class of private
investors. In this setting, a *1214 nation-state might
Justice SOTOMAYOR, concurring in part.
reasonably wish to condition its consent to arbitrate with
I agree with the Court that the local litigation requirement
a previously unspecified investor counterparty on the
at issue in this case is a procedural precondition to
investor's compliance with a requirement that might be
arbitration (which the arbitrators are to interpret), not
deemed “purely procedural” in the ordinary commercial
a condition on Argentina's consent to arbitrate (which
context, ante, at 1207 – 1208. Moreover, as THE
a court would review de novo ). Ante, at 1207, 1210.
CHIEF JUSTICE notes, “[i]t is no trifling matter” for
Importantly, in reaching this conclusion, the Court
a sovereign nation to “subject itself to international
acknowledges that “the treaty before us does not state that
arbitration” proceedings, so we should “not presume that
the local litigation requirement is a ‘condition of consent’
any country ... takes that step lightly.” Post, at 1219
to arbitration.” Ante, at 1209. The Court thus wisely
(dissenting opinion).
“leave[s] for another day the question of interpreting
treaties that refer to ‘conditions of consent’ explicitly.”
Consider, for example, the United States–Korea Free
Ibid. I join the Court's opinion on the understanding that
Trade Agreement, which as the Court recognizes, ante,
it does not, in fact, decide this issue.
at 1209 – 1210, includes a provision explicitly entitled
“Conditions and Limitations on Consent of Each Party.”
I write separately because, in the absence of this express
Art. 11.18, Feb. 10, 2011. That provision declares that
reservation, the opinion might be construed otherwise.
“[n]o claim may be submitted to arbitration” unless a
The Court appears to suggest in dictum that a decision
claimant first waives its “right to initiate or continue
by treaty parties to describe a condition as one on their
before any administrative tribunal or court ... any
consent to arbitrate “is unlikely to be conclusive” in
proceeding with respect to any measure alleged to
deciding whether the parties intended for the condition
constitute a breach” under another provision of the
to be resolved by a court. Ante, at 1208 – 1209. Because
treaty. Ibid. If this waiver condition were to appear
this suggestion is unnecessary to decide the case and is in
without the “consent” label in a binding arbitration
tension with the Court's explicit reservation of the issue,
agreement between two commercial parties, one might
I join the opinion of the Court with the exception of Part
characterize it as the kind of procedural “ ‘condition
IV–A–1.
precedent to arbitrability’ ” that we presume parties intend
for arbitrators to decide. Howsam, 537 U.S., at 85, 123
The Court's dictum on this point is not only unnecessary;
S.Ct. 588. But where the waiver requirement is expressly
it may also be incorrect. It is far from clear that a
denominated a “condition on consent” in an international
treaty's express use of the term “consent” to describe a
investment treaty, the label could well be critical in
precondition to arbitration should not be conclusive in
determining whether the states party to the treaty intended
the analysis. We have held, for instance, that “a gateway
the condition to be reviewed by a court. After all, a dispute
dispute about whether the parties are bound by a given
as to consent is “the starkest form of the question whether
arbitration clause raises a ‘question of arbitrability’ for a
the parties have agreed to arbitrate.” Post, at 1222.
court to decide.” Howsam v. Dean Witter Reynolds, Inc.,
And we ordinarily presume that parties intend for courts It is instead a treaty between two sovereign nations: the
to decide such questions because otherwise arbitrators United Kingdom and Argentina. No investor is a party
might “force unwilling parties to arbitrate a matter they to the agreement. Having elided this rather important fact
reasonably would have thought a judge ... would decide.” for much of its analysis, the majority finally “relax[es] [its]
First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 945, ordinary contract assumption and ask[s] whether the fact
115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). that the document before us is a treaty makes a critical
difference to [its] analysis.” Ante, at 1208. It should come
Accordingly, if the local litigation requirement at issue as no surprise that, after starting down the wrong road,
here were labeled a condition on the treaty parties' the majority ends up at the wrong place.
“consent” to arbitrate, that would in my view change the
analysis as to whether the parties intended the requirement I would start with the document that is before us and
to be interpreted by a court or an arbitrator. As it take it on its own terms. That document is a bilateral
is, however, all parties agree that the local litigation investment treaty between the United Kingdom and
requirement is not so denominated. See Agreement for Argentina, in which Argentina agreed to take steps to
the Promotion and Protection of Investments, Art. 8(2), encourage U.K. investors to invest within its borders (and
Dec. 11, 1990, 1765 U.N.T.S. 38. Nor is there compelling the United Kingdom agreed to do the same with respect
reason to suppose the parties silently intended to make it to Argentine investors). Agreement for the Promotion
a condition on their consent to arbitrate, given that a local and Protection of Investments, Dec. 11, 1990, 1765
court's decision is of no legal significance under the treaty, U.N.T.S. 33 (Treaty). The Treaty does indeed contain
ante, at 1207 – 1208, and given that the entire purpose of a completed agreement for arbitration—between the
bilateral investment agreements is to “reliev[e] investors of signatory countries. Art. 9. The Treaty also includes, in
any concern that the courts of host countries will be unable Article 8, certain provisions for resolving any disputes that
or unwilling to provide justice in a dispute between a might arise between a signatory country and an investor,
foreigner and their own government,” Brief for Professors who is not a party to the agreement.
and Practitioners of Arbitration Law as Amici Curiae 6.
Moreover, Argentina's conduct confirms that the local One such provision—completely ignored by the Court in
litigation requirement is not a condition on consent, for its analysis—specifies that disputes may be resolved by
rather than objecting to arbitration on the ground that arbitration when the host country and an investor “have
there was no binding arbitration agreement to begin with, so agreed.” Art. 8(2)(b), 1765 U.N.T.S. 38. No one doubts
Argentina actively participated in the constitution of the that, as is the normal rule, whether there was such an
arbitral panel and in the proceedings that followed. See agreement is for a court, not an arbitrator, *1216 to
Eastern Airlines, Inc. v. Floyd, 499 U.S. 530, 546, 111 S.Ct. decide. See First Options of Chicago, Inc. v. Kaplan, 514
1489, 113 L.Ed.2d 569 (1991) (treaty interpretation can be U.S. 938, 943–945, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).
informed by parties' postenactment conduct). 1
When there is no express agreement between the host
*1215 In light of these many indicators that Argentina country and an investor, they must form an agreement
and the United Kingdom did not intend the local in another way, before an obligation to arbitrate arises.
litigation requirement to be a condition on their consent The Treaty by itself cannot constitute an agreement to
to arbitrate, and on the understanding that the Court does arbitrate with an investor. How could it? No investor is a
not pass on the weight courts should attach to a treaty's party to that Treaty. Something else must happen to create
use of the term “consent,” I concur in the Court's opinion. an agreement where there was none before. Article 8(2)
(a) makes clear what that something is: An investor must
submit his dispute to the courts of the host country. After
18 months, or an unsatisfactory decision, the investor may
Chief Justice ROBERTS, with whom Justice KENNEDY then request arbitration.
joins, dissenting.
The Court begins by deciding a different case, “initially Submitting the dispute to the courts is thus a condition
treat[ing] the document before us as if it were an ordinary to the formation of an agreement, not simply a matter
contract between private parties.” Ante, at 1206. The of performing an existing agreement. Article 8(2)(a)
“document before us,” of course, is nothing of the sort.
constitutes in effect a unilateral offer to arbitrate, which anywhere in the world, solely at the option of private
an investor may accept by complying with its terms. To parties.
be sure, the local litigation requirement might not be
absolute. In particular, an investor might argue that it
was an implicit aspect of the unilateral offer that he be
A
afforded a reasonable opportunity to submit his dispute to
the local courts. Even then, however, the question would The majority focuses throughout its opinion on what
remain whether the investor has managed to form an it calls the Treaty's “arbitration clause,” ante, at 1203,
arbitration agreement with the host country pursuant to but that provision does not stand alone. Rather, it is
Article 8(2)(a). That question under Article 8(2)(a) is— only part—and a subordinate part at *1217 that—of
like the same question under Article 8(2)(b)—for a court, a broader dispute resolution provision. Article 8 is thus
not an arbitrator, to decide. I respectfully dissent from the entitled “Settlement of Disputes Between an Investor
Court's contrary conclusion. and the Host State,” and it opens without so much
as mentioning arbitration. 1765 U.N.T.S. 37. Instead
it initially directs any disputing investor and signatory
I country (what the Treaty calls a “Contracting Party”)
to court. When “an investor of one Contracting Party
The majority acknowledges—but fails to heed—“the first and the other Contracting Party” have an investment-
principle that underscores all of our arbitration decisions: related dispute that has “not been amicably settled,” the
Arbitration is strictly ‘a matter of consent.’ ” Granite Rock Treaty commands that the dispute “shall be submitted,
Co. v. Teamsters, 561 U.S. 287, 299, 130 S.Ct. 2847, 177 at the request of one of the Parties to the dispute, to
L.Ed.2d 567 (2010) (quoting Volt Information Sciences, the decision of the competent tribunal of the Contracting
Inc. v. Board of Trustees of Leland Stanford Junior Univ., Party in whose territory the investment was made.” Art.
489 U.S. 468, 479, 109 S.Ct. 1248, 103 L.Ed.2d 488 8(1), id., at 37–38. (emphasis added). This provision could
(1989)); see ante, at 1206 – 1207. We have accordingly not be clearer: Before taking any other steps, an aggrieved
held that arbitration “is a way to resolve those disputes investor must submit its dispute with a Contracting Party
—but only those disputes—that the parties have agreed to that Contracting Party's own courts.
to submit to arbitration.” First Options of Chicago, Inc.,
supra, at 943, 115 S.Ct. 1920. The same “first principle” There are two routes to arbitration in Article 8(2)(a),
underlies arbitration pursuant to bilateral investment and each passes through a Contracting Party's domestic
treaties. See C. Dugan, D. Wallace, N. Rubins, & B. courts. That is, the Treaty's arbitration provisions in
Sabahi, Investor–State Arbitration 219 (2008) (Dugan); Article 8(2)(a) presuppose that the parties have complied
J. Salacuse, The Law of Investment Treaties 385 (2010); with the local litigation provision in Article 8(1).
K. Vandevelde, Bilateral Investment Treaties: History, Specifically, a party may request arbitration only (1) “after
Policy, and Interpretation 433 (2010). So only if Argentina a period of eighteen months has elapsed from the moment
agreed with BG Group to have an arbitrator resolve their when the dispute was submitted to the competent tribunal
dispute did the arbitrator in this case have any authority of the Contracting Party in whose territory the investment
over the parties. was made” and “the said tribunal has not given its final
decision,” Art. 8(2)(a)(i), id., at 38, or (2) “where the final
The majority opinion nowhere explains when and how decision of the aforementioned tribunal has been made
Argentina agreed with BG Group to submit to arbitration. but the Parties are still in dispute,” Art. 8(2)(a)(ii), ibid.
Instead, the majority seems to assume that, in agreeing Either way, the obligation to arbitrate does not arise until
with the United Kingdom to adopt Article 8 along with the the Contracting Party's courts have had a first crack at the
rest of the Treaty, Argentina thereby formed an agreement dispute.
with all potential U.K. investors (including BG Group) to
submit all investment-related disputes to arbitration. That Article 8 provides a third route to arbitration in paragraph
misunderstands Article 8 and trivializes the significance 8(2)(b)—namely, “where the Contracting Party and the
to a sovereign nation of subjecting itself to arbitration investor of the other Contracting Party have so agreed.”
Ibid. In contrast to the two routes in Article 8(2)(a),
this one does not refer to the local litigation provision. accept Argentina's offer, an investor must therefore first
That omission is significant. It makes clear that an litigate its dispute in Argentina's courts—either to a “final
investor can bypass local litigation only by obtaining the decision” or for 18 months, whichever comes first. Unless
Contracting Party's explicit agreement to proceed directly the investor does so (or, perhaps, establishes a valid excuse
to arbitration. Short of that, an investor has no choice for failing to do so, as discussed below, see infra, at
but to litigate in the Contracting Party's courts for at least 17), it has not accepted the terms of Argentina's offer
some period. to arbitrate, and thus has not formed an arbitration
agreement with Argentina. 1
The structure of Article 8 confirms that the routes
to arbitration in paragraph (2)(a) are just as much Although the majority suggests that the local litigation
about eliciting a Contracting Party's consent to arbitrate requirement would not be a “condition of consent” even
as the route in paragraph 8(2)(b). Under Article 8(2) if the Treaty explicitly called it one, the Court's holding is
(b), the requisite consent is demonstrated by a specific limited to treaties that contain no such clear statement. See
agreement. Under Article 8(2)(a), the requisite consent ante, at 1208 – 1210. But there is no reason to think that
is demonstrated by compliance with the requirement to such a clear statement should be required, for we generally
resort to a country's local courts. do not require “talismanic words” in treaties. Medellín v.
Texas, 552 U.S. 491, 521, 128 S.Ct. 1346, 170 L.Ed.2d
Whereas Article 8(2)(a) is part of a completed agreement 190 (2008). Indeed, another arbitral tribunal concluded
between Argentina and the United Kingdom, it that the local litigation requirement was a condition
constitutes only a unilateral standing offer by Argentina on Argentina's consent to arbitrate despite the absence
with respect to U.K. investors—an offer to submit to of the sort of clear statement apparently contemplated
arbitration where certain conditions are met. That is how by the majority. See ICS Inspection & Control Servs.
scholars understand arbitration provisions in bilateral Ltd. v. Argentine Republic, PCA Case No. 2010–9,
investment treaties in general. See Dugan 221; Salacuse Award on Jurisdiction, ¶ 262 (Feb. 10, 2012). Still other
381; Brief for Practitioners and Professors of International tribunals have reached the same conclusion with regard to
Arbitration Law as Amici Curiae 4. And it is how BG similar litigation requirements in other Argentine bilateral
Group itself describes this investment treaty in particular. investment treaties. See Daimler Financial Servs. AG v.
See Brief for Petitioner 43 (the Treaty is a “standing offer” Argentine Republic, ICSID Case No. ARB/05/1, Award,
by Argentina “to arbitrate”); Reply Brief 9 (same). ¶¶ 193, 194 (Aug. 22, 2012); Wintershall Aktiengesellschaft
v. Argentine Republic, ICSID Case No. ARB/04/14,
An offer must be accepted for a legally binding contract Award, ¶ 116 (Dec. 8, 2008).
to be formed. And it is an “undeniable principle of
the law of contracts, that an offer ... by one person to In the face of this authority, the majority quotes a treatise
another, imposes no obligation upon the former, until for the proposition that “ ‘[a] substantial body of arbitral
it is accepted by the latter, *1218 according to the authority from investor-state disputes concludes that
terms in which the offer was made. Any qualification compliance with procedural mechanisms in an arbitration
of, or departure from, those terms, invalidates the agreement (or bilateral investment treaty) is not ordinarily
offer.” Eliason v. Henshaw, 4 Wheat. 225, 228, 4 L.Ed. a jurisdictional prerequisite.’ ” Ante, at 1211 (quoting
556 (1819) (emphasis added). This principle applies to 1 G. Born, International Commercial Arbitration 842
international arbitration agreements just as it does to (2009)). But that simply restates the question. The whole
domestic commercial contracts. See Dugan 221–222; issue is whether the local litigation requirement is a
Salacuse 381; Schreuer, Consent to Arbitration, in The mere “procedural mechanism” or instead a condition on
Oxford Handbook of International Investment Law 830, Argentina's consent to arbitrate.
836–837 (P. Muchlinski, F. Ortino, & C. Schreuer eds.
2008). BG Group concedes that other terms of Article 8(1)
constitute conditions on Argentina's consent to arbitrate,
By incorporating the local litigation provision in Article even though they are not expressly labeled as such. See Tr.
8(1), paragraph 8(2)(a) establishes that provision as a of Oral Arg. 57 (“You have to be a U.K. investor, you
term of Argentina's unilateral offer to arbitrate. To have to have a treaty claim, you have to be suing another
party to the treaty. And if those aren't true, then there is The law of international arbitration and domestic contract
no arbitration agreement ” (emphasis added)). The Court law lead to the same conclusion: Because paragraph (2)(a)
does not explain why the only other term—the litigation of Article 8 constitutes only a unilateral standing offer by
requirement—should be viewed differently. the Contracting Parties to each other's investors to submit
to arbitration under certain conditions, an investor cannot
*1219 Nor does the majority's reading accord with form an arbitration agreement with a Contracting Party
ordinary contract law, which treats language such as the under the Treaty until the investor accepts the actual terms
word “after” in Article 8(2)(a)(i) as creating conditions, of the Contracting Party's offer. Absent a valid excuse,
even though such language may not constitute a “clear that means litigating its dispute in the Contracting Party's
statement.” See 13 R. Lord, Williston on Contracts § courts to a “final decision” or, barring that, for at least 18
38:16 (4th ed. 2013). The majority seems to regard the months.
local litigation requirement as a condition precedent to
performance of the contract, rather than a condition
precedent to formation of the contract. Ante, at 1207
B
– 1208; see 13 Lord §§ 38:4, 38:7. But that cannot be.
Prior to the fulfillment of the local litigation requirement, The nature of the obligations a sovereign incurs in
there was no contract between Argentina and BG Group agreeing to arbitrate with a private party confirms that the
to be performed. The Treaty is not such an agreement, local litigation requirement is a condition on a signatory
since BG Group is of course not a party to the Treaty. country's consent to arbitrate, and not merely a condition
Neither the majority nor BG Group contends that the on performance of a pre-existing arbitration agreement.
agreement is under Article 8(2)(b), the provision that There are good reasons for any sovereign to condition its
applies “where the Contracting Party and the investor consent to arbitrate disputes on investors' first litigating
of the other Contracting Party have so agreed.” An their claims in the country's own courts for a specified
arbitration agreement must be formed, and Article 8(2)(a) period. It is no trifling matter for a sovereign nation
spells out how an investor may do that: by submitting the to subject itself to suit by private parties; we do not
dispute to local courts for 18 months or until a decision presume that any country—including our own—takes
is rendered. that step lightly. Cf. United States v. Bormes, 568 U.S.
––––, ––––, 133 S.Ct. 12, 16, 184 L.Ed.2d 317 (2012)
Moreover, the Treaty's local litigation requirement (Congress must “unequivocally express[ ]” its intent to
certainly does not resemble “time limits, notice, laches, waive the sovereign immunity of the United *1220
estoppel,” or the other kinds of provisions that are States (quoting United States v. Nordic Village, Inc., 503
typically treated as conditions on the performance of U.S. 30, 33, 112 S.Ct. 1011, 117 L.Ed.2d 181 (1992);
an arbitration agreement, rather than prerequisites to internal quotation marks omitted)). But even where a
formation. Revised Uniform Arbitration Act of 2000 § sovereign nation has subjected itself to suit in its own
6(c), Comment 2, 7 U.L.A. 26 (2009). Unlike a time courts, it is quite another thing for it to subject itself
limit for submitting a claim to arbitration, see Howsam to international arbitration. Indeed, “[g]ranting a private
v. Dean Witter Reynolds, Inc., 537 U.S. 79, 85, 123 S.Ct. party the right to bring an action against a sovereign
588, 154 L.Ed.2d 491 (2002), the litigation requirement state in an international tribunal regarding an investment
does not simply regulate the timing of arbitration. As the dispute is a revolutionary innovation” whose “uniqueness
majority recognizes, ante, at 1210 – 1212, the provision and power should not be over-looked.” Salacuse 137. That
does not simply require the parties to wait for 18 months is so because of both the procedure and substance of
before proceeding to arbitration, but instead requires investor-state arbitration.
them to submit their claims for adjudication during that
period. And unlike a mandatory pre-arbitration grievance Procedurally, paragraph (3) of Article 8 designates the
procedure, see John Wiley & Sons, Inc. v. Livingston, 376 Arbitration Rules of the United Nations Commission on
U.S. 543, 556–559, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964), International Trade Law (UNCITRAL) as the default
the litigation requirement sends the parties to court—and rules governing the arbitration. Those rules authorize the
not just any court, but a court of the host country. Secretary–General of the Permanent Court of Arbitration
at The Hague to designate an “appointing authority” who
—absent agreement by the parties—can select the sole particular foreign investors to be different in kind and to
arbitrator (or, in the case of a three-member tribunal, require special limitations on its use.
the presiding arbitrator, where the arbitrators nominated
by each of the parties cannot agree on a presiding The majority regards the local litigation requirement as
arbitrator). UNCITRAL Arbitration Rules, Arts. 6, 8–9 toothless simply because *1221 the Treaty does not
(rev. 2010 ed.). The arbitrators, in turn, select the site of require an arbitrator to “give substantive weight to
the arbitration (again, absent an agreement by the parties) the local court's determinations on the matters at issue
and enjoy broad discretion in conducting the proceedings. between the parties,” ante, at 1207; see also ante, at 1207,
Arts. 18, 17(1). but instead provides that “[t]he arbitration decision shall
be final and binding on both Parties,” Art. 8(4), 1765
Substantively, by acquiescing to arbitration, a state U.N.T.S. 38. While it is true that an arbitrator need not
permits private adjudicators to review its public policies defer to an Argentine court's judgment in an investor
and effectively annul the authoritative acts of its dispute, that does not deprive the litigation requirement
legislature, executive, and judiciary. See Salacuse 355; of practical import. Most significant, the Treaty provides
G. Van Harten, Investment Treaty Arbitration and that an “arbitral tribunal shall decide the dispute in
Public Law 65–67 (2007). Consider the dispute that accordance with ... the laws of the Contracting Party
gave rise to this case: Before the arbitral tribunal, involved in the dispute.” Art. 8(4), ibid. I doubt that a
BG Group challenged multiple sovereign acts of tribunal would give no weight to an Argentine court's
the Argentine Government taken after the Argentine authoritative construction of Argentine law, rendered in
economy collapsed in 2001—in particular, Emergency the same dispute, just because it might not be formally
Law 25,561, which converted dollar-denominated tariffs bound to adopt that interpretation.
into peso-denominated tariffs at a rate of one Argentine
peso to one U.S. dollar; Resolution 308/02 and Decree The local litigation requirement can also help to narrow
1090/02, which established a renegotiation process for the range of issues that remain in controversy by the time
public service contracts; and Decree 214/02, which stayed a dispute reaches arbitration. It might even induce the
for 180 days injunctions and the execution of final parties to settle along the way. And of course the investor
judgments in lawsuits challenging the effects of the might prevail, which could likewise obviate the need for
Emergency Law. Indeed, in awarding damages to BG arbitration. Cf. McKart v. United States, 395 U.S. 185,
Group, the tribunal held that the first three of these 195, 89 S.Ct. 1657, 23 L.Ed.2d 194 (1969).
enactments violated Article 2 of the Treaty. See App. to
Pet. for Cert. 241a–242a, 305a. None of this should be interpreted as defending
Argentina's history when it comes to international
Perhaps they did, but that is not the issue. Under Article investment. That history may prompt doubt that requiring
8, a Contracting Party grants to private adjudicators not an investor to resort to that country's courts in the first
necessarily of its own choosing, who can meet literally instance will be of any use. But that is not the question.
anywhere in the world, a power it typically reserves to its Argentina and the United Kingdom reached agreement on
own courts, if it grants it at all: the power to sit in judgment the term at issue. The question can therefore be rephrased
on its sovereign acts. Given these stakes, one would as whether it makes sense for either Contracting Party
expect the United Kingdom and Argentina to have taken to insist on resort to its courts before being compelled
particular care in specifying the limited circumstances in to arbitrate anywhere in the world before arbitrators not
which foreign investors can trigger the Treaty's arbitration of its choosing. The foregoing reasons may seem more
process. And that is precisely what they did in Article 8(2) compelling when viewed apart from the particular episode
(a), requiring investors to afford a country's own courts before us.
an initial opportunity to review the country's enactments
and assess the country's compliance with its international
obligations. Contrast this with Article 9, which provides
II
for arbitration between the signatory countries of disputes
under the Treaty without any preconditions. Argentina Given that the Treaty's local litigation requirement is a
and the United Kingdom considered arbitration with condition on consent to arbitrate, it follows that whether
an investor has complied with that requirement is a Argentina and BG Group at all. Cf. ante, at 1213 – 1214
question a court must decide de novo, rather than an (SOTOMAYOR, J., concurring in part) (“Consent is
issue for the arbitrator to decide subject only to the most especially salient in the context of a bilateral investment
deferential judicial review. See, e.g., Adams v. Suozzi, 433 treaty, where the treaty is not an already agreed-upon
F.3d 220, 226–228 (C.A.2 2005) (holding that compliance arbitration provision between known parties”).
with a condition on formation of an arbitration agreement
is for a court, rather than an arbitrator, to determine). The The majority never even starts down this path. Instead,
logic is simple: Because an arbitrator's authority depends it preempts the whole inquiry by concluding that the
on the consent of the parties, the arbitrator should not as a local litigation requirement is the kind of “procedural
rule be able to decide for himself whether the parties have precondition” that parties typically expect an arbitrator to
in fact consented. Where the consent of the parties is in enforce. Ante, at 1207 – 1208. But as explained, the local
question, “reference of the gateway dispute to the court litigation requirement does not resemble the requirements
avoids the risk of forcing parties to arbitrate a matter that we have previously deemed presumptively procedural. See
they may well not have agreed to arbitrate.” Howsam, 537 supra, at 1219. It does not merely regulate the timing of
U.S., at 83–84, 123 S.Ct. 588. arbitration. Nor does it send the parties to non-judicial
forms of dispute resolution.
This principle is at the core of our arbitration precedents.
See Granite Rock Co., 561 U.S., at 299, 130 S.Ct. More importantly, all of the cases cited by the majority
2847 (questions concerning “the formation of the parties' as examples of procedural provisions involve commercial
arbitration agreement” are for a court to decide de contracts between two private parties. See ante, at 1207
novo ). The same principle is also embedded in the – 1208. None of them—not a single one—involves an
law of international commercial arbitration. 2 Born agreement between sovereigns or an agreement to which
2792 (“[W]here one party denies ever having made an the person seeking to compel arbitration is not even a
arbitration agreement or challenges the validity of any party. The Treaty, of course, is both of those things.
such agreement, ... the possibility of de novo judicial
review of any jurisdictional award in an annulment action The majority suggests that I am applying “a different
is logically necessary”). See also Restatement (Third) kind of analysis” from that governing private commercial
of U.S. Law of International Commercial Arbitration contracts, just because what is at issue is a treaty. Ante,
*1222 § 4–12(d)(1) (Tent. Draft No. 2, Apr. 16, 2012) (“a at 1210 – 1211. That is not so: The key point, which the
court determines de novo ... the existence of the arbitration majority never addresses, is that there is no completed
agreement”). agreement whatsoever between Argentina and BG Group.
An agreement must be formed, and whether that has
Indeed, the question in this case—whether BG Group happened is—as it is in the private commercial contract
accepted the terms of Argentina's offer to arbitrate— context—an issue for a court to decide. See supra, at 1221
presents an issue of contract formation, which is the – 1222.
starkest form of the question whether the parties have
agreed to arbitrate. In Howsam v. Dean Witter Reynolds, The distinction between questions concerning consent to
Inc., we gave two examples of questions going to consent, arbitrate and mere procedural requirements under an
which are for courts to decide: “whether the parties existing arbitration agreement can at times seem elusive.
are bound by a given arbitration clause” and “whether Even the most mundane procedural requirement can be
an arbitration clause in a concededly binding contract recast as a condition on consent as a matter of technical
applies to a particular type of controversy.” 537 U.S., logic. But it should be clear by now that the Treaty's
at 84, 123 S.Ct. 588. In both examples, there is at least local litigation requirement is not a mere formality—not
a putative arbitration agreement between the parties to in Buenos Aires, not in London. And while it is true that
the dispute. The only question is whether the agreement “parties often submit important matters to arbitration,”
is truly binding or whether it covers the specific dispute. ante, at 1209, our precedents presume that parties do not
Here, by contrast, the question is whether the arbitration submit to arbitration the most important matter of all:
clause in the Treaty between the United Kingdom and whether they are subject to an agreement to arbitrate in
Argentina gives rise to an arbitration agreement between the first place.
Although the Court of Appeals got there by a slightly 134 S.Ct. 1198, 188 L.Ed.2d 220, 82 USLW 4166, 14 Cal.
different route, it correctly concluded that a court Daily Op. Serv. 2337, 2014 Daily Journal D.A.R. 2692, 24
must decide questions concerning the interpretation and Fla. L. Weekly Fed. S 599
application of the local litigation requirement de novo.
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50
L.Ed. 499.
1 The dissent discounts the significance of Argentina's conduct on the ground that Argentina “object[ed] to the [arbitral]
tribunal's jurisdiction to hear the dispute.” Post, at 1223, n. 2. But there is a difference between arguing that a party has
failed to comply with a procedural condition in a binding arbitration agreement and arguing that noncompliance with the
condition negates the existence of consent to arbitrate in the first place. Argentina points to no evidence that its objection
was of the consent variety. This omission is notable because Argentina knew how to phrase its arguments before the
arbitrators in terms of consent; it argued separately that it had not consented to arbitration with BG Group on the ground
that BG was not a party to the license underlying the dispute. See App. to Pet. for Cert. 182a–186a. First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), is not to the contrary, as that case held
that “arguing the arbitrability issue to an arbitrator” did not constitute “clea[r] and unmistakabl[e]” evidence sufficient to
override an indisputably applicable presumption that a court was to decide whether the parties had agreed to arbitration.
Id., at 944, 946, 115 S.Ct. 1920. The question here, by contrast, is whether that presumption attaches to begin with—
that is, whether the local litigation requirement was a condition on Argentina's consent to arbitrate (which would trigger
the presumption) or a procedural condition in an already binding arbitration agreement (which would not). That Argentina
apparently took the latter position in arbitration is surely relevant evidence that the condition was, in fact, not one on
its consent.
1 To be clear, the only question is whether BG Group formed an arbitration agreement with Argentina. To say that BG
Group never formed such an agreement is not to call into question the validity of its various commercial agreements
with Argentina.
2 Justice SOTOMAYOR contends that “Argentina's conduct confirms that the local litigation requirement is not a condition
on consent, for rather than objecting to arbitration on the ground that there was no binding arbitration agreement to begin
with, Argentina actively participated in the constitution of the arbitral panel and in the proceedings that followed.” Ante,
at 1214 (opinion concurring in part). But as the arbitral tribunal itself recognized, Argentina did object to the tribunal's
jurisdiction to hear the dispute. App. to Pet. for Cert. 99a, 134a, 143a, 161a–163a. And we have held that “merely arguing
the arbitrability issue to an arbitrator”—say, by “filing with the arbitrators a written memorandum objecting to the arbitrators'
jurisdiction”—“does not indicate a clear willingness to arbitrate that issue, i.e., a willingness to be effectively bound by
the arbitrator's decision on that point.” First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 946, 115 S.Ct. 1920, 131
L.Ed.2d 985 (1995). The concurrence contends that Argentina “apparently” argued its jurisdictional objection in terms
of procedure rather than consent, ante, at 1205, n., but the one piece of evidence cited—a negative inference from the
arbitrator's characterization of Argentina's argument on a subsidiary issue—hardly suffices to distinguish First Options.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[1] omission of identity of arbitrator and rules of [2] Alternative Dispute Resolution
arbitration did not render arbitration agreement invalid; Evidence
The party seeking to avoid arbitration bears
[2] arbitration agreement was not invalid based on the burden of proving its defenses against
purchasers' unsupported assertion that it gave corporation enforcing an otherwise valid arbitration
exclusive authority to select arbitrators; provision.
[3] denial of motion to compel was abuse of discretion to Cases that cite this headnote
extent that it was based on finding that agreement was
procedurally unconscionable due to “gross disparity”;
[3] Alternative Dispute Resolution
Validity
[4] agreement was not unconscionable based on purely
speculative assertions by purchasers; Arbitration agreements are enforceable only
if they meet the requirements of the general
[5] to extent that purchasers complained of “General contract law of the applicable state.
Conditions” of warranty, such matters were for arbitrator
Cases that cite this headnote
to address in first instance;
[6] attorney fees provision of agreement was [4] Alternative Dispute Resolution
unenforceable with respect to claims for breach of What law governs
contract and violations of Texas Deceptive Trade
absence of such information did not render and presented no evidence in support of such
agreement invalid. claim.
Cases that cite this headnote Cases that cite this headnote
they “began to notice serious defects” in their home, argued “[t]his entire arbitration clause is unconscionable,
including “significant foundation problems.” According and not capable of bits and pieces being severed.”
to appellees, after Regent “refused to assist” them, they
made a claim under the Warranty, which claim was Further, appellees contended “the unconscionability
rejected by BBWG. Appellees' petition asserted a cause of this clause is even more evident when it is
of action against BBWG for breach of contract based on taken into consideration with other terms in the
BBWG's “failing to accept Plaintiffs' valid and enforceable Warranty that dictate the terms of the arbitration.”
warranty claim.” Further, appellees asserted they “are Specifically, appellees complained of two provisions in
entitled to recover reasonable and necessary attorneys' the “General Conditions” section of the Warranty that
fees” as a result of BBWG's breach *474 of contract follows the Warranty's arbitration provision described
pursuant to section 38.001 of the Texas Civil Practice and above. 3 Appellees contended those two “General *475
Remedies Code. See TEX. CIV. PRAC. & REM. CODE Conditions” (1) improperly “limited Plaintiffs' claims to
ANN. § 38.001 (West 2015). only those dictated in the Warranty, expressly stating
regardless of the law” and (2) attempted to “eliminate”
BBWG filed a general denial answer. Also, BBWG their right to seek reimbursement of their attorney's fees
asserted (1) affirmative defenses in which it contended, in pursuant to the civil practice and remedies code and
part, that plaintiffs had committed a “material breach” the Texas Deceptive Trade Practices Act (“DTPA”).
of the Warranty and “failed to satisfy all conditions According to appellees, the “entire arbitration clause”
precedent” because they “failed to comply with the dispute and the two “additional conditions” in the Warranty that
process required by the Warranty” and (2) a claim for are “not part of the arbitration clause, but [apply] to the
“attorney's fees ... incurred in arbitration and in any arbitration clause,” are “grossly one-sided” and “meant to
litigation prior to or subsequent to arbitration” and “all oppress Plaintiffs” and “deter them from bringing claims
court and arbitration costs” pursuant to the terms of the against the Defendants.” In support of those arguments,
Warranty. appellees attached a copy of the Warranty and a printout
of a page from BBWG's website respecting “Dispute
Additionally, on July 29, 2015, BBWG filed a “plea Resolution.” The website page stated in part (1) BBWG
in abatement and motion to compel arbitration” in offers a “proven resolution process, Conciliation,” which
which it sought “an order compelling arbitration and is intended to “help all parties reach agreement without
abating all proceedings against all defendants pending an the additional cost, time, inconvenience or bad will of legal
arbitrator's award.” Therein, BBWG stated in part (1) action,” and (2) “[i]n an extreme case, if Conciliation does
“Plaintiffs' claims against BBWG arise exclusively out of not facilitate an agreeable and equitable outcome, you and
the Warranty Document”; (2) “there is no valid defense your builder may request arbitration by a professional
to enforceability of the arbitration agreement”; and (3) independent organization.”
“[a]ccordingly, the Court should compel arbitration and
stay the proceedings.” **3 During the hearing on BBWG's plea in abatement
and motion to compel arbitration, appellees restated
Appellees filed a response to BBWG's plea in abatement their arguments described above. Then, counsel for
and motion to compel arbitration in which they asserted in BBWG argued in part (1) appellees' contentions respecting
part that the “entire arbitration clause” in the Warranty is selection of an arbitration company are “premature”
“unconscionable” because (1) it “requires Plaintiffs to ask because arbitration has not yet been requested by
an arbitrator to award damages against a company that appellees and therefore no list respecting this matter
is sending business to the arbitration company”; (2) “the has yet been compiled; (2) the arbitration provision in
rules that govern the arbitration are unknown until a pre- question allows for “selecting an arbitration company,”
approved arbitration company is selected, yet Plaintiffs rather than choosing from “a list of biased and unneutral
were not given access to those arbitration companies, or to individual arbitrators,” and is therefore distinguishable
their rules when they presumably agreed to this arbitration from the arbitration provisions in the authority relied
clause”; and (3) “to date, Plaintiffs are unable to access the upon by appellees; (3) pursuant to the severability clause
pre-approved companies or their rules.” Also, appellees described above, the trial court “could very easily strike”
any unenforceable portion of the arbitration provision
and uphold the remainder of that provision; and (4) “We review an order denying a motion to compel
“the Texas Supreme Court has repeatedly stated that arbitration under an abuse of discretion standard.”
issues that go to contractual provisions other than the Morford v. Esposito Sec., LLC, No. 05–14–01223–CV,
arbitration provision are to be arbitrated” and are “not 2015 WL 5472640, at *4 (Tex.App.–Dallas Sept. 18, 2015,
even to be discussed or considered for purposes of no pet.) (mem.op.) (citing In re Labatt Food Serv., L.P.,
a Motion to Compel Arbitration.” Additionally, the 279 S.W.3d 640, 642–43 (Tex.2009) (orig.proceeding);
following exchange occurred between the trial court and Sidley Austin Brown & Wood, LLP v. J.A. Green Dev.
counsel for BBWG: Corp., 327 S.W.3d 859, 863 (Tex.App.–Dallas 2010, no
pet.)). We defer to the trial court's factual determinations
[COUNSEL FOR BBWG]: ... When we have an if they are supported by evidence, but we review the
arbitration company, such as ... AAA, for the trial court's legal determinations de novo. Id. (citing
homeowners to choose from, they then select the Labatt, 279 S.W.3d at 643; Sidley, 327 S.W.3d at 863);
arbitration company that they like best. They do that Tex. Health Res. v. Kruse, No. 05–13–01754–CV, 2014
by looking at that company's cost, that company's rules, WL 3408636, at *1 (Tex.App.–Dallas July 11, 2014, pet.
and making the best determination for them. denied) (mem.op.). “Whether an arbitration agreement is
enforceable is subject to de novo review.” Tex. Health
THE COURT: That's very generous of you. So if your
Res., 2014 WL 3408636, at *1 (citing Labatt, 279 S.W.3d
client decided—and I have some doubts that it would,
at 643).
but if your client decided to put AAA on this list, or
select AAA, because it's your right, they would have to
proceed under the Commercial Arbitration Rules?
B. Applicable Law
[COUNSEL FOR BBWG]: The warranty states that
the arbitration will be conducted under the arbitration [1] [2] In general, a party seeking to compel arbitration
company's rules in effect at the time of the arbitration. under the Federal Arbitration Act (“FAA”) must
establish (1) the existence of a valid, enforceable
THE COURT: So in a case like this where it deals with arbitration agreement and (2) that the claims at issue
this subject matter, their filing fee would be about what?
fall within that agreement's scope. 5 Pilot Travel Ctrs.,
$10,000?
LLC v. McCray, 416 S.W.3d 168, 177 (Tex.App.–Dallas
[COUNSEL FOR BBWG]: Your Honor, I'm not aware 2013, no pet.) (citing In re Kellogg Brown & Root, Inc.,
of the exact cost. It would depend on the company that 166 S.W.3d 732, 737 (Tex.2005) (orig.proceeding)); see
they chose. also J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227
(Tex.2003) (although there is strong presumption favoring
THE COURT: So they would—by the time this was arbitration, that presumption arises only after party
over, they would spend *476 easily north of $100,000 seeking to compel arbitration proves valid arbitration
to arbitrate this case. 4 agreement exists). The party seeking to avoid arbitration
then bears the burden of proving its defenses against
Following the hearing, BBWG's motion was “denied in enforcing the otherwise valid arbitration provision.
its entirety” by the trial court. This interlocutory appeal Pilot Travel Ctrs., 416 S.W.3d at 177 (citing In
timely followed. See TEX. CIV. PRAC. & REM. CODE re AdvancePCS Health, L.P., 172 S.W.3d 603, 607
ANN. § 51.016 (West 2015); 9 U.S.C. § 16 (2012). (Tex.2005) (orig.proceeding)). A court has no discretion
and must compel arbitration if it is established that there
is a valid arbitration agreement and the claims raised fall
within the scope of that agreement. See id.
II. DENIAL OF BBWG'S MOTION
TO COMPEL ARBITRATION **4 [3] [4] [5] Section 2 of the FAA states that
“[a] written provision in any ... contract evidencing a
A. Standard of Review transaction involving commerce to settle by arbitration
a controversy thereafter arising out of such contract or
transaction ... shall be valid, irrevocable, and enforceable,
As described above, the Warranty contains a written language (“the International Arbitration rules”) suggests
provision stating the parties agree that (1) “any that a particular set of arbitration rules would govern the
Dispute under any BBWG warranty” that “cannot be dispute; but, as it turns out, there are no rules called the
resolved by one of the Alternative Dispute Resolution ‘International Arbitration rules.’ ” Id. By contrast, the
processes described herein” will be submitted to “binding alleged arbitration agreement in the case before us (1)
arbitration” and (2) “[t]he decision of the arbitrator shall provides a method for selecting an arbitration company,
be final and binding on all parties.” which company's rules will apply to the arbitration, and
(2) does not designate particular rules that are known to be
[13] First, we address appellees' contention that the nonexistent. We cannot agree with appellees that Marks
alleged arbitration agreement before us is “not a valid supports their position respecting vagueness.
agreement to arbitrate” because it “lacks essential terms.”
Specifically, according to appellees, (1) it “fails to include **6 [15] Next, we address together appellees' remaining
material terms such as where the dispute is to be two arguments respecting the existence of a “valid
arbitrated, the identity of any arbitration company or the agreement to arbitrate.” Specifically, appellees contend
specific arbitrator(s), or the rules and costs of arbitration” (1) “[b]ecause the ‘agreement’ gives BBWG the sole
and (2) “[a]ll of these missing terms are ones that any authority to select the arbitrator(s), Appellees are denied
reasonable person would consider vitally important to an the opportunity to select an unbiased arbitrator,” and (2)
agreement to have their disputes heard in a forum other “BBWG's arbitration scheme is an inherently conflicted
than Texas courts.” However, appellees cite no authority, system, which creates a roadblock to neutrality and
and we have found none, to support their position that impartiality.” As to the first of those arguments, appellees
the terms described by them are “essential” as to an assert in part,
arbitration agreement. Cf. Goetz v. Goetz, 130 S.W.3d 359,
362 (Tex.App.–Houston [14th Dist.] 2004, pet. denied) BBWG controls the list of
(“the failure to identify an arbitrator, or even specify a arbitrators from which the
method for choosing one, does not render an arbitration arbitrator is selected, having
agreement unenforceably incomplete”); 9 U.S.C. § 5 (“If unrestricted and exclusive control
in the agreement provision be made for a method of of the arbitrator to be “chosen.”
naming or appointing an arbitrator or arbitrators or an BBWG does not provide a list
umpire, such method shall be followed; but if no method of approved arbitrators to the
be provided therein, ... then upon the application of either homeowner. BBWG waits until
party to the controversy the court shall designate and a claim is submitted to select
appoint an arbitrator or arbitrators or umpire....”). an arbitrator, allowing BBWG to
handpick an arbitrator it wants
[14] Second, appellees argue the alleged agreement to to resolve the dispute. BBWG is
arbitrate is “impermissibly vague” because it “fails to free to submit a list of arbitrators
identify any arbitrator, arbitration body, or arbitral who are partial to BBWG. The
rules.” In support of that position, appellees cite a list could include BBWG's own
case outside this jurisdiction involving international officers, directors, family members,
arbitration. See Marks 3 Zet–Ernst Marks GmBh & Co. or arbitrators who regularly receive
KG v. Presstek, Inc., 455 F.3d 7, 9–10 (1st Cir.2006). business from BBWG. BBWG is free
The agreement at issue in Marks stated in part, “Any to change its list at any time.
dispute ... between the Parties arising out of or relating
to this Agreement which cannot be settled amicably shall However, the arbitration provision does not state that
be referred to and determined by arbitration in The BBWG will provide a “list of arbitrators.” Appellees do
Hague under the International Arbitration rules.” Id. at not explain or address, and the record does not show,
9. The court in that case concluded the arbitration clause how BBWG's providing a list of “approved arbitration
was “poorly drafted” because (1) “the clause does not companies” from which appellees may choose a company
identify the specific arbitral body at The Hague that to conduct the arbitration equates to “unrestricted
would adjudicate any dispute” and (2) *479 “the contract and exclusive control of the arbitrator to be ‘chosen.’
” Further, in support of both arguments described [16] Now, we address BBWG's assertion that appellees
above, appellees cite several cases from Texas and failed to meet their burden to establish the arbitration
other jurisdictions. See In re Phelps Dodge Magnet agreement in question is unconscionable. As to appellees'
Wire Co., 225 S.W.3d 599, 605–06 (Tex.App.–El Paso contention respecting “gross disparity,” appellees' entire
2005, orig. proceeding) (employer's “problem solving argument in their appellate brief consists of the following
policy” was not arbitration agreement under FAA where sentence: “There is a gross disparity between Appellees,
procedures provided employer could opt for review by individual homeowners purchasing a home found almost
panel composed exclusively of employer's employees); immediately to have structural issues, and BBWG, a
McMullen v. Meijer, Inc., 355 F.3d 485, 493–94 (6th sophisticated commercial bonding company.” Appellees
Cir.2004) (arbitration agreement granting employer do not cite the record or any authority in support of that
exclusive control over pool of individual potential position. BBWG argues in its reply brief in this Court (1)
arbitrators from which arbitrator was to be selected was “Plaintiffs appear to raise a procedural unconscionability
unenforceable); Murray v. United Food & Commercial argument (i.e., that ‘there is a gross disparity between
Workers Int'l Union, 289 F.3d 297, 302–03 (4th Cir.2002) Plaintiffs ... and BBWG’) for the very first time in this
(arbitration provision that provided for review by single appeal” and (2) “[b]ecause this argument was not made
arbitrator who would be selected from list of arbitrators to the trial court (and because it is wholly unsupported
provided by union with no specified constraints and by evidence), the [trial court] abused its discretion if it
stated that arbitrator did not have authority to alter based its decision to deny BBWG's Motion to Compel
or diminish any power of union's president, including Arbitration on procedural unconscionability grounds.”
termination of an employee, was unenforceable); Hooters
of Am., Inc. v. Phillips, 173 F.3d 933, 940 (4th Cir.1999) The record does not show “gross disparity” was asserted
(where process allowed for employee's selection of one by appellees in the trial court. Further, even assuming
of three arbitrators on three-person arbitration panel, without deciding that this argument is preserved for
but provided that all three arbitrators must be selected appellate review, appellees direct us to no evidence in
from list of individual arbitrators created exclusively by the record, and we have found none, respecting “gross
Hooters with no restrictions, court concluded Hooters disparity” between appellees and BBWG. On this record,
“breached its agreement to arbitrate”); Raglani v. Ripken we conclude the trial court erred to the extent it concluded
Prof'l Baseball, 939 F.Supp.2d 517, 523–25 (D.Md.2013) the arbitration agreement was unconscionable based on
(arbitration provision that granted employer exclusive “gross disparity.”
control over list of individual arbitrators that may be
utilized was unenforceable). [17] Additionally, appellees assert the arbitration
agreement in question is unconscionable because it
*480 Unlike the case before us, each of the cases cited “permits [BBWG] to unilaterally select the arbitrator.”
by appellees involved arbitration provisions that granted According to appellees, (1) “[t]he [arbitration provision]
employers exclusive control over the pool of individual drafted by BBWG is extremely one-sided, designed to
arbitrators from which employees could select arbitrators. create an alternative forum to resolve disputes that has
Appellees cite no authority, and we have found none, no semblance of neutrality”; (2) “[t]he fact that [BBWG]
invalidating an arbitration provision on the ground that it controls the pool of potential arbitrators taints the
allows one party to provide a list of arbitration companies arbitration process because the dispute will not be resolved
from which the other party is to choose a company to by an impartial third person chosen by the parties”; (3)
conduct the arbitration. “the contract and the facts solidly support the concept
that BBWG's intention is to control every aspect of the
**7 On this record, we conclude BBWG conclusively ‘dispute resolution’ process”; and (4) “[t]he trial judge also
established the existence of a valid agreement to arbitrate. noted that the filing fee for an AAA arbitration would be
in the $10,000 range, and that ‘by the time it was over’
Plaintiffs/Appellees ‘would easily spend north of $100,000
to arbitrate the case.’ ”
2. Unconscionability
BBWG argues (1) “Plaintiffs have never requested should be commercially disinterested with respect to the
arbitration in this case, so a list of arbitration companies particular dispute intended to be presented to him for
has not been formally provided by BBWG”; (2) “[a]ny judgment”; (2) a selected arbitrator must disclose “any
argument that the arbitration companies to be approved circumstances likely to affect his or her impartiality,
by BBWG are biased is therefore premature and wholly including any bias or any financial or personal interest in
unsupported by evidence”; (3) “[b]ecause Plaintiffs have the result of the arbitration”; (3) such arbitrator shall be
the power to choose the arbitration company, they have replaced if either party requests replacement; (4) “either
the ability to select the rules they like best from the list party to the case may challenge the appointment of [an
of arbitration companies provided by BBWG”; and (4) arbitrator] for prejudicial or other causes”; and (5) if a
“[t]here is no evidence that the cost of *481 arbitration challenge is determined to be valid, the executive vice
would be prohibitively expensive.” president is to replace the arbitrator. Id. Further, the
court of appeals stated that the parties may challenge the
**8 As described above, the supreme court has stated appointment of an arbitrator in an appeal of the initial
that an inquiry respecting unconscionability “is not award pursuant to the FAA. Id. Then, that court reasoned
satisfied by speculation but by specific proof in the as follows:
particular case of the arbitral forum's inadequacy.”
Venture Cotton, 435 S.W.3d at 232. On subsequent [The farmers] argue that their ability to object to
remand in Venture Cotton, the Eleventh District Court appointed arbitrators is a “hollow and worthless right
of Appeals in Eastland considered the substantive because disqualification simply leads to an endless
unconscionability of an arbitration agreement between procession of ACSA cotton merchant members” who
a group of cotton farmers (the “farmers”) and a cotton will “benefit from arbitration rulings that favor member
cooperative marketing association (“Venture”) managed cotton merchants in disputes with non-member cotton
by Noble Americas Corp. (“Noble”). Venture Cotton producers.” [The farmers] do not argue whether
Coop. v. Freeman, No. 11–11–00093–CV, ––– S.W.3d unbiased arbitrators can, in general, be found. Instead,
––––, ––––, 2015 WL 1967251, at *6 (Tex.App.–Eastland they argue whether, under the rules in this case,
Apr. 30, 2015, no pet.) (hereinafter Venture Cotton II unbiased arbitrators will be found....
). The agreement in that case provided that arbitration
While it is possible that the arbitral forum will be biased
would be conducted by the American Cotton Shippers
because one of the Appellants serves on the board of
Association (“ACSA”) pursuant to ACSA rules. Id. at
directors for the ACSA and because he or she might
––––, 2015 WL 1967251, at *1.
play a role in approving a biased arbitrator that is
not replaced upon request, it is simply that—a mere
The farmers contended in part that a conflict of
possibility. Until [the farmers] are denied *482 access
interest existed between appellants Venture and Noble,
to unbiased arbitrators, it would be a matter of pure
collectively, and the ACSA because the manager of Noble
speculation to find that there is a conflict of interest that
was also on the ACSA's board of directors. Id. at ––––,
will not be resolved.
2015 WL 1967251 at *6. The court of appeals observed
(1) the ACSA executive vice president and president have Id. at ––––, 2015 WL 1967251, at *7.
active roles in the selection process in that the executive
vice president selects the three arbitrators to hear a The court of appeals stated in part that because the
case and the president approves the selection and (2) farmers failed to present evidence that the ACSA will in
arbitrators are “selected from the [ACSA] membership, fact provide biased arbitrators to hear the farmers' case,
retired members, or from a roster of qualified arbitrators the farmers had failed to show that the rules in question
approved by the Board of Directors.” Id. The court of prevent them from effectively vindicating their rights in
appeals stated it was thus possible that “the arbitrators the arbitral forum. Id. Therefore, that court concluded,
that are selected by the executive vice president to hear the farmers' argument that the arbitral forum will be
this case will come from a list of arbitrators that Noble's biased did not support the trial court's determination that
manager, as one of the directors on the board, approved.” the arbitration agreement was unconscionable. Id.
Id. However, the court of appeals observed, the ACSA
rules provide (1) “[t]o qualify as an arbitrator, a member
**9 In the case before us, the arbitration provision states complain as to the following portion of the arbitration
in part that (1) when arbitration is requested, BBWG will provision:
provide a “list of approved arbitration companies” from
which the requestor may select a company to conduct the Each party shall pay their
arbitration and (2) the arbitration will be conducted under own attorney fees and expenses.
the arbitration company's rules in effect at the time of the Additional fees may be assessed
arbitration. The record shows arbitration has not been in accordance with the arbitration
requested and no list of approved arbitration companies company rules and fees. The
has been provided. Thus, the possibility of unresolved bias arbitrator shall have the discretion
or partiality respecting the selection of an arbitrator under to reallocate such fees and expenses,
the rules that will apply in this case is “a matter of pure save and except attorney's fees, in the
speculation.” See id.; see also Venture Cotton, 435 S.W.3d interest of justice.
at 232.
According to appellees, (1) “[t]he above provision in
the arbitration clause is unconscionable *483 and
[18] [19] [20] Further, to the extent appellees' argument
unenforceable because it attempts to limit the statutory
can be construed to assert that the record supports a
rights of Plaintiffs and other consumers” and “[i]t
conclusion that arbitration under the parties' agreement
eliminates any cause of action Appellees would otherwise
is unconscionable based on prohibitive cost, we cannot
have” and (2) “the agreement deprives Appellees
agree with that position. “[E]xcessive costs imposed by an
from recovering damages and attorney's fees otherwise
arbitration agreement render a contract unconscionable
available to them under the DTPA.”
if the costs prevent a litigant from effectively vindicating
his or her rights in the arbitral forum.” Olshan, 328
Additionally, appellees contend “[t]he arbitration clause is
S.W.3d at 893 (citing Green Tree Fin. Corp.–Ala. v.
unconscionable because it requires each party to bear its
Randolph, 531 U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373
own costs of litigation, and ‘under no circumstances shall
(2000)). However, “[e]vidence of the ‘risk’ of possible costs
any party, prevailing or otherwise, be entitled to an award
of arbitration is insufficient evidence of the prohibitive
and/or judgment which includes or provides for attorney's
cost of the arbitration forum.” Id. at 895. Rather,
fees and/or court costs.’ ” According to appellees, “[t]he
both the United States Supreme Court and the Texas
provision compels Appellees to waive rights afforded by
Supreme Court require “specific evidence that a party
statutes, including Chapter 38 of the Texas Civil Practice
will actually be charged excessive arbitration fees.” Id.
& Remedies Code, which allows recovery of attorney fees
The party opposing arbitration must show the likelihood
for, among other things, breach of contract and their
of incurring such costs in his particular case. Id. While
rights under the DTPA.” In support of those arguments,
claimants are not required to actually incur the cost of
appellees cite generally to Venture Cotton and assert that
arbitration before they can show its excessiveness, “parties
in that case, the supreme court “concluded that a similar
must at least provide evidence of the likely cost of their
arbitration clause's waiver of remedies under the DTPA
particular arbitration, through invoices, expert testimony,
was unenforceable because it did not satisfy the DTPA's
reliable cost estimates, or other comparable evidence.”
requirements for a waiver of claims under the Act.”
Id. “Evidence that merely speculates about the risk of
possible cost is insufficient.” Id. In the case before us,
**10 BBWG contends (1) “defenses against the overall
appellees' argument in their appellate brief includes the
agreement itself (i.e., the BBWG Warranty), such as
trial judge's statements described above respecting costs.
whether the agreement impermissibly disclaims certain
However, appellees cite no evidence in the record, and
rights and remedies, must be arbitrated,” and (2) because
we have found none, showing appellees “will actually be
the arbitration provision provides for severability of any
charged excessive arbitration fees.” See id.
portion of that provision “determined to be unenforceable
by the arbitrator or by the court,” a determination by the
Finally, appellees assert “[t]he arbitration agreement is
trial court that the provision limiting attorney's fees was
also unconscionable because BBWG's warranty deprives
impermissible “would be an insufficient basis for denying
Appellees of substantive rights.” Specifically, appellees
BBWG's right to compel arbitration.”
[21] [22] An arbitration agreement covering statutory Consumer Rights,’ or words of similar meaning”; and
claims is generally invalid if it “waive[s] substantive include language substantially similar to the form the
rights and remedies the statute affords.” In re Poly–Am., statute provides. Id. § 17.42. Also, section 38.001 of the
L.P., 262 S.W.3d 337, 349 (Tex.2008) (orig.proceeding). Texas Civil Practice and Remedies Code provides for
However, “[a]n illegal or unconscionable provision of a recovery of attorney's fees by a claimant prevailing in a
contract may generally be severed so long as it does not breach of contract action. TEX. CIV. PRAC. & REM.
constitute the essential purpose of the agreement.” Id. CODE ANN. § 38.001.
at 360. “Whether or not the invalidity of a particular
provision affects the rest of the contract depends upon [24] To the extent appellees' appellate argument can
whether the remaining provisions are independent or be construed to complain of the “General Conditions”
mutually dependent promises, which courts determine provisions in the Warranty described above, those
by looking to the language of the contract itself.” Id. provisions are not within or specifically referenced by
“The relevant inquiry is whether or not parties would the arbitration provision. Further, the case cited by
have entered into the agreement absent the unenforceable appellees in support of their position, Venture Cotton,
provisions.” Id. involved a complaint as to a provision in the set of
arbitration rules specifically designated in the arbitration
[23] Additionally, “when the parties have contracted for provision in that case, rather than a complaint respecting
arbitration of their disputes, a trial court ‘may consider a different section of the parties' contract. See 435 S.W.3d
only issues relating to the making and performance of at 226, 229. Appellees do not explain, and the record
the agreement to arbitrate.’ ” Olshan, 328 S.W.3d at does not show, how complaints as to the Warranty's
898 (quoting Prima Paint Corp. v. Flood & Conklin “General Conditions” constitute a challenge to the
Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 18 L.Ed.2d arbitration clause itself. See id. at 232. On this record,
1270 (1967)); see also Buckeye Check Cashing, Inc. v. we conclude appellees' complaints respecting provisions
Cardegna, 546 U.S. 440, 445–46, 126 S.Ct. 1204, 163 in the Warranty's “General Conditions” are matters to be
L.Ed.2d 1038 (2006) (“[U]nless the challenge is to the entrusted to the arbitrators. See id.; Olshan, 328 S.W.3d
arbitration clause itself, the issue of the contract's validity at 898.
is considered by the arbitrator in the first instance.”);
Venture Cotton, 435 S.W.3d at 232 & n. 6 (“Questions **11 [25] As to appellees' complaints respecting the
of waiver, illegality, remedies, and attorney's fees often portions of the arbitration provision that state “[e]ach
relate to the broader, container contract, rather than the party shall pay their own attorney fees and expenses”
separable agreement to arbitrate, and, as such, are matters and “[t]he arbitrator shall have the discretion to reallocate
entrusted to the arbitrators.”); In re FirstMerit Bank, such fees and expenses, save and except attorney's fees,”
N.A., 52 S.W.3d 749, 756 (Tex.2001) (orig.proceeding) the claims in this case include breach of contract and
(stating that plaintiffs' defenses of unconscionability, DTPA claims asserted by appellees pursuant to statutes
duress, fraudulent inducement, and revocation “must that provide for recovery of attorney's fees by prevailing
specifically relate to the Arbitration Addendum itself, not claimants. See TEX. CIV. PRAC. & REM. CODE ANN.
the contract as a whole, if they are to defeat arbitration”). § 38.001; TEX. BUS. & COM. CODE ANN. § 17.50. The
“[W]hen authority over the *484 matter is unclear, a record does not show appellees have waived the rights
strong federal presumption favors arbitration.” Venture afforded by statute respecting recovery of attorney's fees
Cotton, 435 S.W.3d at 232 (citing Poly–Am., 262 S.W.3d as to those claims. See Venture Cotton II, ––– S.W.3d
at 348). at ––––, 2015 WL 1967251, at *2 (concluding alleged
waivers of statutory rights in arbitration agreement were
Further, the DTPA provides in part that consumers not specific enough to be effective); see also TEX. BUS. &
prevailing in an action pursuant to that act “shall be COM. CODE ANN. § 17.42. On this record, we agree with
awarded” their attorney's fees. TEX. BUS. & COM. appellees' position that those portions of the arbitration
CODE ANN. § 17.50 (West 2011). Although certain agreement are invalid. See Venture Cotton, 435 S.W.3d
DTPA remedies can be contractually waived, such waiver at 230 (provision that arbitration would proceed under
must be “conspicuous and in bold-face type of at least ACSA rule that eliminated rights otherwise available
10 points in size”; “identified by the heading ‘Waiver of under DTPA was invalid where record did not show
compliance with DTPA waiver requirements); Venture erred by declining to sever the arbitration provision's
objectionable limitation on appellees' statutory rights
Cotton II, ––– S.W.3d at ––––, 2015 WL 1967251, at *2.
respecting recovery of attorney's fees and proceed with
enforcement of the remaining provisions. See id.; see also
[26] However, as described above, the arbitration
Venture Cotton II, –––S.W.3d at ––––, ––––, 2015 WL
provision states in part that “[i]f any provision of
1967251, at *2, *10 (severing provision of arbitration
this arbitration agreement shall be determined to be
agreement that limited statutory rights as to attorney's
unenforceable by the arbitrator or by the court, the
fees).
remaining provisions shall be deemed to be severable
there from [sic] and enforceable according to their terms.”
According to BBWG, “[t]he parties' intent is thus clear: We decide in favor of BBWG on its issue. 7
any provisions held unenforceable should be severed out
to permit arbitration of claims to proceed as intended.”
Appellees do not specifically address severability in their III. CONCLUSION
appellate brief.
**12 We decide BBWG's sole issue in its favor. We
As described above, in determining an agreement's reverse the portion of the trial court's order denying
essential purpose, “[t]he relevant *485 inquiry is whether BBWG's motion to compel arbitration; order (1) the
or not parties would have entered into the agreement severing of the arbitration provision's limitation on
absent the unenforceable provisions.” Poly–Am, 262 appellees' statutory rights as to recovery of attorney's
S.W.3d at 360. The record shows the arbitration fees and (2) the granting of BBWG's motion to compel
provision's essential purpose was to provide for expedient arbitration; and remand this case to the trial court for
and efficient resolution of disputes without resorting to further proceedings consistent with this opinion.
legal action. See Venture Cotton, 435 S.W.3d at 230.
Further, nothing in the record shows the arbitration
provision's effect on statutory rights and remedies was All Citations
more than a “peripheral concern” to the essential purpose.
488 S.W.3d 468, 2016 WL 1612916
See id. On this record, we conclude the trial court
Footnotes
1 Specifically, the general warranty provisions stated, in part, as follows:
C. ARBITRATION PROVISION
In the event any Dispute under any BBWG warranty, including without limitation, a claim of subrogation, negligent or
intentional misrepresentation or nondisclosure in the inducement, breach of any alleged duty of good faith and fair
dealing, and/or any dispute over the scope of this Arbitration Provision, cannot be resolved by one of the Alternative
Dispute Resolution processes described herein, You, the Builder and BBWG agree to submit the Dispute to binding
arbitration. You will have the right to select the arbitration company from the list of approved arbitration companies
BBWG will provide to You when arbitration is requested. The arbitration will be conducted under the arbitration
company's rules in effect at the time of the arbitration.
The decision of the arbitrator shall be final and binding on all parties and may be entered as a judgment in any State
or Federal court of competent jurisdiction. By accepting the warranty, You are agreeing to waive Your right to
a trial by either judge or jury in a court of law.
... Any party shall be entitled to recover reasonable attorney's fees and costs incurred in enforcing this arbitration
provision, and the arbitrator shall have sole authority to award such fees and costs.
The arbitrator's compensation fee, administrative fee and all expenses charged by the arbitrator and/or the arbitration
service shall be borne equally by the arbitrating parties. Each party shall pay their own attorney fees and expenses.
Additional fees may be assessed in accordance with the arbitration company rules and fees. The arbitrator shall
have the discretion to reallocate such fees and expenses, save and except attorney's fees, in the interest of justice.
The parties agree that this arbitration provision involves and concerns interstate commerce and is governed by the
Federal Arbitration Act ... to the exclusion of any different or inconsistent state or local law, ordinance or judicial rule....
....
If any provision of this arbitration agreement shall be determined to be unenforceable by the arbitrator or by the court,
the remaining provisions shall be deemed to be severable there from [sic] and enforceable according to their terms.
(emphasis original) (hereinafter, the “arbitration provision”).
2 Regent is not a party to this appeal and the record does not show it has sought to compel arbitration. Appellees' claims
against Regent included negligence, gross negligence, breach of express and implied warranties, violations of the Texas
Deceptive Trade Practices Act, and breach of contract.
3 The two “General Conditions” complained of by appellees state as follows:
D. GENERAL CONDITIONS
....
6. Exclusive Remedy Agreement—Except as provided herein, You have waived the right to seek damages or other
legal or equitable remedies from the Builder, its principles [sic], his subcontractors, agents, vendors, suppliers,
workers, material men, and/or design professionals under any and all causes of action whether statutory or at
common law, including but not limited to negligence and/or strict liability. The agreement contained herein shall be
enforceable to the fullest extent permissible by the law of the state in which the property is located and shall apply
to any claim thereafter made against the Builder or any other person. Your sole remedy, in the event of a defect in
Your Home or in the real property upon which it is situated, is as prescribed in the terms and conditions of the BBWG
Warranty issued on the Home. Nothing in this paragraph shall effect [sic] or be applicable to any other express
written warranty You may have received from any single vendor or manufacturer who has supplied any appliance
or component for the Home.
....
9. Attorney's Fees and Costs Forbidden—Each party shall bear its own costs of litigation and under no circumstances
shall any party, prevailing or otherwise be entitled to an award and/or judgment which includes or provides for
attorney's fees and/or court costs.
4 The acronym “AAA” is commonly used in arbitration cases to refer to the American Arbitration Association. See, e.g.,
Roehrs v. FSI Holdings, Inc., 246 S.W.3d 796, 801 (Tex.App.–Dallas 2008, pet. denied).
5 As described above, the arbitration provision states in part “[t]he parties agree that this arbitration provision involves
and concerns interstate commerce and is governed by the Federal Arbitration Act ... to the exclusion of any different or
inconsistent state or local law, ordinance or judicial rule.” The parties do not dispute that the FAA is applicable in this case.
6 Appellees did not assert in the trial court, and do not contend on appeal, that their claims fall outside the scope of the
alleged arbitration agreement in question. See Venture Cotton, 435 S.W.3d at 228.
7 BBWG's prayer for relief in its appellate brief requests that this Court not only reverse the denial of BBWG's motion
to compel, but also reverse the denial of its plea in abatement and “abate” this “cause” pending an arbitration award.
Section 3 of the FAA provides in part that when a court is satisfied that an issue involved in a suit is properly referable to
arbitration, that court “shall on application of one of the parties stay the trial of the action until such arbitration has been
had.” 9 U.S.C. § 3. Further, section 16 of the FAA allows for interlocutory appeal from an order “refusing a stay of any
action under section 3 of this title,” as well as from an order “denying a petition ... to order arbitration to proceed.” See
id. § 16(a)(1)(A)–(B). However, BBWG's appellate issue, appellate argument, and notice of appeal complain only as to
the denial of its motion to compel arbitration and do not mention or address “abatement” or stay of this case or cite any
applicable authority. On this record, we conclude BBWG's complaint respecting denial of its plea in abatement presents
nothing for this Court's review. See TEX. R. APP. P. 38.1(i); cf. Metro. Life Ins. Co. v. Lindsay, 920 S.W.2d 720, 726 &
n. 7 (Tex.App.–Houston [1st Dist.] 1996, no writ) (reversing denial of motion to compel arbitration pursuant to FAA and
stating that although record did not support appellant's contention that trial court also abused its discretion by refusing to
stay litigation among non-arbitrating parties pending outcome of arbitration, “nothing in this opinion” prohibits trial court
from reconsidering stay on remand).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
City manager, against whom charges of official Attorneys and Law Firms
misconduct had been dropped, brought action against
defendant who had provided information to authorities, *289 Roger Townsend, Houston, William Powers, Jr.,
alleging malicious prosecution. The 138th District Court, Austin, Lisa Powell, Charles C. Murray, McAllen, for
Cameron County, Darrell B. Hester, J., entered jury petitioners.
verdict for city manager, and appeal was taken. The
Neil E. Norquest, McAllen, Norton A. Colvin,
Corpus Christi Court of Appeals, 845 S.W.2d 926,
Jr., Brownsville, Gordon L. Briscoe, Harlingen, for
Gilberto Hinojosa, J., affirmed in part and reversed in
respondents.
part, and writ of error was sought. The Supreme Court,
Hecht, J., held that, unless person knowingly provides Opinion
false information, person cannot be held to have “caused”
criminal prosecution, as required to establish tort of HECHT, Justice, delivered the opinion of the Court,
malicious prosecution, unless person's acts were both in which PHILLIPS, Chief Justice, and HIGHTOWER,
necessary and sufficient cause of prosecution. CORNYN, GAMMAGE, ENOCH, and SPECTOR,
Justices, join.
Reversed and remanded.
We address three questions in this malicious prosecution
Doggett, J., concurred in part and dissented in part. action: first, whether the trial court properly instructed
the jury concerning the causal connection a plaintiff
must prove between defendant's conduct and plaintiff's
criminal prosecution to establish liability; second, whether
West Headnotes (2) a defendant can ever be liable for making statements
to law enforcement officials which he did not actually
know were false; and third, whether damages for loss of
[1] Malicious Prosecution
consortium can be awarded for harm to a spouse that
Instigation of or participation in
involves no physical injury? For reasons that follow, we
prosecution
answer the first and third questions “no”, and the second
Unless person knowingly provides false question “yes”. The district court rendered judgment
information to authorities, person cannot be against defendants, which a sharply divided court of
held to have “caused” criminal prosecution,
*291 RESTATEMENT (SECOND) OF TORTS ch. (Emphasis added.) The trial court did not define “cause,
29, intro. note, at 405 (1977) [hereinafter “the or aid or cooperate in causing” in the jury charge. Giving
RESTATEMENT”]. These interests are balanced by these words their plain meaning, the jury could have
carefully defining the elements of an action for malicious concluded that it was enough for Meszaros to have aided
prosecution, and the balance is maintained by strictly or cooperated with law enforcement officials in bringing
adhering to these elements. about Lieck's prosecution. Petitioners argue that this does
not satisfy the requirements for liability.
It is frequently said that actions for malicious prosecution
are not favored in the law. E.g., Sullivan v. O'Brien, 85 The court of appeals rejected petitioners' argument in a
S.W.2d 1106, 1112 (Tex.Civ.App.—San Antonio 1935, single sentence: “The courts of this State have repeatedly
writ ref'd); Diamond Shamrock Corp. v. Ortiz, 753 stated that the causation issue submitted in this case is
S.W.2d 238, 241 (Tex.App.—Corpus Christi 1988, writ the proper question for malicious prosecution cases.” 845
denied); Parker v. Dallas Hunting & Fishing Club, 463 S.W.2d at 943. The court cited four cases in support
themselves facing allegations in a civil suit. The prospect 94 (Texas Practice 1988). Island Recreational considered
of such liability poses too great a disincentive for people to whether the trial court's failure to instruct the jury on a
cooperate freely with law enforcement officials. As many party's theory was reversible error. In the present case,
Texas courts have already recognized, a person's actions the trial court affirmatively charged the jury on the wrong
must be the cause in fact of a criminal prosecution before standard of causation. We have not extended the holding
he can be liable for malicious prosecution. The trial court's of Island Recreational, see Exxon Corp. v. Perez, 842
instruction permitted the jury to find liability under a S.W.2d 629 (Tex.1992) (per curiam), and we do not do
lesser standard and was therefore in error. so in this case. We need not consider here whether Island
Recreational should be overruled.
*293 [1] The RESTATEMENT concepts of initiation
and procurement are better suited to malicious The trial court rendered judgment against petitioners
prosecution cases than the more general idea of causation. on a verdict which allowed the jury to find only that
In such cases in the future, the jury should be asked, Meszaros aided or cooperated in causing Lieck's criminal
not whether the defendant “caused” criminal proceedings, prosecution. The trial court's failure to limit the jury to the
but whether he either “initiated” or “procured” them, proper standard of causation constitutes reversible error.
depending on the nature of the case. Initiation would not
ordinarily need to be defined, as it would be demonstrated
by evidence that defendant filed formal charges against
IV
plaintiff, but procurement should be defined as follows:
Petitioners also argue that a person who cooperates
A person procures a criminal
with law enforcement authorities by providing them
prosecution if his actions were
information should not be liable for malicious prosecution
enough to cause the prosecution,
unless he knows the information to be false. Petitioners
and but for his actions the
base their argument on the RESTATEMENT § 653,
prosecution would not have
cmt. g, quoted in Thomas, 596 S.W.2d at 317, and
occurred. A person does not procure
policy considerations underlying actions for malicious
a criminal prosecution when the
prosecution and defamation.
decision whether to prosecute is
left to the discretion of another,
Comment g describes the circumstances under which
including a law enforcement official
a person may be said to have procured a criminal
or the grand jury, unless the
prosecution by influencing a public prosecutor. The
person provides information which
comment states:
he knows is false. A criminal
prosecution may be procured by A private person who gives to a public
more than one person. official information of another's supposed criminal
misconduct, of which the official is ignorant, obviously
We discuss below the basis for the exception for providing
causes the institution of such subsequent proceedings
false information.
as the official may begin on his own initiative, but
giving the information or even making an accusation of
criminal misconduct does not constitute a procurement
B of the proceedings initiated by the officer if it is left
entirely to his discretion to initiate the proceedings or
Respondents argue that even if the trial court erred not. When a private person gives to a prosecuting officer
in failing to instruct the jury properly on the element information that he believes to be true, and the officer
of causation, that error was harmless, citing Island in the exercise of his uncontrolled discretion initiates
Recreational Dev. Corp. v. Republic of Texas Sav. Ass'n, criminal proceedings based upon that information, the
710 S.W.2d 551 (Tex.1986). Petitioners urge us to overrule informer is not liable under the rule stated in [§ 653] even
Island Recreational as having been wrongly decided. See though the information proves to be false and his belief
34 GUS. M. HODGES & T. RAY GUY, THE JURY was one that a reasonable man would not entertain. The
CHARGE IN TEXAS CIVIL LITIGATION § 34, at 92–
exercise of the officer's discretion makes the initiation Petitioners have cited no authority from any other
of the prosecution his own and protects from liability jurisdiction which supports their argument, and we are
the person whose information or accusation has led the aware of none. They argue that a person would not
officer to initiate the proceedings. be liable for defamation of a public official, like Lieck,
without proof that statements made were known to be
If, however, the information is known by the giver to false, and that the same rule should apply in a malicious
be false, an intelligent exercise *294 of the officer's prosecution case. Otherwise, they argue, the imposition
discretion becomes impossible, and a prosecution based of civil liability will infringe upon constitutionally
upon it is procured by the person giving the false guaranteed freedom of speech. We are not persuaded.
information. In order to charge a private person with As we noted above, the conflicting policies underlying
responsibility for the initiation of proceedings by a malicious prosecution actions must be carefully balanced.
public official, it must therefore appear that his desire to The requirements that a person make statements without
have the proceedings initiated, expressed by direction, probable cause and with malice, and the stringent
request or pressure of any kind, was the determining requirement of procurement, are sufficient protection to
factor in the official's decision to commence the those cooperating with law enforcement officials.
prosecution, or that the information furnished by him
upon which the official acted was known to be false. Accordingly, we conclude that the trial court did not err
in refusing to instruct the jury that Meszaros could not
Plainly, comment g does not support petitioners'
be liable for malicious prosecution unless he knew the
argument. The last sentence states that a person may
statements he made to investigators to be false.
be liable, not only when he gives information he knows
is false to a prosecutor, but also when his conduct is
the determining factor in the prosecutor's decision to
prosecute. The comment states that a person who provides V
information which he believes is true but is in fact
false is not liable when the prosecutor relies upon his [2] We turn finally to the question whether Nydia
own discretion in deciding whether to prosecute. If the Lieck is entitled to damages for loss of consortium when
prosecutor does not exercise his own discretion, however, Lieck suffered no physical injury. Although we have
the comment indicates that the provider of information never held that damages for loss of spousal consortium
has procured a criminal prosecution whether he knew the cannot be recovered absent proof of physical injury, the
information to be false or not. only cases in which we have allowed such damages did
involve physical injury. See Reed Tool Co. v. Copelin,
The comment states that an intelligent exercise of 610 S.W.2d 736 (Tex.1980); Whittlesey v. Miller, 572
discretion is impossible when a prosecutor is provided S.W.2d 665 (Tex.1978). Moreover, in Reagan v. Vaughn,
false information. This is not literally true in all instances. 804 S.W.2d 463, 467 (Tex.1990), we limited recovery of
Prosecutors may well suspect that information they damages for loss of parental consortium to those cases
receive is unreliable and decide not to initiate criminal where the parent has sustained “serious, permanent, and
proceedings. What is true is that a person who provides disabling” physical injuries. There is no reason to have
false information cannot complain if a prosecutor acts one rule for parental relationships and another rule for
on it; he cannot be heard to contend that the prosecutor spousal relationships. We are bound by Reagan to hold
should have known better. Such a person has procured that damages for loss of spousal consortium are not
the resulting prosecution, regardless of the actions of recoverable absent proof of physical injury.
the prosecutor, and the causation element for malicious
prosecution is satisfied. This rule does not assist the Furthermore, we believe that the conflicting policies
Liecks. The jury found that Meszaros did not make full underlying malicious prosecution actions require that
and fair disclosure to investigating officers. This is not the recovery of damages be limited to the person prosecuted,
equivalent of a finding that Meszaros made statements he and should not extend to members of his family. A
knew were false. person who provides information leading to *295 the
prosecution of another should not face liability for
damages other than to the person prosecuted.
******
Nydia cites decisions by four intermediate appellate
For the reasons explained, we reverse the judgment of
courts in other states which have permitted recovery
the court of appeals, remand Kenneth Lieck's action
of consortium damages in malicious prosecution cases
against BFI and Meszaros to the trial court for further
without proof of physical injury. See Minion v. Gaylord's
proceedings, and render judgment that Nydia Lieck take
Int'l Corp., 541 So.2d 209 (La.Ct.App.1989); Rivers v. Ex–
nothing.
Cell–O Corp., 100 Mich.App. 824, 300 N.W.2d 420 (1980);
Zalewski v. Gallagher, 150 N.J.Super. 360, 375 A.2d 1195
(1977); Dunn v. Alabama Oil & Gas Co., 42 Tenn.App. 108,
299 S.W.2d 25 (Tenn.Ct.App.1956). She does not cite a DOGGETT, J., joins in Parts I–IV only, and notes his
case from any state's highest court, and we are aware of dissent to Part V.
none. We decline to follow these authorities.
GONZALEZ, J., not sitting.
Accordingly, we hold that Nydia is not entitled to recover
All Citations
damages for loss of consortium.
881 S.W.2d 288
Footnotes
1 The jury found Lieck's damages to be $50,000 for past loss of earning capacity, $0 for future loss of earning capacity,
$50,000 for past mental anguish, $100,000 for future mental anguish, $500,000 for injury to reputation, and $6,500
attorney fees to defend the criminal charges.
2 “A private person who initiates or procures the institution of criminal proceedings against another who is not guilty of
the offense charged is subject to liability for malicious prosecution if (a) he initiates or procures the proceedings without
probable cause and primarily for a purpose other than that of bringing an offender to justice, and (b) the proceedings
have terminated in favor of the accused.”
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
777 Cases that cite this headnote Held: Regardless of whether it is brought in federal or
state court, a challenge to the validity of a contract as
[4] Alternative Dispute Resolution a whole, and not specifically to the arbitration clause
Existence and validity of agreement within it, must go to the arbitrator, not the court. Prima
Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395,
Claim that a purportedly usurious contract
87 S.Ct. 1801, 18 L.Ed.2d 1270, and Southland Corp.
containing an arbitration provision was void
v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1,
for illegality was to be determined by
answer the question presented here by establishing three
arbitrator, not court, where claim challenged
propositions. First, as a matter of substantive federal
contract as whole, not arbitration provisions
arbitration law, an arbitration provision is severable from
in particular, and arbitration provisions were
the remainder of the contract. See Prima Paint, 388
thus enforceable apart from the remainder of
U.S., at 400, 402–404, 87 S.Ct. 1801. Second, unless the
the contract.
challenge is to the arbitration clause itself, the issue of the
700 Cases that cite this headnote contract's validity is considered by the arbitrator in the
first instance. See id., at 403–404, 87 S.Ct. 1801. Third,
this arbitration law applies in state as well as federal
[5] Alternative Dispute Resolution
courts. See Southland, supra, at 12, 104 S.Ct. 852. The crux
Validity
of respondents' claim is that the Agreement as a whole
Federal Arbitration Act provision stating that (including its arbitration provision) is rendered invalid by
arbitration provisions in a contract are valid, the usurious finance charge. Because this challenges the
irrevocable, and enforceable “save upon such Agreement, and not specifically its arbitration provisions,
grounds as exist at law or in equity for the the latter are enforceable apart from the remainder of the
revocation of any contract” includes those contract, and the challenge should be considered by an
grounds for revocation that render a contract arbitrator, not a court. The Florida Supreme Court erred
void, as well as those that render a contract in declining to apply Prima Paint's severability rule, and
voidable. 9 U.S.C.A. § 2. respondents' assertion that that rule does not apply in state
court runs contrary to Prima Paint and Southland. Pp.
141 Cases that cite this headnote
1207–1211.
753 (1995) (dissenting opinion); Doctor's Associates, Inc. Accordingly, I would leave undisturbed the judgment of
the Florida Supreme Court.
v. Casarotto, 517 U.S. 681, 689, 116 S.Ct. 1652, 134
L.Ed.2d 902 (1996) (same); Green Tree Financial Corp. v.
Bazzle, 539 U.S. 444, 460, 123 S.Ct. 2402, 156 L.Ed.2d All Citations
414 (2003) (same). Thus, in state-court proceedings, the
FAA cannot be the basis for displacing a state law that 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d 1038, 74 USLW
prohibits enforcement of an arbitration clause contained 4119, 06 Cal. Daily Op. Serv. 1491, 2006 Daily Journal
in a contract that is unenforceable under state law. D.A.R. 2008, 19 Fla. L. Weekly Fed. S 94
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50
L.Ed. 499.
1 The issue of the contract's validity is different from the issue whether any agreement between the alleged obligor and
obligee was ever concluded. Our opinion today addresses only the former, and does not speak to the issue decided in
the cases cited by respondents (and by the Florida Supreme Court), which hold that it is for courts to decide whether
the alleged obligor ever signed the contract, Chastain v. Robinson–Humphrey Co., 957 F.2d 851 (C.A.11 1992), whether
the signor lacked authority to commit the alleged principal, Sandvik AB v. Advent Int'l Corp., 220 F.3d 99 (C.A.3 2000);
Sphere Drake Ins. Ltd. v. All American Ins. Co., 256 F.3d 587 (C.A.7 2001), and whether the signor lacked the mental
capacity to assent, Spahr v. Secco, 330 F.3d 1266 (C.A.10 2003).
2 In pertinent part, § 4 reads:
“A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written
agreement for arbitration may petition any United States district court [with jurisdiction] ... for an
order directing that such arbitration proceed in a manner provided for in such agreement ... .[U]pon
being satisfied that the making of the agreement for arbitration or the failure to comply therewith
is not in issue, the court shall make an order directing the parties to proceed to arbitration in
accordance with the terms of the agreement ... .”
3 Our more natural reading is confirmed by the use of the word “contract” elsewhere in the United States Code to refer
to putative agreements, regardless of whether they are legal. For instance, the Sherman Act, ch. 647, 26 Stat. 209,
as amended, states that “[e]very contract, combination ..., or conspiracy, in restraint of trade [is] hereby declared to be
illegal.” 15 U.S.C. § 1. Under respondents' reading of “contract,” a bewildering circularity would result: A contract illegal
because it was in restraint of trade would not be a “contract” at all, and thus the statutory prohibition would not apply.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
required by National Association of Securities Arbitration Act....” Darryl Mayfield, the City's assistant
Dealers (NASD) rules, arbitration agreement city manager, signed the agreement on the City's behalf,
was not rendered void, where agreement did and Atha Stokes, the city secretary, attested to it.
not require that NASD rules apply, but rather
specifically provided for arbitration under In 1994, the City sued Cantella for fraud, Texas Securities
Federal Arbitration Act (FAA). 9 U.S.C.A. § Act violations, negligence and gross negligence. Cantella
1 et seq. moved to stay the suit and to compel arbitration. At a
hearing on the motion, Cantella proved up the arbitration
7 Cases that cite this headnote agreement and that the subject matter involved commerce,
thereby bringing the agreement within the FAA's scope.
[8] Mandamus See Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266,
Acts and proceedings of courts, judges, 269–70 (Tex.1992). Nevertheless, the trial court denied
and judicial officers Cantella's motion. The court of appeals denied Cantella
mandamus relief.
Party who is erroneously denied right to
arbitrate under Federal Arbitration Act
[1] [2] [3] [4] [5] Federal and state law strongly
(FAA) has no adequate remedy at law and
favor arbitration. See Moses H. Cone Memorial Hosp.
mandamus relief is appropriate. 9 U.S.C.A. §
v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct.
1 et seq.
927, 941–42, 74 L.Ed.2d 765 (1983); Prudential Sec., Inc.
23 Cases that cite this headnote v. Marshall, 909 S.W.2d 896, 898 (Tex.1995); Capital
Income Properties–LXXX v. Blackmon, 843 S.W.2d 22,
23 (Tex.1992); Tipps, 842 S.W.2d at 268. Indeed, a
presumption exists in favor of agreements to arbitrate
Attorneys and Law Firms under the FAA. Marshall, 909 S.W.2d at 898–99. Courts
must resolve any doubts about an agreement to arbitrate
*943 Carla Powers Herron, James A. Gilman, Houston, in favor of arbitration. Marshall, 909 S.W.2d at 899. A
for relator. party opposing an arbitration agreement bears the burden
of defeating it. Marshall, 909 S.W.2d at 900. Once a
Kyle W. King, Hugh L. McKinney, Charles L. Henke, party seeking to compel arbitration establishes that an
John E. O'Neill, Michael Napoli, Houston, Robert L. agreement exists under the FAA, and that the claims
Fluornoy, Lufkin, Eric Tibbs, Houston, for respondent. raised are within the agreement's scope, the trial court
“has no discretion but to compel arbitration and stay its
Opinion
proceedings pending arbitration.” See Shearson Lehman
*944 PER CURIAM. Bros., Inc. v. Kilgore, 871 S.W.2d 925, 928 (Tex.App.—
Corpus Christi 1994, orig. proceeding).
In this original proceeding, Cantella & Company seeks
relief from the trial court's order denying arbitration of [6] The City argues that it did not agree to arbitrate
the City of Lufkin's suit against Cantella arising from a and, therefore, the courts cannot require it to submit to
securities transaction. Because the parties entered into a the process. See Freis v. Canales, 877 S.W.2d 283, 284
valid arbitration agreement under the Federal Arbitration (Tex.1994)(holding that a court cannot order arbitration
Act (the FAA) 1 , we conditionally grant mandamus relief. absent an agreement between the parties). Specifically, the
City argues that the arbitration provision was “hidden”
In 1993, Cantella and the City entered into a “Client's on the back of the client's agreement, and consequently,
Agreement” whereby Cantella agreed to handle securities Mayfield did not know about the arbitration provision
transactions for the City. The agreement has an when he signed the document. Therefore, the City argues
arbitration clause. It provides that “all controversies that Mayfield did not agree to arbitration on the City's
which may arise between us ... shall be determined behalf. This argument does not persuade us.
by arbitration.” The agreement further provides that
arbitration “shall be conducted pursuant to the Federal
The agreement is a single page with text on both 859 P.2d at 450 (Nelson, J., dissenting). These remedial
sides. Nothing is “hidden” on the back side of the remedies are consistent with the strong public policy
document. The arbitration provision is quite conspicuous. emphasized by caselaw favoring arbitration agreements
It is separately numbered and captioned in bold between parties. See Moses H. Cone Memorial Hosp., 460
print, “ARBITRATION”. Also, the entire arbitration U.S. at 24–25, 103 S.Ct. at 941–42; Tipps, 842 S.W.2d at
provision, unlike other provisions in the agreement, is 268.
typed in all capital letters. Because of the document's
nature, combined with the legal presumption that a party The City relies on two recent cases for the proposition
who signs a contract knows its contents, we reject the that Cantella's alleged non-compliance with NASD
City's argument that it did not agree to arbitrate because rules, section 21(f), makes the agreement void. See
it did not see the arbitration provision in the agreement. Nielsen v. Piper, Jaffray & Hopwood, Inc., 66 F.3d 145
See Thigpen v. Locke, 363 S.W.2d 247, 253 (Tex.1962); (7th Cir.1995); Mueske, 859 P.2d at 444. These cases
Kilgore, 871 S.W.2d at 928–29. are distinguishable. In both Nielsen and Mueske, the
courts declared the respective arbitration agreements void
[7] Alternatively, the City asserts that because the because the contracts had specific language requiring that
arbitration provision does not strictly comply with arbitration “shall be in accordance with the rules [of] the
National Association of Securities Dealers (NASD) rules, National Association of Securities Dealers, Inc. [NASD].”
the agreement is void. Specifically, the City complains that See Nielsen, 66 F.3d at 148; Mueske, 859 P.2d at 446.
Cantella did not comply with NASD Manual–Rules of Because the defendants' contracts in Nielsen and Mueske
Fair Practice (CCH) *945 ¶ 2171, Art. III, Sec. 21(f), violated NASD rules at the same time that they expressly
because: (1) it neglected to place a disclosure statement called for NASD rules to apply, the courts declared the
above the signature line of the agreement, warning of arbitration agreements invalid. See Nielsen, 66 F.3d at
the arbitration provision; (2) it did not highlight the 146–47; Mueske, 859 P.2d at 450.
arbitration provision; and, (3) it did not forward a
conformed copy of the agreement to the City. Here, the agreement between Cantella and the City
does not require that NASD rules apply. Instead, the
Our review of the document reveals that the arbitration agreement specifically provides for arbitration under the
provision is “highlighted” in all capital letters and in FAA. Regardless, if Cantella violated section 21(f), as the
bold text. The City's argument that it did not receive a City alleges, voiding the agreement is not the appropriate
conformed copy of the agreement is based on Mayfield remedy under NASD rules. See Mueske, 859 P.2d at
and Stokes' affidavits, stating that they could not find a 450 (Nelson, J., dissenting); cf. Nielsen, 66 F.3d at 147
copy of the agreement in the City's files. Cantella concedes (recognizing that new NASD rule did not allow for
that the agreement does not comply with section 21(f) enforcement of arbitration agreement in class action suit).
to the extent that the disclosure warning of arbitration Accordingly, we reject the City's argument that Cantella
is located at the bottom of the client's agreement instead should be forced to forego its contractual right to arbitrate
of being properly placed immediately above the signature because of any non-compliance with section 21(f) of
line. NASD rules.
The NASD is a private, independent, self-regulating [8] A party who is erroneously denied the right to
organization. See Mueske v. Piper, Jaffray & Hopwood, arbitrate under the FAA has no adequate remedy at law
Inc., 260 Mont. 207, 859 P.2d 444, 448–49 (1993). and mandamus relief is appropriate. Marshall, 909 S.W.2d
Under 15 U.S.C. § 78o–3, the Securities and Exchange at 900; Tipps, 842 S.W.2d at 272–73. Because Cantella
Commission reviews and approves NASD's rules and established an agreement to arbitrate with the City under
procedures. While some NASD rules preclude arbitration the FAA, we conditionally grant writ of mandamus. See
for non-compliance, there is no such penalty for non- TEX.R.APP. P. 122. We direct the trial court to order that
compliance with section 21(f). Instead, the remedies for a the City's claims against Cantella proceed to arbitration.
broker's section 21(f) violations are censure, suspension, The clerk is instructed to issue the writ only if the trial
expulsion, fine and sanctions. See NASD Manual–Rules court does not follow our direction.
of Fair Practice (CCH) ¶ 2301, Art. V, Sec. 1; Mueske,
All Citations
Footnotes
1 See 9 U.S.C. § 1 et seq.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
After reviewing the mandamus record before us, we Painter, 827 S.W.2d 103, 105 (Tex.App.—Austin 1992,
writ denied).
conclude that although the trial court correctly concluded
that the arbitration clause is valid and enforceable, it
It is also undisputed that the Plaintiffs claim that CIP
abused its discretion in failing to compel arbitration
breached its fiduciary duty to them in operating and
under the Federal Act. 2 We have recently reiterated the
managing the partnership, in repeatedly misrepresenting
strong policy preference for enforcing arbitration clauses.
the financial health of the operation, and in fraudulently
Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266 (Tex.1992)
inducing them to invest in the partnership. These claims
(orig. proceeding). The Federal Act, which applies to
arise out of and relate to the limited partnership
transactions “involving commerce,” dictates enforcement
agreement. In Anglin we held that Deceptive Trade
of an arbitration agreement upon evidence that a written
Practice Act claims may be subject to arbitration, 842
agreement to arbitrate exists and that the claims raised
S.W.2d at 271, and the United States Supreme Court
are within the scope of the agreement. The Federal Act
has held that a claim of fraud in the inducement unless
is part of the substantive law of Texas. Southland Corp.
specifically directed to the making of the arbitration clause
v. Keating, 465 U.S. 1, 14–16, 104 S.Ct. 852, 860–61, 79
does not defeat application of that clause to the agreement
L.Ed.2d 1 (1984); Anglin, 842 S.W.2d at 271; Batton v.
as a whole. Prima Paint Corp., 388 U.S. at 406, 87 S.Ct. at
Green, 801 S.W.2d 923, 927 (Tex.App.—Dallas 1990, no
1807; Mesa Operating, 797 F.2d at 244.
writ). In Anglin we also concluded that a party denied
the benefit of an agreement to arbitrate is without an
*24 Accordingly, because CIP has shown that a written
adequate remedy by appeal when pursuing application
arbitration agreement exists and that the Plaintiffs' claims
of the Federal Act in state court, and that mandamus is
fall within the scope of that agreement, without hearing
therefore appropriate. 842 S.W.2d at 271.
oral argument and pursuant to Texas Rule of Appellate
Procedure 122, a majority of the court conditionally
The undisputed facts of this case establish the applicability
grants the writ of mandamus and directs the trial court
of the Federal Act: citizens from a number of different
to order that all claims proceed to arbitration under the
states have purchased interests from a business entity in
Federal Arbitration Act. The clerk is instructed to issue
one state for the purpose of carrying out a commercial
the writ only should the trial court fail to follow our
venture in another state. See Prima Paint v. Flood &
direction.
Conklin Mfg. Co., 388 U.S. 395, 401 n. 7, 87 S.Ct. 1801,
1805 n. 7, 18 L.Ed.2d 1270 (1967); Mesa Operating Ltd.
Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d All Citations
238, 243 (5th Cir.1986); Lost Creek Util. v. Travis Indep.
843 S.W.2d 22
Footnotes
1 CIP also filed an application for writ of error from the judgment of the Thirteenth Court of Appeals dismissing CIP's
interlocutory appeal for want of jurisdiction. Capital Income Properties–LXXX v. Waldman, 835 S.W.2d 152 (Tex.App.—
Corpus Christi 1992). The court of appeals held that the arbitration clause was not enforceable under Texas law and that
federal law did not permit an interlocutory appeal in state court. That application is denied by separate order.
2 Section 2 of the Federal Act provides that:
a written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle
by arbitration a controversy thereafter arising out of such contract or transaction, ... shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Attorneys and Law Firms Cash Biz, LP, Redwood Financial, LLC, and Cash Zone,
LLC d/b/a Cash Biz (collectively referred to as “Cash
Edward Hubbard, Patrick E. Gaas, Sumit Kumar Arora, Biz”) provide short-term consumer loans, also known
Coats Rose Yale Ryman & Lee PC, Houston, TX, for as “payday loans.” See TEX. FIN. CODE ANN. §
Appellant. 393.221 (defining a payday loan). As is normal practice
with “payday loans”, Cash Biz required all borrowers to
Daniel Dutko, H. Mark Burck, Philip A. Meyer, Hanszen
provide a post-dated personal check in the amount of the
Laporte, LLP, Houston, TX, for Appellee.
loan plus the finance charge. As a general practice, if a
Sitting: Karen Angelini, Justice Rebeca C. Martinez, borrower defaulted, Cash Biz deposited the post-dated
Justice Jason Pulliam, Justice check on the loan's due date in satisfaction of the loan.
• (f) all claims asserted by us against you, including Hiawatha Henry, Addie Harris, Montray Norris, and
claims for money damages to collect any sum we Roosevelt Coleman, Jr. (the Borrowing Parties) obtained
claim you owe us; ... loans from Cash Biz and subsequently defaulted on their
repayment obligations. Cash Biz attempted to deposit
• (g) all claims asserted by you individually against us ...
the post-dated checks written upon execution of the loan
including claims for money damages and/or equitable
documents; however, the checks were declined based upon
or injunctive relief; ...
insufficient funds.
• (i) all claims asserted by you as a private attorney
general, as a representative and member of a class ... Cash Biz contacted the applicable local district attorneys
against us ... ; and/or and submitted information necessary to make a criminal
complaint, stating these borrowers “engaged in criminal
• (j) all claims arising from or relating directly or conduct during the formation and performance of the loan
indirectly to the disclosure by us ... of any non-public transactions, including the issuance of bad checks and
personal information about you. check fraud.” The district attorneys then filed criminal
charges against each of the Borrowing Parties for violation
In addition, relevant to this appeal, the arbitration of Texas Penal Code Section 32.41, which prohibits
provision states: issuance of “bad checks”. But see TEX. PENAL CODE
ANN. § 32.41 (West Supp. 2015) (offense requires issuer's
You acknowledge and agree that by entering into this
knowledge of insufficient funds at the time of issuance;
Arbitration Provision:
knowledge may be presumed except for postdated check).
(a) YOU ARE GIVING UP YOUR RIGHT TO HAVE
A TRIAL BY JURY TO RESOLVE ANY DISPUTE The criminal charges against each of the Borrowing
ALLEGED AGAINST US, THE LENDER AND/ Parties were eventually dismissed; however, several of
OR OUR/ITS RELATED THIRD PARTIES; ... and the Borrowing Parties were arrested and detained. In
addition, other Cash Biz borrowers within the purported
(c) YOU ARE GIVING UP YOUR RIGHT TO class faced criminal convictions for theft by check
SERVE AS A REPRESENTATIVE ... OR TO and were assessed jail time, restitution, and fines as
PARTICIPATE AS A MEMBER OF A CLASS punishment.
Here, the Borrowing Parties' allege in their first amended Thus, the burden of proof shifted to the Borrowing Parties
class action petition that Cash Biz “illegally and to establish an affirmative defense, that is, waiver of the
wrongfully used the criminal justice system to collect right to enforce the arbitration provision. Venture Cotton
payday loans,” “illegally and wrongfully threatened its Co-op., 435 S.W.3d at 227; J.M. Davidson, 128 S.W.3d at
customers with criminal prosecution,” and “illegally and 227.
wrongfully classified post-dated checks as bad checks and
pursued criminal charges.”
2. The Borrowing Parties' Burden of Proof to Defeat
While the torts alleged are based upon independent Arbitration: Whether Cash Biz Waived its Right to
acts outside the formation or performance of the Loan Enforce Arbitration Agreement
Contracts, the arbitration provision compels a very broad *6 The Borrowing Parties' sole defense to arbitration
definition of “dispute”. By defining “dispute” as “all is Cash Biz waived its right to arbitrate by substantially
common law claims based upon tort, fraud, or other invoking the judicial process through its filing of criminal
intentional tort”, this broad definition encompasses all complaints. Accordingly, the Borrowing Parties assert
claims based on acts that occur outside the formation Cash Biz sought to obtain a satisfactory result of
or performance of the Loan Contracts, and specifically repayment of the civil debts through restitution.
the causes of action alleged here. Therefore, the causes
of action alleged by the Borrowing Parties against Cash Biz responds it merely provided information to
Cash Biz fall within the broad definition of “dispute” support a complaint of potentially criminal activity, and
with the arbitration provision. This broad definition, the prosecuting district attorneys facilitated independent
which encompasses “any claim” between the parties, is investigation and arrest. Because the district attorneys
limited only by the legal requirement that the facts be held discretion whether to file and/or prosecute criminal
“intertwined” or have a “substantial relationship.” See charges, Cash Biz asserts it did not invoke any judicial
Pennzoil Co., 30 S.W.3d at 498; Hou-Scape, Inc., 945 process.
S.W.2d at 205-06.
The factual allegations within the first amended petition Applicable Law
focus upon Cash Biz's filing of criminal complaints against
the Borrowing Parties to collect on the civil debt created As a defense to a motion to compel arbitration,
by the Loan Contracts. As alleged, the Loan Contracts the opposing party may show that the party seeking
serve as basis for the underlying allegations because arbitration either expressly or impliedly waived its right to
the Borrowing Parties' civil debt arose out of the Loan enforce the arbitration agreement. Perry Homes v. Cull,
Contracts, and the existence of this debt served as the 258 S.W.3d 580, 584 (Tex. 2008). Whether waiver occurs
impetus for Cash Biz to complain of criminal activity. depends on the individual facts and circumstances of each
For this reason, the facts alleged in support of the case. See Pilot Travel Ctrs v. McCray, 416 S.W.3d 168, 183
asserted causes of action have a significant relationship (Tex. App.—Dallas 2013, no pet.); Southwind Group, Inc.
to and are factually intertwined with the underlying Loan v. Landwehr, 188 S.W.3d 730, 735 (Tex. App.—Eastland
Contracts. Although the allegations are centered upon 2006, no pet.). To establish an implied waiver of a right
tortious conduct that does not pertain to the parties' to enforce arbitration, a party must show, based upon the
obligations within the Loan Contracts, these alleged torts totality of circumstances: (1) the party seeking arbitration
would not have occurred except for the existence of the substantially invoked the judicial process; and (2) the
Loan Contracts. party opposing arbitration suffered actual prejudice as a
result. G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458
Because the facts as alleged to support the causes of S.W.3d 502, 511-12 (Tex. 2015); Perry Homes v. Cull, 258
action are factually intertwined with the Loan Contracts S.W.3d 580, 589-93 (Tex. 2008); Williams Indus., Inc. v.
and because the broad definition of “dispute” within the Earth Dev. Sys. Corp., 110 S.W.3d 131, 135 (Tex. App.—
arbitration provision encompasses these allegations, Cash Houston [1st Dist.] 2003, no pet.). Again, because public
Biz satisfied its burden of proof to show the claims in policy favors arbitration, there is a strong presumption
dispute fall within the scope of the arbitration provision. against finding a party waived its right to arbitration. In re
Bruce Terminix Co., 988 S.W.2d 702, 704–05 (Tex. 1998) noticing deposition, agreeing to reset trial date, and
(orig. proceeding); EZ Pawn Corp. v. Mancias, 934 S.W.2d waiting nearly a year to move for arbitration). To waive
87, 89 (Tex. 1996) (orig. proceeding). The burden to prove arbitration, the party must “engage in some overt act
waiver is thus a heavy one, and any doubts regarding in court that evince[s] a desire to resolve the arbitrable
waiver are resolved in favor of arbitration. Perry Homes, dispute through litigation rather than arbitration.” Tuscan
258 S.W.3d at 584; In re Bruce Terminix Co., 988 S.W.2d Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717,
at 705. 721 (Tex. App.—Houston [1st Dist.] 2014, pet. denied);
Haddock v. Quinn, 287 S.W.3d 158, 177 (Tex. App.—Fort
No Texas caselaw addresses the specific issue whether Worth 2009, pet. denied).
the filing of a criminal complaint constitutes substantial
invocation of a judicial process to constitute waiver of *7 Within the context of a criminal case,
arbitration in a civil suit. However, caselaw establishing
factors to consider and interpreting acts which constitute [a] person procures a criminal
substantial invocation apply to guide this determination prosecution if his actions were
under these facts. enough to cause the prosecution,
and but for his actions the
With regard to the first prong, in determining whether prosecution would not have
the party seeking arbitration substantially invoked the occurred. A person does not procure
judicial process, courts review the circumstances of each a criminal prosecution when the
case to determine whether a party made specific and decision whether to prosecute is
deliberate acts after suit was filed that are inconsistent left to the discretion of another,
with its right to arbitrate or if a party otherwise engaged including a law enforcement official
in active participation to substantially invoke judicial or the grand jury, unless the
person provides information which
process. 3 See Pilot Travel Ctrs, 416 S.W.3d at 183;
he knows is false. A criminal
Southwind Group, Inc., 188 S.W.3d at 735; Sedillo, 5
prosecution may be procured by
S.W.3d at 827. This requisite action necessitates more
more than one person.
than filing suit or initiation of litigation; a party must
engage in deliberate conduct inconsistent with the right Browning-Ferris Indus., Inc. v. Lieck, 881 S.W.2d 288, 293
to arbitrate, that is, an active attempt to achieve a (Tex. 1994); Daniels v. Kelley, 2010 WL 2935798, at *4
satisfactory result through means other than arbitration. (Tex. App.—San Antonio July 28, 2010, no pet.) (mem.
See e.g. G.T. Leach Builders, LLC, 458 S.W.3d at 512 op.).
(holding no waiver by asserting counterclaims, seeking
change of venue, filing motions to designate responsible
third parties, for continuance, and to quash depositions,
designating experts and waiting six months to move Application
for arbitration); Richmont Holdings, Inc. v. Superior
To prove Cash Biz waived arbitration, the Borrowing
Recharge Sys., L.L.C., 455 S.W.3d 573, 576 (Tex. 2014)
Parties presented evidence consisting of a series of criminal
(holding no waiver by initiating lawsuit, invoking forum-
case summaries and a case list of criminal cases initiated
selection clause, moving to transfer venue, propounding
in Harris County Justice of the Peace court. This evidence
request for disclosure, and waiting nineteen months after
reveals Cash Biz was the “complainant” in a number of
being sued to move for arbitration); In re Fleetwood
criminal cases, including those of the named Borrowing
Homes of Texas, L.P., 257 S.W.3d 692, 694 (Tex.
Parties, which resulted in criminal charges for “issuance
2008) (holding no waiver by noticing deposition, serving
of bad check”.
written discovery, and waiting eight months to move
for arbitration); In re Bruce Terminix, 988 S.W.2d at
To refute this assertion, Cash Biz presented an affidavit
703–04 (holding no waiver by propounding requests for
and supplemental affidavit of David Flanagan, an
production and interrogatories and waiting six months to
“authorized representative” whose “principal business for
seek arbitration); EZ Pawn Corp., 934 S.W.2d at 88-89
Cash Biz includes all general affairs and operations of
(holding no waiver by propounding written discovery,
the business.” In his supplemental affidavit, Flanagan Ass'n of Texas, Inc., 2016 WL 1612916, at *3; Garcia, 340
attested: S.W.3d at 868.
Cash Biz simply left the information *8 In any event, Cash Biz presents a limited issue on
entirely to the discretion of the appeal, and the Borrowing Parties limit their argument
district attorney, and any action on appeal, to the issue whether Cash Biz's filing of
taken by the district attorney criminal complaints was sufficient to constitute waiver of
thereafter was made completely on the contractual right to arbitrate. The borrowing Parties
his/her own. Cash Biz did not do not present argument that Cash Biz engaged in any
make any formal charges, did not conduct beyond the filing of criminal complaints. The
participate in any criminal trial, and evidence that pertains to this limited issue is not disputed,
did not obtain criminal judgments. that is, Cash Biz provided information and filed criminal
Similarly, Cash Biz was neither a complaints against the Borrowing Parties. Therefore, this
witness in any criminal proceeding court's determination of waiver need only focus on this
nor was it asked to appear in any undisputed evidence.
such proceeding.
Cash Biz's filing of a criminal complaint does not rise
The case list presented by the Borrowing Parties impliedly to the extent of active engagement in litigation that
reveals that absent Cash Biz's complaint, no criminal Texas courts have consistently held to be specific and
prosecution would have occurred. The case list does not deliberate actions inconsistent with a right to arbitrate
reflect, however, the extent of Cash Biz's involvement in or that display an intent to resolve a dispute through
the criminal process, which is necessary for determination litigation. To begin, courts consistently evaluate a party's
of the issue whether Cash Biz substantially invoked the conduct after suit is filed to determine whether it waived
judicial process. its right to arbitration. See Pilot Travel Ctrs, 416 S.W.3d
at 183; Sedillo, 5 S.W.3d at 827; Nationwide of Bryan,
The trial court's order contains fact findings that Cash Inc. v. Dyer, 969 S.W.2d 518, 521 (Tex. App.—Austin
Biz “filed criminal charges against Plaintiffs, participated 1998, no pet.). Here, the parties focus on Cash Biz's
in criminal trials, obtained criminal judgments, and conduct in a separate proceeding before the underlying
attempted to collect from Plaintiffs.” While this court litigation was filed by the Borrowing Parties. Further,
must defer to the trial court, as fact finder, this deference under these facts, Cash Biz was not a party to the criminal
is limited to those fact findings supported by the record. prosecutions and did not serve as a witness or provide
See In re Labatt Food Serv., L.P., 279 S.W.3d at 643; any interviews to facilitate prosecution. Cash Biz's actions,
Bonded Builders Home Wty Ass'n of Texas, Inc., 2016 WL though presumably vindictive, do not evince a desire to
1612916, at *3; Garcia, 340 S.W.3d at 868. Here, the trial achieve repayment of any loans through the criminal
court's fact findings are not supported by the record. The process. Thus, Cash Biz's actions were not sufficiently
case list and summaries presented do not reflect that Cash active or deliberate to constitute substantial invocation
Biz “participated in criminal trials, obtained criminal of the judicial process. See G.T. Leach Builders, LLC,
judgments, and attempted to collect from Plaintiffs.” The 458 S.W.3d at 512; Richmont Holdings, Inc., 455 S.W.3d
evidence submitted reveals only that Cash Biz provided at 576. Finally, Cash Biz's actions, even if wrong, were
information and filed criminal complaints against the insufficient to rise to the level of “substantial invocation”
Borrowing Parties. The only evidence submitted that of a litigation process. In Texas, the filing of criminal
pertains to the trial court's fact findings is Flanagan's charges and initiation of criminal process is the discretion
supplemental affidavit, which is contrary to all of the of the prosecuting attorney. Even if this court were to
trial court's findings. Flanagan attests Cash Biz did not construe Cash Biz's preliminary act as an initiation of
initiate criminal proceedings and did not participate in, or litigation to “achieve a satisfactory result,” the filing of
was in any way involved in, the criminal prosecution of suit or initiation of litigation is not “substantial invocation
the Borrowing Parties. Consequently, this court need not of judicial process”. See G.T. Leach Builders, LLC, 458
defer to these specific fact findings. See In re Labatt Food S.W.3d at 512; Richmont Holdings, Inc., 455 S.W.3d
Serv., L.P., 279 S.W.3d at 643; Bonded Builders Home Wty at 576. Therefore, the filing of a criminal complaint,
the Borrowing Parties' malicious prosecution and other has staunchly maintained that it acted with no self-
claims against it. The majority concedes that the evidence interest, but “simply left the information [of potential
is undisputed that Cash Biz “provided information and criminal conduct] to the discretion of the district attorney,
filed criminal complaints against the Borrowing Parties,” and any action taken by the district attorney thereafter
and that “absent Cash Biz's complaint, no criminal was made completely on his/her own.” To the contrary,
prosecution would have occurred.” 2 The majority holds the evidence in this case shows a pattern of specific,
that such evidence is insufficient, however, because it deliberate, and affirmative conduct by Cash Biz in filing
does not show that Cash Biz engaged in “deliberate sworn complaints (accompanied by documentation) with
conduct inconsistent with the right to arbitrate, that the district attorneys' offices as an immediate and direct
is, an active attempt to achieve a satisfactory result reaction to its borrowers' defaults on their payday loans.
through means other than arbitration.” See Maj. Op. The 13-page list of criminal cases in the Justice of the Peace
at p. 12. The majority reasons that Cash Biz's filing Courts for Harris County, Texas, where the bad check
of a criminal complaint does not rise to the level of cases against the Borrowing Parties were filed, shows that
“active engagement in litigation” through “specific and Cash Biz was the complainant in more than 400 bad
deliberate actions” that are inconsistent with the right to check cases filed during the relevant time period from
arbitrate, or that reveal an intent to resolve the dispute May 2011 through July 2012. The appellees represent that
through litigation rather than arbitration, because: (1) Cash Biz repeated this conduct in other Texas counties
the criminal complaints were filed before the Borrowing as well. Given the sheer number and geographic scope of
Parties filed suit; (2) Cash Biz was not a party to, and the complaints, it is disingenuous to assert, as Cash Biz
did not participate as a witness in, the separate criminal does, that it was simply acting as a concerned citizen who
prosecution; and (3) Cash Biz's actions do not show was aware of potentially criminal conduct, without any
its desire to obtain repayment of the loans through the desire for restitution from any of its borrowers. Moreover,
criminal process. See Maj. Op. at p. 14-15. The majority at the hearing, counsel for Cash Biz ultimately conceded
stresses that, even assuming Cash Biz's action in filing the that Cash Biz would provide the “bad check” information
complaints “initiated” the criminal prosecution, the mere to the prosecutors, and the prosecutors' office would send
filing of suit or initiation of litigation does not, by itself, out letters “to collect.”
constitute substantial invocation of the judicial process.
In addition, in its appellate brief and at oral argument,
*10 I disagree with the majority's analysis for several Cash Biz conceded that it was “mistaken” in believing
reasons. First, the traditional waiver requirement that that it was a crime for its borrowers to give it a post-
the judicial process have been substantially invoked after dated check as security for the loan (as it required).
the filing of the underlying lawsuit is based on the usual See TEX. PENAL CODE ANN. § 32.41 (West Supp.
situation where there is only one legal proceeding. See, 2015) (defining the offense of issuance of a bad check).
e.g., Perry Homes, 258 S.W.3d at 585, 591. Here, we are Indeed, the criminal charges against the four named
presented with the unique situation of a civil lawsuit and Borrowing Parties were ultimately dismissed. This does
a criminal proceeding, both of which arise out of the same not change the fact that they suffered prejudice as a
civil debt. Second, while the formal parties in a criminal result of the charges, arrests, and defense costs, as well
proceeding are the defendant and the State of Texas, In re as the mental, emotional, and reputational damages.
Amos, 397 S.W.3d 309, 314 (Tex. App.—Dallas 2013, orig. Other defaulting borrowers against whom Cash Biz
proceeding), the victim or complainant has a personal filed complaints suffered convictions and punishment,
interest in the prosecution and thus plays a unique role in including restitution. Ultimately, Cash Biz invoked the
criminal proceedings. See In re Ligon, 408 S.W.3d 888, 896 collection authority of the district attorney's office with
(Tex. App.—Beaumont 2013, orig. proceeding). the expectation to obtain restitution, i.e., repayment of the
loans.
Third, I disagree with the majority that Cash Biz's actions
in “merely” filing the criminal complaints do not show While it may be technically correct that the district
its desire to obtain repayment of the loans, or otherwise attorney made the ultimate decision whether to file bad
obtain a satisfactory result, through the criminal process. check charges based on the information contained in Cash
As Flanagan's supplemental affidavit indicates, Cash Biz Biz's sworn complaints, it is also true that no criminal
prosecution would ever have been initiated without Cash Id. at 481. The court of appeals explained that, “[w]hile
Biz alerting the district attorney's office and supplying we ordinarily would not consider actions in a separate
the information stated in, and attached to, its complaints. cause as indicative of waiver,” the motion for contempt
See Browning-Ferris Indus., Inc. v. Leick, 881 S.W.2d 288, expressly stated that Christus Spohn planned to use the
293 (Tex. 1994). By submitting the sworn complaints, criminal court's contempt finding to prevent the use of
Cash Biz not only procured the prosecution, it became the criminal defendant's statement in the civil matter. Id.
a “witness” in the criminal prosecution, i.e., a person at 481. The court “construe[d] Spohn's actions in this
who presented personal knowledge of the borrowers' separate lawsuit as part of its strategic plan of defense
purported criminal conduct. See Crawford v. Washington, in the underlying matter that would be inconsistent
541 U.S. 36, 50-53 (2004) (defining “ ‘witnesses' against with a right to arbitrate.” Id. (emphasis added). The
the accused” within the context of the Sixth Amendment court of appeals concluded that “Spohn's third-party
to include not only those who actually testify at trial, but petition, motion for contempt, and attempt to impose
also those whose out-of-court statements are used against sanctions constitute specific and deliberate actions that
the defendant). Once the complaint was submitted, the are inconsistent with the right to arbitrate and suggest
right of confrontation attached to each defendant. Id. at that Spohn was attempting to achieve a satisfactory result
50. Whether Cash Biz was attempting to obtain repayment through the judicial process.” Id. at 481-82. Based on this
of the loans through restitution as its conduct suggests, combination of facts and circumstances, the court held
or to obtain some other form of punishment against that Christus Spohn had substantially invoked the judicial
its defaulting borrowers, it deliberately and repeatedly process and waived its right to enforce arbitration. Id. at
invoked the criminal justice system in an attempt to 482.
achieve some form of satisfactory result based on the civil
debt. In doing so, Cash Biz ignored its own right and A Nevada court has addressed waiver of arbitration in
obligation under the arbitration agreement contained in a factual scenario that is substantially similar, if not
the Loan Contracts to seek collection of the debts through identical, to the scenario presented here. The Nevada
arbitration rather than judicially. Supreme Court has held that a payday loan company
that obtained default judgments against its borrowers
*11 While the instant facts involving Cash Biz's actions waived its right to arbitration under the loan contracts
in a separate criminal proceeding do not fit within in a separate lawsuit. Principal Invs., Inc. v. Harrison,
the traditional waiver analysis applied to a single civil 366 P.3d 688, 697-98 (Nev. 2016). In that case, during
lawsuit, the parties have presented us with some cases a seven-year period, Rapid Cash filed more than 16,000
that are instructive on the application of waiver law individual collection actions in justice of the peace court
to similar fact scenarios. Only one Texas case discusses in Clark County, Nevada against its borrowers seeking
the interplay between civil and criminal litigation in a repayment of the loans. Id. at 690. Relying on affidavits
waiver-of-arbitration context. In In re Christus Spohn of service by its process server, Rapid Cash obtained
Health Sys. Corp., 231 S.W.3d 475 (Tex. App.—Corpus thousands of default judgments. Id. at 690-91. The
Christi-Edinburg 2007, orig. proceeding), a nurse was borrowers filed a class-action lawsuit against Rapid Cash
murdered in her employer hospital's parking lot and alleging fraud upon the court through false affidavits of
her family sued the hospital for wrongful death. Id. at service, abuse of process, negligence, civil conspiracy and
478. Christus Spohn “substantially litigated” the case violation of fair debt collection laws. Id. at 691. Rapid
during the fourteen-month period before it filed a motion Cash moved to compel arbitration under the provision
to compel arbitration. Id. at 480-81 (describing how contained in the loan agreements, but the trial court
the hospital engaged in “voluminous discovery,” filed a denied the motion based on waiver due to the collection
motion to designate the criminal defendant as a third party actions in justice court. Id. at 691-92. Acknowledging that
defendant, and filed an original third party petition, while FAA waiver law requires “prior litigation of the same
three trial dates were rescheduled). During the fourteen- legal and factual issues as those the party now wants
month period before the hospital sought to compel to arbitrate,” the Nevada Supreme Court affirmed the
arbitration, the hospital filed a motion for contempt in finding of waiver, reasoning the class-action claims “arise
the criminal proceeding based on alleged discovery abuse out of, and are integrally related to, the litigation Rapid
in the civil case by counsel for the deceased's family. Cash conducted in justice court.” Id. at 697. The court
stated that if the default judgments that Rapid Cash a “specific claim [it] subsequently wants to arbitrate,” to
wit: the specific issue of non-payment from which all of
obtained were unenforceable as the product of fraud or
the Borrowing Parties' causes of action derive.
criminal misconduct, it would be “unfairly prejudicial
to the judgment debtor to require arbitration of claims
*12 I believe the record here shows that Cash Biz
seeking to set that judgment aside ... and otherwise to
substantially invoked the judicial process by deliberately
remediate its improper entry.” Id. at 697-98.
engaging in a series of overt acts in court that evidence
a desire to resolve the same arbitrable dispute through
Harrison is not directly on point, but is instructive because
litigation rather than arbitration. See Tuscan Builders, LP
there “the named plaintiffs' claims all concern[ed], at their
v. 1437 SH6 L.L.C., 438 S.W.3d 717, 721 (Tex. App.
core, the validity of the default judgments,” and in our
—Houston [1st Dist.] 2014, pet. denied) (op. on reh'g)
situation the Borrowing Parties' malicious prosecution
(quoting Haddock v. Quinn, 287 S.W.3d 158, 177 (Tex.
claims similarly “arise out of, and are integrally related
App.—Fort Worth 2009, pet. denied)). Therefore, I would
to” the criminal bad check charges instigated by Cash Biz.
hold that, by filing the criminal “bad check” complaints
See id. at 698. Waiver of the right to arbitration under the
against the Borrowing Parties, seeking repayment or some
FAA does not require that the party litigate the identical
other form of satisfaction, Cash Biz waived its contractual
claims in order to invoke the judicial process, but rather a
right to arbitrate the malicious prosecution claims arising
“specific claim it subsequently wants to arbitrate.” Subway
out of the criminal proceedings.
Equip. Leasing Corp. v. Forte, 169 F.3d 324, 328 (5th
Cir. 1999) (emphasis added). Here, Cash Biz initiated a
As to the class-action prohibition, it is not an
process that invited the Harris County district attorney
independent agreement, but is included within the
to address issues that are at stake in the underlying
arbitration agreement in the Loan Contracts. Therefore
lawsuit. The Borrowing Parties' malicious prosecution
its applicability depends on the applicability of the
claim contains elements of a plaintiff's innocence. 3 The
arbitration agreement. I would therefore hold that the
Borrowing Parties' innocence and the absence of probable
class-action prohibition was similarly waived by Cash
cause were litigated in the prior criminal proceedings.
Biz's invocation of the judicial process.
Their other claims for fraud and violations of the DTPA
and Finance Code similarly involve litigation in the
criminal proceedings of defensive issues based on Cash Biz All Citations
misrepresenting the conditions for the loans the process
of collection, and threatening them to achieve repayment. Not Reported in S.W.3d, 2016 WL 4013794
Cash Biz invoked the criminal judicial process to litigate
Footnotes
1 The proposed Class is defined as “[a]ll residents of the State of Texas who received a ‘deferred presentment transaction’
or payday loan as defined by TEX. FIN. CODE § 393.221 from Cash Biz in the State of Texas and Cash Biz's pursuit
of [sic] criminal charges to collect or recover the payday loan.”
2 See TEX. CONST. Art. 1, sec. 18 (“No person shall ever be imprisoned for debt.”); see also TEX. FIN. CODE ANN. §
392.301(a) (West 2006) (“In debt collection, a debt collector may not use threats, coercion or attempts to coerce that
employ any of the following practices ... (2) accusing falsely or threatening to accuse falsely a person of fraud or any
other crime”); TEX. FIN. CODE ANN. § 393.201(c)(3) (West Supp. 2015) (credit services contract must state “a person
may not threaten or pursue criminal charges against a consumer related to a check or other debit authorization provided
by the consumer as security for a transaction in the absence of forgery, fraud, theft, or other criminal conduct.”).
3 In the civil context, courts consider factors such as: (i) when the movant knew of the arbitration clause; (ii) the reason for
any delay in moving to enforce arbitration; (iii) how much discovery was conducted; (iv) who initiated the discovery; (v)
whether the discovery related to the merits; (vi) how much the discovery would be useful for arbitration; and (vii) whether
the movant sought judgment on the merits. Perry Homes, 258 S.W.3d at 591-92
1 Because the majority opinion does not reach the second-prong issue of prejudice, I also omit that analysis; however, I
believe the Borrowing Parties proved that they suffered actual prejudice.
2 The majority agrees that the list of criminal cases in the Harris County Justice of the Peace Court showing Cash Biz as
“complainant” in all the cases against the Borrowing Parties, as well as multiple other borrowers, “impliedly reveals” that
no criminal prosecution would have been initiated without Cash Biz's complaints.
3 The elements of a malicious prosecution claim are: (1) the commencement of a criminal prosecution against the plaintiff;
(2) causation (initiation or procurement) of the action by the defendant; (3) termination of the prosecution in the plaintiff's
favor; (4) the plaintiff's innocence; (5) the absence of probable cause for the proceedings; (6) malice in filing the charge;
and (7) damage to the plaintiff. Richey v. Brookshire Grocery Co., 952 S.W.2d 515, 517 (Tex. 1997); Davis v. Prosperity
Bank, 383 S.W.3d 795, 802 (Tex. App.—Houston [14th Dist.] 2012, no pet.).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[8] Guaranty Neal & McBeath, Bill Neal and Marc McBeath, Vernon,
Scope and Extent of Liability for respondent.
A guarantor is entitled to have his agreement Opinion
strictly construed so that it is limited to his
undertakings, and it will not be extended by BARROW, Justice.
construction or implication.
This suit was brought by Frances Kincaid Coker (Frances)
18 Cases that cite this headnote against her former husband, Mac L. Coker, Jr. (Mac), on
a property settlement agreement incorporated into their
divorce decree. The decree awarded Frances a real estate
[9] Guaranty
commission previously earned by Mac from the sale of
General rules of construction
certain ranch property. The seller of the property was
Where uncertainty exists as to the meaning of to pay the commission in seven annual installments as
a contract of guarantee, its terms should be payments were made by the purchaser. After Frances
given a construction which is most favorable received payments totaling $14,317.16, the purchaser
to guarantor. defaulted and no further commissions were receivable.
The question presented here is whether Mac agreed to pay
16 Cases that cite this headnote
Frances a minimum of $25,000 or whether Frances was
assigned all of Mac's interest in the commissions to be paid
[10] Contracts by the seller in this particular transaction.
Construing whole contract together
Courts must favor an interpretation that Both parties asserted that the property settlement
affords some consequence to each part of the agreement was unambiguous and each moved for a
instrument so that none of the provisions will favorable summary judgment. The trial court construed
be rendered meaningless. the agreement as one of guaranty and rendered summary
judgment that Frances recover the sum of $10,682.84 from
309 Cases that cite this headnote Mac. The court of appeals affirmed in an unpublished
opinion. Tex.R.Civ.P. 452. We reverse the judgments of
[11] Judgment the courts below and remand the cause to the trial court.
Domestic relations
The parties were divorced on September 24, 1971 after
In action brought by divorced wife against her
being married about ten years. They had accumulated
former husband to recover under the terms of
community property consisting of a 1969 Buick
property settlement agreement incorporated
automobile, two Dallas Cowboy seat options, unpaid real
into their divorce decree, substantial fact issue
estate commissions earned by Mac while employed as
existed as to whether former husband agreed
a broker for the real estate firm of Majors & Majors
to pay wife a specified amount of money
and certain personal effects. The parties entered into a
property settlement agreement which was approved by the further have as her sole and separate property, free
trial court and incorporated into the divorce decree. The and clear *393 of all claim, right or title asserted
decree provides in relevant part: by husband, that certain right, commission or account
receivable heretofore earned by husband during his
IT IS THEREFORE FURTHER employment with the firm of Majors & Majors in
ORDERED, ADJUDGED AND connection with the sale of the “Jinkens ranch property
DECREED that Petitioner Frances in Tarrant County, Texas,” such future commission or
Kincaid Coker have and she account receivable being in the approximate sum of
hereby is awarded as her sole $25,000.00.
and separate property one 1969
Buick automobile, Serial No. ....
4443792127816, all household goods
and personal possessions now in 8. Husband represents and warrants to the wife that,
her possession or located at her to the best of his knowledge, approximately $25,000.00
place of residence, one Texas remains due and owing to him as his portion of
Stadium Bond along with season commissions earned in connection with the sale of the
ticket sold in connection therewith, “Jinkens property in Tarrant County, Texas,” and he
and those certain commissions and hereby guarantees to wife that she will receive the said
accounts receivable heretofore earned sum of $25,000.00, from Majors & Majors, or from
by husband during his employment any other payor of such commissions receivable. Such
with the firm of Majors and commission is payable to her as payments are made by
Majors in connection with the sale purchasers to sellers, and will normally be received by
of the “Jinkens Ranch property her through the office of Majors & Majors. In the event,
in Tarrant County, Texas”; that for any reason she fails to receive such installments of
Respondent have and he hereby is commission exactly as husband would have prior to
awarded as his sole and separate his assignment of his rights thereto to wife, husband
property one Texas Stadium Bond agrees to pay to wife in Dallas County, Texas all such
along with season ticket sold in sums of money, which she has failed to receive, up to the
connection therewith, all personal guaranteed sum of $25,000.00. (emphasis added).
effects in his possession and those
certain commissions or accounts The parties thereby agreed that Mac would keep his
receivable owing to him from rights to the monthly commissions earned on leases
Majors and Majors being the he had negotiated and Frances would be assigned the
monthly commissions on leases commission earned by Mac from the sale of the “Jinkens
negotiated while Respondent was ranch property in Tarrant County.” Prior to the divorce,
in the employment of Majors and Mac had participated in the sale of the Jinkens ranch
Majors. (emphasis added). whereby he would receive 40% of the sales commission
payable by the seller to Majors & Majors over a seven
The property settlement agreement provides in part: year period contingent on the annual payments being
made by the purchaser. In 1976, however, the purchaser
5. Wife shall receive as her sole and separate property, defaulted and according to the terms of the sales contract,
free and clear of any claim, right or title of husband, the seller was not required to continue payments of the
the following described property: one 1969 Buick commission. Therefore, Mac's rights in the commission
automobile, serial no. 4443792127816, all household were terminated.
goods and personal possessions now in the wife's
possession or located at her place of residence, (except Frances admitted that she had received all the commission
that the husband shall receive one bedroom suite now payable to Mac prior to default, but she contends that
located in Crowell, Texas), and one Texas Stadium under the property settlement agreement she was to
bond, free of all indebtedness, along with the season receive a minimum of $25,000. The trial court and the
ticket sold in connection therewith. The wife shall court of appeals agreed with Frances. We must attempt
to construe this contract and determine the intent of the the commission sales agreement. This interpretation
parties as shown by the written instruments. conflicts with paragraph 5 of the agreement and the
language used in the divorce decree.
[1] [2] [3] In construing a written contract, the primary
concern of the court is to ascertain the true intentions According to the rules of construction, paragraph 8 must
of the parties as expressed in the instrument. R & P be considered along with paragraph 5 and the underlying
Enterprises v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d circumstances to ascertain the true intention of the parties.
517, 518 (Tex.1980); City of Pinehurst v. Spooner Addition See City of Pinehurst, 432 S.W.2d at 518, 519. The court
Water Co., 432 S.W.2d 515, 518 (Tex.1968). To achieve of appeals failed to fully consider paragraph 5 of the
this objective, courts should examine and consider the agreement which clearly states that Mac only assigned
entire writing in an effort to harmonize and give effect that “certain right, commission or account receivable
to all the provisions of the contract so that none will heretofore earned by husband.” Also, the language of the
be rendered meaningless. Universal C.I.T. Credit Corp. divorce decree supports an interpretation only assigning
v. Daniel, 150 Tex. 513, 243 S.W.2d 154, 158 (1951). Mac's interest in the commission.
No single provision taken alone will be given controlling
effect; rather, all the provisions must be considered [8] [9] [10] When the language in paragraph 8 is
with reference to the whole instrument. Myers v. Gulf considered alone and particularly the last sentence thereof,
Coast Minerals Management Corp., 361 S.W.2d 193, 196 the meaning is unclear. The provision could be construed
(Tex.1962); Citizens Nat'l Bank in Abilene v. Texas & P. as a guarantee by Mac that Frances would receive $25,000
Ry. Co., 136 Tex. 333, 150 S.W.2d 1003, 1006 (1941). or merely a promise that he would not interfere with the
In harmonizing these provisions, terms stated earlier in payments made by Majors & Majors to her after they
an agreement must be favored over subsequent terms. received the commission from the seller. If we construe
Ogden v. Dickinson State Bank, –––S.W.2d ––––, ––––, 26 the agreement as a contract of guaranty, any uncertainty
Tex.Sup.Ct.J. 200, 202 (Jan. 26, 1983). must be resolved in favor of Mac as guarantor. 1 Even if
we conclude the rules of guaranty do not apply, we could
[4] [5] [6] [7] If the written instrument is so wordednot say with certainty that Mac promised to pay Frances
that it can be given a certain or definite legal meaning or $25,000 regardless of the payment of the commission.
interpretation, then it is not ambiguous and the court will Such an interpretation would render the provisions in the
construe the contract as a matter of law. Universal C.I.T. divorce decree and paragraph 5 relating to the assignment
Credit Corp., 243 S.W.2d at 157; R & P Enterprises, 596 of the commission surplusage. Courts must favor an
S.W.2d at 519. A contract, however, is ambiguous when interpretation that affords some consequence to each part
its meaning is uncertain and doubtful or it is reasonably of the instrument so that none of the provisions will be
susceptible to more than one meaning. *394 Skelly Oil rendered meaningless. See Odgen, –––S.W.2d at ––––, 26
Co. v. Archer, 163 Tex. 336, 356 S.W.2d 774, 778 (1962). Tex.Sup.Ct.J. at 202; Portland Gasoline Co. v. Superior
Whether a contract is ambiguous is a question of law Marketing Co., 150 Tex. 533, 243 S.W.2d 823, 824 (1951).
for the court to decide by looking at the contract as
a whole in light of the circumstances present when the [11] The divorce decree and paragraph 5 state what
contract was entered. R & P Enterprises, 596 S.W.2d at interest is assigned to Frances. Unless paragraph 8 is
518. When a contract contains an ambiguity, the granting construed to merely set out the manner in which Frances
of a motion for summary judgment is improper because would receive the annual payments, this paragraph
the interpretation of the instrument becomes a fact issue. conflicts with paragraph 5 and the divorce decree. This
See Harris v. Rowe, 593 S.W.2d 303, 306 (Tex.1980). conflict creates an ambiguity as to the intent of the parties
as expressed in the written agreement and the decree.
The court of appeals determined that Mac had absolutely
guaranteed the payment of $25,000 to Frances. Although The court of appeals held the provisions of the property
the court of appeals recognized that the liability of settlement agreement unambiguously required Mac to pay
a guarantor is generally measured by the liability Frances $25,000 regardless of whether the commissions
of the principal, it held that paragraph 8 of the were in fact paid by the purchaser. This construction
settlement agreement created a broader obligation than conflicts with paragraph 5 as well as the divorce decree.
Therefore, this agreement is ambiguous and the trial court In the first sentence of paragraph eight, Mac
erred in granting summary judgment. The trier of fact unconditionally represented and warranted that the
must resolve the ambiguity *395 by determining the true “Jinkins property” commission was due and owing to
intent of the parties. Trinity Universal Ins. Co. v. Ponsford him. He then assigned the commission to Frances and
Bros., 423 S.W.2d 571, 575 (Tex.1968). “guaranteed” receipt by her of $25,000. While it is true
that the payments of the commission were due only so
We reverse the judgments of the courts below and remand long as payments on the purchase of the property were
the cause to the trial court. made, and upon default no commission would be paid,
this limitation is not incorporated in nor alluded to in the
agreement setting forth his obligation to pay his wife the
$25,000. In fact, the agreement is quite to the contrary.
SPEARS, J., dissents in which POPE, C.J., and RAY and
ROBERTSON, JJ., join.
The third sentence of paragraph eight provides:
SPEARS, Justice, dissenting. “In the event, for any reason she fails to receive such
I respectfully dissent. installments of commission exactly as Husband would
have prior to this assignment of his rights thereto to Wife,
I do not believe that the property settlement agreement Husband agrees to pay Wife in Dallas County, Texas all
entered into by the Cokers is ambiguous. If a written such sums of money, which she has failed to receive, up
instrument can be given a definite interpretation, it is not to the guaranteed sum of $25,000.00.” (emphasis added).
ambiguous and the court will construe the contract as a
When this statement is construed with the other provisions
matter of law. R & P Enterprises v. La Guarta, Gavrel &
of the agreement it is clear that Mac guaranteed that
Kirk, Inc., 596 S.W.2d 517, 518 (Tex.1980).
Frances would receive $25,000 regardless of what might
happen to the commission. The sentence is a directional
The majority correctly states that the primary objective
provision indicating when and how she is to receive the
in the interpretation of contracts is to give effect to the
payments. No other provision in the contract pointed to
intentions of the parties as expressed in the instrument.
by the majority negates this guarantee; rather, all other
R & P Enterprises v. La Guarta, Gavrel & Kirk, Inc., 596
provisions are consistent with it. Mac “warranted” the
S.W.2d at 518; Citizens National Bank in Abilene v. Texas
commission was due him and he “guaranteed” the sum of
& P. Ry. Co., 136 Tex. 333, 150 S.W.2d 1003, 1006 (1944).
$25,000 would be paid to his ex-wife. In other words, Mac
Also, the court must consider the entire instrument so
guaranteed that Frances would receive approximately
that none of the provisions will be rendered meaningless.
$25,000 from Majors & Majors or any other payor.
R & P Enterprises, 596 S.W.2d at 519; Myers v. Gulf
He further promised that if she failed to receive these
Coast Minerals Management Corp., 361 S.W.2d 193, 196
payments as he would have prior to assignment directly
(Tex.1962).
from the third party payors, he would pay the balance up
to $25,000.
By applying these rules of construction and looking
at the contract as a whole, we see the clear,
Mac's guarantee is unqualified and expresses no
unambiguous meaning of the words used. It is obvious
other condition for its enforceability than default of
to me that Frances was to receive a minimum of
performance by the principal obligor. It should be treated,
$25,000. The divorce decree awarded her “those certain
therefore, as the guaranty of payment that it is. An
commissions and accounts receivable heretofore earned
unconditional guaranty for payment becomes a primary
by husband ....” (emphasis added). Paragraph five of
obligation upon *396 default. See Ferguson v. McCarrell,
the property settlement provides that Frances shall
588 S.W.2d 895 (Tex.1979); Universal Metal & Machinery,
have as her separate property “that certain right,
Inc. v. Bohart, 539 S.W.2d 874, 877 (Tex.1976).
commission or account receivable heretofore earned by
husband ....” (emphasis added).
The majority curiously finds ambiguity in the words
“guarantee,” “for any reason,” “agrees to pay wife,” “all
such sums of money which she failed to receive,” and
Footnotes
1 A guarantor is entitled to have his agreement strictly construed so that it is limited to his undertakings, and it will not be
extended by construction or implication. Reece v. First State Bank of Denton, 566 S.W.2d 296, 297 (Tex.1978); McKnight
v. Virginia Mirror Co., 463 S.W.2d 428, 430 (Tex.1971); Southwest Savings Association v. Dunagan, 392 S.W.2d 761,
766 (Tex.Civ.App.—Dallas 1965, writ ref'd n.r.e.). Where uncertainty exists as to the meaning of a contract of guaranty,
its terms should be given a construction which is most favorable to the guarantor. Commerce Savings Assoc. v. GGE
Management Co., 539 S.W.2d 71, 78 (Tex.Civ.App.—Houston [1st Dist.] 1976) modified and affirmed with per curiam, 543
S.W.2d 862 (Tex.1976); Walter E. Heller & Co. v. Allen, 412 S.W.2d 712, 721 (Tex.Civ.App.—Tyler 1967, writ ref'd n.r.e.).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
and has broad authority to examine the safety consider matters outside the pleadings, and
and soundness of the banks it supervises. may rest its decision on its own resolution of
disputed facts. Fed. R. Civ. P. 12(b)(1).
Cases that cite this headnote
Cases that cite this headnote
Cases that cite this headnote Cases that cite this headnote
the latter, a party implicitly proves the former, Language used by an agency is an important
because the agency's adoption of a binding consideration in determining whether legal
norm obviously would reflect final agency consequences flow from agency action, such
action. 5 U.S.C.A. § 704. that it is reviewable as “final” under the
Administrative Procedure Act (APA). 5
Cases that cite this headnote U.S.C.A. § 704.
[40] Administrative Law and Procedure Cases that cite this headnote
Finality; ripeness
Guidance that does not tell regulated parties [44] Constitutional Law
what they must do or may not do in order to Arbitrariness
avoid liability is merely a general statement Fifth Amendment's due process clause
of policy, not a final agency action subject protects the individual citizen from the
to judicial review under the Administrative arbitrary exercise of power by the
Procedure Act (APA). 5 U.S.C.A. § 704. government. U.S. Const. Amend. 5.
Cases that cite this headnote Cases that cite this headnote
[42] Administrative Law and Procedure Cases that cite this headnote
Finality; ripeness
In determining whether agency documents [46] Administrative Law and Procedure
reflected “final” agency action, and so Proceedings for Adoption
were subject to judicial review under the Administrative Law and Procedure
Administrative Procedure Act (APA), the Hearings and Adjudications
court need not limit its analysis to the four
Supreme Court has recognized a distinction
corners of the documents; rather, it may look
in administrative law between proceedings
to post-guidance events to determine whether
for the purpose of promulgating policy-
the agency has applied the guidance as if it
type rules or standards, on the one hand,
were binding on regulated parties. 5 U.S.C.A.
and proceedings designed to adjudicate
§ 704.
disputed facts in particular cases on the
Cases that cite this headnote other; adjudicative proceedings require more
individualized process than rule-making
decisions. U.S. Const. Amend. 5.
[43] Administrative Law and Procedure
Regulation and supervision in general In June 2014, Plaintiffs' Community Financial Services
Banks and Banking Association of America, Ltd. (“CFSA”) and Advance
Federal Reserve Board America, Cash Advance Centers, Inc. (“Advance
America”) filed a Complaint against Defendants the
Banks and Banking
Federal Deposit Insurance Corporation (“the FDIC”),
Powers, functions and dealings in general
the Board of Governors of the Federal Reserve System
Constitutional Law (“the Board”), and the Office of the Comptroller of the
Financial institutions, transactions, and Currency and Thomas J. Curry, in his official capacity as
services the Comptroller of the Currency (“the OCC”). Plaintiffs
Payday lender and national trade association seek declaratory and injunctive relief to set aside certain
representing payday lenders stated a claim informal guidance documents and other actions by the
for violation of their right to procedural FDIC, the Board, and the OCC on the grounds that
due process by alleging that Federal they exceed the agencies' statutory authority, are arbitrary
Deposit Insurance Corporation (FDIC) and capricious, were promulgated without following the
and other government entities promulgated procedures required by law, and deprive Plaintiffs of
certain informal guidance documents for liberty interests without due process of law.
banks, engaged in coercive back-room
communications, and created de facto rule This matter is before the Court on Defendants' Motions
against providing financial services to payday to Dismiss for Lack of Jurisdiction and for Failure to
lenders, that stigma resulted from defendant State a Claim (collectively, “Motions to Dismiss”) [Dkt.
agencies' actions, that the stigma deprived Nos. 16, 17, 18], Plaintiffs' Motion for Jurisdictional
plaintiffs of two interests, namely, their Discovery (“Motion for Discovery”) [Dkt. No. 25], and
interest in having bank accounts and their Plaintiffs' Motion for Leave to File a Second Amended
interest in their ability to engage in their Complaint [Dkt. No. 56]. Upon consideration of the
chosen line of business, and that defendants'
motions, 1 oppositions, replies, surreplies, notices of
actions thus implicated a protected liberty
support, response, the entire record herein, and for the
interest. U.S. Const. Amend. 5.
reasons stated below, the Motions to Dismiss are granted
Cases that cite this headnote in part and denied in part, the Motion for Discovery
is denied, and the Motion for Leave to File a Second
Amended Complaint is granted.
[2] Defendant FDIC is an independent agency and acts known as “Operation Choke Point,” to force banks
as the primary federal regulator for certain state-chartered to terminate their business relationships with payday
banks. In that capacity, the FDIC prescribes standards to lenders. Operation Choke Point has recently been
promote banks' safety and soundness, and may do so by the subject of a House Committee Investigation
regulation or guideline. The FDIC also examines banks, and reports. See SAC ¶¶ 56–58; STAFF OF H.
prepares examination reports, and brings enforcement COMM. ON OVERSIGHT & GOV'T REFORM,
actions. See FDIC Mot. at 2; FDIC, Who is the FDIC?, 113TH CONG., REP. ON THE DEP'T OF JUSTICE'S
available at www.fdic.gov/about/learn/symbol. “OPERATION CHOKE POINT”: ILLEGALLY
CHOKING OFF LEGITIMATE BUSINESSES?
[3] Defendant OCC is an independent bureau within the (Comm. Print 2014) (“Comm.Report”); STAFF
U.S. Department of the Treasury that functions as the OF H. COMM. ON OVERSIGHT AND GOV'T
primary supervisor of federally chartered (national) banks REFORM, 113TH CONG., FEDERAL DEPOSIT
and savings and loan associations. The OCC administers INSURANCE CORPORATION'S INVOLVEMENT
statutory provisions governing most aspects of the federal IN “OPERATION CHOKE POINT” (Comm. Print
banking system and has broad authority to examine the 2014) (“Comm. FDIC Report”).
safety and soundness of the banks it supervises. See OCC
Mot. at 5; OCC, About the OCC, available at http:// Defendants allegedly forced banks to terminate
www.occ.gov/about. relationships with Plaintiffs and Plaintiffs' members
by first promulgating regulatory guidance regarding
[4] Defendant Board of Governors of the Federal Reserve “reputation risk,” and by later relying on the reputation
System is a federal agency authorized to regulate and risk guidance “as the fulcrum for a *107 campaign of
examine bank holding companies and state-chartered backroom regulatory pressure seeking to coerce banks to
banks that are members of the Federal Reserve System. terminate longstanding, mutually beneficial relationships
State member banks that are regulated by the Board are with all payday lenders.” Pls.' Opp'n at 9.
also regulated by state banking agencies. See Board Mot.
at 2–3.
B. Procedural Background
Payday lenders utilize the services of banks as part of their On June 5, 2014, Plaintiffs filed their original Complaint
business. For example, “[w]hen a prospective borrower against Defendants asserting violations of the APA and
applies for the loan ... he or she typically provides a post- due process [Dkt. No. 1]. The First Amended Complaint
dated check or an electronic debit authorization for the was filed on July 30, 2014 (“FAC”) [Dkt. No. 12]. On
value of the loan, plus a fee. The lender immediately August 18, 2014, the Board filed its Motion to Dismiss
advances the customer funds, then after a specified period for Lack of Jurisdiction, or Alternatively for Failure to
of time, usually determined by the customer's next payday, State a Claim [Dkt. No. 16] (“Board Mot.”). The FDIC
the borrower returns to repay the loan and fee. But if the filed a similar Motion [Dkt. No. 17] (“FDIC Mot.”), as
customer does not return, the terms of the transaction did the OCC [Dkt. No. 18] (“OCC Mot.”). On October
permit the lender to deposit the post-dated check or to 2, 2014, Plaintiffs filed their Opposition to Motions to
execute the debit authorization. In order to have that Dismiss [Dkt. No. 23] (“Pls.' Opp'n”).
security, the lender must have a deposit account with a
bank and/or access to the Automated Clearing House The following day, Plaintiffs filed a Motion for Discovery
(ACH) network.” SAC ¶ 28; see also OCC Motion to [Dkt. No. 25] (“Discovery Mot.”). On October 31, 2014,
Dismiss (“OCC Mot.”) [Dkt. No. 18–1] at 1 (“a payday the Board filed its Reply in support of its Motion to
lender typically must submit checks provided by its Dismiss [Dkt. No. 41] (“Board Reply”) and its Opposition
borrowers through the payment system by causing the to Plaintiffs' Motion for Discovery [Dkt. No. 42] (“Board
checks to be deposited at a bank.”) Discovery Opp'n”); the FDIC filed its Reply [Dkt. No. 46]
(“FDIC Reply”) and Opposition [Dkt. No. 45] (“FDIC
Plaintiffs allege that Defendants participated and Discovery Opp'n”); and the OCC filed its Reply [Dkt.
continue to participate in a campaign initiated by No. 44] (“OCC Reply”) and Opposition [Dkt. No. 43]
the United States Department of Justice (“DOJ”), (“OCC Discovery Opp'n”). Plaintiffs filed their Reply in
support of their Motion for Discovery [Dkt. No. 49] (“Pls.'
Discovery Reply”) on November 10, 2014. Plaintiffs also 391 (1994). The plaintiff bears the burden of establishing
filed a Surreply to Defendants' Replies in Support of the by a preponderance of the evidence that the Court has
Motions to Dismiss [Dkt. No. 50] (“Pls.' Surreply”) the subject matter jurisdiction to hear the case. SeeShuler
same day. In response, the FDIC filed a Surreply [Dkt. v. United States, 531 F.3d 930, 932 (D.C.Cir.2008). In
No. 51] (“FDIC Surreply”) on November 14, 2014. deciding whether to grant a motion to dismiss for lack of
jurisdiction under Rule 12(b)(1), the court must “accept
On October 23, 2014, prior to the filing of Defendants' all of the factual allegations in [the] complaint as true.”
Replies and Discovery Oppositions, Plaintiffs filed a Jerome Stevens Pharmaceuticals, Inc. v. Food & Drug
Notice of Supplemental Support [Dkt. No. 35] (“Pls.' Admin., 402 F.3d 1249, 1253 54 (D.C.Cir.2005) (quoting
First Supp.”) notifying the Court of a letter from an United States v. Gaubert, 499 U.S. 315, 327, 111 S.Ct.
FDIC official to a depository institution. On December 1267, 113 L.Ed.2d 335 (1991)). The Court may also
12, 2014, after briefing was complete on the Motions consider matters outside the pleadings, and may rest
to Dismiss and the Motion for Discovery, Plaintiffs its decision on its own resolution of disputed facts.
filed a Second Notice of Supplemental Support [Dkt. SeeHerbert v. Nat'l Acad. of Sci., 974 F.2d 192, 197
No. 52] (“Pls.' Second Supp.”) to notify the Court of (D.C.Cir.1992).
a U.S. House of Representatives Committee Report
on the FDIC's involvement in Operation Choke Point.
On December 23, 2014, the FDIC filed a Response to B. Standing
Plaintiffs' Second Supplemental Notice [Dkt. No. 53] [9] [10] As a threshold matter, Defendants argue that
(“FDIC Supp. Resp.”). Plaintiffs do not have standing. Article III of the
Constitution limits the jurisdiction of federal courts to
certain “Cases” and “Controversies.” See U.S. Const.
II. Second Amended Complaint art. 3, § 2. “[N]o principle is more fundamental to the
After briefing was complete on the Motions to Dismiss judiciary's proper role in our system of government than
and the Motion for Jurisdictional Discovery, Plaintiffs the constitutional limitation of federal-court jurisdiction
filed a Motion for Leave to File a Second Amended to actual cases or controversies.” Clapper v. Amnesty Int'l
Complaint on April 10, 2015 [Dkt. No. 56]. Defendants' USA, ––– U.S. ––––, 133 S.Ct. 1138, 1146, 185 L.Ed.2d
only opposition to the Motion to Amend is that the 264 (2013) (quoting DaimlerChrysler Corp. v. Cuno, 547
proposed Second Amended Complaint is futile because U.S. 332, 341, 126 S.Ct. 1854, 164 L.Ed.2d 589, (2006)).
it does not overcome the alleged deficiencies in the First “One element of the case-or-controversy requirement is
Amended Complaint with regard to standing and/or that plaintiffs must establish that they have standing to
failure to state a claim. Consequently, Defendants argue sue.” Id. (internal quotation marks and citation omitted).
that the Motion to Amend should be denied as futile.
See Opp'ns to Motion to Amend. Because this Court [11] “[T]he irreducible constitutional minimum of
finds, infra, that Plaintiffs have standing and some claims standing contains three elements. First, the plaintiff must
survive the Motions to Dismiss, and are therefore not have suffered an injury in fact ... which is (a) concrete and
futile, Plaintiffs' Motion to Amend will be granted. For particularized, and (b) actual or imminent, not conjectural
purposes of deciding the Motions to Dismiss, the Court or hypothetical. Second, there must be a causal connection
will rely on the Second Amended Complaint [Dkt. No. 56– between the injury and the conduct complained of ...
1] (“SAC”) in this Memorandum Opinion. Third, it must be likely, as opposed to merely speculative,
that the injury will be redressed by a favorable decision.”
Lujan v. Defenders of Wildlife, 504 U.S. 555, 560–61, 112
III. Jurisdiction S.Ct. 2130, 119 L.Ed.2d 351 (1992) (internal quotation
marks, citations, and footnote omitted).
A. Standard of Review Under Fed. R. Civ. P. 12(b)(1)
[5] [6] [7] [8] As courts of limited jurisdiction, federal
[12] “A plaintiff's burden to demonstrate standing grows
courts possess only those powers *108 specifically
heavier at each stage of the litigation.” Osborn v. Visa Inc.,
granted to them by Congress or directly by the United
No. 14–7004, 797 F.3d 1057, 1063, 2015 WL 4619874,
States Constitution. Kokkonen v. Guardian Life Ins. Co.
at *4 (D.C.Cir. Aug. 4, 2015) (citing Lujan, 504 U.S.
of Am., 511 U.S. 375, 377, 114 S.Ct. 1673, 128 L.Ed.2d
at 561, 112 S.Ct. 2130). “At the pleading stage, general
factual allegations of injury resulting from the defendant's Defendants do not dispute that Plaintiffs have
conduct may suffice, for on a motion to dismiss we suffered an injury in fact. CFSA's members, including
‘presume that the general allegations embrace those Plaintiff Advance America, have lost beneficial banking
specific facts which are necessary to support the claim.’ ” relationships, causing them on short notice to lose
Lujan, 504 U.S. at 561, 112 S.Ct. 2130 (quoting Lujan v. business and expend resources to locate new banking
National Wildlife Federation, 497 U.S. 871, 889, 110 S.Ct. partners. Pls.' Opp'n at 11. Many payday lenders have not
3177, 111 L.Ed.2d 695 (1990)). been able to replace the terminated bank relationships.
Id. Plaintiffs have also alleged that Defendants' actions
[13] Our Court of Appeals recently reiterated and have deprived them of their ability to compete for banks'
emphasized the requirement that courts must “accept resources and have stigmatized them. Id. at 12–13.
as true all material allegations of the complaint” at the
pleadings stage. Osborn, 797 F.3d at 1064, 2015 WL In sum, it is clear that Plaintiffs have alleged facts
4619874, at *5 (internal citation omitted). In Osborn, the sufficient to show an injury in fact at the pleadings stage.
Court of Appeals found that the plaintiffs' alleged facts
were “specific, plausible, and susceptible to proof at trial,”
and therefore they “pass[ed] muster for standing purposes 2. Causation
at the pleadings stage.” Id. at 1066, 2015 WL 4619874, at Defendants argue that Plaintiffs do not meet the causation
*6. prong of standing because their injuries are not “fairly
traceable” to any acts by the Defendants, and that it
[14] [15] *109 “When a plaintiff's asserted injury arises was the independent decisions of the respective banks to
from the Government's regulation of a third party that terminate their relationships with Plaintiffs' members. See
is not before the court, it becomes ‘substantially more Board Mot. at 10–11; FDIC Mot. at 12, 15.
difficult’ to establish standing.” Nat'l Wrestling Coaches
Ass'n v. Dep't of Educ., 366 F.3d 930, 938 (D.C.Cir.2004) [17] To show causation, Plaintiffs must show that the
(quoting Lujan, 504 U.S. at 562, 112 S.Ct. 2130). Where Defendants' actions were a “substantial factor motivating
standing has been found on the basis of third-party the decisions of the third parties that were the direct source
conduct, “the record presented substantial evidence of a of the [P]laintiff[s'] injuries.” National Wrestling Coaches,
causal relationship between the government policy and the 366 F.3d at 940–41. Thus the key issue is the degree
third-party conduct, leaving little doubt as to causation of Defendants' alleged involvement or influence on the
and the likelihood of redress.” Id. at 941. Therefore, while banks' decisions to terminate relationships with payday
the Court accepts as true all material allegations made by lenders.
Plaintiffs, Plaintiffs bear a greater burden of what they
must allege in order to show standing on the basis of third- Plaintiffs allege that the Defendants undertook a “two-
party conduct. stage regulatory campaign designed to cripple and
ultimately eliminate the payday lending industry.” Pls.'
[16] In this case, the elements of causation and Opp'n at 9. The first stage involved Defendants issuing
redressability “hinge on the independent choices of the informal regulatory guidance regarding “reputation risk.”
regulated third party,” namely the banks. Id. at 938. While Plaintiffs allege that the Defendant agencies expanded
it is Plaintiffs' burden to “adduce facts showing that those the definition of “reputation risk” beyond its traditional
choices have been or will be made in such a manner as to understanding to include bad publicity due to the actions
produce causation and permit redressability of injury,” Id. of third parties, even when the actions were unrelated to
(quoting Lujan, 504 U.S. at 562, 112 S.Ct. 2130) (emphasis work done on behalf of the bank. SAC ¶ 5, 47–51.
added), at the motion to dismiss stage, Plaintiffs need only
allege facts that are “specific, plausible, and susceptible Plaintiffs cite to several documents issued by the
to proof at trial.” Osborn, 797 F.3d at 1066, 2015 WL FDIC, as well as one by the *110 OCC, as
4619874 at *6. examples of the expansion of “reputation risk.” See
e.g., OCC, Third–Party Relationships: Risk Management
Guidance, OCC Bulletin 2013–29 (Oct. 30, 2013); FDIC,
1. Injury in Fact Financial Institution Letter: Guidance for Managing
Third–Party Risk, FIL44–2008 (June 6, 2008); FDIC,
Financial Institution Letter: Guidance on Payment to an internal email from Marguerite Sagatelian, Senior
Processor Relationships, FIL–127–2008 (Nov. 7, 2008); Counsel with the FDIC Consumer Enforcement Unit,
FDIC, Financial Institution Letter: Payment Processor stating that FDIC Legal was “looking into avenues by
Relationships, FIL–3–2012 (Jan. 31, 2012); FDIC, which the FDIC can potentially prevent [its] banks from
Managing Risks in Third–Party Payment Processor facilitating payday lending.” Pls. Second Supp., Ex. B at
Relationships, 8 SUPERVISORY INSIGHTS (Summer 118 [Dkt. No. 52–2].
2011). The Supervisory Insights article included a list
of merchant categories—including payday loans—“that Plaintiffs bolster their allegations by noting that the
have been associated with high-risk activity.” Managing Federal Reserve Board of Governors is the prudential
Risks in Third–Party Payment Processor Relationships, 8 regulator for three banks that have already terminated
SUPERVISORY INSIGHTS at 7; Pls. Second Supp., Ex. relationships with Plaintiffs and their members, the OCC
B at 157 (collectively, “Agency Documents”). is the prudential regulator for seven banks that terminated
relationships with Plaintiffs and their members, and that
The second stage, according to Plaintiffs' theory, is the FDIC is the prudential regulator for four banks
that Defendants relied on the expanded definition of that terminated relationships with Plaintiffs and their
“reputation risk,” as outlined in the regulatory guidance, members. SAC ¶ 84.
“as the fulcrum for a campaign of backroom regulatory
pressure” to coerce banks into terminating relationships Plaintiffs also point to a DOJ memo indicating that it had
with payday lenders. Pls.' Opp'n at 9. Defendants allegedly been in contact with “several state attorneys general, FTC,
acted in concert with DOJ in Operation Choke Point and FDIC, the Federal Reserve Bank of Atlanta, *111 and
“used their prudential ‘safety and soundness' regulatory [they] hope to begin working with the OCC soon,” in “an
authority” to pressure banks. SAC ¶ 5; see also SAC ¶¶ attempt to increase their knowledge and attention to the
56–60. roles banks and payment processors play in facilitating
fraud.” Memorandum from Michael S. Blume, Dir., DOJ
Plaintiffs further allege that, as part of Operation Consumer Prot. Branch, to Stuart F. Delery, Ass't Att'y
Choke Point, Defendants privately threatened banks with Gen., DOJ Civil Division at 14 (Sept. 9, 2013), in Comm.
adverse regulatory action if they continued doing business Report app. at HOGR–3PPP000339. Finally, Plaintiffs
with payday lenders. See id. In support of their theory, claim that Defendants undertook the actions they did
Plaintiffs cite to an internal DOJ memo titled “Operation with the express purpose of pressuring banks to terminate
Choke Point: Eight–Week Status Report,” in which relationships with payday lenders.
meetings with the FDIC and the possibility of the FDIC
assigning agents to work on DOJ cases were discussed. In sum, Plaintiffs have alleged sufficient facts, that, if
Pls.' Opp'n at 25 (citing Memorandum from Michael S. proven true, could show that the Defendants' conduct
Blume, Dir., DOJ Consumer Prot. Branch, to Stuart F. was a “substantial factor motivating the decisions of third
Delery, Principal Deputy Ass't Att'y Gen., DOJ Civil Div. parties that were the direct source of [P]laintiff[s'] injuries.”
at 6 (Apr. 17, 2013), in Comm. Report app. at HOGR– National Wrestling Coaches, 366 F.3d at 940–41. Because
3PPP000048. the “facts alleged by the Plaintiffs are specific, plausible,
and susceptible to proof at trial, they pass muster for
Plaintiffs also refer to a February 15, 2013 letter from standing purposes at the pleadings stage.” Osborn, 797
FDIC Regional Director M. Anthony Lowe to an F.3d at 1066, 2015 WL 4619874 at *6.
unidentified bank regarding that bank's involvement in
payday lending. See Pls.' Supp. Support, Ex. A [Dkt. No.
35–1]. In the letter, Lowe states, “we have generally found 3. Redressability
that activities related to payday lending are unacceptable [18] [19] Next, Defendants argue that Plaintiffs lack
for an insured depository institution.” Id. at 2. Lowe also standing because their injuries are not redressable by the
states that members of the Region's Senior Management Court. Redressability requires that Plaintiffs demonstrate
will be contacting the bank in the near future “to further “a substantial likelihood 3 that the requested relief
discuss [its] concerns relative to the aforementioned will remedy the alleged injury in fact.” Teton Historic
[payday lender] relationship.” Id. Similarly, Plaintiffs cite Aviation Found. v. U.S. Dep't of Def., 785 F.3d 719, 724
[20] Defendants focus their redressability arguments Defendants also point out that the Agency Documents do
primarily on the invalidation of the Agency Documents, permit banks to have relationships with payday lenders.
offering little discussion about Plaintiffs' other requested Moreover, the FDIC notes that it recently promulgated
*112 relief. They also argue that 12 U.S.C. § 1818(i)(1) two Financial Institution Letters (“FILs”) explicitly
prevents this Court from providing any injunctive relief stating that banks “that properly manage” relationships
that interferes with “the issuance or enforcement of any with customers engaged in higher-risk activities, and the
notice or order.” Board Mot. at 15–16; FDIC Mot. at associated risks, “are neither prohibited nor discouraged
43–44; OCC Mot. at 18–19. The nature of any injunctive from providing” services to those customers. FDIC Mot.
relief the Court is able to provide is extremely relevant at 18–19 (quoting FIL–43–2013). Thus, the FDIC argues
to standing, as “Plaintiffs cannot establish standing by that invalidating the Agency Documents is unlikely to
requesting relief that the Court lacks the authority to provide prospective relief, as there would be no change
grant.” Long Term Care Pharmacy All. v. Leavitt, 530 in the FDIC's official position, which already permits
F.Supp.2d 173, 185 (D.D.C.2008). relationships with payday lenders. Id. at 19.
Therefore, the Court will address the parties' redressability [21] Although invalidation of the Agency Documents
arguments regarding the invalidation of the Agency would not necessarily lead to restoration of banking
Documents and injunctive relief separately, and will then relationships, it may certainly affect Defendants' ability
assess the “substantial likelihood” of redressability. Teton to pressure banks in the future. Plaintiffs have argued
Historic Aviation Found., 785 F.3d at 724. that Defendants relied on the definition of “reputation
risk” contained in the Agency Documents as the
“fulcrum” of their campaign pressuring banks to claims for injunctive relief that do not cover Sections 1818,
terminate relationships with payday lenders. Pls.' Opp'n at 1813o, or 1831p–1.
9. Under Plaintiffs' theory, it is likely that the invalidation
of the Agency Documents could deprive Defendants of Moreover, all the cases cited by Defendants involve
this “fulcrum.” Plaintiffs are not required to “show to challenges to specific enforcement actions or orders. See,
a certainty that a favorable decision will redress [their] e.g.,Board of Governors of Fed. Reserve Sys. v. MCorp
injury.” Teton Historic Aviation Found., 785 F.3d at 726 Fin., Inc., 502 U.S. 32, 39, 112 S.Ct. 459, 116 L.Ed.2d 358
(internal citation omitted). (1991) (court lacked jurisdiction to enforce automatic stay
in bankruptcy against agency enforcement proceeding);
Ridder v. Office of Thrift Supervision, 146 F.3d 1035,
1039 (D.C.Cir.1998) (no jurisdiction under 1818(i)(1) to
*113 ii. Section 1818(1) and Injunctive Relief
enjoin provision in consent order); Groos Nat'l Bank
Defendants argue that Section 1818 of the Federal v. Comptroller of the Currency, 573 F.2d 889, 895 (5th
Deposit Insurance Act (“FDI Act”) divests the Court Cir.1978) (court cannot issue declaratory judgment that
of jurisdiction to grant Plaintiffs most of the injunctive would prevent agency from pursuing enforcement).
relief they seek. See Board Mot. at 15; OCC Mot. at 18–
20; FDIC Mot. at 44–45; 12 U.S.C. § 1818(i)(1). Section That is simply not the case here. Section 1818(i) does
1818(i)(1) states that “no court shall have jurisdiction to not necessarily prevent the Court from granting Plaintiffs'
affect by injunction or otherwise” any ongoing or future requests for injunctive relief. 4
enforcement action by Defendants, or to “review, modify,
suspend, terminate, or set aside” such actions. 12 U.S.C.
§ 1818(i)(1).
iii. Likelihood of Redressability
As an initial matter, Plaintiffs correctly point out that Even if some injunctive relief might be available to
there is no enforcement action at issue here, nor are they Plaintiffs, the Court must also determine if injunctive relief
asking the Court to enjoin future enforcement actions. See and/or the invalidation of the Agency Documents will
Pls.' Opp'n at 25. result in a “substantial likelihood” that Plaintiffs' injuries
will be redressed.
Defendants argue that any injunction the Court might
enter is likely to interfere with or effectively enjoin future Defendants point out that other reasons unrelated to the
enforcement actions, and is therefore precluded by Section challenged Agency Documents and actions by Defendants
1818(i)(1). See Board Mot. at 15–17; OCC Mot. at 20; may affect banks' individual decisions on whether to
FDIC Reply at 22–23. The FDIC further argues that reinstate relationships with payday lenders. See Board
the limitation imposed by Section 1818(i)(1) extends to Mot. at 15 (citing National Wrestling Coaches, 366 F.3d at
supervisory actions as well, such as examination findings 939); FDIC Mot. at 14. Such factors include *114 safety
and notices of undercapitalized status. See FDIC Mot. at and soundness standards, bank capacity and systems to
44–45; FDIC Reply at 22–23. effectively manage risk, DOJ's continued activities under
Operation Choke Point, etc.See OCC Mot. at 14; Board
[22] While it is true that Section 1818(i)(1) precludes this Mot. at 14. Due to these factors, Defendants contend, it is
Court's jurisdiction to issue an injunction that interferes not clear that a decision by this Court would change the
with an enforcement action or an order under Sections outcome of banks' decisions.
1818, 1831o, or 1831p-l, that does not preclude the Court's
ability to grant any injunctive relief against Defendants. Plaintiffs believe that, because some banks regretted
The exact contours of any injunctive relief this Court terminating payday lenders, “they presumably would
might grant would depend on the specific facts that are reverse those decisions if the coercive regulatory influence
proven. Mere speculation that an injunction “might” was removed.” Pls.' Opp'n at 20. Plaintiffs support this
interfere with “any notice or order” does not necessarily assumption with letters from banks indicating that the
mean that the Court has no authority to grant Plaintiffs' banks were “very sorry” to terminate the relationship,
were “frustrated and disappointed” with the situation,
and, in the case of one bank, expressing the “hope [that redress Plaintiffs' injuries. The FDIC and OCC do not
they could] find a way to work together again soon.” address the issue at all, and instead rely wholly on their
Id. (citations omitted). These letters do suggest that some belief that injunctive relief is not available because of
banks would likely consider re-establishing relationships. Section 1818(i)(1). See FDIC Reply at 3–4; OCC Reply
at 9–13. The Board responds that, even if the Court
Although they believe banks would resume relationships enjoined Defendants from exerting regulatory pressure,
with them should the Court order relief, Plaintiffs argue it does not necessarily follow that banks would restore
that it is not necessary to show that even a single any relationships and “banks still could terminate these
bank would restore service to payday lenders in order relationships” with payday lenders for a multitude of
to establish redressability. Pls.' Opp'n at 19. Instead, lawful *115 business reasons. See Board Reply at 10–11
Plaintiffs argue that, to the extent Defendants deprived (emphasis in original).
them of “the ability to compete for banks' limited
compliance and risk management resources on an equal While the Board is correct that banks could still terminate
footing,” and therefore Plaintiffs need only demonstrate payday lenders even if Plaintiffs received injunctive relief,
that they are “able and ready” to compete for banking Plaintiffs are not required to show that banks could
services should the Court provide relief. Pls.' Opp'n at not, under any circumstances, terminate relationships in
19 (citing Northeastern Fla. Chapter of Associated Gen. order to show redressability. If Plaintiffs are able to
Contractors of Am. v. City of Jacksonville, Fla., 508 U.S. prove that injunctive relief would result in a substantial
656, 666, 113 S.Ct. 2297, 124 L.Ed.2d 586 (1993). likelihood that banks will restore relationships or not
terminate relationships in the future, they have sufficiently
City of Jacksonville, and the redressability standard established.
Plaintiffs cite it for, do not support Plaintiffs' argument.
City of Jacksonville involved a challenge to a minority Assuming for now the truth of Plaintiffs' allegations that
business program that required 10% of the amount spent Defendants expanded the definition of reputation risk
on city contracts be set aside for “Minority Business and relied on that expanded definition to pressure banks
Enterprises.” Id. at 659, 113 S.Ct. 2297. The Supreme into terminating relationships with payday lenders, it is
Court found that, in order to establish standing, the reasonable to conclude that a Court order invalidating
plaintiff did not need to show that it would have won the the guidance documents and enjoining Defendants would
contracts, but rather only needed to demonstrate that the redress Plaintiffs' injuries. In the absence of such pressure,
policy prevented it from competing for the contracts on some banks may well choose to reestablish relationships
an equal basis. Id. at 666, 113 S.Ct. 2297. Unlike City of with Plaintiffs. Finally, the absence of such pressure is
Jacksonville, this case does not involve any sort of set- also likely to prevent additional banks from terminating
aside or quota program. Nor was City of Jacksonville a relationships with Plaintiffs in the future.
third-party standing case, which is “substantially more
difficult.” Lujan v. Defenders of Wildlife, 504 U.S. 555, In sum, Plaintiffs have alleged facts sufficient to show that
562, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992). Moreover, there is a “substantial likelihood” that a favorable ruling
Plaintiffs do not even allege that bank relationships by this Court would redress their injuries.
were terminated because Plaintiffs were at a competitive
disadvantage due to Defendants' actions.
C. Mootness
Plaintiffs argue that the injunctive relief they request The FDIC argues that the two guidance documents it
would “restrain Defendants from inflicting additional has issued render Plaintiffs' case moot, FDIC Mot. at 22,
injury by continuing to pressure banks to terminate because, to the extent the FDIC Agency Documents may
[Plaintiffs'] accounts,” thereby providing meaningful have previously led banks to terminate relationships with
prospective relief and redressability. Pls.' Opp'n at 19 payday lenders, the two more recent FILs they have issued
(emphasis omitted). expressly clarified that termination of relationships is not
required.
However, Defendants provide little in the way of
counterargument as to why injunctive relief would not The two new guidance documents, as noted previously,
are FILs issued in September 2013 and July 2014. The
FILs state that banks, with appropriate controls in place, Therefore, while the September 2013 and July 2014 FILs
may continue to do business with “merchant customers may have addressed a portion of Plaintiffs' allegations,
engaged in higher risk activities,” and those who properly they have not resolved the entirety of Plaintiffs' claims.
manage such relationships “are neither prohibited nor Therefore Plaintiffs' claims are not moot.
discouraged” from doing business with payday lenders
(among others). FIL–43–2013 at 2; FIL–41–2014 at 2.
The July 2014 FIL also removed the list of high-risk D. Plaintiffs' Motion for Jurisdictional Discovery
merchant categories, due to “the misperception that the In response to Defendants' contention that the Court
listed examples of merchant categories were prohibited has no jurisdiction, Plaintiffs have filed a Motion for
or discouraged.” FIL–41–2014 at 2. Therefore, the FDIC Jurisdictional Discovery in order to further support their
concludes, even if the FDIC Agency Documents did Complaint. Because the Court has found that it has
force banks to terminate their relationships with payday jurisdiction, Plaintiffs' Motion for Jurisdictional discovery
lenders, the two FILS negate any such action now. is moot and is therefore denied.
[25] *116 The FDIC has not met this heavy burden.
Plaintiffs failed to respond to this argument in their
The invalidation of the Agency Documents is only
Opposition, and the FDIC argues that Plaintiffs have
one facet of the relief Plaintiffs' seek—Plaintiffs' other
therefore conceded this point. See Pls.' Opp'n; FDIC
alleged harms and requested relief are not mooted by
Reply at 5; see alsoClifton Power Corp. v. Fed. Energy
the FDIC's clarification of the Agency Documents.
Reg. Comm'n, 88 F.3d 1258, 1267 (D.C.Cir.1996) (taking
Furthermore, in addition to the allegation that the Agency
as conceded a seemingly sound argument that was not
Documents forced banks to terminate relationships with
opposed); Rosenblatt v. Fenty, 734 F.Supp.2d 21, 22
them, Plaintiffs also allege that the Agency Documents
(D.D.C.2010) (“an argument in a dispositive motion that
improperly redefine “reputation risk” and violate the
the opponent fails to address in an opposition may be
APA. SAC ¶¶ 137, 169, 195. The September 2013 and July
deemed conceded”).
2014 FILs do not change the definition of or even mention
“reputation risk.” See FIL–43–2013; FIL–41–2014; see
It was only after the FDIC stated that Plaintiffs had
also Pls.' Opp'n at 23. Nor do the FILs remedy the alleged
conceded this argument that Plaintiffs filed a Surreply
APA violations of the previous FILs.
addressing prudential standing. Plaintiffs counter that
“inherent in all of Plaintiffs' arguments that are based
upon the [FDI] Act ... is the proposition that Plaintiffs'
injuries fall within the zone of interest protected by the 296, 315 (D.C.Cir.2014) (citation omitted). Furthermore,
[FDI] Act.” Pls.' Surreply at 2–3. a complaint which “tenders ‘naked assertion[s]’ devoid of
‘further factual enhancement’ ” will not suffice. Ashcroft
[27] However, the Supreme Court's recent decision in v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d
Lexmark Int'l, Inc. v. Static Control Components, Inc., 868 (2009) (quoting Twombly, 550 U.S. at 557, 127 S.Ct.
––– U.S. ––––, 134 S.Ct. 1377, 188 L.Ed.2d 392 (2014), 1955) (alteration in Iqbal ).
“makes plain the zone of interests test no longer falls under
the prudential standing umbrella.” Crossroads Grassroots
Policy Strategies v. Fed. Election Comm'n, 788 F.3d 312, B. APA Claims
319 (D.C.Cir.2015) (citing Lexmark, 134 S.Ct. at 1387 n. Plaintiffs allege that Defendants violated the APA in
4). *117 Nor is the zone of interests test a jurisdictional a number of ways. The APA requires that the Court
requirement.Id. Instead, the Supreme Court ruled that the “hold unlawful and set aside agency action, findings, and
zone of interests test is now considered a merits issue, in conclusions” that are, inter alia: “arbitrary, capricious, an
which the “court asks whether the plaintiff ‘has a cause abuse of discretion, or otherwise not in accordance with
of action under the statute.’ ” Id. (quoting Lexmark, 134 law”; “contrary to constitutional right, power, privilege,
S.Ct. at 1387). or immunity”; “in excess of statutory jurisdiction,
authority, or limitations”; or “without observance of
Given the clear holdings from the Supreme Court and procedure required by law.” 5 U.S.C. § 706(2).
our Court of Appeals' clear rulings that the zone of
interests test is not related to jurisdiction or standing, the Plaintiffs allege that Defendants: (1) promulgated binding
FDIC's argument that Plaintiffs lack prudential standing rules without providing notice and comment, as required
necessarily must be denied. by law, see SAC, Counts 1, 5, and 9; (2) exceeded
their authority conferred by 12 U.S.C. § 1831p–1 to set
standards for safety and soundness, see SAC, Counts 2,
IV. Failure to State a Claim 6, and 10; (3) acted arbitrarily and capriciously, see SAC,
Counts 3, 7, and 11; and (4) deprived them of protected
A. Standard of Review Under Fed. R. Civ. P. 12(b)(6) liberty interests without due process of law, see SAC,
[28] [29] To survive a motion to dismiss under Rule 12(b) Counts 4, 8, and 12.
(6) for failure to state a claim upon which relief can be
granted, a plaintiff need only plead “enough facts to state
a claim to relief that is plausible on its face” and to “nudge
[ ] [his or her] claims across the line from conceivable to 1. Final Agency Action Requirement
plausible.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544,
[33] Before the Court can evaluate the merits of Plaintiffs'
570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). “[O]nce a
APA claims, it must first determine whether Defendants'
claim has been stated adequately, it may be supported by
actions are considered final agency actions. The APA
showing any set of facts consistent with the allegations in
authorizes judicial review only of “[a]gency action made
the complaint.” Id. at 563, 127 S.Ct. 1955.
reviewable by statute and final agency action for which
there *118 is no other adequate remedy in a court.” 5
[30] [31] [32] Under the Twombly standard, a “court
U.S.C. § 704. Plaintiffs have cited no provision of the
deciding a motion to dismiss must not make any judgment
FDI Act authorizing judicial review beyond that which is
about the probability of the plaintiffs' success ... [,]
provided for in the APA. Therefore, the alleged agency
must assume all the allegations in the complaint are
actions by Defendants must be final agency actions in
true (even if doubtful in fact) ... [, and] must give the
plaintiff the benefit of all reasonable inferences derived order to be judicially reviewable. 5 Nat'l Ass'n of Home
from the facts alleged.” Aktieselskabet AF 21. November Builders v. Norton, 415 F.3d 8, 13 (D.C.Cir.2005); see
2001 v. Fame Jeans Inc., 525 F.3d 8, 17 (D.C.Cir.2008) alsoLujan v. Nat'l Wildlife Fed'n, 497 U.S. 871, 882, 110
(internal quotation marks and citations omitted). The S.Ct. 3177, 111 L.Ed.2d 695 (1990) (“When ... review
court does not, however, accept as true “legal conclusions is sought not pursuant to specific authorization in the
or inferences that are unsupported by the facts alleged.” substantive statute, but only under the general review
Ralls Corp. v. Comm. on Foreign Inv. in U.S., 758 F.3d
provisions of the APA, the ‘agency action’ in question FDIC Mot. at 23–24; OCC Mot. at 21–29, while the
must be ‘final agency action.’ ”) (citing 5 U.S.C. § 704). Board notes that Plaintiffs do not even allege that any
guidance documents issued by the Board violate the APA,
[34] [35] “The Supreme Court has established a two-part see Board Mot. at 18. In addition, Defendants argue that
test to determine when an agency action is reviewable as *119 the communications Plaintiffs cite in support of
final.” Nat'l Ass'n of Home Builders, 415 F.3d at 13. First, their argument of a de facto rule do not constitute final
the action under review “must mark the ‘consummation’ agency action. Board Mot. at 19; FDIC Mot. at 36–37.
of the agency's decisionmaking process—it must not
be of a merely tentative or interlocutory nature.” Id. As noted above, under Bennett, Defendants' actions
(quoting Bennett v. Spear, 520 U.S. 154, 177–78, 117 cannot be viewed as “final agency action” under § 704
S.Ct. 1154, 137 L.Ed.2d 281 (1997)). Second, the action of the APA unless they “mark the consummation of the
must “be one by which ‘rights or obligations have been agency's decisionmaking process” and either determine
determined,’ or from which ‘legal consequences will flow.’ “rights or obligations” or result in “legal consequences.”
” Id. (quoting Bennett, 520 U.S. at 178, 117 S.Ct. 1154). Bennett, 520 U.S. at 178, 117 S.Ct. 1154 (citations and
Final agency action may be comprised of “a series of internal quotation marks omitted).
agency pronouncements rather than a single edict.” Ciba–
Geigy Corp. v. Envtl. Prot. Agency, 801 F.2d 430, 435 n. After setting forth the two-step Bennett analysis, Plaintiffs
7 (D.C.Cir.1986). inexplicably fail to discuss the first Bennett step and
make no argument as to how the Agency Documents
[36] [37] [38] Our Court of Appeals has also given or the alleged de facto rules “mark the consummation
guidance for evaluating whether legal consequences flow of [Defendants'] decisionmaking processes.” See Pls.'
from an action. One line of analysis “considers the effects Opp'n at 27–28. The closest Plaintiffs come to addressing
of an agency's action, inquiring whether the agency has the first Bennett step is a passing reference stating,
‘(1) impose[d] any rights and obligations, or (2) genuinely without further explanation, that the Agency Documents
[left] the agency and its decisionmakers free to exercise “purport to reflect the agencies' expertise, experience,
discretion.’ ” Id. (quoting CropLife Am. v. Envtl. Prot. and reasoned reflection.” Pls.' Opp'n at 29. Plaintiffs
Agency, 329 F.3d 876, 883 (D.C.Cir.2003)). “The language continue that “[n]othing in the guidelines suggests that
used by an agency is an important consideration in they are ‘tentative, open to further consideration, or
such determinations.” Id. “The second line of analysis conditional on future agency action.’ ” Id. (quoting City
looks to the agency's expressed intentions. This entails of Dania Beach, Fla. v. F.A.A., 485 F.3d 1181, 1188
a consideration of three factors: (1) the agency's own (D.C.Cir.2007)).
characterization of the action; (2) whether the action was
published in the Federal Register or the Code of Federal Plaintiffs' statement sufficiently alleges that the Agency
Regulations; and (3) whether the action has binding Documents reflect the consummation of the agencies
effects on private parties or on the agency.” Id. at 806–07 decision-making process, rather than a tentative or
(internal quotation marks and citation omitted). interlocutory step in that process. Given that the
documents were published and widely distributed by the
FDIC and OCC, it is reasonable to view them as the
consummation of the agencies' decision-making processes.
2. Defendants' Actions Constitute Neither
Therefore, the Court finds that the first Bennett prong has
Final Agency Actions Nor Binding Norms
been met with regard to the Agency Documents.
[39] Plaintiffs point to two actions by each of the
Defendants that they consider final agency actions: 1) the Plaintiffs have alleged that Defendants created a de
promulgation of the Agency Documents; and 2) coercive facto rule—in other words, Defendants' alleged “coercive
back-room communications and the creation of a de facto communications with banks,” taken together, have
rule against providing financial services to all payday effectively created a rule against providing financial
lenders. See SAC ¶¶ 116–22, 127, 148–54, 159, 180– services to payday lenders.
184, 189. The FDIC and OCC argue that the Agency
Documents do not constitute final agency action, see
It is not readily apparent how the amorphous de facto to avoid liability” is merely a general statement of policy.
rule against payday lenders alleged by Plaintiffs is National Mining Ass'n., 758 F.3d 243, 252 (2014).
the consummation of the Defendants' decision-making
processes. 6 In the absence of any explanation by [41] Furthermore, the Agency Documents expressly state
Plaintiffs, the Court concludes that the alleged de facto that they are not obligatory and are meant only to
rule fails to meet the first step of the Bennett test. Having serve as guidance. See e. g., FIL–44–2008 at 2 (“[t]he
failed the first prong of the Bennett test, any alleged de guidelines should not be considered a set of mandatory
facto rule created by Defendants is not a final agency procedures”); OCC Bulletin 2013–29 at 1 (“[t]his bulletin
action and therefore not subject to review under the provides guidance to national banks and federal savings
associations”). While this alone does not totally insulate
APA. 7
the documents from having legal consequences, the
agency's characterization of the documents is one of the
Turning to the second prong of the Bennett test,
relevant factors for consideration. Ctr. for Auto Safety,
Plaintiffs make several arguments regarding the legal
452 F.3d at 806–07. Guidance documents must establish
consequences of the Agency Documents. Plaintiffs
a “new substantive rule” before they can be characterized
characterize them as “filled with obligatory language and
as final action under the APA. Broadgate, Inc. v. USCIS,
threats of enforcement actions.” Pls.' Opp'n at 31. Such
730 F.Supp.2d 240, 245 (D.D.C.2010).
characterizations are clearly unsupported by the facts on
which Plaintiffs rely. Plaintiffs excerpt phrases from the
[42] The Court need not limit its analysis to the four
Agency Documents such as “it is essential that,” “it is
corners of the Agency Documents. Our Circuit has
imperative that,” and “the FDIC expects,” as examples
“looked to post-guidance events to determine whether the
*120 of obligatory language. Id. Read in context, it
agency has applied the guidance as if it were binding on
is clear that the language does not create new legal
regulated parties.” Nat'l Min. Ass'n v.McCarthy, 758 F.3d
obligations. Instead, the language is used with regard to
243, 253 (D.C.Cir.2014).
banks' overall responsibility to manage risks and third-
party risks 8 —obligations that existed prior to the Agency Plaintiffs allege that Defendants engaged in a campaign
Documents. In addition, the documents consistently use of backroom pressure against banks and payday lenders,
non-mandatory language such as “should,” rather than relying on the definition of “reputation risk” outlined in
“shall” or “must.” See e.g., FIL–127–2008; OCC Bulletin the Agency Documents. See Pls.' Opp'n at 29. Specifically,
2013–29; see alsoHolistic Candlers & Consumers Ass'n Plaintiffs argue that the use of “reputation risk” in
v. F.D.A., 664 F.3d 940, 944 (D.C.Cir.2012) (use of many termination letters from banks indicates that
“should” and “may” make plain that “there has been no the redefinition of “reputation risk” has been actively
order compelling the appellants to do anything”) (internal enforced. Id. However, these letters are from banks,
citation omitted). not Defendants, *121 and do not indicate any legal
consequences or enforcement stemming from the Agency
[40] Indeed, Plaintiffs actually acknowledge the advisory Documents or Defendants.
nature of the Agency Documents, stating that “[a]lthough
the banks' failure to follow the agencies' informal guidance In a similar vein, Plaintiffs argue that DOJ's attachment
may not directly trigger civil liability, these guidance of an FDIC guidance document to subpoenas is indicative
documents set a standard for risk management that may of the legal effect of the guidance document. Pls.' Opp'n
also be used indirectly in other civil enforcement actions,” at 33. Plaintiffs cite to Barrick Goldstrike Mines Inc. for
Pls.' Opp'n at 33, and alleging that some “letters encourage the proposition that an informal action stating an agency's
banks to cut off relations ... if the risks are too great.” Id. position, along with the threat of enforcement action, may
at 32 (emphasis added). Although the Agency Documents constitute final agency action. See Pls.' Opp'n at 29–30
provide guidance on the FDIC and OCC's views regarding (citing Barrick Goldstrike Mines Inc. v. Browner, 215 F.3d
risk management, they do not impose any obligations 45, 48 (D.C.Cir.2000).
or prohibitions on banks. Guidance that “does not tell
regulated parties what they must do or may not do in order [43] While an enforcement action may be sufficient to
show legal consequences, it is not per se indicative of
final agency action. The enforcement action must still In Counts 4, 8, and 12 of the Second Amended
be evaluated within the Bennett rubric of “rights or Complaint, Plaintiffs allege that Defendants stigmatized
obligations” or “legal consequences.” them, deprived them of their bank accounts, and
threatened their ability to engage in their chosen line of
In Barrick, an enforcement letter from the guidance- business, all without notice and opportunity to be heard,
issuing agency, relying on the guidance document as the in violation of their procedural due process rights under
basis for enforcement, caused the guidance document to the Fifth Amendment to the United States Constitution.
have legal consequences. In this case however, none of See SAC ¶¶ 141–47, 173–79, 198–204; U.S. Const. amend.
the Defendants have issued any enforcement letters and V.
Barrick is not relevant.
[44] [45] *122 The Fifth Amendment's due process
DOJ's use of an FDIC guidance document does not clause protects the individual citizen from the arbitrary
necessarily reflect the FDIC's views, nor do any legal exercise of power by the government. Mathews v. Eldridge,
consequences flow from the document itself; any legal 424 U.S. 319, 332, 96 S.Ct. 893, 47 L.Ed.2d 18 (1976).
consequences flow from the actions of DOJ. Plaintiffs For a plaintiff to establish a procedural due process
point to no case law to support the contention that DOJ's claim, it must show that (1) it has a protected interest,
use of the FDIC's document constitutes enforcement (2) the government deprived it of this interest, and
action—and therefore final agency action—by the FDIC. (3) the deprivation occurred without proper procedural
protections. SeeIndus. Safety Equip. Ass'n, Inc. v. Envtl.
Plaintiffs also allege that the guidelines provide the Prot. Agency, 837 F.2d 1115, 1122 (D.C.Cir.1988).
Defendant agencies with a justification for requiring a
bank to submit a safety and soundness plan, which
is “an initial step toward exercising their enforcement
1. Applicability of Due Process Protections
powers.” Pls.' Opp'n at 32. Obviously, there is an
important distinction between an initial step toward an Defendants argue that the Supreme Court has held that
enforcement action, and an actual enforcement action. due process protections are not applicable to legislative
SeeReliable Automatic Sprinkler Co. v. Consumer Prod. activities of an administrative agency that are generalized
Safety Comm'n, 324 F.3d 726, 731–32 (D.C.Cir.2003) in nature and affect a large number of parties. See Board
(no final agency action where agency issued preliminary Mot. at 28–29 (citing Natural Res. Def. Council, Inc.
determination of violation of law, but was required by v.Envtl. Prot. Agency, 859 F.2d 156, 194 (D.C.Cir.1988);
statute to bring a formal action before it could make a Bi–Metallic Inv. Co. v. State Bd. of Equalization Colorado,
legally binding determination). Plaintiffs are not alleging 239 U.S. 441, 36 S.Ct. 141, 60 L.Ed. 372 (1915)); OCC Mt.
that the Agency Documents commit the FDIC or OCC at 37–38. In Bi–Metallic, the Supreme Court held that no
to a particular course of action. It remains within the hearing was constitutionally required prior to a decision
FDIC and OCC's discretion to determine whether an by Colorado to increase the valuation of taxable property.
enforcement action is warranted. Bi–Metallic Inv. Co., 239 U.S. at 445–46, 36 S.Ct. 141.
For all the foregoing reasons, the Court concludes that [46] However, the Supreme Court has recognized a
the Agency Documents are not final agency actions for distinction in administrative law “between proceedings
purposes of § 704 review because they do not determine for the purpose of promulgating policy-type rules or
any rights or obligations. Consequently, they are not standards, on the one hand, and proceedings designed to
subject to judicial review under the APA and all of adjudicate disputed facts in particular cases on the other.”
Plaintiffs claims under the APA fail to state a claim. United States v. Florida E. Coast Ry. Co., 410 U.S. 224,
Therefore, Defendants' Motions to Dismiss shall be 245, 93 S.Ct. 810, 35 L.Ed.2d 223 (1973). Adjudicative
granted with regard to Counts 1, 2, 3, 5, 6, 7, 9, 10, and 11, proceedings require more individualized process than
as well as the portions of Counts 4, 8, and 12 that plead rule-making decisions. Seeid. at 244–45, 93 S.Ct. 810.
violations of the APA.
[47] Plaintiffs' allegations fall somewhere in between
the Court's two opposing poles. Plaintiffs first allege
C. Violation of Fifth Amendment Due Process
that Defendants' promulgated guidelines, which are Interests afforded due process protection are not created
akin to “policy-type rules or standards.” Plaintiffs also by the Constitution, but are defined by existing “rules
allege that Defendants engaged in coercive backroom or understandings that secure certain benefits and that
communications aimed at payday lenders and targeted support claims of entitlement to these benefits.” Id.
specific payday lenders. See Pls.' Opp'n at 43 n. 17.
Plaintiffs allege that Defendants took these actions for the Plaintiffs allege that the stigma resulting from Defendants'
direct purpose of putting them out of business, which is actions have affected two of their protected interests: 1)
more akin to an informal adjudication. an interest in their bank accounts; and 2) an interest in
their ability to engage in their chosen line of business. Pls.'
The FDIC also argues that the Due Process Clause does Opp'n at 42–43.
not apply to the indirect adverse effects of government
action. See FDIC Mot. at 43 (citing O'Bannon v. [51] [52] While a company may have a “liberty interest
Town Court Nursing Ctr., 447 U.S. 773, 789, 100 S.Ct. in avoiding the damage to its reputation and business”
2467, 65 L.Ed.2d 506 (1980)). While the O'Bannon caused by stigma, Reeve Aleutian Airways, Inc. v. United
court distinguished “between government action that States, 982 F.2d 594, 598 (D.C.Cir.1993), the Supreme
directly affects a citizen's legal rights, or imposes a Court has held that stigma alone is insufficient to
direct restraint on his liberty, and action that is directed implicate due process interests, seeGen. Elec. Co. v.
against a third party and affects the citizen only Jackson, 610 F.3d 110, 121 (D.C.Cir.2010) (citing Paul v.
indirectly or incidentally,” this case fits into neither Davis, 424 U.S. 693, 708, 96 S.Ct. 1155, 47 L.Ed.2d 405
category. O'Bannon, 447 U.S. at 788, 100 S.Ct. 2467. (1976). In addition to stigma or reputational harm, the
Though Defendants' alleged actions were directed at plaintiff must be able to show “that (1) the government
the banks, Plaintiffs argue that they were the intended has deprived them of some benefit to which they have a
targets—that Defendants undertook the actions with the legal right, e.g., the right to be considered for government
express purpose of affecting Plaintiffs. Taking Plaintiffs' contracts in common with all other persons; or (2) the
allegations as true, the impact was neither “indirect” nor government-imposed stigma is so severe that it broadly
“incidental,” and therefore O'Bannon is inapplicable. precludes plaintiffs from pursuing a chosen trade or
business.” Id. at 121 (internal quotation marks and
Defendants' actions, as alleged by Plaintiffs, are not citations omitted).
legislative in nature and are more analogous to an
adjudication of payday lenders right to do business. Nor [53] Plaintiffs have alleged that the stigma promulgated
are the effects of Defendants' alleged actions indirect or by Defendants has resulted in lost banking relationships,
incidental. Therefore, the Court concludes that Plaintiffs and that the continued loss of banking relationships may
have sufficiently *123 stated a claim for which due preclude them from pursuing their chosen line of business.
process protections apply. Pls. Opp'n at 42–43. This is sufficient to constitute a
“tangible change in status” and implicate a protected
liberty interest. O'Donnell v. Barry, 148 F.3d 1126, 1141
(D.C.Cir.1998).
2. Interests Protected by Due Process
[48] [49] [50] Turning to the merits of Plaintiffs' alleged Plaintiffs also argue that the stigma deprived them of their
due process claim, “[t]he first inquiry in every due process right to a bank account. Plaintiffs cite to National Council
challenge is whether the plaintiff has been deprived of a of Resistance of Iran v. Department of State (“NCRI ”) for
protected interest in ‘property’ or ‘liberty.’ ” American the proposition that our Court of Appeals has previously
Mfrs. Mut. Ins. Co. v. Sullivan, 526 U.S. 40, 59, 119 held that a colorable allegation of a property interest in a
S.Ct. 977, 143 L.Ed.2d 130 (1999) (U.S. Const.amend.14). bank account is sufficient to support a due process claim.
In order to have a life, liberty, or property interest, a See Pls.' Opp'n at 42–43 (citing NCRI, 251 F.3d 192, 204
party must have more than an abstract need or desire— (D.C.Cir.2001)).
the party must have “a legitimate claim of entitlement
to it.” Board of Regents of State Colleges v. Roth, 408 It is important to distinguish between the right to have a
U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548 (1972). bank account, and the right to the contents of one's bank
account. In NCRI, it was not only the bank account alone, more important than the right to purchase liquor.” Id. The
loss of a bank account as a result of stigma is sufficient to
but also the funds that it contained. NCRI, 251 F.3d at
implicate a right to due process.
204. The issue here is not that Plaintiffs have been denied
access to their funds, but that they have been denied an
In sum, Plaintiffs have sufficiently alleged that their liberty
account at all.
interests are implicated by Defendants' alleged actions and
that the alleged stigma has deprived them of their rights to
In Wisconsin v. Constantineau, the Supreme Court held
bank accounts and their chosen line of business, so as to
that “[w]here a person's good name, reputation, honor,
state a claim for violation of constitutional due process.
or integrity is at stake because of what the government
is doing to him, notice and an opportunity to be heard
are essential.” See 400 U.S. 433, 437, 91 S.Ct. 507, 27 V. Conclusion
L.Ed.2d 515 (1971). The Supreme Court elaborated its For all of the foregoing reasons, Defendants' Motions
*124 Constantineau holding in Paul v. Davis, stating that for Lack of Jurisdiction, or Alternatively for Failure
when an individual is “deprived ... of a right previously to State a Claim are granted in part and denied in
held under state law” as a result of stigmatization, due part. Plaintiffs' Motion for Jurisdictional Discovery is
process is required. Paul v. Davis, 424 U.S. 693, 708, 96 denied, and Plaintiffs' Motion for Leave to File a
S.Ct. 1155, 47 L.Ed.2d 405 (1976). The deprivation at Second Amended Complaint is granted. An Order shall
issue in Constantineau was “the right to purchase or obtain accompany this Memorandum Opinion.
liquor in common with the rest of the citizenry.” Id.
Footnotes
1 See Section I. B, Procedural Background, infra, for a detailed history of the relevant briefs and their shorthand citations.
2 For purposes of ruling on a motion to dismiss, the factual allegations of the complaint must be presumed to be true and
liberally construed in favor of the plaintiff. Aktieselskabet AF 21.November 2001 v. Fame Jeans Inc., 525 F.3d 8, 15
(D.C.Cir.2008); Shear v. Nat'l Rifle Ass'n of Am., 606 F.2d 1251, 1253 (D.C.Cir.1979). Therefore, the facts set forth herein
are taken from the First Amended Complaint. The Court is not required though, to accept “a legal conclusion couched as
a factual allegation” or inferences unsupported by the facts set forth in the complaint. Trudeau v. Fed. Trade Comm'n,
456 F.3d 178, 193 (D.C.Cir.2006).
3 Plaintiffs argue that they need only allege that the relief requested would result in a “significant increase in the likelihood”
that their banking relationships will be reinstated.” Pls.' Opp'n at 19–20 (citing Utah v. Evans, 536 U.S. 452, 464, 122
S.Ct. 2191, 153 L.Ed.2d 453 (2002)). Both phrasings are used in our Circuit and are essentially the same in practice. See,
e.g., Town of Barnstable, Mass. v. Fed. Aviation. Admin., 659 F.3d 28, 31 (D.C.Cir.2011) (stating “significant increase in
the likelihood” and “substantial probability” are synonymous); Spectrum Five LLC v. Fed. Commc'ns Comm'n, 758 F.3d
254, 261 (D.C.Cir.2014) (utilizing “significant increase in the likelihood” standard).
4 The FDIC also argues that Plaintiffs' requested injunctions are overbroad and improper. FDIC Mot. at 45. While the FDIC
may turn out to be correct, that alone does not, at this time, defeat jurisdiction to provide injunctive relief.
5 An alternate way of viewing the final agency action question is whether the action constitutes “a de facto rule or binding
norm that could not properly be promulgated absent” the requirements of the APA. Ctr. for Auto Safety v. Nat'l Highway
Traffic Safety Admin., 452 F.3d 798, 806 (D.C.Cir.2006). By demonstrating the latter, a party implicitly proves the former,
“because the agency's adoption of a binding norm obviously would reflect final agency action.” Id.
6 Plaintiffs' allegation of a de facto rule is not to be confused with a legal conclusion that Defendants created a de facto
rule sufficient for purposes of § 704.
7 In the SAC, Plaintiffs also allege that Defendants coerced Early Warning Services (“EWS”), a credit reporting company,
“directly and indirectly through its five parent banks” to set an effective Annual Percentage Rate cap of 36% and cease
providing its services to payday lenders. SAC ¶ 112. EWS is not regulated by Defendants. Plaintiffs fail to allege in the SAC
any facts that could support an argument that Defendants' alleged coercion was the consummation of the Defendants'
decision-making processes.
8 For example: “The FDIC expects a financial institution to adequately oversee all transactions and activities that it
processes and to appropriately manage and mitigate operational risks, Bank Secrecy Act (BSA) compliance, fraud
risks, and consumer protection risks, among others.” FIL–3–2012 at 2 (emphasis added); “Financial institutions that
do not adequately manage these relationships may be viewed as facilitating fraudulent or unlawful activity by a
payment processor or merchant client. Therefore, it is imperative that financial institutions recognize and understand the
businesses with which they are involved.” FIL–127–2008 at 1 (emphasis added).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
participate to extent that it designated In accordance with Federal Rule of Civil Procedure
arbitrator and filed over 80 pages of legal 52(a), the Court now renders its findings of fact and
argument and documentation in support of conclusions of law on the two remaining 1 and related
its position. Convention on the Recognition issues: (1) whether plaintiff, Consorcio Rive (“Rive”),
and Enforcement of Foreign Arbitral Awards, waived its right to invoke arbitration of the dispute
Art. I et seq., 9 U.S.C.A. § 201 note. between the parties by filing a criminal Statement
of Facts; and (2) whether the filing of the criminal
Cases that cite this headnote
Statement of Facts precluded Briggs of Cancun, Inc.
(“Briggs of Cancun”) from meaningfully participating
[7] Alternative Dispute Resolution in the arbitration proceedings, thus providing it with
Failure to Arbitrate a defense to the enforcement of the arbitral award
Fear of arrest and extradition do not pursuant to article V(1)(b) of the Convention on
constitute inability to attend arbitration the Recognition and Enforcement of Foreign Arbitral
hearing. Awards (“Convention”), codified at 9 U.S.C. § 201 et seq.
Cases that cite this headnote To the extent the findings of fact are more properly
classified as conclusions of law, they should be so
considered; and to the extent the conclusions of law are
more properly classified as findings of fact, they should be
Attorneys and Law Firms so considered.
16. At trial, David Briggs testified that he did not seek 25. Rive has never expressly waived its right to arbitration
alternative ways to appear at the hearings, such as by under the agreements between Rive and Briggs of Cancun.
telephone, nor did he send a Briggs of Cancun company
representative to appear on behalf of the company. 26. Neither Rive nor Briggs of Cancun were parties to any
criminal proceedings in Cancun, Mexico.
17. In addition, for reasons not explained by the evidence
adduced at trial, Briggs of Cancun attorney Andres
Gonzalez also failed to appear at the hearings. David
II. CONCLUSIONS OF LAW
Briggs testified that he did not instruct Mr. Gonzales not
to attend the arbitration hearing. 1. The instant litigation has been filed pursuant to the
Convention on the Recognition and Enforcement of
18. Briggs of Cancun has never presented to this Court Foreign Arbitral Awards (the “Convention”), codified at
a single piece of evidence or information that it alleges 9 U.S.C. § 201 et seq., to which both Mexico and the
it would have presented to the arbitrators, but did not, United States are signatories.
because it was precluded from participating fully in the
arbitration. 2. Because the Convention was negotiated pursuant to
the Treaty power set forth in the U.S. Constitution,
19. On November 6, 1997, the Mexican arbitration board and Congress passed enabling legislation to make the
held a final hearing, of which all parties were given Convention the highest law of the land, the Convention
proper notice. 3 Although Briggs of Cancun did not must be enforced over all prior inconsistent rules of law.
appear, Rive's counsel presented written conclusions, and Sedco, Inc. v. Petroleos Mexicanos Mexican National Oil
subsequently answered questions from the arbitrators. Co., 767 F.2d 1140, 1145 (5th Cir.1985).
Rec. Docs. 142 & 172 at 256 (“Laudo Definitivo”). No
oral testimony was presented at that hearing. 3. An action or proceeding falling under the Convention is
deemed to arise under the laws and treaties of the United
20. On June 24, 1998, the Mexican arbitration board: (1) States. 9 U.S.C. § 203.
ruled that the Agreement was rescinded due to Briggs
of Cancun's breaches; (2) awarded Rive $150,000 from 4. Federal district courts have original jurisdiction over
Briggs of Cancun for obligations under the October 1, such an action or proceeding, and venue is proper in
1991 agreement; (3) awarded Rive $110,000 from Briggs any district in which, save for the arbitration agreement,
of Cancun for costs and expenses; (4) awarded Rive an action or proceeding with respect to the controversy
$2,500,000 from Briggs of Cancun for damages resulting between the parties could be brought, or in such district
from the breach; and (5) awarded Rive 15% interest after which embraces the place designated in the agreement as
Briggs of Cancun was notified of decision. the place of arbitration if such place is within the United
States. 9 U.S.C. § 204.
21. The arbitration award, totaling $2,760,000, excluding
interest, was not served on the parties until March 8, 1999. 5. Under 9 U.S.C. § 202, the following arbitration awards
fall under the Convention:
22. Rive paid all arbitration costs, totaling approximately
$33,000.
9. Article IV of the Convention provides the procedure for (b) the party against whom the award is invoked was not
enforcing arbitral awards and reads, in part: given proper notice of the appointment of the arbitrator
or of the arbitration proceedings or was otherwise
*794 1. To obtain the recognition and enforcement unable to present his case; or
mentioned in the preceding article, the party applying
16. According to the Convention and repeated federal 22. With respect to prejudice, the Fifth Circuit has found
decisions in this and other circuits, these are the only that “[w]hen one party reveals a disinclination to resort to
available defenses to an action to enforce a foreign arbitral arbitration on any phase of suit involving all parties, those
award. parties are prejudiced by being forced to bear the expenses
of a trial ... Arbitration is designed to avoid this very
[1] 17. Waiver of the right to arbitrate is not among the expense. Substantially invoking the litigation machinery
seven defenses to enforcement of a foreign arbitral award qualifies as the kind of prejudice ... that is the essence of
set forth in the Convention. Thus, as a matter of law, waiver.” E.C. Ernst, Inc. v. Manhattan Construction Co. of
defendant's argument that the arbitration award should Texas, 559 F.2d 268, 269 (5th Cir.1977).
not be enforced by this Court because plaintiff waived it
is unavailing. 4 [4] 23. “[M]erely initiating litigation, without more, does
not effect a waiver” because no actual prejudice results
[2] 18. Alternatively, even if defendant's waiver defense from that isolated action. Lauricia v. Microstrategy Inc.,
was not precluded by the Convention, in the Fifth Circuit, 114 F.Supp.2d 489 (E.D.Va.2000).
25. Article V(1)(b) of the Convention states that a foreign 30. Moreover, the evidence indicates that Briggs of
arbitration award can be refused confirmation where a Cancun did participate to the extent that it designated an
party lacked notice or was “otherwise unable to present arbitrator and filed over 80 pages of legal argument and
his case.” 9 U.S.C. § 201 note. This defense “basically documentation in support of its position. Because Briggs
corresponds to the due process defense that a party was of Cancun has brought forward no additional information
not given ‘the opportunity to be heard at a meaningful or evidence that it would have presented at the arbitration
time and in a meaningful manner’ as defined in Mathews v. if it had the opportunity to do so, the Court finds that
Eldridge, 424 U.S. 319, 333, 96 S.Ct. 893, 902, 47 L.Ed.2d Briggs of Cancun did have an opportunity to meaningfully
18.” Generica Ltd. v. Pharmaceutical Basics, Inc., 125 F.3d participate in the arbitration.
1123, 1129 (7th Cir.1997) (other citations omitted).
31. In a case presenting analogous facts, the district
26. Because Briggs of Cancun was continuously informed court in Empresa Constructora Contex Limitada v. Iseki,
of all hearing dates and was provided sufficient 106 F.Supp.2d 1020, 1026 (S.D.Cal.2000), held that the
opportunity to present witnesses and evidence in defense defendant's due process rights under the Convention
of the action, Briggs of Cancun was given proper notice of were not violated when the corporate defendant's owner
the arbitration proceedings. and C.E.O., as well as other corporate representatives,
failed to attend the arbitration held in Chile claiming
27. The due process guarantee incorporated in article V(1) that they feared arrest. Finding that because the
(b) of the Convention requires that “an arbitrator must defendant was a corporate entity distinct from *797
provide a fundamentally fair hearing.” Generica Ltd., 125 its owners and representatives and could therefore be
F.3d at 1130. “A fundamentally fair hearing is one that adequately represented by counsel competent to handle
‘meets “the minimal requirements of fairness”—adequate the company's defense, defendant did not prevail in its
notice, a hearing on the evidence, and an impartial V(1)(b) defense.
decision by the arbitrator.’ ” Id. “[P]arties that have
chosen to remedy their disputes through arbitration rather [7] 32. Additionally, it has also been held that fear
than litigation should not expect the same procedures of arrest and extradition do not constitute an inability
they would find in the judicial arena.” Id. Essentially, in to attend an arbitration hearing. See, Nat'l Dev. Co. v.
exchange for the convenience and other benefits obtained Khashoggi, 781 F.Supp. 959 (S.D.N.Y.1992).
through arbitration, parties lose “the right to seek redress
from the court for all but the most exceptional errors at 33. For the foregoing reasons, the Court finds that
arbitration.” Dean v. Sullivan, 118 F.3d 1170, 1173 (7th Briggs of Cancun's defense under article V(1)(b) of the
Cir.1997). Convention must fail. The Court also specifically finds
that even if there was a valid arrest warrant pending
28. Consistent with the federal policy of encouraging against David Briggs for some period of time, Briggs of
arbitration and enforcing arbitration awards, the defense Cancun is not entitled to a defense under article V(1)(b)
that a party was “unable to present its case” raised of the Convention because Briggs of Cancun could have
pursuant to article V(1)(b) of the Convention is narrowly participated through its Mexican attorney or corporate
representative or by telephone. Further, Briggs of Cancun 35. Similarly, the Court does not revisit the issue of
whether the arbitration award is final, because the
has not demonstrated that it was prejudiced in any way
issue was previously determined by Judge Schwartz, and
by whatever restrictions the alleged criminal action might
further, is mooted by the fact that Briggs of Cancun did
have imposed, because it has not pointed to exonerating
not post a bond as requested by the Court.
evidence that it would have presented, but could not, but
for the filing of the criminal Statement of Facts.
36. Thus, the Court ORDERS that the Mexican
arbitration award dated June 24, 1998 be and it is hereby
34. The Court need not consider the parties' discussion
recognized and enforced against Briggs of Cancun, Inc. in
of the public policy defense under the Convention,
all respects.
because that defense is not one of the narrow issues
preserved for trial following Judge Schwartz's ruling on
37. The Court FURTHER ORDERS the parties to
the Motion to Reconsider the grant of summary judgment
submit, within ten days from entry of this order, a joint
in plaintiff's favor. However, if it were before the Court,
proposed form for final judgment in accordance with these
the Court would find that its conclusion that due process
findings and conclusions.
requirements were met undermines this argument, and
that enforcement of this award does not violate the public
policies of Mexico, the United States, or the State of All Citations
Louisiana.
134 F.Supp.2d 789
Footnotes
1 On September 20, 2000, Judge Schwartz entered an order granting reconsideration of his prior order dismissing Briggs'
counterclaims. The issue for reconsideration was limited solely to the waiver issue (Briggs' Ninth Defense). Rec. Doc. 91.
2 David Briggs Enterprises, Inc. is a related entity which the Court has previously ruled is not an “alter ego” for Briggs of
Cancun, Inc.
3 The notice defense is not one that was specifically preserved by Judge Schwartz. Nonetheless, the Court observes that
the documentary evidence presented at trial demonstrated that Briggs was informed that the arbitration would take place
on November 6, 1997 at 11:00 a.m. See, e.g., Rec. Doc. 169, at 10285. While Briggs' attorney subsequently misstated
the date in correspondence to the Chamber of Commerce of Mexico City (Rec.Doc. 141), the error was pointed out to him
in a subsequent letter from the Chairman of the Chamber of Commerce. Rec. Doc 170. At any rate, Gonzalez' mistake
and its correction do not alter the fact that notice that the hearing would occur on November 6, 1997 was provided, and
the hearing was subsequently held on November 6, 1997.
4 Moreover, it appears from the evidence that the argument that the filing of the criminal Statement of Facts resulted in
a waiver of arbitration by Rive was considered and rejected by the arbitration committee. See Rec. Doc. 169, ¶ c; Rec.
Doc. 141 ¶ c.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Holdings: The Court of Appeals, Fillmore, J., held that: 1 Cases that cite this headnote
and in favor of the plaintiff; if the pleadings Basic test as to whether a law is penal is
affirmatively negate jurisdiction, the plea whether the wrong sought to be redressed
should be granted. is a wrong to the public or a wrong
to an individual; public wrongs involve a
1 Cases that cite this headnote violation of public rights and duties, which
affect the whole community, considered as
[5] Pleading a community, and are considered crimes,
Scope of inquiry and matters considered whereas individual wrongs are infringements
in general of private or civil rights belonging to
individuals, considered as individuals, and
When a plea to the jurisdiction challenges
constitute civil injuries.
jurisdictional facts, the court considers
evidence submitted by the parties. Cases that cite this headnote
2 Cases that cite this headnote
[9] Criminal Law
Courts Invested with Criminal
[6] Appeal and Error
Jurisdiction
Matters or Evidence Considered in
Determining Question Injunction
On ground of invalidity
Appeal and Error
Pleadings and rulings thereon City ordinance regulating credit access
businesses with physical locations within the
In reviewing a trial court's grant or denial of
city in order to reduce abusive and predatory
a plea to the jurisdiction, the appellate court
lending practices, which made violation of the
does not look to the merits of the plaintiff's
ordinance an offense punishable by a fine of
case, but considers only the pleadings and
up to $500 per day per violation was “penal”
the evidence pertinent to the jurisdictional
in nature, and thus, criminal court was proper
inquiry.
venue in which to determine meaning and
2 Cases that cite this headnote validity of statute, and civil court could
exercise jurisdiction over claim challenging
validity of ordinance and seeking to enjoin
[7] Pleading
its enforcement only if the ordinance was
Amendments following sustaining of
unconstitutional and its enforcement would
pleas
result in irreparable harm to a party's vested
If the pleadings do not contain enough property rights.
facts to demonstrate the trial court's
subject matter jurisdiction, but do not Cases that cite this headnote
affirmatively demonstrate incurable defects in
jurisdiction, the plaintiff should be afforded
[10] Criminal Law
the opportunity to amend; however, if the
Courts Invested with Criminal
pleadings affirmatively negate the existence
Jurisdiction
of jurisdiction, a plea to the jurisdiction may
Meaning and validity of a penal statute or
be granted without giving the plaintiff an
ordinance should ordinarily be determined
opportunity to amend.
by a court exercising criminal jurisdiction
Cases that cite this headnote in order to avoid potentially conflicting
decisions between civil and criminal courts of
last resort regarding the meaning and validity
[8] Criminal Law
of a statute; however, a court exercising civil
Creation and Definition of Offenses
jurisdiction may exercise equity jurisdiction to
Cases that cite this headnote 1 Cases that cite this headnote
The City filed a plea to the jurisdiction to the second challenge the sufficiency of the claimant's pleadings or the
combined pleading. The City asserted appellants had not existence of necessary jurisdictional facts. See Miranda,
pleaded facts demonstrating a valid cause of action exists 133 S.W.3d at 226–28. When the plea challenges the
that falls within a constitutional or legislative waiver of claimant's pleadings, we determine whether the claimant
its governmental immunity from suit. The City specifically has pleaded facts that affirmatively demonstrate the trial
argued (1) the trial court lacked subject matter jurisdiction court's jurisdiction, construing the pleadings liberally and
to construe, declare invalid, or enjoin enforcement of a in favor of the claimant. Miranda, 133 S.W.3d at 226. If
penal ordinance; (2) appellants had not asserted, *802 the pleadings affirmatively negate jurisdiction, the plea
and could not assert, a valid preemption claim to establish should be granted. Heckman, 369 S.W.3d at 150. When the
waiver of governmental immunity from suit; (3) there is no plea challenges jurisdictional facts, we consider evidence
waiver of immunity for appellants' request for attorney's submitted by the parties. Miranda, 133 S.W.3d at 227. In
fees; and (4) CSAT lacked organizational standing to performing our review, we do not look to the merits of the
assert a claim. claimant's case, but consider only the pleadings and the
evidence pertinent to the jurisdictional inquiry. Heckman,
Appellants responded to the plea to the jurisdiction 369 S.W.3d at 150; Rawlings v. Gonzalez, 407 S.W.3d 420,
arguing the trial court had jurisdiction because they 425 (Tex.App.-Dallas 2013, no pet.).
had no other means of challenging the constitutionality
of the Ordinance and because the Ordinance impaired [7] If the pleadings do not contain enough facts
vested property rights. They also argued the City was to demonstrate the propriety of jurisdiction, but
not immune from suit because they were seeking a do not affirmatively demonstrate incurable defects
declaration under the Uniform Declaratory Judgment Act in jurisdiction, the claimant should be afforded the
(the DJA) 5 that the Ordinance is invalid. Appellants opportunity to amend. Miranda, 133 S.W.3d at 226–27.
finally argued CSAT had organizational standing to sue But if the pleadings affirmatively negate the existence of
on behalf of its members because the legal and factual jurisdiction, the plea may be granted without giving the
bases of the arguments it asserted did not depend on the claimant an opportunity to amend. Miranda, 133 S.W.3d
circumstances of any one member. The trial court granted at 227; City of McKinney v. Hank's Rest. Grp., L.P., 412
the City's plea to the jurisdiction without specifying the S.W.3d 102, 109–10 (Tex.App.-Dallas 2013, no pet.); see
ground for doing so. also In re John G. & Marie Stella Kenedy Mem'l Found.,
315 S.W.3d 519, 522 (Tex.2010) (orig. proceeding) *803
(when claimant is unable to establish jurisdiction, the trial
court lacks authority to enter any order other than to
Standard of Review dismiss) (citing State v. Morales, 869 S.W.2d 941, 949
(Tex.1994)).
[1] Whether the trial court has subject matter jurisdiction
is a question of law that we review de novo. Tex. Dep't
of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 226, 228
(Tex.2004); Perez v. City of Dallas, 180 S.W.3d 906, 909 Subject Matter Jurisdiction
(Tex.App.-Dallas 2005, no pet.). The claimant has the
burden to affirmatively demonstrate the trial court has In one issue, appellants contend the trial court erred by
subject matter jurisdiction. Heckman v. Williamson Cnty., granting the plea to the jurisdiction because (1) although
369 S.W.3d 137, 150 (Tex.2012); Tex. Ass'n of Bus. v. Tex. the Ordinance is penal, the trial court had jurisdiction
Air Control Bd., 852 S.W.2d 440, 446 (Tex.1993). to construe it, (2) the City's governmental immunity
is waived for proceedings involving the validity of a
[2] [3] [4] [5] [6] A plea to the jurisdiction is municipal
a ordinance, and (3) CSAT has organizational
dilatory plea that challenges the trial court's subject matter standing to sue on behalf of its members.
jurisdiction. Heckman, 369 S.W.3d at 149; Bland Indep.
Sch. Dist. v. Blue, 34 S.W.3d 547, 554 (Tex.2000). It
is used to defeat a cause of action without regard to Penal Ordinance
whether the claims asserted have merit. Bland Indep. Sch.
Dist., 34 S.W.3d at 554. A plea to the jurisdiction can
[8] The basic test as to whether a law is penal is whether of both civil and criminal courts construing criminal
the wrong sought to be redressed is a wrong to the public statutes ‘would tend to “hamstring” the efforts of [law]
or a wrong to an individual. Huntington v. Attrill, 146 U.S. enforcement officers, create confusion, and might result
657, 668, 13 S.Ct. 224, 36 L.Ed. 1123 (1892). Public wrongs finally in precise contradiction of opinions between the
involve a violation of public rights and duties, which [civil courts] and the Court of Criminal Appeals to which
affect the whole community, considered as a community, the Constitution has intrusted supreme and exclusive
and are considered crimes; whereas individual wrongs jurisdiction in criminal matters' ”) (quoting Roberts v.
are infringements of private or civil rights belonging to Gossett, 88 S.W.2d 507, 509 (Tex.Civ.App.-Amarillo
individuals, considered as individuals, and constitute civil 1935, no writ)); City of Dallas v. Woodfield, *804 305
injuries. Id. at 668–69; see also Trop v. Dulles, 356 U.S. S.W.3d 412, 417 (Tex.App.-Dallas 2010, no pet.); see
86, 96, 78 S.Ct. 590, 2 L.Ed.2d 630 (1958) (“In deciding also TEX. CONST. art. V, §§ 3(a), 5(a); Tex. Liquor
whether or not a law is penal, this Court has generally Control Bd. v. Canyon Creek Land Corp., 456 S.W.2d 891,
based its determination upon the purpose of the statute. 894 (Tex.1970) (“The civil courts are not powerless to
If the statute imposes a disability for the purposes of interpret [a criminal statute], but its meaning and validity
punishment—that is, to reprimand the wrongdoer, to should ordinarily be determined by courts exercising
deter others, etc., it has been considered penal.”). criminal jurisdiction.”). However, a court exercising civil
jurisdiction may exercise equity jurisdiction to construe
[9] Here, the Ordinance states its primary purpose is “to a criminal statute or ordinance in a “narrow” set of
protect the welfare of the citizens of the city of Dallas circumstances. Morales, 869 S.W.2d at 944; Woodfield,
by monitoring credit access businesses in an effort to 305 S.W.3d at 417; see also State v. Shoppers World, Inc.,
reduce abusive and predatory lending practices.” Dallas, 380 S.W.2d 107, 110 (Tex.1964) (“[C]ourts of equity will
Tex., Code § 50–144. As such, it is clearly addressing take jurisdiction to enjoin enforcement of penal laws only
a wrong to the public at large. Also, the Ordinance in exceptional situations, thus leaving those laws to be
makes it an “offense” for a CAB to violate the provisions interpreted through the criminal trial process whenever
of the Ordinance. Id. § 50–146(a). A violation of the possible.”). “[A]s a rule, a party cannot seek to construe
Ordinance is “punishable” by a fine not to exceed or enjoin enforcement of a criminal statute in a civil
$500 per day per violation. Id. § 50–146(a), (b). The proceeding without a showing of irreparable injury to the
Ordinance also provides for a “defense to prosecution” for party's vested property rights[.]” Tex. Educ. Agency v.
a violation of the Ordinance. Id. § 50–147. We conclude the Leeper, 893 S.W.2d 432, 441 (Tex.1994) (citing Morales,
Ordinance is a penal ordinance. See State ex rel. Flowers v. 869 S.W.2d at 945); see also Woodfield, 305 S.W.3d at 417.
Woodruff, 150 Tex.Crim. 255, 200 S.W.2d 178, 181 (1947)
(“There can be no question but that the ordinance under There are four types of situations that could arise
consideration is penal in its nature, as it provides a fine up
where a claimant might attempt to obtain relief from an
to $100 for each violation of any part of the ordinance.”); equity court based on the alleged unconstitutionality of
Destructors, Inc. v. City of Forest Hill, No. 02–08–00440– a penal statute or ordinance: (1) the statute or ordinance
CV, 2010 WL 1946875, at *3 (Tex.App.-Fort Worth is enforced and the claimant is being prosecuted; (2)
May 13, 2010, no pet.) (mem. op.) (ordinance that used the statute or ordinance is enforced and the threat of
term “unlawful” and gave enforcement authority to police prosecution is imminent, although the claimant has yet
department was a penal ordinance). to be prosecuted; (3) there is no actual or threatened
enforcement of the statute or ordinance and the claimant
does not seek an injunction against its enforcement, but
the statute or ordinance is nonetheless integrally related
Review of Penal Ordinance
to conduct subject to the court's equity jurisdiction; and
[10] [11] The meaning and validity of a penal statute (4) there is no actual or threatened enforcement of the
or ordinance should ordinarily be determined by a statute or ordinance and no complaint of specific conduct
court exercising criminal jurisdiction in order to avoid remediable by injunction; Morales, 869 S.W.2d at 944–
potentially conflicting decisions between civil and criminal 45; Woodfield, 305 S.W.3d at 417. In this case, neither
courts of last resort regarding the meaning and validity of TitleMax nor Ace has been prosecuted for a violation of
a statute. Morales, 869 S.W.2d at 945, 947–48 (“prospect the Ordinance. Further, there is no evidence any other
member of CSAT has been prosecuted for a violation and appellants did not complain in their opening brief
of the Ordinance. The City, however, has informed on appeal that the trial court erred by determining the
appellants that it intends to enforce the Ordinance Ordinance was not preempted by the Act. After the
and prosecute any CAB that has allegedly violated the City noted this deficiency in its response brief, appellants
Ordinance. Accordingly, the threat of prosecution is asserted in their reply brief that they adequately alleged in
imminent. We conclude the facts of this case fall under the their live pleading that the Ordinance is unconstitutional
second situation identified in Morales. because it is preempted by state law and “have no
obligation to prove the merits of their case at this juncture
[12] [13] [14] When a penal statute or ordinance by demonstrating that the ... Act is unconstitutional or
is being enforced and, although the claimant has not preempted.”
been prosecuted, prosecution is imminent, an equity court
will not interfere with the ordinary enforcement of the [15] We question whether appellants have waived their
statute or ordinance unless the statute or ordinance complaint on appeal by failing to address all grounds
is unconstitutional and its enforcement will result in on which the trial court's ruling could have been based.
irreparable injury to vested property rights. Morales, 869 See TEX.R.APP. P. 38.1(i); Ollie v. Plano Indep. Sch.
S.W.2d at 945; see also Woodfield, 305 S.W.3d at 417 Dist., 383 S.W.3d 783, 790 (Tex.App.-Dallas 2012, pet.
n. 2. If the claimant fails to satisfy both prongs of the denied), cert. denied, ––– U.S. ––––, 133 S.Ct. 2812,
test, an equity court lacks jurisdiction over the claim. 186 L.Ed.2d 872 (2013) (appellant waived any error by
City of La Marque v. Braskey, 216 S.W.3d 861, 863 trial court in dismissing claims by failing to challenge
(Tex.App.-Houston [1st Dist.] 2007, pet. denied); Potter one possible ground of trial court's ruling on plea to
Cnty. Attorney's Office v. Stars & Stripes Sweepstakes, jurisdiction); Destructors, Inc., 2010 WL 1946875, at *2
L.L.C., 121 S.W.3d 460, 468 (Tex.App.-Amarillo 2003, no (to prevail on appeal, appellant was required to “show
pet.) (citing Morales, 869 S.W.2d at 945). “The underlying the trial court could not properly grant the plea to the
reason for this rule is that the meaning and validity jurisdiction on any of the grounds asserted by the City”);
of a penal statute or ordinance should ordinarily be San Antonio State Hosp. v. Guerrero, No. 04–04–00396–
determined by courts exercising criminal jurisdiction.” CV, 2004 WL 2236619, at *1 (Tex.App.-San Antonio Oct.
Passel v. Fort Worth Indep. Sch. Dist., 440 S.W.2d 61, 6, 2004, no pet.) (mem. op.) (trial court's order denying
63 (Tex.1969). “When these questions can be resolved in plea to jurisdiction was affirmed because governmental
any criminal proceeding that may be instituted and vested entity failed to attack on appeal all possible bases for trial
property rights are not in jeopardy, there is no occasion for court's ruling). However, even if appellants adequately
the intervention of equity.” *805 Id.; see also Morales, addressed in their brief the issue of whether the Ordinance
869 S.W .2d at 945. “A person may continue his activities is unconstitutional or preempted, they have failed to
until he is arrested and then procure his release by showing establish under the second prong of the Morales test that
that the law is void.” Passel, 440 S.W.2d at 63; see also enforcement of the Ordinance will result in irreparable
Morales, 869 S.W.2d at 945. harm to a vested property interest.
332 S.W.3d 578, 597 (Tex.App.-Houston [1st Dist.] 2009, vested property right in making a living, subject only
pet. denied) (quoting Tex. S. Univ. v. State Street Bank to valid and subsisting regulatory statutes,” and that
& Trust Co., 212 S.W.3d 893, 903 (Tex.App.-Houston equity jurisdiction to enjoin enforcement of the statute in
[1st Dist.] 2007, pet. denied)). Property owners do not question was proper because the statute was preventing
have a constitutionally protected, vested right to use them from performing their otherwise lawful business. Id.
property in any certain way. Morrow *806 v. Truckload at 634. Smith stands for the proposition that a statute
Fireworks, Inc., 230 S.W.3d 232, 238, 240 (Tex.App.- harms vested property rights if it completely shuts down
Eastland 2007, pet. dism'd). However, a seller does have a an otherwise lawful business.
vested property right in the lawful possession of physical
items of inventory that it owns. Maldonado, 398 S.W.3d Post-Smith cases, such as Morrow, demonstrate that a
at 270; Morrow, 230 S.W.3d at 238. law that does not forbid a lawful business from operating
will not be regarded as harming vested property rights.
Appellants argue, relying on Smith v. Decker, 158 Tex. In Morrow, the Eastland Court of Appeals considered
416, 312 S.W.2d 632, 634 (1958), that they have a “vested whether a district court exercising civil jurisdiction had
property right in making a living.” Smith concerned the authority to grant a fireworks company an injunction
a state law imposing a state licensing requirement on that prevented Midland County from enforcing a penal
some persons engaged in the business of writing bail ordinance that banned the outdoor use of fireworks in
bonds. See id. at 633. The statute at issue imposed the the county. Morrow, 230 S.W.3d at 234, 236–37. The
requirement on a person, firm, or corporation engaged fireworks company alleged it had spent over $300,000 on
in the business of writing bail bonds in a county having inventory and over $50,000 for leases and advertising that
a city with a population of 350,000 or more and in a would be lost if it could not sell its fireworks because
county containing in whole or in part a city having a of the ban. Id. at 239. The appellate court concluded
population of not less than 73,000 and not more than that, although the company alleged “tremendous financial
100,000. Id. at 635. Ted Smith and other individuals who loss” as a result of the county's ban, the company lacked
are not specifically identified in the opinion (the bail a vested property interest in the operation of its business
bondsmen) were unlicensed but nevertheless engaged in of selling fireworks. Id. The appellate court recognized the
the business of writing bail bonds in Dallas County, which fireworks company had “a property right in the physical
contained a city falling within the second population items, such as inventory, that it own[ed],” but concluded
bracket to which the statute applied. The bail bondsmen no vested property right was threatened *807 under the
filed a mandamus action to compel the sheriff to approve facts presented because the company could still sell its
one of the bonds, and then amended their pleading fireworks and was not required to surrender its inventory.
to seek injunctive relief on the ground that the statute Id. at 238, 240; see also Wild Rose Rescue Ranch v. City of
was unconstitutional. Id. The bail bondsmen contended Whitehouse, 373 S.W.3d 211, 216 (Tex.App.-Tyler 2012,
the statute violated Article 3, Section 56 of the Texas no pet.) (appellant failed to show vested property right
Constitution, which prohibited the Legislature from “because it has no absolute right to use its property for a
passing any local or special law where a general law could particular purpose”); City of Beaumont v. Starvin Marvin's
be made applicable, because the population brackets set Bar & Grill, L.L.C., No. 09–11–00229–CV, 2011 WL
out in the statute constituted an arbitrary classification 6748506, at *4 (Tex.App.-Beaumont Dec. 22, 2011, pet.
that bore no reasonable relationship to the objects the denied) (mem. op.) (lessee's use of property as a restaurant
statute sought to accomplish. Id. at 634. The trial court with live outdoor music was not vested property right);
denied the bail bondsmen's requested relief and held that Mr. W. Fireworks, Inc. v. Comal Cnty., No. 03–06–00638–
the statute was constitutional. Id. at 633. CV, 2010 WL 1253931, at *8 (Tex.App.-Austin Mar.
31, 2010, no pet.) (mem. op.) (“Mr. W does not have
The bail bondsmen appealed directly to the Texas a vested property right to sell or dispense fireworks in
Supreme Court, which reversed the trial court's decision. Comal County.”); Sterling v. San Antonio Police Dept., 94
Id. at 633, 637. The supreme court first considered whether S.W.3d 790, 794 (Tex.App.-San Antonio 2002, no pet.)
the bail bondsmen had adequately shown that the statute (appellant's pleading that “loss of business and goodwill
in question invaded vested property rights. Id. at 633– resulting [from] cessation of operations will be difficult if
34. The court concluded the bail bondsmen had “a not impossible to determine” was insufficient to support
jurisdiction because he had no vested property right to The ordinance could be enforced not only against the
lease gambling devices); Hang On III, Inc. v. Gregg Cnty., owner of the property, but also against the family of the
893 S.W.2d 724, 727 (Tex.App.-Texarkana 1995, writ *808 deceased who decided to place the body there and
dism'd) (property owner did not have vested property right against anyone who assisted in the burial of the body. Id.
to operate a sexually-oriented business and did not have The supreme court determined the ordinance effectively
“a constitutionally protected right in a property merely prevented the business that owned the property from
because it began as a conforming use and is later rendered challenging the ordinance's validity because the business's
nonconforming.”); Spartan Industries, Inc. v. State, 379 customers would be reluctant to expose themselves to
S.W.2d 931, 932 (Tex.Civ.App.-Eastland 1964, no writ) criminal prosecution in order to challenge the law. Id.
(department store did not have vested property interest at 529–30; see also Dallas Cnty. Housemovers Ass'n, 555
sufficient to challenge “Sunday Closing Laws” prohibiting S.W.2d at 214; Wild Rose Rescue Ranch, 373 S.W.3d
sale of certain merchandise on both of two consecutive at 217. The court, therefore, had equity jurisdiction to
days of Saturday and Sunday). construe the ordinance because, unless a challenge could
be asserted prior to prosecution, the ordinance would
Appellants contend they have property, such as business have the chilling effect of preventing any challenges to
plans, existing customer lists and loan portfolios, forms, its validity. City of Austin, 28 S.W. at 530 (“As long as
websites, and business methods, that will be affected by the ordinance remains undisturbed, it acts in terrorem,
the Ordinance. However, they do not argue that the and practically accomplishes a prohibition against the
Ordinance forbids them from engaging in the lending burial of the dead within the limits of the city of Austin,
business—nor can they, since the Ordinance on its face save in the excepted localities.”); see also Dallas Cnty.
only regulates the terms under which appellants may Housemovers Ass'n, 555 S.W.2d at 214; Wild Rose Rescue
offer their services. Appellants, therefore, cannot establish Ranch, 373 S.W.3d at 217.
that the Ordinance harms their vested property rights, as
necessary for the trial court to have equity jurisdiction to
City of Austin is clearly distinguishable from this case. In
entertain appellants' suit. City of Austin, the supreme court made a clear distinction,
in the case of a commercial enterprise, between an
[20] [21] Relying on City of Austin v. Austin City ordinance prohibiting activities solely of a seller and those
Cemetery Association, 87 Tex. 330, 28 S.W. 528 (1894), imposing criminal penalties on customers as well. 6 The
appellants also contend that their claims are excepted Ordinance imposes no potential liability on a customer of
from the general jurisdictional rule set out in Morales a CAB based on a violation of the Ordinance. If a CAB
because they do not have an adequate remedy at law. disregards the Ordinance and provides services that do
The ability to assert the unconstitutionality of a penal not comply with the credit restrictions in the Ordinance,
provision as a defense to a criminal prosecution is an the conduct would not subject the CAB's customer to
adequate remedy at law. State v. Logue, 376 S.W.2d potential criminal liability and would provide the CAB
567, 572 (Tex.1964) (orig. proceeding); City of Dallas an opportunity to test the validity of the Ordinance as a
v. Dallas Cnty. Housemovers Ass'n, 555 S.W.2d 212, defense to prosecution. See Passel, 440 S.W.2d at 63.
214 (Tex.Civ.App.-Dallas 1977, no writ). Appellants,
however, argue this rule should not apply in this case As to appellants' claim the City has failed to enforce
because the City has not prosecuted any CAB under the Ordinance, leaving appellants with no means to
the Ordinance and, therefore, appellants have no ability challenge it, the City has informed appellants of its
to challenge the Ordinance in criminal court. They also intention to enforce the Ordinance. There is no evidence
contend the fines imposed by the Ordinance “could easily that TitleMax, Ace, or any other member of CSAT has
grow so large they could cause economic ruin,” creating violated the Ordinance or that the City has failed to file an
an in terrorem effect that forces compliance with the enforcement action based on any alleged violation of the
Ordinance. Ordinance. We cannot conclude, on this record, that the
City has deliberately chosen not to enforce the Ordinance.
The ordinance at issue in City of Austin limited the
location of land used for cemetery purposes to certain Appellants have failed to show they do not have an
areas of the city. City of Austin, 28 S.W. at 528–29. adequate remedy at law or that the enforcement of the
Ordinance will cause them any harm other than that the enforcement of penal statutes, it does not have equity
jurisdiction to render a declaratory judgment regarding
inherent in prosecution for an offense. See Dallas Cnty.
the constitutionality of a criminal statute or ordinance.
Housemovers Ass'n, 555 S.W.2d at 214; Starvin Marvin's
Morales, 869 S.W.2d at 947. A court exercising civil
Bar & *809 Grill, L.L.C., 2011 WL 6748506, at *4.
jurisdiction “simply has no jurisdiction to render naked
Accordingly, the trial court did not err by determining it
declarations of ‘rights, status or other legal relationships
did not have equity jurisdiction over appellants' claims.
arising under a penal statute.’ ” Id. (quoting Malone v.
City of Houston, 278 S.W.2d 204, 206 (Tex.Civ.App.-
Galveston 1955, writ ref'd n.r.e.)); see also Ryan v.
Declaratory Judgment Act Rosenthal, 314 S.W.3d 136, 143 (Tex.App.-Houston [14th
Dist.] 2010, pet. denied). We conclude the trial court did
[22] Appellants finally assert the trial court erred by
not err by determining it did not have jurisdiction to
granting the City's plea to the jurisdiction because they
consider appellants' request for declaratory relief. Based
are seeking a declaration pursuant to the DJA that
on our resolution of appellants' first two arguments, we
the Ordinance is invalid, and the DJA contains an
need not address appellants' argument that CSAT has
express waiver of governmental immunity. See TEX. CIV.
organizational standing to assert claims on behalf of its
PRAC. & REM.CODE ANN. § 37.006(b) (requiring that
members. See TEX.R.APP. P. 47.1.
municipality be made a party in any suit involving validity
of an ordinance). However, the DJA is not an independent
source of subject matter jurisdiction, but instead is
available only when a court already has jurisdiction over Conclusion
the underlying controversy. Morales, 869 S.W.2d at 947
We conclude the trial court did not err by granting the
(“A litigant's request for declaratory relief cannot confer
City's plea to the jurisdiction. We resolve appellants'
jurisdiction on the court, nor can it change the basic
sole issue against them and affirm the trial court's order
character of a suit.”); see also Tex. Parks & Wildlife Dep't
dismissing appellants' claims.
v. Sawyer Trust, 354 S.W.3d 384, 388 (Tex.2011) (DJA
is “merely a procedural device for deciding cases already
within a court's jurisdiction” (quoting Tex. Air Control All Citations
Bd., 852 S.W.2d at 444)).
433 S.W.3d 796
[23] [24] For the same reasons that a court exercising
civil jurisdiction does not have equity jurisdiction to enjoin
Footnotes
1 A CSO is:
[A] person who provides, or represents that the person can or will provide, for the payment of valuable consideration
any of the following services with respect to the extension of consumer credit by others:
(A) improving a consumer's credit history or rating;
(B) obtaining an extension of consumer credit for a consumer; or
(C) providing advice or assistance to a consumer with regard to Paragraph (A) or (B).
TEX. FIN.CODE ANN. § 393.001(3) (West 2006).
2 A CAB is a CSO that “obtains for a consumer or assists a consumer in obtaining an extension of consumer credit in
the form of a deferred presentment transaction or a motor vehicle title loan.” TEX. FIN.CODE ANN. § 393.601(2) (West
Supp.2013).
3 Section 50–151.3 provides:
(a) The cash advanced under an extension of consumer credit that a credit access business obtains for a consumer
or assists a consumer in obtaining in the form of a deferred presentment transaction may not exceed 20 percent of
the consumer's gross monthly income.
(b) The cash advanced under an extension of consumer credit that a credit access business obtains for a consumer
or assists a consumer in obtaining in the form of a motor vehicle title loan may not exceed the lesser of:
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Synopsis
[2] Evidence
Background: Indemnitee, a manufacturer of asbestos
Laws of Other States
products, brought action against guarantor of indemnity,
alleging tortious interference with contractual relations, Texas courts may presume that another state's
conspiracy to commit tortious interference, fraudulent law is the same as Texas law absent proof or
transfers, and conspiracy to commit fraudulent transfers. argument to the contrary.
Guarantor moved to compel arbitration under various
Cases that cite this headnote
agreements, including stock purchase agreement and
guaranty. The 80th District Court, Harris County, denied
motion. Guarantor appealed. [3] Action
What law governs
The party requesting application of a foreign
law has the initial burden of showing that the
Holdings: The Court of Appeals, J. Brett Busby, J., held
foreign law conflicts with Texas law.
that:
Cases that cite this headnote
[1] under direct-benefits estoppel doctrine, guarantor
could enforce arbitration clause of stock purchase
contract despite being a non-signatory; [4] Alternative Dispute Resolution
Contractual or consensual basis
[2] termination of mutual guaranty agreement between Arbitration cannot be ordered in the absence
guarantor and indemnitor did not abrogate guarantor's of an agreement to arbitrate.
ability to compel arbitration;
Cases that cite this headnote
[3] guarantor did not expressly waive right to arbitrate;
and [5] Alternative Dispute Resolution
Evidence
[4] guarantor did not substantially invoke judicial process
The party moving for arbitration has the
and thus did not impliedly waive right to arbitrate.
initial burden to present evidence that a valid
arbitration agreement exists, and if there is an
Reversed and remanded. agreement to arbitrate, the party must also
establish that the claims asserted fall within
the scope of the agreement.
1 Cases that cite this headnote Panel consists of Justices Jamison, Busby, and Brown.
(Tex.1995)). A person must be a stranger to a contract Meyer and Ford conspired to violate
to interfere tortiously *443 with it. Id. (citing Morgan statutes protecting dealers from
Stanley & Co. v. Texas Oil Co., 958 S.W.2d 178, 179 certain actions by manufacturers.
(Tex.1997)). Thus, a signatory generally is not “required to
arbitrate a tortious interference claim against a complete Id. at 307. The court also considered it important
stranger to his contract and its arbitration clause.” Id. that WMCO's damages “cannot be calculated without
at 763. But if the signatory plaintiff's right to recover reference to the [agreement].” Id. The court thus held
and its damages depend on the existence of the contract that Meyer and Ford, although nonsignatories to the
containing the arbitration clause, or if the non-signatory agreement between WMCO and the dealer, could compel
defendant is an agent or affiliate of a signatory, then the arbitration under the agreement's arbitration clause. Id. at
plaintiff can be compelled to arbitrate its claim. Meyer, 308. 6
211 S.W.3d at 306–07; In re Vesta, 192 S.W.3d at 762; PER
Group, L.P. v. Dava Oncology, L.P., 294 S.W.3d 378, 387– Similarly, appellees' tortious interference claims against
88 (Tex.App.–Dallas 2009, no pet.); see also In re Kellogg, Cooper in their second amended petition depend on
166 S.W.3d at 739 (listing estoppel and agency among the the existence of the SPA and Cooper's guaranty of
theories for requiring arbitration with non-signatory). Pneumo Abex's performance thereunder. See Smith v.
Kenda Capital, LLC, 451 S.W.3d 453, 460 (Tex.App.–
Cooper contends that it may enforce the arbitration Houston [14th Dist.] 2014, no pet.) (“[D]irect benefits
clause under the supreme court's opinion in Meyer. estoppel analysis focuses on whether a contract containing
Appellees argue that Meyer is distinguishable because the the clause at issue also includes other terms on which
non-signatories in that case were not strangers to the the signatory *444 plaintiff must rely to prosecute its
agreement, as they contend Cooper is here. claims.”). As discussed above, the SPA required Pneumo
Abex to indemnify Metro's predecessor, and Cooper and
In Meyer, Ford Motor Company's agreement with one its then-subsidiary guaranteed that indemnity in 1994.
of its dealers provided Ford with an assignable right Appellees allege that in 2011, Cooper tortiously caused
of first refusal to acquire the dealer's business if the (and conspired with others to cause) Pneumo Abex to
dealer decided to sell. 211 S.W.3d at 304. When the breach its indemnity obligation to Metro under the SPA,
dealer later signed an agreement to sell its business to which contains an arbitration clause. 7 If Pneumo Abex
WMCO, Ford exercised its right and assigned that right did not breach the SPA in restructuring the guaranty
to Meyer and his company. Id. WMCO then sued the and other commitments backing its indemnity obligation,
dealer, Meyer, and Ford, alleging, among other things, then there would be no claim for tortious interference or
that Meyer tortiously interfered with WMCO's agreement conspiracy. Moreover, the remedies appellees seek under
to buy the dealer's business. Id. Meyer and Ford moved each cause of action are the direct benefit of the indemnity
to compel arbitration under a clause in the agreement obligation to Metro under the SPA: they request
between the dealer and WMCO. Id. at 304–05. Meyer and injunctive relief obligating Cooper to fund any shortfall
Ford contended that because WMCO made the agreement in the trust set up to pay the indemnity, or alternatively
with the dealer, WMCO was equitably estopped from damages for the loss of Cooper's guaranty of that
refusing arbitration. Id. at 305. The supreme court agreed, indemnity—damages that cannot be calculated without
noting that WMCO's claims against Ford and Meyer reference to the terms of the indemnity obligation in the
“depend on the existence of” WMCO's agreement with the SPA. For these reasons, Meyer supports Cooper's ability
dealer: to compel Metro to arbitrate its tortious interference
claims under the SPA's arbitration clause.
If [the dealer] properly terminated
the [agreement with WMCO], based
Relying on our decision in Brewer & Pritchard, P.C.
on Ford's exercise of its right of
first refusal, then there would be no v. AMKO Resources International, LLC, 8 appellees
claim for tortious interference, no argue that Cooper nevertheless cannot compel arbitration
need to decide whether Ford validly because it is a complete stranger to the SPA. They point
exercised the right of first refusal, out that Cooper had no relationship with the SPA's
and no need to decide whether signatories—Metro's predecessor and Pneumo Abex—
when the SPA was executed, and that the SPA itself connection with the 2011 settlement (and its agreement
did not require Cooper to guarantee Pneumo Abex's with the other defendants to interfere) were undertaken
performance. We do not agree that these facts defeat with a specific intent to cap its guaranty obligation,
direct-benefits estoppel. and that Cooper engaged in fraudulent transfers (and
conspired to do so) when it obtained a release of its
Unlike in Brewer & Pritchard, Cooper guaranteed the guaranty obligation in exchange for certain payments
performance of one of the agreement's signatories, to the trust. The remedies appellees seek include an
Pneumo Abex, in 1994—long before the allegedly tortious injunction obligating Cooper to fund any shortfall in the
2011 transactions made the basis of this suit. Moreover, trust set up to pay the indemnity Cooper had guaranteed,
Brewer & Pritchard did not involve a non-signatory or alternatively damages in the amount of the shortfall.
defendant seeking to compel arbitration with a signatory In short, appellees are claiming the benefit of the Mutual
plaintiff (as our inquiry under the SPA does), nor Guaranty, so they are estopped from avoiding the burden
did it address whether the plaintiff's right to recover of its arbitration clause. See In re Kellogg, 166 S.W.3d at
and its damages depended on the existence of the 739.
agreement containing the arbitration clause. Metro's
tortious interference claims do depend on the existence of Appellees respond that arbitration can no longer be
the SPA, so Meyer supports arbitration of those claims as compelled under the Mutual Guaranty because Cooper,
explained above. Other courts agree that a guarantor or Pneumo Abex, and others terminated that agreement
surety of a party's obligation under a contract containing following the 2011 settlement. They point to *446 the
an arbitration clause may invoke or be bound by that following language in the termination agreement:
clause in a suit regarding the obligation. 9 Because Metro's
Effective as of the Closing, and notwithstanding any
tortious interference *445 claims depend on the existence
provision of the Mutual Guaranty to the contrary, the
of Pneumo Abex's indemnity obligation in the SPA,
Mutual Guaranty shall be fully, finally and irrevocably
which Cooper guaranteed, we hold Cooper may compel
terminated and of no further force or effect, and no
signatory Metro to arbitrate those claims under the
Party nor any other Person shall have any further
SPA. 10 obligation or liability under the Mutual Guaranty from
and after Closing.
and that the court should, in effect, require Cooper termination agreement ended its obligation to arbitrate.
to honor its guaranty notwithstanding the termination. Here, appellees are not parties to the termination
Having asked the court to ignore the Mutual Guaranty's agreement. Instead, appellees are third parties trying to
termination, appellees can hardly complain if its clause revive the obligations of the original agreement. The
requiring arbitration of any dispute “arising in connection logical force of the doctrine of direct-benefits estoppel—
with” the agreement is also given effect. which was not at issue in TransCore —supports requiring
appellees to arbitrate their claims.
Appellees urge us instead to follow TransCore Holdings,
Inc. v. Rayner, 104 S.W.3d 317 (Tex.App.–Dallas Appellees' claims against Cooper hinge on the existence
2003, pet. denied). In TransCore, parties including of the Mutual Guaranty, and the gist of their case is
TransCore and Rayner entered into a stock purchase to undo its termination. If Cooper “properly terminated
agreement containing an arbitration clause. Id. at 319. the” Mutual Guaranty, then “there would be no claim
Subsequently, the parties entered into a termination for tortious interference” or fraudulent transfer and no
agreement that included a backward-looking mutual need to determine whether Cooper “conspired” with
release of obligations and claims and a forward-looking the other defendants to do so. Meyer, 211 S.W.3d at
provision requiring actions relating to the agreement 307. Appellees cannot have it both ways, picking and
to be brought in court. Id. at 320–21, 323. Rayner choosing which portions of the Mutual Guaranty should
argued that the termination agreement released him from be enforced and which portions should not. See id. at
his obligation to arbitrate TransCore's claim that he 306; cf. Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983)
made misrepresentations prior to termination. Id. at 321. (“No single [contractual] provision taken alone [should]
The Dallas Court of Appeals agreed, noting that the be given controlling effect; rather, all the provisions must
termination agreement was a new agreement with new be considered with reference to the whole instrument”).
consideration that unconditionally released the parties
from all previous obligations. Id. at 321–22, 323. We hold that the termination of the Mutual Guaranty
agreement between Cooper and Pneumo Abex did
This case differs from TransCore in two critical respects. not abrogate Cooper's ability to compel arbitration of
First, the backward-looking release language in the appellees' claims under that agreement. In addition, as
TransCore termination agreement is absent here. This explained above, Cooper may compel arbitration of
termination agreement, which was entered into effective Metro's claims under the SPA. Accordingly, we sustain
April 5, 2011, only eliminates any “further obligation” to Cooper's first issue and hold that the trial court erred to
arbitrate under the Mutual Guaranty “from and after” the extent it denied Cooper's motion to compel arbitration
termination. The provision agreeing to bring disputes on the ground that appellees' claims do not fall within
regarding the termination agreement only to New York the scope of valid arbitration agreements that Cooper can
courts does not address the handling of disputes under invoke.
the Mutual Guaranty. 12 *447 Thus, the termination
agreement leaves intact the obligation under the Mutual
II. Cooper did not expressly waive its right to arbitrate
Guaranty to arbitrate disputes “arising in connection with
appellees' claims.
the agreement” up to the point of termination. Appellees'
[15] [16] Once the arbitration movant establishes a valid
claims challenge Cooper's acts leading up to and including
arbitration agreement that encompasses the claims at
the 2011 settlement, which was entered into as of February
issue, a trial court has no discretion to deny the motion
1, 2011. Because those claims arise in connection with
to compel arbitration unless the opposing party proves
the Mutual Guaranty agreement as explained above, the
a defense to arbitration such as waiver. J.M. Davidson,
termination agreement does not affect the obligation to
Inc. v. Webster, 128 S.W.3d 223, 227 (Tex.2003); In re
arbitrate them.
FirstMerit Bank, N.A., 52 S.W.3d 749, 753–54 (Tex.2001)
(orig. proceeding). Cooper's second and third issues ask
Second, the termination agreement in TransCore
whether the trial court erred to the extent it denied the
was between the parties to the original agreement:
motion to compel by finding that Cooper waived its right
one party seeking to compel arbitration under the
to arbitration against Metro and Whitman.
original agreement, and another party arguing that the
• whether the party who pursued arbitration was the [25] “Even substantially invoking the judicial process
plaintiff or the defendant; does not waive a party's arbitration rights unless the
opposing party proves that it suffered prejudice as a
• how long the party who pursued arbitration delayed result.” In re Bruce Terminix Co., 988 S.W.2d 702, 704
before seeking arbitration; (Tex.1998). The arbitration opponent must provide proof
of prejudice to overcome the strong presumption against
• when the party who pursued arbitration learned of the waiver. In re Vesta, 192 S.W.3d at 763. In the context of
arbitration clause's existence; waiver of an arbitration right, “prejudice” relates to the
inherent unfairness in terms of delay, expense, or damage
• how much of the pretrial activity related to the merits
to a party's legal position that occurs when the party's
rather than to arbitrability or jurisdiction;
opponent forces it to litigate an issue and later seeks to
• how much time and expense has been incurred in arbitrate that same issue. Perry Homes, 258 S.W.3d at 597.
litigation; A party cannot attempt to have it both ways by switching
between litigation and arbitration to its own advantage.
• whether the party who pursued arbitration sought or See Okorafor, 295 S.W.3d at 40 (citing In re Fleetwood
opposed arbitration earlier in the case; Homes of Texas, L.P., 257 S.W.3d 692, 694 (Tex.2008)).
• whether the party who pursued arbitration sought They also point to Cooper's request for the production
judgment on the merits. of “all documents and communications that show what
amount would have constituted ‘equivalent value’ with
respect to the settlement of the New York Lawsuit” and
“all documents (if any) in which Whitman Insurance after Whitman joined the case as a plaintiff. 16 The record
Company ... is identified, as an entity and/or a party that shows that during the first ten months of the case, from
is entitled to indemnification ... pursuant to the terms of December 2011 to October 2012, the parties were engaged
the SPA.” Appellees declare that they have produced more in settlement negotiations and Metro sought to extend
than 21,000 documents, and argue that Cooper is trying
trial deadlines for that reason. 17 Much of the second year
to have it both ways by moving to compel arbitration only
was spent on venue motions, jurisdictional motions, and
after receiving extensive discovery responses. The affidavit
mediation, which failed in November 2013. Settlement
of appellees' counsel states that, “[t]o date, [appellees']
negotiations and mediation do not substantially invoke
attorneys and staff have spent over 9,000 hours working
the judicial process, nor are they inconsistent with a
on the lawsuit and incurred approximately $3,500,000 in
desire to arbitrate. See Tex. Residential Mort., L.P.
fees and $94,000 in other costs.” Appellees also argue
v. Portman, 152 S.W.3d 861, 863–64 (Tex.App.–Dallas
that Cooper substantially invoked the judicial process by
2005, no pet.). Likewise, venue and jurisdictional motions
moving for a continuance and agreeing to an extension of
do not constitute substantial invocation of the judicial
discovery.
process because they do not relate to the merits of the case.
See Granite, 130 S.W.3d at 367; Deep Water Slender Wells,
We disagree with appellees' position that Cooper
Ltd. v. Shell Intern. Exploration & Prod., Inc., 234 S.W.3d
substantially invoked the judicial process. In holding that
679, 695 (Tex.App.–Houst. [14th Dist.] 2007, pet. denied)
substantial invocation had occurred in Perry Homes,
(“A dismissal of all *452 claims to enforce a clause
the *451 Supreme Court of Texas noted the extensive
requiring litigation in another forum is a determination
discovery propounded by the movants but stated that
that the merits of the claims should be determined
discovery is not the only measure of waiver under
elsewhere; therefore, enforcement of such a forum-
the totality-of-the-circumstances test. Perry Homes, 258
selection clause is a nonmerits basis for dismissal.”).
S.W.3d at 596. 15 The court then pointed out that the
movants had objected stridently to arbitration before Appellees cite Tuscan Builders, LP v. 1437 SH6 L.L.C.,
changing their minds and seeking arbitration shortly 438 S.W.3d 717 (Tex.App.–Houston [1st Dist.] 2014, pet.
before the trial setting. Id. The court also invoked the denied), a case in which the First Court of Appeals
rule that one cannot wait until the eve of trial to request held that the movant substantially invoked the judicial
arbitration, observing that “most of the discovery in process. Appellees assert that this case is similar because
the case had already been completed before [movants] the movant in Tuscan waited for more than a year after
requested arbitration.” Id. the lawsuit was filed before seeking arbitration, did not
accompany its answer with a notice to pursue arbitration,
The facts here are different from those in Perry Homes and completed written discovery on the merits, inspected
more analogous to In re Vesta, in which the supreme court property at issue in the lawsuit, designated experts, and
held that arbitration had not been waived. 192 S.W.3d at joined in a motion to extend the discovery period and
763–64. The parties moving for arbitration in Vesta had postpone trial. Id. at 722–23.
litigated for two years and engaged in discovery, but they
did not initially oppose arbitration. See Perry Homes, 258 This case is distinguishable from Tuscan Builders. The
S.W.3d at 600 (distinguishing Vesta on those grounds). party seeking to compel arbitration in Tuscan Builders
Furthermore, the Vesta case was not close to trial, and the filed a third-party action and conducted a building
party opposing arbitration incurred most of its discovery inspection that likely would not have been available in
expenses in obtaining discovery rather than providing it. arbitration. Id. at 723. The court concluded that the
Id. motion to compel arbitration was “more consistent with a
late-game tactical decision than an intent to preserve the
[26] Like the parties moving to compel arbitration in right to arbitrate.” Id. at 722. In this case, by contrast,
Vesta, Cooper did not oppose arbitration at any time Cooper did not file counterclaims, and appellees do not
during the case. In addition, although the parties had contend that any merits discovery obtained would not
engaged in some merits discovery, this case was not on have been available in arbitration. Appellees also “do[ ]
the eve of trial when Cooper filed its motion to compel not allege that the discovery already conducted would
arbitration in May 2014—approximately four months not be useful in arbitration.” In re Vesta, 192 S.W.3d at
763; see also Granite, 130 S.W.3d at 367 (“Propounding Cooper unequivocally waived its right to arbitration by
substantially invoking the judicial process. Perry Homes,
discovery will not, in and of itself, result in waiver of
258 S.W.3d at 593.
the right to compel arbitration”). Cooper's twenty-eight-
month delay is but one factor, which by itself is insufficient
Having concluded that under the totality of the
to waive the right to arbitrate. See In re Serv. Corp.
circumstances, Cooper did not substantially invoke the
Int'l, 85 S.W.3d at 174; see also Granite, 130 S.W.3d at
judicial process, we need not address whether appellees
367 (“Length of delay alone is not a basis for inferring
suffered prejudice. We sustain Cooper's second and third
waiver.”).
issues and hold the trial court erred to the extent it ruled
that Cooper waived its right to arbitration of appellees'
Cooper is in court because appellees sued it, and Cooper
claims.
did not seek disposition on the merits. See G.T. Leach
Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 512–
13 (Tex.2015) (noting similar factors in holding right to
arbitrate had not been waived). Appellees have not shown CONCLUSION
that Cooper obtained discovery it otherwise would not
have obtained, and this case was not on the eve of trial. For these reasons, the trial court erred in denying the
As for the expenses appellees incurred in prosecuting their Cooper appellants' motion *453 to compel arbitration.
suit, the affidavit does not delineate which costs were We reverse the trial court's order denying the motion,
incurred in litigating against Cooper and which costs were render judgment ordering arbitration of appellees' claims
incurred in litigating against the other named defendants. against the Cooper defendants who are parties to this
Nor does it address which costs were incurred in obtaining appeal, and remand this case to the trial court for further
or responding to discovery. The costs thus likely include proceedings consistent with this opinion, including the
those associated with litigating the claims against the other grant of an appropriate stay. See Tex. Civ. Prac. &
named defendants and those associated with appellees' Rem.Code Ann. § 171.025(a) (West 2011).
efforts at obtaining discovery from Cooper. The record
does not demonstrate the extent to which appellees “pre-
All Citations
trial costs were ... self-inflicted.” In re Vesta, 192 S.W.3d at
763. Accordingly, we hold appellants have not shown that 475 S.W.3d 436
Footnotes
1 Although Cooper Holdings, Ltd. joined appellants in the motion to compel arbitration, the trial court did not rule on the
motion with respect to Cooper Holdings, Ltd. The notice of appeal does not list Cooper Holdings, Ltd. as an appellant.
Accordingly, Cooper Holdings, Ltd. is not an appellant in this case. We therefore do not address whether it was entitled
to arbitration of Metro's and Whitman's claims.
2 Appellees filed a third amended petition after Cooper had filed its motion to compel arbitration.
3 Appellees pled additional causes of action later abandoned; therefore, we need not analyze them.
4 Metro originally brought this action against Cooper Industries, LLC, Cooper Industries Ltd., Cooper Holdings, Ltd., Cooper
US, Inc., Cooper Industries, PLC, M & F Worldwide Corp., MAFCO Worldwide Corp., MAFCO Consolidated Group, LLC,
PCT International Holdings, Inc., and the Pneumo Abex Asbestos Claims Settlement Trust. The third amended petition
also names Mcg Intermediate Holdings Inc. as a defendant.
5 The APA states that it is governed by Delaware law, but the parties do not discuss Delaware law. The SPA contains a
clause stating that the “law of the State of New York shall govern the parties' dispute.” In appellees' response to Cooper's
motion to compel arbitration, they argued that New York law governs the arbitration provision in the SPA. On appeal,
however, appellees assert that we need not address the question whether Texas or New York law applies because
Cooper is not entitled to compel arbitration under either state's laws. Cooper, for its part, contends that Texas law is
entirely consistent with New York law, and that it is entitled to arbitration under the law of both states.
Texas courts may presume that another state's law is the same as Texas law absent proof or argument to the contrary.
Coca–Cola Co. v. Harmar Bottling Co., 218 S.W.3d 671, 685 (Tex.2006). The party requesting application of a foreign
law has the initial burden of showing that the foreign law conflicts with Texas law. Greenberg Traurig of New York, P.C.
v. Moody, 161 S.W.3d 56, 70 (Tex.App.–Houston [14th Dist.] 2004, no pet.). Because all parties assert the outcome
is the same under both New York and Texas law, and the parties do not address Delaware law, we apply Texas law.
6 In a portion of the Meyer opinion, the supreme court also noted allegations of substantially interdependent and concerted
misconduct. 211 S.W.3d at 307–08. But the court compelled arbitration on a theory of direct-benefits estoppel, and it
declined to adopt a theory of concerted-misconduct estoppel in a subsequent case. In re Merrill Lynch Trust Co. FSB,
235 S.W.3d 185, 191 & n. 22 (Tex.2007) (orig. proceeding). We rely solely on the theory of direct-benefits estoppel here.
7 Alternatively, appellees allege that Cooper's actions rendered Pneumo Abex's performance of its obligations to Metro
under the SPA more difficult, if not impossible.
8 No. 14–13–00113–CV, 2014 WL 3512836, at *11 (Tex.App.–Houston [14th Dist.] July 15, 2014, no. pet.) (mem.op.)
(holding buyer of leases was stranger to seller's fee agreement with law firm that had represented seller in dispute with
lease operator, and therefore firm could not use arbitration clause in fee agreement to compel buyer to arbitrate claims
regarding buyer's failure to pay firm a portion of sales price).
9 See, e.g., Choctaw Generation L.P. v. Am. Home Assur. Co., 271 F.3d 403, 406–08 (2d Cir.2001) (holding surety for
one party's obligation under a construction contract containing arbitration clause could compel other party to arbitrate
its claims against surety even though surety was not a party to construction contract and surety contract contained no
arbitration clause because the controversy presented was linked to the construction contract); T–Mobile USA, Inc. v.
Montijo, No. C12–1317RSM, 2012 WL 6194204, at *4 (W.D.Wa. Dec. 11, 2012) (same as to guarantors); Bimota SPA v.
Rousseau, 628 F.Supp.2d 500, 505–06 (S.D.N.Y.2009) (same); Fujian Pac. Elec. Co. v. Bechtel Power Corp., No. C 04–
3126 MHP, 2004 WL 2645974, at *6–7 (N.D.Cal. Nov. 19, 2004) (same); see also Bell v. Campbell, 143 S.W. 953, 956–
57 (Tex.Civ.App.–Amarillo 1911, writ ref'd) (holding sureties bound by arbitration agreement and award against principal);
Empire Steel Corp. v. Omni Steel Corp., 378 S.W.2d 905, 911 (Tex.Civ.App.–Fort Worth 1964, writ ref'd n.r.e.) (same
as to guarantors). We note that in a subsequent case, the Second Circuit described Choctaw as involving a situation
in which the non-signatory surety (American Home) was explicitly named in the underlying contract as having certain
tasks to perform thereunder. Ross v. Am. Exp. Co., 547 F.3d 137, 145 (2d Cir.2008). The Choctaw opinion does not
appear to support this characterization. See 271 F.3d at 403–05, 407 (noting that underlying contract required party
to post and replenish letter of credit, and that American Home contracted separately with party to issue bond securing
party's performance but was not party to underlying contract). In any event, none of the cases cited at the beginning
of this footnote attach importance to whether the surety or guarantor is identified by name in the underlying agreement
containing the arbitration clause.
10 Because we conclude that Whitman is bound to arbitrate its claims under the 1994 Mutual Guaranty, as discussed below,
we do not address whether Cooper could compel Whitman to arbitrate under the SPA. We also note that the parties have
not separately addressed whether Cooper could compel Metro to arbitrate its claims of fraudulent transfer and conspiracy
to commit fraudulent transfer. We likewise need not address that issue under the SPA given our conclusion below that
Metro is bound to arbitrate those claims under the Mutual Guaranty.
11 see also Butchers, Food Handlers & Allied Workers Union, Local 174 v. Hebrew Nat'l Kosher Foods, Inc., 818 F.2d 283,
287 (2d Cir.1987) (“If the contract does not state that the duty to arbitrate ends with the termination of the contract, the
strong policies favoring arbitration should ordinarily lead the court to conclude that the obligation to arbitrate—especially
as to claims that accrued during the term of the contract—survives the expiration of the contract.”).
12 See Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 587 (Tex.App.–Houston [14th Dist.] 1999, no pet.).
13 see also In re Bruce Terminix Co., 988 S.W.2d at 704 (citing case holding no waiver by defendant who removed case from
state to federal court); In re Frost Nat'l Bank, 13–07–00748–CV, 2008 WL 4889836, at *3 (Tex.App.–Corpus Christi Nov.
7, 2008, no pet.) (holding party did not waive right to compel arbitration by moving to transfer venue based on provision
in agreement) (mem.op.); Global Fin. Servs., L.L.C. v. Estate of McLean, No. 04–07–627–CV, 2008 WL 372521, at *3
(Tex.App.–San Antonio Feb. 13, 2008, no pet.) (mem.op.); Granite Constr. Co. v. Beaty, 130 S.W.3d 362, 367 (Tex.App.–
Beaumont 2004, no pet.) (“[A] motion to transfer venue does not seek a final determination of the litigation.”).
14 As noted above, whether a party has waived an arbitration right is a question of law that this Court reviews de novo. See
Perry Homes, 258 S.W.3d at 598. If the trial court is called upon to resolve factual disputes about the conduct in which the
party engaged, this Court defers to the trial court's implied fact findings if they are supported by sufficient evidence. See id.
15 see also G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 514 (Tex.2015)(collecting cases in which “we
have declined to find waiver even when the movant itself propounded written discovery”).
16 Although appellees point to evidence (summarized above) that substantial merits discovery had occurred, the record also
contains indications that the situation was not like that in Perry Homes, in which most discovery had been completed.
According to a filing by appellees in February 2014, no “meaningful merits discovery” had yet been received from Cooper
given the litigation over jurisdictional issues. In April 2014, appellees moved to modify the docket control order, stating
that the parties had been “prevented ... from being able to engage in meaningful document discovery on the merits until
recently,” and that “no fact-witness depositions have been taken on the merits as of this date.”
17 Metro filed its original petition on December 30, 2011. On October 31, 2012, Metro filed an unopposed motion to modify the
scheduling order and request for Rule 166 Conference. Metro asserted that the “parties have been engaged in extensive
settlement negotiations in an effort to resolve this case. Because the parties' efforts have been focused on resolving the
matter short of litigating the issue, the parties request an extension and modification of this Court's docket control order.”
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
*2 The Texas Health and Human Services Commission 475 S.W.3d 470, 487 (Tex. App.—Dallas 2015). The
is responsible for administering food stamps, now called court determined that the “gist of the article included the
Supplemental Nutrition Assistance Program (SNAP) assertion that [Rosenthal] had committed welfare fraud”
benefits, in Texas. Before publication, no one from D by “submitting false information to [the Commission] to
Magazine contacted the Commission for comment. After continue to receive SNAP benefits to which she otherwise
preparing the article for print, editor-at-large Tim Rogers would not have been entitled.” Id. at 483. As part of
called Rosenthal to ask for her comments. Rosenthal its analysis, the court relied on a Wikipedia-supplied
told Rogers she was being harassed by her fiancé's ex- definition of “welfare queen” to determine the meaning
girlfriend and expressed concern that Rogers was working of the term contained in the article's title. Id. at 482
with her alleged harasser. Rogers suggested that she call D n.8. Having concluded the article accused Rosenthal of
Magazine from its public listing to verify his identity, but committing welfare fraud, the court of appeals—relying
she did not follow up. on the Commission's investigation—determined that there
was evidence the article's gist was untrue and defamatory.
After publication, the Commission's chief counsel sent Id. at 483–84. We granted D Magazine's petition for
Rogers a letter about the article, which counsel described review. 2
as having alleged that Rosenthal “committed fraud
in applying for and receiving SNAP benefits.” The
letter stated that the Commission had “audio recordings
that indicate that the information [in the article] was II. Free Speech and the TCPA
obtained by deception,” and the letter requested that
all of Rosenthal's personally identifiable information be A. TCPA Framework
removed from the online version.
One of the foundational principles of American
After reading the article, Rosenthal contacted the democracy is the freedom to comment on matters
Commission to inquire whether she had committed of public concern. SeeAshcroft v. Free Speech Coal.,
any wrongdoing in obtaining SNAP benefits. The 535 U.S. 234, 253 (2002) (“The right to think is the
Commission investigated and sent Rosenthal a letter beginning of freedom, and speech must be protected ...
explaining that its “investigation found no evidence because speech is the beginning of thought.”). Federal
anyone has fraudulently obtained or otherwise abused constitutional protections for speech were “fashioned to
state benefits.” Rosenthal forwarded the letter to D assure unfettered interchange of ideas for the bringing
Magazine. about of political and social changes desired by the
people.” N.Y. Times Co. v. Sullivan, 376 U.S. 254, 269
(1964) (quoting Roth v. United States, 354 U.S. 476, 484
Rosenthal sued D Magazine 1 for defamation and
(1957)). The Texas Constitution also explicitly protects
also asserted claims under the Texas Deceptive Trade
freedom of expression, declaring that “[e]very person shall
Practices–Consumer Protection Act and the Identity
be at liberty to speak, write or publish his opinions on
Theft Enforcement and Protection Act. D Magazine
any subject ... and no law shall ever be passed curtailing
moved for dismissal of all claims and sought attorney's
the liberty of speech or of the press.” TEX. CONST.
fees under the Texas Citizens Participation Act. The trial
art. I, § 8. Protections for the press are especially vital
court granted the motion as to the statutory claims but
because of the pivotal role it plays in the dissemination
denied it “in all other respects as the Court finds that
of information to the public. N.Y. Times Co. v. United
Plaintiff has established by clear and specific evidence a
States, 403 U.S. 713, 717 (1971) (Black, J., concurring)
prima facie case of defamation.” D Magazine brought an
(“In the First Amendment, the Founding Fathers gave the
interlocutory appeal. TEX. CIV. PRAC. & REM. CODE
free press the protection it must have to fulfill its essential
§ 54.014(a)(12) (authorizing an interlocutory appeal from
role in our democracy.”).
an order denying a TCPA motion to dismiss).
publication's individual statements are literally true, the to receive government-assistance benefits illegally.” Id. at
story “can convey a false or defamatory meaning by 483. D Magazine and several amici 3 challenge the court's
omitting or juxtaposing facts.” Id. (quoting Turner, 38 reliance on Wikipedia, contending that Wikipedia is an
S.W.3d at 114). inappropriate source for judicial opinions.
that Rosenthal, described as a “University Park mom,” at least by implication, either withheld information from
has “figured out how to get food stamps while living in or reported it inaccurately to the Commission. In sum,
the lap of luxury.” It then invites the reader to see how a reasonable person could construe the article to accuse
Rosenthal “pulls it off” despite the assumption that one Rosenthal of fraudulently obtaining thousands of dollars
living in the affluent Park Cities would “never qualify.” of SNAP benefits.
For example, the article states that Rosenthal had to *7 D Magazine's arguments to the contrary are
“prove she qualified” for SNAP in order to obtain benefits unavailing. For example, D Magazine asserts that
and that, although “we can't say for sure” what Rosenthal the “CRIME” heading is consistent with the article's
told the Commission, “public records indicate that [she] criticism of SNAP, contending that the article is about
must have been less than forthcoming” in renewing her how someone with a history of theft, like Rosenthal,
application. The article notes that Rosenthal's address is nevertheless able to obtain SNAP benefits. While
on file with the Commission matches an “old address” Rosenthal's history of theft is discussed at the end of the
in North Dallas that is listed on her driver's license. article, it is not the focus. And it does not convince us
It also states that Rosenthal listed this same address that D Magazine's construction of the article as a whole
on an affidavit of indigency she filed in district court, is the only reasonable one. SeeMusser v. Smith Protective
notes that “[f]alsifying such a document is a felony,” and Servs., Inc., 723 S.W.2d 653, 654 (Tex. 1987) (noting that
identifies another court document in which Rosenthal the initial question of law to be decided in a libel action
averred “under oath” that her address had changed to one is whether “the words used [were] reasonably capable of
in University Park “on the tax rolls for $1.15 million.” a defamatory meaning”). To the contrary, a reasonable
Noting that the University Park home was owned by a person could certainly conclude that an article under the
man Rosenthal had identified as her fiancé and that a heading “CRIME” is in fact about the commission of a
Facebook photo showed Rosenthal wearing a diamond crime. And, as discussed above, that conclusion would be
ring, the article also states that Rosenthal left blank the supported by the article's contents.
part of the application requiring applicants to identify
people who give them gifts or pay their bills. The final D Magazine also contends that the article's statement
portion of the article notes that Rosenthal has “numerous that Rosenthal “must have been less than forthcoming” is
theft-related arrests and convictions” and concludes that at most speculation, noting the prefatory disclaimer that
“even if Rosenthal did report her run-ins with the law, the “we can't say for sure what she told the [Commission].”
state still might award benefits” because the Commission We disagree. First, the article does not say Rosenthal
“only check[s] for felony drug convictions.” “may” have been less than forthcoming; it says “must.”
This language indicates that she did withhold required
The article never expressly accuses Rosenthal of lying information from the Commission and, in any event, the
or fraudulently obtaining benefits, and D Magazine statement cannot be considered in a vacuum. Moreover,
insists that each statement in the article is literally, the article goes on to discuss specific information in
or at least substantially, true. 6 But the article's gist the Commission's records and to cite other sources that
is based on “a reasonable person's perception of the purportedly contradict that information. Considered in
entirety of [the article] and not merely on individual context, the disclaimer carries little weight.
statements.” Turner, 38 S.W.3d at 115. Viewing the
article as a whole, we conclude that a reasonable person Further, the article juxtaposes statements in ways that
could perceive it as accusing Rosenthal of providing false strongly imply wrongdoing. For example, it states that
information to the Commission (either affirmatively or by Rosenthal supplied a North Dallas address in an affidavit
omission) in order to obtain benefits to which she was of indigency—the same address listed in the Commission's
not entitled. The entire article is under the stark heading records—and then parenthetically states that “[f]alsifying
“CRIME” and is accompanied by an unrelated mug shot. such a document is a felony.” And immediately after
It affirmatively states that Rosenthal “must have been noting that Rosenthal did not report any gifts or money
less than forthcoming,” at least in renewing her SNAP received from others, the article states that she has
application, and follows that statement with examples “relationships” to nine other households that are in a
throughout the article of instances in which Rosenthal, living trust for her daughter, implying the existence of
significant assets not reported to the Commission. But and concluded that she engaged in no wrongdoing in
Rosenthal presented evidence in response to the dismissal obtaining SNAP benefits.
motion that the “households” the article mentions are
vacant lots—none worth more than $9,000—that her The final disputed element of the claim is whether
brother put in a living trust in her daughter's name D Magazine acted with the requisite degree of fault.
without her knowledge. Rosenthal also presented evidence In Texas, courts apply a negligence standard in cases
that neither she nor her daughter ever received any involving a private plaintiff seeking defamation damages
payments from the trust. Again, while not expressly from a media defendant. Neely, 418 S.W.3d at 61. Under
accusing Rosenthal of lying, these juxtaposed statements that standard, the defendant is negligent if it “knew or
are consistent with the general implication that Rosenthal should have known a defamatory statement was false,”
was “less than forthcoming” with the Commission in unless the content of the false statement would not
order to obtain benefits. “warn a reasonabl[y] prudent editor or broadcaster of its
defamatory potential.” Id. at 72 (quoting Foster v. Laredo
To arrive at its version of the article's gist, D Magazine Newspapers, Inc., 541 S.W.2d 809, 820 (Tex. 1976)).
does the very thing of which it accuses the court of appeals:
it considers the article's statements individually instead of We agree with the court of appeals' conclusion that
in context. Properly evaluating the article “as a whole in Rosenthal has provided sufficient evidence to make a
light of the surrounding circumstances based upon how a prima facie case of D Magazine's negligence in publishing
person of ordinary intelligence would perceive it,” Neely, the article. 475 S.W.3d at 486–87. Rogers testified that D
418 S.W.3d at 80, we hold that a reasonable view of Magazine discussed the substance of the article with the
the article's gist is that Rosenthal fraudulently obtained anonymous author and reviewed various public records,
SNAP benefits. 7 such as the affidavit of indigency mentioned in the article,
property tax records showing the value of the Park Cities
home and the properties in the name of Rosenthal's
daughter's living trust, and public records regarding
B. Prima Facie Case of Defamation Rosenthal's criminal history. Notably, the article itself
recognized that information provided to the Commission
*8 As noted, to survive D Magazine's motion to dismiss,
is confidential, yet much of the article was premised
Rosenthal had to establish a prima facie case of each of
on personal information about Rosenthal purportedly
the following elements of her defamation claim: (1) D
Magazine published a false statement; (2) the statement obtained from the Commission. 8 And the record does not
defamed her; (3) D Magazine acted with negligence reflect that D Magazine ever contacted the Commission
regarding the truth of the statement; and (4) she suffered about the article, despite the magazine's assertion in this
damages or the article is defamatory per se. SeeLipsky, lawsuit that the article was intended to be a critique of the
460 S.W.3d at 593. The article's gist informs our analysis program administered by that very agency.
and is dispositive of the second and fourth elements.
Because the article could reasonably be construed to Rosenthal testified that, when Rogers called her about
accuse Rosenthal of committing a crime, it is defamatory the story, she told him that she was being harassed
per se, and Rosenthal need not show actual damages. and expressed concern that her harasser was involved
SeeHancock v. Variyam, 400 S.W.3d 59, 63–64 (Tex. 2013) in the story. Although Rogers testified that the harasser
(“Historically, defamation per se has involved statements was not the story's author, he did not expressly dispute
that are so obviously hurtful to a plaintiff's reputation her possible involvement, nor did he provide any other
that the jury may presume general damages, including for details about the author's identity and credentials or how
loss of reputation and mental anguish.”); see alsoLipsky, the magazine confirmed the accuracy of the information
460 S.W.3d at 596 (citing accusing someone of committing purportedly obtained from the Commission. Rosenthal
a crime as an example of defamation per se). Rosenthal testified that Rogers asked her “what [she] had to say
also presented clear and specific evidence that the article's about ... committing food stamp fraud” but did not ask
gist is not substantially true; specifically, she presented about any of the article's specific statements. She also
evidence that the Commission conducted an investigation testified that she did not return Rogers' call because he told
her the magazine “was publishing the Article regardless of did not act improperly in obtaining those benefits, we hold
what [she] had to say.” 9 that D Magazine is not entitled to dismissal based upon
the fair-comment privilege.
In sum, we agree with the court of appeals that Rosenthal
presented evidence that D Magazine failed to take
reasonable steps to verify the accuracy of the story's gist D. Attorney's Fees
and should have known the gist was false. We hold that
the pleadings and affidavits established a prima facie case D Magazine argues that the trial court erred in denying
of D Magazine's negligence in publishing the story. its request for attorney's fees under the TCPA, which
requires the trial court to award reasonable attorney's
fees to the movant if the court dismisses “a legal action”
under that Act. Id. § 27.009(a)(1). The TCPA defines “legal
C. Defenses
action” as “a lawsuit, cause of action, petition, complaint,
*9 D Magazine argues that, even if we conclude that cross-claim, or counterclaim or any other judicial pleading
Rosenthal established a prima facie case of defamation, or filing that requests legal or equitable relief.” Id. §
it is still entitled to dismissal under the TCPA because it 27.001(6). As noted, the trial court dismissed Rosenthal's
established two affirmative defenses—truth and the fair statutory claims, including claims brought on behalf of her
comment privilege—by a preponderance of the evidence. minor daughter, but not her defamation claim. The trial
SeeTEX. CIV. PRAC. & REM. CODE § 27.005(d). We court awarded no attorney's fees.
disagree.
D Magazine makes two arguments on this issue. First,
First, although truth is generally a defense to defamation, it argues that it was entitled to dismissal of all claims,
the burden shifts to the plaintiff to prove falsity in cases including the defamation claim, and that the trial court
involving matters of public concern. Neely, 418 S.W.3d therefore erred in failing to award fees. As we agree with
at 56, 62. Falsity is thus an element of Rosenthal's the trial court's refusal to dismiss the defamation claim, we
defamation claim. By contrast, an affirmative defense, reject this argument.
such as the statute of limitations, is “based on a different
set of facts from those establishing” the cause of action Second, D Magazine argues that, even if the trial court
and “defeats the plaintiff's claim without regard to the properly denied its motion to dismiss with respect to
truth of the plaintiff's assertions.” Zorrilla v. Aypco Rosenthal's defamation claim, D Magazine is still entitled
Constr. II, LLC, 469 S.W.3d 143, 156 (Tex. 2015) to an award of attorney's fees with respect to the claims
(citations omitted). Because falsity is an element of the trial court did dismiss. The court of appeals concluded
Rosenthal's claim, at this stage of the proceedings she was that it lacked jurisdiction over this issue because the Civil
required to make a prima facie case by clear and specific Practice and Remedies Code authorizes interlocutory
evidence that the gist of the article was not substantially appeals only of orders denying a TCPA motion to dismiss,
true. TEX. CIV. PRAC. & REM. CODE § 27.005(c). As and D Magazine's claim for attorney's fees is premised on
discussed, Rosenthal has met this burden. the trial court's partial grant of a motion to dismiss. We
disagree. The trial court issued a single order that partially
Second, D Magazine has failed to prove the fair- denied D Magazine's motion to dismiss, including its
comment privilege applies. The fair comment privilege is request for attorney's fees, and D Magazine was entitled
an affirmative defense to a defamation action extending to to an interlocutory appeal of that order. Id. § 51.014(a)(12)
publications that are “reasonable and fair comment[s] on (authorizing an appeal from an interlocutory order that
or criticism[s] of ... matter[s] of public concern published “denies a motion to dismiss filed under [the TCPA]”).
for general information.” Id. § 73.002(a), (b)(2). This
privilege applies only if the publication is “fair, true, and *10 Addressing the merits of the argument in the
impartial.” Id. § 73.002(b)(1). However, in light of our interest of judicial economy, we hold the trial court erred
conclusion that a reasonable construction of the article's in denying the fee request. The trial court dismissed
gist is that Rosenthal fraudulently obtained SNAP the statutory claims Rosenthal asserted on behalf of
benefits, and the Commission's findings that Rosenthal herself and her minor daughter, and each of those claims
constituted a “legal action” under the TCPA's broad As a general proposition, I believe Wikipedia is not a
definition of the term. D Magazine was therefore entitled sufficiently reliable source of information to serve as
to an award of reasonable attorney's fees. Id. § 27.009(a) the leading authority on a case-determinative matter,
(1). We express no opinion on how the continuation of the particularly when the court's reliance is sua sponte without
defamation claim affects the proper amount of such a fee, notice to the parties, as it was in this case. 4
leaving that to the trial court's discretion on remand.
been edited inappropriately, just before you view jargon or usage guide.” 19 Whatever merit there may be
to crowdsourcing the English language, Wikipedia simply
them.” 9
lacks the necessary safeguards to prevent abuse and assure
Indeed, “Wikipedia's radical openness means that any the level of certainty and validity typically required to
given article may be, at any given moment, in a bad sustain a judgment in a legal proceeding. 20
state: for example, it could be in the middle of a
large edit or it could have been recently vandalized.” 10 *13 Take, for example, the Wikipedia entry for “welfare
Even if expeditiously remediated, transient errors are not queen,” which was first created in November 2006 by the
always obvious to the casual reader. As Wikipedia states user Chalyres. 21 Since the entry was first drafted, 239
more pointedly, “Wikipedia is a wiki, which means that
edits have been made by 146 users. 22 But there is no
anyone in the world can edit an article, deleting accurate
reliable way to determine whether these edits (1) deleted
information or adding false information, which the reader
or added accurate information, (2) deleted or added false
may not recognize. Thus, you probably shouldn't be citing
or biased information, 23 (3) were made by individuals
Wikipedia.” 11
with expertise on the term's usage, or (4) were made by
individuals actually representative of the community.
Apart from these candid self-assessments, which no
doubt apply with equal force to other online sources
As a court, one of our “chief functions” is “to act as an
and encyclopedias, a more pernicious evil lurks
animated and authoritative dictionary.” 24 In that vein,
—“opportunistic editing.” 12 Because “[a]nyone with
we are routinely called upon to determine the common
Internet access can write and make changes to Wikipedia
meaning of words and phrases in contracts, statutes,
articles” and “can contribute anonymously, [or] under a
pseudonym,” reliance on Wikipedia as an authoritative and other legal documents. 25 Though we often consult
source for judicial decision-making incentivizes self- dictionaries in discharging our duty, 26 rarely, if ever, is
interested manipulation. 13 Case in point: a Utah court of one source alone sufficient to fulfill the task. To that
appeals recently described how the Wikipedia definition end, I acknowledge that Wikipedia may be useful as
of “jet ski” provided “stronger support” for one of the a “starting point for serious research,” 27 but it must
parties in a subsequent appeal than it had when considered never be considered “an endpoint,” at least in judicial
by the court in the parties' previous appeal. 14 The court proceedings. 28
observed the difficulty of discerning whether the change
was instigated by the court's prior opinion, perhaps “at the Wikipedia's valuable role in today's technological society
instance of someone with a stake in the debate.” 15 cannot be denied. Our society benefits from the fast,
free, and easily-accessible information it provides. A
*12 Still, some have argued Wikipedia is “a good source wealth of information is now available at the touch
for definitions of new slang terms, for popular culture of a few key strokes, and a community of Wikipedia
references, and for jargon and lingo including computer editors serves to increase the accuracy and truth of that
information, promoting the public good through those
and technology terms.” 16 Perhaps, but not necessarily.
efforts. However, in my view, Wikipedia properly serves
While Wikipedia's “openly editable” model may be well
the judiciary only as a compendium—a source for sources
suited to capturing nuances and subtle shifts in linguistic
—and not as authority for any disputed, dispositive, or
meaning, there is no assurance that any particular
definition actually represents the commonly understood legally consequential matter. 29
Footnotes
1 The named defendants are D Magazine Partners, L.P. d/b/a D Magazine, Magazine Limited Partners, L.P., and Allison
Media, Inc. Over the course of this litigation, the parties and courts have referred to these defendants collectively as D
Magazine. We will do the same.
2 We have jurisdiction over interlocutory appeals “in which the justices of the courts of appeals disagree on a question of
law material to the decision.” TEX. GOV'T CODE § 22.225(c).
3 The Texas Press Association, Texas Association of Broadcasters, Reporters Committee for Freedom of the Press, and
Freedom of Information Foundation of Texas submitted an amicus brief in support of D Magazine's petition for review.
4 The history tab on each page does time stamp changes in entries and keeps past versions available. This is only useful,
however, if those citing Wikipedia include in their citation the exact date and time they accessed the page. The Harvard
Journal of Law and Technology has introduced a citation form for Wikipedia that includes the specific time the page was
accessed. Wagner, supra at 235.
5 The “CRIME” heading also appears on the magazine's cover, which lists the titles of the various articles within that issue
and places the heading over the title of the article about Rosenthal.
6 Rosenthal disputes the article's statement that she has been convicted of theft, noting that she has pleaded no-contest
to shoplifting charges but has never been convicted.
7 The court of appeals held that the article's gist was “a combination of” the parties' descriptions, holding that a “reasonable
person would conclude the article was a criticism of SNAP, which allowed [Rosenthal], who had been convicted of theft,
to receive benefits while living in a $1.15 million home and while defrauding [the Commission] by filing false information
with [the Commission].” 475 S.W.3d at 482. D Magazine argues that the court of appeals' version of the gist is internally
inconsistent: either the Commission knowingly allowed Rosenthal to receive SNAP benefits while living in an expensive
home and despite a history of theft, or Rosenthal defrauded the system by submitting false information to obtain benefits.
We need not decide whether the gist could be broad enough to include both of these points. The average reader could
conclude that the gist of the article was that Rosenthal obtained SNAP benefits by providing false information, both
affirmatively and by omission, to the Commission.
8 No evidence indicates that D Magazine itself was directly involved in obtaining any information from the Commission.
9 D Magazine disputes this assertion, but at this stage of the proceedings we assume its truth.
1 Screenshot of unsaved edits to Welfare Queen, WIKIPEDIA, https://en.wikipedia.org/wiki/Welfare_queen.
2 SeeTEX. CIV. PRAC. & REM. CODE § 27.005(b), (c) (“[A] court shall dismiss a legal action ... [that] is based on, relates
to, or is in response to the party's exercise of ... the right of free speech ... [unless] the party bringing the legal action
establishes by clear and specific evidence a prima facie case for each essential element of the claim in question.”).
3 https://www.wikipedia.org.
4 475 S.W.3d 470, 482 n.8 (Tex. App.—Dallas 2015); see Eugene Volokh, Questionable Use of Wikipedia by
the Seventh Circuit?, VOLOKH CONSPIRACY (July 30, 2008), http://bit.ly/2mWmg0I (link shortened from http://
volokh.com/2008/07/30/questionable-use-of-wikipedia-by-the-seventh-circuit/) (“If the judges wanted to argue [the
meaning of a key term] based on their experience, based on logic, or based on contrary lexicographic authorities ... that's
fine, and they did that in some measure. But they cited Wikipedia as the lead authority supporting their conclusion, and
as the source for their important and controversial definition; and this strikes me as troubling.”) (citing Rickher v. Home
Depot, Inc., 535 F.3d 661, 666–67 (7th Cir. 2008)).
5 See, e.g., Eola Barnett & Roslyn Baer, Embracing Wikipedia as a Research Tool for Law: To Wikipedia or not to
Wikipedia?, 45 LAW TCHR. 194, 210 (2011) (“There are arguments for accepting the discerning use of Wikipedia,
particularly as an informal and initial starting point for legal and incidental research and not discarding Wikipedia outright.
Wikipedia has a role to play in the public domain dissemination of information and features which make it a viable option
for initiating research.”); Diane Murley, In Defense of Wikipedia, 100 LAW LIBR. J. 593, 595 (2008) (“In general, students
and lawyers should not be citing to articles from Wikipedia, or any other encyclopedia. However, Wikipedia can be a great
quick reference source or a starting point for identifying other, authoritative sources.”); Beth Simone Noveck, Wikipedia
and the Future of Legal Education, 57 J. LEGAL EDUC. 3, 4 (2007) (“Unlike Google, which presents a hit list of search
results without context, Wikipedia includes hyperlinks to other materials and reintroduces the serendipity of browsing
and discovering new sources. At the very least, this is an excellent way for students and legal professionals to begin
their research.”); Rachel Anderson, Marc-Tizoc Gonzalez & Stephen Lee, Toward a New Student Insurgency: A Critical
Epistolary, 94 CAL. L. REV. 1879, 1901 n.92 (2006) ( “While Wikipedia is not usually used in academic works, its articles
can provide excellent introductions to specialized knowledge or encyclopedic overviews of obscure events.”).
6 See Lee F. Peoples, The Citation of Wikipedia in Judicial Opinions, 12 YALE J. L. & TECH. 1, 3 (2009).
7 See generally Jason C. Miller & Hannah B. Murray, Wikipedia in Court: When and How Citing Wikipedia and Other
Consensus Websites is Appropriate, 84 ST. JOHN'S L. REV. 633 (2010).
8 Wikipedia: About, WIKIPEDIA, https://en.wikipedia.org/wiki/Wikipedia:About (last visited Mar. 8, 2017).
9 Wikipedia: General Disclaimer, WIKIPEDIA, http://bit.ly/2npqBaH (link shortened from https://en.wikipedia.org/wiki/
Wikipedia:General_disclaimer) (last visited Mar. 8, 2017) (emphases in original).
10 Wikipedia: Researching with Wikipedia, WIKIPEDIA, http://bit.ly/2mEub2k (link shortened from https://en.wikipedia.org/
wiki/Wikipedia:Researching_with_Wikipedia#Citing_Wikipedia) (last visited Mar. 8, 2017) (explaining, in a nutshell, that
Wikipedia should not be used, by itself, for primary research on any topic other than Wikipedia).
11 Wikipedia: Citing Wikipedia, WIKIPEDIA, http://bit.ly/2mTfTLH (link shortened from https://en.wikipedia.org/wiki/
Wikipedia:Citing_Wikipedia#A_caution_before_citing_Wikipedia) (last visited Mar. 8, 2017) (emphasis in original).
12 See generally Fire Ins. Exch. v. Oltmanns, 285 P.3d 802, 808 n.3 (Utah Ct. App. 2012) (Voros, J., concurring) (“Among its
shortcomings—and strengths—is Wikipedia's fluidity. Anyone can edit a Wikipedia entry at any time, making it vulnerable
to ‘opportunistic editing.’ Thus, ‘an unscrupulous lawyer (or client) could edit the Web site entry to frame the facts in a
light favorable to the client's cause.’ ” (quoting Noam Cohen, Courts Turn to Wikipedia, but Selectively, N.Y. TIMES (Jan.
29, 2007), http://www.nytimes.com/2007/01/29/technology/29wikipedia.html)).
13 Wikipedia: About, WIKIPEDIA, https://en.wikipedia.org/wiki/Wikipedia:About (last visited Mar. 8, 2017).
14 Fire Ins. Exch. v. Oltmanns, 370 P.3d 566, 569 n.3 (Utah Ct. App. 2016), cert. granted, 379 P.3d 1182 (Utah 2016).
15 Id.
16 Lee F. Peoples, The Citation of Wikipedia in Judicial Opinions, 12 YALE J. L. & TECH. 1, 31 (2009); see also id. at 32
(“The collaborative and democratic nature of Wikipedia entries makes them potentially attractive sources for courts to
consider when called upon to determine the perception of the public or community standards.”); Rickher v. Home Depot,
Inc., 535 F.3d 661, 666–67 (7th Cir. 2008) (relying on Wikipedia definition of “wear and tear” in analysis of key contract
language); Fire Ins. Exch., 285 P.3d at 806 n.1 (noting “where an understanding of the vernacular or colloquial is key
to the resolution of a case ... Wikipedia is tough to beat”); id. at 807–09 (Voros, J., concurring) (defending the use of
Wikipedia as a source for definitions).
17 See English Mountain Spring Water Co. v. Chumley, 196 S.W.3d 144, 149 (Tenn. Ct. App. 2005) (rejecting Wikipedia
as authority for defining “bottled water” as a “beverage” because “this source is open to virtually anonymous editing by
the general public, the expertise of its editors is always in question, and its reliability is indeterminable”); cf. Order of
Affirmance at 3–4, Nev. Dep't of Motor Vehicles v. Junge, No. 49350 (Nev. July 7, 2009) (concluding “a reasonable mind
would not accept the Urban Dictionary entries alone as adequate to support a conclusion that [a certain word] is offensive
or inappropriate” because the user-contributed definitions “can be personal to the user and do not always reflect generally
accepted definitions for words”).
18 Wikipedia policies “have wide acceptance among editors and describe standards that all users should normally follow.”
Wikipedia: Policies and Guidelines, WIKIPEDIA, http://bit.ly/2lTKPfA (link shortened from https://en.wikipedia.org/wiki/
Wikipedia:Policies_and_guidelines) (last visited Mar. 8, 2017).
19 Wikipedia: Wikipedia Is not a Dictionary, WIKIPEDIA, http://bit.ly/2n1JVxu (link shortened from https://en.wikipedia.org/
wiki/Wikipedia:Wikipedia_is_not_a_dictionary) (last visited Mar. 8, 2017) (emphasis in original).
20 Cf. Gharda USA, Inc. v. Control Sols., Inc., 464 S.W.3d 338, 348 (Tex. 2015) (“Qualified experts may offer opinion
testimony if that testimony is both relevant and based on a reliable foundation.”); Bostic v. Georgia-Pacific Corp., 439
S.W.3d 332, 349 (Tex. 2014) (“In concluding that studies showing more than a doubling of the risk may be supportive
of legal causation, provided that other indicia of reliability are met, we explained that this standard corresponds to the
legal requirement that the plaintiff prove his case by a preponderance of the evidence.”); Cooper Tire & Rubber Co. v.
Mendez, 204 S.W.3d 797, 800 (Tex. 2006) (“Admission of expert testimony that does not meet the reliability requirement
is an abuse of discretion.”); Tex. Dep't of Protective & Regulatory Servs. v. Mega Child Care, Inc., 145 S.W.3d 170,
199 (Tex. 2004) (“In the absence of express statutory language prohibiting judicial review, a legislative intent to prohibit
judicial review must be established by specific legislative history or other reliable evidence of intent.”); Miga v. Jensen, 96
S.W.3d 207, 213 (Tex. 2002) (“Lost profits are damages for the loss of net income to a business measured by reasonable
certainty.”); cf. alsoTEX. R. CIV. P. 166a(c) (authorizing summary judgment based on interested-party affidavit only if
“the evidence is clear, positive and direct, otherwise credible and free from contradictions and inconsistencies, and could
have been readily controverted”); TEX. R. EVID. 201(b) (limiting judicial notice of adjudicative facts to those “not subject
to reasonable dispute,” meaning “(1) generally known within the trial court's territorial jurisdiction or (2) can be accurately
and readily determined from sources whose accuracy cannot reasonably be questioned”).
21 Information for “Welfare Queen”, WIKIPEDIA, http://bit.ly/2mk0iBT (link shortened from https://en.wikipedia.org/w/
index.php?title=Welfare_queen&action=info#mw-pageinfo-watchers) (last visited Mar. 8, 2017).
22 Statistics for Welfare Queen, WIKIHISTORY, http://bit.ly/2mQu4l7 (link shortened from https://tools.wmflabs.org/xtools/
wikihistory/wh.php?page_title=Welfare_queen) (last visited Mar. 8, 2017).
23 At times, edits also may add offensive and racist content. See, e.g., http://bit.ly/2mJqGYj (link shortened from https://
en.wikipedia.org/w/index.php?title=Mexicans&diff=362223560&oldid=362223553) (last visited Mar. 8, 2017) (showing an
example of offensive and racist edit to the Wikipedia entry “Mexicans”).
24 ANTONIN SCALIA & BRYAN A. GARNER, READING LAW: THE INTERPRETATION OF LEGAL TEXTS 415 (2012)
(quoting LORD MACMILLAN, LAW AND OTHER THINGS 163 (1938)).
25 Id.
26 See, e.g., Paxton v. City of Dallas, ––– S.W.3d ––––, 2017 WL 469597, at *7 (Tex. 2017).
27 Wikipedia: Researching with Wikipedia, WIKIPEDIA, http://bit.ly/2mEub2k (link shortened from https://en.wikipedia.org/
wiki/Wikipedia:Researching_with_Wikipedia#Citing_Wikipedia) (last visited Mar. 8, 2017) (emphasis in original); see
sources cited supra note 5.
28 Wikipedia: Researching with Wikipedia, WIKIPEDIA, http://bit.ly/2mEub2k (link shortened from https://en.wikipedia.org/
wiki/Wikipedia:Researching_with_Wikipedia#Citing_Wikipedia) (last visited Mar. 8, 2017); see R. Jason Richards,
Courting Wikipedia, 44 TRIAL 62 (2008) (“To be sure, Wikipedia is a useful tool from which legal professionals may
begin their research. However, because the site's content is subject to random manipulation by anyone with an Internet
connection, relying on it as an authoritative source in legal pleadings and opinions is reckless.” (emphasis in original)).
29 See Wikipedia: No Original Research, WIKIPEDIA, http://bit.ly/2f3qc8x (link shortened from https://en.wikipedia.org/wiki/
Wikipedia:No_original_research) (last visited Mar. 8, 2017) (stating that Wikipedia adheres to a “[n]o original research”
policy and that “all material added to articles must be attributable to a reliable, published source, even if not actually
attributed” (emphases in original)); Wikipedia: Researching with Wikipedia, WIKIPEDIA, https://en.wikipedia.org/wiki/
Wikipedia:Researching_with_Wikipedia#Citing_Wikipedia (last visited Mar. 9, 2017) (“It will usually be more acceptable
to cite those original sources rather than Wikipedia since it is, by nature, a secondary or tertiary source.” (emphases in
original)); see also Daniel J. Baker, A Jester's Promenade: Citations to Wikipedia in Law Reviews, 2002–2008, 7 I/S: J.L.
& POL'Y FOR INFO. SOC'Y 361, 369 (2012).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Roger Cortez
I also recall seeing Ray Ortiz putting chamois into
I recall telling Dan Savarino, the former warehouse the front of his pants that he had stole [sic] from the
manager, that merchandise was being stolen from the warehouse.
warehouse and he told me that was the American way,
and that it happens in every company. I also recall Later Tuesday evening, Arnold Ortiz and his wife asked
seeing Alex Jimenez throw a box over the fence that to meet with Johnson and O'Connell to talk about the
I believe contained spark-plugs. This was maybe nine investigation. They agreed to get together for drinks at the
months to a year ago. hotel where Johnson and O'Connell were staying. Arnold
Ortiz then explained to them that appellee and Jimenez
Extra merchandise has been put on my truck, but I hadn't stolen the goods put on his truck, but had bought
always bring it back. Ray Ortiz and Alex would try them from Savarino as damaged merchandise.
to get me to keep it off the truck so they could sell it,
but I have refused to do this. The next day, Johnson and O'Connell turned the
statements over to the La Feria police department and
repeatedly called the police to discuss what would be done
Marcus Castro
about the situation. That afternoon, Officer Estrada came
I saw Ray Ortiz in the spark plug room stuffing to the warehouse office. Appellee and Jimenez were called
Chamois down the inside front of his pants. I reported to the office and Estrada took them down to the police
this to Mr. Dan Savarino the manager at the time. station for questioning. They were later arrested after
Estrada filed a complaint against them for felony theft on
the basis of Arnold Ortiz' statement against them. Shortly
Ray Ortiz approached me and asked to add a case of thereafter, Arnold Ortiz was also arrested for felony theft.
Sealbeams to my load, because he knew he would be
riding with me that day to help unload. I refused. Several weeks later, an examining trial was held before
Justice of the Peace Henry Dierks to determine if there
was probable cause to hold appellee for felony theft.
Raymond Perez Johnson, Cortez and Castro testified against appellee at
the examining trial. Johnson, knowing that Savarino had
For the past two to two and one half (2½) years I been responsible for the loss of the oil drum, testified
have seen merchandise being taken illegally from the that the drum and a number of other items were missing
warehouse. Arnold Ortiz, a truck driver and his counsin from the La Feria warehouse. Then, after the prosecutor
asked if he had ever given appellee, Jimenez or Arnold [3] Actions for malicious prosecution are not favored in
permission to take this property, Johnson replied “no,” the law. Parker v. Dallas Hunting and Fishing Club, 463
without elaborating upon his knowledge that Savarino S.W.2d 496, 499 (Tex.Civ.App.—Dallas 1971, no writ);
had taken the oil drum. Justice Dierks found probable Montgomery Ward & Co. v. Kirkland, 225 S.W.2d 906,
cause. Shortly after the *241 examining trial, however, 909 (Tex.Civ.App.—San Antonio 1950, writ ref'd n.r.e.).
the district attorney declined to prosecute the case because Not only does public policy discourage the bringing of
of insufficient evidence. such actions, but also the proof must be positive, clear
and satisfactory. Kirkland, 225 S.W.2d at 909. Where a
Appellee testified at trial that he hasn't worked since his business or organization discovers what it believes to be
arrest in 1983, but now stays home taking care of his criminal behavior during an internal investigation, public
children while his wife works. He further testified that he policy requires that there be wide latitude in reporting
suffered from alcoholism, depression and humiliation as a facts to prosecuting authorities in order that the exposure
result of this incident. of crime not be discouraged. Thomas, 596 S.W.2d at 317.
In points one through three, six and seven, appellants We will first discuss whether the appellee produced any
complain that there is no evidence to support the jury's evidence that the appellants lacked probable cause to act
findings on the elements of malicious prosecution. as they did in bringing appellee to the attention of the local
police.
[1] The elements of malicious prosecution are:
[4] The burden of proving that no probable cause existed
(1) the commencement of a criminal prosecution against for instituting the proceedings in a malicious prosecution
plaintiff; case is initially upon the plaintiff, and there inferably is
an initial presumption that a defendant acted reasonably
(2) which has been caused by the defendant or through
and in good faith and therefore had probable cause.
defendant's aid or cooperation;
The presumption disappears, however, when the plaintiff
(3) which terminated in favor of the plaintiff; produces evidence that the motives, grounds, beliefs and
other evidence upon which the defendant acted were
(4) that plaintiff was innocent; indeed not probable cause to commence the proceedings
which the defendant instituted. Akin v. Dahl, 661 S.W.2d
(5) that there was no probable cause for such 917, 920 (Tex.1983), cert. denied, 466 U.S. 938, 104 S.Ct.
proceedings; 1911, 80 L.Ed.2d 460 (1984). Probable cause has been
defined as “the existence of such facts and circumstances
(6) that it was done with malice; and
as would excite belief in a reasonable mind, acting on
(7) resulted in damage to plaintiff. the facts within the knowledge of the prosecutor, that the
person charged was guilty of the crime for which he was
Thomas v. Cisneros, 596 S.W.2d 313, 316 (Tex.Civ.App. prosecuted.” Id., 661 S.W.2d at 921; Ramsey v. Arrott, 64
—Austin 1980, writ ref'd n.r.e.); Ellis v. Sinton Savings Tex. 320 (1885).
Association, 455 S.W.2d 834, 836 (Tex.Civ.App.—Corpus
Christi 1970, writ ref'd n.r.e.). In the present case, appellants discovered theft in their
warehouse at La Feria, where appellee was one of a
[2] In deciding a no evidence point, we consider only the small group of employees who had regular access to
evidence and inferences which support the jury finding the merchandise being stolen. On further investigation,
and disregard all evidence and inferences to the contrary. appellants were given four written statements from
However, the point must be sustained if there is a warehouse employees implicating appellee in the theft of
complete absence of, or no more than a scintilla of appellants' property. Had there been no further evidence,
evidence which supports the verdict. McKnight v. Hill & probable cause to turn these statements over to the local
Hill Exterminators, Inc., 689 S.W.2d 206, 207 (Tex.1985); police and request action would have been obvious and
Garza v. Alviar, 395 S.W.2d 821, 823 (Tex.1965). unassailable.
*242 [5] However, appellee submits that probable none of the items Johnson listed. Had Johnson been given
an opportunity, he might have singled the oil drum out
cause was proved to be lacking as a result of appellants'
as an item which he knew appellee did not take, but the
knowledge of other exculpatory information withheld
prosecutor never asked Johnson to elaborate on this point.
from the police. Appellants generally have a duty to make
Johnson cannot be held responsible for the order or extent
a full and fair disclosure of all evidence to the police and a
of the prosecutor's questions and was not free to make his
failure to make material exculpatory information known
own unsolicited remarks to further clarify the matter.
to the police could be evidence of a hostile motive or
insufficient grounds. See Eans v. Grocer Supply Co., 580
Appellee would like this Court to infer from the meager
S.W.2d 17, 21 (Tex.Civ.App.—Houston [1st Dist.] 1979,
evidence presented that appellants had intentionally set
no writ).
him up to be arrested, and revealed only incriminating
evidence to the police. Cf. Eans, 580 S.W.2d at 20–
[6] First, appellee points to Arnold's explanation to
21. This is clearly not the case here. We hold that the
appellants that his written statement was misleading in
evidence presented by the appellee is legally insufficient to
that appellee had paid for the merchandise he took from
disprove appellants' probable cause to believe appellant
the warehouse. This explanation did not discredit the
had stolen merchandise, and to release incriminating
other three statements which described separate instances
statements to the police and cooperate in the prosecution
of theft by appellee. Moreover, appellee presented no
of appellee. Reasonable minds could not dispute the
evidence that appellants mislead the La Feria police about
existence of such facts and circumstances as would excite
Arnold's statement or failed to reveal everything that they
belief in a reasonable mind, acting on the facts within the
knew to the police. Even if we assume appellants did
appellants' knowledge, that appellee was guilty of felony
not reveal Arnold's explanation to the police, this was
theft. Appellants' second point of error is sustained.
at most a harmless oversight, unnecessary in view of the
fact that the police also arrested Arnold and had ample
Having found that there was no evidence that appellants
opportunity to question him themselves about the truth of
lacked probable cause to proceed as they did, we find this
his accusations.
to be dispositive of the appeal and we need not address
appellants' remaining points of error.
Second, appellee points to Johnson's supposedly
misleading testimony at the examining trial which appellee
The judgment of the trial court is REVERSED and
claims wrongfully suggested that he was guilty of stealing
judgment here RENDERED in favor of the appellants.
an oil drum that Johnson knew Savarino had stolen.
Johnson's testimony, however, is entirely consistent in
light of the fact that he was questioned about many All Citations
items missing from the warehouse which appellee was
suspected of stealing. Appellee had permission to take 753 S.W.2d 238
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
because the parties were free to refer in the contract to other federal law. Fourth, the language the court uses
California law as it would have been absent federal pre- to frame the issue focuses only on arbitration. Fifth, the
emption. The court reasoned that the phrase “law of your view that state law retains independent force after being
state” was both a specific provision that should govern authoritatively invalidated is one courts are unlikely to
more general provisions and an ambiguous provision that apply in other contexts. Sixth, none of the principles of
should be construed against the drafter. Therefore, the contract interpretation relied on by the California court
court held, the parties had in fact included California law suggests that other California courts would reach the same
as it would have been without federal pre-emption. interpretation elsewhere. The court applied the canon that
contracts are construed against the drafter, but the lack of
Held : Because the California Court of Appeal's any similar case interpreting similar language to include
interpretation is pre-empted by the Federal Arbitration invalid laws indicates that the antidrafter canon would
Act, that court must enforce the arbitration agreement. not lead California courts to reach a similar conclusion in
Pp. 467 – 471. cases not involving arbitration. Pp. 468 – 471.
(a) No one denies that lower courts must follow 225 Cal.App. 4th 338, 170 Cal.Rptr.3d 190, reversed and
Concepcion, but that elementary point of law does not remanded.
resolve the case because the parties are free to choose
the law governing an arbitration provision, including BREYER, J., delivered the opinion of the Court, in which
California law as it would have been if not pre-empted. ROBERTS, C.J., and SCALIA, KENNEDY, ALITO,
The state court interpreted the contract to mean that and KAGAN, JJ., joined. THOMAS, J., filed a dissenting
the parties did so, and the interpretation of a contract opinion. GINSBURG, J., filed a dissenting opinion, in
is ordinarily a matter of state law to which this Court which SOTOMAYOR, J., joined.
defers, Volt Information Sciences, Inc. v. Board of Trustees
of Leland Stanford Junior Univ., 489 U.S. 468, 474, 109
S.Ct. 1248, 103 L.Ed.2d 488. The issue here is not whether Attorneys and Law Firms
the court's decision is a correct statement of California
Christopher Landau, Washington, DC, for Petitioner.
law but whether it is consistent with *465 the Federal
Arbitration Act. Pp. 467 – 468. Thomas C. Goldstein, Bethesda, MD, for Respondents.
(b) The California court's interpretation does not place Melissa D. Ingalls, Robyn E. Bladow, Shaun Paisley,
arbitration contracts “on equal footing with all other Kirkland & Ellis LLP, Los Angeles, CA, Christopher
contracts,” Buckeye Check Cashing, Inc. v. Cardegna, 546 Landau, P.C. Kirkland & Ellis LLP, Washington, DC, for
U.S. 440, 443, 126 S.Ct. 1204, 163 L.Ed.2d 1038, because Petitioner.
California courts would not interpret contracts other than
F. Edie Mermelstein, Law Offices of F. Edie Mermelstein,
arbitration contracts the same way. Several considerations
Huntington Beach, CA, Paul D. Stevens, Milstein
lead to this conclusion.
Adelman, LLP, Santa Monica, CA, Ingrid Maria
Evans, Evans Law Firm, Inc., San Francisco, CA,
First, the phrase “law of your state” is not ambiguous
Thomas C. Goldstein, Counsel of Record, Goldstein &
and takes its ordinary meaning: valid state law.
Russell, P.C., Bethesda, MD, Harvey Rosenfield, Pamela
Second, California case law—that under “general contract
Pressley, Consumer Watchdog, Santa Monica, CA, for
principles,” references to California law incorporate
Respondents.
the California Legislature's power to change the law
retroactively, Doe v. Harris, 57 Cal.4th 64, 69–70, 158 Opinion
Cal.Rptr.3d 290, 302 P.3d 598, 601–602—clarifies any
doubt about how to interpret it. Third, because the court Justice BREYER delivered the opinion of the Court.
nowhere suggests that California courts would reach the
same interpretation in any other context, its conclusion The Federal Arbitration Act states that a “written
appears to reflect the subject matter, rather than a general provision” in a contract providing for “settle[ment] by
principle that would include state statutes invalidated by arbitration” of “a controversy ... arising out of” that
“contract ... shall be valid, irrevocable, and enforceable, Cal.Rptr.3d 76, 113 P.3d 1100, 1110, that a “waiver” of
save upon such grounds as exist at law or in equity for class arbitration in a “consumer contract of adhesion”
the revocation *466 of any contract.” 9 U.S.C. § 2. that “predictably involve[s] small amounts of damages”
We here consider a California court's refusal to enforce and meets certain other criteria not contested here is
an arbitration provision in a contract. In our view, that “unconscionable under California law and should not be
decision does not rest “upon such grounds as exist ... for enforced.” See Cohen v. DirecTV, Inc., 142 Cal.App.4th
the revocation of any contract,” and we consequently set 1442, 1446–1447, 48 Cal.Rptr.3d 813, 815–816 (2006)
that judgment aside. (holding a class-action waiver similar to the one at issue
here unenforceable pursuant to Discover Bank ); see also
Consumers Legal Remedies Act, Cal. Civ.Code Ann.
§§ 1751, 1781(a) (West 2009) (invalidating class-action
I
waivers for claims brought under that statute). But in
DIRECTV, Inc., the petitioner, entered into a service 2011, this Court held that California's Discover Bank
agreement with its customers, including respondents Amy rule “ ‘stands as an obstacle to the accomplishment and
Imburgia and Kathy Greiner. Section 9 of that contract execution of the full purposes and objectives of Congress' ”
provides that “any Claim either of us asserts will be embodied in the Federal Arbitration Act. AT & T Mobility
resolved only by binding arbitration.” App. 128. It LLC v. Concepcion, 563 U.S. 333, 352, 131 S.Ct. 1740, 179
then sets forth a waiver of class arbitration, stating L.Ed.2d 742 (2011) (quoting Hines v. Davidowitz, 312 U.S.
that “[n]either you nor we shall be entitled to join or 52, 67, 61 S.Ct. 399, 85 L.Ed. 581 (1941)); see Sanchez v.
consolidate claims in arbitration.” Id., at 128–129. It Valencia Holding Co., LLC, 61 Cal.4th 899, 923–924, 190
adds that if the “law of your state” makes the waiver of Cal.Rptr.3d 812, 353 P.3d 741, 757 (2015) (holding that
class arbitration unenforceable, then the entire arbitration Concepcion applies to the Consumers Legal Remedies Act
provision “is unenforceable.” Id., at 129. Section 10 of the to the extent that it would have the same effect as Discover
contract states that § 9, the arbitration provision, “shall be Bank ). The Federal Arbitration Act therefore pre-empts
governed by the Federal Arbitration Act.” Ibid. and invalidates that rule. 563 U.S., at 352, 131 S.Ct. 1740;
see U.S. Const., Art. VI, cl. 2.
In 2008, the two respondents brought this lawsuit
against DIRECTV in a California state court. They *467 The California Court of Appeal subsequently
seek damages for early termination fees that they believe held in this case that, despite this Court's holding
violate California law. After various proceedings not in Concepcion, “the law of California would find the
here relevant, DIRECTV, pointing to the arbitration class action waiver unenforceable.” 225 Cal.App.4th 338,
provision, asked the court to send the matter to 342, 170 Cal.Rptr.3d 190, 194 (2014). The court noted
arbitration. The state trial court denied that request, and that Discover Bank had held agreements to dispense
DIRECTV appealed. with class-arbitration procedures unenforceable under
circumstances such as these. 225 Cal.App.4th, at 341,
The California Court of Appeal thought that the critical 170 Cal.Rptr.3d, at 194. It conceded that this Court in
legal question concerned the meaning of the contractual Concepcion had held that the Federal Arbitration Act
phrase “law of your state,” in this case the law of invalidated California's rule. 225 Cal.App.4th, at 341, 170
California. Does the law of California make the contract's Cal.Rptr.3d, at 194. But it then concluded that this latter
class-arbitration waiver unenforceable? If so, as the circumstance did not change the result—that the “class
contract provides, the entire arbitration provision is action waiver is unenforceable under California law.” Id.,
unenforceable. Or does California law permit the parties at 347, 170 Cal.Rptr.3d, at 198.
to agree to waive the right to proceed as a class in
arbitration? If so, the arbitration provision is enforceable. In reaching that conclusion, the Court of Appeal referred
to two sections of California's Consumers Legal Remedies
At one point, the law of California would have made Act, §§ 1751, 1781(a), rather than Discover Bank itself.
the contract's class-arbitration waiver unenforceable. In See 225 Cal.App.4th, at 344, 170 Cal.Rptr.3d, at 195.
2005, the California Supreme Court held in Discover Section 1751 renders invalid any waiver of the right
Bank v. Superior Court, 36 Cal.4th 148, 162–163, 30 under § 1781(a) to bring a class action for violations of
that Act. The Court of Appeal thought that applying Circuit had reached the opposite *468 conclusion on
“state law alone” (that is, those two sections) would precisely the same interpretive question decided by the
render unenforceable the class-arbitration waiver in § 9 California Court of Appeal. Murphy v. DirecTV, Inc., 724
of the contract. Id., at 344, 170 Cal.Rptr.3d, at 195. But F.3d 1218, 1226–1228 (2013). We granted the petition.
it nonetheless recognized that if it applied federal law
“then the class action waiver is enforceable and any state
law to the contrary is preempted.” Ibid. As far as those
II
sections apply to class-arbitration waivers, they embody
the Discover Bank rule. The California Supreme Court has [1] [2] No one denies that lower courts must follow this
recognized as much, see Sanchez, supra, at 923–924, 190 Court's holding in Concepcion. The fact that Concepcion
Cal.Rptr.3d 812, 353 P.3d, at 757, and no party argues was a closely divided case, resulting in a decision from
to the contrary. See Supp. Brief for Respondents 2 (“The which four Justices dissented, has no bearing on that
ruling in Sanchez tracks respondents' position precisely”). undisputed obligation. Lower court judges are certainly
We shall consequently refer to the here-relevant rule as the free to note their disagreement with a decision of this
Discover Bank rule. Court. But the “Supremacy Clause forbids state courts
to dissociate themselves from federal law because of
The court reasoned that just as the parties were free in their disagreement with its content or a refusal to recognize the
contract to refer to the laws of different States or different superior authority of its source.” Howlett v. Rose, 496 U.S.
nations, so too were they free to refer to California law as it 356, 371, 110 S.Ct. 2430, 110 L.Ed.2d 332 (1990); cf. Khan
would have been without this Court's holding invalidating v. State Oil Co., 93 F.3d 1358, 1363–1364 (C.A.7 1996),
the Discover Bank rule. The court thought that the parties vacated, 522 U.S. 3, 118 S.Ct. 275, 139 L.Ed.2d 199 (1997).
in their contract had done just that. And it set forth two The Federal Arbitration Act is a law of the United States,
reasons for believing so. and Concepcion is an authoritative interpretation of that
Act. Consequently, the judges of every State must follow
First, § 10 of the contract, stating that the Federal it. U.S. Const., Art. VI, cl. 2 (“[T]he Judges in every State
Arbitration Act governs § 9 (the arbitration provision), is shall be bound” by “the Laws of the United States”).
a general provision. But the provision voiding arbitration
if the “law of your state” would find the class-arbitration [3] [4] While all accept this elementary point of law, that
waiver unenforceable is a specific provision. The court point does not resolve the issue in this case. As the Court of
believed that the specific provision “ ‘is paramount to’ ” Appeal noted, the Federal Arbitration Act allows parties
and must govern the general. 225 Cal.App.4th, at 344, 170 to an arbitration contract considerable latitude to choose
Cal.Rptr.3d, at 195 (quoting Prouty v. Gores Technology what law governs some or all of its provisions, including
Group, 121 Cal.App.4th 1225, 1235, 18 Cal.Rptr.3d 178, the law governing enforceability of a class-arbitration
185–186 (2004); brackets omitted). waiver. 225 Cal.App.4th, at 342–343, 170 Cal.Rptr.3d,
at 194. In principle, they might choose to have portions
Second, the court said that “ ‘a court should construe of their contract governed by the law of Tibet, the law
ambiguous language against the interest of the party that of pre-revolutionary Russia, or (as is relevant here) the
drafted it.’ ” 225 Cal.App.4th, at 345, 170 Cal.Rptr.3d, law of California including the Discover Bank rule and
at 196 (quoting Mastrobuono v. Shearson Lehman Hutton, irrespective of that rule's invalidation in Concepcion. The
Inc., 514 U.S. 52, 62, 115 S.Ct. 1212, 131 L.Ed.2d Court of Appeal decided that, as a matter of contract law,
76 (1995)). DIRECTV had drafted the language; to the parties did mean the phrase “law of your state” to
void the arbitration provision was against its interest. refer to this last possibility. Since the interpretation of a
Hence the arbitration provision was void. The Court of contract is ordinarily a matter of state law to which we
Appeal consequently affirmed the trial court's denial of defer, Volt Information Sciences, Inc. v. Board of Trustees
DIRECTV's motion to enforce the arbitration provision. of Leland Stanford Junior Univ., 489 U.S. 468, 474, 109
S.Ct. 1248, 103 L.Ed.2d 488 (1989), we must decide not
The California Supreme Court denied discretionary whether its decision is a correct statement of California
review. App. to Pet. for Cert. 1a. DIRECTV then filed law but whether (assuming it is) that state law is consistent
a petition for a writ of certiorari, noting that the Ninth with the Federal Arbitration Act.
conclusion appears to reflect the subject matter at issue only “when a general and a particular provision are
here (arbitration), rather than a general principle that inconsistent”).
would apply to contracts using similar language but
involving state statutes invalidated by other federal law. [9] The court added that it would interpret “ ‘ambiguous
language against the interest of the party that drafted
Fourth, the language used by the Court of Appeal focused it,’ ” namely DIRECTV. 225 Cal.App.4th, at 345, 170
only on arbitration. The court asked whether “law of your Cal.Rptr.3d, at 196 (quoting Mastrobuono, 514 U.S., at
state” “mean[s] ‘the law of your state to the extent it is not 62, 115 S.Ct. 1212). The dissent adopts a similar argument.
preempted by the [Federal Arbitration Act],’ or ‘the law See post, at 474 – 476. But, as we have pointed out,
of your state without considering the preemptive effect, if supra, at 469 – 470, were the phrase “law of your state”
any of the [Federal Arbitration Act].’ ” 225 Cal.App.4th, ambiguous, surely some court would have construed that
at 344, 170 Cal.Rptr.3d, at 195. Framing the question term to incorporate state laws invalidated by, for example,
in such terms, rather than in generally applicable terms, federal labor law, federal pension law, or federal civil
suggests that the Court of Appeal could well have meant rights law. Yet, we have found no such case. Moreover, the
that its holding was limited to the specific subject matter reach of the canon construing contract language against
of this contract—arbitration. the drafter must have limits, no matter who the drafter
was. The fact that we can find no similar case interpreting
Fifth, the Court of Appeal reasoned that invalid the words “law of your state” to include invalid state laws
state arbitration law, namely the Discover Bank rule, indicates, at the least, that the antidrafter canon would not
maintained legal force despite this Court's holding in lead California courts to *471 reach a similar conclusion
Concepcion. The court stated that “[i]f we apply state in similar cases that do not involve arbitration.
law alone ... to the class action waiver, then the
waiver is unenforceable.” 225 Cal.App.4th, at 344, 170 ***
Cal.Rptr.3d, at 195. And at the end of its opinion it
reiterated that “[t]he class action waiver is unenforceable Taking these considerations together, we reach a
under California law, so the entire arbitration agreement conclusion that, in our view, falls well within the confines
is unenforceable.” Id., at 347, 170 Cal.Rptr.3d, at 198. of (and goes no further than) present well-established
But those statements do not describe California law. See law. California's interpretation of the phrase “law of your
Concepcion, 563 U.S., at 344, 352, 131 S.Ct. 1740; Sanchez, state” does not place arbitration contracts “on equal
61 Cal.4th, at 923–924, 190 Cal.Rptr.3d 812, 353 P.3d, at footing with all other contracts,” Buckeye Check Cashing,
757. The view that state law retains independent force even Inc., 546 U.S., at 443, 126 S.Ct. 1204. For that reason, it
after it has been authoritatively invalidated by this Court does not give “due regard ... to the federal policy favoring
is one courts are unlikely to accept as a general matter and arbitration.” Volt Information Sciences, 489 U.S., at 476,
to apply in other contexts. 109 S.Ct. 1248. Thus, the Court of Appeal's interpretation
is pre-empted by the Federal Arbitration Act. See Perry
Sixth, there is no other principle invoked by the Court v. Thomas, 482 U.S. 483, 493, n. 9, 107 S.Ct. 2520, 96
of Appeal that suggests that California courts would L.Ed.2d 426 (1987) (noting that the Federal Arbitration
reach the same interpretation of the words “law of Act pre-empts decisions that take their “meaning precisely
your state” in other contexts. The court said that the from the fact that a contract to arbitrate is at issue”).
phrase “law of your state” constitutes “ ‘a specific Hence, the California Court of Appeal must “enforc[e]”
exception ’ ” to the agreement's “ ‘general adoption of the arbitration agreement. 9 U.S.C. § 2.
the [Federal Arbitration Act].’ ” 225 Cal.App.4th, at
344, 170 Cal.Rptr.3d, at 195. But that tells us nothing The judgment of the California Court of Appeal is
about how to interpret the words “law of your state” reversed, and the case is remanded for further proceedings
elsewhere. It does not answer the relevant question: not inconsistent with this opinion.
whether those words encompass laws that have been
authoritatively held invalid. Cf. Prouty, 121 Cal.App.4th, It is so ordered.
at 1235, 18 Cal.Rptr.3d, at 185–186 (specific words govern
leave-it contract everywhere it did business. Ibid. “[T]o reversed a state-court decision on the ground that the state
protect the party who did not choose the language from an court misapplied state contract law when it determined the
unintended or unfair result,” the California court applied meaning of a term in a particular arbitration agreement.
“the common-law rule of contract interpretation that a Today's decision is a dangerous first.
court should construe ambiguous language against the
interest of the party that drafted it.” 225 Cal.App.4th, Beyond genuine debate, DIRECTV originally meant the
at 345, 170 Cal.Rptr.3d, at 196 (quoting Mastrobuono “law of your state” clause to refer to its customer's home
v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62–63, state law untouched by federal preemption. As DIRECTV
115 S.Ct. 1212, 131 L.Ed.2d 76 (1995)). That rule was explained in a state-court filing, the clause prevented
particularly appropriate in this case, the court reasoned, enforcement of the arbitration agreement in those States,
for, “as a practical matter, it seems unlikely that plaintiffs California among them, where the class-arbitration
anticipated in 2007 that the Supreme Court would hold in proscription was unenforceable as a matter of state
2011 that the FAA preempts” state-law protection against law, while requiring bilateral arbitration in States that
compelled class-arbitration waivers. 225 Cal.App.4th, at did not outlaw purported waivers of class proceedings.
345, 170 Cal.Rptr.3d, at 196 (internal quotation marks App. 52 (“The Customer Agreement between DIRECTV
omitted). and its customers provides that the customer's home
state laws will govern the relationship, and that any
disputes will be resolved in individual arbitration if the
customer's home state laws enforce the parties' arbitration
II
agreement.” (emphasis added)).
The Court today holds that the California Court of
Appeal interpreted the language in DIRECTV's service According to DIRECTV, because the class-arbitration
agreement so unreasonably as to suggest discrimination ban, post-Concepcion, is enforceable in all States, this case
against arbitration in violation of the *473 FAA. Ante, at must now be resolved, if at all, in bilateral arbitration. The
469 – 470. As I see it, the California court's interpretation Court agrees. After Concepcion, the Court maintains, it
of the “law of your state” provision is not only reasonable, no longer matters whether DIRECTV meant California's
it is entirely right. “home state laws” when it drafted the 2007 version of
its service agreement. But Concepcion held only that a
Arbitration is a matter of “consent, not coercion.” Stolt– State cannot compel a party to engage in class arbitration
Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, when the controlling agreement unconditionally prohibits
681, 130 S.Ct. 1758, 176 L.Ed.2d 605 (2010) (internal class procedures. See 563 U.S., at 351, 131 S.Ct. 1740
quotation marks omitted). The FAA “requires courts to (“Arbitration is a matter of contract, and the FAA
enforce privately negotiated agreements to arbitrate, like requires courts to honor parties' expectations,” so parties
other contracts, in accordance with their terms.” Volt may consent to class procedures even though such
Information Sciences, Inc. v. Board of Trustees of Leland procedures “may not be required by state law.”). Just
Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, as a contract itself may provide for class arbitration, so
103 L.Ed.2d 488 (1989). “[T]he interpretation of private the parties may choose to be bound by a particular state
contracts is ordinarily a question of state law, which law, in this case, the CLRA, even if the FAA would
this Court does not sit to review.” Id., at 474, 109 S.Ct. otherwise displace that state law. Hall Street Associates,
1248. See also First Options of Chicago, Inc. v. Kaplan, L.L.C. v. Mattel, Inc., 552 U.S. 576, 586, 128 S.Ct. 1396,
514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 170 L.Ed.2d 254 (2008) (“[T]he FAA lets parties tailor
(1995) (when interpreting arbitration agreements, courts some, even many, features of arbitration by contract,
“should apply ordinary state-law principles that govern including ... procedure and choice of substantive law.”). 1
the formation of contracts”). Historically, this Court “In principle,” the Court acknowledges, *474 parties
has respected state-court interpretations of arbitration “might choose to have portions of their contract governed
agreements. See Mastrobuono, 514 U.S., at 60, n. 4, 115 by the law of Tibet, [or] the law of pre-revolutionary
S.Ct. 1212; Volt Information Sciences, 489 U.S., at 484, 109 Russia.” Ante, at 468; see Brief for Petitioner 20 (observing
S.Ct. 1248. Indeed, in the more than 25 years between Volt that the FAA would allow parties “to bind themselves by
Information Sciences and this case, not once has this Court reference to the rules of a board game”). Pre-revolutionary
Russian law, but not California's “home state laws” exclude the application of California legislation, it surely
operative and unquestionably valid in 2007? Makes little chose a bizarre way to accomplish that result.
sense to me.
As earlier noted, see supra, at 472 – 473, and
Nothing in Concepcion or the FAA nullifies provisions as the California court appreciated, courts generally
of the CLRA. They hold sway when parties elect judicial construe ambiguous contractual terms against the drafter.
resolution of their disputes, and should similarly control See Mastrobuono, 514 U.S., at 63, 115 S.Ct. 1212
when parties choose that consumer-protective law to (“Respondents drafted an ambiguous document, and
govern their arbitration agreements. See Volt Information they cannot now claim the benefit of the doubt.”). This
Sciences, 489 U.S., at 475, 109 S.Ct. 1248 (where parties “common-law rule of contract interpretation,” id., at 62,
had “incorporat[ed] ... California rules of arbitration into 115 S.Ct. 1212, reflects the principle that a party should
their agreement,” they had “no FAA-guaranteed right not be permitted to write an ambiguous term, lock another
to compel arbitration” on terms inconsistent with those party into agreeing to that term, and then reap the benefit
California rules). 2 Thus, even after Concepcion, one could of the ambiguity once a dispute emerges. The rule has
properly refer to the CLRA's class-waiver proscription particular force where, as here, a court is interpreting
as “California law.” To repeat, the dispositive question a “standardized contrac[t]” that was not the product of
in this case is whether the parties intended the “law of bilateral bargaining. Restatement (Second) of Contracts §
your state” provision to mean state law as preempted by 206, Comment a (1979).
federal law, as the Court today reads the provision, or
home state law as framed by the California Legislature, Allowing DIRECTV to reap the benefit of an ambiguity
without considering the preemptive effect of federal law, it could have avoided would ignore not just the hugely
as the California court read it. unequal bargaining power of the parties, but also their
reasonable expectations at the time the contract was
The latter reading is the better one. DIRECTV had no formed. See Mastrobuono, 514 U.S., at 63, 115 S.Ct.
occasion to refer to “the law of [its customer's] state” 1212 (it is particularly appropriate to construe terms
had it meant to incorporate state law as preempted by against the drafter where the other party had no reason
the FAA. That is, DIRECTV, like virtually every other to anticipate or intend the drafter's preferred result). See
company with a similar service agreement, could have also Trans World Airlines, Inc. v. Franklin Mint Corp.,
employed a clause directly conditioning enforceability 466 U.S. 243, 262, 104 S.Ct. 1776, 80 L.Ed.2d 273 (1984)
of the arbitration agreement on the exclusion of class (“[C]ontract[s] ... are to be read in the light of the
arbitration. Indeed, DIRECTV has done just that in conditions and circumstances existing at the time they
service agreements both before and after 2007. App. 121 were entered into, with a view to effecting the objects and
(the 2004 version provides that “[a] Court may sever any purposes of the [parties] thereby contracting.” (quoting
portion of [the arbitration agreement] that it finds to Rocca v. Thompson, 223 U.S. 317, 331–332, 32 S.Ct.
be unenforceable, except for the prohibition on class or 207, 56 L.Ed. 453 (1912); ellipsis in original)). At
representative arbitration”); Brief for Respondents 35– the time DIRECTV imposed this agreement on its
36 (stating that the June 2015 version of DIRECTV's customers, it assumed that the arbitration clause would
agreement provides that “[a] court may sever any be unenforceable in California. App. 52 (explaining in
portion of [the arbitration agreement] that it finds state-court filing that, “[b]ecause California law would
to be unenforceable, except for the prohibition on not enforce the arbitration agreement ..., DIRECTV
[class arbitration]” (internal quotation marks omitted)). has not sought and will not seek to arbitrate disputes
Had DIRECTV followed this pattern in its 2007 form with California customers”). Likewise, any California
contract, the arbitration agreement, post-Concepcion, customer who read the agreement would scarcely have
unquestionably would have been enforceable in all States. understood that she had submitted to bilateral arbitration
In the 2007 version, however, DIRECTV *475 chose of any and all disputes with DIRECTV. She certainly
a different formulation, one referring to the “law of [its would have had no reason to anticipate the Court's
customer's] state.” I would not translate that term to be decision in Concepcion, rendered four years later, or to
synonymous with “federal law.” If DIRECTV meant to consider whether “law of your state” is a chameleon
term meaning California legislation when she received her Household Int'l, Inc., 376 F.3d 656, 661 (C.A.7 2004)
service contract, but preemptive federal law later on. (“The realistic alternative to a class action is not 17
million individual suits, but zero individual suits, as
DIRECTV primarily responds that the FAA requires only a lunatic or a fanatic sues for $30.”), cert. denied,
construction of all terms in arbitration agreements in 543 U.S. 1051, 125 S.Ct. 877, 160 L.Ed.2d 772 (2005).
favor of arbitrability. True, this Court has found in Nonetheless, the Court held that the FAA mandated
the FAA a “federal policy favoring arbitration.” Ante, enforcement of the entire arbitration agreement, including
at 471 (quoting Volt Information Sciences, 489 U.S., at the class-arbitration ban. Concepcion, 563 U.S., at 343,
476, 109 S.Ct. 1248). But the Court has also cautioned 131 S.Ct. 1740. Two years later, in Italian Colors, 570
that an arbitration-favoring presumption applies “only U.S., at ––––, 133 S.Ct., at 2310, the Court reaffirmed
where it reflects, and derives its legitimacy from, a judicial that class-arbitration prohibitions are enforceable even
conclusion that arbitration of a particular dispute is what where claimants “have no economic incentive to pursue
the parties intended because their express agreement to their ... claims individually in arbitration.” Today, the
arbitrate was validly formed[, is] legally enforceable[,] and Court holds that consumers lack not only protection
[is] best construed to encompass the dispute.” Granite against unambiguous class-arbitration bans in adhesion
Rock Co. v. Teamsters, 561 U.S. 287, 303, 130 S.Ct. contracts. They lack even the benefit of the doubt when
2847, 177 L.Ed.2d 567 (2010). DIRECTV acknowledges anomalous terms in such contracts reasonably could be
that “[t]his case ... involves a threshold dispute over the construed to protect their rights. 3
enforceability of the parties' arbitration agreement” in its
entirety. Reply Brief 7. Like the California court, I would *477 These decisions have predictably resulted in
resolve that dispute by employing *476 traditional rules the deprivation of consumers' rights to seek redress
of contract interpretation sans any arbitration-favoring for losses, and, turning the coin, they have insulated
presumption, including the rule that ambiguous language powerful economic interests from liability for violations of
should be construed against the drafter. See supra, at 472 consumer-protection laws. See N.Y. Times, Nov. 1, 2015,
– 473, 474 – 475. p. A1, col. 5 (“By inserting individual arbitration clauses
into a soaring number of consumer and employment
contracts, companies [have] devised a way to circumvent
III the courts and bar people from joining together in class-
action lawsuits, realistically the only tool citizens have
Today's decision steps beyond Concepcion and Italian to fight illegal or deceitful business practices.”). Studies
Colors. There, as here, the Court misread the FAA to confirm that hardly any consumers take advantage
deprive consumers of effective relief against powerful of bilateral arbitration to pursue small-dollar claims.
economic entities that write no-class-action arbitration Resnik, Diffusing Disputes: The Public in the Private of
clauses into their form contracts. In Concepcion, 563 Arbitration, the Private in Courts, and the Erasure of
U.S., at 336, 131 S.Ct. 1740, customers brought a class Rights, 124 Yale L.J. 2804, 2900–2910 (2015) (Resnik,
action claiming that AT & T Mobility had improperly Diffusing Disputes). Because consumers lack bargaining
charged $30.22 in sales tax while advertising cellular power to change the terms of consumer adhesion
telephones as free. AT & T Mobility's form consumer contracts ex ante, “[t]he providers [have] won the power
contract contained a mandatory arbitration clause and a to impose a mandatory, no-opt-out system in their
class-arbitration proscription. Because consumers lacked own private ‘courts' designed to preclude aggregate
input into the contractual terms, and because few rational litigation.” Resnik, Fairness in Numbers: A Comment
consumers would go through the hassle of pursuing on AT & T v. Concepcion, Wal–Mart v. Dukes, and
a $30.22 claim in bilateral arbitration, the California Turner v. Rogers, 125 Harv. L. Rev. 78, 133 (2011).
courts deemed the arbitration agreement unenforceable as See also Miller, Simplified Pleading, Meaningful Days
unconscionable. See id., at 365, 131 S.Ct. 1740 (BREYER, in Court, and Trials on the Merits: Reflections on
J., dissenting) (“ ‘[T]he maximum gain to a customer the Deformation of Federal Procedure, 88 N.Y.U. L.
for the hassle of arbitrating a $30.22 dispute is still Rev. 286, 323 (2013) (“[P]owerful economic entities
just $30.22.’ ” (quoting Laster v. AT & T Mobility can impose no-class-action-arbitration clauses on people
LLC, 584 F.3d 849, 856 (C.A.9 2009))); Carnegie v. with little or no bargaining position—through adhesion
contracts involving securities accounts, credit cards, edifice of its own creation.” Allied–Bruce Terminix Cos.
mobile phones, car rentals, and many other social v. Dobson, 513 U.S. 265, 283, 115 S.Ct. 834, 130 L.Ed.2d
amenities and necessities.”). 4 The proliferation of take-it- 753 (1995) (concurring opinion). See also Miller, supra,
or-leave-it agreements mandating arbitration and banning at 324 (“[O]ver the years the Act has been transformed
class procedures, and this Court's readiness to enforce by the Supreme Court through constant expansion into
such one-sided agreements, have disabled consumers an expression of a ‘federal policy’ favoring arbitration,
from “shop[ping] to avoid arbitration mandates.” Resnik, whether it involves a bilateral business dispute or not.”).
Diffusing Disputes 2839. See also id., at 2872 (“[T]he
numbers of clauses mandating arbitration are soaring The Court's ever-larger expansion of the FAA's scope
across many sectors.”). contrasts sharply with how other countries treat
mandatory arbitration clauses in consumer contracts of
The Court has suggested that these anticonsumer adhesion. A 1993 European Union Directive forbids
outcomes flow inexorably from the text and purpose of the binding consumers to unfair contractual terms, defined
FAA. But Congress passed the FAA in 1925 as a response as those “not ... individually negotiated” that “caus[e]
to the reluctance of some judges to enforce commercial a significant imbalance in the parties' rights and
arbitration agreements between merchants with relatively obligations ... to the detriment of the consumer.”
equal bargaining power. Moses, Arbitration Law: Who's Coun. Directive 93/13, Art. 3, 1993 O.J. (L. 95) 31.
in Charge? 40 Seton Hall L. Rev. 147, 170–171 (2010). A subsequent EU Recommendation interpreted this
See also id., at 170 (contract disputes between merchants Directive to bar enforcement of one-party-dictated
have been a proper subject of arbitration since the 1600's). mandatory consumer arbitration agreements. Comm'n
The FAA's purpose was to “make the contracting party Recommendation 98/257, 1998 O.J. (L. 115) 34 (“The
live up to his agreement.” H.R.Rep. No. 68–96, at 1 consumer's recourse to the out-of-court procedure may
(1924). See also Moses, supra, at 147 (Congress sought not be the result of a commitment prior to the
to “provide federal courts with procedural law that materialisation of the dispute, where such commitment
would permit the enforcement of arbitration agreements has the effect of depriving the consumer of his
between merchants in diversity cases.”). Congress in 1925 right to bring an action before the courts for the
could not have anticipated that the Court would apply settlement of the dispute.”). As a result of this Directive
the FAA to render consumer adhesion *478 contracts and Recommendation, disputes between providers and
invulnerable to attack by parties who never meaningfully consumers in the EU are arbitrated only when the parties
agreed to arbitration in the first place. See Resnik, mutually agree to arbitration on a “post-dispute basis.”
Diffusing Disputes 2860 (“The merchants and lawyers Sternlight, Is the U.S. Out on a Limb? Comparing the U.S.
who forged the public law of arbitration in the United Approach to Mandatory Consumer and Employment
States sought federal legislation to enforce consensual Arbitration to That of the Rest of the World, 56 U.
agreements.” (emphasis added)). Miami L. Rev. 831, 847–848 (2002) (emphasis deleted); see
id., at 852 (enforcement of mandatory arbitration clauses
Nor does the text of the FAA compel this result. in consumer contracts of adhesion “is quite rare, if not
Section 2, on which the Court relied in Concepcion, nonexistent,” outside the United States).
Italian Colors, and this case, prescribes simply that
arbitration provisions are to be treated the same as other ***
contractual terms: “[a] written provision in ... a contract
evidencing a transaction involving commerce to settle by The California Court of Appeal appropriately applied
arbitration a controversy ... shall be valid, irrevocable, traditional tools of state contract law to interpret
and enforceable, save upon such grounds as exist at DIRECTV's reference to the home state laws of its
law or in equity for the revocation of any contract.” customers. Demeaning that court's judgment through
9 U.S.C. § 2. As Justice O'Connor observed when the harsh construction, this Court has again expanded
Court was just beginning to transform the FAA into what the scope of the FAA, further degrading the rights
it has become, “the Court has abandoned all pretense of consumers and further insulating already powerful
of ascertaining congressional intent with respect to the economic entities from liability for unlawful acts. I resist
Federal Arbitration Act, building instead, case by case, an
the Court's bent, and would affirm the judgment of the All Citations
California Court of Appeal.
136 S.Ct. 463, 193 L.Ed.2d 365, 84 USLW 4018, 166
Lab.Cas. P 61,659, 15 Cal. Daily Op. Serv. 13,165, 2015
Daily Journal D.A.R. 13,261, 63 Communications Reg.
(P&F) 1442, 25 Fla. L. Weekly Fed. S 567
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50
L.Ed. 499.
1 FAA preemption is distinct from federal preemption in other contexts. Unlike “state laws invalidated by, for example,
federal labor law, federal pension law, or federal civil rights law,” ante, at 470, state laws are preempted by the FAA only
to the extent that they conflict with the contracting parties' intent. See Mastrobuono v. Shearson Lehman Hutton, Inc., 514
U.S. 52, 59, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995) (“[I]n the absence of contractual intent to the contrary, the FAA would
pre-empt” a particular state law. (emphasis added)); Brief for Law Professors as Amicus Curiae 10 (“FAA preemption
cannot occur without reference to a particular agreement of the parties....”).
2 The Court refers to the relevant California law as the “Discover Bank rule” and suggests that, “under ‘general contract
principles,’ references to California law incorporate the California Legislature's power to change the law retroactively.”
Ante, at 469. But despite this Court's rejection of the Discover Bank rule in Concepcion, the California Legislature has
not capitulated; it has retained without change the CLRA's class-waiver prohibition. The Discover Bank rule relied on
an interpretation of the FAA, see 36 Cal.4th 148, 162–173, 30 Cal.Rptr.3d 76, 113 P.3d 1100, 1100–1117 (2005); in
contrast, the CLRA's class-waiver proscription reflects California's legislative policy judgment.
3 It has not always been this way. In Wilko v. Swan, 346 U.S. 427, 435, 438, 74 S.Ct. 182, 98 L.Ed. 168 (1953), the
Court unanimously held that an arbitration clause in a brokerage agreement was unenforceable. The Court noted that
the Securities Act was “drafted with an eye to the disadvantages under which buyers labor” when negotiating brokerage
agreements, id., at 435, 74 S.Ct. 182, and described arbitration as less protective of the rights of stock buyers than
litigation, id., at 435–437, 74 S.Ct. 182. The Court later overruled Wilko, rejecting what it described as Wilko 's “suspicion
of arbitration as a method of weakening the protections afforded in the substantive law.” Rodriguez de Quijas v. Shearson/
American Express, Inc., 490 U.S. 477, 481, 109 S.Ct. 1917, 104 L.Ed.2d 526 (1989). See also Gilmer v. Interstate/
Johnson Lane Corp., 500 U.S. 20, 33, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991) (relying on Rodriguez de Quijas to
conclude that “[m]ere inequality in bargaining power ... is not a sufficient reason to hold that arbitration agreements
are never enforceable in the employment context”). Similarly, before Italian Colors, the Court had suggested that “the
existence of large arbitration costs could preclude a litigant ... from effectively vindicating her federal statutory rights in the
arbitral forum,” and when that is so, an arbitration agreement may be unenforceable. Green Tree Financial Corp.–Ala. v.
Randolph, 531 U.S. 79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). Although the Court in Italian Colors did not expressly
reject this “effective vindication” principle, the Court's refusal to apply the principle in that case suggests that the principle
will no longer apply in any case. See 570 U.S., at ––––, 133 S.Ct., at 2320 (KAGAN, J., dissenting); CompuCredit Corp.
v. Greenwood, 565 U.S. ––––, –––– – ––––, 132 S.Ct. 665, 676, 181 L.Ed.2d 586 (2012) (GINSBURG, J., dissenting)
(criticizing the Court for ignoring a federal statutory “right to sue” and for holding “that credit repair organizations can
escape suit by providing in their take-it-or-leave-it contracts that arbitration will serve as the parties' sole dispute-resolution
mechanism”).
4 The Consumer Financial Protection Bureau recently published a study documenting the proliferation of mandatory
arbitration clauses containing class-arbitration waivers in consumer financial-services contracts, as well as the vanishingly
small number of claims brought by financial-services consumers in bilateral arbitration. See Consumer Financial
Protection Bureau, Arbitration Study § 1, pp. 9–13 (2015).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
page nine of the franchise agreement. The Montana from singling out arbitration provisions for suspect status,
Supreme Court reversed, holding that the arbitration requiring instead that such provisions be placed upon the
clause was unenforceable because it did not meet the state- same footing as other contracts. Scherk v. Alberto-Culver
law requirement that “[n]otice that a contract is subject Co., 417 U.S. 506, 511, 94 S.Ct. 2449, 2453, 41 L.Ed.2d
to arbitration” be “typed in underlined capital letters 270. Montana's § 27-5-114(4) directly conflicts with §
on the first page of the contract.” Mont.Code Ann. § 2 because the State's law conditions the enforceability
27-5-114(4). DAI and Lombardi unsuccessfully argued of arbitration agreements on compliance with a special
that § 27-5-114(4) was preempted by § 2 of the Federal notice requirement not applicable to contracts generally.
Arbitration Act (FAA), which declares written provisions The Montana Supreme Court misread Volt in reaching
for arbitration “valid, irrevocable, and enforceable, save a contrary conclusion. The state rule examined in Volt
upon such grounds as exist at law or in equity for the determined only the efficient order of proceedings;
revocation of any contract.” In arguing for preemption, **1654 it did not affect the enforceability of the
DAI and Lombardi dominantly relied on Southland Corp. arbitration agreement itself. Applying § 27-5-114(4) here,
v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1, in contrast, would invalidate the arbitration clause. Pp.
and Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96 1656-1657.
L.Ed.2d 426, in which this Court established that “state
law ... is applicable if that law arose to govern issues 274 Mont. 3, 901 P.2d 596 (1995), reversed and remanded.
concerning the validity, revocability, and enforceability
of contracts generally,” but not if the state-law principle GINSBURG, J., delivered the opinion of the
“takes its meaning precisely from the fact that a contract Court, in which REHNQUIST, C.J., and STEVENS,
to arbitrate is at issue.” Id., at 492, n. 9, 107 S.Ct., at 2527, O'CONNOR, SCALIA, KENNEDY, SOUTER, and
n. 9 (emphasis added). The Montana Supreme Court, BREYER, JJ., joined. THOMAS, J., filed a dissenting
however, thought Volt Information Sciences, Inc. v. Board opinion, post, p. 1657.
of Trustees of Leland Stanford Junior Univ., 489 U.S. 468,
109 S.Ct. 1248, 103 L.Ed.2d 488, limited § 2's preemptive
force and correspondingly qualified Southland and Perry; Attorneys and Law Firms
the proper inquiry, the Montana Supreme Court said,
Mark R. Kravitz, New Haven, CT, for petitioners.
should focus not on the bare words of § 2 but on the
question: Would the application of § 27-5-114(4)'s notice Lucinda A. Sikes, Washington, DC, for respondents.
requirement undermine the FAA's goals and policies. In
the Montana court's judgment, the notice requirement did Opinion
not undermine these goals and policies, for it did not
Justice GINSBURG delivered the opinion of the Court.
preclude arbitration agreements altogether. On remand
from this Court for reconsideration in light of Allied-Bruce This case concerns a standard form franchise agreement
Terminix Cos. v. Dobson, 513 U.S. 265, 115 S.Ct. 834, 130 for the operation of a Subway sandwich shop in Montana.
L.Ed.2d 753, the Montana court adhered to its original *683 When a dispute arose between parties to the
ruling. agreement, franchisee Paul Casarotto sued franchisor
Doctor's Associates, Inc. (DAI), and DAI's Montana
Held: Montana's first-page notice requirement, which development agent, Nick Lombardi, in a Montana state
governs not “any contract,” but specifically and solely court. DAI and Lombardi sought to stop the litigation
contracts “subject to arbitration,” *682 conflicts with the pending arbitration pursuant to the arbitration clause set
FAA and is therefore displaced by the federal measure. out on page nine of the franchise agreement.
Generally applicable contract defenses, such as fraud,
duress, or unconscionability, may be applied to invalidate The Federal Arbitration Act (FAA or Act) declares
arbitration agreements without contravening § 2, see, e.g., written provisions for arbitration “valid, irrevocable, and
Allied-Bruce, 513 U.S., at 281, 115 S.Ct., at 843, but enforceable, save upon such grounds as exist at law or
courts may not invalidate arbitration agreements under in equity for the revocation of any contract.” 9 U.S.C. §
state laws applicable only to arbitration provisions, see, 2. Montana law, however, declares an arbitration clause
e.g., ibid. By enacting § 2, Congress precluded States unenforceable unless “[n]otice that [the] contract is subject
to arbitration” is “typed in underlined capital letters notice requirement had not been met, the Montana
on the first page of the contract.” Mont.Code Ann. § Supreme Court declared the parties' dispute “not subject
27-5-114(4) (1995). The question here presented is whether to arbitration.” 268 Mont., at 382, 886 P.2d, at 939.
Montana's law is compatible with the federal Act. We
hold that Montana's first-page notice requirement, which DAI and Lombardi unsuccessfully argued before the
governs not “any contract,” but specifically and solely Montana Supreme Court that § 27-5-114(4) was
contracts “subject to arbitration,” conflicts with the FAA preempted by § 2 of the FAA. 1 DAI and Lombardi
and is therefore displaced by the federal measure. dominantly relied on our decisions in Southland Corp. v.
Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984),
and Perry v. Thomas, 482 U.S. 483, 107 S.Ct. 2520, 96
I L.Ed.2d 426 (1987). In Southland, we held that § 2 of
the FAA applies in state as well as federal courts, see
Petitioner DAI is the national franchisor of Subway 465 U.S., at 12, 104 S.Ct., at 859, and “withdr[aws] the
sandwich shops. In April 1988, DAI entered a franchise power of the states to require a judicial forum for the
agreement with respondent Paul Casarotto, which resolution of claims which the contracting parties agreed
permitted Casarotto to open a Subway shop in Great to resolve by arbitration,” id., at 10, 104 S.Ct., at 858. We
Falls, Montana. The franchise agreement stated, on page noted in the pathmarking Southland *685 decision that
nine and in ordinary type: “Any controversy or claim the FAA established a “broad principle of enforceability,”
arising out of or relating to this contract or the breach id., at 11, 104 S.Ct., at 858, and that § 2 of the federal
thereof shall be settled by Arbitration....” App. 75. Act provided for revocation of arbitration agreements
only upon “grounds as exist at law or in equity for
In October 1992, Casarotto sued DAI and its agent, the revocation of any contract.” In Perry, we reiterated:
Nick Lombardi, in Montana state court, alleging state- “[S]tate law, whether of legislative or judicial origin, is
law contract and tort claims relating to the franchise applicable if that law arose to govern issues concerning
agreement. DAI demanded arbitration of those claims, the validity, revocability, and enforceability of contracts
and successfully moved in the Montana trial court to stay generally. A state-law principle that takes its meaning
the lawsuit pending arbitration. Id., at 10-11. precisely from the fact that a contract to arbitrate is at
issue does not comport with [the text of § 2].” 482 U.S., at
*684 The Montana Supreme Court reversed. Casarotto 492, n. 9, 107 S.Ct., at 2527, n. 9.
v. Lombardi, 268 Mont. 369, 886 P.2d 931 (1994). That
court left undisturbed the trial court's findings that The Montana Supreme Court, however, read our decision
the franchise agreement fell within the scope of the in Volt Information Sciences, Inc. v. Board of Trustees
FAA and covered the claims Casarotto stated against of Leland Stanford Junior Univ., 489 U.S. 468, 109 S.Ct.
DAI and Lombardi. The Montana Supreme Court held, 1248, 103 L.Ed.2d 488 (1989), as limiting the preemptive
however, that Mont.Code Ann. § 27-5-114(4) rendered force of § 2 and correspondingly qualifying Southland
the agreement's arbitration clause unenforceable. The and Perry. 268 Mont., at 378-381, 886 P.2d, at 937-939.
Montana statute provides: As the Montana Supreme Court comprehended Volt, the
proper inquiry here should focus not on the bare words
“Notice that a contract is subject of § 2, but on this question: Would the application of
to arbitration ... shall be typed in Montana's notice requirement, contained in § 27-5-114(4),
underlined capital letters on the first “undermine the goals and policies of the FAA.” 268
page of the contract; and unless Mont., at 381, 886 P.2d, at 938 (internal quotation marks
such notice is displayed thereon, omitted). Section 27-5-114(4), in the Montana court's
the contract may not be subject to judgment, did not undermine the goals and policies of
arbitration.” the FAA, for the notice requirement did not preclude
arbitration agreements altogether; it simply prescribed
Notice of the arbitration clause in the franchise agreement
“that before arbitration agreements are enforceable, they
did not appear on the first page of the contract. Nor
be entered knowingly.” Id., at 381, 886 P.2d, at 939.
was anything relating to the clause typed in underlined
capital letters. Because the State's statutory **1655
DAI and Lombardi petitioned for certiorari. Last Term, generally applicable contract defenses, such as fraud,
we granted their petition, vacated the judgment of the duress, or unconscionability, may be applied to invalidate
Montana Supreme Court, and remanded for further arbitration agreements without contravening § 2. See
consideration in light of Allied-Bruce Terminix Cos. v. Allied-Bruce, 513 U.S., at 281, 115 S.Ct., at 843; Rodriguez
Dobson, 513 U.S. 265, 115 S.Ct. 834, 130 L.Ed.2d 753 de Quijas v. Shearson/American Express, Inc., 490 U.S.
(1995). See 515 U.S. 1129, 115 S.Ct. 2552, 132 L.Ed.2d 807 477, 483-484, 109 S.Ct. 1917, 1921-1922, 104 L.Ed.2d 526
(1995). In Allied-Bruce, we restated what our decisions in (1989); Shearson/American Express Inc. v. McMahon, 482
Southland and Perry had established: U.S. 220, 226, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987).
*686 “States may regulate contracts, including [2] Courts may not, however, invalidate arbitration
arbitration clauses, under general contract law agreements under state laws applicable only to arbitration
principles and they may invalidate an arbitration clause provisions. See Allied-Bruce, 513 U.S., at 281, 115 S.Ct.,
‘upon such grounds as exist at law or in equity for at 843; Perry, 482 U.S., at 492, n. 9, 107 S.Ct., at 2527, n.
the revocation of any contract.’ 9 U.S.C. § 2 (emphasis 9. By enacting § 2, we have several times said, Congress
added). What States may not do is decide that a precluded States from singling out arbitration provisions
contract is fair enough to enforce all its basic terms for suspect status, requiring instead that such provisions
(price, service, credit), but not fair enough to enforce its be placed “upon the same footing as other contracts.”
arbitration clause. The Act makes any such state policy Scherk v. Alberto-Culver Co., 417 U.S. 506, 511, 94 S.Ct.
unlawful, for that kind of policy would place arbitration 2449, 2453, 41 L.Ed.2d 270 (1974) (internal quotation
clauses on an unequal ‘footing,’ directly contrary to the marks omitted). Montana's § 27-5-114(4) directly conflicts
Act's language and Congress's intent.” 513 U.S., at 281, with § 2 of the FAA because the State's law conditions the
115 S.Ct., at 843. enforceability of arbitration agreements on compliance
with a special notice requirement not applicable to
On remand, without inviting or permitting further briefing contracts generally. The FAA thus displaces the Montana
or oral argument, 2 the Montana **1656 Supreme Court statute with respect to arbitration agreements covered by
adhered to its original ruling. The court stated: “After the Act. See 2 I. Macneil, R. Speidel, T. Stipanowich, &
careful review, we can find nothing in the [Allied-Bruce] G. Shell, Federal Arbitration Law § 19.1.1, pp. 19:4-19:5
decision which relates to the issues presented to this Court (1995) (under Southland and Perry, “state legislation
in this case.” Casarotto v. Lombardi, 274 Mont. 3, 7, 901 requiring greater information or choice in the making
P.2d 596, 598 (1995). Elaborating, the Montana court of agreements to arbitrate than in other contracts is
said it found “no suggestion in [Allied-Bruce] that the preempted”). 3
principles from Volt on which we relied [to uphold §
27-5-114(4) ] have been modified in any way.” Id., at 8, 901 *688 The Montana Supreme Court misread our Volt
P.2d, at 598-599. We again granted certiorari, 516 U.S. decision and therefore reached a conclusion in this case
1036, 116 S.Ct. 690, 133 L.Ed.2d 594 (1996), and now at odds with our rulings. Volt involved an arbitration
reverse. agreement that incorporated state procedural rules, one
of which, on the facts of that case, called for arbitration
to be stayed pending the resolution of a related judicial
II proceeding. The state rule examined in Volt determined
only the efficient order of proceedings; it did not **1657
[1] Section 2 of the FAA provides that written arbitration affect the enforceability of the arbitration agreement itself.
agreements “shall be valid, irrevocable, and enforceable, We held that applying the state rule would not “undermine
save upon such grounds as exist at law or in equity for the goals and policies of the FAA,” 489 U.S., at 478, 109
the revocation of any contract.” 9 U.S.C. § 2 (emphasis S.Ct., at 1255, because the very purpose of the Act was to
added). Repeating our observation in Perry, the text of “ensur[e] that private agreements to arbitrate are enforced
§ 2 declares that state law may be applied “if that law according to their terms,” id., at 479, 109 S.Ct., at 1256.
arose to govern issues *687 concerning the validity,
revocability, and enforceability of contracts generally.” Applying § 27-5-114(4) here, in contrast, would not
482 U.S., at 492, n. 9, 107 S.Ct., at 2527, n. 9. Thus, enforce the arbitration clause in the contract between
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
1 Section 2 provides, in relevant part:
“A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, ... shall
be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract.” 9 U.S.C. § 2.
2 Dissenting Justice Gray thought it “cavalier” of her colleagues to ignore the defendants' request for an “opportunity to
brief the issues raised by the ... remand and to present oral argument.” Casarotto v. Lombardi, 274 Mont. 3, 9-10, 901
P.2d 596, 599-600 (1995).
3 At oral argument, counsel for Casarotto urged a broader view, under which § 27-5-114(4) might be regarded as harmless
surplus. See Tr. of Oral Arg. 29-32. Montana could have invalidated the arbitration clause in the franchise agreement
under general, informed consent principles, counsel suggested. She asked us to regard § 27-5-114(4) as but one
illustration of a cross-the-board rule: Unexpected provisions in adhesion contracts must be conspicuous. See also Brief
for Respondents 21-24. But the Montana Supreme Court announced no such sweeping rule. The court did not assert
as a basis for its decision a generally applicable principle of “reasonable expectations” governing any standard form
contract term. Cf. Transamerica Ins. Co. v. Royle, 202 Mont. 173, 180, 656 P.2d 820, 824 (1983) (invalidating provision in
auto insurance policy that did not “honor the reasonable expectations” of the insured). Montana's decision trains on and
upholds a particular statute, one setting out a precise, arbitration-specific limitation. We review that disposition, and no
other. It bears reiteration, however, that a court may not “rely on the uniqueness of an agreement to arbitrate as a basis
for a state-law holding that enforcement would be unconscionable, for this would enable the court to effect what ... the
state legislature cannot.” Perry v. Thomas, 482 U.S. 483, 492, n. 9, 107 S.Ct. 2520, 2527, n. 9, 96 L.Ed.2d 426 (1987).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[3] Contracts
620 S.W.2d 110 Rate or Amount in General
Supreme Court of Texas.
Where contract for supplying water and
EAST MONTGOMERY COUNTY MUNICIPAL sewage treatment services was unambiguous,
UTILITY DISTRICT NO. 1, Petitioner, conduct of parties was immaterial in
determining amount to be paid for such
v.
services.
ROMAN FOREST CONSOLIDATED
MUNICIPAL UTILITY DISTRICT, Respondent. 4 Cases that cite this headnote
No. C-346.
| [4] Municipal Corporations
July 22, 1981. Construction and operation
Public Contracts
Declaratory judgment action was commenced seeking Compensation
interpretation of two contracts. The District Court,
Under terms of contract whereby one
Montgomery County, Alworth, J., entered judgment and
municipal utility district was to provide water
appeal was taken. The Court of Civil Appeals, Dies,
and sewage treatment facilities to another
J., 619 S.W.2d 1, reversed, and application for writ of
utility district with latter district paying
error was made. The Supreme Court held that under
operating charges for such services, district
terms of contract whereby one municipal utility district
providing services may not include costs of
was to provide water and sewage treatment facilities to
its water distribution system or its sewer
another utility district with latter district paying operating
collection system as part of operating budget.
charges for such services, district providing services may
not include costs of its water distribution system or its Cases that cite this headnote
sewer collection system as part of operating budget.
Opinion
[1] Contracts
Construction by Parties PER CURIAM.
Conduct of parties is ordinarily immaterial
in determining meaning of unambiguous This is an appeal from a declaratory judgment construing
instruments. two contracts. Under the first contract, Roman Forest
agrees to furnish fresh water to East Montgomery. Under
4 Cases that cite this headnote the second contract, Roman Forest agrees to provide
sewage treatment services for East Montgomery. This
lawsuit concerns what expenses Roman Forest may
[2] Contracts
charge East Montgomery under each contract. The trial
Construction by Parties
court rendered a judgment for East Montgomery. The
Conduct of parties is only relevant after court court of civil appeals reversed the judgment of the trial
has determined that contract is ambiguous. court and rendered judgment for Roman Forest. 619
S.W.2d 1.
2 Cases that cite this headnote
The two contracts were signed in April, 1975. The first question is whether Roman Forest may include the costs
of its own sewer collection system as part of the operating
detailed billing was presented to East Montgomery in
budget for the jointly operated sewage treatment and
late 1976. It is not clear from the record whether annual
disposal system.
budgets were ever presented to East Montgomery for
approval as required by the contracts.
The trial court's judgment held that only the costs of
operating and maintaining the sewage treatment and
The water furnishing contract provides that Roman
disposal plant be included, and that the costs of Roman
Forest will deliver water to East Montgomery at a
Forest's sewage collection system not be included. As with
specified location. East Montgomery will maintain its
the water furnishing contract, the court of civil appeals
own water distribution system from that point. Roman
reversed, relying on the conduct of the parties.
Forest has its own separate water distribution system.
All water for both systems is furnished from one well.
[1] [2] [3] [4] The conduct of the parties is ordinarily
Thus Roman Forest is only providing “water furnishing”
immaterial in the determining of the meaning of an
services to East Montgomery under that contract. The
unambiguous instrument. Pennell v. United Insurance
contract provides that East Montgomery will pay a
Co., 150 Tex. 541, 243 S.W.2d 572, 575 (1951); Universal
specified portion of the operating budget for Roman
C. I. T. Credit Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d
Forest's “said facility.” The previous sentence mentioned
154, 157 (1951); Richardson v. Hart, 143 Tex. 392, 185
the “water-furnishing facility.” The question is whether
S.W.2d 563 (1945); see Harris v. Rowe, 593 S.W.2d
Roman Forest may include the costs of its own water
303, 306 (Tex.1979). The conduct of the parties in only
distribution system as part of the budget of the water
relevant after the court has determined that the contract
furnishing facility.
is ambiguous. Neither party contends that the contract
is ambiguous. The conduct of the parties is therefore
The trial court's judgment held that only the costs of
irrelevant. We hold that the water furnishing contract
operating and maintaining the water furnishing system
expresses the intent of the parties that East Montgomery
may be considered, and that the costs of Roman Forest's
pay only for the costs of water furnishing facilities. We
water distribution system should be excluded. The court
hold that the sewage contract expresses the intent of the
of civil appeals reversed. It relied on the conduct of the
parties that East Montgomery pay only for the cost of the
parties.
sewage treatment and disposal services.
The sewage treatment contract provides that Roman
There were no pleadings concerning waiver, estoppel,
Forest will treat East Montgomery's sewage. Each district
modification or any other alternate theories of recovery.
maintains its own separate sewage collection system.
There is one jointly operated sewage treatment and
The holding of the court of civil appeals is in conflict
disposal system, which serves both East Montgomery and
with the court's opinion in Pennell v. United Insurance
Roman Forest. Thus, Roman Forest is only providing
Co., supra. Pursuant to Rule 483, Texas Rules of Civil
sewage treatment and disposal services, and is *112 not
Procedure, we grant the application for writ of error, and
providing sewage collection services to East Montgomery.
without hearing oral argument, reverse the judgment of
The contract provides that East Montgomery will pay
the court of civil appeals and affirm the judgment of the
a specified portion of the operating budget for Roman
trial court.
Forest's “system.” The first sentence of this portion
of the contract states: “In consideration for the waste
treatment and disposal services to be rendered by (Roman All Citations
Forest) to (East Montgomery) pursuant to this Contract,
(East Montgomery) shall pay operating charges for such 620 S.W.2d 110
waste disposal services in the following manner ....” The
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Burden of Proof
555 S.W.2d 478 Burden of proof in habeas corpus proceeding
Court of Criminal Appeals of Texas. is upon petitioner. Vernon's Ann.C.C.P. art.
11.07.
Ex parte Will RAINS, Jr.
7 Cases that cite this headnote
No. 54898.
|
[4] Habeas Corpus
Sept. 14, 1977.
Counsel
Defendant who had been convicted of murder and It was incumbent upon petitioner seeking writ
sentenced to 40 years' imprisonment filed petition for of habeas corpus upon contention that at
writ of habeas corpus, contending that at time of formal time of formal sentencing he was indigent
sentencing he was indigent and was without counsel, and without counsel and that as result was
and that as result he was denied appellate review of his denied appellate review of his conviction to
conviction. The Criminal District Court, Dallas County, show by preponderance of evidence that he
Jerome Chamberlain, J., found defendant to be lawfully had been indigent, had no counsel and did not
restrained, and record was forwarded. The Court of affirmatively waive right to counsel.
Criminal Appeals, Onion, P. J., held that petitioner had by
preponderance of evidence sustained his burden of proof 4 Cases that cite this headnote
to show that he was at time of sentencing indigent, had no
counsel, and did not affirmatively waive right to counsel. [5] Criminal Law
Capacity and Requisites in General
Relief prayed for in petition granted.
Right to counsel may be waived only if waiver
is knowingly, voluntarily and intelligently
Douglas, J., dissented.
made.
[2] Evidence
[7] Criminal Law
Nature and Scope in General
Validity and Sufficiency, Particular Cases
Judge's personal knowledge of matters not
Petitioner contending that at time of
contained in official judicial records of court
sentencing he was indigent and without
is not proper matter for judicial notice.
counsel and as a result was denied appellate
1 Cases that cite this headnote review of his conviction, who stated that he
did not tell sentencing judge he was indigent
and did not request counsel, but explained
[3] Habeas Corpus
that this was due to his ignorance of law, did he was indigent, was without counsel, and that as a result
not affirmatively waive right to counsel. was denied an appellate review of his conviction.
1 Cases that cite this headnote After a hearing on petitioner's application for habeas
corpus, the trial court filed findings of fact and
conclusions of law, finding petitioner to be lawfully
[8] Criminal Law
restrained. The record was forwarded to this court.
Indigence
Where assistance of counsel is constitutional *480 The record reflects that petitioner was convicted
requisite, right to be furnished counsel does of murder with malice on May 23, 1961 and assessed a
not depend on request therefor. punishment of forty (40) years in the penitentiary by a
jury. On June 23, 1961 formal sentence was imposed. No
1 Cases that cite this headnote notice of appeal was given.
court reporter's notes from the 1961 trial were no longer habeas corpus judge, who was not the sentencing judge
available. in 1961, indicate to the parties he was going to rely upon
personal knowledge. It is well established that a judge's
The State offered no testimony or any other controverting personal knowledge of matters not contained in official
evidence. judicial records of the court is not a proper matter for
judicial notice. Jackson v. State, 70 Tex.Cr.R. 582, 157
The trial court's findings of fact and conclusions of law
S.W. 1196 (1913); Lerma v. State, 81 Tex.Cr.R. 109, 194
filed on March 28, 1977 were in part as follows:
S.W. 167 (1917); Stephenson v. State, 500 S.W.2d 855
“1. Neither the statement of facts nor the court reporter's
(Tex.Cr.App.1973) (dissenting opinion and cases there
notes are available so as to allow appellate review of
cited).
Petitioner's case.
Here, the court's conclusions of law are general and On appeal the Georgia Supreme Court affirmed the trial
vague and do not deal specifically with the allegations in court's denial of habeas corpus but on different grounds,
petitioner's habeas corpus application. saying that the petitioner did not testify at the habeas
[2] The conclusion reached seems to be based largely corpus hearing that he “wanted a lawyer, asked for one,
(according to the findings) on *481 the “court's personal or made any effort to get one” or that “because of his
knowledge of the parties associated with this case as poverty, or for any other reason, he was unable to hire a
well as other factors . . . .” The extent and nature of lawyer.”
such personal knowledge is not disclosed, nor did the
In granting the petition for certiorari, the United States In the instant case both the petitioner and his mother
Supreme Court stated, “ ‘(i)t is settled that where the testified he was indigent at the time of sentencing and
assistance of counsel is a constitutional requisite, the right had no attorney present. While they were cross-examined,
to be furnished counsel does not depend on a request. their testimony went unchanged. The State offered no
Carnley v. Cochran, 369 U.S. 506, 513, 82 S.Ct. 884, 8 testimony or other evidence to contradict testimony
L.Ed.2d 70, 76 (1962).’ ” See also Swenson v. Bosler, 386 offered on behalf of the petitioner.
U.S. 258, 87 S.Ct. 996, 18 L.Ed.2d 33 (1967); Ex parte [5] [6] We conclude that petitioner sustained his burden
Perez, 479 S.W.2d 283 (Tex.Cr.App.1972). of proof as to his indigency and the fact he had no counsel
at the time of sentencing. Further, the right to counsel may
As to whether the petitioner in Kitchens v. Smith, supra, be waived only if the waiver is knowingly, voluntarily and
had sustained his burden of proving his inability at the intelligently made. Carnley v. Cochran, supra; Walton v.
time of trial to hire an attorney, the United States Supreme Arkansas, 371 U.S. 28, 83 S.Ct. 9, 9 L.Ed.2d 9 (1962); Ex
Court wrote: parte Auten, supra.
“Of course, to establish his right to appointed counsel in
1944, petitioner had the burden of proving his inability
at that time to hire an attorney. His petition for habeas As stated in Carnley v. Cochran, supra,
corpus specifically averred that he was unable to obtain “Presuming waiver from a silent record is impermissible.
counsel ‘because of his impoverished condition’ at that The record must show, or there must be an allegation and
time. The respondent denied this allegation and thus put evidence which show, that an accused was offered counsel
the matter in issue. At the hearing, petitioner testified, ‘I but intelligently and understandingly rejected the offer.
was a lot younger and I didn't have any money and I didn't Anything less is not waiver.” 369 U.S. at p. 516, 82 S.Ct.
have a lawyer . . . .’ (Emphasis added.) The State made no at p. 890.
effort whatever to contradict petitioner's testimony that
he was indigent; no part of its case went to the issue [7] [8] The record in the instant case is barren of any
of indigency. In this light, the Georgia Supreme Court's indication of waiver. The petitioner stated he did not tell
finding that petitioner ‘did not testify . . . that because the sentencing judge he was indigent and did not request
of his poverty, or for any other reason, he was unable to counsel, but explained that this was due to his ignorance
hire a lawyer’ is explicable only under the most rigid rules of the law. As noted above, however, where the assistance
of testimonial construction. Though petitioner did not of counsel is a constitutional requisite, the right to be
precisely testify that his failure to obtain a lawyer *482 furnished counsel does not depend on a request therefor.
was a result of his indigency, this was the undeniable
implication of his testimony, especially in view of the [9] We conclude the petitioner has sufficiently sustained
habeas corpus petition's allegation that petitioner was his burden as to the allegations in his habeas corpus
unable to hire an attorney ‘because of’ his indigency. The petition.
hearing below, as the transcript shows, was conducted
informally. Petitioner had no lawyer, and introduced
no evidence other than his own testimony. He testified In Mempa v. Rhay, 389 U.S. 128, 88 S.Ct. 254, 19 L.Ed.2d
discursively; no objections were made by the State, nor did 336 (1967), the United States Supreme Court held that
it cross-examine petitioner on the issue of indigency. the appointment of counsel for an indigent is required
at every stage of a criminal proceeding where substantial
“It is our view that on this record petitioner proved rights may be affected. In McConnell v. Rhay, supra, the
he was without counsel due to indigency at the time Supreme Court held that Mempa v. Rhay, supra, was to
of his conviction. The petition for certiorari is granted, be applied retroactively. See also Crawford v. State, 435
the judgment of the Georgia Supreme Court is reversed S.W.2d 148 (Tex.Cr.App.1968).
and the case remanded for further proceedings not
In Ex parte Vestal, 468 S.W.2d 372 (Tex.Cr.App.1971),
inconsistent with this opinion.” (Emphasis supplied.)
this court held that formal sentencing is a “stage of
a criminal proceeding where substantial rights may be
affected” and where an indigent defendant was without The relief prayed for in the habeas corpus petition is
counsel at sentencing his conviction could not stand. granted, the 1961 conviction for murder is set aside and
the petitioner is ordered remanded to the sheriff of Dallas
It clearly appears that the petitioner is entitled to have
an attorney at re-sentencing and is entitled to an out- County to answer the indictment in Cause No. D-3836.
of-time appeal. Since it was stipulated that the court It is so ordered.
reporter's stenographic notes of the 1961 trial are no
longer available, it is impossible to provide an out-
of-time appeal. See Ex parte Mays, 510 S.W.2d 606 DOUGLAS, J., dissents.
(Tex.Cr.App.1974); Ex parte Vestal, supra; Ex parte
Coleman, 455 S.W.2d 209 (Tex.Cr.App.1970); Ex parte All Citations
Gaines, 455 S.W.2d 210 (Tex.Cr.App.1970).
555 S.W.2d 478
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
there is clear and unmistakable evidence that declines to confirm arbitration award; use
they did so. 9 U.S.C.A. § 10. of “abuse of discretion” standard, even as
to questions of law, when reviewing district
1719 Cases that cite this headnote court decisions confirming arbitration awards
is inappropriate. 9 U.S.C.A. § 10.
[6] Alternative Dispute Resolution
514 Cases that cite this headnote
Performance, breach, enforcement, and
contest of agreement
Shareholders did not manifest intent to
have question of their personal liability
for debts of their corporation submitted
**1921 Syllabus *
to arbitration, pursuant to an arbitration
provision contained in workout agreement, *938 This case arose out of disputes centered on a
even though shareholders appeared before “workout” agreement, embodied in four documents,
arbitration panel to assert claim that issue was which governs the “working out” of debts owed by
not arbitrable; shareholders were appearing respondents-Manuel Kaplan, his wife, and his wholly
in support of corporation arbitrating other owned investment company, MK Investments, Inc.
matters, and there was precedent that they (MKI)-to petitioner First Options of Chicago, Inc.,
could argue arbitrability without losing their a firm that clears stock trades on the Philadelphia
right to independent court review. 9 U.S.C.A. Stock Exchange. When First Options' demands for
§ 10. payment went unsatisfied, it sought arbitration by a
stock exchange panel. MKI, which had signed the only
112 Cases that cite this headnote
workout document containing an arbitration agreement,
submitted to arbitration, but the Kaplans, who had not
[7] Alternative Dispute Resolution signed that document, filed objections with the panel,
Agreements to arbitrate denying that their disagreement with First Options was
Arbitrators' determination, that question arbitrable. The arbitrators decided that they had the
of whether shareholders of investment power to rule on the dispute's merits and ruled in
company were personally liable for company's First Options' favor. The District Court confirmed the
obligations under workout agreement was award, but the Court of Appeals reversed. In finding
arbitrable pursuant to arbitration clause of that the dispute was not arbitrable, the Court of Appeals
agreement, could be independently reviewed said that courts should independently decide whether an
by court; there was no indication that arbitration panel has jurisdiction over a dispute, and
shareholders had agreed to arbitrate question that it would apply ordinary standards of review when
of arbitrability. 9 U.S.C.A. § 10. considering the District Court's denial of respondents'
motion to vacate the arbitration award.
345 Cases that cite this headnote
Held:
[8] Alternative Dispute Resolution
1. The arbitrability of the Kaplan/First Options dispute
Discretion
was subject to independent review by the courts. Pp.
Alternative Dispute Resolution
1923-1926.
Questions of law or fact
Courts of Appeal reviewing district courts (a) The answer to the narrow question whether the
decisions as to whether parties have agreed arbitrators or the courts have the primary power to decide
to submit dispute to arbitration are to whether the parties agreed to arbitrate a dispute's merits
accept findings of fact that are not “clearly is fairly simple. Just as the arbitrability of the merits of
erroneous” but decide questions of law de a dispute depends upon whether the parties agreed to
novo, whether district court confirms or arbitrate that dispute, see, e.g., Mastrobuono v. Shearson
Lehman Hutton, Inc., 514 U.S. 52, 115 S.Ct. 1212, 131 3. The factbound question whether the Court of Appeals
L.Ed.2d 76, so the question “who has the primary power erred in its ultimate conclusion that the dispute was not
to decide arbitrability” turns upon whether the parties arbitrable is beyond the scope of the questions this Court
agreed to submit that question to arbitration. If so, then agreed to review. P. 1926.
the court should defer to the arbitrator's arbitrability
decision. If not, then the court should decide the question 19 F.3d 1503 (CA3 1994), affirmed.
independently. These two answers flow inexorably from
the fact that arbitration is simply a matter of contract BREYER, J., delivered the opinion for a unanimous
between the parties. Pp. 1923-1924. Court.
went unsatisfied, First Options sought arbitration by a disagreement present in this case. First, the Kaplans and
panel of the Philadelphia Stock Exchange. First Options disagree about whether the Kaplans are
personally liable for MKI's debt to First Options. That
*941 MKI, having signed the only workout document disagreement makes up the merits of the dispute. Second,
(out of four) that contained an arbitration clause, they disagree about whether they agreed to arbitrate the
accepted arbitration. The Kaplans, however, who had merits. That disagreement is about the arbitrability of
not personally signed that document, denied that their the dispute. Third, they disagree about who should have
disagreement with First Options was arbitrable and filed the primary power to decide the second matter. Does that
written objections to that effect with the arbitration panel. power belong primarily to the arbitrators (because the
The arbitrators decided that they had the power to rule court reviews their arbitrability decision deferentially) or
on the merits of the parties' dispute, and did so in favor to the court (because the court makes up its mind about
of First Options. The Kaplans then asked the Federal arbitrability independently)? We consider here only this
District Court to vacate the arbitration award, see 9 third question.
U.S.C. § 10 (1988 Ed., Supp. V), and First Options
requested its confirmation, see § 9. The court confirmed Although the question is a narrow one, it has a certain
the award. Nonetheless, on appeal the Court of Appeals practical importance. That is because a party who has not
for the Third Circuit agreed with the Kaplans that their agreed to arbitrate will normally have a right to a court's
dispute was not arbitrable; and it reversed the District decision about the merits of its dispute (say, as here, its
Court's confirmation of the award against them. 19 F.3d obligation under a contract). But, where the party has
1503 (1994). agreed to arbitrate, he or she, in effect, has relinquished
much of that right's practical value. The party still can
We granted certiorari to consider two questions regarding ask a court to review the arbitrator's decision, but the
the standards that the Court of Appeals used to review court will set that decision aside only in very unusual
the determination that the Kaplans' dispute with First circumstances. See, e.g., 9 U.S.C. § 10 (award procured
**1923 Options was arbitrable. 513 U.S. 1040, 115 S.Ct. by corruption, fraud, or undue means; arbitrator exceeded
634, 130 L.Ed.2d 539 (1994). First, the Court of Appeals his powers); Wilko v. Swan, 346 U.S. 427, 436-437, 74
said that courts “should independently decide whether an S.Ct. 182, 187-188, 98 L.Ed. 168 (1953) (parties bound
arbitration panel has jurisdiction over the merits of any by arbitrator's decision not in “manifest disregard” of the
particular dispute.” 19 F.3d, at 1509 (emphasis added). law), overruled on other grounds, Rodriguez de Quijas
First Options asked us to decide whether this is so (i.e., v. Shearson/American Express, Inc., 490 U.S. 477, 109
whether courts, in “reviewing the arbitrators' decision S.Ct. 1917, 104 L.Ed.2d 526 (1989). Hence, who-court or
on arbitrability,” should “apply a de novo standard arbitrator-has the primary authority to decide whether a
of review or the more deferential standard applied to party has agreed to arbitrate can make a critical difference
arbitrators' decisions on the merits”) when the objecting to a party resisting arbitration.
party “submitted the issue to the arbitrators for decision.”
Pet. for Cert. i. Second, the Court of Appeals stated that it [1] [2] *943 We believe the answer to the “who”
would review a district court's denial of a motion to vacate question (i.e., the standard-of-review question) is fairly
a commercial arbitration award (and the correlative grant simple. Just as the arbitrability of the merits of a dispute
of a motion to confirm it) “de novo.” 19 F.3d, at 1509. depends upon whether the parties agreed to arbitrate
First Options argues that the Court of Appeals instead that dispute, see, e.g., Mastrobuono v. Shearson Lehman
should have applied an “abuse of discretion” standard. Hutton, Inc., 514 U.S. 52, 57, 115 S.Ct. 1212, 1216,
See Robbins v. Day, 954 F.2d 679, 681-682 (CA11 1992). 131 L.Ed.2d 76 (1995); Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct.
3346, 3353, 87 L.Ed.2d 444 (1985), so the question “who
has the primary power to decide arbitrability” turns
*942 II
upon what the parties agreed about that matter. Did the
The first question-the standard of review applied to an parties agree to submit the arbitrability question itself to
arbitrator's decision about arbitrability-is a narrow one. arbitration? If so, then the court's standard for reviewing
To understand just how narrow, consider three types of the arbitrator's decision about that matter should not
differ from the standard courts apply when they review Supp.1993) (hereinafter Domke). The relevant state law
any other matter that parties have agreed to arbitrate. See here, for example, would require the court to see whether
AT & T Technologies, Inc. v. Communications Workers, the parties objectively revealed an intent to submit the
475 U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d arbitrability issue to arbitration. See, e.g., Estate of Jesmer
648 (1986) (parties may agree to arbitrate arbitrability); v. Rohlev, 241 Ill.App.3d 798, 803, 182 Ill.Dec. 282, 286,
Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, 609 N.E.2d 816, 820 (1993) (law of the State whose
583, n. 7, 80 S.Ct. 1347, 1353, n. 7, 4 L.Ed.2d 1409 (1960) law governs the workout agreement); Burkett v. Allstate
(same). That is to say, the court should give considerable Ins. Co., 368 Pa.Super. 600, 608, 534 A.2d 819, 823-824
leeway to the arbitrator, setting aside his or her decision (1987) (law of the State where the Kaplans objected to
only in certain narrow circumstances. See, e.g., **1924 9 arbitrability). See generally Mitsubishi Motors, supra, at
U.S.C. § 10. If, on the other hand, the parties did not agree 626, 105 S.Ct., at 3353.
to submit the arbitrability question itself to arbitration,
then the court should decide that question just as it would [5] This Court, however, has (as we just said) added
decide any other question that the parties did not submit an important qualification, applicable when courts decide
to arbitration, namely, independently. These two answers whether a party has agreed that arbitrators should decide
flow inexorably from the fact that arbitration is simply arbitrability: Courts should not assume that the parties
a matter of contract between the parties; it is a way to agreed to arbitrate arbitrability unless there is “clea[r]
resolve those disputes-but only those disputes-that the and unmistakabl[e]” evidence that they did so. AT & T
parties have agreed to submit to arbitration. See, e.g., Technologies, supra, at 649, 106 S.Ct., at 1418-1419; see
AT & T Technologies, supra, at 649, 106 S.Ct., at 1418; Warrior & Gulf, supra, at 583, n. 7, 80 S.Ct., at 1353, n. 7.
Mastrobuono, supra, at 57-58, and n. 9, 115 S.Ct., at In this manner the law treats silence or ambiguity about
1216-1217, and n. 9; Allied-Bruce Terminix Cos. v. Dobson, the question “who (primarily) should decide arbitrability”
513 U.S. 265, 271, 115 S.Ct. 834, 837-838, 130 L.Ed.2d 753 differently from the way it treats silence or ambiguity
(1995); Mitsubishi Motors Corp., supra, at 625-626, 105 about the question “whether a particular merits-related
S.Ct., at 3353. dispute is arbitrable because *945 it is within the scope
of a valid arbitration agreement”-for in respect to this
We agree with First Options, therefore, that a court must latter question the law reverses the presumption. See
defer to an arbitrator's arbitrability decision when the Mitsubishi Motors, supra, at 626, 105 S.Ct., at 3353 (“
parties submitted that matter to arbitration. Nevertheless, ‘[A]ny doubts concerning the scope of arbitrable issues
*944 that conclusion does not help First Options win this should be resolved in favor of arbitration’ ”) (quoting
case. That is because a fair and complete answer to the Moses H. Cone Memorial Hospital v. Mercury Constr.
standard-of-review question requires a word about how Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d
a court should decide whether the parties have agreed 765 (1983)); Warrior & Gulf, supra, at 582-583, 80 S.Ct.,
to submit the arbitrability issue to arbitration. And, that at 1352-1353.
word makes clear that the Kaplans did not agree to
arbitrate arbitrability here. But, this difference in treatment is understandable. The
latter question arises when the parties have a contract
[3] [4] When deciding whether the parties agreed to that provides for arbitration of some issues. In such
arbitrate a certain matter (including arbitrability), courts circumstances, the parties likely gave at least some
generally (though with a qualification we discuss below) thought to the scope of arbitration. And, given the law's
should apply ordinary state-law principles that govern permissive policies in respect to arbitration, see, e.g.,
the formation of contracts. See, e.g., Mastrobuono, supra, Mitsubishi Motors, supra, at 626, 105 S.Ct., at 3353, one
at 62-63, and n. 9, 115 S.Ct., at 1218-1219, and n. 9; can understand why the law would insist upon clarity
Volt Information Sciences, Inc. v. Board of Trustees of before concluding that the parties did not want to arbitrate
Leland Stanford Junior Univ., 489 U.S. 468, 475-476, 109 a related matter. See Domke § 12.02, p. 156 (issues will be
S.Ct. 1248, 1253-1254, 103 L.Ed.2d 488 (1989); Perry v. deemed arbitrable unless “it is clear that the arbitration
Thomas, 482 U.S. 483, 492-493, n. 9, 107 S.Ct. 2520, **1925 clause has not included” them). On the other
2526-2527, n. 9, 96 L.Ed.2d 426 (1987); G. Wilner, 1 hand, the former question-the “who (primarily) should
Domke on Commercial Arbitration § 4:04, p. 15 (rev. ed. decide arbitrability” question-is rather arcane. A party
often might not focus upon that question or upon the see 9 U.S.C. § 4); (2) that permitting parties to argue
significance of having arbitrators decide the scope of arbitrability to an arbitrator without being bound by
their own powers. Cf. Cox, Reflections Upon Labor the result would cause delay and waste in the resolution
Arbitration, 72 Harv.L.Rev. 1482, 1508-1509 (1959), cited of disputes; and (3) that the Arbitration Act therefore
in Warrior & Gulf, 363 U.S., at 583, n. 7, 80 S.Ct., at requires a presumption that the Kaplans agreed to be
1353, n. 7. And, given the principle that a party can be bound by the arbitrators' decision, not the contrary. The
forced to arbitrate only those issues it specifically has first of these points, however, while true, simply does
agreed to submit to arbitration, one can understand why not say anything about whether the Kaplans intended
courts might hesitate to interpret silence or ambiguity on to be bound by the arbitrators' decision. The second
the “who should decide arbitrability” point as giving the point, too, is inconclusive, *947 for factual circumstances
arbitrators that power, for doing so might too often force vary too greatly to permit a confident conclusion about
unwilling parties to arbitrate a matter they reasonably whether allowing the arbitrator to make an initial (but
would have thought a judge, not an arbitrator, would independently reviewable) arbitrability determination
decide. Ibid. See generally Dean Witter Reynolds Inc. v. would, in general, slow down the dispute resolution
Byrd, 470 U.S. 213, 219-220, 105 S.Ct. 1238, 1241-1242, process. And, the third point is legally erroneous, for
84 L.Ed.2d 158 (1985) (Arbitration Act's basic purpose there is no strong arbitration-related policy favoring First
is to “ensure judicial enforcement of privately made Options in respect to its particular argument here. After
agreements to arbitrate”). all, the basic objective in this area is not to resolve
disputes in the quickest manner possible, no matter
[6] *946 On the record before us, First Options what the parties' wishes, Dean Witter Reynolds, supra,
cannot show that the Kaplans clearly agreed to have at 219-220, 105 S.Ct., at 1241-1242, but to ensure that
the arbitrators decide (i.e., to arbitrate) the question of commercial arbitration agreements, like other contracts,
arbitrability. First Options relies on the Kaplans' filing “ ‘are enforced according to their terms,’ ” Mastrobuono,
with the arbitrators a written memorandum objecting 514 U.S., at 54, 115 S.Ct., at 1214 (quoting Volt
to the arbitrators' jurisdiction. But merely arguing the Information Sciences, 489 U.S., at 479, 109 S.Ct., at 1256),
arbitrability issue to an arbitrator does not indicate a and according to the intentions of the parties, Mitsubishi
clear willingness to arbitrate that issue, i.e., a willingness Motors, 473 U.S., at 626, 105 S.Ct., at 3353. See Allied-
to be effectively bound by the arbitrator's decision on Bruce, 513 U.S., at 271, 115 S.Ct., at 838. That policy
that point. To the contrary, insofar as the Kaplans favors the Kaplans, not First Options.
were forcefully objecting to the arbitrators deciding their
dispute with First Options, one naturally would think that [7] We conclude that, because the Kaplans did not clearly
they did not want the arbitrators to have binding authority agree to submit the question of arbitrability to arbitration,
over them. This conclusion draws added support from the Court of Appeals was correct in finding that **1926
(1) an obvious explanation for the Kaplans' presence the arbitrability of the Kaplan/First Options dispute was
before the arbitrators (i.e., that MKI, Mr. Kaplan's wholly subject to independent review by the courts.
owned firm, was arbitrating workout agreement matters);
and (2) Third Circuit law that suggested that the Kaplans
might argue arbitrability to the arbitrators without losing
III
their right to independent court review, Teamsters v.
Western Pennsylvania Motor Carriers Assn., 574 F.2d 783, [8] We turn next to the standard a court of appeals
786-788 (1978); see 19 F.3d, at 1512, n. 13. should apply when reviewing a district court decision that
refuses to vacate, see 9 U.S.C. § 10 (1988 Ed., Supp.
First Options makes several counterarguments: (1) that V), or confirms, see § 9, an arbitration award. Although
the Kaplans had other ways to get an independent the Third Circuit sometimes used the words “de novo ”
court decision on the question of arbitrability without to describe this standard, its opinion makes clear that
arguing the issue to the arbitrators (e.g., by trying to it simply believes (as do all Circuits but one) that there
enjoin the arbitration, or by refusing to participate in the is no special standard governing its review of a district
arbitration and then defending against a court petition court's decision in these circumstances. Rather, review
First Options would have brought to compel arbitration, of, for example, a district court decision confirming an
arbitration award on the ground that the parties agreed to a district court decision that upholds an agency.
Similarly, courts grant arbitrators considerable leeway
to submit their dispute to arbitration, should proceed like
when reviewing most arbitration decisions; but that fact
review of any other district court decision finding *948
does not mean that appellate courts should give extra
an agreement between parties, e.g., accepting findings
leeway to district courts that uphold arbitrators. First
of fact that are not “clearly erroneous” but deciding
Options argues that the Arbitration Act is special because
questions of law de novo. See 19 F.3d, at 1509.
the Act, in one *949 section, allows courts of appeals
to conduct interlocutory review of certain antiarbitration
One Court of Appeals, the Eleventh Circuit, has said
district court rulings (e.g., orders enjoining arbitrations),
something different. Because of federal policy favoring
but not those upholding arbitration (e.g., orders refusing
arbitration, that court says that it applies a specially
to enjoin arbitrations). 9 U.S.C. § 16 (1988 Ed., Supp. V).
lenient “abuse of discretion” standard (even as to
But that portion of the Act governs the timing of review;
questions of law) when reviewing district court decisions
it is therefore too weak a support for the distinct claim
that confirm (but not those that set aside) arbitration
that the court of appeals should use a different standard
awards. See, e.g., Robbins v. Day, 954 F.2d, at 681-682.
when reviewing certain district court decisions. The Act
First Options asks us to hold that the Eleventh Circuit's
says nothing about standards of review.
view is correct.
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Synopsis
Background: After mediated settlement in which parties [3] Alternative Dispute Resolution
released claims relating to oil and gas royalties and Validity
mineral underdevelopment but specifically excluded from Arbitration agreements that comport with
the release claims for environmental liability and personal traditional principles of contract law are
injury and provided for arbitration of such unreleased upheld by the court.
claims, plaintiffs brought action asserting environmental
and personal injury claims. After an evidentiary hearing, 6 Cases that cite this headnote
the 206th District Court, Hidalgo County, Rose Guerra
Reyna, J., 2005 WL 6036449, denied defendants' motion [4] Alternative Dispute Resolution
to compel arbitration. Defendants brought interlocutory Validity of assent
appeal. The Corpus Christi–Edinburg Court of Appeals,
While an arbitration agreement procured by
2005 WL 3435061, affirmed. Review was granted.
fraud is unenforceable, the party opposing
arbitration must show that the fraud relates
to the arbitration provision specifically, not to
[Holding:] The Supreme Court, Don R. Willett, J., held the broader contract in which it appears.
that waiver-of-reliance provision precluded fraudulent
inducement claim, with respect to arbitration clause. 9 Cases that cite this headnote
30 Cases that cite this headnote 5 Cases that cite this headnote
47 Cases that cite this headnote 11 Cases that cite this headnote
negate the fraudulent-inducement claim as a matter of Schlumberger and the Swansons agreed to a complete
law? We review this legal question de novo. 9 release of claims to settle a dispute involving an
underwater diamond-mining project off the South African
coast. 16 The Swansons sold their interests in the venture
2. Enforcement of the Parties' Arbitration to Schlumberger for roughly $1 million, 17 and *57 the
Agreement Under the Texas General Arbitration Act parties signed a settlement agreement, which included this
waiver-of-reliance provision:
[2] [3] [4] [5] We first address application of the
TAA, which the parties' settlement *56 agreement
specifically invoked. Federal and Texas law strongly favor [E]ach of us [the Swansons] expressly warrants and
represents and does hereby state ... and represent ... that
arbitration, 10 and we uphold arbitration agreements that
no promise or agreement which is not herein expressed
comport with traditional principles of contract law. 11 has been made to him or her in executing this release,
While an arbitration agreement procured by fraud is and that none of us is relying upon any statement or
unenforceable, 12 the party opposing arbitration must representation of any agent of the parties being released
show that the fraud relates to the arbitration provision hereby. Each of us is relying on his or her own judgment
specifically, not to the broader contract in which it and each has been represented by Hubert Johnson as
13 legal counsel in this matter. The aforesaid legal counsel
appears. If a trial court finds that the claim falls within
the scope of a valid arbitration agreement, the “court has has read and explained to each of us the entire contents
no discretion but to compel arbitration and stay its own of this Release in Full, as well as the legal consequences
says McAllen, because the litigation that led to the of-reliance and release-of-claims provisions, the Court
1999 settlement concerned royalty underpayments and will generally uphold the contract. An all-embracing
mineral underdevelopment, issues having nothing to disclaimer of any and all representations, as here, shows
do with the environmental and personal-injury torts the parties' clear intent. A “once and for all” settlement
that sparked the current litigation and were excepted may constitute an additional factor urging rejection of
from the settlement agreement. That is, while the fraud-based claims, but a freely negotiated agreement to
misrepresentation in Schlumberger “pertained to the very settle present disputes and arbitrate future ones should
matter negotiated, settled, and released”—a factor that also be enforceable. Moreover, contrary to McAllen's
McAllen terms “the primary basis” for the Court's assertions, the parties' discussions here did in fact address
holding—the misrepresentation here did not concern environmental matters. Not only were such matters “very
known disputed matters (which were settled and released) important” to McAllen during settlement negotiations,
but potential future disputes (which were set aside as he testified, the parties also negotiated the surface
and reserved). And the disclaimer applies solely to agreement, which directly touches on the subject of Forest
representations about the former, not the latter. Under Oil's alleged fraud: environmental contamination on the
this banner, McAllen makes three subsidiary arguments. McAllen Ranch. The surface agreement, incorporated
into the settlement agreement, required Forest Oil to
First, McAllen stresses that the parties' settlement in remove hazardous material and remediate past and
Schlumberger definitively ended their valuation dispute. future contamination. Therefore, the parties expressly
McAllen points out that the settled dispute was the negotiated the treatment of surface issues; environmental
only dispute, meaning that the agreed-to disclaimer issues were an important aspect of the contract. Although
was sufficiently specific to bar a *58 later fraudulent- the settlement agreement does not preclude all future
inducement suit alleging one side misled the other about environmental disputes, it does require arbitration of
valuation. 24 By contrast, in this case, ending the royalty them.
underpayment and mineral underdevelopment dispute
was not the sole purpose of the settlement agreement, Second, McAllen contends the settlement language itself
McAllen argues, making the disclaimer insufficiently compels a different result from Schlumberger. McAllen
specific to be applied to every representation made by maintains that the disclaimer he signed is limited by its
Forest Oil. terms to representations about the matters released and
settled, not to misrepresentations about matters reserved
McAllen identifies a valid factual distinction, but and excluded from the settlement. Here, the waiver-of-
we fail to see how the disclaimer's preclusive effect reliance provision states: “Each of the [plaintiffs] expressly
should be different where, as here, the parties agreed warrants and represents and does hereby state and
to resolve litigated claims and arbitrate future ones. represent that no promise or agreement which is not
Although we noted in Schlumberger that the company's herein expressed has been made to him, her, or it in
representations about the project's value and feasibility executing the releases contained in this Agreement....” 27
led to “the very dispute that the release was supposed to McAllen claims the isolated *59 phrase “in executing
resolve,” 25 this language is more accurately interpreted the releases” limits the waiver's application only to
as emphatic language, not limiting language. Our released claims because the phrase refers to “releases”
analysis in Schlumberger rested on the paramount in the plural. Because an arbitration provision is not a
principle that Texas courts should uphold contracts release, he reasons, the parties did not waive reliance
negotiated at arm's length by “knowledgeable and with respect to misrepresentations concerning the matters
sophisticated business players” represented by “highly reserved for arbitration. This argument discounts the
competent and able legal counsel,” a principle that second half of the same sentence, which makes clear
applies with equal force to contracts that reserve the parties intended an exhaustive waiver unconfined to
claims specifically released: “none of them is relying upon
future claims as to contracts that settle all claims. 26
any statement or any representation of any agent of the
Essentially, Schlumberger holds that when knowledgeable
parties expressly discuss material issues during contract parties being released hereby.” 28 Contrary to McAllen's
negotiations but nevertheless elect to include waiver- interpretation, a natural and contextual reading, given
the repeated and all-encompassing “any” modifier, is not
nearly so restrictive. It rather plainly means the parties, connection with the Leases” must be arbitrated. McAllen
“in executing the releases,” were not led astray by any knew environmental disputes might arise and agreed to
representations whatsoever, even representations about arbitrate these disputes.
nonreleased claims since those, too, can induce someone
to release other claims. The disclaimer's words do not say It is true that Schlumberger noted a disclaimer of reliance
what McAllen construes them to say, that there was “no “will not always bar a fraudulent inducement claim,” 30
promise or agreement concerning the released claims which but this statement merely acknowledges that facts may
is not herein expressed”; those four italicized words do not exist where the disclaimer lacks “the requisite clear and
exist. Waiving reliance on statements made in executing unequivocal expression of intent necessary to disclaim
the release provisions encompasses both claims released
reliance” on the specific representations at issue. 31 Courts
and reserved because even statements about the latter can
must always examine the contract itself and the totality
nudge assent to settle the former. Notably, in this case,
of the surrounding circumstances when determining if
the release itself (in a section titled “Releases” no less)
a waiver-of-reliance provision is binding. We did so in
specifically requires arbitration, making clear that at the
Schlumberger, but since courts of appeals seem to disagree
time of the agreement, the parties disclaimed reliance with
respect to all decisions being made during negotiations, over which Schlumberger facts were most relevant, 32 we
including the decision to resolve future disputes regarding now clarify those that guided our reasoning: (1) the terms
environmental and personal-injury claims via arbitration. of the contract were negotiated, rather than boilerplate,
It is difficult to argue that Forest Oil's alleged fraud in and during negotiations the parties specifically discussed
obtaining arbitration bears no relation to the release when the issue which has become the topic of the subsequent
the arbitration requirement appears in the release. It is dispute; (2) the complaining party was represented by
similarly difficult to square McAllen's argument with this counsel; (3) the parties dealt with each other in an arm's
explicit language from the settlement agreement, which length transaction; (4) the parties were knowledgeable in
incorporated the surface agreement: “disputes relating to business matters; and (5) the release language was clear.
These factors were each present in Schlumberger, and they
this Agreement ... will be resolved by arbitration.” 29
are each present in this case.
advised by the most knowledgeable legal counsel, is nonarbitrable issues. 40 Because the trial court is better
grievously impaired. positioned to make that determination in this instance, we
remand the severance issue to that court.
We conclude the arbitration requirement is integral to
the overall release and the settlement agreement's waiver- However, as noted above, McAllen and Forest Oil agreed
of-reliance language applies by its terms to the parties' to arbitrate disputes over what the agreement covers.
commitment to arbitrate. None of McAllen's arguments In terms of timing, the arbitrators should decide scope
materially distinguishes our holding in Schlumberger: before the trial court decides severance. It is impractical
“a release that clearly expresses the parties' intent (and probably impossible) for the trial court to decide
to waive fraudulent inducement claims, or one that the severability of the nonsignatories' claims before the
disclaims reliance on representations about specific arbitration panel has decided the scope of the signatories'
matters in dispute, can preclude a claim of fraudulent claims. Accordingly, the trial court, in order to make
inducement.” 34 Today's holding should not be construed an informed severance decision, should defer its decision
to mean that a mere disclaimer standing alone will forgive until the arbitrators decide which issues are arbitrable.
intentional lies regardless of context. We decline to adopt
a per se rule that a disclaimer automatically precludes a
fraudulent-inducement claim, but we hold today, as in
5. Conclusion
Schlumberger, that “on this record,” the disclaimer of
reliance refutes the required element of reliance. McAllen may be correct that “[t]he facts of this case
are not the facts of Schlumberger ”—every case involves
unique facts—but the decisive ones are assuredly close
4. Scope of the Arbitration Clause enough that Schlumberger binds this relevantly similar
case. The unequivocal disclaimer of reliance in the parties'
[9] [10] Having determined that McAllen's fraudulent- bargained-for settlement agreement conclusively negates
inducement claim cannot defeat the arbitration provision as a matter of law the element of reliance needed to
in the 1999 settlement agreement, we now turn to whether support McAllen's fraudulent-inducement claim. Because
McAllen's claims fall within the scope of that arbitration Forest Oil has demonstrated that a valid arbitration
35
provision. Generally, after finding an agreement valid, agreement exists, an agreement that empowers the
a court considers the agreement's terms to determine arbitrators to determine what issues are arbitrable, we
reverse the court of appeals' judgment and remand this
which issues are arbitrable. 36 This arbitration agreement,
case to the trial court to compel arbitration in accordance
however, removes the “scope determination” from the
with our opinion.
court and places it with the arbitration panel. 37 This
provision, shrinking the court's traditional role and
expanding the arbitrators', is not challenged on legal
Chief Justice JEFFERSON filed a dissenting opinion, in
or public policy grounds. 38 Accordingly, we have no
which Justice MEDINA joined.
discretion but to direct the trial court to compel
arbitration and stay McAllen's litigation. 39
Chief Justice JEFFERSON, joined by Justice MEDINA,
The remaining question is what should happen to the dissenting.
claims brought by the nonsignatory plaintiffs who are not According to the Court, the considerations most relevant
parties to the arbitration requirement (or to this appeal). to our analysis in Schlumberger Technology Corp. v.
Forest Oil concedes the trial court cannot order the Swanson, 959 S.W.2d 171 (Tex.1997), were:
nonsignatory plaintiffs to arbitration. Section 171.025(a)
(1) the terms of the contract were
of the Civil Practice and Remedies Code provides that
negotiated, rather than boilerplate,
“[t]he court shall stay a proceeding that *62 involves an
and during negotiations the parties
issue subject to arbitration if an order for arbitration or an
specifically discussed the issue
application for that order is made under this subchapter.”
which has become the topic of
Section 171.025(b) expressly allows for the severance of
the subsequent dispute; (2) the The Court reads Schlumberger as settling these competing
complaining party was represented concerns by precluding a fraudulent inducement claim
by counsel; (3) the parties dealt where there is a disclaimer of reliance and the factors listed
with each other in an arm'slength above are present.
transaction; (4) the parties were
knowledgeable in business matters; But Schlumberger is not so broad. There, we held that,
and (5) the release language was where the four other factors listed by the Court are
clear. present, “a release that clearly expresses the parties'
intent to waive fraudulent inducement claims, or one
268 S.W.3d 60. My disagreement with the Court centers that disclaims reliance on representations about specific
on the first point. Under the Court's analysis, a party may matters in dispute, can preclude a claim of fraudulent
intentionally misrepresent facts essential to the bargain inducement.” Id. at 181. The release in Schlumberger did
to induce the other to sign, as long as the agreement not contain an express waiver of fraudulent inducement
says reliance is waived. This is not sound policy, and claims, but did disclaim reliance on representations
Schlumberger does not support this result. I would hold about specific matters in dispute. Id. at 180. The release
that McAllen's fraudulent inducement claim survives the itself noted that “ ‘there [wa]s considerable doubt,
disclaimer of reliance at issue here. Because the Court does disagreement, dispute and controversy with reference to
not, I respectfully dissent. the validity of the [claim being settled],’ ” and the “sole
purpose of the release was to end [that] dispute.” Id.
The Schlumberger Court therefore concluded “that the
I parties contemplated, by the inclusion of [the disclaimer
of reliance], that the Swansons would not rely on any
representations of Schlumberger about the commercial
Schlumberger feasibility and value of this project, which, after all, was
the very dispute that the release was supposed to resolve.”
In Schlumberger, we noted that we had previously held “as
Id.
a matter of policy, that a merger clause can be avoided
based on fraud in the inducement and that the parol
That the Schlumberger Court limited its holding to a
evidence rule does not bar proof of such fraud,” and that
release “that clearly expresses the parties' intent to waive
“[i]n doing so, we brought *63 the law on the subject
fraudulent inducement claims, or one that disclaims
‘into harmony with the great weight of authority, with
reliance on representations about specific matters in
the rule of the Restatement of the Law of Contracts, and
dispute” is clear from the rest of the opinion. Id. at
with the views of eminent textwriters.’ ” Schlumberger, 959
181. Indeed, we “emphasize [d]” in Schlumberger “that a
S.W.2d at 179 (quoting Dallas Farm Mach. Co. v. Reaves,
disclaimer of reliance or merger clause will not always bar
158 Tex. 1, 307 S.W.2d 233, 239 (1957)). This remains
a fraudulent inducement claim.” Id. We cited Prudential
the general rule in Texas. See Prudential Ins. Co. of Am.
Insurance Co. of America v. Jefferson Associates, in which
v. Jefferson Assocs., 896 S.W.2d 156, 162 (Tex.1995); see
we said “[a] buyer is not bound by an agreement to
also Weitzel v. Barnes, 691 S.W.2d 598, 600 (Tex.1985)
purchase something ‘as is' that he is induced to make
(admitting parol evidence to establish misrepresentation
because of a fraudulent representation or concealment of
in DTPA claim); Restatement (Second) of Contracts, §
information by the seller.” Prudential, 896 S.W.2d 156,
214 cmt. c (“What appears to be a complete and binding
162 (Tex.1995). This would be a strange authority to cite
integrated agreement may be a forgery, a joke, a sham, or
if Schlumberger were as sweeping as the Court suggests:
an agreement without consideration, or it may be voidable
it is difficult to imagine a party making fraudulent
for fraud, duress, mistake, or the like, or it may be illegal.
representations on a subject that has not been discussed.
Such invalidating causes need not and commonly do not
And while the Court states that “this statement merely
appear on the face of the writing. They are not affected even
acknowledges that facts may exist where the disclaimer
by a ‘merger’ clause.”) (emphasis added). We then noted
lacks ‘the requisite clear and unequivocal expression
that “[j]uxtaposed to this authority, we have a competing
of intent necessary to disclaim reliance’ on the specific
concern—the ability of parties to fully and finally resolve
representations at issue,” it does so without addressing
disputes between them.” Schlumberger, 959 S.W.2d at 179.
Prudential, instead quoting an earlier passage *64 from courts are to assume that the parties intended every
Schlumberger. 268 S.W.3d at 55 (quoting Schlumberger, contractual provision to have some meaning,” the Court
959 S.W.2d at 179). was able to “presume” that the disclaimer of reliance
applied specifically to representations about that sole
In sum, in Schlumberger we balanced parties' need to settle dispute. Schlumberger, 959 S.W.2d at 180. In the instant
disputes against our strong aversion to fraud. The result case, in contrast, the settlement agreement covered a
was a narrow exception to the rule that integration clauses number of topics, chiefly royalty underpayment and
do not bar fraudulent inducement claims. By expanding mineral underdevelopment. Thus, unlike Schlumberger,
Schlumberger, the Court's holding will force courts to we cannot presume that the disclaimer of reliance referred
honor contracts indisputably induced by fraud on the specifically to environmental issues, and the general rule
basis of blanket reliance waivers, like the one at issue here. that fraudulent inducement claims are not barred by
I would not. integration clauses should apply.
II III
As discussed above, under Schlumberger, to bar a Forest Oil argues that McAllen could not have justifiably
fraudulent inducement claim, a disclaimer of reliance relied on Forest Oil's representation that there were no
must either expressly waive the claim or disclaim reliance existing issues with the surface because that representation
on representations about the specific disputed matter, was contradicted by the agreement's express terms.
Schlumberger, 959 S.W.2d at 181; otherwise, the general Because the surface agreement contains no contrary
rule that integration clauses do not bar fraudulent statement regarding surface conditions, it is not necessary
inducement claims applies. The disclaimer in this case does to examine this claim in detail.
neither. The relevant portion of the disclaimer reads:
Forest Oil also argues that McAllen could not
Each of the Plaintiffs and justifiably rely on the representation of his litigation
Intervenors expressly warrants and adversary during settlement negotiations. Forest Oil cites
represents and does hereby state McCamish, Martin, Brown & Loeffler v. F.E. Appling
and represent that no promise Interests, for the proposition that “a third party's
or agreement which is not herein reliance on an attorney's representation is not justified
expressed has been made to him, when the representation takes place in an adversarial
her, or it in executing the releases context.” McCamish, 991 S.W.2d 787, 794 (Tex.1999).
contained in this Agreement, and This statement, however, refers not to whether attorneys'
that none of them is relying upon *65 statements can provide the grounds for a fraudulent
any statement or any representation inducement claim, but to individual attorneys' liability
of any agent of the parties being for negligent misrepresentation under the Restatement
released hereby. (Second) of Torts section 552. Id. at 795 (concluding “that
there is no reason to exempt lawyers from the operation of
This disclaimer makes no explicit reference to fraudulent
section 552”). Regardless, there is evidence that McAllen
inducement. The question, then, is whether it disclaims
relied not only on the statements of “an unidentified
reliance on representations about a specific disputed
lawyer for one of the four defendants,” 268 S.W.3d at 55,
matter in the agreement. While the disclaimers in this case
but on representations made by the parties themselves:
and Schlumberger may appear to be “virtually identical,”
268 S.W.3d at 60, the factual differences between this Q. (By Mr. Mancias) Yes, sir. Were you told in no
case and Schlumberger are critical. In Schlumberger, uncertain terms by the oil companies, including Forest
there was essentially one dispute—specifically described Oil Company, that there were no contaminants or
in the agreement—being settled, and therefore, “[b]ecause pollutants on the surface of your property?
A. (By Mr. McAllen) Yes. And all the Forest attorneys (Emphasis added.) McAllen's reliance on these statements
were there. I believe Forest Doran himself was there. was not, therefore, unjustifiable as a matter of law.
Q. Who is Forest Doran?
Q. Can you tell the Judge whether or not Mr. Doran was Conclusion
present when those representations you just testified
about were made to you? Today the Court replaces Schlumberger's requirement that
a release must “clearly express[ ] the parties' intent to waive
A. That, I can't recall. fraudulent inducement claims, or ... disclaim[ ] reliance
on representations about specific matters in dispute” in
Q. All right, sir. But the attorneys were present? order to preclude a fraudulent inducement claim, 959
S.W.2d at 181, with the requirement that the parties
A. The attorneys—his attorneys were present.
merely “specifically discussed the issue which has become
*** the topic of the subsequent dispute” during negotiations,
268 S.W.3d 60. Courts, including this one, have long
A. But during the process, the owners for Forest and battled the specter of fraud in contracts; I fear that the
Conoco and everybody else who was involved in the Court's opinion may one day be a weapon in the hands of
lawsuit assured me that there was no issues [sic] having to those who profit from it. I respectfully dissent.
do with the surface, and if I wanted to get this settlement
agreement behind us, I had to do that. But they were
very convincing. All Citations
268 S.W.3d 51, 168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct.
J. 1309
Footnotes
1 This appeal does not involve every party to the 1999 settlement agreement at issue. The defendants in the litigation
that resulted in that settlement were Forest Oil Corporation, Shell Oil Company, Conoco Incorporated, and Fina Oil &
Chemical Company, along with divisions of these entities. The plaintiffs included various business entities, individuals,
and individual trusts. These parties settled their dispute in June 1999.
Five years later, James McAllen and several others filed suit against Forest Oil, its employee (Daniel B. Worden), and
ConocoPhillips Corporation. ConocoPhillips was nonsuited, so only Forest Oil and Worden are petitioners here. They
are referred to collectively as “Forest Oil.” Four plaintiffs to the pending litigation—James McAllen, El Rucio Land &
Cattle Company, San Juanito Land Partnership, and McAllen Trust Partnership—are respondents to this appeal and
referred to collectively as “McAllen,” unless otherwise noted. These four plaintiffs admit they are bound by the 1999
settlement agreement either as signatories or successors in interest thereto. Several other plaintiffs are not parties
to this appeal, and Forest Oil concedes the trial court lacked authority to require these other plaintiffs to arbitrate the
current dispute.
2 The release language reads:
[The plaintiffs] generally and unconditionally RELEASE, DISCHARGE, and ACQUIT [the defendants] of and from
any and all claims and causes of action of any type or character known or unknown, which they presently have or
could assert, including but not limited to all claims and causes of action (i) in any manner relating to, arising out
of or connected with the McAllen Ranch Leases, or any of them, (ii) in any manner relating to, arising out of or
connected with the Lands covered by the McAllen Ranch Leases, or any of them, (iii) in any manner relating to,
arising out of or connected with any implied covenants pertaining to the McAllen Ranch Leases, or any of them,
including (without limitation) implied covenants or obligations with respect to drainage, development, unitization,
marketing or the administration of the McAllen Ranch Leases ... (vi) all claims and causes of action that the [plaintiffs]
asserted or could have asserted in the Lawsuit including (without limitation) matters arising or sounding in contract,
in tort (including intentional torts, fraud, conspiracy, and negligence), in trespass, for forfeiture, or under any other
theory or doctrine, including any claim for attorneys fees, costs, and sanctions; and the [plaintiffs] hereby declare
that all such claims and causes of action have been fully compromised, satisfied, paid and discharged; except that
the [plaintiffs] reserve and except from this release only (a) their rights to receive the consideration (monetary and
otherwise) provided in this Agreement, (b) their rights to accrued but unpaid royalties ..., (c) any rights and claims
arising under the McAllen Ranch Leases ... after the Effective Date of this Agreement, (d) any rights or claims they
may have, if any, for environmental liability, surface damages, personal injury, or wrongful death occurring at any
time and relating to the McAllen Ranch Leases, (e) the funds held [pursuant to this Agreement], and (f) any intentional
act done in contravention of this Agreement or the McAllen Ranch Leases between the date of execution hereof
and the Effective Date. Any disputes over any of the above items excepted and reserved from this release shall be
resolved in arbitration pursuant to [this Agreement].
3 The surface agreement required that oil companies remove nonnatural materials from the sites of abandoned wells and
“not store or dispose of any hazardous materials on the surface of the Leases.” In addition, the surface agreement states
plainly that surface issues shall be addressed by arbitration: “Surface issues which arise in connection with the Leases
shall be subject to that certain Arbitration Agreement set forth and described in the Settlement Agreement. The specific
issues addressed below shall become part of the Settlement Agreement and shall be enforceable in accordance with
the terms of such Agreement.”
4 The waiver-of-reliance provision reads:
[1] Each party acknowledges and confirms that each has had the opportunity to consult with counsel and has been
fully advised by counsel prior to the execution of this Agreement.
[2] Each of the Plaintiffs and Intervenors expressly warrants and represents and does hereby state and represent that
no promise or agreement which is not herein expressed has been made to him, her, or it in executing the releases
contained in this Agreement, and that none of them is relying upon any statement or any representation of any agent
of the parties being released hereby. Each of the Plaintiffs and Intervenors is relying on his, her, or its own judgment
and each has been represented by his, her, or its own legal counsel in this matter. The legal counsel for Plaintiffs
have read and explained to each of the Plaintiffs the entire contents of the releases contained in this Agreement as
well as the legal consequences of the releases....
[3] Defendants expressly represent and warrant and do hereby state and represent that no promise or agreement
which is not herein expressed has been made to them in executing the releases contained in this Agreement, and that
they are not relying upon any statement or representation of any of the parties being released hereby. Defendants,
and each of them are relying upon its own judgment and each has been represented by its own legal counsel in
this matter. The legal counsel for Defendants have read and explained to them the entire contents of the releases
contained in this Agreement as well as the legal consequences of the releases.
5 The plaintiffs filed a joint petition asserting negligence, gross negligence, trespass, nuisance, strict liability, negligence
per se, misrepresentation, fraud, fraudulent concealment, and intentional battery. The facts giving rise to these causes
of action took place on two properties: the Santillana Ranch and the McAllen Ranch. We will refer to the claims arising
on the McAllen Ranch as the “McAllen Ranch claims” and claims arising on the Santillana Ranch as the “Santillana
Ranch claims.”
Forest Oil produces oil on the McAllen Ranch pursuant to the McAllen Ranch Leases; this relationship was the basis
of the original 1999 litigation that produced the now-disputed settlement agreement. The Santillana Ranch is owned
by John R. Willis Management Partnership; this entity is one of the plaintiffs to the underlying suit that are not parties
to this appeal. See supra note 1.
The Third Amended Petition claims Forest Oil buried radioactive material on the McAllen Ranch, resulting in
groundwater and soil contamination. The petition does not assert personal injuries related to the McAllen Ranch.
McAllen tried to establish a rhinoceros sanctuary on the Santillana Ranch and asked Forest Oil, which has no lease
on that ranch, to donate oilfield pipe to be used as pen enclosures. Forest Oil took pipe from the McAllen Ranch to
the Santillana Ranch, where McAllen and his employees worked on the rhinoceros pens. McAllen claims this pipe was
radioactive and has produced both environmental and personal injuries.
Forest Oil claims that because the pipe giving rise to the Santillana Ranch claims came from the McAllen Ranch, the
Santillana Ranch claims also fall within the settlement agreement's arbitration clause, which requires arbitration of
claims “arising out of or relating to the McAllen Ranch Leases.” We do not reach this issue.
6 268 S.W.3d 63.
7 Id. at 64.
8 We have jurisdiction to hear an appeal from an interlocutory order denying arbitration if the court of appeals' decision
conflicts with our precedent. See TEX. GOV'T CODE §§ 22.001(a)(2), 22.225(c); TEX. CIV. PRAC. & REM.CODE §
171.098; Certain Underwriters at Lloyd's of London v. Celebrity, Inc., 988 S.W.2d 731, 733 (Tex.1998). As explained
below, the court of appeals' decision conflicts with Schlumberger Technology Corp. v. Swanson, 959 S.W.2d 171
(Tex.1997).
9 When an appeal from a denial of a motion to compel arbitration turns on a legal determination—here, the preclusive
effect of the contract's disclaimer—we apply a de novo standard. J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227
(Tex.2003) (“The trial court's determination of the arbitration agreement's validity is a legal question subject to de novo
review.”); see also In re D. Wilson Constr. Co., 196 S.W.3d 774, 781 (Tex.2006).
10 Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898 (Tex.1995); see also In re FirstMerit Bank, N.A., 52 S.W.3d 749,
753 (Tex.2001). Whether a case is governed by the Federal Arbitration Act (FAA) or the TAA, many of the underlying
substantive principles are the same; where appropriate, this opinion relies interchangeably on cases that discuss the
FAA and TAA.
11 In re D. Wilson Constr. Co., 196 S.W.3d at 781; Webster, 128 S.W.3d at 227.
12 TEX. CIV. PRAC. & REM.CODE § 171.001(b) (“A party may revoke the agreement only on a ground that exists at law
or in equity for the revocation of a contract.”); see also Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct.
1652, 134 L.Ed.2d 902 (1996); In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 738 (Tex.2005).
13 See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). If a
fraudulent-inducement claim attacks the broader contract, then the arbitrator, not a court, considers the matter. See In re
FirstMerit Bank, N.A., 52 S.W.3d at 758. In this case, we assume that the alleged fraud went to the arbitration agreement
itself since Forest Oil does not argue otherwise. See TEX.R.APP. P. 53.2(f); Ramos v. Richardson, 228 S.W.3d 671,
673 (Tex.2007).
14 In re FirstMerit Bank, N.A., 52 S.W.3d at 753–54; see also TEX. CIV. PRAC. & REM.CODE § 171.021.
15 959 S.W.2d 171, 179 (Tex.1997).
16 Id. at 174.
17 Id.
18 Id. at 180. The disclaimer in today's case is virtually the same. See supra note 4.
19 Id. at 174.
20 Id.
21 Id. at 178.
22 Id. at 181.
23 Id. at 179–81.
24 Id. at 180 (“The sole purpose of the release was to end the dispute about the value of this commercial project between
Schlumberger and the Swansons once and for all.”).
25 Id. The reasoning of the case applies broadly to contracts generally, and we see no reason to accept McAllen's restrictive
interpretation.
26 Id.
27 See supra note 4.
28 Id.
29 See also supra note 3 (“Surface issues which arise in connection with the Leases shall be subject to that certain Arbitration
Agreement set forth and described in the Settlement Agreement.”).
30 959 S.W.2d at 181.
31 Id. at 179.
32 See, e.g., Warehouse Assocs. Corporate Ctr. II, Inc. v. Celotex Corp., 192 S.W.3d 225, 230–34 (Tex.App.–Houston [14th
Dist.] 2006, pet. filed) (limiting Schlumberger to cases in which the parties resolve a long-running dispute that is also
the topic of the alleged fraudulent representation); Coastal Bank SSB v. Chase Bank of Texas, N.A., 135 S.W.3d 840,
844 (Tex.App.–Houston [1st Dist.] 2004, no pet.) (considering the broad language of the waiver-of-reliance provision to
be the controlling factor); IKON Office Solutions, Inc. v. Eifert, 125 S.W.3d 113, 124–28 (Tex.App.–Houston [14th Dist.]
2003, pet. denied) (applying Schlumberger in a factual situation that did not involve a settlement agreement or a contract
that terminated the parties' relationship); John v. Marshall Health Servs., Inc., 91 S.W.3d 446, 450 (Tex.App.–Texarkana
2002, pet. denied) (refusing to apply Schlumberger because “[h]ere, the contract was the beginning, not the end, of the
relationship between” the parties).
33 See Transp. Ins. Co. v. Faircloth, 898 S.W.2d 269, 280 (Tex.1995) (“Settlements are favored because they avoid the
uncertainties regarding the outcome of litigation, and the often exorbitant amounts of time and money to prosecute or
defend claims at trial.”); Bocanegra v. Aetna Life Ins. Co., 605 S.W.2d 848, 855 (Tex.1980) (Campbell, J., concurring)
(“Settlement agreements are highly favored in the law because they are a means of amicably resolving doubts and
preventing lawsuits.”).
34 959 S.W.2d at 181.
35 The TAA allows personal-injury claims to be arbitrated when each party, on advice of counsel, has agreed to do so in a
writing signed by the parties and their attorneys. TEX. CIV. PRAC. & REM.CODE § 171.002(c). All parties to this appeal
—or their predecessors in interest—and their attorneys signed the settlement agreement, which contains the arbitration
agreement, so there is no statutory prohibition to arbitrating these claims.
36 In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex.2001).
37 The arbitration provision reads: “All disputes arising out of or relating to the McAllen Ranch Leases, including, without in
any way limiting the foregoing, disputes relating to this Agreement or disputes over the scope of this arbitration clause, will
be resolved by arbitration in Houston, Texas, using three neutral arbitrators.” While this provision clearly encompasses
the McAllen Ranch claims, it is not clear that it includes the Santillana Ranch claims.
38 In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 129–30 (Tex.2004) (“As a rule, parties have the right to contract as
they see fit as long as their agreement does not violate the law or public policy.”); see also Fairfield Ins. Co. v. Stephens
Martin Paving, LP, 246 S.W.3d 653, 663–64 (Tex.2008).
39 TEX. CIV. PRAC. & REM.CODE § 171.021; In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex.1999).
40 TEX. CIV. PRAC. & REM.CODE § 171.025(b) (“The stay applies only to the issue subject to arbitration if that issue is
severable from the remainder of the proceeding.”).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[14] Damages
[10] Alternative Dispute Resolution Mode of estimating damages in general
Employment disputes
Damages for tortious interference with
Sales agent's claim against marketing contract are not limited to damages for breach
company's president, for allegedly of contract alone, although that is probably
fraudulently inducing agent into funneling most common measure of damages.
business through another entity to avoid
payment of commissions to agent, was 3 Cases that cite this headnote
sufficiently independent of any breach of
agency agreement with marketing company
[15] Alternative Dispute Resolution
that it was not subject to arbitration under
Employment disputes
agreement.
Sales agent's claim that marketing company's
president tortiously interfered with his
Cases that cite this headnote Trial court could not stay arbitration where
only motions before court were motion to stay
litigation and compel arbitration, and motion
[17] Alternative Dispute Resolution to quash discovery.
Disputes and Matters Arbitrable Under
Agreement 2 Cases that cite this headnote
If claim against nonparty to contract that
contains arbitration clause is so interwoven [22] Alternative Dispute Resolution
with contract that it could not stand alone, Stay of Arbitration
then arbitration is appropriate.
Although trial court had discretion to decide
4 Cases that cite this headnote in which order breach of contract issues and
alter ego issues were to be resolved, staying
arbitration until it determined all matters in
[18] Alternative Dispute Resolution controversy, when breach of contract claim
Disputes and Matters Arbitrable Under was subject to arbitration under sales agent's
Agreement agreement with marketing company, exceeded
Where basis of claim against individual its authority.
is solely that individual is alter ego of
corporation which is party to contract which 1 Cases that cite this headnote
contains arbitration clause, that claim is so
connected to contract claim that arbitration [23] Appearance
clause controls. Motions in general
parties shall bear the cost of such a civil action. TEX.REV.CIV.STAT.ANN. art. 238–2
arbitration equally. (Vernon 1973).
Cook first filed suit in federal court alleging that Fridl is clearly appealing the trial court's ruling on the
he was owed commissions under the contract. Cook application to compel arbitration, as well as the order
made a demand for arbitration under the contract in staying all arbitration proceedings. Thus, by virtue of the
June 1994, which he later withdrew in a motion for arbitration act, we conclude that we have jurisdiction to
nonsuit without prejudice addressed to the American hear this appeal.
Arbitration Association. The federal suit had meanwhile
been dismissed, and Cook filed a second suit in state
court. In this suit, Cook sued “James Fridl d/b/a Cross
PARTIES DEFENDANT
Marketing, Inc.” Cook's first amended petition alleged
breach of contract, tortious interference, and fraud This Court finds troublesome the designation and role
against Fridl, as alter ego of CMI. of parties defendant here, a confusion to which both
plaintiff and defendant(s) have contributed. Cook has
Fridl entered a general denial. Cross Marketing, Inc. sued “James Fridl d/b/a Cross Marketing Inc.” Fridl has
moved to stay litigation and compel arbitration under answered with a general denial. Fridl individually filed
the contract, pursuant to TEX.REV.CIV.STAT.ANN. his cost bond perfecting this appeal. Cross Marketing,
1 Inc., although at least nominally a corporate entity, has
art. 225, § B (Vernon 1973). The trial court denied
CMI's motion, and further ordered all arbitration be never been named as a corporate defendant, has not been
stayed “pending the determination ... of all matters in served with citation, nor filed an answer. It was CMI,
controversy between the parties.” The case is before us on however (without Fridl) who filed the motion for stay
Fridl's appeal of this interlocutory order. We affirm in part of litigation and motion to quash discovery, the orders
and reverse in part. denying which Fridl now appeals. Fridl denies plaintiff's
allegations of alter ego, and there have been no findings
or admissions on that issue. We can make sense of this
only by interpreting CMI's motion to stay as a general
JURISDICTION
appearance in this *511 case, and its submission to the
[1] [2] As a threshold issue, we must decide whether trial court's jurisdiction over it as a party defendant.
we enjoy jurisdiction to hear this appeal from the trial Appellee has not challenged Fridl's standing to urge on
court's interlocutory order refusing to compel arbitration; appeal CMI's right to arbitration. In short, Fridl and CMI
Cook claims we do not. Generally this Court has no seem to be operating interchangeably in this litigation,
jurisdiction to review interlocutory orders, unless such with the acquiescence of all parties. We will analyze the
appeal is permitted by rule or statute. Jack B. Anglin issues on appeal from that perspective.
Co., Inc. v. Tipps, 842 S.W.2d 266, 272 (Tex.1992). The
Texas General Arbitration Act does provide for such
interlocutory review, stating that: STANDARD OF REVIEW
Sec. A. An appeal may be taken from: [3] [4] In reviewing factual questions concerning an
order denying arbitration, we use a “no evidence”
(1) An order denying an application to compel
standard. Hearthshire Braeswood Plaza Ltd. Partnership
arbitration ...
v. Bill Kelly Co., 849 S.W.2d 380, 384 (Tex.App.—
(2) An order granting an application to stay Houston [14th Dist.] 1993, writ denied). We review legal
arbitration ... conclusions de novo. Catholic Diocese of Brownsville,
Texas v. A.G. Edwards & Sons, Inc., 919 F.2d 1054 (5th
..... Cir.1990).
CMI contract to establish damages under his tortious those portions of a contract which it likes, while avoiding
interference claim. those which it does not. Merely pleading alter ego does
Fridl cannot be liable for tortious interference if he is the not relieve Cook of his obligation to arbitrate. Steinberg/
alter ego of CMI, and as the breach of contract between W.F.I. Foods, Inc. v. D.C.M. and Assoc., 522 So.2d 512,
Cook and CMI may be superfluous to this claim even as 513 (Fla.Dist.Ct.App.1988). We agree with the Florida
to damages, we hold it does not meet the Valero test. Cook Court, which observed that:
could bring the same tortious interference claims against a
wholly unrelated party, who would certainly not be bound We cannot accept the proposition
to arbitrate under the contract. That Fridl is alleged to be that a party to a contract calling
the alter ego of CMI is not necessarily dispositive of the for arbitration may avoid that
tortious interference claim. We therefore conclude that the undertaking by the simple device
trial court did not abuse its discretion in refusing to compel of joining as defendants in its
arbitration on Cook's tortious interference claim. lawsuit others with which the
party has no such agreement to
arbitrate [cite omitted]. To permit
IV. Fourth Claim such an easy means of avoiding a
contractual agreement to arbitrate
[15] [T]he conduct of FRIDL ... constitutes tortious would fly in the face of the
interference with the prospective contract between Florida legislature's intention ... to
COOK and the actual customers who have purchased grant legal recognition to arbitration
annuity and investment products. agreements.... Id.
Again, this is a claim separate and independent from
the parties' rights and duties under the contract. Indeed, We think Texas legislation and caselaw similarly require
this claim does not appear related to the contract us to honor the arbitration agreement in alter ego
containing the arbitration clause at all, but rather situations.
relates to potential contracts that might arise, absent
interference, between Cook and his clients. The trial [20] The forum proper for a determination of alter ego,
court did not abuse its discretion in refusing to compel however, is a different question. Surveying how courts of
arbitration on this claim. other jurisdictions have handled this question, we find that
they generally require the trial court to determine the alter
ego question, with referral to arbitration after a finding
ALTER EGO CLAIM
as to alter ego is made. Fisser v. International Bank, 282
[16] Next, we turn to Cook's more unique argument, that F.2d 231, 234 (2nd Cir.1960); Habitations Limited, Inc. v.
because only a party may compel arbitration and because BKL Realty Sales Corp., 169 A.D.2d 657, 565 N.Y.S.2d
Cook has chosen to sue only Fridl, who was not a party to 36, 37 (1991); American Builder's Assoc. v. Au–Yang, 226
the contract between Cook and CMI, that the trial court Cal.App.3d 170, 276 Cal.Rptr. 262, 266 (1990); Ravel v.
properly denied arbitration. *514 This appears to be an Dirco Enterprises, Inc., 159 A.D.2d 564, 552 N.Y.S.2d 426,
issue of first impression in Texas. 427 (1990); Laborers' Local Union Nos. 472 and 172 v.
Interstate Curb & Sidewalk, 90 N.J. 456, 448 A.2d 980,
[17] [18] [19] Here, we believe that a variation of the 984 (1982). We think this is an appropriate course, and
Valero test is appropriate. If the claim against a non-party will not vacate the trial court's order staying arbitration
to the contract is so interwoven with the agreement that if the reason for doing so is to allow a determination
it could not stand alone, then arbitration is appropriate. of whether Fridl is CMI's alter ego before arbitration is
Certainly, where the basis of a claim against an individual compelled. 5 The breach of contract claim, however, must
is solely that the individual is alter ego of the corporation be arbitrated, and to the extent that the trial court's actions
which is party to the contract, that claim is so connected to contemplate a stay of arbitration while it determines all
the contract claim that the arbitration clause controls. To issues, including breach of contract, it is in error and must
hold otherwise would allow a plaintiff, by artful pleading, be vacated.
to avoid arbitration required by the very contract which
plaintiff seeks to enforce. A party is not entitled to enforce
The tortious interference claim is likewise controlled by believe CMI has waived complaint by making a general
the finding as to alter ego, as plaintiff Cook can only appearance in the case.
prevail on that claim if Fridl is not CMI's alter ego.
We conclude that determining the issue of alter ego [24] [25] It is true, as Fridl urges, that a trial court only
first, before determining the contract claims subject to possesses jurisdiction over parties properly before it. It is
arbitration, is a reasonable course of action, and the trial equally true, however, that a party generally appearing in
court is within its discretion in addressing the issues in that a case waives any complaints as to personal jurisdiction.
order, provided he does not usurp those matters subject to
arbitration. Point of Error One is therefore overruled. [26] [27] [A] general appearance occurs when the
party ‘invokes the judgment of the court in any way on
any question other than that of the court's jurisdiction,
without being compelled to do so by previous ruling of
ENTRY OF ORDER STAYING ARBITRATION
the court sustaining the jurisdiction.’ Smith v. Amarillo
In his second point of error, Fridl urges that the trial Hospital Dist., 672 S.W.2d 615, 617 (Tex.App.—Amarillo
court erred in ordering that the arbitration “be stayed 1984, no writ).
pending the determination by this Court of all matters in See also Toler v. Travis County Child Welfare Unit,
controversy between the parties....” We sustain this point 520 S.W.2d 834, 836 (Tex.Civ.App.—Austin 1975, writ
for two reasons. ref'd n.r.e.); 3 R. McDonald, Texas Civil Practice § 11:9
(1992). In determining whether a voluntary appearance
[21] First, as pointed out by Fridl, this portion of the is a general appearance, the emphasis is on affirmative
trial court's order granted affirmative relief not requested action which impliedly recognizes the court's jurisdiction
by any party. The only motions before the trial court over the parties. Mere presence of a party or his attorney
were the motion to stay litigation and compel arbitration, in the courtroom at the time of a hearing or a trial, where
and motion to quash discovery. Plaintiff had not asked neither participates in the prosecution or defense of the
that arbitration be *515 stayed, and he was not entitled action, is not an appearance. Smith, 672 S.W.2d at 617.
to relief he had never requested. Bosworth v. Gulf Coast
Dodge, Inc., 879 S.W.2d 152, 160 (Tex.App.—Houston We find that CMI's motion to compel arbitration and
[14th Dist.] 1994, no writ). Fridl preserved this complaint to stay litigation was an affirmative act recognizing the
by pointing it out to the trial court in his motion for court's jurisdiction. We therefore conclude that CMI has
rehearing. We believe the trial court abused its discretion waived any complaints as to lack of personal jurisdiction.
by granting this relief. Fridl's Point of Error Three is overruled.
Footnotes
1 “On application, the court may stay an arbitration proceeding commenced or threatened on a showing that there is no
agreement to arbitrate. Such an issue, when in substantial and bona fide dispute, shall be forthwith and summarily tried
and the stay ordered if found for the moving party. If found for the opposing party, the court shall order the parties to
proceed to arbitration.” TEX.REV.CIV.STAT.ANN. art. 225, § B (Vernon 1973).
2 In his appellate brief, Cook suggests a third reason for affirming the court's order: an implied finding that the contract was
unconscionable. There is no evidence to support this theory, so we cannot affirm on that ground. Hearthshire Braeswood
Plaza Ltd. Partnership, 849 S.W.2d at 384.
3 Courts of other jurisdictions have made similar observations where breach of contract and alter ego were both at issue
in a case involving arbitration. See Fisser v. International Bank, 282 F.2d 231, 234–35 (2nd Cir.1960); Laborers' Local
Union Nos. 472 and 172 v. Interstate Curb & Sidewalk, 90 N.J. 456, 448 A.2d 980, 984–85 (1982).
4 In that regard, one court has held that it is fundamentally unfair to bind an individual to the outcome of an arbitration
proceeding, where the individual had not at the time of the proceeding been adjudicated alter ego, and had not participated
in the arbitration. Southern California Pipe Trades District Council v. Merritt, 126 Cal.App.3d 530, 179 Cal.Rptr. 794, 801
(1981). Similarly, another court has held that collateral estoppel will not bind an individual, not adjudicated an alter ego at
the time of arbitration, as that individual is not a party to the arbitration. Marcus v. Superior Court for County of Orange,
75 Cal.App.3d 204, 141 Cal.Rptr. 890, 893 (1977).
5 As noted earlier, a finding of alter ego prior to arbitration will bind Fridl to the outcome of those proceedings. If the
arbitration occurred prior to an alter ego finding, however, an argument might be made that the alter ego did not participate
in the arbitration, and thus due process considerations forbid that the alter ego be bound.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
the last day of expiration, the lease ended on purchase the vehicles by giving the lessor (Frost) ninety
expiration date after sixty months and used days' written notice and provided for payment to be
the term “termination” to describe end of lease made “on the last day of [the lease's] Expiration [in] an
before the expiration, and allowing exercise of amount in cash equal to the then Fair Market Value as
the option before expiration would permit the hereafter defined in this section, of such Equipment.” The
assignee to purchase the vehicles for twenty agreement then clarified that the lessor would collect an
percent of the original invoice price at any amount equal to twenty percent of the original invoice
point during the five-year lease. price of the vehicles when they were sold, whether to the
lessee or to a third party; specifically, if the vehicles were
2 Cases that cite this headnote sold to a third party, the lessor would pay the lessee any
proceeds in excess of that amount, and, should the lessor
receive less than the twenty percent from the sale, the lessee
would owe the difference as a final rental payment.
Attorneys and Law Firms
Just over a year into the lease term, Williams assigned the
*310 David M. Gunn, Russell S. Post, Beck, Redden lease, with Frost's consent, to L & F Distributors, Inc.,
& Secrest, L.L.P., Houston, Frank Weathered, Dunn another beer distributor. Shortly thereafter, L & F notified
Weathered Coffey Rivera Kasperitis & Rodriguez, P.C., Frost of its intent to exercise the purchase option. Before
Corpus Christi, Daniel H. Byrne, Fritz Byrne Head &
Frost responded, L & F sued Frost for a declaratory
Harrison, LLC, Austin, Francisco Enriquez, Law Offices judgment, and L & F later amended its petition to add
of Frank Enriquez, McAllen, for Petitioner. a claim for specific performance. L & F also sent Frost
a letter with a payment of $169,874.99, which amounted
Charles C. Murray, Lisa Powell, Atlas & Hall, L.L.P.,
to twenty percent of the original invoice price of the
McAllen, for Respondent.
vehicles. Frost rejected and returned L & F's payment,
Karen Sue Neeley, John Mark Heasley, Texas Bankers refusing to sell the vehicles until the last day of the lease
Association, Austin, for Amicus Curiae. term, and also counterclaimed for declaratory relief and
breach of contract when L & F stopped paying rent on
Opinion the vehicles. The parties agreed to narrow the scope of the
dispute to the declaratory judgment requests and to limit
*311 PER CURIAM.
Frost's claim for damages. Both parties filed motions for
This case involves the interpretation of a term equipment- summary judgment.
lease agreement with a purchase option provision. The
lessee attempted to exercise the purchase option and buy The trial court partially granted L & F's motion for
the equipment a little over a year into the five-year lease summary judgment and denied Frost's motion, declaring
term, but the lessor refused, contending that the contract that Frost breached the lease agreement by refusing to
only allowed the lessee to purchase the equipment when sell the vehicles when L & F tendered payment. The trial
the lease term ended. The trial court and the court of court also awarded L & F its attorney's fees. The court
appeals agreed with the lessee's interpretation, but we of appeals affirmed, holding that the lease agreement was
agree with the lessor's. Accordingly, we reverse the court unambiguous and allowed L & F, as lessee, to purchase
of appeals' judgment, render judgment in part for the the vehicles with proper notice at any time on or before
lessor, and remand the case to the trial court for further the end of the term. 2 122 S.W.3d 922, 933.
proceedings.
[1] [2] [3] [4] [5] In construing a contract, we must
Frost National Bank purchased fourteen new delivery ascertain and give effect to the parties' *312 intentions
vehicles and leased them to Williams Distributors, Inc., a as expressed in the document. J.M. Davidson, Inc. v.
beer distributor. Frost and Williams entered into a sixty- Webster, 128 S.W.3d 223, 229 (Tex.2003); Lopez v. Muñoz,
month equipment lease agreement. 1 The lease's purchase Hockema & Reed, L.L.P., 22 S.W.3d 857, 861 (Tex.2000).
option provision, known as a terminal rental adjustment We consider the entire writing and attempt to harmonize
clause, or TRAC, gave the lessee (Williams) the right to and give effect to all the provisions of the contract by
analyzing the provisions with reference to the whole than ninety (90) days prior written notice to Lessor, the
agreement. Webster, 128 S.W.3d at 229. We construe right to purchase all but not less than all the Equipment
contracts “from a utilitarian standpoint bearing in mind on or before the Expiration. Purchase shall be made by
the particular business activity sought to be served” and paying to Lessor on the last day of such Expiration an
“will avoid when possible and proper a construction which amount in cash equal to the then Fair Market Value as
is unreasonable, inequitable, and oppressive.” Reilly v. hereafter defined in this section, of such Equipment....
Rangers Mgmt., Inc., 727 S.W.2d 527, 530 (Tex.1987). If,
after the pertinent rules of construction are applied, the The court of appeals held that the purchase option
contract can be given a definite or certain legal meaning, provision (section 3(A) of the Optional Provisions) is
it is unambiguous and we construe it as a matter of unambiguous. 122 S.W.3d at 931. Specifically, the court
law. Webster, 128 S.W.3d at 229. On the other hand, a of appeals noted that the first sentence allows L & F to
contract is ambiguous if it is susceptible to more than one buy the vehicles either on or before the expiration of the
reasonable interpretation. Id. lease, the only qualifications being that L & F cannot be in
default, must buy all the vehicles, and must give Frost at
[6] The following provisions of the lease agreement, least ninety days' notice of the purchase. Id. The court of
including the purchase option provision discussed above, appeals then held that the second sentence, which requires
are particularly relevant to the parties' dispute: payment to be made “on the last day of such Expiration,”
does not create an ambiguity or call for payment only at
MASTER EQUIPMENT LEASE AGREEMENT the end of the sixty-month lease term. Id.
contractual definition of “Expiration,” neither of which is reasonable interpretation of the lease, we construe it as a
matter of law.
appropriate in construing an agreement.
******
In addition, L & F's and the court of appeals' construction
is “unreasonable, inequitable, and oppressive.” Reilly,
We hold that the lease is unambiguous and provides that,
727 S.W.2d at 530. Such a construction allows the lessee
while the lessee may give notice at any time during the lease
to terminate the lease and purchase the vehicles for the
term that it intends to exercise the purchase option, the
same price (twenty percent of the original invoice price)
lessee can actually purchase the vehicles only at the lease's
at any point during the five-year lease term with the
expiration, which occurs sixty months after the lease
requisite notice. At the lessee's discretion, then, the lessor
term begins. Accordingly, without hearing oral argument,
would essentially have to forgo almost the entire rental
Tex.R.App. P. 59.1, we reverse the court of appeals'
value of the equipment and sell it almost new for twenty
judgment, render judgment for Frost on its declaratory
percent of its value, the same price it would receive for
judgment claim, and remand the case to the trial court for
selling the equipment at the end of the lease term after
further proceedings consistent with this opinion.
collecting rent on it for sixty months. Bearing in mind
that our primary goal is to ascertain the intent of the
parties when they entered into the agreement, we find such All Citations
a construction unreasonable. Because there is only one
165 S.W.3d 310, 48 Tex. Sup. Ct. J. 803
Footnotes
1 The parties actually entered into two essentially identical agreements, one concerning eight of the vehicles and one
concerning the other six, but for simplicity we will refer to them as a single agreement.
2 The court of appeals also affirmed the trial court's denial of Frost's motion to transfer venue. 122 S.W.3d at 927–29. Frost
does not challenge the venue ruling in this Court.
3 Frost also argues that the Uniform Commercial Code, as adopted in Texas, allows us to consider course of dealing, course
of performance, and usage of trade to “explain or supplement” the lease. See Tex. Bus. & Com. Code § 2A.202. Because
the plain language of the contract is clear and supports Frost's interpretation, we need not consider such evidence for
explanatory purposes.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Holdings: The Court of Appeals, Phylis J. Speedlin, J., [3] Appeal and Error
held that: Cases Triable in Appellate Court
Appeal and Error
Implied waiver and conduct constituting allegations that Wells Fargo Bank, N.A., America's
waiver Servicing Company, Premiere Asset Services, Langley &
There can be no waiver of a right if the person Banack, Inc., Robert Carl Jones (an attorney employed
sought to be charged with waiver says or does by the law firm of Langley & Banack), and Albert
nothing inconsistent with an intent to rely Garcia wrongfully foreclosed on Edward and Margarita
upon such right. Huerta's (“the Huertas”) property. The Huertas obtained
a home equity loan from Wells Fargo. In connection
1 Cases that cite this headnote with this loan, the Huertas and Wells Fargo entered
into an arbitration agreement. The arbitration agreement
provided that:
[12] Alternative Dispute Resolution
Evidence Any party to this Agreement or to any Loan Document
There is a strong presumption against waiver may require that any Dispute be resolved by binding
of an arbitration agreement under the Federal arbitration in accordance with the terms of this
Arbitration Act, and any doubts regarding Arbitration Program, administered by the American
waiver are resolved in favor of arbitration. 9 Arbitration Association (the “AAA”) ... and the
U.S.C.A. § 1 et seq. Federal Arbitration Act....
3 Cases that cite this headnote A ‘Dispute’ shall include any dispute, claim or
controversy of any kind, whether in contract or in
tort, legal or equitable, now existing or hereafter
arising, relating in any way to this Note or Loan
Attorneys and Law Firms Documents or any related agreement incorporating
this Arbitration Program (the “Documents”), or any
*866 Wade C. Crosnoe, Thompson, Coe, Cousins & past, present, or future loans, transactions, contracts,
Irons, L.L.P., Austin, TX, for Appellant. agreements, relationships, incidents, or injuries of any
kind whatsoever relating to or involving consumer
Andrew M. Greenwell, Harris & Greenwell, Corpus
lending, business banking, community banking, Private
Christi, TX, for Appellee.
Client Services, or any successor group or department
Sitting: PHYLIS J. SPEEDLIN, Justice, REBECCA of Lender.... Arbitration may be demanded at any time,
SIMMONS, Justice, and MARIALYN BARNARD, and may be compelled by summary proceedings in
Justice. Court.
Collection Act and alleged that he committed trespass, accomplish the intent and purpose of this Agreement,
theft, burglary and conversion, and invasion of privacy. including papers: (1) to assign any and all claims that
Wells Fargo and/or its Affiliates might have against
Thereafter, all defendants, including Garcia, moved to Albert Garcia, First Texas Realty, Blue Star Services
compel arbitration. In response to the motions to compel and/or their Affiliates related to or arising from the
arbitration, the Huertas asserted there was not a valid events made the basis of this Lawsuit; (2) to waive
and binding arbitration agreement because, among other any rights to enforce any arbitration agreement as it
reasons, the agreement was only between “Wells Fargo may relate to any claims asserted against Garcia, First
Bank Texas, N.A.” and the Huertas, not any of the actual Texas Realty, and Blue Star Services, as agents for
parties to the lawsuit. The trial court denied all of the Wells Fargo, whether brought as a result of assignment
motions to compel arbitration. *868 from Wells Fargo or brought independently from
such assignment; ... (4) to vacate the order compelling
Wells Fargo, America's Servicing Company, Premiere, arbitration; ...
Langley & Banack, Jones, and Garcia then filed a petition
for writ of mandamus in this court, seeking to compel A month after the Settlement Agreement was executed,
the trial court to vacate the order denying their motions the Huertas filed their “Motion to Amend the Amended
to compel arbitration. We held that Wells Fargo had Order on Motions to Compel Arbitration, Motion for
the right to enforce the arbitration agreement. 1 Id. Leave to File Fifth Amended Petition and Motion to
at 824. We further held that although the remaining Set Case on Trial Docket and Enter Docket Control
defendants, including Garcia, were nonsignatories to the Order” (“Motion to Amend”). The Motion to Amend
arbitration agreement, they acted as agents of Wells asked the trial court to amend its prior amended order
Fargo and their allegedly wrongful acts related to their compelling arbitration, and to deny arbitration as to
behavior as agents of Wells Fargo; therefore, they were the Huertas' claims against Garcia. In support of the
also entitled to enforce the arbitration agreement. Id. motion, the Huertas introduced portions of the Settlement
at 825. Finally, we held that none of the defendants Agreement and argued that Wells Fargo's express waiver
had waived their right to compel arbitration based on of its right to arbitrate under the arbitration agreement
invocation of the judicial process. Id. at 830–31. We operated as a waiver of Garcia's right to arbitrate
conditionally granted mandamus and directed the trial under the same agreement. After a hearing, the trial
court to withdraw its order denying the defendants' court granted the Motion to Amend, and amended the
motions to compel arbitration. Id. at 832. The trial court order compelling arbitration “so as to deny arbitration
complied, and signed an “Amended Order on Motion as to Albert Garcia and his assumed names and
to Compel Arbitration” which granted the defendants' related companies based on the additional evidence of
motions to compel arbitration and stayed the district express waiver of the arbitration agreement by the Wells
court litigation pending the outcome of the arbitration Fargo Parties.” Garcia now appeals. See TEX. CIV.
proceedings. PRAC. & REM.CODE ANN. § 51.016 (West Supp.2010)
(permitting interlocutory appeal of order denying motion
Thereafter, the Huertas negotiated a settlement with Wells to compel arbitration under the Federal Arbitration Act).
Fargo and the remaining defendants, except for Garcia.
The Settlement Agreement provides for the assignment of On appeal, Garcia contends the trial court erred in
Wells Fargo's claims against Garcia to the Huertas and granting the Motion to Amend because (1) it conflicts with
contains a provision requiring the settling defendants to our prior mandamus opinion ordering the trial court to
execute (1) an assignment of their claims against Garcia compel arbitration and (2) Wells Fargo was not entitled to
to the Huertas and (2) a waiver of the defendants' rights waive arbitration on Garcia's behalf. Garcia alternatively
to enforce the arbitration agreement with respect to any argues he is entitled to enforce the arbitration agreement
claim against Garcia: under the doctrine of equitable estoppel.
[1] Until recently, orders denying motions to compel proves a valid arbitration agreement exists. Webster, 128
arbitration in matters subject to the Federal Arbitration S.W.3d at 227. Under both the FAA and the TAA, we
Act (FAA) were not subject to interlocutory appeal; apply ordinary state contract law principles in order to
instead, they were reviewed in mandamus proceedings decide whether a valid arbitration agreement exists. See In
using an abuse of discretion standard. See Jack B. Anglin re D. Wilson Const. Co., 196 S.W.3d 774, 781 (Tex.2006)
Co. v. Tipps, 842 S.W.2d 266, 272–73 (Tex.1992). Under (citing First Options of Chicago, Inc. v. Kaplan, 514 U.S.
that standard, “we defer to the trial court's factual 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995)). Once
determinations if they are supported by evidence, but a valid agreement to arbitrate has been established, a
we review the trial court's legal determinations de novo.” presumption attaches favoring arbitration and the burden
In re Labatt Food Service, L.P., 279 S.W.3d 640, 643 shifts to the party resisting arbitration to establish a
(Tex.2009). defense to enforcing arbitration. See In re AdvancePCS
Health L.P., 172 S.W.3d 603, 607 (Tex.2005) (per curiam);
[2] [3] Section 51.016 now permits courts to review such In re Hartigan, 107 S.W.3d 684, 687–88 (Tex.App.-San
orders by appeal. See TEX. CIV. PRAC. & REM.CODE Antonio 2003, orig. proceeding [mand. denied] ).
ANN. § 51.016; In re 24R, Inc., 324 S.W.3d 564, 566 n. 1
(Tex.2010). This court has not addressed the standard of
review applicable to such appeals. However, on appeals
DISCUSSION
of orders denying arbitration under the Texas Arbitration
Act (TAA), we apply a no-evidence standard to the trial We first address Garcia's contention that Wells Fargo's
court's factual determinations and a de novo standard waiver of arbitration contained in the Settlement
to legal determinations. See MacIvor v. Zuehl Airport Agreement did not extend to waive Garcia's right to
Flying Cmty. Owners Assoc., No. 04–10–00053–CV, 2010 arbitration. In our prior opinion, we noted that Garcia
WL 2298906, at *2 (Tex.App.-San Antonio June 9, was an agent of Wells Fargo, and that the Huertas'
2010, no pet.) (mem. op) (applying de novo review to claims against Garcia related to his behavior as Wells
interlocutory appeal of order denying motion to compel Fargo's agent. Wells Fargo, 300 S.W.3d at 825; see also
arbitration under TAA when order turns on a legal In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739
determination); Pony Exp. Courier Corp. v. Morris, 921 (Tex.2005) (nonsignatory may be bound to arbitration
S.W.2d 817, 820 (Tex.App.-San Antonio 1996, no writ) agreement by agency law). We thus held that Garcia was
(noting that “no evidence” is the appropriate standard entitled to enforce the arbitration agreement as an agent of
when reviewing factual questions concerning an order Wells Fargo. Wells Fargo, 300 S.W.3d at 825; see also In re
denying arbitration). When a matter involving both Merrill Lynch Trust Co., 123 S.W.3d 549, 556 (Tex.App.-
factual determinations and legal conclusions is decided San Antonio 2003, orig. proceeding), mand. granted, 235
by the trial court, we generally employ the abuse of S.W.3d 217 (Tex.2007) (orig. proceeding) (per curiam)
discretion standard, in which we defer to the trial court's (“The scope of an arbitration agreement may be extended
factual determinations while determining questions of law to claims against agents of the principal when all the
de *869 novo. Morris, 921 S.W.2d at 820. Accordingly, agents' allegedly wrongful acts relate to their behavior
we will apply the abuse of discretion standard of review as agents of the principal signatory company, and those
to interlocutory appeals under section 51.016. See Sidley acts were within the scope of the claims covered by the
Austin Brown & Wood, LLP v. J.A. Green Dev. Corp., arbitration provisions for which the principal would be
327 S.W.3d 859, 862–63 (Tex.App.-Dallas 2010, no liable.”).
pet.) (applying abuse of discretion standard in reviewing
interlocutory appeal under section 51.016). [8] [9] Having already established that Garcia is
entitled to enforce the arbitration agreement, we must
[4] [5] [6] [7] Whether there is a valid and enforceablenow determine whether Wells Fargo's express waiver of
agreement to arbitrate is a legal question subject to de novo its own right to arbitrate contained in the Settlement
review. In re Labatt Food Service, 279 S.W.3d at 643; J.M. Agreement operated to deny Garcia his right to enforce
Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex.2003). the arbitration agreement. Whether a party has waived
There is a strong presumption favoring arbitration, which his right to arbitration is a question of law that we
arises only after the party seeking to compel arbitration review de novo, giving no deference to the trial court's
ruling. Wells Fargo, 300 S.W.3d at 830 (citing Perry agreement during the entire course of this proceeding,
both before and after this Court issued its opinion in In re
Homes v. Cull, 258 S.W.3d 580, 598 (Tex.2008)). In the
Wells Fargo. The mere fact that Wells Fargo subsequently
arbitration context, the majority of cases alleging waiver
waived “any rights to enforce the arbitration agreement
involve the invocation of the legal process to one party's
as it ... relate[s] to any claims asserted against Garcia”
detriment. See, e.g., In re Citigroup Global Mkts., Inc.,
does not mean that Garcia—who relied upon this Court's
258 S.W.3d 623, 625 (Tex.2008) (orig. proceeding); Perry,
holding that he had the right to enforce the agreement—
258 S.W.3d at 589–90. The Huertas did not allege waiver
also waived his right to enforce the arbitration agreement.
based on invocation of the judicial process; rather, they
asserted that Wells Fargo's express waiver contained in the
[12] Further, there is a strong presumption against
Settlement Agreement must be imputed to *870 Garcia
waiver under the FAA, In re D. Wilson, 196 S.W.3d
because he acted as an agent of Wells Fargo, and his right
at 783, and any doubts regarding waiver are resolved
to arbitration was therefore derivative of Wells Fargo's.
in favor of arbitration. In re Bruce Terminix Co., 988
The Huertas cite no authority for this proposition, and
S.W.2d 702, 705 (Tex.1998). In light of this presumption,
we cannot agree that one party's waiver of the right to
and acknowledging the lack of evidence of waiver by
arbitration can be imputed to another.
Garcia, we cannot conclude that Wells Fargo's waiver of
[10] [11] Waiver is “an intentional relinquishment of arbitration was imputed to Garcia. Accordingly, we hold
the trial court erred in denying arbitration to Garcia on
a known right or intentional conduct inconsistent with
the basis of express waiver by Wells Fargo. We reverse
claiming that right.” Jernigan v. Langley, 111 S.W.3d 153,
the judgment of the trial court, and remand the cause
156 (Tex.2003). “There can be no waiver of a right if the
to the trial court with instructions to enter an order
person sought to be charged with waiver says or does
compelling arbitration as to Garcia and staying all other
nothing inconsistent with an intent to rely upon such
proceedings pending the outcome of arbitration. Based
right.” Id. Here, the Huertas did not allege that Garcia
on our resolution, we need not reach Garcia's arguments
himself acted in such a way so as to repudiate his right
relative to the law of the case or equitable estoppel.
to enforce the arbitration agreement, and there is no
evidence in the record of a knowing or intentional waiver
by Garcia. Additionally, the Huertas have not alleged that All Citations
Garcia did anything inconsistent with an intent to rely
on the arbitration process. To the contrary, Garcia has 340 S.W.3d 864
consistently invoked his right to enforce the arbitration
Footnotes
1 We specifically held that Wells Fargo Bank, N.A. established that Wells Fargo Bank Texas, N.A. was consolidated and
resulted in Wells Fargo Bank, N.A., which had the right to enforce the arbitration agreement. Id. at 824.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
financial institution. On July 11, 2007, that charge was “[W]hen a contract contains an arbitration clause, a strong
terminated in Gatlin's favor. presumption in favor of arbitration exists and courts have
no choice but to order arbitration unless it may be said
*2 As relevant to the pending motion, Gatlin alleges with positive assurance that the arbitration clause is not
arrest without probable cause in violation of the Fourth susceptible of an interpretation that covers the asserted
Amendment against Caputo individually on the basis that dispute.” CK Witco Corp. v. Paper Allied Indus., Chem.
he willfully acted in concert with the officers in causing the & Energy Workers Int'l Union, 272 F.3d 419, 421-22
unlawful arrest (Count II), as well as Illinois common law (7th Cir.2001) (internal citations and quotations omitted).
false arrest and malicious prosecution. He alleges that ISG “To compel arbitration, a party need only show: (1) an
and Bill Kay are liable for Caputo's state law torts based agreement to arbitrate, (2) a dispute within the scope of the
on the doctrine of respondeat superior (Count VII). Gatlin arbitration agreement, and (3) a refusal by the opposing
seeks compensatory and punitive damages against all the party to proceed to arbitration.” Zurich American Ins. Co.
defendants. v. Watts Indus., Inc., 466 F.3d 577, 580 (7th Cir.2006)
(citations omitted). “[A]ny doubts concerning the scope of
Bill Kay maintains that Gatlin's claims of false arrest arbitrable issues should be resolved in favor of arbitration,
and malicious prosecution fall within the scope of an whether the problem at hand is the construction of the
arbitration agreement signed by the parties in conjunction contract language itself or an allegation of waiver, delay,
with the vehicle purchase agreement. That arbitration or a like defense to arbitrability.” Mastrobouno, 514 U.S.
agreement provides, in relevant part, that it at 62 n. 8 (quoting Moses H. Cone Memorial Hospital v.
Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct.
[s]hall apply to any dispute, issue, 927, 74 L.Ed.2d 765 (1983)). To further this policy in favor
controversy or claim arising from of arbitration, Section 3 of the FAA provides, in relevant
any events which occurred prior to, part:
on or subsequent to the execution
of this Arbitration Agreement. A
‘dispute’ includes any controversy *3 If any suit or proceeding be brought in any of the
or claim arising from or relating courts of the United States upon any issue referable
to the vehicle you have purchased to arbitration under an agreement in writing for such
or leased on the date shown arbitration, the court in which such suit or proceeding is
above. The term “dispute” also pending, upon being satisfied that the issue involved in
includes, but is not limited to, claims such suit or proceeding is referable to arbitration ... shall
relating to the negotiation of the on application of one of the parties stay the trial of the
purchase or lease of the vehicle, action until such arbitration has been had in accordance
and any dispute relating to any with the terms of the agreement, providing the applicant
vehicle service contract purchased or for the stay is not in default in proceeding with such
provided at the time the vehicle was arbitration.
purchased or leased, or thereafter. In 9 U.S.C. § 3. 4
addition, the term ‘dispute’ includes “[The opponent of arbitration] bears the burden of
any question regarding whether a establishing that the arbitration clause is unenforceable.”
matter is subject to arbitration under Stewart v. Molded Plastic's Research of Ill., Inc., 2001 WL
this Arbitration Agreement. 1607464, at * 1 (N.D.Ill.Dec.17, 2001) (citing Shearson/
Am. Express, Inc. v. McMahon, 482 U.S. 220, 226-27,
107 S.Ct. 2332, 96 L.Ed.2d 185 (1987) (“The burden
II. Legal Standard is on the party opposing arbitration, however, to show
The central purpose of the Federal Arbitration Act that Congress intended to preclude a waiver of judicial
(“FAA”) is to “ensure that private agreements to arbitrate remedies for the statutory rights at issue.”)).
are enforced according to their terms.” Mastrobouno v.
Shearson Lehman Hutton, Inc., 514 U.S. 52, 53-54, 115
S.Ct. 1212, 131 L.Ed.2d 76 (1995) (citations omitted). 3 III. DISCUSSION
Footnotes
1 The court has jurisdiction over this case pursuant to 28 U.S.C. §§ 1331, 1343, and 1367.
2 The court has taken the facts concerning the purchase agreement and related events, which are not materially disputed,
from the Complaint and from Bill Kay's Reply in Support of its Motion. The facts concerning Caputo and the defendant
officers are derived from the complaint and are disputed by the defendants but will be presumed true for the purpose of
this motion. Safranek v. Copart, Inc., 379 F.Supp.2d 927, 928 (N.D.Ill.2005)
3 Professor Margaret Moses argues forcefully, however, that judges have misinterpreted the FAA, granting it far greater
breadth than Congress contemplated when it passed the law:
“... [The Federal Arbitration Act]-which has been construed to preempt state law, eliminate the
requirement of consent to arbitration, permit arbitration of statutory rights, and remove the jury
trial right from citizens without their knowledge or consent-is a statute that would not likely have
commanded a single vote in the 1925 Congress.”
Margaret L. Moses, Statutory Misconstruction: How the Supreme Court Created a Federal Arbitration Law Never
Enacted by Congress, 34 FLA. ST. U.L.REV. 99 (2006).
4 Bill Kay argues that Illinois law also supports his motion, but the plaintiff responds only within the context of the FAA.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
his own notes and collateral $10,000 from one bank and
[13] Guardian and Ward $5,000 from another, and deposited the same in the bank
Operation and Effect of Appointment in his general checking account. Persky had nothing to do
Where order appointing guardian was regular with the procuring of these loans. Greever then advanced
on its face and recited proper notice, order the money to Persky in installments as he needed it, taking
was not void and subject to “collateral attack” his notes therefor, payable to Greever in thirty days. These
by defendant against whom guardian was notes provided for interest after maturity. As these notes
maintaining suit to recover allegedly usurious matured from time to time they were renewed with similar
interest for the estate on ground that judgment notes. Persky actually paid Greever the three per cent per
appointing the guardian was void for lack of month on the loans, not only during the first ninety days as
proper notice and hearing. per the original agreement, but continued to pay the three
per cent on the loans for several months thereafter, and
Cases that cite this headnote Greever accepted same as ‘commissions.’ These payments,
which were credited by Greever as ‘commission’ were
[14] Guardian and Ward not paid at the time the renewal notes were executed,
Operation and Effect of Appointment but were paid thereafter at irregular intervals and in
Where order appointing guardian was regular irregular amounts. When Greever would receive a check
on its face, order was sufficient to protect for one of these irregular payments he would mark on it
defendant against whom guardian was ‘commission,’ and credit it accordingly. Greever testified
maintaining a suit as such from a second positively that Persky only agreed to pay a commission
action on same cause of action and hence for a period of ninety days, and whatever commissions
defendant could not complain that order was were paid thereafter were paid voluntarily by Persky,
void for lack of proper notice and hearing. without any previous agreement obligating him to do so.
It appears to be agreed that none of the payments made as
1 Cases that cite this headnote ‘commissions' **711 was intended by either of the parties
to be applied on the principal of the notes given by Persky
to Greever. The jury in answer to special issues found,
in effect, that the money advanced by Greever to Persky
Attorneys and Law Firms was a loan, but that it was the intention of both Persky
and Greever that the sums paid as commissions should
*65 **710 Ray Bland, John C. Kay, and Kilgore & constitute ‘compensation for B. B. Greever's services in
Rogers, all of Wichita Falls, for plaintiff in error. procuring from the bank upon his own credit, or his
own securities, the money which he advanced to I. B.
J. R. Wilson, of Wichita Falls, for defendant in error. Persky.’ Upon motion, the court rendered judgment non
obstante veredicto, holding as a matter of law that the
Opinion
transactions were usurious loans, and that all payments
ALEXANDER, Chief Justice. made as ‘commissions' should be applied as interest, and
allowing plaintiff to recover accordingly. The Court of
This is a usury case. There is no dispute in the testimony Civil Appeals reversed the judgment of the trial court and
on most of the material points in the case. The facts, remanded the cause for a new trial. 156 S.W.2d 566.
as testified to by the defendant, B. B. Greever, are
substantially as follows: In the year 1936 I. B. Persky *67 It is defendant's view that the payments in question
was in financial difficulties *66 and needed money. He were paid to him as commissions for lending his credit to
contacted Greever, who was not in the loan business, and Persky and obtaining for him the loans from the banks.
offered to pay him a commission of three per cent per According to Greever's own testimony he borrowed the
month for a period of ninety days if Greever would use money from the banks on his own notes and collateral,
his credit and procure for him a loan of $15,000. Greever, and placed it in his bank account; and then lent it to
who did not have the money himself, but did have the Persky from time to time as he needed it. He took Persky's
collateral with which to borrow the same, borrowed on notes for the loans, and when they matured they were
renewed by mutual agreement. As the money was collected must be made for the purpose of enabling the borrower to
it was placed by Greever in his own account. There is obtain the money from a third party, or the transaction
nothing in the evidence to show that the money borrowed must be something other than a mere loan of money. The
from the banks was set aside to Persky, or that, as Persky fact that the party has to pledge his credit or collateral with
repaid it, it was in turn paid over to the banks. Stripped a third party in order to obtain the funds which he himself
of any unnecessary details, it appears to be a case in which lends to the borrower does not authorize him to charge
Greever furnished the collateral and borrowed the money the commission in addition to the highest legal rate of
from the banks on his own account, and lent it to Persky interest. Chakales v. Djiovanides, 161 Va. 48, 170 S.E. 848.
for a consideration in excess of ten per cent per annum. If he makes the loan himself, whatever trouble or hazard is
incurred by him in securing the money from a third party
[1] [2] [3] An agent or a broker may lawfully charge in order to enable him to make the loan is in contemplation
a commission for his services in negotiating a loan with a of the law fully compensated for by the payment of the
third party, and such commission will not be taken into lawful rate of interest. 42 Tex.Jur. 932; Forreston State
consideration in determining whether or not the loan is Bank v. Brooks, Tex.Civ.App., 51 S.W.2d 645; **712
usurious, where it is done in good faith, and not as a Independent Lbr. Co. v. Gulf State Bank, Tex.Civ.App.,
mere cloak to avoid the usury law. But, in order to be 299 S.W. 939, writ refused; National Bond & Mortgage
valid it must appear that the loan was ultimately made Corp. v. Mahanay, Tex.Civ.App., 70 S.W.2d 236.
with or passed on to a third party, and that the extra
charge was made in good faith for so negotiating the loan. [6] [7] [8] Greever relies heavily on the case of
Such a charge may not be made where the party charging McDaniel v. Orr, Tex.Com.App., 30 S.W.2d 489.
the commission is merely lending his own money. 42 However, the facts in that case are clearly distinguishable
Tex.Jur. 933; Trinity Fire Ins. Co. v. Kerrville Hotel Co., from the facts in the case at bar. In that case the money was
129 Tex. 310, 103 S.W.2d 121, 110 A.L.R. 442; Deming borrowed to construct a building. The debtor, in addition
Inv. Co. v. Giddens, Tex.Civ.App., 41 S.W.2d 260, writ to repaying the principal, paid the creditor $250.00 for
dismissed; Deming Inv. Co. v. Clark, Tex.Civ.App., 89 ‘services.’ The creditor pleaded and offered to prove that
S.W.2d 853; Adleson v. B. F. Dittmar Co., 124 Tex. 564, the $250.00 was paid for services rendered by him to the
80 S.W.2d 939; Nevels v. Harris, 129 Tex. 190, 102 S.W.2d debtor in connection with the construction of the building.
1046, 109 A.L.R. 1464. In this case the party charging On the other hand, the debtor contended that it was paid
the commission did not negotiate the loan to a third as interest for the use of money. This Court simply held
party, but made it himself out of his own funds; and, as that it was a fact issue as to whether the $250.00 was paid
a consequence, the commission charged and collected by for the use of the money or for the alleged extra services
him must be included as interest charged for the use of the in connection with the construction of the building.
money lent. Admittedly, a lender may, without violating the usury
law, make an extra charge for any distinctly separate and
[4] [5] It is insisted by the defendant that the commission additional consideration other than the simple lending of
charged by him constituted a lawful charge for the sale the money (42 Tex.Jur. 932; Nevels v. Harris, 129 Tex. 190,
and advancement of his credit, to enable the borrower 102 S.W.2d 1046, 109 A.L.R. 1464); and where there is any
to obtain the money. It may be accepted as true that dispute in the evidence as to whether there was *69 any
where one acts in good faith, and not for the purpose other separate and additional consideration, a question of
of concealing a usurious loan made by him, he may sell fact is raised for the jury. But since, according to his own
his credit to a borrower for a consideration; *68 and to testimony, Greever did not render any service whatever to
that end may endorse, guarantee, or become surety for the the borrower other than procuring and lending the money
payment of a loan made to the borrower by a third person to him, for which he had no right to charge an extra
at the highest lawful rate of interest, without rendering commission or bonus, there was no question of fact to be
either the contract for the sale of his credit or the loan determined by the jury as to whether the parties intended
made by the third party usurious. Oil City Motor Co. v. that the commission should be charged as interest for the
C. I. T. Corp., 10 Cir., 76 F.2d 589, 104 A.L.R. 240. See, use of the money or as compensation for Greever's services
also, 21 A.L.R. 895; 105 A.L.R. 813. But, again, in order in procuring the money from a third party.
for such a transaction to be legal, the sale of the credit
[9] [10] [11] Under the above authorities the three [12] Plaintiff's petition alleged that the total interest paid
per cent commission collected, as per the contract, during within two years of the filing of the suit amounted to
the first ninety days after the lending of the money to $4,345. It listed each payment so made. Upon the trial
Persky was clearly usurious, and would from the basis it was discovered that an item of $150 paid October 2,
for the statutory penalty. It will be noted, however, that 1937, was omitted from the list of payments set out in
the original contract to pay a commission covered only the petition, **713 although it was included in the total
a period of ninety days after the original notes were of $4,345, whereupon plaintiff, with leave of the court,
executed. When these notes matured they were renewed filed a trial amendment covering such omitted item. This
by the execution of similar notes. Persky not only paid the trial amendment was filed February 14, 1941. The Court
three per cent commission during the first ninety days, but of Civil Appeals was of the opinion that the filing of
continued to pay it, and Greever continued to accept it, the original suit was not sufficient to stop the running of
after the expiration of the ninety-day period. But Greever limitation on the $150 item above mentioned, and since
denied that there was any contract or agreement by which that payment had been made more than two years prior
Persky was obliged to continue to pay such three per cent to the filing of the trial amendment, the right to recover
commission after the expiration of the first ninety-day thereon was barred by limitation. We are not in accord
period. He testified that the payment were made by check with this view. This item of $150 was included in the total
and that he marked thereon ‘commission,’ and applied item of $4,345, upon which recovery was sought in the
them as such. He requested the court to submit to the original petition. The trial amendment merely gave the
jury an issue as to whether there was such a contract, date and amount of one of the items included therein. It is
but the court declined to submit it. Certainly no such clear that the cause of action stated in the trial amendment
contract was established by the undisputed evidence. It is a part of the original action. It is not based upon
seems to be very well settled in this State that in order to and does not grow out of a new, distinct, or different
authorize the erecovery of the penalty provided for under transaction or occurrence from that stated in the original
our statutes for the collection of usurious interest, there petition, and is therefore not barred by the statute of
must have been a contract to pay the usurious interest so limitation. General Laws, 42nd Leg., 1931, c. 115, p. 194,
collected. Voluntary acceptance of interest in excess of the Vernon's Annotated Revised Civil Statutes, Art. 5339b; 28
lawful rate is not sufficient. Arts. 5071, 5073, R.C.S.1925; Tex.Jur. 213; Goodwin v. Hidalgo County Water Control
42 Tex.Jur. 896; Palmetto Lbr. Co. v. Gibbs, 124 Tex. & Improvement Dist. No.1, Tex.Civ.App., 58 S.W.2d
615, 80 S.W.2d 742, 102 A.L.R. 474; Continental Savings 1092; First State Bank & Trust Co. of Rio Grande City v.
& Building Ass'n v. Wood, Tex.Civ.App., 33 S.W.2d Ramirez, 133 Tex. 178, 126 S.W.2d 16; Cameron County
770, affirmed, Tex.Com.App., 56 S.W.2d 641; Federal Water Improvement Dist. No. 8 v. Western Metal Mfg.
Mortgage Co. v. Davis, Tex.Civ.App., 100 S.W.2d 717, Co. of Texas, Tex.Civ.App., 125 S.W.2d 650.
721, affirmed, Tex.Com.App., 131 Tex. 46, 111 S.W.2d
1066; Rest Haven Cemetery v. Swilley, Tex.Civ.App., [13] [14] The suit was brought by Mrs. Goldie Persky as
127 S.W.2d 996. Since the evidence did not conclusively guardian of the estate of I. B. Persky. By plea in abatement
establish a contract to pay the three per cent commission the defendant *71 challenged the right of the guardian to
after the *70 expiration of the first ninety-day period, maintain the suit as such; and as ground therefor asserted
there was material error on the part of the trial court in that the judgment appointing a guardian for I. B. Persky's
allowing a recovery of double the amount of the three estate was void for lack of proper notice and hearing at
per cent commission paid after the expiration of the first and prior to the entry thereof. The order appointing the
ninety-day period, without having submitted to the jury guardian appears to be regular on its face, and recites
the issue as to whether or not there was a contract to proper notice. Consequently, it was not void and subject
pay such commission. If upon another trial it should be to a collateral attack, such as was made in this case.
found that the sums of money collected after the ninety- Being regular on its face, it was sufficient to protect the
day period, and credited by Greever as commissions, defendant against a second action on the same cause of
were collected without a contract to credit same as action, and for that reason he has no right to complain.
commissions, all such payments should be credited on the
debt.
The judgment of the Court of Civil Appeals, reversing the All Citations
judgment of the trial court and remanding the cause for a
new trial, is affirmed. 140 Tex. 64, 165 S.W.2d 709
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Gynecology Assocs., 168 N.J. 124, 132, 773 A.2d 665 after Griffin retained possession of the car even though
(2001) (quoting Marchak v. Claridge Commons, Inc., 134 financing for this transaction was not obtained and
N.J. 275, 282, 633 A.2d 531 (1993)). Therefore, “courts Griffin made no payments beyond his initial $1,000
operate under a ‘presumption of arbitrability in the deposit. Specifically, Griffin alleges that Burlington
sense that an order to arbitrate the particular grievance Volkswagen attempted to repossess the car by wrongfully
should not be denied unless it may be said with positive reporting to the Burlington Police Department that he
assurance that the arbitration clause is not susceptible had stolen it, as a result of which he was arrested and
of an interpretation that covers the asserted dispute.’ incarcerated in Mississippi and had to defend himself
” EPIX Holdings Corp. v. Marsh & McLennan Cos., against criminal charges. Griffin's claims of false arrest,
410 N.J.Super. 453, 471, 982 A.2d 1194 (App.Div.2009) false imprisonment, abuse of process, and malicious
(quoting Caldwell v. KFC Corp., 958 F.Supp. 962, 973 prosecution based on Burlington Volkswagen's actions
(D.N.J.1997)). will depend, at least in part, on a determination of
the parties' respective interests in the car under the
Courts have generally read the terms “arising out of” or Motor Vehicle Retail Order in light of the failure to
“relating to” a contract as indicative of an “extremely obtain financing for Griffin's *520 purchase. Therefore,
broad” agreement to arbitrate any dispute relating in Griffin's claims “arise out of” and “relate to” this
any way to the contract. Angrisani v. Financial Tech. consumer transaction and are thus subject to the
Ventures, L.P., 402 N.J.Super. 138, 149, 952 A.2d arbitration clause contained in the retail order form. See
1140 (App.Div.2008); accord EPIX Holdings, supra, 410 Dan Wachtel Ford, Lincoln, Mercury, Inc. v. Modas, 891
N.J.Super. at 472, 982 A.2d 1194 (quoting with approval So.2d 287 (Ala.2004) (holding that plaintiff's claims of
the court's “expansive interpretation” in *519 Sweet “malicious prosecution ... and abuse of process [arose] out
Dreams Unlimited, Inc. v. Dial-A-Mattress Int'l, Inc., 1 of **104 actions taken by [defendant upon plaintiff's]
F.3d 639, 642 (7th Cir.1993), of “an arbitration clause refusal to return” a car after defendant was unable to
applying to disputes ‘arising out of the agreement’ as find financing). But see Mannix v. Hosier, 249 A.D.2d
including ‘any dispute between the contracting parties that 966, 672 N.Y.S.2d 574, 575 (App.Div.1998) (holding that
is in any way connected with their contract.’ ”). plaintiff's claim of malicious prosecution that resulted
from harassment charges brought by plaintiff's broker
Arbitration provisions using such expansive language “only collaterally related to the financial relationship
are construed to require arbitration of statutory claims between the parties”).
such as alleged civil rights violations and common law
torts. See, e.g., EPIX Holdings, supra, 410 N.J.Super. Griffin analogizes Burlington Volkswagen's action in
at 461, 468-75, 982 A.2d 1194 (tort claims including reporting that the car had been stolen to the police to
breach of fiduciary duty, negligent misrepresentation, and a Burlington Volkswagen employee assaulting him in
fraud); Alfano v. BDO Seidman, LLP., 393 N.J.Super. order to regain possession of the car. However, a tort
560, 575-77, 925 A.2d 22 (App.Div.2007) (tort claims claim based on such an assault would not require a
including fraud and civil conspiracy); Gras v. Assocs. First determination of the parties' respective rights in the car
Capital Corp., 346 N.J.Super. 42, 54-57, 786 A.2d 886 under the Motor Vehicle Retail Order. A Missouri court
(App.Div.2001) (Consumer Fraud Act claim); Young v. has concluded that
Prudential Ins. Co., 297 N.J.Super. 605, 608, 614-21, 688
A.2d 1069 (App.Div.1997) (Law Against Discrimination for a tort claim to be subject to arbitration under a
and Conscientious Employee Protection Act claims). broad arbitration clause, it must raise some issue the
resolution of which requires reference to or construction
The retail order form signed by Griffin included an of some portion of the parties' contract. Where,
expansive form of arbitration clause under which he however, a tort claim is independent of the contract
agreed “to arbitrate any claim, dispute, or controversy ... terms and does not require reference to the underlying
that may arise out of or relating to the purchase ... contract, arbitration is not compelled.
identified in the Motor Vehicle Retail Order and the
[Estate of Athon v. Conseco Finance Servicing Corp., 88
financing thereof.” Griffin's claims “arise out of” and
S.W.3d 26, 30 (Mo.Ct.App.2002) (citations omitted).]
“relate to” the actions that Burlington Volkswagen took
See also EPIX Holdings, supra, 410 N.J.Super. at 475, As alternative grounds for reversal of the judgment
dismissing his complaint, Griffin also argues that
982 A.2d 1194 (requiring arbitration under expansive
Burlington Volkswagen should be foreclosed from relying
arbitration clause because plaintiff could not “maintain
upon the arbitration clause because its invocation of
its claim for damages without reference to, and reliance
the criminal process to regain possession of the car
upon, the underlying contract”). Under this approach
constituted a waiver or equitably estopped Burlington
to determining arbitrability under the broad form of
Volkswagen from seeking arbitration of Griffin's claims.
arbitration clause involved in this case, a tort claim based
These arguments are clearly without merit. R. 2:11-3(e)(1)
on an assault upon Griffin to regain possession of the car
(E).
would not be subject to arbitration because it would not
require “reference to the underlying contract.” However,
Affirmed.
Griffin's tort claims against Burlington Volkswagen are
subject to arbitration because they *521 depend in part
on an interpretation of the parties' rights under the Motor All Citations
Vehicle Retail Order.
411 N.J.Super. 515, 988 A.2d 101
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Synopsis
Background: Property developer sued insurance brokers Affirmed in part, reversed in part, and remanded.
for negligence and breach of contract after a hurricane
caused extensive damages to a development project,
alleging that brokers allowed a builder's risk insurance
West Headnotes (39)
policy to expire and be replaced by a permanent insurance
policy even though construction of the project was
not complete. Brokers designated general contractor, [1] Courts
subcontractors, and engineers as responsible third parties. Review by or certificate to Supreme
Developer amended its petition to name those parties Court by Court of Civil Appeals of questions
as defendants. Subsequently, general contractor and the where its decision conflicts with or overrules
other defendants filed motions to compel arbitration. that of another Court of Civil Appeals or
The 404th District Court, Cameron County, Elia Cornejo that of the Supreme Court
Lopez, J., denied the motions. The defendants pursued Supreme Court had jurisdiction to review
an interlocutory appeal. The Corpus Christi - Edinburg a judgment of the court of appeals in an
Court of Appeals, 2013 WL 2298447, affirmed. The interlocutory appeal from trial court's denial
defendants filed petitions for review, which the Supreme of motions to compel arbitration in a dispute
Court granted. between property developer and various
defendants, including general contractor, over
responsibility for an expiration of a builder's
Holdings: The Supreme Court, Boyd, J., held that: risk insurance policy; the holding of the
court of appeals created an inconsistency
[1] general contractor's acts of requesting a continuance with prior precedent regarding the issue of
and then agreeing to a new trial did not constitute an whether courts or arbitrators should decide
express waiver of its arbitration rights as set forth in a whether a contractual deadline barred a
contract between general contractor and developer; demand for arbitration, and clarification of
the inconsistency would remove unnecessary
[2] general contractor did not impliedly waive its certainty in the law and unfairness to litigants.
arbitration rights; Tex. Gov't Code Ann. § 22.225(c, e).
5 Cases that cite this headnote 4 Cases that cite this headnote
artful pleading, for the purpose of determining to hold a nonsignatory liable pursuant
the applicability of “direct benefits estoppel,” to duties imposed by the contract and
which bars a claimant from both seeking to denying arbitration's applicability because
hold a nonsignatory liable pursuant to duties the defendant is a nonsignatory, the alleged
imposed by contract and denying arbitration's liability must arise solely from the contract or
applicability because the defendant is a must be determined by reference to it.
nonsignatory.
3 Cases that cite this headnote
5 Cases that cite this headnote
1 Cases that cite this headnote Contracts between general contractor and
subcontractors did not require property
developer to arbitrate its claims against
[36] Alternative Dispute Resolution subcontractors for negligence and breach
Waiver or Estoppel of contractual duties, even assuming that
For a claim to seek a direct benefit from a the subcontracts were binding on developer,
contract containing an arbitration provision, and even though the subcontracts contained
as required for direct benefit estoppel to arbitration provisions; another provision in
apply to bar a claimant from both seeking each subcontract stated that subcontractor
to hold a nonsignatory liable pursuant expressly agreed, notwithstanding any
to duties imposed by the contract and provision to the contrary in the
denying arbitration's applicability because the contract documents, that the subcontract
defendant is a nonsignatory, the claim must did not contain a provision for the
depend on the existence of the contract and mandatory arbitration of disputes, and
be unable to stand independently without the even though the arbitration provisions and
contract. the notwithstanding provision conflicted,
the notwithstanding provision specifically
5 Cases that cite this headnote provided that in the event of any conflict, the
notwithstanding provision would prevail.
[37] Alternative Dispute Resolution
4 Cases that cite this headnote
Waiver or Estoppel
For a claim to seek a direct benefit from a
contract containing an arbitration provision,
as required for direct benefit estoppel to
apply to bar a claimant from both seeking
contractor, G.T. Leach Builders, L.L.C.; (2) two of arbitration agreement and that it applies to Sapphire's
G.T. Leach's subcontractors, Power Design, Inc. and claims against G.T. Leach, but contends that G.T. Leach
Atlas Comfort Systems USA, LLC 3 (collectively, the expressly and impliedly waived its right to demand
Subcontractors); and (3) an engineering contractor, CHP arbitration. Alternatively, Sapphire argues that G.T.
& Associates Consulting Engineers, Inc., and its employee Leach failed to demand arbitration prior to a deadline
that the contract expressly imposes. The court of appeals
Mark Janneck (collectively, the Engineers). 4 Sapphire,
agreed with Sapphire's second argument and did not
in turn, promptly amended its petition to name these
reach its first. We conclude that (1) G.T. Leach did not
parties as defendants, alleging that their negligence and
waive its arbitration rights, and (2) the issue of whether
contractual breaches resulted in construction defects that
the contractual deadline bars G.T. Leach's demand for
caused the condominium project to sustain the water
arbitration is one that the arbitrators—not the courts—
damage that resulted in the uncovered losses. Although
must decide. Because the waiver argument challenges G.T.
Sapphire asserted these claims within the four-year statute
Leach's ability to rely on the arbitration agreement at all,
of limitations applicable to claims *510 for breach of
we address it first.
contract, the two-year statute of limitations on negligence
claims had already expired. At that time, however, Texas
law allowed a claimant to assert claims against a party A. Waiver of Right to Arbitration
designated as a responsible third party even though the [2] [3] Sapphire asserts that G.T. Leach has waived
statute of limitations barred the claim. 5 its right to enforce their arbitration agreement. Waiver
—the “intentional relinquishment of a known right”—
[1] After pursuing pretrial motions and participating can occur either expressly, through a clear repudiation
in discovery, G.T. Leach—the general contractor— of the right, or impliedly, through conduct inconsistent
moved to compel arbitration and stay the litigation, with a claim to the right. Perry Homes, 258 S.W.3d at
relying on an arbitration agreement contained in its 590–91, 594; Moayedi v. Interstate 35/Chisam Rd., L.P.,
general contract with Sapphire. The Insurance Brokers, 438 S.W.3d 1, 6 (Tex.2014). Sapphire argues that G.T.
Subcontractors, and Engineers (collectively, the Other Leach both expressly and impliedly waived its right to
Defendants) subsequently filed similar motions, also compel arbitration in this case. The trial court agreed
relying on the arbitration agreement in the general and denied G.T. Leach's motion to compel arbitration,
contract, even though they never signed that contract. but the court of appeals did not reach the issue. Both
The Subcontractors relied, in addition, on language in parties have fully briefed the issue and urge us to decide
their subcontracts with G.T. Leach, even though Sapphire it here. When, as here, the relevant facts are undisputed,
never signed the subcontracts. The trial court denied whether a party waived its right to arbitrate is a question of
all of the motions without explaining its reasons. The law. Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542,
defendants pursued an interlocutory appeal, the court 545 (Tex.2014) (per curiam); Perry Homes, 258 S.W.3d at
of appeals affirmed, 6 and we granted the defendants' 598 & n.102. At the parties' mutual request, we reach the
issue here to avoid unnecessary delay. See, e.g., Placencio
petitions for review. 7
v. Allied Indus. Int'l, Inc., 724 S.W.2d 20, 22 (Tex.1987)
(reaching, rather than remanding, issue of law not reached
by court of appeals “[t]o avoid unnecessary delay”). Based
II. on the undisputed facts, we conclude that G.T. Leach has
not waived its right to arbitration.
G.T. Leach
1. Express Waiver
We first consider whether G.T. Leach can compel
[4] Sapphire first argues that G.T. Leach expressly waived
arbitration. In the general contract, G.T. Leach and
its arbitration rights by seeking a continuance and
Sapphire agreed that “[a]ny Claim arising out of or
agreeing to a new trial date. Specifically, Sapphire notes
related to the Contract ... shall ... be subject to agreed
that G.T. Leach filed (jointly with the other defendants) a
private arbitration” and “shall be decided by binding
motion for continuance stating that “there is insufficient
arbitration.” 8 Sapphire *511 concedes that this is a valid time for the parties to prepare this case with the current
make intelligent decisions about how to defend the suit, rights by initiating lawsuit, invoking forum-selection
and as we have stated, a party may protect its existing clause, moving to transfer venue, propounding request for
litigation rights from forfeiture without waiving its right to disclosure, and waiting nineteen months after being sued
arbitration. We have declined to find waiver of the right to to move for arbitration); Fleetwood Homes, 257 S.W.3d
arbitrate in other cases where the movant made a request at 694 (holding that movant did not waive arbitration
for disclosure. See Richmont Holdings, 455 S.W.3d at 575; rights by noticing deposition, serving written discovery,
Vesta Ins., 192 S.W.3d at 763. and waiting eight months to move for arbitration); Bruce
Terminix, 988 S.W.2d at 703–04 (holding that movant did
G.T. Leach also designated experts and responsible third not waive arbitration rights by propounding requests for
parties, but these actions were also defensive in nature production and interrogatories and waiting six months
and necessary to preserve G.T. Leach's rights. If G.T. to seek arbitration); Mancias, 934 S.W.2d at 88–89
Leach had failed to timely designate experts, it would have (holding that movant did not waive arbitration rights
forfeited the right to present expert witnesses if the suits by propounding written discovery, noticing deposition,
went to trial. See TEX. R. CIV. P. 193.6(a). Likewise, agreeing to reset trial date, and waiting nearly a year to
G.T. Leach had to designate responsible third parties by move for arbitration).
the deadline imposed in the scheduling order. G.T. Leach
did not create the need to timely designate experts and
responsible third parties by agreeing to a scheduling order:
b. Prejudice
the rules of civil procedure impose a default deadline for
expert designations when the court has not set one, and [12] [13] [14] [15] [16] Nor has Sapphire proven
the Civil Practice and Remedies Code imposes a deadline that it suffered unfair prejudice as a result of G.T.
for designating responsible third parties. TEX. R. CIV. P. Leach's litigation conduct. Detriment or prejudice, in
195.2; TEX. CIV. PRAC. & REM. CODE § 33.004(a). this context, refers to an “inherent unfairness caused by
a ‘party's attempt to have it both ways by switching
While we agree that G.T. Leach could have been more between litigation and arbitration to its own advantage.’
prompt in seeking arbitration, most of the delay of ” In re Citigroup Global Mkts., Inc., 258 S.W.3d 623,
which Sapphire complains occurred either during the 625 (Tex.2008) (per curiam) (quoting Perry Homes, 258
eighteen months before Sapphire added G.T. Leach to this S.W.3d at 597). Prejudice may result when a party seeking
case or during the four-plus months during which G.T. arbitration first sought to use the judicial process to gain
Leach sought to transfer venue. See TEX. R. CIV. P. access to information that would not have been available
86 (governing order of pleadings for motion to transfer in arbitration, but propounding discovery will not, in and
venue). The delay between the trial court's denial of the of itself, result in waiver of a right to compel arbitration.
motion to transfer venue and G.T. Leach's motion to Bruce Terminix, 988 S.W.2d at 704. Similarly, while delay
compel arbitration was between two and three months. may be a factor both in terms of whether the movant
We conclude that three months is not a substantial delay has substantially invoked the judicial process and whether
relative to the timeline of this case as a whole. Cf. the nonmovant has suffered prejudice, mere delay is not
Fleetwood Homes, 257 S.W.3d at 694 (no waiver despite ordinarily enough, even if it is substantial. Richmont
eight-month delay); Vesta Ins., 192 S.W.3d at 763 (no Holdings, 455 S.W.3d at 576; see also Fleetwood Homes,
waiver despite two-year delay). 257 S.W.3d at 694 (eight-month delay); Vesta Ins., 192
S.W.3d at 763 (two-year delay). “Waiver can be implied
Considering the totality of the circumstances, we hold that from a party's unequivocal conduct, but not by inaction.”
G.T. Leach has not substantially invoked the litigation ADM Investor, 304 S.W.3d at 374 (citing Perry Homes,
process in contravention of its contractual right to 258 S.W.3d at 593).
arbitration. See Perry Homes, 258 S.W.3d at 589–90
(adopting totality-of-the-circumstances test). As in several G.T. Leach may have had access to more information as a
cases involving similar or greater participation in litigation result of this litigation than if Sapphire's dispute with G.T.
than occurred here, we decline to find waiver under these Leach had originated in arbitration. But Sapphire, not
circumstances. See Richmont Holdings, 455 S.W.3d at 576 G.T. Leach, chose to initiate this suit in the courts rather
*515 (holding that movant did not waive arbitration than arbitration, and G.T. Leach did not serve a single
request for production, interrogatory, or deposition notice must defer to the arbitrators to determine the meaning and
in the case. Sapphire's contention (discussed below) that it effect of the contractual deadline.
has been prejudiced by the delay because the contractual
deadline for initiating arbitration expired before G.T.
Leach moved to compel arbitration is unavailing because 1. Waiver
that deadline expired before Sapphire even named G.T. [17] [18] Sapphire contends that G.T. Leach waived its
Leach a party to this suit. argument that only the arbitrators can decide Sapphire's
contractual-deadline defense because G.T. Leach failed
In summary, although we agree that G.T. Leach could to raise the argument in the trial court or in the court
have demanded waiver more promptly than it did, we hold of appeals. In support, Sapphire relies on our well-
that the totality of the circumstances do not establish that established error-preservation rules, which preclude a
G.T. Leach substantially invoked the judicial process to party from seeking appellate review of an issue that the
the extent required to demonstrate a waiver of its right party did not properly raise in the trial court. See TEX.
to arbitration, and its participation in the litigation has R. APP. P. 33.1(a)(1) (“As a prerequisite to presenting
not caused Sapphire the kind of prejudice necessary to a complaint for appellate review, the record must show
clear the “high hurdle” of waiver. We thus conclude that that ... the complaint was made to the trial court ....”); see
G.T. Leach has not impliedly waived its right to demand also In re B.L.D., 113 S.W.3d 340, 350 (Tex.2003) (listing
arbitration in this case. cases for proposition that “error [must be] preserved in the
trial court”). 10 These rules do not apply here, however,
because Sapphire first raised its contractual-deadline
B. Contractual Deadline defense in the court of appeals, not in the trial court.
We now turn to Sapphire's contention that a contractual Under our rules, an issue *517 presented in a petition
deadline bars G.T. Leach's arbitration demand. The for review to this Court must have “been preserved for
deadline at issue provides that any appellate review in the trial court and assigned as error in
the court of appeals,” but only “[i]f the matter complained
*516 demand for arbitration shall
of originated in the trial court.” TEX. R. APP. P. 53.2(f).
be made within ... a reasonable time
after the Claim has arisen, and in no
In the trial court, Sapphire argued only that G.T.
event shall it be made after the date
Leach waived its right to arbitration by participating in
when institution of legal or equitable
the litigation. The only time Sapphire referred to the
proceedings based on such Claim
contractual deadline in the trial court was to support
would be barred by the applicable
its waiver-by-litigation defense and, in particular, its
statute of limitations as determined
contention that G.T. Leach's participation in the litigation
pursuant to Section 13.7.
was prejudicial to Sapphire. 11 Sapphire never asserted in
The court of appeals agreed with Sapphire that this the trial court that the contractual deadline independently
deadline bars G.T. Leach's demand for arbitration bars G.T. Leach's arbitration demand. G.T. Leach thus
because the statute of limitations had run on Sapphire's had no reason to argue in the trial court that the
claims by the time G.T. Leach made its demand. 9 G.T. arbitrators, rather than the court, must resolve that
Leach argues that the court should not have addressed the assertion. On this point, there was no error for G.T. Leach
contractual deadline at all, because Sapphire's contention to preserve in the trial court.
that the deadline bars G.T. Leach's arbitration demand
is itself an issue that Sapphire agreed to resolve through [19] [20] Sapphire first relied on the contractual deadline
arbitration. In other words, G.T. Leach argues that only as an independent bar to G.T. Leach's arbitration demand
the arbitrators—and not the courts—can decide whether in its appellee's brief in the court of appeals, and the
the contractual deadline bars G.T. Leach's demand for error that G.T. Leach now complains of (i.e., that the
arbitration. In response, Sapphire asserts that G.T. Leach court of appeals should not have decided that issue) first
waived this argument by failing to raise it in the trial court arose from the court of appeals' judgment. Although G.T.
or the court of appeals. We conclude that G.T. Leach Leach could have made this argument in its reply brief
did not waive the argument, and we agree that the courts or in a motion for rehearing in the court of appeals, 12
Act (TAA) 14 thus provides that courts “shall order the party's conduct in litigation equates to a waiver of its rights
parties to arbitrate on application of a party showing: (1) under the arbitration agreement, there is no presently
an agreement to arbitrate; and (2) the opposing party's enforceable agreement to arbitrate.
refusal to arbitrate.” TEX. CIV. PRAC. & REM. CODE §
171.021(a) (emphasis added); In re FirstMerit Bank, N.A., In this regard, the United States Supreme Court has
52 S.W.3d 749, 753–54 (Tex.2001) (“Once the trial court recognized a distinction between questions of “substantive
concludes that the arbitration agreement encompasses the arbitrability”—which courts decide—and “procedural
claims, and that the party opposing arbitration has failed arbitrability”—which courts must refer to the arbitrators
to prove its defenses, the trial court has no discretion but to decide. See BG Group, PLC v. Republic of Arg., –––U.S.
to compel arbitration and stay its own proceedings.”) ––––, 134 S.Ct. 1198, 1206–07, 188 L.Ed.2d 220 (2014);
Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 81,
[25] [26] The courts' role, then, is first to decide 123 S.Ct. 588, 154 L.Ed.2d 491 (2002). In Howsam, a
whether the parties made a valid and presently enforceable brokerage firm argued that its client could not initiate
agreement to arbitrate. TEX. CIV. PRAC. & REM. an arbitration because the client failed to do so within
CODE § 171.021(b) (“If a party opposing an application a six-year deadline that the parties had contractually
[for arbitration] denies the existence of the agreement, the adopted as part of their arbitration agreement. 537 U.S.
court shall summarily determine that issue.”). If they did, at 81, 123 S.Ct. 588. The Court held that this was not a
then the court must decide whether the present disputes question of arbitrability for the courts to decide. Id. at
fall within the scope of that agreement. See id.; In re 83, 123 S.Ct. 588. Although the Court acknowledged that,
Hous. Pipe Line Co., 311 S.W.3d 449, 451 (Tex.2009); “[l]inguistically speaking, one might call any potentially
J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 dispositive gateway question a ‘question of arbitrability,’
(Tex.2003). These questions that courts must resolve are ” it explained that “the phrase ‘question of arbitrability’
sometimes referred to as questions of “arbitrability.” has a far more limited scope” and does not encompass “
*520 See, e.g., Hous. Pipe Line, 311 S.W.3d at 451–52; ‘procedural’ questions which grow out of the dispute and
bear on its final disposition” or “allegation[s] of waiver,
Perry Homes, 258 S.W.3d at 587–92. 15 If, by answering
delay, or a like defense.” Id. at 84, 123 S.Ct. 588 (citation
these questions, the court determines that the present
omitted). Quoting the Revised Uniform Arbitration Act
disputes are in fact arbitrable under the parties' agreement,
of 2000, the Court explained that, “in the absence
the court must complete its role by ordering the parties
of an agreement to the contrary, issues of substantive
to arbitration and leaving it to the arbitrators to resolve
arbitrability ... are for a court to decide and issues of
those disputes. See TEX. CIV. PRAC. & REM. CODE
procedural arbitrability, i.e., whether prerequisites such as
§ 171.021; Venture Cotton Co-op. v. Freeman, 435 S.W.3d
time limits, notice, laches, estoppel, and other conditions
222, 232 (Tex.2014).
precedent to an obligation to arbitrate have been met,
are for the arbitrators to decide.” Id. at 81, 123 S.Ct. 588
[27] We have also recognized that the question of whether
(emphasis and citation omitted, ellipsis in Howsam ).
a party has waived its right to arbitration through its
litigation conduct is a question of arbitrability for the
The Supreme Court reiterated this distinction in
courts to decide. Perry Homes, 258 S.W.3d at 588.
BG Group, further clarifying the difference between
We concluded that this is a question of arbitrability,
substantive arbitrability questions addressing the
rather than a question to be arbitrated, because (1)
existence, enforceability, and scope of an agreement
“[c]ontracting parties would expect the court to decide
*521 to arbitrate (which courts decide), and procedural
whether one party's conduct before the court waived the
arbitrability questions addressing the construction and
right to arbitrate,” (2) it is a “gateway” matter regarding
application of limits on that agreement (which only
“whether the parties have submitted a particular dispute
arbitrators can decide):
to arbitration,” and (3) “courts decide defenses relating
solely to the arbitration clause.” Id. at 588–89. In essence, On the one hand, courts presume that the parties intend
the question of whether a party has waived its right to courts, not arbitrators, to decide what we have called
arbitration by its conduct in litigation is just another disputes about “arbitrability.” These include questions
way of asking the first question of arbitrability: whether such as “whether the parties are bound by a given
there is a presently enforceable arbitration agreement. If a arbitration clause,” or “whether an arbitration clause
in a concededly binding contract applies to a particular can award Sapphire a remedy on its negligence claims
type of controversy.” in light of Sapphire's more than two-year delay in
asserting them. More pointedly, it involves an alleged
On the other hand, courts presume that the parties “delay beyond a limitations deadline.” Perry Homes, 258
intend arbitrators, not courts, to decide disputes S.W.3d at 589; see also id. at 588 (noting that “federal
about the meaning and application of particular courts ... consistently [defer to arbitrators] when waiver
procedural preconditions for the use of arbitration. concerns limitations periods” *522 ). We explained in
These procedural matters include claims of “waiver, Perry Homes that, absent express contractual agreement
delay, or a like defense to arbitrability.” And they to the contrary, issues of this nature must be resolved by
include the satisfaction of “prerequisites such as time arbitrators rather than courts. See id. at 588–89; see also
limits, notice, laches, estoppel, and other conditions BG Grp., 134 S.Ct. at 1207 (observing that “satisfaction
precedent to an obligation to arbitrate.” of ‘prerequisites such as time limits' ” are questions of
procedural arbitrability for the arbitrator to decide).
134 S.Ct. at 1206–07 (citations omitted).
F.3d 25, 43–44 (1st Cir.2006) (holding that arbitrator or equity would bind them to the contract generally.” In
should decide whether contract's one-year limitations re Weekley Homes, L.P., 180 S.W.3d 127, 129 (Tex.2005).
provision conflicted with Clayton Act's four-year statute We conclude here, however, that neither law nor equity
of limitations for antitrust claims). But Sapphire asserts requires Sapphire to arbitrate these claims.
no such contentions in this case. Instead, it concedes the
existence of an enforceable arbitration agreement that
applies to its claims against G.T. Leach, and argues only A. Arbitration Under the General Contract
that the terms of that agreement limit G.T. Leach's rights We begin with the Other Defendants' reliance on the
under the agreement itself. Consistent with the decisions general contract as support for their arbitration demands.
We conclude that Sapphire did not agree in the *524
of numerous federal courts, 18 we *523 conclude that
general contract to arbitrate its claims against the Other
Sapphire's argument presents questions of procedural
Defendants and is not equitably estopped from refusing
arbitrability that only the arbitrators can decide, and the
to do so.
court of appeals thus erred by deciding the issue.
could enforce its arbitration provisions. See Rubiola, 334 to be accorded in the arbitration. We conclude that
S.W.3d at 222 (holding that “parties to an arbitration the Other Defendants' reliance on the scope of the
agreement may grant non-signatories the right to compel agreement between Sapphire and G.T. Leach to establish
arbitration”). 19 the existence and enforceability of an agreement between
Sapphire and the Other Defendants is misplaced. As we
This contention raises questions about “the existence of have explained, a party seeking to compel arbitration
a valid arbitration clause between specific parties and is must establish both (1) the existence of a valid enforceable
therefore a gateway matter for the court to decide.” Id. agreement to arbitrate and (2) that the claims at issue fall
at 224. Ultimately, the question requires us to determine within the scope of that agreement. TEX. CIV. PRAC. &
“the intent of the parties, as expressed in the terms REM. CODE § 171.021(a); FirstMerit Bank, 52 S.W.3d
of the agreement,” so we apply “ordinary principles of at 753. The Other Defendants' argument that Sapphire
state contract law [to] determine whether there is a valid agreed that they, as non-signatories, could enforce the
agreement to arbitrate.” Id. (quoting Bridas S.A.P.I.C. v. arbitration agreement addresses the first issue, not the
Gov't of Turkm., 345 F.3d 347, 355, 358 (5th Cir.2003)); second. Although Sapphire's claims may fall within the
see also Kellogg Brown & Root, 166 S.W.3d at 738 (holding scope of the agreement, the scope of the arbitration clause
that, “[u]nder the FAA, ordinary principles of state “does not answer whether [Sapphire] must arbitrate” with
contract law determine whether there is a valid agreement the Other Defendants. Kellogg Brown & Root, 166 S.W.3d
to arbitrate”). The Other Defendants argue that several at 739–40.
provisions of the contract demonstrate Sapphire's intent
to allow them to require arbitration, but we find none of
them persuasive. b. The Joinder Provisions
permissive word ‘may’ to mean something other than make their joinder “required”; rather, it allows for their
its plain meaning.”); Wichita Cnty., Tex. v. Hart, 917 joinder, but only if their joinder is “required” to provide
S.W.2d 779, 782 (Tex.1996) (“The Legislature's use of complete relief. We conclude that the joinder provision
the permissive *526 term ‘may’ in the Whistleblower does not give the Other Defendants, who are not parties
Act's venue provision, in light of its contemporaneous to the general contract, a legal right to require Sapphire to
reorganization of the venue statute, strongly suggests arbitrate with them.
that the Act's venue provision is permissive.”). The
original AIA form provided that “[n]o arbitration shall The Other Defendants contend that, at a minimum,
include, ... parties other than the Owner, Contractor, a the joinder provision gives G.T. Leach a contractual
separate Contractor, ... and other persons substantially right to join others whose presence is “necessary to
involved in a common question of fact or law whose completely resolve the dispute,” even if it does not give
presence is required if complete relief is to be accorded those other parties the right to join themselves. In light
in arbitration.” In its original form, the provision thus of the provision's permissive language and references to
prohibited joinder of any but the listed parties (at least, the necessity of each party's “consent,” as we have just
absent written consent of all the parties), but it did not discussed, we disagree. Moreover, even if the contract gave
require joinder of the listed parties. Sapphire and G.T. G.T. Leach such a right, G.T. Leach has not requested
Leach revised this provision to state that “Any [instead of that relief in this Court. G.T. Leach asks this Court
“No”] arbitration may [instead of “shall”] include parties to “order the claims brought by Sapphire against [G.T.
other than” the listed parties, and added “Subcontractors” Leach] to arbitration,” without reference to the claims
to the list. The effect of their revisions was to remove brought by Sapphire against the Other Defendants.
the prohibition against including parties “other than”
those listed. Because they changed “shall” to “may,”
they did not require the joinder of unlisted parties, but
c. The Definition of “Contractor”
neither did they require the joinder of the listed parties.
In fact, they retained a sentence from the original form The Engineers and Insurance Brokers point out that the
providing that a party's “[c]onsent to arbitration involving general contract states that it is an agreement between
an additional person or entity ... shall not constitute “the Owner” and “the Contractor,” and that Sapphire
consent to arbitration of a claim not described therein or *527 and G.T. Leach each signed the agreement in
with a person or entity not named or described therein.” those respective capacities. They note, however, that the
contract provides that the term “Contractor” includes
The provision thus permits the parties to the general any contractor who executes a separate agreement with
contract to consent to the joinder of additional parties the owner. Since Sapphire is suing them for breach of
in the arbitration, but it does not require them to do so. separate agreements directly between each of them and
Ultimately, the Other Defendants concede as much by Sapphire, they contend that they are each a “Contractor”
repeatedly acknowledging throughout their briefs that the under the general contract and thus entitled to enforce its
joinder provision “allows inclusion or joinder,” “allow[s] arbitration agreement. The contract, however, expressly
them to be joined” so that they “could participate” in provides that the “Contract Documents shall not be
the arbitration, and “permits all parties to arbitrate” construed to create a contractual relationship of any
together. Nevertheless, they contend that, because this kind ... between [Sapphire] and a Subcontractor ... or [ ]
clause is ambiguous as to whether it is mandatory or between any persons or entities other than [Sapphire] and
permissive, we must construe it as mandatory in support
[G.T. Leach].” 20
of the law's presumption in favor of arbitration. This
presumption, however, requires that doubt “as to waiver,
In summary, we find no language in the general contract
scope, and other issues not relating to enforceability—
that gives the Other Defendants rights to enforce the
must be resolved in favor of arbitration.” Poly–Am., 262
general contract's arbitration clause against Sapphire.
S.W.3d at 348 (emphasis added). And, in any event, we
We thus conclude that Sapphire did not agree in the
do not find the language here to be ambiguous. The fact
general contract to arbitrate its claims against the Other
that the provision refers to other parties as those whose
Defendants.
presence “is required” to accord complete relief does not
arbitration of disputes between the parties. First, section effect to all of the provisions with reference to the whole
11.1 states the parties' agreement to arbitrate disputes: instrument, Myers v. Gulf Coast Minerals Mgmt. Corp.,
361 S.W.2d 193, 196 (Tex.1962); and (4) we must construe
All claims, disputes and other the provisions together if we can, rather than allow one to
matters in question arising out of, cancel the other, In re U.S. Home Corp., 236 S.W.3d 761,
or relating to, this Subcontract 765 (Tex.2007).
or the breach thereof shall be
decided by arbitration in accordance We conclude that there is no way to give full effect to
with the Construction Industry both provisions, and that one must necessarily “nullify”
Arbitration Rules of the American the other at least to some extent. If we give effect to
Arbitration Association unless the the agreement to arbitrate in section 11.1, for example,
parties mutually agree otherwise. then we must necessarily conclude that the agreement
does “contain a provision for the mandatory arbitration
Section 11.3 then states that, if G.T. Leach “enter[s]
of disputes,” and thus nullify section 12.13's disclaimer.
into arbitration with [Sapphire] or others regarding
The Subcontractors argue that we can give effect to both
matters relating to this Subcontract, Subcontractor will
by construing the disclaimer to mean that arbitration
agree, if requested by [G.T. Leach] to consolidation
is “mandatory” unless all parties mutually agree not
of this arbitration with [G.T. Leach's] arbitration with
to arbitrate, in which case arbitration would not be
[Sapphire],” and in that case the Subcontractors “shall
mandatory. But parties can always mutually agree not
be bound by the result of the arbitration with [Sapphire]
to do what they previously agreed to do, and in any
to the same degree as [G.T. Leach].” Finally, however,
event, section 11.1 already provides that the parties can
section 12.13 states that the parties do not agree to
“mutually agree” not to arbitrate.
mandatory arbitration:
Notwithstanding any provision Generally, we must give the subcontracts their plain
to the contrary contained meaning and enforce them without rendering either
in the Contract Documents, provision entirely superfluous. Cf. El Paso Field Servs.,
Subcontractor expressly agrees that L.P. v. MasTec N. Am., Inc., 389 S.W.3d 802, 808
this Subcontract does not contain (Tex.2012) (prohibiting such a result); see also Moayedi,
a provision for the mandatory 438 S.W.3d at 7; Mercer v. Hardy, 444 S.W.2d 593, 595
arbitration of disputes, nor does (Tex.1969). But we cannot do *532 that when the plain
it incorporate by reference such a meaning of one provision unambiguously requires that
provision if such is contained in we not enforce another. See Tex. Lottery Comm'n v. First
the [general] contract between [G.T. State Bank of DeQueen, 325 S.W.3d 628, 637 (Tex.2010).
Leach] and [Sapphire]. There is a direct conflict between section 11.1's provision
that all disputes “shall be decided by arbitration” and
The court of appeals held that the disclaimer in this section section 12.13's provision that “this Subcontract does not
12.13 “nullif [ies]” the arbitration agreement in section contain a provision for the mandatory arbitration of
11.1, and Sapphire relies on that holding here. disputes.” And if that were all that the two provisions
provided, an ambiguity might exist that requires us to rely
The Subcontractors contend that section 12.13's on canons of construction to determine the parties' intent.
disclaimer does not nullify the agreement in section
11.1 because (1) the agreement appears earlier within But section 12.13 explicitly states that the
the contract, and “terms stated earlier in an agreement Subcontract does not require mandatory arbitration
must be favored over subsequent terms” in that same “[n]otwithstanding any provision to the contrary” in any
agreement, Coker v. Coker, 650 S.W.2d 391, 393 of the contract documents. Cf. In re Lee, 411 S.W.3d 445,
(Tex.1983); (2) the agreement is more specific than the 454 (Tex.2013) ( “The use of the word ‘notwithstanding’
disclaimer, and specific provisions control over general indicates that the Legislature intended section 153.0071
provisions, see Forbau v. Aetna Life Ins. Co., 876 S.W.2d to be controlling.”). Like the statute at issue in DeQueen,
132, 133–34 (Tex.1994); (3) we must consider and give which expressly provided that any conflicting “rule of
Footnotes
1 “It is the policy of this state to encourage the peaceable resolution of disputes ... through voluntary settlement procedures,”
including binding and nonbinding arbitration. TEX. CIV. PRAC. & REM. CODE §§ 154.002, 154.027.
2 “A court shall order the parties to arbitrate on application of a party showing ... an agreement to arbitrate;” otherwise, “the
court shall deny the application.” Id. § 171.021(a)(1), (b).
3 Atlas Comfort is now known as Comfort Systems USA—South Central.
4 Sapphire initially filed two separate lawsuits, one against the Insurance Brokers and another against the architects who
designed the project. The architects first named G.T. Leach, the Subcontractors, and the Engineers as responsible third
parties, and Sapphire amended its pleadings to name them as defendants in that suit. When the Insurance Brokers
learned of these developments in that suit, they named G.T. Leach, the Subcontractors, and the Engineers as responsible
third parties in this suit. The architects later settled and resolved all claims asserted by and against them.
5 See Act of May 4, 1995, 74th Leg., R.S., ch. 136, § 1, sec. 33.004(e), 1995 Tex. Gen. Laws 971, 973, amended by Act
of June 2, 2003, 78th Leg., R.S., ch. 204, § 4.04, sec. 33.004(e), 2003 Tex. Gen. Laws 847, 856, repealed by Act of May
24, 2011, 82d Leg., R.S., ch. 203, § 5.02, sec. 33.004(e), 2011 Tex. Gen. Laws 757, 759.
6 456 S.W.3d 570.
7 Although we generally lack jurisdiction over interlocutory appeals, see TEX. GOV'T CODE § 22.225(b)(3), we have
jurisdiction to review a court of appeals' interlocutory judgment when its holding creates an inconsistency with prior
precedent “that should be clarified to remove unnecessary uncertainty in the law and unfairness to litigants.” Id. §
22.225(c), (e); see also Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C., 392 S.W.3d 633, 635 n.3 (Tex.2013)
(per curiam) (“We have jurisdiction to hear an appeal from an interlocutory order denying arbitration when the court of
appeals' decision conflicts with prior precedent.”). In this case, the court of appeals' holding creates such an inconsistency
with our decision in Perry Homes v. Cull, 258 S.W.3d 580, 587–92 (Tex.2008), and with the court of appeals' decision
in In re Global Constr. Co., 166 S.W.3d 795, 798–99 (Tex.App.—Houston [14th Dist.] 2005, no pet.), regarding the
issue of whether courts or arbitrators should decide whether a contractual deadline bars a demand for arbitration. The
inconsistency on this issue gives us jurisdiction, which permits us to address and resolve all of the issues that all of the
parties raise in this case. See, e.g., Brown v. Todd, 53 S.W.3d 297, 301 (Tex.2001) (“As we have repeatedly recognized,
if our jurisdiction is properly invoked on one issue, we acquire jurisdiction of the entire case.”).
8 The general contract utilized a “Standard Form of Agreement Between Owner and Contractor” (Form A111–1997) and a
form of “General Conditions of the Contract for Construction” (Form A201–1997), both published by the American Institute
of Architects. Sapphire and G.T. Leach substantially revised these forms, however, by striking and adding language
throughout the contract to reflect their specific agreements. As revised, the arbitration section addresses numerous details
including the process for selecting the arbitrator(s), the rules governing the arbitration, the location and timing of the
arbitration, rights to discovery, finality and appeals from the arbitration award, and the duty to continue performing under
the contract while the arbitration is pending. As discussed further below, one section addresses the consolidation and
joinder of other parties within the arbitration proceeding.
9 By the time Sapphire named G.T. Leach as a defendant—and thus by the time G.T. Leach filed its motion to compel
arbitration—the two-year statute of limitations applicable to Sapphire's negligence claims had already run, but the four-
year statute applicable to Sapphire's breach-of-contract claims had not. The court of appeals did not mention this
distinction, but instead stated broadly that “[t]he parties do not dispute that the applicable statute of limitations had expired
when G.T. Leach sought arbitration.” 455 S.W.3d at 575 n.6; see also id. at 577 (stating that “G.T. Leach does not contest
that the statute of limitations for Sapphire's claims had expired when it filed its motion to compel arbitration.”). These
statements were incorrect. Although the parties did agree that the two-year statute on Sapphire's negligence claims had
expired, they also agreed that the four-year statute on Sapphire's breach-of-contract claims had not. Since we conclude
that the arbitrators must resolve Sapphire's contractual-deadline arguments, however, we need not consider the court
of appeals' error on this point, and we leave it to the arbitrators to resolve all issues related to the construction and
application of the contractual deadline in this case.
10 Sapphire cites to Parks v. Developers Surety & Indemnity Co., 302 S.W.3d 920, 924 (Tex.App.–Dallas 2010, no pet.)
(refusing to consider unconscionability as a defense to contract claim because the defendant failed to plead and assert
it in the trial court), and Posey v. Southwestern Bell Yellow Pages, Inc., 878 S.W.2d 275, 281 (Tex.App.–Corpus Christi
1994, no writ) (“Because the Poseys failed to assert in the court below that the limitation of liability clause was void,
unconscionable or unenforceable, we may not reverse that portion of the summary judgment on appeal.”).
11 Specifically, Sapphire argued: “The most prejudicial aspect of allowing arbitration this late in the game is that the Statute
of Limitations has already run on all of Plaintiff's negligence claims against all Defendants. This effect is so prejudicial
that the express language of the contract prohibits arbitration in this situation.”
12 Although G.T. Leach did not specifically argue in the court of appeals that the arbitrators must decide the contractual-
deadline issue, it did more broadly assert that “there is no legitimate issue as to the arbitrability of all of the issues between
Sapphire and GTL,” and “[b]ecause all of Sapphire's claims against [G.T. Leach] are clearly arbitrable under a valid and
enforceable arbitration provision, the only potentially viable argument Sapphire presents against enforcement is waiver.”
Because “disposing of appeals for harmless procedural defects is disfavored,” and “[a]ppellate briefs are to be construed
reasonably, yet liberally, so that the right to appellate review is not lost by waiver,” Perry v. Cohen, 272 S.W.3d 585, 587
(Tex.2008) (per curiam), G.T. Leach's broad assertions were arguably sufficient to encompass all supporting arguments,
including the argument that Sapphire's claim that the contractual deadline bars G.T. Leach's arbitration demand was
“clearly arbitrable.” See, e.g., Plexchem Int'l, Inc. v. Harris Cnty. Appraisal Dist., 922 S.W.2d 930, 930–31 (Tex.1996)
(holding that the assertion in the court of appeals that “[t]he trial court erred by granting ... summary judgment” was
“sufficient to preserve error and to allow argument as to all possible grounds upon which summary judgment should
have been denied”); see also TEX. R. APP. P. 38.1(f) (“The statement of an issue or point [in an appellate brief] will be
treated as covering every subsidiary question that is fairly included.”). We need not decide that issue, however, since we
conclude that G.T. Leach did not waive its argument even if it failed to raise it in the court of appeals.
13 We appear to have once held to the contrary in In re K.A.F., 160 S.W.3d 923 (Tex.2005), in which we stated that, although
petitioner's “constitutional complaints relate to her appeal and therefore could not have been asserted in the trial court,
she was required to raise them in the court of appeals in order to preserve error.” Id. at 928 (holding that petitioner “waived
these arguments by failing to raise them in the court of appeals”). In support of these statements, however, we cited
two cases in which we had addressed only the well-established rule that a party must preserve error by asserting its
complaints in the trial court. Id. at 928 (citing In re B.L.D., 113 S.W.3d at 350–51 (citing cases for the proposition that
objections and errors “must be preserved in the trial court”); Tex. Dep't of Protective & Regulatory Servs. v. Sherry, 46
S.W.3d 857, 861 (Tex.2001) (refusing to consider constitutional arguments that petitioner did not assert in the trial court).
We cited no rule or authority in K.A.F. to support the proposition that a petitioner waives an argument by failing to raise it
in the court of appeals when the petitioner's complaint first arises from that court's judgment. Consistent with our holdings
in Bunton and Gilbert, as well as our holding today, our statement in K.A.F. should be read to mean that we may treat
such an argument as waived, as we did in that case, but we are not required to do so.
14 The general contract provides for arbitration under the TAA, and each of the defendants sought to compel arbitration
under that Act. While the Federal Arbitration Act (FAA) might also apply, no party argues that the FAA preempts the
TAA on any issue in this case, or that the TAA and FAA materially differ on any such issue. We therefore presume that
the TAA governs, but we may find guidance in court decisions addressing both acts. Cf. Ellis v. Schlimmer, 337 S.W.3d
860, 862 (Tex.2011) (observing that FAA preempts TAA “only when it or other state law would not allow enforcement
of an arbitration agreement that the FAA would enforce” and that party seeking to avoid application of TAA has burden
of raising that issue).
15 In deciding these questions of arbitrability, courts apply the common principles of general contract law to determine the
parties' intent. In re Poly–Am., L.P., 262 S.W.3d 337, 348 (Tex.2008).
16 The Court in Poly–America referenced a “strong federal presumption” in favor of arbitration because the contracts in that
case provided for arbitration under the FAA. Poly–Am., 262 S.W.3d at 348. But the Court has observed in other cases
that Texas law also strongly favors arbitration of disputes and recognizes a presumption in favor of arbitrability. See, e.g.,
Prudential Secs. Inc. v. Marshall, 909 S.W.2d 896, 898–99 (Tex.1995).
17 The general contract defines a “Claim” as
a demand or assertion by one of the parties seeking, as a matter of right, adjustment or interpretation of Contract
terms, payment of money, extension of time or other relief with respect to the terms of the Contract. The term “Claim”
also includes other disputes and matters in question between [Sapphire] and [G.T. Leach] arising out of or relating
to the Contract.
18 See, e.g., United SteelWorkers of Am., AFL–CIO–CLC v. Saint Gobain Ceramics & Plastics, Inc., 505 F.3d 417, 418 (6th
Cir.2007) (holding that application of contractual time limit was issue for arbitrators rather than courts); Marie v. Allied
Home Mortg. Corp., 402 F.3d 1, 11 (1st Cir.2005) (holding that trial court erred in interpreting and applying contractual
requirement that “[a]rbitration under this section must be initiated within sixty days” of event giving rise to the claim
because that issue was for arbitrators to decide); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114, 120–21 (2d
Cir.1991) (“Although Conticommodity [Services Inc. v. Philipp & Lion, 613 F.2d 1222, 1224–25 (2d Cir.1980) ] involved
a one-year time limitation set forth in the arbitration agreement itself, we stated emphatically that any limitations defense
—whether stemming from the arbitration agreement, arbitration association rule, or state statute—is an issue to be
addressed by the arbitrators.”); Nursing Home & Hosp. Union No. 434 AFL–CIO–LDIU by Mackson v. Sky Vue Terrace,
Inc., 759 F.2d 1094, 1097 (3d Cir.1985) (rejecting argument that grievances were “not subject to the arbitration process
because [the other party] did not comply with the specific time limits for filing grievances under the agreement” and
stating that “[e]ven assuming [that] argument has merit, the law is clear that matters of procedural arbitrability, such
as time limits, are to be left for the arbitrator once the court determines that the parties have agreed in the contract to
submit the subject-matter of the dispute to arbitration”); see also McNamara v. Yellow Transp., Inc., 570 F.3d 950, 957
(8th Cir.2009) (adopting reasoning of Marie in context of a party's argument that it was harmed by other party's delay
in seeking arbitration because by that time party would be contractually barred from initiating arbitration, but directing
trial court to retain jurisdiction on remand so that party opposing arbitration would not be left without a forum); Glass v.
Kidder Peabody & Co., 114 F.3d 446, 455 (4th Cir.1997) (“Defenses of laches, mere delay, statute of limitations, and
untimeliness constitute a broad category of waiver defenses that may be raised to defeat compelled arbitration. Laches,
like its companion defenses, however, is a matter of ‘procedural arbitrability’ solely for the arbitrators' decision and not
for the court.”).
19 The agreement at issue in Rubiola gave the “parties” the right to demand arbitration and defined “parties” to include
not only “each and all persons and entities signing this agreement,” but also all “individual partners, affiliates, officers,
directors, employees, agents, and/or representatives of any party to such documents, and ... any other owner and holder
of this agreement.” Rubiola, 334 S.W.3d at 222–23. We agreed that it thus “expressly provides that certain non-signatories
are to be parties to the agreement.” Id. at 224.
20 In addition, a supplemental provision of the general contract states that “[n]o person or entity shall be deemed to be
a third party beneficiary of any provisions of the Contract, nor shall any provisions thereof be interpreted to create
a right of action or otherwise permit anyone not a signatory party to the Contract to maintain an action for personal
injury or property damage.” While the Other Defendants contend that this provision was in an unsigned supplement
to the general contract and, in any event, does not expressly prohibit demands for arbitration, they concede that the
contract expressly incorporates these provisions as part of the “Contract Documents.” In any event, this provision reflects
Sapphire's intent that other parties not have rights under the general contract more clearly than any provision on which
the Other Defendants rely reflects an intent that they have such rights. Even ignoring this provision, the lack of any
provision by which Sapphire agrees to allow the Other Defendants to compel arbitration of Sapphire's claims against
them defeats their attempts to do so.
21 Even if “direct benefits” estoppel does not apply based on the claims in the lawsuit, we have recognized that “a nonparty
may seek or obtain direct benefits from a contract by means other than a lawsuit” and that application of the doctrine
may be based on “conduct during the performance of the contract” rather than conduct during the lawsuit. See Weekley
Homes, 180 S.W.3d at 132–33, 135 (holding that “when a nonparty consistently and knowingly insists that others treat
it as a party, it cannot later ‘turn[ ] its back on the portions of the contract, such as an arbitration clause, that it finds
distasteful’ ”) (citations omitted). The parties do not advance this theory here.
22 The Other Defendants point out that Sapphire's experts filed reports in the trial court in which they relied in part on the
general contract's specification and notes to establish the standards for the Other Defendants' contractual performance.
These reports, however, do not suggest that the general contract imposed the duty to meet these specifications. Instead,
it appears that Sapphire contends that the Other Defendants' separate contractual agreements included promises to
comply with these specifications.
23 Alternatively, the Insurance Brokers argue that
if Sapphire seeks to hold [them] jointly and severally liable for damages with respect to Sapphire's tort claims
against [G.T. Leach], then Sapphire must necessarily rely on allegations of interdependent and concerted misconduct
between those parties. Either way, Sapphire satisfies one or both bases for imposing equitable estoppel under this
Court's decision in Meyer and thus must be compelled to arbitrate its claims against the Insurance Defendants.
But we declined to adopt the “concerted misconduct” theory of equitable estoppel in In re Merrill Lynch Trust Co. FSB,
235 S.W.3d 185, 191–92 (Tex.2007). The Insurance Brokers do not address Merrill Lynch or raise any argument that
this case is distinguishable in any manner material to our analysis of the “concerted misconduct” theory in that case.
We therefore decline to reconsider that decision here.
24 In fact, Sapphire's fourth amended petition does not reference “joint and several liability” at all. The Other Defendants
quote Sapphire's counsel as having orally argued to the trial court that the defendants are jointly and severally liable for
all damages, but we must look to the pleadings to determine the nature of Sapphire's claims.
25 Cf. S. Union Co. v. City of Edinburg, 129 S.W.3d 74, 87 (Tex.2003) (noting that Texas law has recognized specific
legal theories under which corporate structure can be disregarded to hold corporate actors jointly and severally liable
for corporation's contractual obligations); TEX. BUS. ORGS. CODE § 152.304(a) (imposing joint and several liability on
partners for “all” partnership obligations); TEX. GOV'T CODE § 60.152(b)(1) (authorizing contractual assumption of joint
and several liability in certain government contracts); TEX. LAB. CODE § 407A.056 (requiring contractual assumption
of joint and several liability for group and employer under certain group self-insurance agreements); TEX. NAT. RES.
CODE § 161.323 (imposing joint and several liability on “veteran purchaser” and subsequent assignees of veteran with
respect to certain land contracts under some circumstances).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
The trial court may not take judicial notice of 2 Cases that cite this headnote
the truth of factual statements and allegations
contained in the pleadings, affidavits, or other
documents in the file.
evidence presented on the issue of Guyton's suitability compensated for his or her services. See id. § 241 (executors
and administrators are entitled to compensation for
supported her application for appointment. The record
administration of the estate in compliance with the
contains no evidence supporting Guyton's disqualification
Probate Code). Again, this is true whether the trial court
on the grounds of family discord, anger, or any conflict
appointed Guyton or anyone else—including an attorney.
of interest, and the testimony and evidence presented in
Thus, there is no basis for the assumption that appointing
connection with other matters was not subject to judicial
Guyton as the successor administratrix would increase the
notice for the purpose of evaluating Guyton's suitability
estate's expenses; the estate can be charged separately for
for appointment.
both legal services and estate-administration services even
when both services are performed by the same person.
We therefore conclude that the trial court abused
See Burton v. Bean, 549 S.W.2d 48, 51–52 (Tex.Civ.App.-
its discretion by denying Guyton's application for
El Paso 1977, no writ) (a person who serves both as the
appointment based solely on evidence that was not
estate's executor and its attorney can recover fees for legal
properly before the court.
services in addition to compensation for serving as the
executor).
C. The ruling cannot be affirmed based on the “potential
conflict of interest” described by the trial court. In sum, Monteau's failure to allege and prove Guyton's
[12] Although Monteau suggests that the trial court's unsuitability to serve as the successor administratrix was
ruling could be affirmed based on the “potential conflict not remedied by the trial court's assertion of additional
of interest” described by the trial court, we disagree. grounds, its improper judicial notice of all prior testimony
The Texas Disciplinary Rules of Professional Conduct and documents admitted in the case, or its speculation
applicable to attorneys “are not designed to be standards about a potential conflict of interest. Thus, we sustain the
for procedural decisions.” See TEX. DISCIPLINARY issues presented by Guyton on appeal.
R. PROF'L CONDUCT preamble ¶ 15, reprinted *694
in TEX. GOV'T CODE ANN., tit. 2, subtit. G app. A
(Vernon 2005). III. CONCLUSION
Significantly, the trial court's conclusion is based on the Because the trial court's findings of fact and conclusions
related but erroneous assumptions that (1) if Guyton's of law reveal that it failed to analyze or apply the law
attorney could not serve as the estate's legal counsel, correctly, its denial of Guyton's application was an abuse
then Guyton could not serve as the estate's dependent of discretion. See In re Dep't of Family & Protective Servs.,
administrator; and (2) the estate would incur less 273 S.W.3d 637, 642–43 (Tex.2009) (orig. proceeding).
expense if the administrator is an attorney. But, the We therefore reverse the trial court's order appointing
estate administrator is not prohibited from retaining Matthew B. Edquist successor dependent administrator
counsel for the estate. See TEX. PROB.CODE ANN. and remand with instructions to the trial court to grant
§ 242 (personal representatives are entitled to recover Guyton's application for appointment.
“all reasonable attorney's fees, necessarily incurred in
connection with the proceedings and management of such
estate, on satisfactory proof to the court”). This is true All Citations
whether the trial court appointed Guyton or anyone
332 S.W.3d 687
else—including an attorney—to administer the estate.
Moreover, the executor or administrator is entitled to be
Footnotes
1 See TEX. PROB.CODE ANN. § 225 (Vernon 2003) (a successor appointee may bring suit against the predecessor
appointee “for all the estate that came into the hands of the predecessor and has not been accounted for”); id. § 233(a)
(requiring the personal representative of an estate to use ordinary diligence to collect the estate's claims, debts, and
property, and imposing personal liability on the representative who willfully neglects to use such diligence).
2 Guyton presented a second issue, which is in substance a subsidiary argument to her legal-sufficiency challenge. In
this subsidiary argument, Guyton argues that by using family discord as the sole basis for disqualification, the trial court
improperly applied the law to the established facts of the case; however, the trial court's findings of fact and conclusions
of law establish that “family discord” was only one of three reasons the trial court gave for its decision.
3 Although Guyton framed her appellate arguments as a challenge to the legal sufficiency of the evidence, review of
evidentiary sufficiency is part of our abuse-of-discretion review rather than an independent ground for reversal. See In re
Estate of Boren, 268 S.W.3d 841, 846 (Tex.App.-Texarkana 2008, pet. denied). Findings of fact and conclusions of law
can be helpful even where, as here, we review the trial court's ruling for abuse of discretion; however, we are not obliged
to give them the same level of deference we afford to findings that are measured by evidentiary sufficiency alone. See
IKB Indus. (Nigeria) Ltd. v. Pro–Line Corp., 938 S.W.2d 440, 442 (Tex.1997).
4 We have found no binding precedent that such grounds are sufficient to disqualify an applicant who otherwise is entitled
to priority. In Boyles v. Gresham, the Texas Supreme Court included the sentence, “There was no evidence that [the
applicant] was hostile to the heirs of [the decedent].” 158 Tex. at 160, 309 S.W.2d at 51. The court accordingly was not
presented with the question of whether evidence of such hostility would be an adequate independent basis for finding the
applicant unsuitable. Additionally, in three cases decided by the intermediate appellate courts, “family discord” was listed
among the reasons for affirming the trial court's finding that an applicant was unsuitable. See, e.g., Ayala v. Brittingham,
131 S.W.3d 3, 9 (Tex.App.-San Antonio 2003) (op. on reh'g), rev'd on other grounds sub nom. De Ayala v. Mackie, 193
S.W.3d 575 (Tex.2006); Dean v. Getz, 970 S.W.2d 629, 634 (Tex.App.-Tyler 1998, no pet.); Spies v. Milner, 928 S.W.2d
317, 319 (Tex.App.-Fort Worth 1996, no writ). But, there is no authority underlying this line of cases: the Ayala court
cited Dean; the Dean court cited Spies; and the Spies court cited no authority for the proposition that the presence of
“family discord” supported a finding of unsuitability. Moreover, the “discord” appears in each case to have been a conflict
of interest between the applicant and the estate. See, e.g., Ayala, 131 S.W.3d at 9 (executrix filed suit to set aside a
marital agreement and claimed part of the estate as her community property); Dean, 970 S.W.2d at 634 (trial court did
not abuse its discretion in concluding that applicant's “interests were adverse to the estate and its beneficiaries” in that
she would likely have to sue herself as well as the other beneficiaries to clear title to estate's real property); Spies, 928
S.W.2d at 319 (applicant admitted that before the testator's death, applicant took money from the testator's bank account
and used the money without the permission of the guardian of the testator's estate). Such conflicts are sufficient for
disqualification without regard for any accompanying “family discord.” See Olguin v. Jungman, 931 S.W.2d 607, 610
(Tex.App.-San Antonio 1996, no writ).
5 As the trial court stated in its findings of fact, “[T]here have also been other documents and affidavits and testimony
offered by both parties throughout the history of this case, and the Court was asked to take judicial notice of the entire
file and testimony.”
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Reversed in part and remanded with directions. Trial court was not required to accept
allegations in pleadings in response to motions
to stay litigation and compel arbitration
as evidence on ground that movants filed
pleas in abatement, where pleas in abatement
were supplanted by, or at best, coupled
3 Cases that cite this headnote *382 William K. Andrews, Houston, for appellants.
3 Cases that cite this headnote This is an appeal from the trial court's order denying
appellants' pleas in abatement and motions to stay
[21] Alternative Dispute Resolution litigation and compel arbitration. The order of the trial
Writing, signature, and acknowledgment court is reversed in part and affirmed in part.
decided by arbitration in accordance Gardens because Hearthshire and Birney had allegedly
with the Construction Industry promised Kelly that it would receive the $4.5 million
Arbitration Rules of the American renovation project on the Landing. Kelly claimed that in
Arbitration Association currently in reliance on this representation, it financed and completed
effect unless the parties mutually the renovation work at the Gardens, but never received a
agree otherwise and subject to an contract to renovate the Landing.
initial presentation of the claim or
dispute to the Architect as required Hearthshire and Birney filed a Plea in Abatement and
under Paragraph 10.5. 1 Original Answer on February 28, 1992. On March 9,
1992, Kelly amended its petition to add SMP to the
suit, asserting against it the same claims which had
Subsequently, disputes arose between the parties. Kelly
asserted against Hearthshire and Birney. On March 11,
claimed it fully performed under both contracts, but
1992, Hearthshire and Birney filed a Motion to Stay
that Hearthshire only paid for the January contract.
Litigation and Compel Arbitration and a brief in support
Hearthshire claimed the work performed by Kelly was
of the motion. On March 27, 1992, SMP filed its Plea
unsatisfactory. On December 13, 1991, Hearthshire filed
in Abatement, Motion to Stay Litigation and Compel
Demands for Arbitration with the American Arbitration
Arbitration and Original Answer. On April 4, 1992, Kelly
Association (AAA) in order to resolve its disputes with
filed its response to the motions to stay litigation and
Kelly. The demands requested arbitration under the
compel arbitration, and filed an amended petition. In
January contract and the March contract. The cases were
these *384 documents, Kelly alleged that appellants had
given two separate case numbers by the AAA. Kelly
fraudulently induced Kelly to enter into the arbitration
objected to arbitration claiming that it was unavailable to
provision in the March contract. Kelly asserted that it
Hearthshire because: (1) Hearthshire did not comply with
entered into the March contract because Hearthshire and
paragraph 10.5; (2) certain claims asserted by Hearthshire
Birney represented that Project Controllers, Inc. (PCI)
were not arbitrable; and (3) Hearthshire had failed to give
would initially resolve all disputes between the parties.
proper notice under the Texas Deceptive Trade Practices
Kelly based this assertion on the fact that while PCI was
Act. None of the reasons asserted by Kelly at that time,
referred to in the contract as “project manager”, it acted
concerned fraud in the inducement of the contract or fraud
as architect for other purposes, and paragraph 10.5 stated
in the inducement of the arbitration provision.
that all disputes would be initially referred to the architect.
Kelly had worked with PCI before and knew it to be
During the following two month period, the parties
qualified. Kelly alleged that this representation induced it
corresponded with the AAA concerning the arbitrability
to enter into the arbitration provision. Appellants claimed
of the case. This was done at the request of the AAA.
that there was no architect on the project and therefore,
In one of the letters to the AAA, Kelly asserted that
the mandates of paragraph 10.5 were inapplicable. As to
arbitration was not available to Hearthshire because the
the January contract, Kelly also claimed that it was not
March contract had been procured through fraud. In
enforceable because Hearthshire had not signed it.
that same letter, Kelly conceded that certain issues in the
January contract were potentially arbitrable.
On April 7, 1992, the trial court denied appellants' motions
without a hearing. On April 20, 1992, the trial court
On January 24, 1992, Kelly filed a lawsuit seeking a
entered an order denying appellants' pleas in abatement
declaratory judgment that arbitration was unavailable to
and motions to stay litigation and compel arbitration.
Hearthshire, asserting the same objections it had initially
The court further ordered that the arbitration proceedings
made to the AAA. In the petition, Kelly also asserted
under the January and March contracts be stayed. The
claims against Hearthshire and Birney for breach of
trial court did not explain the reasons for, or set out
contract, foreclosure of a mechanic and materialman's
specific grounds for its ruling. Further, the trial court did
lien, suit on a sworn account, quantum meruit, fraud,
not file findings of fact and conclusions of law. Appellants
promissory estoppel, negligent misrepresentation, and
appeal from that order.
grossly negligent misrepresentation. The basis for these
last four claims was Kelly's contention that it had agreed
to perform and finance the renovation work at the
In their third point of error 2 , appellants contend that upon such grounds as exist at law
there was no evidence or insufficient evidence to support or equity for the revocation of any
the trial court's finding of fraud in the inducement of the contract. A court shall refuse to
contract as a whole. enforce an agreement or contract
provision to submit a controversy to
[1] [2] In a standard appeal when the appellant raises arbitration if the court *385 finds it
“no evidence” and “factual insufficiency” points, the was unconscionable at the time the
appellate court reviews the “no evidence” point first. agreement or contract was made.
Glover v. Texas Gen. Indem. Co., 619 S.W.2d 400, 401
TEX.REV.CIV.STAT.ANN. art. 224 (Vernon
(Tex.1981). If the court finds there is some evidence, it
Supp.1992).
proceeds then to consider the insufficient evidence point.
Id. Though appellants style this point of error and others
In its suit for declaratory judgment, Kelly maintained that
as “no evidence” and “insufficient evidence,” the proper
arbitration was unavailable to appellants because they had
standard of review in an appeal from an interlocutory
fraudulently induced Kelly to enter into the contract as
order concerning a motion to stay litigation and compel
a whole, and that under article 224, this was sufficient
arbitration is simply “no evidence.” Wetzel v. Sullivan,
to deny appellants' demands for arbitration. Kelly based
King & Sabom, P.C., 745 S.W.2d 78, 79 (Tex.App.—
this contention on its claim that appellants had allegedly
Houston [1st Dist.] 1988, no writ); Gulf Interstate Eng'g v.
represented to Kelly that it would receive the $4.5 million
Pecos Pipeline, 680 S.W.2d 879, 881 (Tex.App.—Houston
renovation project on the Landing if Kelly financed and
[1st Dist.] 1984, writ dism'd). Therefore, we will review this
completed the renovations on the Gardens. Kelly alleged
point of error and the others similarly styled under the “no
that it fulfilled its end of the bargain, but that appellants
evidence” standard of review.
did not give Kelly the Landing renovation project as
promised. Kelly claimed that the representation as to the
[3] In reviewing “no evidence” or legal sufficiency points,
$4.5 million project induced it to enter the contract, and
the court considers only the evidence and inferences, when
that this was done fraudulently.
viewed in their most favorable light, that tend to support
the finding under attack, and disregards all evidence and
In order to prove fraud, Kelly had to show that: (1) a
inferences to the contrary. Davis v. City of San Antonio,
material representation was made; (2) the representation
752 S.W.2d 518, 522 (Tex.1988); Garza v. Alviar, 395
was false; (3) when appellants made it they knew it was
S.W.2d 821, 823 (Tex.1965). If there is any evidence of
false, or made it recklessly without any knowledge of the
probative force to support the finding, the point must be
truth and as a positive assertion; (4) the representation
overruled and the finding upheld. Sherman v. First Nat'l
was made with the intention that it should be acted
Bank, 760 S.W.2d 240, 242 (Tex.1988); In re King's Estate,
upon by Kelly; (5) Kelly acted in reliance upon the
150 Tex. 662, 244 S.W.2d 660, 661 (1951). When, as in this
representation; and (6) Kelly thereby suffered injury due
case, there are no findings of fact and conclusions of law,
to its reliance on the representation. Trenholm v. Ratcliff,
we must affirm the judgment if there is evidence to support
646 S.W.2d 927, 930 (Tex.1983); Stone v. Lawyers Title
it upon any legal theory asserted by the prevailing party.
Ins. Corp., 554 S.W.2d 183, 185 (Tex.1977); New Process
Gulf Interstate, 680 S.W.2d at 881.
Steel Corp., Inc. v. Steel Corp. of Texas, Inc., 703 S.W.2d
209, 213–14 (Tex.App.—Houston [1st Dist.] 1985, writ
Article 224 of the Texas General Arbitration Act states, in
ref'd n.r.e.). Further, because the representation involved
pertinent part:
a promise to do an act in the future, i.e., allow Kelly
A written agreement to submit any to renovate the Landing in the future, Kelly also had
existing controversy to arbitration to prove that at the time the representation was made,
or a provision in a written appellants had no intention of performing the act. Crim
contract to submit to arbitration Truck & Tractor v. Navistar Int'l Transp. Corp., 823
any controversy thereafter arising S.W.2d 591, 597 (Tex.1992); Spoljaric v. Percival Tours,
between the parties is valid, Inc., 708 S.W.2d 432, 433 (Tex.1986). The evidence in the
enforceable and irrevocable, save record in support of Kelly's contentions consists of two
affidavits of Mr. Kelly. One of these affidavits is attached
to Kelly's response to appellants' motions to stay litigation denied by the trial court was not solely for abatement, the
and compel arbitration. The other affidavit is attached to cases cited by Kelly in support of its plea in abatement
Kelly's second amended petition. Besides these affidavits argument are inapplicable.
and a copy of the contract, the other documents in the
record are pleadings, motions, and responses filed by the [6] The cases cited by Kelly, supporting the argument
parties. that the trial court had to accept its pleadings as true unless
appellants disproved those allegations, do not involve
[4] Kelly urges this court to accept the affidavits and their arbitration. 3 The burden of proof in a plea in abatement
pleadings as evidence in support of the fraud claim. Kelly action is very different from the burden of proof in an
argues that because appellants filed pleas in abatement, action where a party is seeking to avoid arbitration.
the trial court was required to accept as true the factual
allegations of fraud in the inducement as set forth in [7] [8] [9] Arbitration is favored by the courts of
the second amended petition, unless those allegation this state. Manes v. Dallas Baptist College, 638 S.W.2d
were disproved. See Seth v. Meyer, 730 S.W.2d 884, 143, 145 (Tex.App.—Dallas 1982, writ ref'd n.r.e.);
885 (Tex.App.—Fort Worth 1987, no writ). We refuse Carpenter v. North River Ins. Co., 436 S.W.2d 549, 553
to accept Kelly's argument for three reasons: (1) the (Tex.Civ.App.—Houston [14th Dist.] 1968, writ ref'd
appellants did not simply file pleas in abatement, rather n.r.e.). Under the Texas General Arbitration Act, an
the pleas in abatement were supplanted by, or at best, agreement to arbitrate is valid unless grounds exist
coupled with appellants' motions to stay litigation and for revocation. TEX.REV.CIV.STAT.ANN. art. 224
compel arbitration; (2) the burden of proof is on the party (Vernon Supp.1992). As stated in Gulf Interstate, fraud
resisting arbitration; and (3) the standard suggested by and unconscionability are defenses to the enforcement of
Kelly for plea in abatement review is incompatible with an arbitration provision under article 224. Gulf Interstate,
the “no evidence” standard of review also advocated by 680 S.W.2d at 881. Since the law favors arbitration, and
Kelly. article 224 sets up fraud and unconscionability as defenses,
the burden of proof is on the party seeking to avoid
[5] A fair reading of the motions filed by appellants arbitration. See Id. Because Kelly was the party seeking
clearly shows that they were not mere pleas in abatement. to avoid arbitration, it was Kelly's burden to prove fraud.
The substance of the motions is a request for the trial court Therefore, the trial court was not required to accept the
to stay the litigation and compel arbitration. The plea in allegations in Kelly's pleadings as true.
abatement filed by the appellants Hearthshire and Birney
was filed with their original answer as provided for under [10] Finally, we cannot accept the plea in abatement
the Texas Rules of Civil Procedure. See TEX.R.CIV.P. 85. standard of review suggested by Kelly because it is
Later, they filed their motion to stay litigation and compel inconsistent with the “no evidence” standard of review
arbitration. SMP, who was later added as a defendant also advocated by Kelly. Under the plea in abatement
by Kelly, simply lumped the plea in abatement in with standard, Kelly argues that the trial court should have
their original answer and motion to stay litigation and accepted Kelly's pleadings as true since appellants failed
compel arbitration. If the relief sought by appellants had to disprove them. Kelly's argument on appeal suggests
concerned only a plea in abatement, this court would not that we are required to do the same; however, Kelly
have jurisdiction over this appeal. An order overruling a also argues that this court should use the “no evidence”
plea in abatement is interlocutory *386 in nature because standard. Under this standard, we are required to consider
the order does not finally resolve the controversy. 745 only the evidence which supports the trial court's order,
S.W.2d 78, 79; City of Arlington v. Texas Elec. Serv. i.e. Kelly's evidence, and to disregard all evidence to
Co., 540 S.W.2d 580, 582 (Tex.Civ.App.—Fort Worth the contrary, i.e. appellants' evidence. If we used both
1976, writ ref'd n.r.e.). However, we have jurisdiction standards, we would have to accept the allegations in
in this case because the trial court's order did not just Kelly's pleadings as true, and ignore any evidence in the
overrule a plea in abatement, rather the order required the record that contradicted those pleadings. In other words,
parties to litigate and stayed the arbitration proceedings. Kelly would automatically prevail on appeal because its
TEX.REV.CIV.STAT.ANN. art. 238–2, § A(1) and (2) contentions would be accepted and any evidence brought
(Vernon 1973). Because the relief sought by appellants and by appellants would be ignored.
Paragraphs eleven through thirteen contain statements Since the trial court did not specify the reasons for its
regarding the Landing. In these paragraphs, Mr. Kelly ruling, we must proceed with our review of appellants'
states that: remaining points to determine if there is any legal theory
to support the trial court's decision. Id.
1. Birney requested that Kelly perform work on the
Landing, a complex owned by SMP. [12] Appellants argue, in their fifth point of error, that
there was no evidence or insufficient evidence to support
2. Kelly was not allowed to perform the work on the
the finding of fraud in the inducement of the arbitration
Landing.
provision. Again, using only the “no evidence” standard
3. The negotiations with Birney for the Landing project as set out above at length, we hold that there is no evidence
were in his individual capacity and/or as president of the to support a finding of fraud in the inducement of the
general partner for SMP. arbitration provision.
4. There was no written agreement between the parties As we have already discussed, only the affidavit attached
as to the Landing project, and therefore Kelly is not to Kelly's response to the motions to stay litigation and
required to arbitrate disputes regarding the Landing. compel arbitration contains evidence of any type of fraud.
We will now examine the affidavit to determine whether
Viewing these statements in the light most favorable to it contains evidence on the elements of fraud as set out
the trial court's order, Kelly has failed to present sufficient above, as the claim relates to fraud in the inducement of
evidence to support its claim of fraud in the inducement of the arbitration provision. Kelly's argument as to this claim
the contract as a whole. The only evidence in this affidavit of fraud states that it was fraudulently induced to enter
supporting a fraud allegation is Mr. Kelly's statements into the arbitration provision because appellants falsely
represented the PCI would act as the initial arbitrator for the representation was false when it came to dispute
all disputes between the parties. The pertinent parts of resolution. But, nowhere in the affidavit does Mr. Kelly
Kelly's affidavit state, as summarized: maintain that appellants knew the statement was false
when it was made, that they intended that Kelly act based
1. At the request of PCI, Kelly agreed to renovate the upon the statement, or that when the agreement was made,
Gardens. appellants had no present intent to perform. Kelly argues
that these three elements of fraud can be inferred. In
2. All negotiations were with Birney, and PCI
support of this proposition, Kelly cites New Process Steel
participated in the negotiations.
Corp., Inc. v. Steel Corp. of Texas, Inc., 703 S.W.2d 209
3. The contracts were standard owner/contractor (Tex.App.—Houston [1st Dist.] 1985, writ ref'd n.r.e.);
agreements. These types *388 of agreements generally however, New Process Steel is distinguishable from the
provide that an architect will oversee the work; case before us.
however, it is not uncommon that another party will
be substituted in the architect's place and carry out his In New Process Steel, S & S Alloys (S & S) owed
duties. Steel Corporation of Texas (SCOT) an unsecured debt
of $500,000. Because of the financial condition of S &
4. Hearthshire substituted PCI as the entity to perform S, it was questionable whether the debt would ever be
the architect's duties. PCI performed numerous duties, paid. Id. at 211. When the secured creditors of S & S
assigned under the terms of the contract, to the threatened foreclosure, SCOT bought out their interests,
architect. and decided to obtain better management for S & S so
that it could become profitable again. Id. SCOT's board
5. When Hearthshire complained about defective of directors authorized its president, Kiefer, to negotiate
workmanship, Kelly had no reason not to believe that with New Process Steel about taking over management of
PCI would resolve the dispute. S & S. Id. As a result of the negotiations, a management
agreement was reached. New Process Steel agreed to
6. The March contract did not disqualify PCI from
provide management, inventory, and working capital to
handling any disputes. Page one of the contract
S & S while deciding if it was interested in purchasing
indicates that PCI is substituted for the architect for all
the business. Id. SCOT agreed that: (1) it would not try
purposes including dispute resolution.
to collect its debt from S & S during the term of the
7. Based on the fact that PCI would serve as project management agreement; and (2) that as the sole secured
manager, the nature of the work PCI would perform, creditor of S & S, it would place an upper limit on its
and the language of paragraph 10.5, Kelly agreed to security interest in an amount equal to the dollar value of
the contract containing the arbitration provision. Kelly that security interest at the time New Process Steel began
also agreed that PCI would substitute for the architect. its management. Id. During the management period, New
Kelly was comfortable with the arbitration provision Process Steel made sales and cash advances to S & S,
because he had worked with PCI on other projects. while the parties continued to negotiate regarding the
purchase of S & S. Id. New Process Steel considered
8. Hearthshire never submitted its complaints to SCOT's release of its security interest in S & S essential
PCI as required by the contract. PCI confirmed to any agreement. Id. Kiefer kept SCOT's executive board
that Hearthshire never submitted any disputes for informed throughout the negotiations. Id.
resolution.
The parties reached an agreement, and a closing date was
[13] While the affidavit is more substantial as to fraud set for January 16, 1979. Id. Before the closing date, Kiefer
in the inducement of the arbitration provision, it still spoke with a majority of the executive board members and
falls short of what is required. In the affidavit, Mr. received their approval. Id. At closing, New Process Steel
Kelly states that Hearthshire represented that PCI would purchased S & S with the understanding that SCOT would
be the architect and this representation, coupled with accept a new note in exchange for the $1,000,000 note that
the wording of paragraph 10.5 induced him to enter SCOT held against S & S, and the outstanding accounts
into the arbitration provision. He further stated that receivable *389 due to SCOT from S & S. Id. at 212. This
“understanding” was not reduced to writing at the time of In New Process Steel, Kiefer testified that he kept the
the closing. board apprised of the negotiations, had full authority
to make the agreement, and that the agreement was
After the closing, SCOT's management had second approved by the board. Id. Despite this, the chairman of
thoughts about the agreement. Id. SCOT fired Kiefer in the SCOT board denied that either he or the board had
June of 1979, and then advised New Process Steel that it ever approved the agreement, and the evidence was clear
would not perform the January 16 agreement. Id. Thereby, that SCOT failed to perform under the agreement. Id.
in effect, denying the existence of the agreement. New at 215. The court held that the denial of the agreement
Process Steel brought suit against SCOT for breach of and the failure to perform was sufficient to allow the
contract and fraud. Id. The jury found for New Process jury to infer that SCOT had never intended to perform
Steel on its fraud claim 4 , but the trial court refused to give the agreement, and had therefore defrauded New Process
effect to the damage issue based on the fraud claim. Id. at Steel. See Id.
213. New Process Steel complained about this refusal on
appeal. In this case, we are not confronted with a party denying
the existence of an agreement. Appellants do not deny
The court of appeals held that a trial court may disregard the existence of the contract or the arbitration provision.
a jury's finding to a special issue, only if the finding has In fact, they wish to rely on the arbitration provision
no support in the evidence or it is rendered immaterial and force Kelly to abide by it. Appellants simply do
by other findings. Id. The court then set out to determine not agree with Kelly's interpretation of the contract or
whether the evidence was sufficient to support a finding of the arbitration provision. This is altogether different
fraud and the damages awarded by the jury for the fraud from denying that the agreement exists. Even if we were
claim. As in the case before us, New Process Steel involved to accept Kelly's argument, we cannot, under the facts
a promise to take action in the future. of New Process Steel, infer the missing fraud elements
because appellants have not denied the existence of the
After listing the elements of fraud, including present intent agreement.
not to perform, the court of appeals stated that fraudulent
intent is an element of fraud that is difficult to prove. Id.; Therefore, since Kelly failed to provide some evidence
see Freeman v. Greenbriar Homes, Inc., 715 S.W.2d 394, on each of the elements of fraud in the inducement
397 (Tex.App.—Dallas 1986, writ ref'd n.r.e.). But, the of the arbitration provision, the trial court erred if
court stated, when a party denies making the agreement its order was based on Kelly's claim of fraud in the
and fails to perform, this constitutes evidence from which inducement of the arbitration provision. In that there
lack of present intent to perform may be inferred. New is no evidence to support fraud in the inducement of
Process Steel, 703 S.W.2d at 214. In order for New Process the arbitration provision, *390 appellants' fifth point of
Steel to aid Kelly, we must find that the element of “lack error is sustained.
of present intent to perform” is in effect the same as
the element “knowingly making a false statement.” Thus, [14] In points of error two, four, and six, appellants
Kelly's argument must be that if one can infer the former, contend that the trial court erred in denying their
the latter element of fraud may also be inferred. Further, motions to stay litigation and compel arbitration based
Kelly would also have this court assume that if these two on unconscionability. After reviewing the record, we
elements can be inferred, it is reasonable to assume that the find that the legal theory of unconscionability was never
statement was made with the intent that it should be acted raised or argued by Kelly as grounds for avoiding the
upon. Kelly wants us to accept this hypothesis because arbitration provision. When there are no findings of facts
these three elements are the ones not addressed in Mr. and conclusions of law, we must affirm the judgment if
Kelly's affidavit. Kelly argues that they should be inferred there is evidence to support it on any legal theory raised
based upon New Process Steel. Even if we were to accept by the prevailing party. Gulf Interstate, 680 S.W.2d at 881.
this interpretation, which we do not, Kelly's argument Since unconscionability was never asserted by Kelly, it
still fails because New Process Steel differs in one crucial could not have been relied on by the trial court in making
respect. its determination to deny appellants' motions. Thus, it is
unnecessary for us to address points two, four, and six
since they could not have been the basis for the trial court's underlying dispute. They argue that these sections only
order. require that the actual foreclosure of the lien be performed
by a court of competent jurisdiction. In support of their
[15] In their seventh point of error, appellants contend argument, appellants cite Mountain Plains Constructors,
that the trial court erred in finding that the Texas Property Inc. v. Torrez, 785 P.2d 928 (Colo.1990).
Code preludes the resolution of the underlying contract
dispute by arbitration. We decline to follow the approach advocated by Kelly,
and choose to adopt the one presented by appellants and
In its second amended petition, Kelly sought enforcement accepted by the Colorado Supreme Court. In Mountain
and foreclosure of a mechanic and materialman's lien. Plains, the Colorado court addressed the issue of the
Kelly argued in the trial court that under Texas Property proper disposition of an M & M lien when arbitration
Code §§ 53.154 and 53.158, it was required to bring the is required. The court held that when a party is entitled
action through a lawsuit and not through arbitration. We to arbitration, the foreclosure of an M & M lien shall be
agree with Kelly that an M & M lien must be foreclosed by stayed until the arbitrators determine whether the party
a court of competent jurisdiction; however, this does not seeking foreclosure prevails in the underlying dispute. Id.
mean that the underlying contract, which forms the basis at 931.
of the lien, cannot be arbitrated.
Kelly argues that we should not accept this approach
The Texas Property Code provides: because this case is interpreting Colorado statutory
law, not Texas law. Though we have found no
A mechanic's lien may be foreclosed Colorado statutes that correspond precisely to the
only on judgment of a court of language contained TEX.PROP.CODE ANN. §§ 53.154
competent jurisdiction foreclosing and 53.158, it is clear from the statutes regarding the
the lien and ordering the sale of the enforcement of liens that Colorado also requires that
property subject to the lien. foreclosure be accomplished by filing suit in a court of
competent jurisdiction. See COLO.REV.STAT.ANN. §§
TEX.PROP.CODE ANN. § 53.154 (Vernon 1984).
38–20–106, 38–22–105.5, *391 38–22–110 through 38–
22–116, and 38–22–120 (West 1990 & 1992). Therefore,
The Code also provides:
there is no reason to decline to adopt this approach.
Suit must be brought to foreclose
the lien within two years after the But beyond this, our decision on this issue is the result
date of filing the lien affidavit under of common sense. If we allowed Kelly to foreclose the
Section 53.052 or within one year M & M lien before arbitration, and the arbitrators
after completion of the work under found for appellants, they would be without recourse.
the original contract under which The lien would be foreclosed, the property disposed
the lien is claimed, whichever is later. of, and no money judgment could adequately replace
the lost property. However, if Kelly prevails in the
TEX.PROP.CODE ANN. § 53.158 (Vernon Supp.1992). arbitration, it may then have the arbitration award
Kelly contends that the language of these sections is confirmed by the court under the Texas General
mandatory, and therefore, arbitration is unavailable on Arbitration Act, and can sue to foreclose the M & M
this issue. The sections are mandatory; however, Kelly lien. TEX.REV.CIV.STAT.ANN. art. 236 (Vernon 1973).
desires a broader interpretation than is permitted by the Kelly will have an adequate remedy at law. Appellants'
clear language of the sections. seventh point of error is sustained.
Sections 53.154 and 53.158 require that a suit for [16] In their eighth point of error, appellants allege that
foreclosure must be brought, and that the lien can only be the trial court erred in finding that Kelly's claims as to the
foreclosed by a court of competent jurisdiction. Appellants Landing renovation project are not arbitrable.
contend that these sections do not state that arbitration
is unavailable to determine which party prevails in the
As part of its fraudulent inducement claim, Kelly asserted no reference to the Landing project and it would take
that it had only entered into the contracts involving the a leap of logic to argue that the arbitration provisions
Gardens because it had been promised the $4.5 million in the contracts were meant to encompass any disputes
renovation project on the Landing. Besides using this as arising out of a project not mentioned in the contract
part of its claim for fraudulent inducement, Kelly, in its and one that had not even been fully discussed. We hold
second amended petition, filed claims against appellants that the claims arising out of the Landing renovation
for negligent and grossly negligent misrepresentation, project are separate and distinct from those arising out
DTPA, promissory estoppel, and breach of an oral of the contracts pertaining to the Gardens. Therefore,
contract based on the Landing project. Appellants the Landing claims do not have to be arbitrated, and
contend that all of these claims should be included in Kelly may proceed with the litigation as to those claims.
the arbitration proceedings because they “arise out of, or Appellants' eighth point of error is overruled.
relate to the contract or breach thereof,” as provided in
the arbitration provisions contained in the January and *392 In point of error nine, appellants assert that the trial
March contracts covering the Gardens. court erred in finding that the dispute between the parties
over paragraph 10.5 of the contract is not a proper subject
[17] [18] We agree with appellants that causes of for arbitration.
action sounding in tort are not automatically exempted
from arbitration. A dispute arising out of a contractual [20] Though both sides have made numerous allegations
relationship may give rise to breach of contract claims and against the other, the real dispute in this case concerns
tort claims. See Valero Energy Corp. v. Wagner & Brown, the interpretation of paragraph 10.5 of the contract,
777 S.W.2d 564, 566–67 (Tex.App.—El Paso 1989, writ i.e., whether PCI was, or was to act as, the architect
denied). To determine whether the particular tort claim is on the Gardens project. Arbitration is designed for
subject to arbitration, the court must determine whether that purpose. If we were to say that it is improper to
the particular tort claim is so interwoven with the contract allow arbitrators to determine the meaning of contractual
that it could not stand alone or, on the other hand, is a provisions, we would render the entire arbitrary scheme
tort completely independent of the contract and could be meaningless. Since we have already determined that Kelly
maintained without reference to the contract. Id. at 566. has failed to prove fraud, or any other ground to excuse
Thus, here, the question is whether Kelly's claims as to itself from the arbitration provision, all of the disputes
the Landing project can stand alone or can be maintained involving the contracts pertaining to the Gardens should
without reference to the contracts involving the Gardens. be arbitrated, including the interpretation of paragraph
We hold that they can. 10.5. The issue as to whether there is a valid arbitration
provision is separate from the issue of whether the
[19] The only connection between the Landing project contract was breached, the former is determined the court,
and the contracts involving the Gardens is Kelly's claim and the latter by an arbitrator. Shearson Lehman Hutton,
that the promise of the Landing project fraudulently Inc. v. McKay, 763 S.W.2d 934, 938 (Tex.App.—San
induced it to enter the contracts for the renovation of Antonio 1989, no writ). Appellants' ninth point of error is
the Gardens. If necessary, Kelly need not even refer to sustained.
the contracts involving the Gardens in order to maintain
the claims regarding the Landing. Kelly could assert [21] Appellants next contend that the trial court erred
that it was fraudulently promised the Landing project in finding that the arbitration provision of the January
and that the promise was breached, even if the Garden contract was not enforceable against Kelly because
contracts had never existed. Further, when a dispute arises Hearthshire did not sign the contract.
between contracting parties whose relationship includes
an agreement to arbitrate any dispute arising out of or Article 224 of the Texas General Arbitration Act
under the contract, the trial court must determine whether provides that arbitration agreements, whether separate
the issues presented are subject to arbitration under that or within the confines of a contract, must be in
agreement. Id. at 567. The parties must have specifically writing. TEX.REV.CIV.STAT.ANN. art. 224 (Vernon
agreed by clear language to arbitrate the matters in Supp.1992). Article 224, however, does not require
dispute. Id. The contracts covering the Gardens make that the agreement or the contract be signed by the
parties in order for the arbitration provision to be which are. The parties are to arbitrate all claims involving
the contracts pertaining to the Gardens. Any claims that
valid except in two specific instances: contracts for the
relate to the Landing renovation project may proceed to
acquisition of property, services, money, or credit where
litigation. Our reasons for this decision were spelled out in
the consideration is $50,000 or less, and claims for
the discussion under point of error number eight.
personal injury. Those instances do not apply here.
Footnotes
1 Paragraph 10.5 states:
The Architect will interpret and decide matters concerning performance under and requirements of the Contract
Documents on written request of either the Owner or Contractor. The Architect will make initial decisions on all claims,
disputes or other matters in question between the Owner and Contractor, but will not be liable for results of any
interpretations or decisions rendered in good faith. The Architect's decisions in matters relating to aesthetic effect
will be final if consistent with the intent expressed in the Contract Documents. All other decisions of the Architect,
except those which have been waived by making or acceptance of final payment, shall be subject to arbitration upon
the written demand of either party.
2 Appellants have listed their points of error in outline form, 1.A. through 1.L. For clarity, we have renumbered the points
as numbers one through twelve.
3 Seth v. Meyer, 730 S.W.2d 884 (Tex.App.—Fort Worth 1987, no writ); Flowers v. Steelcraft Corp., 406 S.W.2d 199
(Tex.1966).
4 The other jury findings in the case are irrelevant for our purposes here.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Trustee for gas interest royalty owners brought action [3] Mines and Minerals
against gas lessee to recover amounts of transportation In general; general rules of construction
costs which lessee had deducted in calculating royalty In construing unambiguous oil and gas lease,
payments under leases. The 109th District Court, Supreme Court's task is to ascertain parties'
Winkler County, James L. Rex, J., entered partial intentions as expressed in lease.
summary judgment for trustee, holding that lease
language prohibited deduction of transportation costs 14 Cases that cite this headnote
from royalties, and, after bench trial, entered judgment
for trustee. On review, the El Paso Court of Appeals, [4] Mines and Minerals
Eighth Judicial District, Susan Larsen, J., 895 S.W.2d 833, In general; general rules of construction
affirmed. On application for writ of error, the Supreme
In construing unambiguous oil and gas
Court, Baker, J., held that: (1) in calculating royalties to
lease, to achieve goal of ascertaining
be paid to owners under leases, lessee properly deducted
parties' intentions as expressed in lease,
costs of transporting gas to point of sale, despite clauses in
Supreme Court examines entire document and
leases limiting deduction from royalty for postproduction
considers each part with every other part so
costs, and (2) lessee could not be held liable to trustee
that effect and meaning of one part on any
for amounts lessee paid to pipeline carrier to transport
other part may be determined.
gas to point of sale, which amounts lessee deducted in
calculating owners' royalties, under division order that 66 Cases that cite this headnote
allegedly allocated payments among interest owners in
manner that differed from lease provisions.
[5] Contracts
Reversed and rendered. Construction as a whole
Supreme Court presumes that parties to
Owen, J., concurred and filed opinion in which Hecht, J., contract intend every clause to have some
joined. Gonzalez, J., dissented and filed opinion in which effect.
Abbott, J., joined.
77 Cases that cite this headnote
243 Cases that cite this headnote For oil and gas royalty purposes, the most
desirable method of determining market value
at the well is to use comparable sales.
[7] Contracts
Application to Contracts in General 1 Cases that cite this headnote
In construing contract, Supreme Court will
enforce unambiguous document as written. [13] Mines and Minerals
Amount and time of payment
27 Cases that cite this headnote
For oil and gas royalty purposes, in
determining market value at the well by use
[8] Mines and Minerals of comparable sales, “comparable sale” is one
Rights and liabilities that is comparable in time, quality, quantity,
For oil and gas purposes, “royalty” is and availability of marketing outlets.
commonly defined as landowner's share of
production, free of expenses of production. 5 Cases that cite this headnote
18 Cases that cite this headnote 11 Cases that cite this headnote
for Determining, Market Value or Market Price in Oil [17] The terms “royalty” and “market value at the well”
and Gas Lease Requiring Royalty to be Paid on Standard have well accepted meanings in the oil and gas industry.
Measured by Such Terms, 10 ALR 4TH 732 (1981). The post-production clauses in issue here plainly state
Market value is the price a willing seller obtains from a that there “shall be no deduction from the value of the
willing buyer. See Exxon Corp. v. Middleton, 613 S.W.2d Lessor's Royalty.” The leases clearly set the lessor's royalty
240, 246 (Tex.1981). There are two methods to determine as a fraction (¼ or 1 /5) “of the market value at the
market value at the well. well.” Under the leases, the lessee must determine the
value of the lessor's royalty. The lessee accomplishes this
[12] [13] The most desirable method is to use by determining market value at the well and multiplying
comparable sales. Middleton, 613 S.W.2d at 246; Texas Oil it by the fraction specified in the royalty clause (¼ or
& Gas Corp. v. Vela, 429 S.W.2d 866, 872 (Tex.1968). A 1
/5). This result is the value of the lessor's royalty. The
comparable sale is one that is comparable in time, quality,
quantity, and availability of marketing outlets. Middleton, post-production clauses then specify that there can be no
613 S.W.2d at 246; Vela, 429 S.W.2d at 872. deduction from this value (the value of the lessor's royalty)
by reason of any post-production costs.
[14] [15] [16] Courts use the second method when
information about comparable sales is not readily Here, the only conclusion we can draw is that the post-
available. See, e.g., Le Cuno Oil Co. v. Smith, 306 production clauses merely restate existing law. The post-
S.W.2d 190, 193 (Tex.Civ.App.—Texarkana 1957, writ production clauses illustrate that the lessee cannot pay
ref'd n.r.e.), cert. denied, 356 U.S. 974, 78 S.Ct. 1137, the lessor less than his fractional value of the comparable
2 L.Ed.2d 1147 (1958); Clear Creek Oil & Gas Co. v. sales price (market value). This could occur if the amount
Bushmiaer, 165 Ark. 303, 264 S.W. 830, 832 (1924); see realized from the *123 sale of the gas less the post
also Pierce, Royalty Valuation Principles in a Changing production costs was less than the comparable sales price
Gas Market, in STATE BAR OF TEXAS PROF. DEV. and the lessee calculated the lessor's royalty by subtracting
PROGRAM, 11TH ANNUAL ADVANCED OIL, GAS post production costs from amount realized. At times
AND MINERAL LAW COURSE E, E–9 (1993). This the amount realized from the sale of gas has varied
method involves subtracting reasonable post-production greatly from the market value of the gas. See Vela, 429
marketing costs from the market value at the point of S.W.2d at 875–76 (evidence sustained trial court's finding
sale. Texas Oil & Gas Corp. v. Hagen, 683 S.W.2d 24, 28 that market value was 13.047 cents per mcf even though
(Tex.App.—Texarkana 1984), dism'd as moot, 760 S.W.2d amount realized by lessee under long term gas sales
960 (Tex.1988). Post-production marketing costs include contract was 2.3 cents per mcf). Even though the Vela
transporting the gas to the market and processing the scenario may be unlikely to reoccur in the future due to
gas to make it marketable. Hagen, 683 S.W.2d at 29. changes in the market place, see, e.g. Pierce, supra, E–
With either method, the plaintiff has the burden to prove 1—E–3, the market value may differ from the amount
market value at the well. Hagen, 683 S.W.2d at 29. realized.
was the market price at the point of sale. NationsBank 705 S.W.2d at 692. The operator then becomes liable for
conceded at oral argument that the transportation costs the part of the interest owner's payments the operator
Heritage deducted were reasonable. retained. See Gavenda, 705 S.W.2d at 693. The operator
is not liable for the amounts it paid out to other interest
Because there is no evidence to support the comparable owners. Gavenda, 705 S.W.2d at 693.
sales method of computing market value at the well, we
use the alternate method. Under that method, Heritage [21] The court of appeals decision incorrectly states that
must pay a royalty based on the market value at the point “Heritage was liable for reimbursement to the royalty
of sale less the reasonable post-production marketing owners for transportation costs improperly withheld in
costs. Hagen, 683 S.W.2d at 28. Based on the parties' payment to Urantia.” 895 S.W.2d at 839. Under Gavenda,
concessions, the amount Heritage paid is the correct Heritage would be liable, if at all, only for the amount
amount in royalties to NationsBank under the leases. of the unpaid royalty it retained. In this case, there were
other working interest owners who were not parties to
the suit. Absent an agreement *124 otherwise, all the
working interest owners would benefit from an improper
Division Orders
deduction of transportation charges from the royalties
Heritage entered into division orders with the royalty paid to NationsBank. Therefore the trial court could only
owners. The division orders contained the following hold Heritage liable for an amount of unpaid royalties that
language: Heritage retained.
The court of appeals held that the division orders were of Justice OWEN, joined by Justice HECHT, concurring.
no effect and that Heritage was liable for reimbursement I concur in the judgment of the Court. The meaning of
to the royalty owners for transportation costs improperly “market value at the well,” upon which the resolution
withheld in payment to Urantia. The court of appeals' of this case ultimately turns, is not as clear-cut as the
discussion about the effect of a division order that Court's opinion indicates when determining whether post-
contradicts the lease terms conflicts with our earlier production costs are to be shared by a royalty owner.
opinion in Gavenda v. Strata Energy, Inc., 705 S.W.2d 690 I write separately to consider the meaning of “market
(Tex.1986). value at the well” more fully and to recognize that the
construction we are compelled to give to the leases at issue
[18] [19] [20] The general rule is that division orders may not comport with the subjective intent of at least some
are binding until revoked. Gavenda, 705 S.W.2d at 691; of the parties to those agreements.
Middleton, 613 S.W.2d at 250. When an operator prepares
a division order that allocates payments among the
interest owners in a manner that differs from the lease
I
provisions and the operator retains the benefits, the
division order is not binding. Gavenda, 705 S.W.2d at
692. The basis of this rule is unjust enrichment. Gavenda,
NationsBank, as trustee, is an owner of royalty interests “Market value at the well” tells us how and where the
under six leases that are the subject of this suit. Heritage value of the royalty is measured, subject to any other
is a working interest owner under each of the leases and provisions that bear on valuation.
is the operator of the wells located on those leases. The
specific lease provisions that have given rise to this dispute A number of courts in producing states across the country
are set forth in the Court's opinion. have considered the meaning of various royalty clauses,
including “market value at the well” clauses, in deciding
The royalty clauses in contention specifically address which marketing costs, if any, are to be borne by the
marketing costs that may be incurred after the gas royalty owner. The decisions, including those under Texas
leaves the wellhead, including processing, dehydration, law, are not uniform. There are two diverse viewpoints,
compression, and transportation costs. These are with some decisions picking and choosing between the
sometimes called post-production costs. The only costs two, depending on the specific marketing cost under
at issue in this suit, however, are transportation charges. consideration. 2 At one end of the spectrum is the view
Simply put, the issue is how the cost of transporting that because the operator has an implied duty or an
the gas to market is to be allocated under the terms implied covenant to market the gas, all costs of marketing
of these leases. This is a question of law. There are must be borne by the operator. Generally speaking, this is
no factual disputes. NationsBank has conceded that the the minority view. On the other end of the spectrum, many
transportation charges were reasonable and in line with decisions recognize that while there is an implied duty or
market rates. Heritage and NationsBank agree that the covenant to market the gas, this duty does not extend to
prices at which the gas was sold reflected its market value expenses incurred in sales off the lease; marketing costs are
at the point of sale. It is undisputed that the sales of gas to be shared proportionately by the working interest and
at issue have taken place off of the leased premises. The royalty owners.
trial court, the court of appeals, and this Court correctly
concluded that none of the leases are ambiguous. In examining decisions in this area, it must be borne in
mind that not all royalty clauses were created equal. Some
are based on “proceeds,” some on “amount realized,”
II while others are based on “market value.” Some specify
the point at which the value of the royalty is determined,
At the outset, it is important to note that we are construing such as “at the well.” Some do not. Some leases have
specific language in specific oil and gas leases. Parties more than one method for valuing royalty depending on
to a lease may allocate costs, including post-production whether the gas is sold or used off the leased premises or is
or marketing costs, as they choose. See generally 3 sold at the well. Different courts have accorded differing
WILLIAMS, OIL & GAS LAW § 645 (1990). Our task is meanings to the same language.
to determine how those costs were allocated under these
particular leases. With these distinctions in mind, I consider Texas decisions
first.
Each of the royalty provisions begins with the statement
that royalties are to be paid on gas sold off the lease based
on the market value of the gas at the well. The proviso
A
that follows, prohibiting the deduction of marketing costs
from the value of the royalty, is virtually identical in all of The concept of “market value” is well-established in
the leases. Accordingly, any differences among the leases our jurisprudence. It is what a willing buyer under no
are immaterial for purposes of determining the royalty compulsion to buy will pay to a willing seller under no
obligation. 1 compulsion to sell. See, e.g., Exxon Corp. v. Middleton,
613 S.W.2d 240, 246 (Tex.1981). This would seem to
The starting point in construing the leases is the language be a straight-forward measure, but how market value is
chosen by the parties. We first must ascertain the meaning determined in the context of an oil and gas lease is a
of “market value at the well,” which the agreements set question that has been before this Court on more than
*125 out as the initial benchmark for valuing the royalty. one occasion. We held in Texas Oil & Gas Corp. v. Vela
that the price paid under a gas purchase contract between (Tex.1970). In Mobil, market value was defined in the tax
the lessee and the purchaser is not necessarily the market statute as value “at the mouth of the well.” Id. at 891.
price within the meaning of the lease. 429 S.W.2d 866, 871
(Tex.1968). The parties in that case agreed that the market But these decisions do not directly answer the question of
price of gas is to be determined by sales comparable in who bears marketing costs under a “market value at the
time, quality, and availability of marketing outlets. Id. well” royalty clause in a lease. Our Court has spoken to
at 872. See also First Nat'l Bank in Weatherford, Texas this issue only obliquely. In Upham v. Ladd, 128 Tex. 14, 95
v. Exxon Corp., 622 S.W.2d 80, 82 (Tex.1981) (intrastate S.W.2d 365, 366 (1936), we concluded that a lessor suing
sales of gas not comparable to interstate sales regulated by for underpayment of royalties based on a clause calling for
the Federal Power Commission). payment of “proceeds” had stated a cause of action, but
noted that the question of construction of the lease was
In Middleton, we considered when gas is sold within the not yet before the Court.
meaning of a royalty clause based on “market value at
the well.” Exxon contended that the gas was sold at the Decisions of the courts of appeals and other courts
time Exxon entered into a long term contract with the applying Texas law have confronted the question of
purchaser, and that market value should be determined whether post-production costs may be allocated to the
as of then. We disagreed, holding that market value is royalty interest owners, but the holdings are not entirely
determined at the point in time when the gas is actually consistent and construe differing provisions.
produced and delivered. 613 S.W.2d at 245. We also
concluded that “sold at the wells” means sold at the wells One of the earliest decisions dealing with Texas law on
within the lease, not sold at wells within the field. Id. at the subject of marketing costs and payment of royalties
243. was Phillips Petroleum Co. v. Bynum, 155 F.2d 196 (5th
Cir.1946). In discussing how to arrive upon the market
We had occasion to consider whether an operator owes a value of gas, the Fifth Circuit observed that in the absence
duty to a non-participating interest owner to process gas of available evidence of market price at the well, it “would
in Danciger Oil & Refineries, Inc. v. Hamill Drilling Co., seem appropriate” to look at the market price paid by the
141 Tex. 153, 171 S.W.2d 321 (1943). We determined that purchasers in the area at the point of sale, and to then
the operator was not obligated to process the gas where deduct transportation costs. Id. at 198. The Fifth Circuit
the agreement provided that an overriding royalty interest assumed without discussion that transportation charges
would be computed on 1 /24th of the gas “produced, saved should be deducted in arriving upon market value. See
and marketed at the prevailing market price paid by major also Phillips Petroleum Co. v. Johnson, 155 F.2d 185, 189
companies ... free and clear of operating expenses.” Id., (5th Cir.), cert. denied, 329 U.S. 730, 67 S.Ct. 87, 91 L.Ed.
171 S.W.2d at 322–23. The only market in the vicinity 632 (1946) (decided the same day, holding that royalty on
was for processed *126 gas. There was no market for gas processed gas is ⅛th of the sale proceeds less a credit for
produced in its raw state at the wellhead. We reasoned transportation, separation, and sales costs under a royalty
that the overriding royalty payments were to be made out clause that called for “⅛th of net proceeds derived from
of gas “if, as and when produced,” not out of its value the sale of the gas at the mouth of the well”); Holbein
after it had been processed into a more valuable product, v. Austral Oil Co., Inc., 609 F.2d 206, 209 (5th Cir.1980)
even though the clause also referred to gas “marketed.” (dehydration costs deductible from royalty under clause
Id. at 322. We further held that “operating costs” meant basing royalty on amount realized from the sale of gas).
the expenses necessary to market the gas, not processing
the gas into some other product. Id. at 323. At least two decisions from Texas courts of appeals are
at odds with the approach taken by the Fifth Circuit.
We have recognized that for occupation tax purposes, The royalty in Miller v. Speed, 248 S.W.2d 250, 256
the market value of processed gas is measured as to all (Tex.Civ.App.—Eastland 1952, no writ), was held to
ownership interests, including royalty interests, by the be free of any marketing costs. The provision under
total proceeds of the sale of the component parts of the consideration was not expressly a market value clause.
gas after processing, less transportation and processing It simply provided for a royalty of 1 /24th of all gas
costs. Mobil Oil Corp. v. Calvert, 451 S.W.2d 889, 892 produced, saved and made available for market. The case
the law in other jurisdictions and examining the rationale Kansas courts have also seemed to draw a distinction
underpinning the various decisions, the Supreme Court of between sales on the lease premises and those off the
Colorado concluded that the implied covenant to market premises in deciding whether marketing costs may be
gas obligates the lessee to incur post-production costs passed on to the royalty owner. Language in the lease
necessary to place the gas in a condition acceptable for specifying that royalty is to be determined “at the well”
market. Id. at 659. Examples of costs borne solely by has not appeared to be a factor in the courts' decisions.
the lessee included gathering and compression costs to Compare Schupbach v. Continental Oil Co., 193 Kan. 401,
move the gas from the wellhead to a processing plant, and 394 P.2d 1 (1964) (lessee cannot deduct post-production
dehydration costs. Id. at 655–56 n. 8. The court did draw compression costs where sale occurred on the lease and
a distinction, though, between costs necessary to *128 royalty clause was based on proceeds at the mouth of the
market the gas and those that increased value after the well; court noted that compression was installed without
gas had been rendered marketable. Id. at 661. The court consulting royalty owners as to size, location and number
imposed the burden on the lessee to demonstrate that costs of compressors); and Gilmore v. Superior Oil Co., 192 Kan.
enhancing an already marketable product are reasonable 388, 388 P.2d 602 (1964) (could not recover compression
and that they increase royalty revenues in proportion with costs under lease based on “proceeds from the sale of
those costs. Id. at 661. It should be noted that this case was gas at the mouth of the well”; court emphasized that
decided essentially in a vacuum, without reference to any compression was installed on the lease and recognized
specific lease clause. A general question had been certified duty to market, distinguishing situations where market
to the court. is distant from the lease) with Matzen v. Hugoton Prod.
Co., 182 Kan. 456, 321 P.2d 576, 581–82 (1958) (where
The Oklahoma supreme court, after similarly surveying gas gathered, processed and sold off premises, lessee may
other states' decisions, concluded that the implied duty deduct these costs from gross proceeds under clause based
to market gas is a duty to “get the product to the place on proceeds from the sale of gas, even though lease
of sale in marketable form.” Wood v. TXO Prod. Corp., silent as to where market must be found); and Molter v.
854 P.2d 880, 882 (Okla.1992). A “market value at the Lewis, 156 Kan. 544, 134 P.2d 404, 406 (1943) (implied
well” clause was at issue. The court held that compression covenant to market does not require lessee to bear cost of
charges necessary for the gas to enter the purchaser's transporting oil by truck to a distant place even though
pipeline could not be deducted from the royalty where the lease provided for delivery by lessee to lessor into pipeline
sale occurred on the lease premises. Id. In the dissenting “free of cost”). See also Ashland Oil & Refining Co. v.
opinion, four members of the court found this result Staats, Inc., 271 F.Supp. 571, 575 (D.Kan.1967) (refusing
“harsh and untenable” and would have adopted the to enlarge lessee's duty to market to require it to bear full
“better-reasoned” approach of allowing the deduction of cost of 153–mile pipeline system).
compression costs. Id. at 883.
Arkansas seems to recognize a distinction between royalty
The majority in Wood v. TXO distinguished that court's based on “proceeds” versus “market value at the well,”
prior decision in Johnson v. Jernigan, 475 P.2d 396 even if the proceeds are to be determined “at the well.”
(Okla.1970), which held that the obligation to market did Compare Hanna Oil & Gas Co. v. Taylor, 297 Ark. 80, 759
not require the operator to absorb the cost of transporting S.W.2d 563, 564–65 (1988) (compression costs necessary
gas ten miles by pipeline to the point of sale off the lease. to market gas not deductible under lease providing for
Johnson extended the duty to market only to the lease royalty on proceeds received at the well), with Clear Creek
boundaries. Id. at 399. The Johnson court reached this Oil & Gas Co. v. Bushmiaer, 165 Ark. 303, 264 S.W. 830,
conclusion even though the lease called for royalties based 832 (1924) (under lease calling for royalty based on market
on the “gross proceeds at the prevailing market rate for all price at the wells, royalty was net price after deducting
gas sold off the premises.” Id. at 397. The court reasoned transportation costs).
that “gross proceeds” had reference to the value of the
gas on the lease property “without deducting any of the *129 Kentucky and Wyoming decisions appear to permit
expenses involved in developing and marketing the dry gas the deduction of at least transportation charges where the
to this point of delivery.” Id. at 399. sale occurs off the lease. Reed v. Hackworth, 287 S.W.2d
912, 913–14 (Ky.Ct.App.1956) (where lease silent as to
the well” clause, absent language to the contrary, it must comparable sales, as the Court indicates, or value can
be determined whether there is language in the leases in be proven by the so-called net-back approach, which
this case that re-allocates these costs. determines the prevailing market price at a given point
and backs out the necessary, reasonable costs between that
point and the wellhead. But, regardless of how value is
proven in a court of law, logic and economics tell us that
III
there are no marketing costs to “deduct” from value at the
The language of the pertinent clause states: wellhead. See Piney Woods Country Life Sch., 726 F.2d at
231.
Lessee shall pay the Lessor ...
market value at the well for all Further, prohibiting deductions “from the value of
gas ... sold ... off the leased Lessor's royalty” is not the equivalent of directing that
premises ... provided, however, that value be based on anything other than “market value
there shall be no deductions from at the well.” The Court is not presented with a clause
the value of Lessor's royalty by similar to one at issue in Judice v. Mewbourne Oil Co.,
reason of any required processing, 939 S.W.2d 133, 136 (Tex.1996), where a division order
cost of dehydration, compression, directed royalties to be based on “gross proceeds realized
transportation, or other matter to at the well.” There is an inherent, irreconcilable conflict
market such gas. between “gross proceeds” and “at the well” in arriving
at the value of the gas. That conflict renders the phrase
It is clear certain “deductions” are prohibited. The ambiguous. The proviso in the Heritage leases does not
question that must be answered is from what are create an ambiguity. It is simply ineffective.
deductions prohibited. The clause says “from the value of
Lessor's royalty.” The value of Lessor's royalty is “market As long as “market value at the well” is the benchmark
value at the well” for gas sold off the leased premises. for valuing the gas, a phrase prohibiting the deduction
of post-production costs from that value does not change
The court of appeals correctly observed that the intent the meaning of the royalty clause. Thus, even if the Court
of the parties is determined from what they actually were to hold that a lessee's duty to market gas includes the
expressed in the lease as written, not what they may obligation to absorb all of the marketing costs, the proviso
have intended but failed to express. 895 S.W.2d at 836. at *131 issue would add nothing to the royalty clause. All
However, the court of appeals did not apply this principle. costs would already be borne by the lessee. It could not be
It reasoned that the parties “must have intended something said under that circumstance that the clause is ambiguous.
by this language,” and in order to give the language some It could only be said that the proviso is surplusage.
meaning, the court construed the proviso to mean that
royalty owners do not share in post-production costs. Id. However, the proviso prohibiting the deduction of
marketing costs would not be surplusage if we interpreted
There is little doubt that at least some of the parties “market value at the well” to obligate the lessee to pay
to these agreements subjectively intended the phrase at some, but not all, marketing costs. For example, it has
issue to have meaning. However, the use of the words been argued that at least some post-production costs, such
“deductions from the value of Lessor's royalty” is circular as compression, should be borne solely by the lessee as
in light of this and other courts' interpretation of “market part of its duty to market the gas, but that other costs,
value at the well.” The concept of “deductions” of such as processing, should be shared by the lessor. See,
marketing costs from the value of the gas is meaningless e.g., Garman v. Conoco, Inc., 886 P.2d at 654. Such an
when gas is valued at the well. Value at the well is already interpretation of a royalty clause would mean that value
net of reasonable marketing costs. The value of gas “at is determined on a basis other than value “at the well.”
the well” represents its value in the marketplace at any If “value” were not referable to “market value at the
given point of sale, less the reasonable cost to get the gas to well,” but encompassed other considerations, then the
that point of sale, including compression, transportation, proviso could be construed to prohibit the deduction of
and processing costs. Evidence of market value is often any costs “required ... to market such gas.” But such an
approach injects uncertainty into the meaning of “market at issue, which is common to each contract, reads as
value at the well” leases, and could lead to a fact-finding follows:
inquiry in virtually every case as to what was and was
not a cost “required to market the gas.” This weighs [T]here shall be no deductions from
heavily against adopting the approach apparently taken the value of Lessor's royalty by
in Colorado where the lessee has a duty to “create a reason of any required processing,
marketable product,” and a fact question exists as to what cost of dehydration, compression,
costs are required to make the gas marketable. Id. at n. 3. transportation, or other matter to
Our Court has correctly concluded that “market value at market such gas. 1
the well” means just that, what a willing buyer would pay
at the well, recognizing there would be costs to get the gas What could be more clear? This provision expresses the
from the wellhead to a market. parties' intent in plain English, and I am puzzled by
the Court's decision to ignore the unequivocal intent of
There are any number of ways the parties could have sophisticated parties who negotiated contractual terms at
provided that the lessee was to bear all costs of marketing arm's length. See M/S Bremen v. Zapata Off–Shore Co.,
the gas. If they had intended that the royalty owners would 407 U.S. 1, 12, 92 S.Ct. 1907, 1914, 32 L.Ed.2d 513 (1972)
receive royalty based on the market value at the point (noting that, absent compelling reason, contracts “made
of delivery or sale, they could have said so. If they had in an arm's-length negotiation by experienced *132 and
intended that in addition to the payment of market value sophisticated businessmen ... should be honored by the
at the well, the lessee would pay all post-production costs, parties and enforced by the courts”); accord Prudential Ins.
they could have said so. They did not. There is no direct Co. v. Jefferson Assoc., 896 S.W.2d 156, 161 (Tex.1995).
statement in the leases that the royalty owners are to In my opinion, both the trial court and the court of
receive anything in addition to the value of their royalty, appeals correctly held that this language clearly forbids
which is based on value at the well. To the contrary, the Heritage from deducting transportation costs to arrive at
leases only prohibit any deduction from value at the well. the market value of the gas on which the royalty payment
This distinction may be a fine one, but the language used is based.
is not ambiguous and must be given its ordinary meaning.
Fundamental principles of Texas law hold that competent
We cannot re-write the agreement for the parties. See, parties enjoy the utmost freedom of contract and that
e.g., Exxon v. Middleton, 613 S.W.2d at 245 (quoting courts will enforce a contract freely and voluntarily made
Vela, 429 S.W.2d at 871) (explaining that if Exxon had for a lawful purpose. Crutchfield v. Associates Inv. Co., 376
intended its royalty obligation to be based on the prices it S.W.2d 957, 959 (Tex.Civ.App.—Dallas 1964, writ ref'd).
actually received under long term sales contracts, it could Under basic rules of contract interpretation, this Court
have agreed in the lease that royalty would be based on must give effect to the written expression of the parties'
the “amount realized” from the sale, rather than “market intent. See Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132,
value at the well”). 133 (Tex.1994). To do so involves reading all parts of the
contract together, giving effect to each individual part.
****** Id. In this case, however, the Court unnecessarily looks
to the trade meaning of the words used to conclude that
For the foregoing reasons, I concur in the judgment of the the post-production clause is surplusage as a matter of
Court. law. 939 S.W.2d 118. Similarly, the concurrence needlessly
considers other judicial constructions of “market value
at the well,” including several non-Texas cases, without
Justice GONZALEZ, joined by Justice ABBOTT, analyzing whether those contracts bear any similarity to
dissenting. the ones at issue here. Id. at 124 (Owen, J., concurring).
The simple question presented in this case is whether Neither the majority nor the concurrence give proper
Heritage can deduct transportation costs from the value of legal effect to specific language in these contracts which
NationsBank's royalties under these leases. The language clearly denotes the parties' intent that “there shall be no
deductions from the value of Lessor's royalty by reason of
any ... cost of ... transportation.” See Forbau, 876 S.W.2d Mineral Deeds and Leases: An Encyclopedia of Canons
at 133–34. of Construction, 24 TEX.TECH L.REV. 1, 103 (1993).
This canon allocates the burden of uncertainty caused by
Heritage was free to bargain over whether NationsBank the use of inappropriate or vague language in a written
would have the right to participate in post-production instrument. To the extent the court can identify the party
business activities and receive royalties derived from those who either drafted the instrument *133 or provided
activities. The lease provision incorporates all four of the the form used, the canon requires that the uncertainty
distinct business activities into which most gas production be resolved against that party. The “construe against
operations can be divided: production, gathering, the lessee” canon functions similarly. When an oil and
marketing, and processing. It clearly excludes deductions gas lease is subject to two or more equally reasonable
for “any required processing, cost of dehydration, constructions, “the one more favorable to the lessor will be
compression, transportation, or other matter to market allowed to prevail.” Zeppa v. Houston Oil Co., 113 S.W.2d
such gas.” The drafters of this clause could have allowed 612, 615 (Tex.Civ.App.—Texarkana 1938, writ ref'd); see
for deductions of the cost of any of the distinct business also Stanolind Oil & Gas Co. v. Newman Bros. Drilling Co.,
activities that occur after the production of gas, but chose 157 Tex. 489, 305 S.W.2d 169, 176 (1957). In the present
not to include language to that effect. The language in case, Heritage indisputably wrote the lease contracts and
the lease provision is clear, and in the absence of fraud occupied the position of lessee. Thus, even if the provision
or misrepresentation, a party is charged with knowing is ambiguous, application of the basic rules of interpreting
the legal effect of a contract voluntarily made. Barfield v. oil and gas leases would result in a construction against
Howard M. Smith Co., 426 S.W.2d 834, 838 (Tex.1968). Heritage and in favor of NationsBank.
Because the provision at issue is unambiguous, the Court
errs by ignoring the clear intent of the parties. I have one final concern about today's decision. By
attributing an unequivocal, precise meaning to “market
The majority and the concurrence both state that they value at the well” in oil and gas leases, the Court
agree with the trial court and the court of appeals that the announces a new rule that should be applied only
leases in question are unambiguous. 939 S.W.2d 118; id. prospectively. See generally Carrollton–Farmers Branch
at 124 (Owen, J., concurring). I find their agreement odd Indep. Sch. Dist. v. Edgewood Indep. Sch. Dist., 826
and amusing given that, interpreting the same contracts, S.W.2d 489, 515–521 (Tex.1992) (discussing factors for
both opinions reach a completely opposite result than the deciding between retroactive and prospective operation).
lower courts. By definition, if a contract is reasonably We have limited the effect of our decisions in this manner
susceptible to more than one meaning, it is ambiguous. when considerations of fairness and policy preclude full
Coker v. Coker, 650 S.W.2d 391, 393 (Tex.1983); Skelly retroactivity. See, e.g., Moser v. United States Steel
Oil Co. v. Archer, 163 Tex. 336, 356 S.W.2d 774, 778 Corp., 676 S.W.2d 99, 103 (Tex.1984) (limiting new
(1961). By supplying a meaning not found in the leases rule concerning phrase “other minerals” in deeds to
for “market value at the well,” both the majority and the prospective application). This result is appropriate in the
concurrence create an ambiguity where none exists. present case because, before now, the meaning of “market
value at the well” was subject to specific negotiation by
When a contract contains an ambiguity, we consider the parties. Indeed, as the concurring opinion notes, this
the words used in the instrument, in light of the Court has never decided previously whether “ ‘market
surrounding circumstances, and apply the appropriate value at the well’ includes or excludes post-production
rules of construction to settle their meaning. Harris v. costs,” 939 S.W.2d at 127 (Owen, J., concurring), and
Rowe, 593 S.W.2d 303, 306 (Tex.1979). Assuming for the lower courts have not reached agreement on the issue. See
sake of argument that these contracts are ambiguous, id. at 126. Compare Texas Oil & Gas Corp. v. Hagen, 683
we must apply two of the most basic rules governing S.W.2d 24, 28 (Tex.App.—Texarkana 1984) (concluding
interpretation of oil and gas leases: (1) contracts are that “market value at the well” includes deduction for “the
to be construed against the scrivener; and (2) leases reasonable cost of transporting the gas to the market”),
are to be construed against the lessee. The “construe writ dism'd as moot, 760 S.W.2d 960 (Tex.1988) with
against the scrivener” canon flows from basic contract Heritage Resources, Inc. v. Nationsbank, 895 S.W.2d
law. See Kramer, The Sisyphean Task of Interpreting 833, 836–37 (Tex.App.—El Paso 1995) (determining that
market-value royalty clause did not allow deduction for This decision wrongfully denies parties such as
NationsBank the right to collect royalty payments for
transportation costs), rev'd, 939 S.W.2d 118 (Tex.1996).
which they clearly bargained. For the foregoing reasons,
Today, the Court decides that question, but substitutes
I dissent.
its own interpretation of the phrase for the meaning
the parties intended. The Court blindsides NationsBank
and other lessors by mandating that this decision apply All Citations
retroactively.
939 S.W.2d 118, 39 Tex. Sup. Ct. J. 537
Footnotes
1 One of the leases differs somewhat from the others. Because of the way in which the royalty clause of that lease is
structured, an argument could be made that the proviso prohibiting the deduction of marketing costs from the value of
the royalty applies only when the sale of gas occurs at the well and that the proviso does not apply when determining
the market value of gas sold off the lease. It is unnecessary to decide that issue, however, because the parties agree
that the proviso does apply under this lease as well as under the other leases in determining the market value of gas
at the well when it is sold off the premises.
2 For a general discussion of these competing principles and some of the divergent decisions, see Wood v. TXO Production
Corp., 854 P.2d 880 (Okl.1992). See also 3 WILLIAMS, OIL & GAS LAW § 645 (1990).
1 The royalty clause in one lease differs slightly from the others. However, any differences are immaterial to resolving the
issue presented.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
contract that extended beyond the term of the agreement against a non-signatory, courts
majority of the board members went to the should ask whether she is bound by that
merits of the underlying dispute, thus should agreement under traditional principles of
be decided by arbitrator. 9 U.S.C.A. § 1 et seq.; contract and agency law.
West's A.M.C. § 41–13–35.
Cases that cite this headnote
Cases that cite this headnote
Where a defense relates to a contract as a *440 John B. Clark, Daniel, Coker, Horton & Bell,
whole, and not specifically to an arbitration Jackson, MS, for plaintiff.
clause, then there is no distinction between
defenses which render a contract voidable Eugene R. Naylor, Wise, Carter, Child & Caraway,
and defenses which render a contract void; Jackson, MS, Alan D. Lancaster, Liston/Lancaster,
both should be submitted to the arbitrator. 9 Winona, MS, for defendants.
U.S.C.A. § 1 et seq.
on or about June 4, 2001, Tyler–Holmes and 10, 104 S.Ct. 852, 857, 79 L.Ed.2d 1 (1984); Mouton
Perspectives executed an amended agreement (“Amended v. Metropolitan Life Ins. Co., 147 F.3d 453, 456 (5th
Management Agreement”), in which Perspectives agreed Cir.1998).
to reduce the monthly management fee. This was
done, at least partially, to assist Tyler–Holmes with [2] [3] [4] The Fifth Circuit has directed that courts
financial *441 difficulties. The Amended Management are to perform a two-step inquiry to determine whether
Agreement contains a mandatory arbitration clause, parties should be compelled to arbitrate a dispute.
requiring that all disputes and claims relating to the Primerica Life Ins. Co. v. Brown, 304 F.3d 469, 471 (5th
Agreement shall be settled by arbitration. On or about Cir.2002); R.M. Perez & Assoc., Inc. v. Welch, 960 F.2d
October 5, 2001, Horizon purchased most, if not all, of 534, 538 (5th Cir.1992) (citing Mitsubishi Motors Corp. v.
the assets from Perspectives, including certain accounts Soler Chrysler–Plymouth, 473 U.S. 614, 105 S.Ct. 3346,
receivable. Horizon thus became the successor to the 87 L.Ed.2d 444 (1985)). “First, the court must determine
rights of Perspectives as Manager under the Amended whether the parties agreed to arbitrate the dispute. Once
Management Agreement. According to Tyler–Holmes, the court finds that the parties agreed to arbitrate, it must
the geropsychiatric program experienced decreases in consider whether any federal statute or policy renders the
patient numbers, and the services provided through the claims nonarbitrable.” Primerica Life Ins. Co., 304 F.3d
Amended Management Agreement became unnecessary. at 471 (citations omitted). “When conducting this two-
Tyler–Holmes inquired about new terms for a new, pronged analysis, courts must not consider the merits of
and presumably more favorable, agreement. Apparently, the underlying action.” Id. (citing Snap–On Tools Corp.
Horizon was not interested in the proposed terms. v. Mason, 18 F.3d 1261, 1267 (5th Cir.1994)). “Under ...
Thereafter, Tyler–Holmes terminated the Agreement. the FAA, the federal district court ascertains only whether
the arbitration clause covers the allegations at issue. If the
Horizon filed this suit on or about June 12, 2002, to collect dispute is within the scope of the arbitration clause, the
approximately $778,000 which, according to Horizon, court may not delve further into the merits of the dispute.”
Tyler–Holmes owes in arrears and lost profits. The Id. (citations and internal quotes omitted).
complaint asserts a cause of action for, inter alia, breach of
contract. Thereafter, Horizon filed this motion to compel
arbitration and to stay this case pending arbitration.
C. Discussion
States Arbitration Act (9 U.S.C. Section 1 et seq.) And not permit a public entity to make a contract that extends
the Rules of American Arbitration Association. All beyond the term of a majority of the board's members
awards of the arbitration shall be binding and non- might ultimately excuse Tyler–Holmes from compliance
appealable except as otherwise provided in the United with the contract. However, that also involves getting
States Arbitration Act.... The parties hereby agree the to the merits and should be decided by an arbitrator.
rendering of an award by the arbitrator or arbitrators Both of these arguments go the Amended Management
shall be a condition precedent to the initiation of any Agreement as a whole, and are not directed at the
legal proceeding with respect to any dispute arising in arbitration provision. The Fifth Circuit has stated “unless
connection with this Agreement. a defense relates specifically to the arbitration *443
Tyler–Holmes does not argue, and the court does not agreement, it must be submitted to the arbitrator as part of
find any federal statute or policy that renders the claims the underlying dispute.” Primerica Life Ins. Co., 304 F.3d
nonarbitrable. As such, the court must determine whether at 472. Where a defense relates to a contract as a whole,
the parties agreed to arbitrate the dispute. The arbitration and not specifically to an arbitration clause, then there is
clause is broad, and clearly the dispute in question falls no distinction between defenses which render a contract
within the scope of the arbitration agreement. voidable and defenses which render a contract void; both
should be submitted to the arbitrator. Id. at n. 2 (citing
Tyler–Holmes argues that the Amended Management Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S.
Agreement is invalid and/or voidable under Mississippi 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967)).
law, and as such, the arbitration agreement is not
enforceable. Tyler–Holmes advances three reasons to [7] [8] Tyler–Holmes' second assertion is that the
support such a position. First, Tyler–Holmes argues that MCHA and opinions of the Mississippi Attorney General
the arbitration agreement cannot be enforced because a hold that public bodies such as Tyler–Holmes may not
material term of the Amended Management Agreement be required to submit to arbitration. “Even if [Tyler–
violates Miss.Code § 41–13–35(5)(k) of the Mississippi Holmes is correct], the strong federal policy favoring
Community Hospital Act (“MCHA”). Tyler–Holmes arbitration preempts state laws that act to limit the
asserts that the MCHA requires that certain “financing availability of arbitration.” Saturn Distribution Corp.
arrangement[s],” such as are supposedly in the Amended v. Paramount Saturn, Ltd., 326 F.3d 684, 687 (5th
Management Agreement, be approved by the owner of the Cir.2003)(citing Southland Corp., 465 U.S. at 16, 104
hospital by virtue of a resolution. As such, Tyler–Holmes S.Ct. 852). Furthermore, “[t]he Arbitration Act, resting on
argues that because the entire agreement is invalid, the Congress's authority under the Commerce Clause, creates
arbitration clause cannot be enforced. Second, Tyler– a body of federal substantive law that is applicable in both
Holmes asserts that the MCHA and opinions of the federal and state courts.” IP Timberlands Operating Co.
Mississippi Attorney General hold that public bodies v. Denmiss Corp., 726 So.2d 96, 107 (Miss.1998)(citing
such as Tyler–Holmes may not be required to submit to Moses H. Cone Memorial Hosp. v. Mercury Constr.
arbitration. Third, Tyler–Holmes asserts that the MCHA Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983))
does not permit a public entity to make a contract (emphasis added). As such, Tyler–Holmes' arguments
that extends beyond the term of a majority of the about state law limiting the FAA are not well taken.
board's members. Tyler–Holmes asserts that the Amended
Management Agreement extends beyond the term of the [9] Finally, the court notes that Tyler–Holmes does
majority of the Tyler–Holmes' Trustees. not contest that the Trustees and Supervisors can be
compelled to arbitrate as well under traditional agency
[5] [6] As to the first and third reasons submitted principles. Horizon notes that Supervisors grant Trustees
by Tyler–Holmes, the court is of the opinion that these broad powers to govern community hospitals. Trustees
arguments are getting into the merits of the underlying in turn are authorized to employ administrators, such
dispute. Whether the Amended Management Agreement as Greg Mullen, the hospital administrator who signed
can be enforced because a material term of the Agreement the agreements in the case sub judice. Because arbitration
violates certain “financing arrangement[s]” in Miss.Code is a creature of contract law, when asked to enforce
§ 41–13–35(5)(k) should be decided by the arbitrator. an arbitration agreement against a non-signatory, courts
Similarly, Tyler–Holmes' assertion that the MCHA does should ask “whether ... she is bound by that agreement
under traditional principles of contract and agency the claims in this case are arbitrable. As *444 such, the
parties' claims shall be dismissed without prejudice.
law.” Mississippi Fleet Card, LLC v. Bilstat, Inc., 175
F.Supp.2d 894, 901 (S.D.Miss.2001) (citation omitted).
A separate order in accordance with this opinion shall
See also Fleetwood Enterprises, Inc. v. Gaskamp, 280
issue this day.
F.3d 1069, 1076 (5th Cir.2002)(quoting Thomson–CSF,
S.A. v. American Arbitration Ass'n, 64 F.3d 773, 776
(2d. Cir.1995))(Stating there are several “theories under
‘common law principles of contract and agency law’ that ORDER GRANTING MOTION
provide a basis ‘for binding non-signatories to arbitration TO COMPEL ARBITRATION
agreements.’ ”). As such, the court finds that Horizon's
arguments are well taken, and Plaintiff's motion to compel Pursuant to an opinion issued this day, it is hereby
arbitration shall be granted against all Defendants. ORDERED that
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
320 Cases that cite this headnote (a) “[A]rbitration is a matter of contract and a party
cannot be required to submit to arbitration any dispute
[5] Alternative Dispute Resolution which he has not agreed so to submit.” Steelworkers
Agreements to Arbitrate v. Warrior & Gulf Nav. Co., 363 U.S. 574, 582, 80
S.Ct. 1347, 4 L.Ed.2d 1409. The question whether
Contract between brokerage firm and its
parties have submitted a particular dispute to arbitration,
customer, which incorporated the National
i.e., the “question of arbitrability,” is “an issue for
Association of Securities Dealers (NASD)
judicial determination [u]nless the parties clearly and
Code of Arbitration Procedure, did not
unmistakably provide otherwise.” AT & T Technologies,
call for judicial determination of whether
Inc. v. Communications Workers, 475 U.S. 643, 649, 106
arbitration was time-barred under NASD
S.Ct. 1415, 89 L.Ed.2d 648. The phrase “question of
arbitration time limit rule, although rule
arbitrability” has a limited scope, applicable in the kind
limited arbitration to “eligible” disputes,
of narrow circumstance where contracting parties would
where rule's use of term “eligible” did not
likely have expected a court to have decided the gateway
indicate parties' intent for time limit issue
matter. But **590 the phrase is not applicable in other
to be resolved by court prior to arbitration,
kinds of general circumstance where parties would likely
since parties to an arbitration contract would
expect that an arbitrator would decide the question-“
normally expect a forum-based decisionmaker
‘procedural’ questions which grow out of the dispute
to decide forum-specific procedural gateway
and bear on its final disposition,” John Wiley & Sons,
matters.
Inc. v. Livingston, 376 U.S. 543, 557, 84 S.Ct. 909, 11
444 Cases that cite this headnote L.Ed.2d 898, and “allegation [s] of waiver, delay, or
a like *80 defense to arbitrability,” Moses H. Cone
Memorial Hospital v. Mercury Constr. Corp., 460 U.S.
1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765. Following
this precedent, the application of the NASD rule is
**589 Syllabus * not a “question of arbitrability” but an “aspec[t] of
the [controversy] which called the grievance procedures
Per respondent Dean Witter Reynolds, Inc.'s standard into play.” John Wiley & Sons, Inc., supra, at 559, 84
client agreement, petitioner Howsam chose to arbitrate S.Ct. 909. NASD arbitrators, comparatively more expert
her dispute with the company before the National about their own rule's meaning, are comparatively better
Association of Securities Dealers (NASD). NASD's Code able to interpret and to apply it. In the absence of any
of Arbitration Procedure § 10304 states that no dispute statement to the contrary in the arbitration agreement,
“shall be eligible for submission ... where six (6) years it is reasonable to infer that the parties intended the
have elapsed from the occurrence or event giving rise to agreement to reflect that understanding. And for the law
the ... dispute.” Dean Witter filed this suit, asking the to assume an expectation that aligns (1) decisionmaker
Federal District Court to declare the dispute ineligible with (2) comparative expertise will help better to secure the
for arbitration because it was more than six years underlying controversy's fair and expeditious resolution.
old and seeking an injunction to prohibit Howsam Pp. 591-593.
from proceeding in arbitration. The court dismissed
the action, stating that the NASD arbitrator should (b) Dean Witter's argument that, even without an
interpret and apply the NASD rule. In reversing, the antiarbitration presumption, the contracts call for judicial
Tenth Circuit found that the rule's application presented determination is unpersuasive. The word “eligible” in
a question of the underlying dispute's “arbitrability”; and the NASD Code's time limit rule does not, as Dean
the presumption is that a court will ordinarily decide an Witter claims, indicate the parties' intent for the rule to
arbitrability question. be resolved by the court prior to arbitration. Parties to
an arbitration contract would normally expect a forum-
Held: An NASD arbitrator should apply the time limit based decisionmaker to decide forum-specific procedural
rule to the underlying dispute. Pp. 591-593. gateway matters, and any temptation here to place special
antiarbitration weight on the word “eligible” in § 10304 falls within their standard Client Service Agreement's
is counterbalanced by the NASD rule that “arbitrators arbitration clause, which provides:
shall be empowered to interpret and determine the
applicability” of all code provisions, § 10324. P. 593. “[A]ll controversies ... concerning or arising from ... any
account ..., any transaction ..., or ... the construction,
261 F.3d 956, reversed. performance or breach of ... any ... agreement between
us ... shall be determined by arbitration before any self-
BREYER, J., delivered the opinion of the Court, in regulatory organization or exchange of which Dean
which REHNQUIST, C.J., and STEVENS, SCALIA, Witter is a member.” App. 6-7.
KENNEDY, SOUTER, and GINSBURG, JJ., joined.
*82 The agreement also provides that Howsam can select
THOMAS, J., filed an opinion concurring in the
the arbitration forum. And Howsam chose arbitration
judgment, post, p. 593. O'CONNOR, J., took no part in
before the NASD.
the consideration or decision of the case.
The underlying controversy arises out of investment The Courts of Appeals have reached different conclusions
advice that Dean Witter Reynolds, Inc. (Dean Witter), about whether a court or an arbitrator primarily should
provided its client, Karen Howsam, when, some time interpret and apply this particular NASD rule. Compare,
between 1986 and 1994, it recommended that she e.g., 261 F.3d 956 (C.A.10 2001) (case below) (holding that
buy and hold interests in four limited partnerships. the question is for the court); J.E. Liss & Co. v. Levin, 201
Howsam says that Dean Witter misrepresented the virtues F.3d 848, 851 (C.A.7 2000) (same), with PaineWebber Inc.
of the partnerships. The resulting controversy **591 v. Elahi, 87 F.3d 589 (C.A.1 1996) (holding that NASD §
15, currently § 10304, is presumptively for the arbitrator);
Smith Barney Shearson, Inc. v. Boone, 47 F.3d 750 (C.A.5 of arbitrability” for a court to decide. See id., at 943-946,
1995) (same). We *83 granted Howsam's petition for 115 S.Ct. 1920 (holding that a court should decide
certiorari to resolve this disagreement. And we now hold whether the arbitration contract bound parties who did
that the matter is for the arbitrator. not sign the agreement); John Wiley & Sons, Inc. v.
Livingston, 376 U.S. 543, 546-547, 84 S.Ct. 909, 11
L.Ed.2d 898 (1964) (holding that a court should decide
whether an arbitration agreement survived a corporate
II
merger and bound the resulting corporation). Similarly,
[1] This Court has determined that “arbitration is a a disagreement about whether an arbitration clause in
matter of contract and a party cannot be required to a concededly binding contract applies to a particular
submit to arbitration any dispute which he has not agreed type of controversy is for the court. See, e.g., AT & T
so to submit.” Steelworkers v. Warrior & Gulf Nav. Co., Technologies, supra, at 651-652, 106 S.Ct. 1415 (holding
363 U.S. 574, 582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960); that a court should decide whether a labor-management
see also First Options, supra, at 942-943, 115 S.Ct. 1920. layoff controversy falls within the arbitration clause of
Although the Court has also long recognized and enforced a collective-bargaining agreement); Atkinson v. Sinclair
a “liberal federal policy favoring arbitration agreements,” Refining Co., 370 U.S. 238, 241-243, 82 S.Ct. 1318, 8
Moses H. Cone Memorial Hospital v. Mercury Constr. L.Ed.2d 462 (1962) (holding that a court should decide
Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 whether a clause providing for arbitration of various
(1983), it has made clear that there is an exception to this “grievances” covers claims for damages for breach of a no-
policy: The question whether the parties have submitted strike agreement).
a particular dispute to arbitration, i.e., the “question
of arbitrability,” is “an issue for judicial determination [3] At the same time the Court has found the phrase
[u]nless the parties clearly and unmistakably provide “question of arbitrability” not applicable in other kinds
otherwise.” AT & T Technologies, Inc. v. Communications of general circumstance where parties would likely expect
Workers, 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d that an arbitrator would decide the gateway matter. Thus
648 (1986) (emphasis added); First Options, supra, at 944, “ ‘procedural’ questions which grow out of the dispute
115 S.Ct. 1920. We must decide here whether application and bear on its final disposition” are presumptively not
of the NASD time limit provision falls into the scope of for the judge, but for an arbitrator, to decide. John
this last-mentioned interpretive rule. Wiley, supra, at 557, 84 S.Ct. 909 (holding that an
arbitrator should decide whether the first two steps of a
**592 Linguistically speaking, one might call any grievance procedure were completed, where these steps
potentially dispositive gateway question a “question of are prerequisites to arbitration). So, too, the presumption
arbitrability,” for its answer will determine whether the is that the arbitrator should decide “allegation[s] of
underlying controversy will proceed to arbitration on waiver, delay, or a like defense to arbitrability.” Moses
the merits. The Court's case law, however, makes clear H. Cone Memorial Hospital, supra, at 24-25, 103 S.Ct.
that, for purposes of applying the interpretive rule, the 927. Indeed, the Revised Uniform Arbitration Act of 2000
phrase “question of arbitrability” has a far more limited (RUAA), seeking to “incorporate *85 the holdings of
scope. See 514 U.S., at 942, 115 S.Ct. 1920. The Court the vast majority of state courts and the law that has
has found the phrase applicable in the kind of narrow developed under the [Federal Arbitration Act],” states
circumstance where contracting parties would likely have that an “arbitrator shall decide whether a condition
expected a court to have decided the gateway matter, precedent to arbitrability has been fulfilled.” RUAA §
where they are not likely to have thought that they had 6(c), and comment 2, 7 U.L.A. 12-13 (Supp.2002). And
agreed that an arbitrator would do so, and, consequently, the comments add that “in the absence of an agreement to
where reference of the gateway dispute to the court avoids the contrary, issues of substantive arbitrability ... are for a
the risk of *84 forcing parties to arbitrate a matter that court to decide and issues of procedural arbitrability, i.e.,
they may well not have agreed to arbitrate. whether prerequisites such as time limits, notice, laches,
estoppel, and other conditions precedent to an obligation
[2] Thus, a gateway dispute about whether the parties to arbitrate have been met, are for the arbitrators to
are bound by a given arbitration clause raises a “question
A straightforward application of these principles easily to be bound by New York law and because Volt requires
us to enforce their agreement, I would permit arbitrators
resolves the question presented in this case.
to resolve the § 10304 issues that have arisen in this case,
just as New York case law provides. The Court follows a
The agreement now before us provides that it “shall be
different route to reach the same conclusion; accordingly,
construed and enforced in accordance with the laws of the
I concur only in the judgment.
State of New York.” App. 6. Interpreting two agreements
containing provisions virtually identical to the ones in
dispute here, the New York Court of Appeals held that All Citations
issues implicating § 15 (now § 10304) of the National
Association of Securities Dealers Code of Arbitration 537 U.S. 79, 123 S.Ct. 588, 154 L.Ed.2d 491, 71 USLW
Procedure are for arbitrators to decide. See Smith Barney 4019, 02 Cal. Daily Op. Serv. 11,847, 2002 Daily Journal
Shearson Inc. v. Sacharow, 91 N.Y.2d 39, 666 N.Y.S.2d D.A.R. 13,897, 16 Fla. L. Weekly Fed. S 20
990, 689 N.E.2d 884 (1997). Because the parties agreed
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50
L.Ed. 499.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Synopsis
Background: Pharmacy owners brought action on behalf [2] Alternative Dispute Resolution
of themselves and a putative class, asserting that Disputes and Matters Arbitrable Under
pharmacy benefits management company had underpaid Agreement
them for a decade. Management company moved for Arbitration clause in provider agreements
arbitration based on clause in provider agreements, and between pharmacies and pharmacy benefits
the trial court denied the motion to compel. Management management company governed pharmacies'
company petitioned for mandamus relief, and the Court claims that company miscalculated
of Appeals summarily denied mandamus relief. pharmacies' negotiated discount from the
Average Wholesale Price figure (AWP), where
pharmacies signed numerous enrollment
forms over the years, each of which explicitly
Holdings: On petition for writ of mandamus, the Supreme
referenced and agreed to the terms of the
Court held that:
provider agreements, and suit was based on
the provider agreements.
[1] arbitration clause governed pharmacies' claims;
Cases that cite this headnote
[2] agreements to arbitrate were not without
consideration;
[3] Alternative Dispute Resolution
[3] arbitration clauses were not illusory; Validity
Under the Federal Arbitration Act (FAA), an
[4] arbitration clauses were not procedurally agreement to arbitrate is valid if it meets the
unconscionable; and requirements of the general contract law of the
applicable state. 9 U.S.C.A. § 1 et seq.
[5] evidence did not support contention that arbitration
clause was disclosed only after pharmacies joined benefits 61 Cases that cite this headnote
network.
[4] Alternative Dispute Resolution
What law governs
Writ conditionally granted.
Supreme Court would apply Texas law
to decide whether arbitration provision in
contracts between pharmacies and pharmacy
benefits management company was valid,
7 Cases that cite this headnote 11 Cases that cite this headnote
Opinion
[15] Alternative Dispute Resolution
Evidence PER CURIAM.
Evidence did not support pharmacies'
We are once again called upon to decide the enforceability
contention that provider agreements
of an arbitration provision, this time in transactions
between pharmacies and pharmacy benefits
between a pharmacy benefits management company
management company which contained
and member pharmacies. The trial court denied the
arbitration clause were disclosed only after
management company's motion to compel arbitration
pharmacies joined benefits network, and
under the Federal Arbitration Act (FAA). See 9 U.S.C. §§
therefore that pharmacies did not receive
1–16. The court of appeals summarily denied mandamus
notice of the clause and did not agree to
relief. Because the parties' contracts clearly require
arbitrate disputes; pharmacy owner testified
arbitration, we once again grant conditional mandamus
he signed enrollment form, received provider
relief.
agreement, and then signed enrollment forms
for other pharmacies, and no one else testified
that agreement came only after they joined. AdvancePCS Health L.P. (PCS) 1 processes and
adjudicates claims for reimbursement between member
pharmacies and customers' health care plans. In this case,
the owners of several pharmacies 2 filed suit in Hidalgo by the Federal Arbitration Act, 9
County on behalf of themselves and a putative class, U.S.C. §§ 1 et seq.
asserting PCS had underpaid them for a decade.
[3] [4] Under the FAA, an agreement to arbitrate is valid
[1] PCS moved for arbitration under the FAA. A party if it meets the requirements of the general contract law
attempting to compel arbitration must establish a valid of the applicable state. First Options of Chicago, Inc. v.
arbitration agreement whose scope includes the claims Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d
asserted. In re Oakwood Mobile Homes, Inc., 987 S.W.2d 985 (1995). Here, the Provider Agreement contains a
571, 573 (Tex.1999) (per curiam); Cantella & Co. v. choice-of-law provision stating the agreement would be
Goodwin, 924 S.W.2d 943, 944 (Tex.1996) (per curiam). “construed, governed and enforced” according to Arizona
As it is undisputed that the clause asserted here is broad law. 3 But no party asked the trial court to take judicial
enough to cover the pharmacies' claims, the question
notice of Arizona law. 4 See TEX.R. EVID. 202. Indeed,
presented is its validity.
all parties agree that Texas and Arizona law do not differ
on any point material here. As there appears to be no
[2] PCS submitted affidavits establishing that
conflict of laws, “there can be no harm in applying Texas
pharmacies joining its PCS network receive an
law.” Compaq Computer Corp. v. Lapray, 135 S.W.3d 657,
enrollment package containing a Provider Agreement,
672 (Tex.2004); see In re J.D. Edwards World Solutions
enrollment instructions, an enrollment form, a service
Co., 87 S.W.3d 546, 550 (Tex.2002) (per curiam).
level worksheet, various network enrollment forms
and addenda, and a provider manual. The Provider
[5] [6] Of the enrollment documents here, only the
Agreement contains the following arbitration clause:
Provider Agreement contained an arbitration clause, and
9.5 Arbitration: Any and all only the membership and network enrollment forms were
controversies in connection with signed by the pharmacies. But neither the FAA nor Texas
or arising out of this Agreement law requires that arbitration clauses be signed, so long as
will be exclusively settled by they are written and agreed to by the parties. See 9 U.S.C.
arbitration before a single arbitrator § 3; TEX. CIV. PRAC. & REM.CODE § 171.001(a); see
in accordance with the Rules of the also In re Halliburton Co., 80 S.W.3d 566, 569 (Tex.2002)
American Arbitration Association. (holding arbitration clause was accepted by continued
The arbitrator must follow the employment). 5
rule of law, and may only
award remedies provided in this [7] Nor does an arbitration agreement have to be
Agreement. The award of the included in each of the contract documents it purports
arbitrator will be final and binding to cover. See, e.g., Halliburton, 80 S.W.3d at 569
on the parties, and judgment upon (enforcing stand-alone dispute resolution program); In
such award may be entered in any re FirstMerit Bank, N.A., 52 S.W.3d 749, 752–53, 755
court having jurisdiction thereof. (Tex.2001) (applying arbitration clause in loan agreement
Arbitration under this provision to entire mobile-home transaction); In re Am. Homestar of
will be conducted in Scottsdale, Lancaster, Inc., 50 S.W.3d 480, 482 (Tex.2001) (enforcing
Arizona, and Provider hereby *606 arbitration provision that was separate from retail
agrees to such jurisdiction, unless installment contract). The pharmacies signed numerous
otherwise agreed to by the parties enrollment forms over the years (as new providers were
in writing or mandated by Law, added to the PCS network), each of which explicitly
and the expenses of the arbitration, referenced and agreed to the terms of the Provider
including attorneys' fees, will be paid Agreement. So long as the parties agreed to arbitrate this
for by the party against whom the dispute, it does not matter which document included that
award of the arbitrator is rendered. agreement. Cf. DeWitt County Elec. Coop., Inc. v. Parks, 1
This Section 9.5 and the parties' S.W.3d 96, 102 (Tex.1999) (requiring contracts pertaining
rights hereunder shall be governed to same transaction to be construed together).
Once PCS established the existence of an arbitration But the first of these provides a 30–day window during
clause governing this dispute, the burden shifted to the which the arbitration clause cannot be cancelled. See
pharmacies to raise an affirmative defense to arbitration. Halliburton Co., 80 S.W.3d at 569–70 (holding arbitration
See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 clause not illusory when it provided for 10–day window).
(Tex.2003); Oakwood, 987 S.W.2d at 573. They assert The last is inapplicable, as the general reservation of “all
three. rights [PCS] may have at law” cannot be construed to
render the express arbitration clause meaningless. Shell
[8] [9] First, the pharmacies assert other provisions Oil Co. v. Khan, 138 S.W.3d 288, 292 (Tex.2004). And
in the Provider Agreement allow PCS to cancel the the second does not render the clause illusory because of
arbitration agreement at will, thus rendering its promise another provision the pharmacies overlook:
illusory and the agreement without consideration. See
• 8.6 Survival of Certain Provisions. Notwithstanding
J.M. Davidson, 128 S.W.3d at 228. In the context of
the termination of this Agreement, ... any obligations
stand-alone arbitration agreements, binding promises are
that arise prior to the termination of the Agreement
required on both sides as they are the only consideration
shall survive such termination.
rendered to create a contract. See, e.g., id.; Halliburton,
80 S.W.3d at 569. But when an arbitration clause is Had the pharmacies invoked arbitration rather than filing
part of an underlying contract, the rest of the parties' suit, PCS could not have *608 avoided arbitration by
agreement provides the consideration. See FirstMerit
terminating the Provider Agreement. 6 Thus, the clause
Bank, 52 S.W.3d at 757. Having used PCS's services
was not illusory.
and network to obtain reimbursements for 10 years, the
pharmacies cannot claim their agreement to arbitrate was
[11] Second, the pharmacies contend the arbitration
without consideration.
clause is substantively unconscionable because it lacked
mutuality, and procedurally unconscionable because the
[10] Moreover, the arbitration clause here is not illusory
pharmacies were forced to accept it. We rejected the first
even if considered alone. The pharmacies' point to the
claim above, and have previously rejected the second.
following provisions as rendering the contract illusory:
See Halliburton, 80 S.W.3d at 572 (holding arbitration
• 1.3 Amendments. From time to time AdvancePCS may provision not unconscionable simply because employer
amend this Agreement ... by giving notice to Provider made “take it or leave it” offer to at-will employees).
of the terms of the amendment and specifying the date
the amendment becomes effective, which shall not be [12] [13] [14] Adhesion contracts are not
less than thirty (30) days after the notice. automatically unconscionable, and there is nothing per se
unconscionable about arbitration agreements. Oakwood,
• 8.3 Immediate Termination Rights. If ... Provider 987 S.W.2d at 574. Under the FAA, unequal bargaining
fails to perform or breaches any term or provisions power does not establish grounds for defeating an
of the AdvancePCS Documents, AdvancePCS may agreement to arbitrate absent a well-supported claim
terminate this Agreement effective upon notice to that the clause resulted from the sort of fraud or
Provider. This termination right is in addition to overwhelming economic power that would provide
grounds for revocation of any contract. Gilmer v. Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266, 269
Interstate/Johnson Lane Corp., 500 U.S. 20, 33, 111 S.Ct. (Tex.1992). 8
1647, 114 L.Ed.2d 26 (1991); EZ Pawn Corp. v. Mancias,
[16] Thus, the trial court abused its discretion in failing
934 S.W.2d 87, 90–91 (Tex.1996) (per curiam). 7
to compel arbitration. A party denied the right to arbitrate
under the FAA is entitled to mandamus relief. In re Wood,
[15] Third, the pharmacies contend the arbitration clause
140 S.W.3d 367, 370 (Tex.2004) (per curiam).
was disclosed only after they had joined PCS. Hector de
la Rosa testified that PCS sent the Provider Agreement to
Accordingly, without hearing oral argument, we
him only after he had signed and returned the enrollment
conditionally grant the writ of mandamus and order
forms. When asked whether he read the Provider
the trial court to compel arbitration of the pharmacies'
Agreement upon receipt, he answered “[a]bsolutely not.”
claims in accordance with the arbitration *609 clause.
TEX.R.APP. P. 52.8. The writ will issue only if the trial
But de la Rosa signed several of the enrollment forms
court fails to do so.
seriatim; having received the Provider Agreement after
the first, he was on notice of its terms for all the rest.
Nor did anyone else testify that the Provider Agreement
came only after they had joined, including several other Justice JOHNSON did not participate in the decision.
employees and agents who often signed for de la Rosa's
pharmacies. As neither affidavits nor testimony show All Citations
that any pharmacy joined the PCS network without
172 S.W.3d 603, 48 Tex. Sup. Ct. J. 584
an opportunity to read the Provider Agreement, the
pharmacies have not carried their evidentiary burden. See
Footnotes
1 The defendant assumed various corporate identities during the ten-year period for which plaintiffs brought suit—including
relators AdvancePCS Health L.P., AdvancePCS a/k/a AdvancePCS, Inc., PCS Health Systems, Inc., and AdvancePCS
Health Systems, L.L.C. (all referred to herein as “PCS”). The relationship among these entities is immaterial here, as the
Provider Agreement at issue remained substantially the same throughout.
2 Named plaintiffs were Hector de la Rosa and de la Rosa Pharmacy, Inc., John Z. Cavazos and J.Z.C. Corporation, and
Causey's Pharmacy, Inc. (collectively, the “pharmacies”).
3 Because the arbitration clause specifically provided for application of the FAA, this specific provision controls over the
more general choice-of-law clause to the extent of any conflict. Forbau v. Aetna Life Ins. Co., 876 S.W.2d 132, 133–
34 (Tex.1994).
4 The pharmacies' brief on appeal contains a number of helpful references to Arizona cases, but throughout asserts that
Arizona and Texas law are the same.
5 The Texas Arbitration Act requires signatures in two circumstances, neither of which applies here. See TEX. CIV. PRAC.
& REM.CODE § 171.002 (making Act inapplicable to contracts of less than $50,000 or personal injury claims, unless
signed by parties and their attorneys). Moreover, the FAA preempts state contractual requirements that apply only to
arbitration clauses. Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686–87, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996).
6 For reasons that are unclear, the pharmacies also say mutuality is destroyed by provisions in the Provider Agreement
reserving the right to obtain injunctive relief for violations of intellectual property rights, and for resolving conflicts between
a PCS manual and its “On–Line Info.” We find neither applicable.
7 Whether the terms and conditions of this contract, taken as a whole, are unconscionable is a matter for the arbitrator.
See FirstMerit, 52 S.W.3d at 756; Oakwood, 987 S.W.2d at 573 n. 3.
8 Moreover, any pharmacy that continued to use the PCS network after an opportunity to read the Provider Agreement
and object to its terms arguably accepted it. See Halliburton, 80 S.W.3d at 569 (holding employee accepted arbitration
policy by continuing employment after receiving notice of it); EZ Pawn, 934 S.W.2d at 90 (noting party given opportunity
to read arbitration agreement is presumed to know its contents).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[2] assigned recusal hearing judge exceeded her authority [3] Mandamus
when she attempted to entertain original trial judge's Nature and existence of rights to be
motion for reconsideration; protected or enforced
Mandamus
[3] any failure to notify judge of the hearing on defendant's Nature of acts to be commanded
motion to recuse did not violate judge's due process rights;
Prohibition
and
Acts and Proceedings of Courts, Judges,
and Judicial Officers
[4] claims challenging original trial judge's motion for
reconsideration and appointed recusal hearing judge's To establish that the act sought to be
order granting a rehearing on the matter would be compelled or prohibited does not involve a
reviewed for the first time in original mandamus and discretionary or judicial decision, for purposes
prohibition proceedings. of seeking writs of mandamus or prohibition,
the relator must show that she has a clear right
to the relief sought, meaning that the facts
Petition for writ of mandamus conditionally granted. and circumstances dictate only one rational
decision under unequivocal, well settled, and
clearly controlling legal principles.
[8] Judges
[5] Judges
Determination of objections
Effect on acts and proceedings of judge
The “refer rule” requires the challenged judge
Original trial judge's motion for
to refer a recusal motion to another judge to
reconsideration of order granting criminal
decide the motion in the first instance and
defendant's recusal motion was improper in
allows only the newly assigned judge, a judge
the first instance, such that the assigned
other than the challenged judge, to hear and
recusal hearing judge's act of signing the
rule upon the motion to recuse; this process
order granting reconsideration and setting
affords the State and the defendant a fair and
defendant's motion to recuse for a new hearing
impartial forum in which each may litigate
was also improper; once the original trial
the merits of the motion. Vernon's Ann.Texas
judge referred the recusal motion for another
Rules Civ.Proc., Rule 18a.
judge to decide, the recusal rule prohibited
original trial judge from taking any further Cases that cite this headnote
action in the case until the motion was
decided, except for good cause stated in
writing or on the record, and rule even [9] Judges
prohibited original trial judge from filing Determination of objections
a response to the recusal motion. Vernon's Recusal process contemplates the resolution
Ann.Texas Rules Civ.Proc., Rules 18a(f)(2) of the recusal motion through the exercise
(A), 18a(c)(2). of the independent judgment of the assigned
judge absent any outside pressure; it would
3 Cases that cite this headnote defeat the purpose of the refer rule, requiring
the challenged judge to refer a recusal motion
[6] Judges to another judge to decide the motion in the
Determination of objections first instance, to permit the challenged judge
to insert herself in her official capacity as
The purpose of the “recuse-or-refer rule”
judge in order to exert pressure upon and
requiring the challenged judge to either
influence the assigned judge's judgment, as
recuse or refer a recusal motion to another
such a situation is not just inappropriate but
judge to decide the motion is to preserve
blatantly improper for a challenged judge to
public confidence in the impartiality of the
take action designed to influence the outcome
judiciary by minimizing a judge's involvement
of the matter at issue. Vernon's Ann.Texas
in recusal proceedings. Vernon's Ann.Texas
Rules Civ.Proc., Rule 18a.
Rules Civ.Proc., Rule 18a.
Cases that cite this headnote
1 Cases that cite this headnote
[11] Judges
[15] Mandamus
Effect on acts and proceedings of judge
Criminal prosecutions
Assigned recusal hearing judge exceeded
Prohibition
her authority when she attempted to
Proceedings in criminal prosecutions
entertain original trial judge's motion for
reconsideration after assigned recusal hearing Claims challenging original trial judge's
judge had decided the motion to recuse motion for reconsideration of recusal order
and the presiding administrative judge had and appointed recusal hearing judge's order
transferred and reassigned the case to a new granting a rehearing on the matter would
judge in a new court. be reviewed for the first time in original
mandamus and prohibition proceedings even
1 Cases that cite this headnote though criminal defendant failed to oppose
or object to appointed recusal hearing
judge's reconsideration order, where original
[12] Judges
trial judge and appointed recusal hearing
Duration of authority
judge each acted without authorization and
The terms of the assignment order control directing defendant to make her objections
the extent of the visiting judge's authority before appointed recusal hearing judge
and when it terminates; thus, an otherwise possibly would have resulted in yet another
qualified assigned judge's action outside the original proceeding, and defendant was
scope of his or her assignment presents a afforded little or no time to respond to original
procedural irregularity. trial judge's motion for reconsideration.
Cases that cite this headnote Cases that cite this headnote
If a district judge enters an order for which he Pirtle orally found “the appearance of impropriety, the
has no authority, mandamus will issue. appearance of prejudice ... sufficient” to justify recusal,
and she signed an order granting the motion to recuse
Cases that cite this headnote that same day. On October 1, the presiding administrative
judge transferred the case to a new judge, the Honorable
Jeffrey Rosenfield, Dallas County Criminal Court of
Appeals No. 2.
Attorneys and Law Firms
About three weeks later, Judge Mullin filed a motion for
*311 Michael R. Casillas, Assistant District Attorney, reconsideration addressed to Judge Pirtle. Judge Mullin
Chief Prosecutor, Dallas, TX, for Appellant. argued that Judge Pirtle should reconsider and deny
Amos's motion for recusal because Judge Mullin was a
L.T. Butch Bradt, Houston, TX, Brady T. Wyatt III,
necessary party to the hearing, had not received notice of
Attorney at Law, Dallas, TX, for Appellees.
the hearing, and therefore had no opportunity to “cross-
Before Justices MOSELEY, FITZGERALD, and examine [the] witnesses, nor to present any witnesses
MYERS. or evidence to contravene the issues addressed.” 2 She
also argued that the motion for recusal did not establish
bias or prejudice sufficient to justify recusal. On October
OPINION 26, Judge Pirtle signed an order granting Judge Mullin's
motion for reconsideration and setting the motion to
Opinion by Justice FITZGERALD. recuse for a new hearing on November 1.
II. ANALYSIS
I. FACTS
A. Criminal mandamus standards
Amos filed a motion to recuse the trial judge presiding
[1] [2] [3] [4] We have concurrent mandamus
in her criminal case, the Honorable Etta Mullin, Dallas
jurisdiction with the Texas Court of Criminal Appeals
County *312 Criminal Court No. 5. The presiding
in criminal-law matters. Padilla v. McDaniel, 122 S.W.3d
administrative judge assigned the motion to a former
805, 807 (Tex.Crim.App.2003) (orig. proceeding) (per
judge, the Honorable Sue Pirtle, for decision. On
curiam). Mandamus and prohibition are available in a
September 28, 2012, Judge Pirtle conducted a hearing on
criminal proceeding if the relator shows (1) that the
the motion. Counsel for Amos and the State appeared;
act she seeks to compel or prohibit does not involve a
Amos did not appear. Counsel for Amos and counsel for
discretionary or judicial decision and (2) that she has
the State testified at the hearing. 1 The State presented no no adequate remedy at law to redress the harm that
other evidence and had no objections to the motion. Judge she alleges will ensue. Simon v. Levario, 306 S.W.3d
318, 320 (Tex.Crim.App.2009) (orig. proceeding); see (A) (concerning motions to recuse filed before evidence
also In re State ex rel. Weeks, 391 S.W.3d 117, 122– has been offered at trial). The rules even provide that
23 (Tex.Crim.App. 2013) (orig. proceeding); De Leon the challenged judge “should not file a response to the
v. Aguilar, 127 S.W.3d 1, 5 (Tex.Crim.App.2004) (orig. motion.” TEX. R. CIV. P. 18a(c)(2).
proceeding). The first prong requires the relator to
show that she has a clear right to the relief sought, [8] [9] The “refer rule” requires a challenged judge to
meaning that the facts and circumstances dictate only refer the recusal motion to the presiding judge in the
one rational decision under unequivocal, well-settled, and first instance, and allows only the newly assigned judge,
clearly controlling legal principles. Simon, 306 S.W.3d a judge other than the challenged judge, to hear and
at 320. When a relator seeks extraordinary relief that rule upon the motion to recuse. This process affords the
amounts to the undoing of an accomplished judicial act, parties—the State and the defendant—a fair and impartial
that relief is more in *313 the nature of mandamus than forum in which each may litigate the merits of the motion.
prohibition. Id. at 320 n. 2. Further, this process contemplates the resolution of the
motion through the exercise of the independent judgment
of the assigned judge absent any outside pressure. It
B. Clear right to relief would defeat the purpose of the “refer rule” to permit the
challenged judge to insert herself in her official capacity
1. Impropriety of the motion for reconsideration
as judge in order to exert pressure upon and influence
[5] We conclude that Judge Mullin's motion for
the assigned judge's judgment. It is not just inappropriate
reconsideration was improper, and thus that Judge Pirtle
but blatantly improper for a challenged judge to take
clearly erred by signing the order granting reconsideration
action designed to influence the outcome of the matter
and setting Amos's motion to recuse for a new hearing.
at issue. To hold otherwise would seriously compromise
the independence of the assigned judge and undermine the
[6] “Recuse” means both to remove oneself as a judge
integrity of the judicial recusal process.
in a particular case and to challenge or object to a
judge as being disqualified from hearing a particular
[10] We make no distinction between that period during
case, such as because of prejudice. BLACK'S LAW
which the motion is pending and the period immediately
DICTIONARY 1303 (8th ed. 2004). Texas Rule of Civil
following the ruling by the assigned judge. Once a
Procedure 18a, which governs motions to recuse, applies
judge has been recused, the prudent approach is for
in criminal cases. Arnold v. State, 853 S.W.2d 543, 544
the recused judge and the assigned judge to have no
(Tex.Crim.App.1993). Under that rule, the challenged
further communications with each other concerning any
judge must either recuse or refer the motion for another
aspect of that case. See Mosley v. State, 141 S.W.3d
judge to decide. De Leon, 127 S.W.3d at 5. The purpose of
816, 833 (Tex.App.-Texarkana 2004, pet. ref'd). Judicial
the recuse-or-refer rule is to preserve public confidence in
action prohibited during the pendency of the recusal
the impartiality of the judiciary “by minimizing a judge's
motion should not be tolerated after *314 the assigned
involvement in recusal proceedings.” Carmody v. State
judge rules on the motion. In both instances, the rules
Farm Lloyds, 184 S.W.3d 419, 422 (Tex.App.-Dallas 2006,
plainly discourage any attempt by the challenged judge to
no pet.).
influence the judgment of the assigned judge.
the Code of Criminal Procedure makes no provision for omitted). 3 Thus, an otherwise qualified assigned judge's
a third party to intervene in a ‘criminal action.’ ”). In action outside the scope of his or her assignment presents
Wingfield, the court went so far as to state that the trial a “procedural irregularity.” Wilson v. State, 977 S.W.2d
judge “had no discretion to consider the issues raised” 379, 380 (Tex.Crim.App.1998). In Wilson, a former judge
by purported intervenors in a criminal case. 171 S.W.3d was *315 assigned to a particular trial court for a specific
at 381. By analogy, Judge Pirtle had no discretion to five-week period, and he presided over the appellant's trial
consider the issues raised by Judge Mullin in her motion in that court even though his assignment had expired three
for reconsideration. days before the trial started. Id. at 379. The appellant
complained about the judge's lack of authority for the
Based on the foregoing authorities, we conclude that first time on appeal. Id. at 379–80. The court of criminal
Judge Mullin's motion for reconsideration was wholly appeals held that a defendant may challenge an otherwise
improper and without authority. Under the circumstances qualified judge's authority to preside in a particular case
of this case, after Amos filed the motion to recuse and by means of a pretrial objection (rather than a quo
Judge Mullin declined to recuse herself, Rule 18a(f)(2) warranto proceeding, as had been the rule previously),
(A) obliged Judge Mullin to take no further action in but the challenge cannot be raised for the first time on
the case until the issue of her recusal was decided. Once appeal. Id. at 380; accord Jackson v. State, No. 05–10–
Judge Pirtle granted the motion to recuse, Judge Mullin 01190–CR, 2012 WL 955361, at *2 (Tex.App.-Dallas Mar.
should not have involved herself in the case further. Cf. 22, 2012, no pet.) (not designated for publication) (“An
Dunn v. Cnty. of Dallas, 794 S.W.2d 560, 562 (Tex.App.- appellant may not object, for the first time on appeal, to
Dallas 1990, no writ) (once judge recused himself, he a procedural irregularity in the assignment of a former
could take no further action in the case except for good judge who is otherwise qualified.”). We conclude, based
cause stated in the order). Rule 18a(c)(2) states expressly on Wilson, that when an otherwise qualified assigned
that a challenged judge should not file a response to the judge renders an order in a criminal case that exceeds the
motion; it follows that a judge who has actually been authority conferred by his or her order of assignment, the
recused should not file a motion for reconsideration of order is erroneous, although not void.
that decision. See Mosley, 141 S.W.3d at 833 (stating that
a recused judge generally should have no communications In this case, the order of assignment by the presiding
with the judge ultimately assigned to the case). Any administrative judge provided as follows:
involvement by the recused judge after recusal can only
disserve the public policy of preserving public confidence Pursuant to Rule 18a, Texas Rules of Civil Procedure,
in the impartiality of the judiciary. See Carmody, 184 I [hereby] assign the:
S.W.3d at 422. We conclude that Judge Mullin should not
have filed the motion for reconsideration, and that Judge Honorable Sue Pirtle
Pirtle acted contrary to settled law when she granted the
Former Judge of The 382nd District Court
motion for reconsideration.
to the
2. The termination of Judge Pirtle's authority County Criminal Court # 5 of Dallas County, Texas
[11] In addition to the foregoing, we conclude that
Judge Pirtle exceeded her authority when she attempted This assignment is for the purpose of the assigned judge
to entertain Judge Mullin's motion for reconsideration hearing a Motion to Recuse as stated in the Conditions
after Judge Pirtle had decided the motion to recuse and of Assignment. This assignment is effective immediately
the presiding administrative judge had transferred and and shall continue for such time as may be necessary for
reassigned the case to a new judge in a new court. the assigned judge to hear and pass on such motion.
CONDITION(S) OF ASSIGNMENT:
[12] [13] “The terms of the assignment order control
the extent of the visiting judge's authority and when it Cause No. MA–10–6876: The State of Texas vs. Heidi
terminates.” Mangone v. State, 156 S.W.3d 137, 139– Amos.
40 (Tex.App.-Fort Worth 2005, pet. ref'd) (footnote
trial judge attempted to grant a new trial after the authority over the case. In the civil context, mandamus
will lie when a court issues an order that actively
defendant's motion for new trial had been overruled by
interferes with the jurisdiction of another court possessing
operation of law. See id. at 47–48. The court of criminal
dominant jurisdiction. See In re Puig, 351 S.W.3d 301, 306
appeals granted mandamus relief, concluding *317 that
(Tex.2011) (orig. proceeding) (per curiam). We conclude
the judge lacked authority to take that action. Id. at 50.
that mandamus should issue to forestall any interference
with Judge Rosenfield's authority over this criminal case.
We conclude that mandamus is appropriate on the facts
of this case. Judge Mullin acted without authority when
she filed the motion for reconsideration, and Judge Pirtle
acted contrary to settled law when she granted the motion III. CONCLUSION
for reconsideration. If we withhold mandamus relief, any
further proceedings by Judge Pirtle will be improper, and For the foregoing reasons, we conditionally grant Amos's
any orders or judgments resulting from those proceedings petition for writ of mandamus. The writ will issue only
will be erroneous and subject to reversal, resulting in a if Judge Pirtle fails to vacate her October 26, 2012 Order
waste of judicial resources. Cf. De Leon, 127 S.W.3d at Granting Motion for Reconsideration of Order of Recusal
7 (indicating that mandamus may be appropriate where and Setting Hearing Date. We deny Amos's petition to the
reversal is so certain that a trial would be a waste extent she requests a writ of prohibition.
of judicial resources). Moreover, Judge Pirtle's attempt
to continue taking judicial action conflicts with the
All Citations
order of the presiding administrative judge transferring
Amos's case to Judge Rosenfield and interferes with his 397 S.W.3d 309
Footnotes
1 Counsel for the State testified in part, “I don't think that she [Judge Mullin] can be fair and impartial in your case with
Ms. Amos.”
2 Judge Mullin did not categorically state that she had no prior knowledge of the hearing.
3 The rule is the same in civil cases. See, e.g., Davis v. Crist Indus., Inc., 98 S.W.3d 338, 341 (Tex.App.-Fort Worth
2003, pet. denied) (“The terms of the assignment order control[ ] the extent of the visiting judge's authority and when
it terminates.”).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
substantially invoked the judicial process to its its right to arbitrate by failing to initiate
opponent's detriment. arbitration of that claim after trial court
grants its motion to abate suit and compel
72 Cases that cite this headnote arbitration.
71 Cases that cite this headnote Joe Ross Massengill, Ennis, for Respondent.
Opinion
[9] Alternative Dispute Resolution
Suing or participating in suit PER CURIAM.
Although prejudice may result when party
uses judicial processes to gain access to This is an original proceeding seeking relief from the
information that would not have been denial of a plea in abatement and motion to compel
discoverable in arbitration, when only a arbitration. Because the trial court abused its discretion in
minimal amount of discovery has been finding that relator waived arbitration and because relator
conducted, which may also be useful for has no adequate remedy by appeal, we conditionally grant
purpose of arbitration, the court should not the petition for writ of mandamus.
ordinarily infer waiver based upon prejudice.
In 1990, Kay Bates contracted with relator Bruce
33 Cases that cite this headnote Terminix Company for residential termite extermination
services. The contract contained an arbitration clause. 1
[10] Alternative Dispute Resolution After Terminix failed to rid Bates's house of termites,
Suing or participating in suit she filed suit against Terminix on February 28, 1994.
Bates alleged fraud, negligent misrepresentation, breach
Exterminator did not waive right
of contract, and Deceptive Trade Practices Act violations,
to arbitration of homeowner's claims
and she asked the court to reform the contract.
by propounding one set of eighteen
interrogatories and one set of nineteen
Terminix answered the suit and sent Bates requests for
requests for production; American
production and interrogatories, which she answered. On
Arbitration Association (AAA) rules would
August 8, 1994, Terminix moved to abate the action
have allowed arbitrator to arrange for
and compel arbitration. At a hearing on September 26,
production of documents, and only
1994, the trial court orally granted the motion and asked
substantive facts provided by homeowner
Terminix to prepare a written order. But the parties could
was list of persons with knowledge of facts
not agree on wording and the trial court never signed an
relevant to dispute and list of communications
order.
between herself and exterminator.
9 Cases that cite this headnote Almost a year and a half later, on March 1, 1996, Bates
wrote to Terminix requesting its assistance in arranging
for the American Arbitration Association (“AAA”) to
[11] Alternative Dispute Resolution
arbitrate the case. After some additional correspondence,
Waiver or Estoppel
Bates sent Terminix a completed AAA Submission to
Absent a contrary agreement, party against Dispute Resolution form, and on July 5, 1996, Terminix
whom a claim is asserted does not waive
signed the form and returned it to Bates. Because the (11th Cir.1995). Because public policy favors arbitration,
parties disagreed over who would pay the filing fee, the however, the Act imposes a strong presumption against
form was never filed with the AAA. waiver. See Moses H. Cone Mem'l Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d
On September 20, 1996, Bates moved to vacate the 1994 765 (1983); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 90
oral order compelling arbitration. At three hearings on (Tex.1996); Prudential Sec., Inc. v. Marshall, 909 S.W.2d
the motion, Bates argued that Terminix had waived its 896, 898 (Tex.1995). Courts will not find that a party
right to enforce the arbitration clause. In an order dated has waived its right to enforce an arbitration clause by
July 21, 1997, the court granted Bates's motion, denied merely taking part in litigation unless it has substantially
Terminix's original 1994 motion to compel arbitration, invoked the judicial process to its opponent's detriment.
and set the case for trial. The court made a finding of fact See Walker v. J.C. Bradford & Co., 938 F.2d 575, 577 (5th
that Terminix had waived its right to compel arbitration Cir.1991); EZ Pawn, 934 S.W.2d at 89.
and was “in default in proceeding with ... arbitration”
under the Federal Arbitration Act, 9 U.S.C. § 3, because Terminix's use of the judicial process was limited to
it had substantially invoked the judicial process to Bates's filing an answer and propounding one set of eighteen
detriment through its use of discovery in 1994. interrogatories and one set of nineteen requests for
production. 3 Terminix moved to abate the judicial
Terminix sought mandamus from the court of appeals. proceedings and compel arbitration less than six months
The court of appeals denied Terminix's petition on an after Bates filed suit. The Fifth Circuit has held that
alternative ground which had been argued but not ruled a party may invoke court processes to a comparable
on in the trial court: that Terminix had waived its rights by or even greater extent than this without waiving its
failing to initiate arbitration after the trial court granted arbitration rights. See J.C. Bradford, 938 F.2d at 576–
its motion to compel arbitration on September 26, 1994. 78 (finding no waiver by defendant who removed case
953 S.W.2d 537, 540–41. Terminix now seeks mandamus from state to federal court, participated in scheduling
from this Court. and discovery conferences, and propounded two sets of
written discovery one of which was answered). Terminix
[1] [2] [3] [4] This Court will grant mandamus whendid not seek a judicial resolution of its dispute with Bates.
a trial court has clearly abused its discretion and the Compare J.C. Bradford, 938 F.2d at 577–78 (finding no
relator has no adequate remedy by appeal. See Walker v. waiver and noting that defendant “did not ask the court
Packer, 827 S.W.2d 833, 839–40 (Tex.1992). An error in to make any judicial decisions, for example, by requesting
determining what the law is or applying the law to the facts summary judgment”), with Frye v. Paine, Webber, Jackson
constitutes an abuse of discretion. See id. at 840. Whether & Curtis, Inc., 877 F.2d 396, 398 (5th Cir.1989) (party who
a party's conduct waives its arbitration rights under *704 participated in trial waived arbitration); Price, 791 F.2d
the Federal Arbitration Act is a question of law. See Price at 1162 (party who moved for summary judgment waived
v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159 arbitration); and Miller Brewing Co. v. Fort Worth Distrib.
(5th Cir.1986). There is no adequate remedy by appeal for Co., 781 F.2d 494, 497–98 (5th Cir.1986) (party who filed
denial of the right to arbitrate, because the very purpose multiple lawsuits waived arbitration). Thus, this is not a
of arbitration is to avoid the time and expense of a trial case in which a party who has tried and failed to obtain a
and appeal. See Jack B. Anglin Co. v. Tipps, 842 S.W.2d satisfactory result in court then turns to arbitration.
266, 272–73 (Tex.1992).
[8] [9] [10] Even substantially invoking the judicial
[5] [6] [7] The Federal Arbitration Act requires process does not waive a party's arbitration rights unless
courts 2 to stay lawsuits involving arbitrable issues the opposing party proves that it suffered prejudice as
pending arbitration, “providing the applicant for the stay a result. See Prudential, 909 S.W.2d at 898–99. The
is not in default in proceeding with such arbitration.” 9 trial court concluded that Bates was prejudiced by
U.S.C. § 3. In applying this provision, courts commonly Terminix's use of discovery. Although prejudice may
use the term “waiver” rather than the statutory term result when a party uses judicial processes to gain access
“default.” See Morewitz v. West of Eng. Ship Owners to information that would not have been discoverable
Mut. Protection & Indem. Ass'n, 62 F.3d 1356, 1365 n. 16 in arbitration, see J.C. Bradford, 938 F.2d at 578 n.
3, this case falls under the rule that “when only a orig. proceeding); Mamlin v. Susan Thomas, Inc., 490
minimal amount of discovery has been conducted, which S.W.2d 634, 639 (Tex.Civ.App.—Dallas 1973, no writ). 4
may also be useful for the purpose of arbitration, the
court should not ordinarily infer waiver based upon This Court has never squarely addressed the question
prejudice.” Tenneco Resins, Inc. v. Davy Int'l, 770 F.2d of who has the burden to go forward with arbitration
416, 421 (5th Cir.1985). The fact that Bates responded after a trial court grants a defendant's motion to compel
to one set of requests for production does not establish arbitration. However, we tacitly endorsed Moore and
*705 prejudice because AAA rules allow arbitrators to Mamlin 's result in Prudential Securities, Inc. v. Marshall,
arrange for “production of relevant documents and other 909 S.W.2d 896 (Tex.1995). The plaintiffs in Prudential
information.” AMERICAN ARBITRATION ASS'N, argued that the defendant had waived the right to
COMMERCIAL ARBITRATION RULES Rule 10 arbitration by a number of actions, including its failure
(1996). Bates also answered Terminix's interrogatories, to pursue arbitration of certain claims that the trial court
but the only substantive facts her response provided were had ruled were subject to arbitration. See Prudential, 909
a list of persons with knowledge of facts relevant to the S.W.2d at 898. Noting that mere delay does not waive a
dispute and a list of communications between herself and party's arbitration rights, we held that there was no waiver.
Terminix. Whether or not Terminix would have been See id. at 898–99.
able to obtain this information under AAA procedures, it
falls short of the level of discovery that courts have held [11] According to the court of appeals, it would be
waives the right to arbitrate. See Zwitserse Maatschappij “illogical ... [to] place[ ] the onus of proceeding to
van Levensverzekering en Lijfrente v. ABN Int'l Capital arbitration on the very party who may be seeking to avoid
Markets Corp., 996 F.2d 1478, 1480 (2d Cir.1993) it.” 953 S.W.2d at 540. But placing the burden on the
(deposition-like witness hearing conducted under foreign party against whom relief is sought would lead to an
law); St. Mary's Med. Ctr. v. Disco Aluminum Prods., 969 even stranger reversal of the litigants' proper roles. “It
F.2d 585, 591 (7th Cir.1992) (depositions). is antithetical to the interests of such a party to itself
initiate a proceeding, be it a court suit or arbitration,
Bates has not carried the “heavy burden of proof” that would expose it to the risk of liability.” Gold Coast
required to establish waiver of arbitration rights. See J.C. Mall, Inc. v. Larmar Corp., 298 Md. 96, 468 A.2d 91,
Bradford, 938 F.2d at 577. The court must resolve any 100 (1983). “If no arbitration clause existed, [the plaintiff]
doubt in favor of arbitration. See Moses H. Cone, 460 would have had the task and expense of initiating suit;
U.S. at 24–25, 103 S.Ct. 927. Under this standard, the trial she could not have required the [defendant] to sue itself.
court abused its discretion by holding that Terminix's 1994 The rule is the same with arbitration substituted for suit:
participation in the lawsuit waived its right to enforce the the party seeking relief is the one who must go forward
arbitration clause. with arbitration proceedings.” Johnson v. Fireman's Fund
Ins. Co., 272 N.W.2d 870, 882 (Iowa 1978) (Uhlenhopp,
We now turn to the court of appeals' alternative rationale *706 J., dissenting). We therefore hold that absent a
for denying Terminix's petition for mandamus. The court contrary agreement, a party against whom a claim is
of appeals held that as the party seeking to resolve the asserted does not waive its right to arbitrate by failing to
dispute by arbitration rather than in court, Terminix had initiate arbitration of that claim.
the burden to arrange for arbitration of Bates's claims
against it. 953 S.W.2d at 540–41. Thus, the court of Although the parties may choose to contract around
appeals reasoned, Terminix waived its rights by failing to this default rule and require the party against whom
initiate arbitration after the trial court granted its motion relief is sought to initiate arbitration, see Mamlin,
to abate the suit and compel arbitration in September 490 S.W.2d at 639, Bates and Terminix did not do
1994. Id. That conclusion conflicts with the decisions of so. Their contract states that the AAA's Commercial
two other courts of appeals holding that unless the parties Arbitration Rules shall govern. Those rules define
contract otherwise, the burden to initiate arbitration rests “the initiating party” as the “claimant” and provide
on the plaintiff as the party seeking relief. See Moore v. that the claimant shall initiate arbitration through a
Morris, 931 S.W.2d 726, 729 (Tex.App.—Austin 1996, “demand” containing “a statement setting forth “the
nature of the dispute, the amount involved, ... [and] the
Footnotes
1 The clause reads in full:
10. ARBITRATION. The Purchaser and Terminix agree that any controversy or claim between them arising out
of or relating to this agreement shall be settled exclusively by arbitration. Such arbitration shall be conducted in
accordance with the Commercial Arbitration Rules then in force of the American Arbitration Association. The decision
of the arbitrator shall be a final and binding resolution of the disagreement which may be entered as a judgment by
any court of competent jurisdiction. Neither party shall sue the other where the basis of the suit is this agreement
other than for enforcement of the arbitrator's decision.
2 Although section 3 of the Act mentions only “courts of the United States,” it applies to state as well as federal courts. See
Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 26 n. 34, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).
3 Bates also points out that Terminix's experts inspected and tested her house in May 1994, three months into the litigation.
However, Terminix did not obtain the inspection through the judicial process. Instead of filing a request to inspect land
with the trial court, see TEX.R. CIV. P. 167(1), Terminix simply sent Bates a letter stating, “Please let me know if you will
agree to allow [Terminix] to [inspect the house] or whether I need to file a Motion with the Court”; Bates then consented
to the inspection.
4 Accord Shanferoke Coal & Supply Corp. v. Westchester Serv. Corp., 70 F.2d 297, 299 (2d Cir.1934) (Learned Hand, J.),
aff'd, 293 U.S. 449, 55 S.Ct. 313, 79 L.Ed. 583 (1935); Mountain Plains Constructors, Inc. v. Torrez, 785 P.2d 928, 930
(Colo.1990); Gold Coast Mall, Inc. v. Larmar Corp., 298 Md. 96, 468 A.2d 91, 97–101 (1983); Lane–Tahoe, Inc. v. Kindred
Constr. Co., 91 Nev. 385, 536 P.2d 491, 494 (1975); Tothill v. Richey Ins. Agency, Inc., 117 N.H. 449, 374 A.2d 656,
658 (1977); 1 DOMKE, DOMKE ON COMMERCIAL ARBITRATION § 19:06 (rev. ed.1997); 1 OEHMKE, COMMERCIAL
ARBITRATION § 27:02 (rev. ed.1995).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[1] employer substantially invoked the judicial process, [4] Alternative Dispute Resolution
and Evidence
There is a strong presumption against waiver
[2] survivors were prejudiced by employer's action. of arbitration rights.
II. Background
Attorneys and Law Firms
This is a premises liability case. Debra Slough worked
*477 Charles W. Hurd, III, Joy M. Soloway, Fulbright
as a nurse at Christus Spohn Shoreline. Jesus Alvarez
& Jaworski, Christine Kirchner, Jennifer Simons, Stephen
abducted Slough from Christus Spohn's parking garage
J. Knight, Chamberlain, Hrdlicka, White, Williams &
and murdered her. Debra Slough's husband, Corey
Martin, Houston, Darrell L. Barger, Hartline, Dacus,
Slough, filed suit against Christus Spohn individually and
Barger, Dreyer, Corpus Christi, for relator.
on behalf of their three minor children. Relator contends
David T. Bright, Watts Law Firm, Robert C. Hilliard, that the trial court erred in failing to grant its motion
Hilliard & Munoz, Corpus Christi, for real party in to compel arbitration based on an arbitration clause
interest. included in its employee benefit plan. Real parties in
interest contend, inter alia, that there is neither a valid
Before Chief Justice VALDEZ and Justices BENAVIDES arbitration agreement nor that their claims fall within
and VELA. the scope of that agreement. Real parties in interest raise
further defenses to arbitration, including waiver, estoppel,
and procedural and substantive unconscionability. We
OPINION conclude that the issue of waiver is dispositive of this
matter. See Tex.R.App. P. 47.1.
Opinion by Chief Justice VALDEZ.
[9] [10] [11] [12] Waiver occurs only where “a partydispute. Williams Indus., Inc., 110 S.W.3d at 135. In this
has acted inconsistently with its right to arbitrate and regard, we would note that attempts at settlement do not
such actions prejudiced the other party.” In re Oakwood evidence waiver. In re Certain Underwriters at Lloyd's, 18
Homes, 987 S.W.2d at 574. Stated differently, “a party S.W.3d at 876; D. Wilson Constr. Co. v. McAllen Indep.
waives an arbitration clause when it substantially invokes Sch. Dist., 848 S.W.2d 226, 230 (Tex.App.-Corpus Christi
the judicial process to the other party's detriment.” In re 1992, writ dism'd w.o.j.).
Bank One, 216 S.W.3d at 827; see In re Vesta, 192 S.W.3d
at 763. Waiver of an arbitration right must be intentional. [17] [18] [19] Delay alone generally does not establish
In re Bank One, 216 S.W.3d at 827; EZ Pawn Corp., waiver. In re Vesta, 192 S.W.3d at 763. Similarly, purely
934 S.W.2d at 89; In re Certain Underwriters at Lloyd's, defensive measures do not substantially invoke the judicial
18 S.W.3d 867, 872 (Tex.App.-Beaumont 2000, orig. process. See Transwestern Pipeline Co. v. Horizon Oil &
proceeding). Therefore, the test for determining waiver Gas Co., 809 S.W.2d 589, 593 (Tex.App.-Dallas 1991,
is two-pronged: (1) did the party seeking arbitration writ dism'd w.o.j.) (citing filing of general denial to
substantially invoke the judicial process, and (2) did the preclude default judgment and filing of protective order
opposing party prove that it suffered prejudice as a result. in response to discovery request as examples of defensive
Perry Homes v. Cull, 173 S.W.3d 565, 569–70 (Tex.App.- measures); see also In re Serv. Corp. Int'l, 85 S.W.3d 171,
Fort Worth 2005, pet. granted). 174 (Tex.2002) (orig.proceeding) (holding that objecting
to trial setting showed intent to avoid rather than to
[13] The judicial process has been substantially invoked participate in judicial process). A party does not, for
when the party seeking arbitration has taken specific instance, substantially invoke the judicial process merely
and deliberate actions, after the filing of suit, that are by participating in discovery. In re Bruce Terminix Co.,
inconsistent with a right to arbitrate or has actively 988 S.W.2d at 704; Southwind Group, Inc., 188 S.W.3d
tried, but failed, to achieve a satisfactory result through at 736–737; In re Nasr, 50 S.W.3d 23, 27 (Tex.App.-
litigation before turning to arbitration. In re Vesta Group, Beaumont 2001, orig. proceeding). In contrast, pursuing
*479 Inc., 192 S.W.3d at 763; Williams Indus., 110 extensive discovery may substantially invoke the judicial
S.W.3d at 135. Compare Sedillo, 5 S.W.3d at 827 (waiver process. Southwind Group, Inc., 188 S.W.3d at 736–737;
may occur when a party has taken specific and deliberate Nationwide of Bryan, Inc., 969 S.W.2d at 522.
acts after suit has been filed that are inconsistent with the
right to arbitrate), and Nationwide of Bryan v. Dyer, 969 [20] [21] Even when a party has substantially invoked
S.W.2d 518, 521 (Tex.App.-Austin 1998, no pet.) (same), the judicial process, a party's right to arbitration is not
with Grand Homes 96, L.P. v. Loudermilk, 208 S.W.3d 696, waived absent a clear showing that the opposing party has
703–704 (Tex.App.-Fort Worth 2006, pet. filed) (waiver been prejudiced. See In re Vesta Ins. Group, 192 S.W.3d
may occur when a party has actively tried, but failed, to at 763; In re Bruce Terminix Co., 988 S.W.2d at 704. In
achieve a satisfactory result in litigation before turning determining whether or not a party has been prejudiced,
to arbitration); Southwind Group, Inc., 188 S.W.3d at 736 courts focus on factors such as: (1) the movant's access to
(same); Williams Indus., Inc., 110 S.W.3d at 135 (same). information that is not discoverable in arbitration; and (2)
the opponent's incurring costs and fees due to the movant's
[14] [15] [16] Actions that are inconsistent with the actions or delay. See In re Bruce Terminix Co., 988 S.W.2d
right to arbitrate and thus raise the issue of waiver may at 704; Southwind Group, Inc., 188 S.W.3d at 737; Williams
include some combination of filing an answer, setting up Indus., Inc., 110 S.W.3d at 135.
a counterclaim, pursuing extensive discovery, moving for
a continuance, and failing to timely request arbitration.
See In re Certain Underwriters at Lloyd's, 18 S.W.3d at
IV. Analysis
872–873; Sedillo, 5 S.W.3d at 827; Central Nat'l Ins. Co.
v. Lerner, 856 S.W.2d 492, 494 (Tex.App.-Houston [1st We now turn to the procedural history of this matter. The
Dist.] 1993, orig. proceeding). Examples that indicate the underlying lawsuit was originally filed on December 16,
party is attempting to achieve a satisfactory result through 2005. Spohn did not move to compel arbitration *480
litigation before turning to arbitration include moving for until February 8, 2007, after the case had been set for
summary judgment or seeking a final resolution of the trial on three separate dates and almost fourteen months
after the inception of the lawsuit. Spohn filed an amended mentioning *481 an alleged right to arbitration, Spohn
motion to compel arbitration on February 22, 2007. The presented seventeen of its employees for deposition.
trial court heard arguments on the motion to compel
arbitration on March 2, 2007, and requested supplemental The parties, including Spohn, sought affirmative relief
briefing, which was subsequently filed in April and May. regarding their discovery efforts. In the criminal cause
On June 20, 2007, Spohn filed a petition for writ of pending against Jesus Alvarez filed in the 156th District
mandamus complaining of the trial court's failure to rule Court of Bee County, Texas, Spohn moved to hold
and argued that the trial court's failure to rule was a denial counsel for real parties in interest in contempt of court
of the motion to compel “[f]or all practical purposes.” The based on alleged discovery abuse. While we ordinarily
trial court entered an order denying Spohn's motion to would not consider actions in a separate cause as
compel arbitration on June 28, 2007. During the fourteen- indicative of waiver, we would note that Spohn's motion
month interval before the motion to compel arbitration for contempt expressly stated that:
was filed, the parties substantially litigated this case. The
real parties added an additional defendant to the lawsuit, Movant seeks a contempt finding
and Spohn filed a motion for leave to designate Jesus from this Court, so it may
Alvarez as a responsible third party and filed an original present such finding to [respondent
third party petition seeking to add claims against Jesus in this underlying proceeding] in
Alvarez to the lawsuit. Spohn also applied for a temporary connection with various steps civil
restraining order and temporary injunction against real defense counsel will take to suppress
parties in interest, which were granted by the trial court. the use of the improperly obtained
video and/or transcript of Mr.
As mentioned previously, the matter was set for trial on Alvarez's sworn statement, for any
no less than three occasions before Spohn first mentioned purpose, in the civil matter.
the issue of arbitration. Spohn participated in a docket
Accordingly, we construe Spohn's actions in this separate
control conference and a docket control order was entered
lawsuit as part of its strategic plan of defense in the
setting this matter for trial on December 3, 2006, with an
underlying matter that would be inconsistent with a right
alternate setting for April 2, 2007. After plaintiffs added
to arbitrate. Moreover, real parties in interest sought and
an additional defendant, the parties agreed to pass the
received sanctions against Spohn in the instant case for its
December setting and proceed with the April 2, 2007
failure to identify persons with relevant knowledge and its
setting. On January 3, 2007, Spohn filed a verified motion
representations regarding the lack of video surveillance of
for continuance, requesting that the trial date be reset, and
Spohn's premises, when it possessed, but failed to identify
also requested entry of a Level III discovery plan. The
or produce, video surveillance of Spohn's premises on the
trial court granted Spohn's motion for continuance and,
date of Debra Slough's abduction and murder.
on January 8, 2007, reset the case for trial in August of
2007.
Finally, counsel for real parties in interest testified, by
affidavit, that he had asked counsel for Spohn early
During this same fourteen-month period of time before
in the litigation whether there were any reasons real
Spohn moved to compel arbitration, the parties engaged
parties could not bring the claims set out in their petition
in voluminous discovery. Spohn initiated and commenced
because he was concerned that Spohn might consider
a significant amount of affirmative discovery. In addition
decedent Debra Slough to be an employee within the
to standard requests for disclosure, Spohn sent seven
course and scope of her employment, and thus subject
separate sets of written discovery to real parties in
to the employee benefit plan containing the arbitration
interest. These discovery requests, which are part of
agreement. Counsel stated that Spohn repeatedly and
the record, are substantive and address the merits of
expressly denied this. Counsel for Spohn also took the
the case, including both liability and damage issues. 1 position that Slough's murder did not qualify as an
Spohn also ordered nineteen sets of business records from “event” under the employee benefit plan because of a
third parties. Spohn filed numerous discovery motions, “criminal act by a third party.” Further, Spohn has denied
including eight motions to compel, and requested entry any benefits to the Slough family under the employee
of an agreed protective order. Without referencing or benefit plan.
Footnotes
1 Written discovery propounded by Spohn includes: (1) Spohn's first set of interrogatories and first request for production
to Corey Slough, individually (thirteen interrogatories and thirteen requests for production); (2) Spohn's first request for
production to Corey Slough, as representative of the estate of Debra Slough, deceased (nine interrogatories); (3) Spohn's
second request for production and first set of interrogatories to Corey Slough, as representative of the estate of Debra
Slough, deceased (seven requests for production and one interrogatory); (4) Spohn's third request for production to Corey
Slough, as representative of the estate of Debra Slough, deceased (twelve requests for production); (5) Spohn's first set
of interrogatories and requests for production to Corey Slough, as next friend to Katelyn Slough (fourteen interrogatories
and ten requests for production); (6) Spohn's first set of interrogatories and requests for production to plaintiff, Corey
Slough, as next friend to Holly Slough (same); and (7) Spohn's first set of interrogatories and requests for production to
plaintiff, Corey Slough, as next friend to Stacey Slough (same).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
1 Cases that cite this headnote If the trial court was not required or not
allowed to resolve fact issues to determine if
an arbitration agreement was enforceable, but
[15] Mandamus based its ruling on a pure issue of law, the
Nature of Questions Involved Court of Appeals' mandamus review of such
If the trial court has held an evidentiary a decision is much less deferential than that
hearing and has resolved disputed issues of accorded factual determinations.
fact, the appellate court on mandamus review
may not substitute its judgment on the facts Cases that cite this headnote
for that of the trial court.
[20] Mandamus
Cases that cite this headnote
Matters of Discretion
When a trial court's decision is based on a
[16] Mandamus factual determination, the Court of Appeals
Civil Proceedings Other Than Actions may not find on mandamus review that the
If the enforceability of an arbitration trial court abused its discretion in the absence
agreement was properly challenged and of a complete record from the hearing.
the trial court resolved disputed facts
in route to determining that issue, the Cases that cite this headnote
appellate court may disturb that decision on
mandamus review only if it was arbitrary and [21] Mandamus
unreasonable. Form, Requisites, and Sufficiency in
General
Cases that cite this headnote
If the court's decision does not require
resolution of factual issues or if there is no
[17] Mandamus indication that it received and considered
Exercise of Judicial Powers and evidence in arriving at its judgment, a
Functions in General complete record of the hearing is not required
A trial court has no discretion in determining on mandamus review.
what the law is or applying the law to the
facts; thus, a clear failure by the trial court Cases that cite this headnote
to analyze or apply the law correctly will
constitute an abuse of discretion, and may [22] Alternative Dispute Resolution
result in reversal by the extraordinary writ.
2 Cases that cite this headnote Conseco Finance Servicing Corp. loaned Jody Grams
money to purchase a manufactured home. When Jody
and his wife, Candace, sued Conseco for violations of
[32] Mandamus the Texas Debt Collection Act and the Texas Deceptive
Acts and Proceedings of Courts, Judges, Trade Practices Act, Conseco invoked an arbitration
and Judicial Officers clause contained in the sales contract. Respondent, Judge
Failure of trial court to grant lender's motion of the 82 nd District Court, denied Conseco's motion to
to compel arbitration of borrower's claims compel arbitration, and Conseco brings this mandamus
under arbitration clause of loan contract proceeding asking us to order Respondent to grant that
provided lender with no adequate remedy at motion. Jody argues that his claims are not subject to
law to correct this abuse of discretion, and arbitration because the arbitration clause in the contract
thus, lender was entitled to writ of mandamus is unconscionable and his statutory claims are not within
compelling trial court to grant the motion and its scope. Because the Texas Supreme Court has stated
order that claims be submitted to arbitration. that an arbitration clause cannot be challenged in a court
as unconscionable and because Jody's statutory claims
2 Cases that cite this headnote
“relate to” his contract with Conseco, we will direct
Respondent to order the parties to arbitrate his claims.
Act. TEX. FIN.CODE ANN. § 392.301 (Vernon 1998); States Supreme Court “insist[s] that the ‘transaction’ in
TEX. BUS. & COM.CODE ANN. §§ 17.46(b)(12), 17.50 fact ‘involve[ ]’ interstate commerce” to fall within the
(Vernon Supp. Pamph.2000). Conseco filed a motion coverage of the act. Id., 513 U.S. at 281, 115 S.Ct. at 843.
to compel arbitration, relying on this clause to argue
that the parties had agreed to arbitrate “all disputes, [4] Although the United States Supreme Court requires
claims and controversies which arise from or relate to the that the transaction reflected in the contract involve
Contract.” Apparently, Respondent conducted a hearing interstate commerce in fact, it has also allowed the
on the motion to compel, 1 and denied Conseco's request. parties to “specify by contract the rules under which
This mandamus proceeding followed. that arbitration will be conducted.” Volt Info. Sciences
v. Board of Trustees, 489 U.S. 468, 479, 109 S.Ct. 1248,
1256, 103 L.Ed.2d 488 (1989). On that basis, “[t]he parties
may designate which arbitration act they wish to control
What law applies? proceedings under the contract, and the courts will honor
that choice.” Russ Berrie and Co. v. Gantt, 998 S.W.2d
[1] Both Texas and Federal public policy strongly favor
713, 715 n. 6 (Tex.App.—El Paso 1999, no pet.). Here, the
the submission of disputes to arbitration. D. Wilson
parties agreed in the contract that the arbitration would be
Constr. Co. v. Cris Equip. Co., Inc., 988 S.W.2d 388,
governed by the FAA, and we will apply those provisions
393 (Tex.App.—Corpus Christi 1999, orig. proceeding).
to this dispute. Thus, this proceeding is properly before us
Both governing bodies have established specific statues
on Conseco's petition for a writ of mandamus.
to govern arbitration disputes. 9 U.S.C.A. § 1, et seq.
(West 1999); TEX. CIV. PRAC. & REM.CODE ANN.
§ 171.001, et seq. (Vernon Supp.2000). Which statute
applies to this contract has several implications. First, The law as applied in a trial court
if Conseco's demand for arbitration comes *567 within
the ambit of the Federal Arbitration Act (FAA), it is [5] [6] The Federal Arbitration Act creates a substantive
entitled to seek review of the denial of that motion by body of law that is applicable in state courts. Perry v.
mandamus. Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d Thomas, 482 U.S. 483, 489, 107 S.Ct. 2520, 2525, 96
266, 272 (Tex.1992). If its claim must be based on the L.Ed.2d 426 (1987). A court called upon to determine
Texas Act, mandamus is not appropriate because an if arbitration should be compelled under the FAA must
interlocutory appeal is available. Id.; TEX. CIV. PRAC. determine (1) whether the parties agreed to arbitrate, and
& REM.CODE ANN. § 171.098(a)(1). Secondly, on the if so, (2) whether the scope of the agreement encompasses
substance of the claim, Texas law provides for different the asserted claims. Chelsea Square Textiles, Inc. v.
Bombay Dyeing and Manufacturing Co., 189 F.3d 289, 294
restrictions on an arbitration clause than does the Federal
statute. See, e.g., TEX. CIV. PRAC. & REM.CODE (2nd Cir.1999); see also Leander Cut Stone Co. v. Brazos
ANN. § 171.002. Thus, depending upon which law Masonry, Inc., 987 S.W.2d 638, 640 (Tex.App.—Waco
governs, we must consider different requirements to 1999, no pet.). Additionally, the agreement to arbitrate
determine if Respondent abused his discretion when he may be avoided “upon such grounds as exist at law or in
refused to order the dispute to arbitration. equity for the revocation of any contract.” 9 U.S.C.A. § 2;
Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 686,
[2] [3] The Federal act applies to any contract which 116 S.Ct. 1652, 1656, 134 L.Ed.2d 902 (1996).
“involves” interstate commerce. A contract “involves”
interstate commerce if it “affects” interstate commerce, [7] [8] [9] Texas procedure controls the decision
within the broadest meaning of the word approved by by a Texas court when it is called on to decide if a
the United States Supreme Court. Allied–Bruce Terminix disputed claim is subject to an arbitration clause under
Co. v. Dobson, 513 U.S. 265, 273–74, 115 S.Ct. 834, 839, the Federal Act. Jack B. Anglin, 842 S.W.2d at 268. Thus,
130 L.Ed.2d 753 (1995). The “happenstance [of] whether if the opposing party disputes the agreement to arbitrate,
the parties happened to think to insert a reference to i.e., claims that there is no agreement to arbitrate or,
interstate commerce in the document” is not determinative conceding that the agreement exists, raises a ground in
of whether the contract is governed by the FAA. Id., law or in equity for the revocation of any contract, the
513 U.S. at 278, 115 S.Ct. at 842. Rather, the United court may decide the issue on the basis of affidavits,
pleadings, discovery and stipulations, unless the material matters committed to the court's discretion, “[t]he relator
facts are controverted. Leander Cut Stone, 987 S.W.2d must establish that the trial court could reasonably have
at 640. If the facts *568 are controverted, by opposing reached only one decision.” Walker, 827 S.W.2d at 839–
affidavit or otherwise admissible evidence, the trial court 40. A trial court's failure to correctly apply the FAA to
must conduct an evidentiary hearing to determine those the facts of a dispute constitutes an abuse of discretion for
disputed facts before deciding if there is an enforceable which there is no adequate remedy at law. Jack B. Anglin,
agreement to arbitrate between the parties. Id. 842 S.W.2d at 272–73.
[10] [11] When addressing the second issue—whether [15] [16] If the trial court has held an evidentiary
the dispute falls within the scope of the parties' arbitration hearing and has resolved disputed issues of fact, we
agreement—the court should analyze the agreement under may not substitute our judgment on the facts for that
standard contract construction principles. Id. Its focus of the trial court. Walker, 827 S.W.2d at 839. Thus,
should be on the factual allegations involved in the dispute if the enforceability of the arbitration agreement was
and not on the legal causes of action raised by the parties. properly challenged and Respondent resolved disputed
Id. As a matter of federal substantive law, any doubts facts in route to determining that issue, we may disturb his
as to whether the dispute falls within the scope of the decision only if it was “arbitrary and unreasonable.” Id.
arbitration agreement should be resolved in favor of at 840.
arbitration. Mastrobuono v. Shearson Lehman Hutton,
Inc., 514 U.S. 52, 62 & n. 8, 115 S.Ct. 1212, 1218 & n. 8, [17] [18] [19] A review of a trial court's determination
131 L.Ed.2d 76 (1995). As our sister court of appeals has of the legal principles controlling its ruling, however, is
observed: much less deferential. A trial court has no discretion
in determining what the law is or applying the law to
The presumption of arbitrability is particularly the facts. Id. Thus, a clear failure by the trial court
applicable where the clause is broad; that is, it provides to analyze or apply the law correctly will constitute an
for arbitration of “any dispute arising between the abuse of discretion, and may result in reversal by the
parties,” or “any controversy or claim arising out extraordinary writ. Id.; In re Monsanto Co., 998 S.W.2d
of or relating to the contract thereof,” or “any 917, 921–22 (Tex.App.—Waco 1999, orig. proceeding).
controversy concerning the interpretation, performance The scope of an unambiguous arbitration agreement is
or application of the contract.” [citations omitted]. In an issue of contract construction, thus, a question of
such instances, absent any express provisions excluding law subject to de novo review on appeal. Leander Cut
a particular grievance from arbitration, only the most Stone, 987 S.W.2d at 640. Similarly, if the court was not
forceful evidence of purpose to exclude the claim from required or not allowed to resolve fact issues to determine
arbitration can prevail. if the arbitration agreement was enforceable, but based
its ruling on a pure issue of law, our *569 review of its
Babcock & Wilcox Co. v. PMAC, Ltd., 863 S.W.2d 225,
decision on the first prong is much less deferential.
230 (Tex.App.—Houston [14th Dist.] 1993, writ denied);
see also Southwest Health Plan, Inc. v. Sparkman, 921
[20] [21] On a related matter, when a trial court's
S.W.2d 355, 358 (Tex.App.—Fort Worth 1996, no writ).
decision is based on a factual determination, we may not
find that the court abused its discretion in the absence
of a complete record from the hearing. See Walker, 827
Our review of the trial court's actions S.W.2d at 837. If the court's decision does not require
resolution of factual issues or if there is no indication
[12] [13] [14] “Mandamus issues only to correct a clear that it received and considered evidence in arriving at its
abuse of discretion or the violation of a duty imposed judgment, a complete record of the hearing is not required.
by law when there is no other adequate remedy by See id. at 837 n. 3; Barnes v. Whittington, 751 S.W.2d 493,
law.” Walker v. Packer, 827 S.W.2d 833, 839 (Tex.1992) 495 (Tex.1988); Humphreys v. Caldwell, 881 S.W.2d 940,
(quoting Johnson v. Fourth Court of Appeals, 700 S.W.2d 944 (Tex.App.—Corpus Christi 1994, orig. proceeding).
916, 917 (Tex.1985)); In re Bishop, 8 S.W.3d 412, 416
(Tex.App.—Waco 1999, orig. proceeding). When the trial
court's decision rests on the resolution of factual issues or
Is there an enforceable agreement to arbitrate? Are the claims in this suit within the
scope of the arbitration agreement?
[22] [23] Conseco attached a copy of the contract to
its motion to compel arbitration. Thus, it has met its [25] [26] When he purchased the mobile home, Jody
burden of presenting evidence of an arbitration agreement agreed to arbitrate “[a]ll disputes, claims or controversies
between it and Jody. In re Oakwood Mobile Homes, Inc., arising from or relating to” the contract. This is a broad
987 S.W.2d 571, 573 (Tex.1999); Leander Cut Stone, 987 arbitration agreement, which does not exclude any of
S.W.2d at 640. To avoid being compelled to arbitrate Jody's claims from its scope; thus, Jody was required to
claims within the scope of that agreement, Jody must present “the most forceful evidence of purpose to exclude”
have come forward with “grounds as exist at law or in his claim from arbitration to avoid its effect. Babcock, 863
equity for the revocation of any contract.” 9 U.S.C.A. § S.W.2d at 230. Because the scope of the clause is a matter
2; Casarotto, 517 U.S. at 687, 116 S.Ct. at 1656; Oakwood of contract construction, the only source that a court can
Mobile Homes, 987 S.W.2d at 573. Because we do not look to for that “forceful evidence” is the terms of the
have a reporter's record from the hearing before the trial contract itself, unless the clause is ambiguous. See Leander
court, we do not know what grounds Jody argued to Cut Stone, 987 S.W.2d at 640. There is no claim made here
avoid the arbitration clause. However, in this court, he that the clause is ambiguous. Thus, we construe the clause
advances only one reason that the clause is unenforceable: as a matter of law, again dispensing with the necessity of
He claims that the clause was unconscionable when it was a record from the motion-to-compel hearing.
made because its terms potentially require arbitration of
intentional torts and require him to arbitrate any claim he Jody argues that his claims for violations of the Debt
may have against Conseco but reserves Conseco's right to Collection Act and the Deceptive Trade Practices Act
litigate most of its claims against him. are not arbitrable under this provision because (1) these
claims are not based on the formation, negotiation, terms,
[24] Although we are sympathetic to Jody's complaints or performance of the contract, but relate to Conseco's
regarding this arbitration clause, 2 our hands are tied by behavior after the contract was entered, and (2) his
the Texas Supreme Court's decision in Oakwood Mobile claims are statutory causes of action sounding wholly in
Homes. According to the Court, “whether the terms and intentional tort separate and apart from any dispute based
conditions of an arbitration agreement are themselves on his contractual relationship with Conseco.
unconscionable is a matter which must be submitted to
the designated arbitrator.” Oakwood Mobile Homes, 987 [27] Although true that the claim raised by Jody is not
based on the formation or the terms of the contract, the
S.W.2d at 573 n. 3. 3 Thus, in Texas, a claim *570 that
arbitration clause is not so limited. Rather, the clause
the substance of an arbitration clause is unconscionable is
provides for arbitration of any claims “arising from or
not a ground which can be asserted in court to defeat a
relating to” the contract. Jody's complaint arises from
motion to compel arbitration as a matter of law. Id.
Conseco's alleged efforts to collect the amounts due under
the terms of the agreement. Absent the contract, there
Because Jody asserts only a ground which is outside of
would be no relationship between Jody and Conseco,
the authority of Respondent to consider, it is irrelevant
and there would have been no debt the collection of
what evidence Respondent might have heard on the
which caused the difficulty between them. See American
issue. Thus, we do not need a reporter's record from the
Employers' Ins. Co. v. Aiken, 942 S.W.2d 156, 160
hearing to conclude Respondent abused his discretion
(Tex.App.—Fort Worth 1997, no writ). Therefore, we
if he determined that the arbitration agreement was
conclude that Jody's claims based on Conseco's acts in
unenforceable because it is unconscionable. Walker, 827
collecting the debt owed on the contract arise from or
S.W.2d at 837; Barnes, 751 S.W.2d at 495; Humphreys,
relate to the contract and so are within the scope of
881 S.W.2d at 944.
the arbitration clause. Furthermore, the Texas Supreme
Court has held that claims under the DTPA fall within
the scope of an arbitration agreement. Jack B. Anglin, 842
S.W.2d at 270–71.
[28] [29] [30] [31] Jody's second argument for finding [33] Conseco goes further than merely asking that Jody
be compelled to submit to arbitration. First, it also
that his claim is not within the scope of the arbitration
asks that Candace be required to arbitrate her claims.
clause is equally *571 unavailing. Although there was
However, the contract is between only Jody and Conseco.
some debate as to whether statutory claims were exempt
Candace is not a party to it. Conseco has not presented
from arbitration, “[i]t is by now clear that statutory
any argument or authority which would allow it to force
claims may be the subject of an arbitration agreement,
Candace to arbitrate any claims she may have against it in
enforceable pursuant to the FAA.” Gilmer v. Interstate/
the absence of an agreement with Conseco to do so. Thus,
Johnson Lane Corp., 500 U.S. 20, 26, 111 S.Ct. 1647,
we conclude that Respondent did not err in refusing to
1652, 114 L.Ed.2d 26 (1991). Only if “Congress itself
require Candace to submit her claims to arbitration, and
has evinced an intention to preclude a waiver of judicial
we will not instruct him to do so. Pepe Int'l Dev. Co. v. Pub
remedies for the statutory rights at issue” may a party
Brewing Co., 915 S.W.2d 925, 931 (Tex.App.—Houston
avoid its bargain to arbitrate its claims. Id. (emphasis
[1st Dist.] 1996, no writ); Prudential–Bache Securities, Inc.
added). However, because the FAA preempts state laws to
v. Garza, 848 S.W.2d 803, 807 (Tex.App.—Corpus Christi
the contrary, a state may not avoid the application of the
1993, orig. proceeding).
FAA to its statutory claims by its own acts. See Jack B.
Anglin, 842 S.W.2d at 271 (holding that the FAA preempts
Conseco also asks that we issue an order requiring that
the nonwaiver provisions of the DTPA to the extent it
Respondent dismiss both Jody's and Candace's claims
would prevent or restrict enforcement of an arbitration
with prejudice if they have not submitted to arbitration
agreement). Thus, although a federal statutory claim may
within thirty days of Respondent's order compelling
escape an arbitration clause that is subject to the FAA,
arbitration. Conseco presents no authority or argument
depending upon Congress's intent, a state statutory cause
justifying this request. Therefore, this relief is denied.
of action, such as Jody's claim for violations of the Texas
Debt Collections Act, may not.
Conclusion
To what relief is Conseco entitled? Respondent is directed to withdraw his order denying
Conseco's motion to compel arbitration and order that
[32] We have concluded that Jody cannot show that
Jody's claims be submitted to arbitration. Confident that
the arbitration agreement in the contract with Conseco
Respondent will comply, the writ will issue only if he fails
is unconscionable and has failed to show that his claims
to do so within fourteen days of this opinion.
are not within the scope of that clause. Thus, Respondent
abused his discretion when he failed to grant Conseco's
motion to compel arbitration of Jody's claims. Conseco All Citations
has no adequate remedy at law to correct this abuse of
discretion. Thus, it is entitled to a writ of mandamus 19 S.W.3d 562
compelling Respondent to grant the motion and order
that Jody's claims be submitted to arbitration. 4
Footnotes
1 We say “apparently” because Conseco has not presented us with a reporter's record from a hearing on its motion even
though the order denying that motion indicates that “[a] record was duly made.” However, the parties agree that the only
evidence Respondent had before him was the pleadings, including the Grams' verified pleading seeking a temporary
restraining order, the exhibits attached to Conseco's motion to compel arbitration, and the exhibits attached to its brief
in support of that motion. The parties agree that no other evidence was heard by Respondent during the course of the
hearing.
2 Courts have held that arbitration clauses which require the party with lesser bargaining power to arbitrate their claims
but reserve the right to litigate the claims of the party with the greater power are unconscionable. Iwen v. U.S. West
Direct, 293 Mont. 512, 977 P.2d 989 (1999); Arnold v. United Companies Lending Corp., 204 W.Va. 229, 511 S.E.2d
854 (1998); Ramirez v. Circuit City Stores, Inc., 90 Cal.Rptr.2d 916 (Cal.App.1999), review granted, 94 Cal.Rptr.2d 1,
995 P.2d 137 (Cal.2000).
3 Although this statement is contained in a footnote in a per curiam opinion and refers only to an unpublished El Paso
Court of Appeals decision for support, we feel obligated to follow it. If we were writing on a blank slate, we would instead
follow the United States Supreme Court's holding that “generally applicable contract defenses, such as fraud, duress, or
unconscionability, may be applied to invalidate arbitration agreements [by a court] without contravening” the enforcement
provision of the FAA. Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 1656, 134 L.Ed.2d 902
(1996). Unconscionability is a generally applied legal theory in Texas, which allows a court to “refuse to enforce the
contract, or [to] enforce the remainder of the contract without the unconscionable clause, or [to] limit the application of any
unconscionable clause as to avoid any unconscionable result.” TEX. BUS. & COM.CODE ANN. § 2.302 (Vernon 1994).
This section applies to the purchase of a mobile home. See Apeco Corp. v. Bishop Mobile Homes, Inc., 506 S.W.2d 711,
717 (Tex.Civ.App.—Corpus Christi 1974, writ ref'd n.r.e.). Thus, unconscionability is included in the “grounds as exist
at law or in equity for the revocation of any contract” which may be applied by a state court to invalidate an arbitration
agreement. 9 U.S.C.A. § 2 (West 1999); Casarotto, 517 U.S. at 686, 116 S.Ct. at 1656. Our research has disclosed no
other court that has taken the position that only the arbitrator has the authority to determine if the terms of the arbitration
clause are unconscionable. We have found many courts that have ruled upon an argument based on unconscionability.
See, e.g., Dobbins v. Hawk's Enterprises, 198 F.3d 715 (8th Cir.1999); Harris v. Green Tree Financial Corp., 183 F.3d
173 (3rd Cir.1999); We Care Hair Development, Inc. v. Engen, 180 F.3d 838 (7th Cir.1999); Doctor's Associates, Inc.
v. Hamilton, 150 F.3d 157 (2nd Cir.1998); Stedor Enterprises, Ltd. v. Armtex, Inc., 947 F.2d 727 (4th Cir.1991); Iwen v.
U.S. West Direct, 293 Mont. 512, 977 P.2d 989 (1999); Arnold v. United Companies Lending Corp., 204 W.Va. 229, 511
S.E.2d 854 (1998); Williams v. Aetna Finance Co., 83 Ohio St.3d 464, 700 N.E.2d 859 (1998); Sosa v. Paulos, 924 P.2d
357 (Utah 1996); Buraczynski v. Eyring, 919 S.W.2d 314 (Tenn.1996); Stirlen v. Supercuts, Inc., 51 Cal.App.4th 1519,
60 Cal.Rptr.2d 138 (1997); Powertel, Inc. v. Bexley, 743 So.2d 570 (Fla.App.1999). Most have rejected the claim.
4 Although the Civil Practice and Remedies Code provides that the court should “order the parties to arbitrate,” Jody, as
the party seeking relief, has the burden to go forward with the arbitration after Respondent grants Conseco's motion to
compel arbitration of his claims. TEX. CIV. PRAC. & REM.CODE ANN. § 171.021(a) (Vernon Supp.2000); In re Bruce
Terminix Co., 988 S.W.2d 702, 705–06 (Tex.1998).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
In re D. WILSON CONSTRUCTION [4] contractors did not waive their contractual right to
COMPANY, et al., Relators arbitration.
American Standard and the Trane
Company, et al., Petitioners, Writ conditionally granted; interlocutory appeal
v. dismissed.
Brownsville Independent
School District, Respondent. Scott Brister, J., filed a concurring opinion.
59 Cases that cite this headnote 49 Cases that cite this headnote
(FAA), courts should apply ordinary state A contractual term is not rendered invalid
law principles regarding the formation of merely because it exists in a document
contracts. 9 U.S.C.A. § 1 et seq. incorporated by reference.
17 Cases that cite this headnote 8 Cases that cite this headnote
[22] Education
Performance or Breach [25] Alternative Dispute Resolution
Public Contracts Evidence
Alternative dispute resolution; There is a strong presumption against waiver
arbitration of disputes of the right to arbitration under the Federal
Independent school district's claims that there Arbitration Act (FAA). 9 U.S.C.A. § 1 et seq.
were construction defects throughout two
38 Cases that cite this headnote
schools constituted a controversy or claim
arising out of or related to the construction
contracts, within scope of arbitration clauses [26] Alternative Dispute Resolution
of construction contracts. Suing or participating in suit
Merely taking part in litigation is not enough
Cases that cite this headnote
to waive the right to arbitration, unless a party
has substantially invoked the judicial process
[23] Education to its opponent's detriment.
Performance or Breach
13 Cases that cite this headnote
Public Contracts
Alternative dispute resolution;
arbitration of disputes
General contractor and subcontractor for
Attorneys and Law Firms
construction of schools for independent
school district did not waive their contractual *776 John R. Griffith, Lucia Thompson, Paul W. Gertz,
right to arbitration of disputes with district Mark T. Beaman, David E. Little, Fred L. Shuchart,
regarding alleged construction defects, though David P. Benjamin, *777 Cindy A. Lopez Garcia, Albert
in a separate personal injury action that M. Gutierrez, Jr., Margery Huston, Rick Fancher, Rob
students and teachers brought against the Martin, Robert A. Skipworth, Ewing Edben Sikes, III, for
contractors, the contractors filed cross- relator.
actions against district seeking indemnity.
Ernesto Gamez, Jr., Ramon Garcia, Baltazar Salazar,
1 Cases that cite this headnote Catherine W. Smith, for real party in interest.
MEDINA, Justice GREEN, and Justice JOHNSON Company (Trane), sought injunctive relief against BISD
joined. to preserve evidence in a personal injury action that
students and teachers brought against Trane in another
In this consolidated proceeding, we decide whether the court. BISD counterclaimed for alleged defects in
court of appeals had jurisdiction over an interlocutory the construction of the two schools and filed third-
appeal under the Texas Arbitration Act and whether party actions against several parties, including general
the parties' arbitration agreements are ambiguous. We contractors Wilson and Stotler, as well as subcontractors
hold that the court of appeals had jurisdiction over the and second-tier subcontractors. Trane and the third-party
interlocutory appeal and that the agreements are not defendants filed or joined motions to compel arbitration
ambiguous. under the Federal Arbitration Act, 9 U.S.C. §§ 1–16, and
the Texas Arbitration Act, TEX. CIV. PRAC. & REM.
CODE §§ 171.001–.098. 2 After a hearing, the trial court
I. Background issued a brief letter ruling denying arbitration, saying “the
Court finds the contract in question ambiguous.” Trane
In 1993, the Brownsville Independent School District and the third-party defendants filed both a petition for
contracted with two general contractors, D. Wilson writ of mandamus under the FAA and an interlocutory
Construction Company and Stotler Construction appeal under the TAA, and the court of appeals
Company, to build two schools in Brownsville. consolidated the two proceedings. Nos. 13–04–184–CV,
Both contracts incorporate General Conditions and 13–04–333–CV, 2005 WL 310777, at *1 (citing In re
Supplementary Conditions. Valero Energy Corp., 968 S.W.2d 916, 916–17 (Tex.1998)).
The court of appeals dismissed the interlocutory appeal
The General Conditions expressly incorporate AIA for want of jurisdiction, finding the TAA inapplicable
Document A201, a standard construction industry since the dispute concerned a “ ‘transaction involving
document published by the American Institute of commerce.’ ” Id. at 2005 WL 310777, at *2 (quoting In
Architects that details the parties' respective rights, re MONY Sec. Corp., 83 S.W.3d 279, 282–83 (Tex.App.
responsibilities and relationships on the project. 1 —Corpus Christi 2002, consolidated appeal and orig.
Paragraph 4.5 of A201 is titled “Arbitration,” and proceeding)). The court also denied the petition for
subparagraph 4.5.1, titled “Controversies and Claims writ of mandamus, holding that clause 4.5.1.1 in the
Subject to Arbitration,” sets forth the broad, catch-all Supplementary Conditions creates ambiguity. Id. at 2005
scope of the arbitration agreement: “Any controversy WL 310777, at *3. In this appeal, Trane and the third-
or Claim arising out of or related to the Contract, or party defendants complain that (1) the court of appeals
the breach thereof, shall be settled by arbitration in erred in dismissing their interlocutory appeal under the
accordance with the Construction Industry Arbitration TAA for want of jurisdiction, and (2) the trial court erred
Rules of the American Arbitration Association ....” in deeming the arbitration agreements ambiguous and
abused its discretion in denying their motions to compel
The Supplementary Conditions state that they “modify, arbitration.
change, delete from or add to” the General Conditions.
Among other things, the Supplementary Conditions
“[a]dd new Clause 4.5.1.1” to the arbitration provision:
II. Jurisdiction of the Court of Appeals
“Except as otherwise provided in this Contract, any
dispute concerning a question of fact arising under this [1] Trane and the third-party defendants first argue that
contract, which is not disposed of by agreement shall be the court of appeals erred in dismissing their TAA-based
decided by [BISD] .... The decision of [BISD] shall be
interlocutory appeal for want of jurisdiction. We agree. 3
final and conclusive unless” it is timely appealed to the
Superintendent and then to the BISD Board of Trustees,
The contracts in question reference neither the FAA
“whose decision shall be final and conclusive.”
nor TAA, merely noting that “[t]he Contracts shall be
governed by the law of the place where the Project is
*778 This litigation began when one of the
located.” We have interpreted identical language *779
subcontractors, American Standard and the Trane
to invoke federal and state law. In re L & L Kempwood
Assocs., L.P., 9 S.W.3d 125, 127–28 (Tex.1999) (per 126 S.W.3d 176, 181, 184 (Tex.App.—Houston [1st Dist.]
curiam) (consolidated appeal and orig. proceeding). Trane 2003, consolidated appeal and orig. proceeding).
and the third-party defendants sought relief under both
statutes in the court of appeals, bringing a petition for [2] We take this opportunity to clarify precisely when the
writ of mandamus under the FAA, see Jack B. Anglin FAA preempts the TAA. Many courts of appeals wrongly
Co. v. Tipps, 842 S.W.2d 266, 272–73 (Tex.1992), and an view the FAA and TAA as mutually exclusive, but the
interlocutory appeal under the TAA, TEX. CIV. PRAC. United States Supreme Court and this Court have held
& REM. CODE § 171.098(a)(1). a different view for some time: the FAA only preempts
contrary state law, not consonant state law. The United
While refusing jurisdiction under the TAA, the court States Supreme Court has said:
of appeals recognized that it at least had jurisdiction
under the FAA to consider the mandamus petition. 2005 The FAA contains no express pre-emptive provision,
WL 310777, at *2. We held in Jack B. Anglin Co. that nor does it reflect a congressional intent to occupy
mandamus is appropriate to review a trial court's denial the entire field of arbitration. But even when Congress
of a motion to compel arbitration under the FAA. 842 has not completely displaced state regulation in an
S.W.2d at 272–73. area, state law may nonetheless be pre-empted to the
extent that it actually conflicts with federal law—that
The court of appeals determined that it lacked jurisdiction is, to the extent that it “stands as an obstacle to the
over the interlocutory appeal under the TAA because the accomplishment and execution of the full purposes
construction contracts involved interstate commerce, thus and objectives of Congress.” The question before us,
implicating the FAA. 2005 WL 310777, at *2; see Perry therefore, is whether application of [state law] to stay
v. Thomas, 482 U.S. 483, 489, 107 S.Ct. 2520, 96 L.Ed.2d arbitration under this contract in interstate commerce ...
426 (1987) (the FAA applies when the dispute concerns would undermine the goals and policies of the FAA.
a “contract evidencing interstate commerce”); 9 U.S.C. §
*780 Volt Info. Sciences, Inc. v. Bd. of Trs. of Leland
1 (“ ‘commerce’ ... means commerce among the several
Stanford Junior Univ., 489 U.S. 468, 477–78, 109 S.Ct.
States”); In re L & L Kempwood Assocs., L.P., 9 S.W.3d
1248, 103 L.Ed.2d 488 (1989) (citations omitted) (quoting
at 127 (noting that the FAA “extends to any contract
Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 399, 85 L.Ed.
affecting commerce, as far as the Commerce Clause of the
581 (1941)). Similarly, this Court has noted that the FAA
United States Constitution will reach”).
“preempts state statutes to the extent they are inconsistent
with that Act.” Jack B. Anglin Co., 842 S.W.2d at 271.
The court of appeals is not alone in dismissing
interlocutory appeals under the TAA when the FAA
[3] [4] [5] [6] Recently, in the case of In re Nexion
applies. See Kroupa v. Casey, Nos. 01–05–00224–CV,
Health at Humble, Inc., this Court articulated a four-
01–05–00376–CV, 2005 WL 3315279, at *4 (Tex.App.—
factor test to determine whether the TAA would thwart
Houston [1st Dist.] 2005, consolidated appeal and orig.
the goals and policies of the FAA in a particular case.
proceeding) (not designated for publication); Am. Med.
173 S.W.3d 67, 69 (Tex.2005) (per curiam) (construing
Tech., Inc. v. Miller, 149 S.W.3d 265, 269–70 (Tex.App.—
9 U.S.C. § 2). The FAA only preempts the TAA if:
Houston [14th Dist.] 2004, consolidated appeal and orig.
“(1) the agreement is in writing, (2) it involves interstate
proceeding); Verlander Family Ltd. P'ship v. Verlander,
commerce, (3) it can withstand scrutiny under traditional
No. 08–02–00135–CV, 2003 WL 304098, at *3 (Tex.App.
contract defenses [under state law], and (4) state law
—El Paso 2003, no pet.); Pennzoil Co. v. Arnold
affects the enforceability of the agreement.” Id. (emphasis
Oil Co., 30 S.W.3d 494, 498 (Tex.App.—San Antonio
added). In today's case, the court of appeals ignored
2000, consolidated appeal and orig. proceeding). Other
the fourth factor. The mere fact that a contract affects
courts have granted mandamus relief and dismissed the
interstate commerce, thus triggering the FAA, does not
consolidated interlocutory appeal as moot. See, e.g., Kirby
preclude enforcement under the TAA as well. For the
Highland Lakes Surgery Ctr., L.L.P. v. Kirby, 183 S.W.3d
FAA to preempt the TAA, state law must refuse to enforce
891, 895 & n. 5 (Tex.App.—Austin 2006, consolidated
an arbitration agreement that the FAA would enforce,
appeal and orig. proceeding); In re MacGregor (FIN) Oy,
either because (1) the TAA has expressly exempted the
agreement from coverage, see TEX. CIV. PRAC. & REM.
that an arbitration agreement incorporated by reference 4.5.1.1 is narrower than the scope of subparagraph 4.5.1,
is invalid or unenforceable). Accordingly, we reject certain situations would fall solely under the factual
BISD's argument that these provisions were not validly dispute clause. For example, the construction contracts
incorporated into the contracts with Wilson and Stotler. could have called for solid brass doorknobs throughout
the schools. BISD could have argued that the doorknobs
*782 [19] We likewise reject BISD's argument, and Wilson and Stotler used were brass-plated instead of solid
the trial court's holding, that the arbitration agreements brass. Whether the doorknobs are solid brass or brass-
are ambiguous. Subparagraph 4.5.1 of A201 states: plated would be a factual dispute subject to clause 4.5.1.1.
“Any controversy or Claim arising out of or related
to the Contract, or the breach thereof, shall be settled We hold that the arbitration agreements and clause
by arbitration in accordance with the Construction 4.5.1.1 can be reconciled; the arbitration agreements
Industry Arbitration Rules of the American Arbitration are not susceptible to more than one reasonable
Association ....” The Supplementary Conditions “[a]dd interpretation and are therefore not ambiguous. Columbia
new Clause 4.5.1.1” to the arbitration provision: “Except Gas Transmission Corp., 940 S.W.2d at 589.
as otherwise provided in this Contract, any dispute
concerning a question of fact arising under this contract,
which is not disposed of by agreement shall be decided
B. Ambiguity Concerning the Scope of the Agreements
by [BISD] .... The decision of [BISD] shall be final
and conclusive unless” it is timely appealed to the [20] [21] We next consider whether there is
Superintendent and then to the BISD Board of Trustees, ambiguity concerning the agreements' scope. The strong
“whose decision shall be final and conclusive.” presumption favoring arbitration generally requires that
we resolve doubts as to the scope of the agreements in
The caption of clause 4.5.1.1 in the Supplementary favor of coverage. *783 In re Kellogg, Brown & Root,
Conditions evinces the parties' intent to “[a]dd new Inc., 166 S.W.3d 732, 737 (Tex.2005); In re FirstMerit
Clause 4.5.1.1 to subparagraph 4.5.1.” Clause 4.5.1.1 is Bank, 52 S.W.3d 749, 753 (Tex.2001); Cantella & Co. v.
added to subparagraph 4.5.1, and the clause's numerical Goodwin, 924 S.W.2d 943, 944 (Tex.1996) (per curiam)
designation places it beneath subparagraph 4.5.1. In (orig.proceeding). Once an agreement is established, “a
addition, clause 4.5.1.1 begins with the caveat, “[e]xcept court should not deny arbitration ‘unless it can be said
as otherwise provided in this Contract.” Subparagraph with positive assurance that an arbitration clause is not
4.5.1 does provide otherwise in certain cases. If the parties susceptible of an interpretation which would cover the
intended for clause 4.5.1.1 to supplant subparagraph dispute at issue.’ ” Prudential Sec. Inc. v. Marshall, 909
4.5.1, they could have easily drafted language to S.W.2d 896, 899 (Tex.1995) (per curiam) (orig.proceeding)
accomplish exactly that. 6 Further, clause 4.5.1.1 does (emphasis in original) (quoting Neal v. Hardee's Food Sys.,
not mention the additional arbitration procedures Inc., 918 F.2d 34, 37 (5th Cir.1990)).
set forth in subparagraphs 4.5.2–4.5.7. If clause
4.5.1.1 negates subparagraph 4.5.1, as BISD contends, [22] Here, BISD claims there are construction defects
then subparagraphs 4.5.2–4.5.7 are meaningless. The throughout the two schools. This dispute is a “controversy
placement, caption, and caveat of clause 4.5.1.1, as well or Claim arising out of or related to the Contract” to build
as the language of subparagraphs 4.5.2–4.5.7, indicate the schools and thus falls squarely within the scope of the
that the clause is subordinate to subparagraph 4.5.1 if arbitration agreements.
subparagraph 4.5.1 applies in a given situation.
We find no ambiguity in either the validity or the scope
BISD argues that such a construction would render clause of these arbitration agreements. Trane and the third-
4.5.1.1 meaningless. We disagree. By its terms, clause party defendants have proven the existence of valid
4.5.1.1 applies to “any dispute concerning a question arbitration agreements that cover the present dispute. In
of fact arising under this contract,” while subparagraph re Oakwood Mobile Homes, Inc., 987 S.W.2d at 573. The
4.5.1 applies to “[a]ny controversy or Claim arising trial court abused its discretion by denying the motions to
out of or relating to the Contract, or the breach compel arbitration after finding “the contract in question
thereof ....” (emphasis added). While the scope of clause ambiguous.”
[23] [24] Finally, BISD argues that Trane and Stotler Justice BRISTER filed a concurring opinion.
waived any right to arbitrate. In a personal injury suit
filed by students and teachers in a separate court, Trane,
Stotler, and Mac's Insulation, Inc. filed cross-actions Justice BRISTER, concurring.
against BISD, seeking indemnity in that case. Trane also I agree that the court of appeals erred in dismissing
filed the present suit against BISD to obtain injunctive the petitioners' interlocutory appeal, and join in the
relief to preserve evidence in that personal injury case. Court's judgment. I disagree that we should continue
requiring litigants to pursue parallel mandamus and
[25] [26] There is a strong presumption against waiver interlocutory appeal proceedings in arbitration cases.
under the FAA. In re Vesta Ins. Group, Inc., 192 S.W.3d This unnecessary duplication makes arbitration more
759, 762 (Tex.2006) (per curiam). “Merely taking part in cumbersome and costly than other cases, rather than
litigation is not enough unless a party ‘has substantially the “simplicity, informality, and expedition” intended
invoked the judicial process to its opponent's detriment.’ for them. Mitsubishi Motors Corp. v. Soler Chrysler–
” Id. (quoting In re Serv. Corp. Int'l, 85 S.W.3d 171, Plymouth, Inc., 473 U.S. 614, 628, 105 S.Ct. 3346, 87
174 (Tex.2002)). In In re Vesta Ins. Group, Inc., we held L.Ed.2d 444 (1985).
that the relators, who litigated in the trial court for two
years, did not substantially invoke the judicial process to An interlocutory appeal is proper to enforce arbitration
their opponent's detriment because the relators engaged in agreements under the Texas Arbitration Act. See TEX.
minimal discovery, and the real party in interest failed to CIV. PRAC. & REM. CODE § 171.098. Mandamus
demonstrate sufficient prejudice to overcome the strong is proper to enforce arbitration agreements under the
presumption against waiver. Id. at 763. Federal Arbitration Act. See In re Weekley, 180 S.W.3d
127, 130 (Tex.2005).
Likewise, BISD has failed to demonstrate how the cross-
actions for indemnity in the separate personal injury When a party chooses the wrong form to enforce
suit or Trane's pursuit of injunctive relief related to that arbitration, Texas appellate courts “must not ... dismiss
case have worked to BISD's detriment. We hold that the an appeal for formal defects or irregularities in appellate
actions of Trane, Stotler, and Mac's Insulation, Inc. do not procedure without allowing a reasonable time to correct
constitute waiver of their right to arbitrate. or amend the defects or irregularities.” TEX. R. APP.
P. 44.3; Higgins v. Randall County Sheriff's Office, 193
S.W.3d 898, 899 (Tex.2006) (per curiam); Linwood v.
NCNB Texas, 885 S.W.2d 102, 103 (Tex.1994); Grand
IV. Conclusion Prairie Indep. Sch. Dist. v. S. Parts Imps., Inc., 813 S.W.2d
499, 500 (Tex.1991) (per curiam). When this and other
The trial court abused its discretion by finding the
Texas appellate courts decide that an appeal or other
contracts ambiguous and denying the motions to compel
pleading should have been pursued by mandamus, we
arbitration. There is no ambiguity in either the existence
do not generally toss out the appeal or require it to be
or scope of these arbitration agreements. We conditionally
done twice; instead, we treat the improper appeal as a
grant the writ of mandamus and direct the trial
proper mandamus. See, e.g., Powell v. Stover, 165 S.W.3d
court to (1) vacate its order denying the motions to
322, 324 (Tex.2005); Edgewood Indep. Sch. Dist. v. Kirby,
compel arbitration, (2) grant Stotler's motion to compel
804 S.W.2d 491, 494 (Tex.1991); Bielamowicz v. Cedar
arbitration, (3) conduct further proceedings to determine
Hill Indep. Sch. Dist., 136 S.W.3d 718, 719–20 (Tex.App.
whether Wilson is entitled to arbitration, 7 and (4) —Dallas 2004, pet. denied); In re Cobos, 994 S.W.2d
conduct further proceedings to determine whether the 313, 314 (Tex.App.—Corpus Christi 1999, no pet.); In re
various nonsignatories are entitled to arbitration. The writ Swarthout, 982 S.W.2d 92, 92 (Tex.App.—Houston [1st
will issue only if the trial court fails to comply. Insofar Dist.] 1998, no pet.); State ex rel. Wade v. Stephens, 724
*784 as we have granted full relief under our mandamus
S.W.2d 141, 143 (Tex.App.—Dallas 1987, no writ); Clark them to file either, and then have the appellate courts treat
it as they think proper.
v. Russell, 590 S.W.2d 651, 652 (Tex.Civ.App.—Dallas
1979, no writ).
All Citations
Parties should not have to file both an interlocutory
appeal and an original proceeding; even attorneys who can 196 S.W.3d 774, 211 Ed. Law Rep. 519, 49 Tex. Sup. Ct.
predict which one an appellate court will find proper may J. 909
hesitate to gamble with their client's money. I would allow
Footnotes
1 Document Synopses by Series, at http://www.aia.org/docs_series. The American Institute of Architects represents
the professional interests of America's architects. The AIA: Advocacy Community, Knowledge, at http:// www.aia.org/
about_default. Among other things, the AIA publishes industry standard documents for design and construction projects.
About AIA Contract Documents, at http://www.aia.org/docs_about & defPr=1. Document A201 “is frequently adopted by
reference into a variety of other agreements ... to establish a common basis for the primary and secondary relationships
on the typical construction project.” Instruction Sheet for AIA Document A201, General Conditions of the Contract
for Construction—1987 Edition at 1, available at http:// www.engin.umich.edu/class/cee431/AIA/A201Inst.PDF. In the
instant case, the General Conditions incorporate the 1987 (14th) Edition of AIA Document A201, which is approved and
endorsed by the Associated General Contractors of America. AIA Document A201, General Conditions of the Contract
for Construction (1987).
2 Four third-party defendants filed independent motions to compel arbitration: Wilson, Stotler, Mijares Mora Architects,
Inc., and Zamora Engineering, Inc. Mac's Insulation, Inc. joined Stotler's motion. Trane, Victoria Air Conditioning, Ltd.,
and Superheat Air Balancing Co., Inc. joined the Wilson and Stotler motions. Al Cardenas Masonry Inc. joined Trane's
motion. Sechrist–Hall Co., Wrightway Construction, Inc., and Rio Mechanical, Inc. joined the Wilson and Trane motions.
The independent motions of Mijares Mora Architects, Inc. and Zamora Engineering, Inc. do not invoke the FAA or TAA.
Wilson's motion is not in the record, and we are thus unable to determine whether it invokes the FAA, TAA, both, or
neither. All other motions invoke the FAA or both the FAA and the TAA. The motions of all subcontractors and second-
tier subcontractors also argue that the doctrine of equitable estoppel allows nonsignatories to the Wilson and Stotler
contracts to obtain the benefits of the arbitration agreements therein.
3 This Court undeniably has jurisdiction to review the correctness of the court of appeals' decision that it lacked jurisdiction
over the TAA-based interlocutory appeal. See McAllen Med. Ctr., Inc. v. Cortez, 66 S.W.3d 227, 231 (Tex.2001) (“When
a court of appeals determines that it lacks jurisdiction over an interlocutory appeal, this Court has jurisdiction to review
that decision.”).
4 While we continue to see no benefit in requiring parties to pursue parallel proceedings that are “unnecessarily expensive
and cumbersome,” we remain mindful that “we may not enlarge appellate jurisdiction absent legislative mandate.” Jack B.
Anglin Co., 842 S.W.2d at 272. We again invite the Legislature, “[i]n the interests of promoting the policy considerations
of rigorous and expedited enforcement of arbitration agreements, ... to consider amending the Texas Act to permit
interlocutory appeals of orders issued pursuant to the Federal Act.” Id.
5 Our analysis today proceeds under the FAA because, as a procedural matter, Trane and the third-party defendants only
assert in their “Statement of Jurisdiction” that this Court has jurisdiction under Cortez to decide whether the lower court
had jurisdiction. 66 S.W.3d at 231 (“When a court of appeals determines that it lacks jurisdiction over an interlocutory
appeal, this Court has jurisdiction to review that decision.”). They do not assert “conflict or dissent” jurisdiction under the
general interlocutory appeal statute. TEX. GOV'T CODE § 22.225(c).
6 A subparagraph later in the Supplementary Conditions states that it “[d]elete[s] the first sentence [of subparagraph 5.2.1
of the General Conditions] and substitute[s] the following ....” Clearly, the parties were free to delete and replace language
in the General Conditions with language in the Supplementary Conditions, and they had done so elsewhere.
7 Wilson's motion to compel arbitration is not in the record.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[1] Mandamus
Nature and scope of remedy in general [6] Alternative Dispute Resolution
Evidence
Mandamus is an extraordinary remedy
available only in limited circumstances. A presumption exists favoring agreements to
arbitrate under the Federal Arbitration Act
5 Cases that cite this headnote (FAA). 9 U.S.C.A. § 1 et seq.
Randolph, the United States Supreme Court recognized less expensive method of dispute resolution that decreases
that “the existence of large arbitration costs could servicing costs of this loan....” Because the record contains
preclude a litigant ... from vindicating her federal no specific evidence that the de los Santoses will actually
statutory rights....” 24 Nonetheless, the Supreme Court be charged excessive arbitration fees, we conclude that
concluded that an arbitration agreement's mere silence there is legally insufficient evidence that the plaintiffs
with respect to costs and fees, by itself, is a “plainly would be denied access to arbitration based on excessive
costs.
insufficient” basis for invalidating the agreement. 25
Instead, the party opposing arbitration must prove the
[19] [20] The de los Santoses also argue that the
likelihood of incurring such costs. 26 To hold otherwise agreement's terms are unconscionable because they force
would “undermine the liberal federal policy favoring the weaker party to arbitrate their claims, while permitting
arbitration agreements.” 27 the stronger party to litigate their claims. 33 They point us
to decisions in other jurisdictions that have found this type
[18] While the Supreme Court did not specify “how
of clause to be unconscionable. 34 Most federal courts,
detailed the showing of prohibitive expense must be,”
however, have rejected similar challenges on the grounds
there is no doubt that some specific information of
that an arbitration clause does not require mutuality of
future costs is required. 28 In Green Tree, the party obligation, so long as the underlying contract is supported
resisting arbitration cited what she claimed were American
by adequate consideration. 35 In any event, the basic test
Arbitration Association (AAA) figures on arbitration
for unconscionability is whether, given the parties' general
costs, but she provided no evidence that the AAA
commercial background and the commercial needs of the
would actually conduct the arbitration or charge her the
particular trade or case, the clause involved is so one-sided
fees she identified. 29 Because of this uncertainty, the that it is unconscionable under the circumstances existing
Supreme Court deemed the evidence insufficient to defeat
when the parties made the contract. 36 The principle is
30
arbitration. one of preventing oppression and unfair surprise and
not of disturbing allocation of risks because of superior
Here, the de los Santoses testified, in two sworn affidavits,
bargaining power. 37 Here, the Arbitration Addendum
that the AAA charged a minimum $2,000 filing fee and
allows the bank to seek judicial relief to enforce its security
a $250/day/party hearing fee, along with several other
agreement, recover the buyers' monetary loan obligation,
unspecified fees, for hearings before a three-member
and foreclose. Given the weight of federal precedent and
panel. But we *757 need not decide whether these costs
the routine nature of mobile *758 home financing
would be excessive. As in Green Tree, the de los Santoses
provided no evidence that the AAA would actually agreements, 38 we find that the Arbitration Addendum
conduct the arbitration or charge the specified fees. The in this case, by excepting claims essentially protecting
Arbitration Addendum does not state that the AAA the bank's security interest, is not unconscionable. 39 We
will conduct the arbitration, and it makes no mention also recognize that the plaintiffs are free to pursue their
of arbitration costs. We also note that the most recent unconscionability defense in the arbitral forum.
AAA commercial arbitration rules provide that “the AAA
may, in the event of extreme hardship on the part of [21] Moreover, the de los Santoses cannot prevail on their
any party, defer or reduce the administrative fees.” 31 duress defense, since there is no evidence that the sellers
Moreover, in the event the de los Santoses do not avail threatened to do anything they did not have a legal right
themselves of FirstMerit Bank's choice of arbitrators, to do. 40 At most, the sellers stated only that they would
the FAA permits the trial court to choose an alternate not sell the home if the de los Santoses would not sign the
set of arbitrators. 32 The de los Santoses also complain Addendum, which is not evidence of duress. 41
that the requirement of three arbitrators is inherently
costly. But again, without any specific information on [22] [23] The de los Santoses also alleged fraud in the
what the costs will be, this requirement is not evidence of inducement of the Arbitration Addendum. The elements
unconscionability. Finally, in agreeing to the Addendum, of fraud are: (1) that a material representation was
Pete and Janie de los Santos agreed “that arbitration is a made; (2) the representation was false; (3) when the
representation was made, the speaker knew it was false But this claim really pertains to the entire installment
contract and not just the Arbitration Addendum. Again,
or made it recklessly without any knowledge of the
the Arbitration Addendum's validity is a separate issue
truth and as a positive assertion; (4) the speaker made
the representation with the intent that the other party from the validity of the whole contract. 43 And given
should act upon it; (5) the party acted in reliance on that the FAA's primary objective is to encourage the
the representation; and (6) the party thereby suffered arbitration of contract-related issues, the issue of whether
the underlying contract was revoked is an issue that should
injury. 42 In this case, the de los Santoses alleged that
be arbitrated, since it “arises from or relates to” the
the sellers fraudulently represented that they owned
the land under the home, and that the home had a contract. 44
septic system and driveway. They also allege that the
sellers' advertisements and pre-sale statements made no
reference to an arbitration clause, and that the sellers III. CONCLUSION
did not adequately explain the consequences of signing
the Addendum. However, there is no evidence that the Because the claims in this lawsuit are within the scope
sellers actually misrepresented the Addendum's terms, or of the parties' agreement to arbitrate, we conditionally
that they made any false material representations with grant the writ of mandamus and direct the trial court to
regard to the Arbitration Addendum itself. Accordingly, order that all claims proceed to arbitration. The clerk is
we decline to invalidate the Arbitration Addendum based instructed to issue *759 the writ only if the trial court fails
on fraud. to do so.
Footnotes
1 The other parties did not answer the suit, and a default judgment was entered against them.
2 In re Masonite Corp., 997 S.W.2d 194, 197 (Tex.1999).
3 Id.
4 EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 88 (Tex.1996).
5 In re Oakwood Mobile Homes, 987 S.W.2d 571, 573 (Tex.1999).
6 Cantella & Co. v. Goodwin, 924 S.W.2d 943, 944 (Tex.1996).
7 Id.; Green Tree Fin. Corp. v. Randolph, 531 U.S. 79, 91, 121 S.Ct. 513, 522, 148 L.Ed.2d 373 (2000).
8 Cantella, 924 S.W.2d at 944.
9 Mitsubishi Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 626, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985);
Prudential Sec., Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex.1995).
10 See In re Oakwood, 987 S.W.2d at 573.
11 Cantella, 924 S.W.2d at 944.
12 See Lost Creek Mun. Util. Dist. v. Travis Indus. Painters, Inc., 827 S.W.2d 103, 105 (Tex.App.—Austin 1992, writ denied).
13 Allied–Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 272–74, 276–78, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995).
14 See, e.g., Mesa Operating Ltd. P'ship v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 243 (5th Cir.1986); Snyder v.
Smith, 736 F.2d 409, 418 (7th Cir.1984), cert. denied, 469 U.S. 1037, 105 S.Ct. 513, 83 L.Ed.2d 403 (1984).
15 Prudential Sec., 909 S.W.2d at 900.
16 See TEX. BUS. & COM.CODE § 2.608(a), 2.711(c).
17 See Pepe Int'l Dev. Co. v. Pub Brewing Co., 915 S.W.2d 925, 930 (Tex.App.—Houston [1st Dist.] 1996, no writ); New
Process Steel Corp. v. Titan Indus. Corp., 555 F.Supp. 1018, 1022 (S.D.Tex.1983).
18 See Nationwide of Bryan, Inc. v. Dyer, 969 S.W.2d 518, 520 (Tex.App.—Austin 1998, no pet.).
19 See In re Oakwood, 987 S.W.2d at 573.
20 See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–04, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967).
21 See id.
22 In re Oakwood, 987 S.W.2d at 574.
23 Id. at 573.
24 531 U.S. 79, 91, 121 S.Ct. at 522, 148 L.Ed.2d 373.
25 Id.
26 Id.
27 Id.
28 Id. at 522–23.
29 Id. at 522 & n. 6.
30 See id.
31 American Arbitration Association, Arbitration Rules for the Real Estate Industry, Rule 51.
32 See 9 U.S.C. § 5.
33 See In re Conseco Fin. Servicing Corp., 19 S.W.3d 562, 569 n. 3 (Tex.App.—Waco 2000, pet. dism'd by agr.).
34 See, e.g., Armendariz v. Foundation Health Psychcare Servs., 24 Cal.4th 83, 99 Cal.Rptr.2d 745, 6 P.3d 669, 691–94
(Cal.2000); Iwen v. U.S. West Direct, 293 Mont. 512, 977 P.2d 989, 995–96 (1999).
35 See, e.g., Harris v. Green Tree Fin. Corp., 183 F.3d 173, 183 (3d Cir.1999); Doctor's Assoc., Inc. v. Distajo, 66 F.3d 438,
451–53 (2d Cir.1995); Wilson Elec. Contractors, Inc. v. Minnotte Contracting Corp., 878 F.2d 167, 168–69 (6th Cir.1989);
Young v. Jim Walter Homes, Inc., 110 F.Supp.2d 1344, 1350 (M.D.Ala.2000); Pridgen v. Green Tree Fin. Servicing Corp.,
88 F.Supp.2d 655, 658–59 (S.D.Miss.2000); Gray v. Conseco, Inc., 2000 WL 1480273, 2000 U.S. Dist. LEXIS 14821,
13–16 (C.D.Cal. Sept. 29, 2000).
36 TEX. BUS. & COM.CODE § 2.302 cmt. 1.
37 Id.
38 See Palm Harbor Homes, Inc. v. McCoy, 944 S.W.2d 716, 723 n. 8 (Tex.App.—Fort Worth 1997, orig. proceeding).
39 See Pridgen, 88 F.Supp.2d at 658–59; see also Conseco Fin. Servicing Corp. v. Wilder, 47 S.W.3d 335 (Ky.App.2001).
40 In re Oakwood, 987 S.W.2d at 574.
41 See id.
42 Formosa Plastics Corp. v. Presidio Engrs. & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998).
43 See Miller v. Puritan Fashions Corp., 516 S.W.2d 234, 238–39 (Tex.Civ.App.—Waco 1974, writ ref'd n.r.e.).
44 See Mewbourne Oil Co. v. Blackburn, 793 S.W.2d 735, 737 (Tex.App.—Amarillo 1990, orig. proceeding).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Absent a contractual agreement, Texas law home parks in southeast Texas that also sells and leases
allows attorney fees only for a prevailing mobile homes. The agreement included an arbitration
plaintiff. V.T.C.A., Civil Practice & Remedies clause covering “any dispute, controversy or claim among
Code §§ 38.001, 38.002. the Parties.” In August 2005 Fleetwood cancelled the
agreement on the ground that Gulf was planning to sell or
3 Cases that cite this headnote use mobile homes at a location other than that specified
in the dealer agreement.
[7] Alternative Dispute Resolution
Unconscionability After Gulf filed suit in October 2005, Fleetwood filed
an answer demanding arbitration, *694 but did not
Arbitration clause of dealer agreement
actually move to compel arbitration until July 2006. Gulf
between manufacturer of mobile homes and
opposed the motion on two grounds: express waiver and
owner of mobile home parks, allowing either
unconscionability.
party to recover attorney fees as prevailing
party, was not substantively unconscionable.
[2] [3] “[A] party waives an arbitration clause by
2 Cases that cite this headnote substantially invoking the judicial process to the other
party's detriment or prejudice.” Perry Homes v. Cull, 2008
WL 1922978, at *4, 258 S.W.3d 589, 590 (Tex.2008).
Waiver is a legal question for the court based on the
Attorneys and Law Firms totality of the circumstances, and asks whether a party has
substantially invoked the judicial process to an opponent's
*693 Michael J. Craddock, Felicia Norvell, David detriment, the latter term meaning inherent unfairness
Charles Routzon Jr., Craddock Reneker & Davis, L.L.P., caused by “a party's attempt to have it both ways by
Rachel Elizabeth Khirallah, Dallas, TX, for Relator. switching between litigation and arbitration to its own
advantage.” Id. 2008 WL 1922978, at *8, at 596.
Michael Allen Starzyk, April Lee Walter, Starzyk &
Associates, P.C., Alan M. Bush, Woodlands, TX, for Real Gulf argues that Fleetwood expressly waived arbitration,
Party in Interest. pointing to several emails from Fleetwood's counsel
regarding a proposed trial setting, culminating in the
Opinion
following:
PER CURIAM.
I have reviewed the Setting Request
[1] Parties that “conduct full discovery, file motions and would ask that we try to
going to the merits, and seek arbitration only on the get a setting in March.... Given
eve of trial” waive any contractual right to arbitration. the documentation I received last
In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 764 week and the work we need to
(Tex.2006). The relators here did none of those, instead do as a result of those documents,
merely discussing a potential trial setting and sending Fleetwood is not going to be in
a set of written discovery the day before moving to a position to try this case in
compel arbitration. The trial court held the relators December. If you are agreeable to
waived arbitration, and a divided court of appeals denied this, we could sign an agreed Setting
mandamus relief. 2006 WL 3028222. We disagree, and Request, otherwise, I will have to
thus conditionally grant it. See In re Weekley, 180 S.W.3d oppose the request after you submit
127, 130 (Tex.2005) (“Mandamus relief is proper to it and request a later setting.
enforce arbitration agreements governed by the FAA.”).
We need not decide whether Gulf is correct that express
waiver is governed by different rules than those that
Fleetwood Enterprises, Inc., manufactures mobile homes.
govern implied waiver, as we disagree that this rises to the
In January 2005 it signed a dealer agreement with Gulf
level of an express waiver. Nothing in this communication
Regional Services, Inc., an owner and developer of mobile
expressly waives arbitration or revokes the arbitration arbitration limits its right to discovery. But limited
discovery is one of arbitration's “most distinctive
demand Fleetwood included in every answer it filed.
features.” Perry Homes, 2008 WL 1922978, at *9, 258
S.W.3d at 587; see also Preston v. Ferrer, 552 U.S.
[4] Instead, the question here is whether Fleetwood
346, ––––, 128 S.Ct. 978, 169 L.Ed.2d 917 (2008) (“A
impliedly waived arbitration by failing to pursue its
prime objective of an agreement to arbitrate is to achieve
arbitration demand for eight months while discussing
streamlined proceedings and expeditious results.”). Gulf's
a trial setting and allowing limited discovery. We have
argument that “streamlined” discovery makes arbitration
already answered that question “No.” In EZ Pawn Corp.
unconscionable would nullify almost all arbitration
v. Mancias, we held a party had not waived arbitration
agreements. We hold that arbitration's limits on discovery
by filing an answer, discussing a docket-control order,
for both parties does not make it unconscionable. See In re
sending written discovery, noticing a deposition, and
Palm Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex.2006)
agreeing to postpone a trial setting. 934 S.W.2d 87, 90
(“The test for substantive unconscionability is whether,
(Tex.1996). Gulf points out correctly that the movant in
given the parties' general commercial background and
EZ Pawn had not yet “discovered” the arbitration clause
the commercial needs of the particular trade or case, the
until after these actions had already taken place. Id. at 89.
clause involved is so one-sided that it is unconscionable
But our opinion was based on the nonmovant's failure to
under the circumstances existing when the parties made
show any prejudice, id. at 90, a requirement we recently
the contract.” (internal quotation marks omitted)).
reaffirmed. See Perry Homes, 2008 WL 1922978, at *7,
258 S.W.3d at 595.
[6] [7] Second, Gulf asserts the agreement here is
unconscionable because it allows the prevailing party to
As in EZ Pawn, the evidence here is legally insufficient
recover attorney's fees. It is true that absent a contractual
to support a finding of prejudice. Gulf does not
agreement like this, Texas law allows attorney's fees
explain how it possibly could have been prejudiced by
only for a prevailing plaintiff. See TEX. CIV. PRAC. &
exchanging emails about a trial setting. Moreover, while
REM.CODE § 3 8.001–.002. But allowing both parties to
these communications are a factor to be considered in
recover fees hardly makes an agreement “one-sided”; such
the totality-of-the-circumstances, they are not the only
agreements, common in commercial contexts, surely make
factors. See id. 2008 WL 1922978, at *10, at 599. Here,
them less so.
Fleetwood took no depositions, although it noticed one
deposition before cancelling it. 1 It served one set of
Because Gulf has failed to show that Fleetwood waived
written discovery the day before it moved to compel
its contractual right to arbitration, we conditionally grant
arbitration. It filed no dispositive motions, nor did it
Fleetwood's petition for writ of mandamus and direct the
wait until the eve of *695 trial to move to compel.
trial court to compel arbitration. We are confident that the
Taken together, these actions are not enough to overcome
trial court will promptly comply, and our writ will issue
the presumption against waiver. See In re Vesta Ins.
only if it does not.
Group, Inc., 192 S.W.3d 759, 763 (Tex.2006); In re Bruce
Terminix, 988 S.W.2d 702, 704 (Tex.1998).
All Citations
[5] Gulf also argues the arbitration clause is substantively
unconscionable, citing two reasons. First, it asserts that 257 S.W.3d 692, 51 Tex. Sup. Ct. J. 1066
Footnotes
1 Gulf deposed three Fleetwood representatives, but does not explain how it was prejudiced in being allowed to do so. See
Perry Homes, 2008 WL 1922978, at *10, 258 S.W.3d at 599 (“[A] party who requests lots of discovery is not prejudiced by
getting it and taking it to arbitration in the same way [as] a party who produces lots of discovery ....”) (emphasis in original).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Footnotes
1 The question whether relator possesses standing to challenge the payments to the attorneys pro tem in a civil suit is not
before this Court in this original proceeding.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
arbitration by pursuing their claims only against two the contract.... [C]laims can be brought in tort (and in
nonsignatories. The parties agree the Federal Arbitration court) if liability arises from general obligations imposed
Act applies. See 9 U.S.C. § 1 et seq. The trial court by law.” Weekley, 180 S.W.3d at 132. Claims of fraudulent
refused to compel arbitration, and the Thirteenth Court inducement arise from general obligations imposed by
of Appeals denied mandamus relief. We conditionally law, not the underlying contract. Tony Gullo Motors I,
grant it. See In re Weekley Homes, L.P., 180 S.W.3d 127, L.P. v. Chapa, 212 S.W.3d 299, 304 (Tex.2006) (“The
130 (Tex.2005) (“Mandamus relief is proper to enforce duty not to fraudulently procure a contract arises from
arbitration agreements governed by the FAA.”). the general obligations of law rather than the contract
itself, and may be asserted in tort even if the only
The students enrolled in an electrician's program at the damages are economic.”); Formosa Plastics Corp. USA
San Antonio College of Medical and Dental Assistants v. Presidio Eng'rs and Contractors, Inc., 960 S.W.2d 41,
—McAllen Branch (“the College”), a wholly-owned 46 (Tex.1998) (“[I]t is well established that the legal duty
subsidiary of Kaplan Higher Education Corporation. not to fraudulently procure a contract is separate and
They allege they were fraudulently induced to enroll by independent from the duties established by the contract
assurances that upon graduation they would be eligible itself.”).
for licenses as journeymen or master electricians. Each
student signed an enrollment agreement detailing tuition, [4] [5] Nevertheless, the agents of a signatory may
rules, and graduation requirements, and requiring them sometimes invoke an arbitration clause even if they
to arbitrate “[a]ny controversy or claim arising out of, or themselves are nonsignatories and a claimant is not suing
relating to, this Agreement.” 1 on the contract. Thus, if two companies sign a contract
to arbitrate disputes, one cannot avoid it by recasting a
Initially, the plaintiffs filed suit against Kaplan, the contract dispute as a tortious interference claim against
College, Frank Jennings (the College's president) and an owner, officer, agent, or affiliate of the other. In re
Leticia Ventura (the College's admissions director). When Vesta Ins. Group, Inc., 192 S.W.3d 759, 762–63 (Tex.2006)
the defendants moved for arbitration, the plaintiffs (per curiam). “Every contract claim against a corporation
dropped their claims against the College and Jennings could be recast as a tortious interference claim against its
(both signatories to the agreements) as well as all claims agents,” and it is impractical to require every corporate
of joint venture or enterprise, leaving only claims against agent to sign or be listed in every contract. Id. at 762. As
Kaplan and Ventura (both nonsignatories). a contracting party generally cannot avoid unfavorable
clauses by suing the other party's agents, this rule is
necessary “ ‘to place arbitration agreements on equal
[1] Although alleged in various forms, 2 the substance
footing with other contracts'.” Id. (quoting E.E.O.C. v.
of the students' claim was fraudulent inducement, as they
Waffle House, Inc., 534 U.S. 279, 293, 122 S.Ct. 754, 151
seek refunds of tuition and other costs they would not have
L.Ed.2d 755 (2002)).
incurred had they not been induced *209 to sign up. See
Weekley, 180 S.W.3d at 131–32 (stating that arbitrability
[6] [7] For the same reasons, the same rule must apply
“turns on the substance of the claim, not artful pleading”);
when a party to an arbitration contract seeks to avoid it
Haase v. Glazner, 62 S.W.3d 795, 797–800 (Tex.2001)
by pleading a contract dispute as fraudulent inducement
(distinguishing fraudulent inducement from other fraud
by an officer, agent, or affiliate of the other. Here too,
claims as it “presupposes that a party has been induced
almost every contract claim against a corporation could be
to enter a contract”). We have held that such claims fall
recast as a fraudulent inducement claim against the agents
within an agreement to arbitrate all disputes “involving”
or employees who took part in the negotiations preceding
an underlying contract. See In re J.D. Edwards World
it. If such arbitration clauses are enforceable only if every
Solutions Co., 87 S.W.3d 546, 550–51 (Tex.2002). Clearly,
officer, employee, agent, or affiliate signs or is listed in the
the students' complaints arise out of and relate to their
contract, they would be more easily avoided than other
enrollment agreements.
contract clauses.
the judgment if their suit is successful. The Texas whole, and not specifically to the arbitration clause, must
go to the arbitrator.”); In re FirstMerit Bank, N.A., 52
Education Code requires vocational schools to provide
S.W.3d 749, 756 (Tex.2001).
full refunds if enrollment was procured by representations
“by the owner or representatives of the school.” TEX.
[8] [9] We emphasize again today that arbitration
EDUC.CODE § 132.061(a)(2); see also Minyard Food
clauses do not automatically cover all corporate agents or
Stores, Inc. v. Goodman, 80 S.W.3d 573, 577 (Tex.2002)
affiliates. See In re Merrill Lynch Trust Co., 235 S.W.3d
(stating that employers are generally liable for employees'
185, 191 (Tex.2007); In re Vesta Ins. Group, Inc., 192
torts committed in course, scope, and furtherance of
S.W.3d 759, 763 (Tex.2006) (per curiam). Like other
employer's business). *210 The enrollment agreements
contracts, arbitration agreements “are enforced according
specifically provided for tuition refunds in the event
to their terms and according to the intentions of the
enrollment was induced by misrepresentation. If the
parties.” First Options of Chicago, Inc. v. Kaplan, 514 U.S.
College's liability for such refunds (about $10,000 for each
938, 947, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995) (internal
student) can be decided in court by suing its agents, then
citation omitted). Thus, for example, owners may not be
the arbitration contract has been effectively abrogated.
able to invoke a subsidiary's arbitration clause when they
act on their own behalf rather than for their subsidiary.
The students argue that Ventura and the other admissions
See, e.g., Westmoreland v. Sadoux, 299 F.3d 462, 466 (5th
officers to whom they spoke were not employees of the
Cir.2002). But when an agreement between two parties
College but of Kaplan. But the undisputed facts (and the
clearly provides for the substance of a dispute to be
students' own pleadings) show that regardless of who paid
arbitrated, one cannot avoid it by simply pleading that a
them, they were acting as agents of the College when they
nonsignatory agent or affiliate was pulling the strings.
advertised, recruited, and procured contracts on its behalf,
and that the College itself will have to answer for any
Accordingly, without hearing oral argument, see
misrepresentations they made in doing so.
TEX.R.APP. P. 52.8(c), we conditionally grant the writ
of mandamus and direct the trial court to order that the
The students also assert that Kaplan cannot seek
students' claims proceed to arbitration. Our writ will not
arbitration because of “unclean hands” in its dealings
issue unless the trial court fails to do so.
with them. But this defense pertains to the enrollment
agreement in general rather than the arbitration clause
in particular, and thus must be arbitrated. See Buckeye All Citations
Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449, 126
S.Ct. 1204, 163 L.Ed.2d 1038 (2006) (“We reaffirm today 235 S.W.3d 206, 226 Ed. Law Rep. 343, 50 Tex. Sup. Ct.
that ... a challenge to the validity of the contract as a J. 1058
Footnotes
1 Each enrollment agreement contained the following arbitration provision: ACKNOWLEDGEMENT OF OBLIGATION: ...
Any controversy or claim arising out of, or relating to, this Agreement, or breach thereof, no matter how pleaded or styled,
shall be settled by arbitration in accordance with the Commercial Rules of Arbitration Association, and judgment upon
the award rendered by the Arbitrator(s) may be entered in any court having jurisdiction.
2 The students' pleadings alleged negligence, negligence per se based on alleged violations of the Texas Education and
Texas Administrative Codes, violations of the Texas Deceptive Trade Practices Act, and negligent misrepresentation.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Holdings: The Supreme Court, Jefferson, C.J., held that: 28 Cases that cite this headnote
[18] Estoppel
Contracts
Under direct benefits estoppel, although a
non-signatory's claim may relate to a contract
subcontract. Among other things, the Title Agreement action should be abated because the collateral's ownership
provided that full title to the collateral would pass was “the very issue ... being arbitrated before the ICC.”
irrevocably to MacGregor immediately after MacGregor MacGregor, Unidynamics, and KBR then negotiated an
made two payments to Unidynamics, which were to agreement, which the trial court entered as an Agreed
occur no later than December 19, 2001. The Title Order. Pursuant to that order, MacGregor agreed to post
Agreement further required Unidynamics to release the a $1,000,000 bond and, upon presentation of the bond,
collateral to MacGregor upon MacGregor's request. It KBR agreed to release the collateral to MacGregor. 5
is undisputed that MacGregor timely paid Unidynamics; MacGregor posted the bond on October 28, 2002.
however, Unidynamics asserted that the payments were
ineffective to pass title to MacGregor. When MacGregor Meanwhile, on October 18, 2002, MacGregor filed a
demanded that Unidynamics release the elevator trunks, motion to abate the state court proceedings pending
Unidynamics refused. The collateral remained in KBR's its arbitration with Unidynamics or, in the alternative,
possession. to compel KBR to pursue its claims in the ongoing
arbitration between MacGregor and Unidynamics. The
trial court denied MacGregor's motion. On December
II 19, 2002, MacGregor filed an interlocutory appeal and
a petition for writ of mandamus in the court of appeals,
contending that the trial court abused its discretion.
Procedural Background The court of appeals dismissed the interlocutory appeal
as moot and conditionally granted mandamus relief,
In May 2002, pursuant to the arbitration provision
ordering the trial court “to vacate its order denying
in the fabrication subcontract, MacGregor asked the
MacGregor's plea in abatement and motion to compel
International Chamber of Commerce (“ICC”) to arbitrate
arbitration, to issue an order compelling KBR to
its dispute with Unidynamics. Among other things,
arbitrate all claims, and to stay all proceedings pending
MacGregor sought: (1) damages for breach of contract
by Unidynamics for failure to release the collateral, (2) arbitration.” 6 126 S.W.3d at 184–85.
a determination *736 as to which defendant owned the
collateral, and (3) a determination regarding MacGregor's On December 9, 2003, KBR petitioned this Court for
proportionate responsibility for the storage costs KBR a writ of mandamus. On February 4, 2004, while the
billed Unidynamics. Unidynamics filed an answer and petition was pending before us, the arbitration between
asserted counterclaims. MacGregor and Unidynamics MacGregor and Unidynamics concluded, and the ICC
then commenced arbitration in Paris, France. issued a final arbitration award. KBR does not contest
that award.
While the arbitration was proceeding, both MacGregor
and Unidynamics demanded that KBR release the
collateral. KBR refused the demands and, on September III
17, 2002, filed suit against both companies in Harris
County. KBR claimed that Unidynamics breached its
contract and, in the alternative, that it was entitled to Mootness
recover quantum meruit damages against Unidynamics
[1] [2] As a preliminary matter, we must decide
and MacGregor. KBR also sued for declaratory relief to
whether the ICC's final arbitration *737 award moots
determine which defendant owned the collateral. Subject
this mandamus proceeding. A case becomes moot if a
to the court's ruling on ownership, KBR sought a judicial
controversy ceases to exist between the parties at any stage
declaration that it possessed valid constitutional and
of the legal proceedings, including the appeal. Allstate
statutory liens against the collateral in its possession. 4 Ins. Co. v. Hallman, 159 S.W.3d 640, 642 (Tex.2005);
MacGregor answered and sought a temporary restraining Bd. of Adjustment of San Antonio v. Wende, 92 S.W.3d
order, temporary injunction, and permanent injunction 424, 427 (Tex.2002); Williams v. Lara, 52 S.W.3d 171,
directing KBR to release the collateral. Unidynamics 184 (Tex.2001). This case stems from the lower courts'
opposed MacGregor's application, arguing that the court action on MacGregor's motion to “compel [ ] KBR to
pursue its claims in the arbitration between [MacGregor] [4] [5] [6] The parties do not dispute the court of
and Unidynamics.” Because that arbitration is over, KBR appeals' holding that the arbitration provision at issue
can no longer be compelled to “join the arbitration.” is governed by the Federal Arbitration Act (“FAA”).
See 126 S.W.3d at 183 (concluding that the trial court See 9 U.S.C. §§ 1–16; 126 S.W.3d at 181. In general,
abused its discretion by refusing to compel KBR to join a party seeking to compel arbitration under the FAA
the ongoing arbitration). The question, then, is whether must establish that: (1) there is a valid arbitration
this proceeding is moot. agreement, and (2) the claims raised fall within that
agreement's scope. In re FirstMerit Bank, 52 S.W.3d
[3] A case is not rendered moot simply because some 749, 753 (Tex.2001); In re Oakwood Mobile Homes, Inc.,
of the issues become moot during the appellate process. 987 S.W.2d 571, 573 (Tex.1999). Doubts regarding an
See Allstate, 159 S.W.3d at 642–43 (holding that a dispute agreement's scope are resolved in favor of arbitration
concerning attorney's fees preserved a live controversy in because there is a presumption favoring agreements to
an otherwise moot appeal); Camarena v. Tex. Employment arbitrate under the FAA. In re FirstMerit Bank, 52 S.W.3d
Comm'n, 754 S.W.2d 149, 151 (Tex.1988) (same). In this at 753; Cantella & Co. v. Goodwin, 924 S.W.2d 943, 944
case, the court of appeals ordered the trial court “to issue (Tex.1996). However, “the presumption arises only after
an order compelling KBR to arbitrate all claims.” 126 the party seeking to compel arbitration proves that a valid
S.W.3d at 184. Although it is no longer possible for KBR arbitration agreement exists,” *738 J.M. Davidson, Inc.
to join the Paris arbitration, the court of appeals' ultimate v. Webster, 128 S.W.3d 223, 227 (Tex.2003), because “the
directive has no temporal component. It requires KBR to purpose of the FAA was to make arbitration agreements
“arbitrate all claims.” as enforceable as other contracts, not more so.” Bridas
S.A.P.I.C. v. Gov't of Turkm., 345 F.3d 347, 354 n. 4 (5th
The live controversy in this proceeding is whether Cir.2003) (citations omitted); see also E.E.O.C. v. Waffle
KBR must arbitrate those claims that remain now that House, Inc., 534 U.S. 279, 293, 122 S.Ct. 754, 151 L.Ed.2d
the arbitration between MacGregor and Unidynamics 755 (2002) (“The FAA directs courts to place arbitration
has concluded. KBR's petition consisted of: (1) a agreements on equal footing with other contracts....”).
breach-of-contract claim against Unidynamics; (2) in the
alternative, a quantum meruit claim against Unidynamics [7] [8] [9] Under the FAA, ordinary principles of state
and MacGregor; and (3) a declaratory judgment action to contract law determine whether there is a valid agreement
determine the collateral's owner and to establish that KBR to arbitrate. First Options of Chi., Inc. v. Kaplan, 514 U.S.
possessed valid liens. The arbitrator determined that, 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995); Wash.
pursuant to the Title Agreement between MacGregor Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260, 264 (5th
and Unidynamics, title to the collateral passed from Cir.2004); J.M. Davidson, Inc., 128 S.W.3d at 227–28; In re
Unidynamics to MacGregor on December 10, 2001. KBR Halliburton Co., 80 S.W.3d 566, 568 (Tex.2002). Because
is satisfied with this resolution of the ownership dispute, arbitration is contractual in nature, the FAA generally
and thus, we need not address whether the ownership “does not require parties to arbitrate when they have
dispute must be arbitrated. Additionally, we need not not agreed to do so.” Volt Info. Scis., Inc. v. Bd. of Trs.
address whether KBR should be compelled to arbitrate of Leland Stanford Junior Univ., 489 U.S. 468, 478–79,
its claims against Unidynamics, because the parties now 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989) ( “Arbitration
agree that those claims are not subject to arbitration. under the [FAA] is a matter of consent, not coercion....”),
Our inquiry is accordingly limited to determining whether quoted in E.E.O.C., 534 U.S. at 293–94, 122 S.Ct. 754;
KBR must arbitrate its quantum meruit and lien-validity see also Bridas, 345 F.3d at 361 (citing J. Douglas Uloth
claims against MacGregor. & J. Hamilton Rial, III, Equitable Estoppel as a Basis
for Compelling Nonsignatories to Arbitrate—A Bridge Too
Far?, 21 Rev. Litig. 593, 632 (2002)). Federal and Texas
state courts have recognized, however, that “[i]t does
IV
not follow ... that under the [FAA] an obligation to
arbitrate attaches only to one who has personally signed
Discussion the written arbitration provision”; instead, under certain
circumstances, principles of contract law and agency may
bind a non-signatory to an arbitration agreement. Fisser compelled to arbitrate. Moreover, we recognize that it is
v. Int'l Bank, 282 F.2d 231, 233 (2d Cir.1960), quoted in important for federal and state law to be as consistent as
Int'l Paper Co. v. Schwabedissen Maschinen & Anlagen, possible in this area, because federal and state courts have
206 F.3d 411, 416 (4th Cir.2000), and Thomson–CSF, S.A. concurrent jurisdiction to enforce the FAA. See Moses H.
v. Am. Arbitration Ass'n, 64 F.3d 773, 776 (2d Cir.1995); Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1,
see also Bailey, 364 F.3d at 267 (quoting Thomson– 25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Our decision
CSF, 64 F.3d at 776); In re FirstMerit Bank, 52 S.W.3d today rests on state law, but it is informed by persuasive
at 755 (citing Nationwide of Bryan, Inc. v. Dyer, 969 and well-reasoned federal precedent.
S.W.2d 518, 520 (Tex.App.-Austin 1998, no pet.)); S.W.
Tex. Pathology Assocs. v. Roosth, 27 S.W.3d 204, 208 Federal courts have recognized six theories, arising out
(Tex.App.-San Antonio 2000, pet. dism'd w.o.j.). of common principles of contract and agency law, that
may bind non-signatories to arbitration agreements: (1)
Although state law determines the validity of an incorporation by reference; (2) assumption; (3) agency;
arbitration agreement, courts have applied both federal (4) alter ego; (5) equitable estoppel, and (6) third-party
and state law to determine the related, but distinct, issue beneficiary. See, e.g., Bridas, 345 F.3d at 356. 7 Here,
of whether non-signatory plaintiffs should be compelled MacGregor asserts that KBR is bound to arbitrate
to arbitrate their claims. See, e.g., Bailey, 364 F.3d at under the doctrine of “direct benefits estoppel”—a type
267–68 (applying federal law); Bridas, 345 F.3d at 355– of equitable estoppel that federal courts apply in the
63 (applying federal law); Fleetwood Enters. v. Gaskamp, arbitration context. See, e.g., Bailey, 364 F.3d at 268;
280 F.3d 1069, 1074–77 (5th Cir.2002) (applying state Bridas, 345 F.3d at 361–62; E.I. DuPont de Nemours & Co.
law); Roosth, 27 S.W.3d at 208–09 (applying state law); v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269
Dyer, 969 S.W.2d at 520 (applying state law); Lakeland F.3d 187, 199–201 (3d Cir.2001); Int'l Paper Co., 206 F.3d
Anesthesia, Inc. v. United Healthcare of La., Inc., 871
at 418. 8
So.2d 380, 392–95 (La.Ct.App.2004) (applying federal
and state law). The FAA does not specify whether state or
[10] [11] [12] Under “direct benefits estoppel,” a non-
federal law governs, and the United States Supreme Court
signatory plaintiff seeking the benefits of a contract is
has not directly addressed the issue.
estopped from simultaneously attempting to avoid the
contract's burdens, such as the obligation to arbitrate
Federal courts of appeals, however, have frequently
disputes. R.J. Griffin & Co. at 160–61; Bailey, 364 F.3d
applied federal substantive law when deciding whether
at 268; Int'l Paper Co., 206 F.3d at 418 (“[T]he doctrine
a non-signatory must arbitrate. See, e.g., Bailey, 364
recognizes that a party may be estopped from asserting
F.3d at 267 n. 6; Bridas, 345 F.3d at 355–63; InterGen
that the lack of his signature precludes enforcement of
N.V. v. Grina, 344 F.3d 134, 142–50 (1st Cir.2003);
the contract's arbitration clause when he has consistently
Dominium Austin Partners v. Emerson, 248 F.3d 720,
maintained that other provisions of the same contract
728 (8th Cir.2001); Int'l Paper Co., 206 F.3d at 417 n.
should be enforced to benefit him.”); Thomson–CSF,
4; Thomson–CSF, 64 F.3d at 778–79. The Fourth and
64 F.3d at 778. Thus, a non-signatory plaintiff may be
Fifth Circuits have reasoned that “ ‘federal substantive
compelled to arbitrate if it seeks to enforce terms of a
law of arbitrability’... resolve[s] this question,” because
contract containing an arbitration provision. See R.J.
the determination of whether a non-signatory is bound
Griffin & Co., 384 F.3d at 161–64; Bailey, 364 F.3d at
“presents no state *739 law question of contract
268; Bridas, 345 F.3d at 361–62 (“Direct benefits estoppel
formation or validity.” R.J. Griffin & Co. v. Beach Club II
applies when a nonsignatory ‘knowingly exploits the
Homeowners Ass'n, 384 F.3d 157, 160 n. 1 (4th Cir.2004)
agreement containing the arbitration clause.’ ”) (quoting
(quoting Int'l Paper Co., 206 F.3d at 417 n. 4); Bailey,
E.I. DuPont de Nemours & Co., 269 F.3d at 199); Int'l
364 F.3d at 267 n. 6 (same). We are not convinced that
Paper Co., 206 F.3d at 418. For example, if a non-
state law plays no role in making this determination. See
signatory's breach-of-warranty and breach-of-contract
Roosth, 27 S.W.3d at 208–09 (applying state law); Dyer,
claims are based on certain terms of a written contract,
969 S.W.2d at 520 (applying state law). Nevertheless, we
then the non-signatory cannot avoid an arbitration
are mindful of the extensive body of federal precedent that
provision within that contract. See Int'l Paper Co., 206
has explored the extent to which non-signatories can be
F.3d at 418. If, however, a non-signatory's *740 claims
can stand independently of the underlying contract, then MacGregor and Unidynamics; therefore, the scope of that
arbitration generally should not be compelled under this subcontract's arbitration clause does not answer whether
theory. See, e.g., R.J. Griffin & Co., 384 F.3d at 164; KBR must arbitrate.
Bridas, 345 F.3d at 362.
[17] To advance its estoppel theory, MacGregor
Consistent with the federal doctrine of “direct benefits contends that KBR's quantum meruit claim is “based on”
estoppel,” this Court has held that a non-signatory the fabrication subcontract in the sense that KBR's labor
plaintiff may be compelled to arbitrate if its claims and services were linked inextricably to that subcontract.
are “based on a contract” containing an agreement to It is true, of course, that KBR was fabricating trunks
arbitrate. In re FirstMerit Bank, 52 S.W.3d at 755 (“[A] that were at the contract's core and that, in performing
litigant who sues based on a contract subjects him or the work, KBR relied on the fabrication subcontract's
herself to the contract's terms.”). In FirstMerit Bank, specifications. However, under “direct benefits estoppel,”
the non-signatory plaintiffs sued the signatory defendant a non-signatory plaintiff cannot be compelled to arbitrate
for, among other things, breach of contract, revocation on the sole ground that, but for the contract containing
of acceptance, and breach of warranty. Id. at 752–53, the arbitration provision, it would have no basis to sue.
755. By bringing the breach-of-contract and breach- The work to be performed under a second-tier subcontract
of-warranty claims, the plaintiffs sought benefits that will inherently be related to and, to a certain extent,
stemmed directly from the contract's terms. We concluded defined by contracts higher in the chain. See Black's Law
that, by seeking to enforce the contract, the non-signatory Dictionary 1464 (8th ed.2004) (defining subcontractor as
plaintiffs “subjected themselves to the contract's terms, “[o]ne who is awarded a portion of an existing contract
including the Arbitration Addendum.” Id. at 756; see by a contractor, esp. a general contractor”). If this were a
also Roosth, 27 S.W.3d at 208 (“The nonsignatory cannot sufficient basis for binding a non-signatory subcontractor,
enforce specific terms of the agreement while seeking to arbitration agreements would become easier to enforce
avoid the arbitration provision.”). than other contracts, counter to the FAA's purpose. See
*741 InterGen, 344 F.3d at 145–46 (noting that federal
The issue here is whether KBR sought to enforce courts have “been hesitant to estop a nonsignatory seeking
terms of the fabrication subcontract by (1) bringing a to avoid arbitration”).
quantum meruit claim against MacGregor, or (2) seeking
a declaration that it possessed valid liens. We begin with [18] We conclude that, under “direct benefits estoppel,”
quantum meruit. although a non-signatory's claim may relate to a contract
containing an arbitration provision, that relationship does
[13] [14] [15] [16] Quantum meruit is an equitablenot, in itself, bind the non-signatory to the arbitration
remedy that “ ‘is based upon the promise implied by provision. Instead, a non-signatory should be compelled
law to pay for beneficial services rendered and knowingly to arbitrate a claim only if it seeks, through the claim, to
accepted.’ ” Vortt Exploration Co., Inc. v. Chevron U.S.A., derive a direct benefit from the contract containing the
Inc., 787 S.W.2d 942, 944 (Tex.1990) (quoting Truly v. arbitration provision. See Bailey, 364 F.3d at 268; MAG
Austin, 744 S.W.2d 934, 936 (Tex.1988)). A party generally Portfolio Consult., GMBH v. Merlin Biomed Group LLC,
cannot recover under quantum meruit when there is a 268 F.3d 58, 61 (2d Cir.2001) (“The benefits must be direct
valid contract covering the services or materials furnished. —which is to say, flowing directly from the agreement.”);
Murray v. Crest Constr., Inc., 900 S.W.2d 342, 345 Int'l Paper Co., 206 F.3d at 417–18; Thomson–CSF, 64
(Tex.1995); Woodard v. S.W. States, Inc., 384 S.W.2d 674, F.3d at 778–79; In re FirstMerit Bank, 52 S.W.3d at 755. 9
675 (Tex.1964) (“Recovery on an express contract and on
quantum meruit are inconsistent.”). A party to a contract [19] In its quantum meruit claim against MacGregor,
may, however, seek alternative relief under both contract KBR seeks payment for services rendered. KBR provided
and quasi-contract theories. Pleading in the alternative services pursuant to its contract with Unidynamics. KBR's
does not defeat the effect of an arbitration clause that asserted right to payment therefore stems directly from
broadly covers all disputes between signatories that arise the KBR–Unidynamics contract, not the fabrication
out of the underlying agreement. But in this case, KBR subcontract. The fabrication subcontract includes no
is not a signatory to the fabrication subcontract between provision for paying KBR. In fact, KBR is effectively
precluded from asserting rights under that contract, Corpus Christi 1972, no writ) (discussing validity and
enforceability of warehouseman's lien).
which expressly provides that “Approved use of any
subcontractor creates no contractual relationship between
In this Court, MacGregor's sole argument for compelling
the subcontractor and [MacGregor].” 10 Thus, we
arbitration of KBR's lien-validity claims is that the claims
conclude that the court of appeals abused its discretion
require a determination of ownership, and thus, they are
to the extent it compelled KBR to arbitrate its quantum
“based on” the Title Agreement within the fabrication
meruit claim against MacGregor.
subcontract. 11 Ownership was, of course, a central
issue before and during the Paris arbitration. When the
[20] Having determined that KBR's quantum meruit
arbitration award resolved the ownership dispute, it also
claim is not subject to arbitration, we turn to KBR's
eliminated the only rationale that MacGregor has asserted
lien-validity claims. KBR sought a judicial declaration
thus far for arbitrating the liens' validity.
that it possessed valid constitutional and warehouseman's
statutory liens. See Tex. Const. art. XVI, § 37; Tex. Bus. &
We do not decide whether other arguments may exist to
Com.Code § 7.209(a)(1). The self-executing constitutional
compel KBR to arbitrate the validity of its liens. To the
lien attaches to buildings and special-order articles that
extent a lien dispute still remains, the trial court is in the
are made or repaired by mechanics, material men, and
best position to determine, on principles we have declared
artisans who have a direct contractual relationship with
today, whether it must be arbitrated.
the owner of the property. See Tex. Const. art. XVI,
§ 37; CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 240
(Tex.2002) (“[F]or constitutional liens that *742 are
self-executing, there are no technical requirements....”); V
First Nat'l Bank v. Whirlpool Corp., 517 S.W.2d 262,
268 (Tex.1974) (holding that “the constitutional lien on
Conclusion
manufactured chattels is available ... only upon articles
made especially for a purchaser pursuant to a special We conditionally grant mandamus relief and order the
order and in accordance with the purchaser's plans or court of appeals to vacate its order compelling KBR to
specifications”); Hayek v. W. Steel Co., 478 S.W.2d 786, “arbitrate all claims.” See 126 S.W.3d at 184. The writ will
790 (Tex.1972); Strang v. Pray, 89 Tex. 525, 35 S.W. 1054, issue only if the court of appeals fails to comply.
1056 (1896). The warehouseman's lien arises “against the
bailor on the goods covered by a warehouse receipt or
on the proceeds thereof in his possession for charges for
storage or transportation ..., insurance, labor, or charges Justice JOHNSON did not participate in the decision.
present or future in relation to the goods, and for expenses
All Citations
necessary for preservation of the goods....” Tex. Bus. &
Com.Code § 7.209(a)(1); see also Flores v. Didear Van 166 S.W.3d 732, 48 Tex. Sup. Ct. J. 678
& Storage Co., 489 S.W.2d 406, 407–09 (Tex.Civ.App.-
Footnotes
1 The term “Oy” for Finnish companies is an abbreviation of “osakeyhtiö” (“osake” means “share,” “yhtiö” means “society”).
See http://encyclopedia. laborlawtalk.com/Oy (last visited May 18, 2005, and available in Clerk of Court's file).
2 In October 2000, MacGregor and Unidynamics entered into another subcontract, under which Unidynamics agreed to
preassemble and install the elevator trunks. That subcontract is not at issue in this case.
3 The arbitration provision in ECE 188 provided: “Any dispute arising out of the Contract shall be finally settled, in
accordance with the Rules of Conciliation and Arbitration of the International Chamber of Commerce [“ICC”], by one or
more arbitrators designated in conformity with those Rules.”
4 See Tex. Const. art. XVI, § 37; Tex. Bus. & Com.Code § 7.209.
5 The parties agreed that the bond would be enforceable and payable in Texas, and that it would “constitute an unconditional
promise to pay upon demand accompanied by proof of Final Judgment adjudicating the validity and amount, if any, of
[KBR's] lien or liens against ... the collateral.”
6 As of the date of this opinion, the trial court has not acted on the court of appeals' orders. Proceedings have not resumed
in the trial court since the court of appeals ordered a stay on January 9, 2003. See 126 S.W.3d at 180–81.
7 Most federal courts, however, list only five of these theories, omitting third-party beneficiary as a separate ground. See
Local Union No. 38, Sheet Metal Workers' Int'l Ass'n v. Custom Air Sys., Inc., 357 F.3d 266, 268 (2d Cir.2004); Javitch
v. First Union Sec., Inc., 315 F.3d 619, 629 (6th Cir.2003); Fleetwood, 280 F.3d at 1076; Employers Ins. of Wausau v.
Bright Metal Specialties, Inc., 251 F.3d 1316, 1322 (11th Cir.2001); Bel–Ray Co. v. Chemrite (Pty) Ltd., 181 F.3d 435,
446 (3d Cir.1999); Int'l Paper Co., 206 F.3d at 417; Thomson–C.S.F., 64 F.3d at 776.
8 While not all federal courts use the phrase “direct benefits estoppel,” we adopt that terminology from Bridas to describe
this form of estoppel. See 345 F.3d at 361–62.
9 Federal courts have also applied “direct benefits estoppel” to bind “non-signatories who, during the life of the contract,
have embraced the contract despite their non-signatory status but then, during litigation, attempt to repudiate the
arbitration clause in the agreement.” E.I. DuPont de Nemours & Co., 269 F.3d at 200; see also InterGen, 344 F.3d at 146
(holding equitable estoppel theory inapplicable to non-signatory that did not seek to derive direct benefits from contracts
“during their currency”); Am. Bureau of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir.1999) (holding
non-signatory who received lower insurance rates and ability to sail under French flag due to contract was bound by
arbitration clause within contract); In re VMS Ltd. P'ship Sec. Litig., 26 F.3d 50, 52 (7th Cir.1994) (holding wife bound by
arbitration clause that only her husband signed as she accepted benefits of investment services). We do not reach this
application of “direct benefits estoppel” here. MacGregor's argument for arbitration rests not on KBR's actions during the
life of the fabrication subcontract, but on KBR's attempt to benefit from that contract through litigation.
10 See MCI Telecomms. Corp. v. Tex. Utils. Elec. Co., 995 S.W.2d 647, 651 (Tex.1999) (“The intention to contract or confer
a direct benefit to a third party must be clearly and fully spelled out or enforcement by the third party must be denied.”);
City of LaPorte v. Taylor, 836 S.W.2d 829, 831 (Tex.App.-Houston [1st Dist.] 1992, no writ) (“Generally, in construction
contracts, in the absence of an express agreement to the contrary, a subcontractor is not in privity with the owner....”).
11 KBR's petition included the following:
29. Ownership. Given the Defendants' competing claims known to Plaintiff by the Defendants, Plaintiff seeks a
declaration from the Court as to which Defendant(s) possesses the ownership rights, title and interest in the elevator
shaft fabrications, component parts and other materials....
30. Constitutional Lien. Subject to the determination of ownership, Plaintiff also seeks a judicial declaration that
Plaintiff possesses a valid constitutional lien to the elevator shaft fabrications, component parts and other materials
pursuant to Article 16, § 37 of the Texas Constitution.
31. Statutory Lien. Subject to the determination of ownership, Plaintiff also seeks a judicial declaration that Plaintiff
possesses a valid statutory lien to the elevator shaft fabrications, component parts and other materials pursuant to
§ 7.209 of the Texas Business and Commerce Code.
(Emphasis added.)
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Holdings: The Supreme Court, Johnson, J., held that: 101 Cases that cite this headnote
[1] under Texas law, the arbitration provision in an [3] Alternative Dispute Resolution
agreement between an employee and his employer, signed Scope and Standards of Review
before the employee's death and requiring arbitration
Whether an arbitration agreement is
pursuant to the Federal Arbitration Act, requires the
enforceable is subject to de novo review.
employee's wrongful death beneficiaries to arbitrate their
wrongful death claims against the employer even though 58 Cases that cite this headnote
they did not sign the agreement, disapproving of In re
Kepka, 178 S.W.3d 279, and Gomez v. Zardenetta, 1998
[4] Alternative Dispute Resolution
WL 19858, and
Matters to Be Determined by Court
[2] it was for the arbitrator, rather than the court, to Under the Federal Arbitration Act (FAA),
resolve beneficiaries' claim that entire contract signed by whether an arbitration agreement binds a
employee, including the arbitration clause, was invalid. nonsignatory is a gateway matter to be
determined by courts rather than arbitrators
unless the parties clearly and unmistakably
Writ conditionally granted. provide otherwise. 9 U.S.C.A. § 1 et seq.
[14] Alternative Dispute Resolution Fidel Rodriguez Jr., San Antonio, Leo D. Figueroa, for
Existence and Validity of Agreement real party in interest.
It was for the arbitrator, rather than Opinion
the court, to resolve claim by employee's
wrongful death beneficiaries that employer Justice JOHNSON delivered the opinion of the Court.
could not compel them to arbitrate their
wrongful death claims pursuant to “Election Under Texas law, wrongful death beneficiaries are
of Comprehensive Benefits, Indemnity, and generally bound by a decedent's pre-death contractual
Arbitration Agreement” that employee had agreement because of the derivative nature of their claims.
executed with employer, which employer did In this case, we consider whether the arbitration provision
not provide workers' compensation insurance in an agreement between a decedent and his employer
but provided an occupational injury plan; requires the employee's wrongful death beneficiaries to
beneficiaries did not specifically challenge arbitrate their wrongful death claims against the employer
validity of arbitration clause and instead even though they did not sign the agreement. We hold that
broadly challenged the contract by asserting it does.
that the contract as a whole was invalid
because the indemnity clause violated the
Labor Code's provision that an employee's I. Background
cause of action against a non-subscriber
employer to recover damages for personal Labatt Food Service, L.P. does not provide workers'
injuries or death sustained in the course and compensation insurance to cover its employees in the
scope of employment could not be waived event of on-the-job injuries. Rather, it provides an
by an employee before the employee's injury “occupational injury plan” (the plan) under which
or death, with beneficiaries also asserting its employees may elect to participate. To become
that the arbitration clause was not severable. participants in the plan, employees sign an agreement
V.T.C.A., Labor Code § 406.033(e). entitled “Election of Comprehensive Benefits, Indemnity,
and Arbitration Agreement.” The agreement contains
24 Cases that cite this headnote several numbered paragraphs. Of primary relevance to
this proceeding are three of those paragraphs. Paragraph
[15] Alternative Dispute Resolution three provides that the employee elects to be covered
Existence and Validity of Agreement under the plan “individually and on behalf of heirs
and beneficiaries.” Paragraph three also provides that
binds the nonsignatory wrongful death beneficiaries of a beneficiaries are bound to arbitrate due to the derivative
party to the agreement. nature of their claims.
entitled to bring suit if the decedent would have been v. Boehmer, 700 S.W.2d 687, 690 (Tex.App.-Corpus
entitled to maintain an action for the injury. Id. at 991– Christi 1985, no writ) (release and settlement signed by
92. The Court held that although the beneficiaries were automobile accident victim barred survival and wrongful
not parties to the release, the contractual release signed death actions after victim died from injuries sustained in
by Thompson barred their wrongful death claims because accident).
they stood in the same legal shoes as Thompson and were
subject to the same contractual defenses. Id. at 992. [12] Despite this line of authority, the wrongful death
beneficiaries argue that agreements to arbitrate are
In Sullivan–Sanford Lumber Co., the Court again held different than other contracts, and they should not be
that a pre-death contractual release signed by a decedent bound by Dancy's agreement. We reject their argument.
barred a subsequent action by his wrongful death If we agreed with them, then wrongful death beneficiaries
beneficiaries. 155 S.W. at 180. The Sullivan–Sanford in Texas would be bound by a decedent's contractual
Lumber Company allowed non-employees to ride their agreement that completely disposes of the beneficiaries'
trains without charge but issued them boarding passes claims, but they would not be bound by a contractual
containing the following language: agreement that merely changes the forum in which *646
the claims are to be resolved. Not only would this be an
The user of this pass rides only anomalous result, we believe it would violate the FAA's
on the following conditions: (1) express requirement that states place arbitration contracts
This permit is accepted with the on equal footing with other contracts. 9 U.S.C. § 2; see
understanding that the person using Volt Info. Scs., Inc. v. Bd. of Trs. of Leland Stanford Junior
it assumes all risk of injury of Univ., 489 U.S. 468, 474, 109 S.Ct. 1248, 103 L.Ed.2d 488
any character while using the same (1989).
and hereby waives any claim for
damages in case of injury.... [13] The beneficiaries also argue that they should not
be bound because Dancy did not have the authority to
135 S.W. 635, 636 (Tex.Civ.App.-Texarkana 1911), rev'd,
bind them to the arbitration agreement when the wrongful
106 Tex. 4, 155 S.W. 179 (1913). J.A. Watson was riding a
death cause of action actually belongs to the surviving
train courtesy of a boarding pass when the train collided
spouse, children, and parents of the deceased. While it
with another train killing Watson. Id. His wife and
is true that damages for a wrongful death action are for
children sued the Lumber Company. Id. The Court held,
the exclusive benefit of the beneficiaries and are meant to
as it did in Thompson, that the beneficiaries were not
compensate them for their own personal loss, the cause of
entitled to recover under the Wrongful Death Act because
action is still entirely derivative of the decedent's rights.
Watson himself could not have recovered for his injuries
TEX. CIV. PRAC. & REM.CODE §§ 71.003(a), .004(a);
if he had survived, and his wrongful death beneficiaries
Russell, 841 S.W.2d at 347. Thus, regardless of the fact
were subject to the same contractual defenses that Watson
that Dancy's beneficiaries are seeking compensation for
would have been subject to had he sued. 155 S.W. at 180.
their own personal loss, they still stand in Dancy's legal
shoes and are bound by his agreement.
Consistent with our holdings in Thompson and Watson,
many courts of appeals have held that a decedent's
In the alternative, the beneficiaries urge us to circumvent
pre-death contract may limit or bar a subsequent
the derivative claim rule by holding that wrongful
wrongful death action. See Newman v. Tropical Visions,
death actions are analogous to and should be treated
Inc., 891 S.W.2d 713, 719 (Tex.App.-San Antonio
similarly to loss of consortium claims. A tort action
1994, writ denied) (pre-injury liability release signed
seeking damages for loss of consortium, however, is
by decedent before taking scuba diving lessons barred
fundamentally different than a statutory wrongful death
subsequent wrongful death and survival action against
action. If Dancy had suffered a severe but nonfatal
scuba instructor); Winkler v. Kirkwood Atrium Office
injury, his children would have been entitled to bring a
Park, 816 S.W.2d 111, 115 (Tex.App.-Houston [14th
claim to recover for the loss of care, guidance, love, and
Dist.] 1991, writ denied) (release executed by decedent
before joining health club precluded his beneficiaries from protection ordinarily provided by their father. 1 Reagan
bringing wrongful death and survival action); McClellan v. Vaughn, 804 S.W.2d 463, 466 (Tex.1990). Their lost
consortium claims would be derivative in the sense that however, resolve the issue based on what the contracting
the beneficiaries would be required to establish Labatt parties intended. Allen v. Pacheco, 71 P.3d 375, 379–80
was liable for their father's underlying injury in order to (Colo.2003) (beneficiaries bound when contract reflects
recover damages. Whittlesey v. Miller, 572 S.W.2d 665, intent of the parties to bind beneficiaries); Herbert v.
668 (Tex.1978). But loss of consortium claims are not Superior Court, 169 Cal.App.3d 718, 215 Cal.Rptr. 477,
entirely derivative as are wrongful death claims; instead, 480 (1985) (beneficiaries bound when contract reflects
they are separate and independent claims distinct from intent of the parties to bind beneficiaries).
the underlying action. Id. at 667, 669. Thus, a settlement
agreement signed by an injured spouse does not bar a A review of the cases decided based on statutory language
subsequent loss of consortium claim by the non-injured indicates that courts in states where wrongful death
spouse. Id. at 669. actions are recognized as independent and separate causes
of action are more likely to hold that the beneficiaries are
A wrongful death action is different than a loss of not bound by a decedent's agreement to arbitrate, see, e.g.,
consortium claim because the Wrongful Death Act Bybee, 189 P.3d at 46–47; Finney, 193 S.W.3d at 395, while
expressly conditions the beneficiaries' claims on the beneficiaries in states where wrongful death actions are
decedent's right to maintain suit for his injuries. TEX. wholly derivative in nature are generally held to be bound
CIV. PRAC. & REM.CODE § 71.003(a); see Russell, by a decedent's arbitration agreement. See Cleveland, 942
841 S.W.2d at 346. The Legislature created an entirely So.2d at 118–19; Ballard, 327 N.W.2d at 372; Bybee,
derivative cause of action when it enacted the Wrongful 189 P.3d at 46 (“Courts that compel nonsignatory heirs
Death Act, and Dancy's beneficiaries are bringing an to abide by arbitration agreements often do so because
entirely derivative claim. Their wrongful death action is under their law a wrongful death cause of action is wholly
not in the same category as a loss of consortium claim derivative of and dependent on the underlying personal
for purposes of derivative status analysis. We decline injury claim.”). Our holding is consistent with those in the
their invitation to circumvent the clear language of the majority of states that have statutes similar to the Texas
Wrongful Death Act. statute and have considered the issue.
In addition, other states have resolved this issue based on Some Texas courts of appeals have held that wrongful
whether the wrongful death action is an independent or death beneficiaries are not bound by a decedent's
derivative cause of action under state law. See Cleveland agreement to arbitrate. See In re Kepka, 178 S.W.3d 279,
v. Mann, 942 So.2d 108, 118–19 (Miss.2006) (beneficiaries 288 (Tex.App.-Houston [1st Dist.] 2005, orig. proceeding
bound by decedent's arbitration agreement because [mand. dismissed] ); Gomez v. Zardenetta, No. 04–97–
under Mississippi Wrongful Death Act, beneficiaries may 0019–CV, 1998 WL 19858, at *7 (Tex.App.-San Antonio
bring suit only if decedent would have been entitled Jan.21, 1998, no pet.) (not designated for publication). To
to bring action immediately before death); Briarcliff the extent the holdings of courts of appeals conflict with
Nursing Home, Inc. v. Turcotte, 894 So.2d 661, 665 our decision, we disapprove of them.
(Ala.2004) (administrator of estate bringing wrongful
death claim bound because administrator stands in
legal shoes of decedent); Ballard v. Sw. Detroit *647
III. The Indemnity Clause
Hosp., 119 Mich.App. 814, 327 N.W.2d 370, 372 (1982)
(administrator bringing wrongful death action bound [14] The Labor Code provides that an employee's cause
by arbitration agreement because wrongful death is of action against a non-subscriber employer to recover
a derivative cause of action under Michigan law); damages for personal injuries or death sustained in the
but see Bybee v. Abdulla, 189 P.3d 40, 43 (Utah course and scope of employment
2008) (beneficiaries not bound because wrongful death
is an independent cause of action under Utah law); may not be waived by an employee
Finney v. Nat'l Healthcare Corp., 193 S.W.3d 393, 395 before the employee's injury or
(Mo.Ct.App.2006) (beneficiary not bound because under death. Any agreement by an
Missouri law the wrongful death act creates a new cause employee to waive [such] a cause
of action belonging to the beneficiaries). Other states, of action ... before the employee's
injury or death is void and We recently considered the first type of challenge in
unenforceable. In re Poly–America, L.P., 262 S.W.3d 337 (Tex.2008).
There, Johnny Luna and his employer, Poly–America,
TEX. LAB.CODE § 406.033(e). The beneficiaries entered into a five-page-long arbitration agreement.
challenge the validity of the entire agreement on the Id. at 345, 360. After Luna was fired, he sued for
basis that the indemnification clause in paragraph three retaliatory discharge and sought a declaratory judgment
is in substance a pre-injury waiver that violates Labor that the arbitration agreement was unenforceable because
Code section 406.033(e). They, however, specify that their it contained provisions that violated public policy and
challenge to the agreement's validity “is not dependent on were unconscionable. Id. at 345. One of his arguments
or directed solely to the arbitration provision.” Instead, was that provisions prohibiting the arbitrator from
they argue that the contract as a whole, including its awarding punitive damages or ordering reinstatement
arbitration clause, is rendered invalid by the allegedly violated Labor Code provisions authorizing such relief.
illegal indemnity clause because the clause is not severable. Id. at 352. We determined that those provisions were
unconscionable and void, but they were severable and
[15] There are two types of challenges to an arbitration did not invalidate the rest of the agreement to arbitrate.
provision: (1) a specific challenge to the validity of Id. at 359–60. We stated that “where a particular waiver
the arbitration agreement or clause, and (2) a broader of substantive remedies or other provision of a contract
challenge to the entire contract, either on a ground that is unconscionable—independent of the agreement to
directly affects the entire agreement, or on the ground arbitrate—it will be unenforceable even though included
that one of *648 the contract's provisions is illegal in an agreement to arbitrate.” Id. at 349. But that
and renders the whole contract invalid. Buckeye Check statement must be read in context of the case as it was
Cashing, Inc. v. Cardegna, 546 U.S. 440, 444, 126 S.Ct. presented to us. We were considering only provisions
1204, 163 L.Ed.2d 1038 (2006). A court may determine that were part of the arbitration agreement. There was
the first type of challenge, but a challenge to the validity no challenge to an invalid or illegal provision outside
of the contract as a whole, and not specifically to the of the arbitration agreement because the entire contract
arbitration clause, must go to the arbitrator. Id. at 448– at issue was an arbitration agreement. Because we were
49, 126 S.Ct. 1204; see Prima Paint, 388 U.S. at 403– considering the various challenged provisions only as they
04, 87 S.Ct. 1801 (claim of fraud in the inducement of were part of the arbitration agreement itself, the Court
arbitration clause itself may be adjudicated by court, but could properly adjudicate Luna's challenge. Buckeye, 546
court may not consider claim of fraud in the inducement U.S. at 444, 126 S.Ct. 1204; Prima Paint, 388 U.S. at 409,
of the contract generally); Forest Oil Corp. v. McAllen, 87 S.Ct. 1801. At oral argument in this case, Labatt urged
268 S.W.3d 51, 56 (Tex.2008) (“[T]he party opposing the Court to similarly sever the indemnity clause if we
arbitration must show that the fraud relates to the found it violated Labor Code section 406.033(e). But as
arbitration clause specifically, not to the broader contract we explain below, we do not reach the issue of whether
in which it appears.”); Perry Homes v. Cull, 258 S.W.3d the indemnity clause is void because it is a question for the
580, 589 (Tex.2008) (“[A]rbitrators generally must decide arbitrator.
defenses that apply to the whole contract, while courts
decide defenses relating solely to the arbitration clause.”); The case now before us presents a challenge of the second
In re Merrill Lynch, 235 S.W.3d at 190 & n. 12 (noting type that we refer to above: a broad challenge to the
that a defense relating to the parties' entire contract rather entire contract on the ground that one of the contract's
than the arbitration clause alone is a question for the provisions is illegal and renders the whole contract invalid,
arbitrators); In re FirstMerit Bank, 52 S.W.3d at 756 but not specifically challenging the arbitration clause. The
(noting that the defenses of unconscionability, duress, Supreme Court addressed a similar challenge in *649
fraudulent inducement, and revocation must specifically Buckeye, 546 U.S. 440, 126 S.Ct. 1204, 163 L.Ed.2d
relate to the arbitration part of a contract and not the 1038. There, Buckeye Check Cashing operated a deferred
contract as a whole if they are to defeat arbitration, and deposit service by which its customers obtained cash
that validity of an arbitration provision is a separate issue in exchange for the customer's check in the amount
from validity of the whole contract). received plus a finance charge. Id. at 442, 126 S.Ct.
1204. For each transaction, Buckeye's customers signed
a “Deferred Deposit and Disclosure Agreement,” which Because of our disposition of the case, we do not address
Labatt's alternative argument that the FAA preempts
included an arbitration clause. Id. Buckeye customers
Labor Code section 406.033(e) to the extent the state
brought a class action suit in Florida state court. Id. at
statute would prevent or restrict enforcement of the
443, 126 S.Ct. 1204. They alleged the finance charges
arbitration provision. See In re Bison Bldg. Materials,
in the agreement violated Florida lending and consumer
Ltd., Nos. 01–07–00003–CV, 01–07–00029–CV, 2008 WL
protection laws. Id. Buckeye moved to compel arbitration,
2548568, at *8 (Tex.App.-Houston [1st Dist.] June 26,
but the plaintiffs argued the contract as a whole, including
2008, orig. proceeding) (mem.op.); In re Border Steel,
the arbitration clause, was rendered invalid by the
Inc., 229 S.W.3d 825, 831–32 (Tex.App.-El Paso 2007,
usurious finance charges. Id. The trial court denied the
orig. proceeding); In re R & R Pers. Specialists of Tyler,
motion to compel, holding that the court rather than an
Inc., 146 S.W.3d 699, 703–04 (Tex.App.-Tyler 2004, orig.
arbitrator should resolve the claim that a contract is void
proceeding).
and illegal. Id. The Florida Supreme Court affirmed, but
the United States Supreme Court reversed. Id. at 449, 126
S.Ct. 1204. The United States Supreme Court held that
“regardless of whether the challenge is brought in federal IV. Conclusion
or state court, a challenge to the validity of the contract
as a whole, and not specifically to the arbitration clause, If Dancy had sued Labatt for his own injuries immediately
must go to the arbitrator.” Id. prior to his death, he would have been compelled to
arbitrate his claims pursuant to his agreement. His
Like the plaintiffs in Buckeye, the beneficiaries in this beneficiaries, therefore, must arbitrate as their right to
case challenge the contract on the ground that an illegal maintain a wrongful death action is entirely derivative of
clause renders the whole contract void. The beneficiaries Dancy's rights. The trial court clearly abused its discretion
challenge the arbitration clause only in the sense that by refusing to compel arbitration.
they also challenge all parts of the agreement because the
parts comprise the whole. But, unless a challenge is to the We conditionally grant Labatt's petition for writ of
arbitration clause or arbitration agreement itself, as it was mandamus. The trial court is directed to enter an order
in In re Poly–America, the question of a contract's validity compelling arbitration of the beneficiaries' claims. We are
is for the arbitrator and not the courts. Accordingly, the confident the trial court will comply, and the writ will issue
beneficiaries' challenge to the validity of the agreement only if it fails to do so.
must be determined by the arbitrator, and we do not
address it. Buckeye, 546 U.S. at 445–46, 126 S.Ct. 1204;
All Citations
In re Merrill Lynch, 235 S.W.3d at 190 & n. 12; In re
FirstMerit Bank, 52 S.W.3d at 756, 758. 279 S.W.3d 640, 28 IER Cases 1268, 52 Tex. Sup. Ct. J.
352
Footnotes
1 Dancy's parents would not have been entitled to recover lost consortium damages had he survived his injuries. See
Roberts v. Williamson, 111 S.W.3d 113, 119 (Tex.2003).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Buyers' contention that seller represented that accordance with the applicable rules of the
the purchase of their mobile home would not American Arbitration Association, to initiate
go through if they did not sign the arbitration the arbitration process against itself or assist
agreement would not support claim of fraud buyers in doing so, and thus, seller's failure
or misrepresentation in the formation of the to initiate arbitration in response to buyers'
agreement, in absence of showing that such letters requesting arbitration was not waiver
representations were false. of seller's right to arbitrate.
1 Cases that cite this headnote 9 Cases that cite this headnote
arising out of sale in accordance with the and requested that they arrange an arbitration hearing. 1
applicable rules of the American Arbitration Receiving no response, the Brandons sued Oakwood for
Association, placed burden of initiating any rescission of the contract.
arbitration on the claimant seeking such
arbitration. Oakwood moved to compel arbitration under the
Agreement. In support of its motion, Oakwood submitted
5 Cases that cite this headnote
a copy of the Agreement, together with an affidavit
attesting that it was voluntarily executed and negotiated
[16] Mandamus at arm's length. The Brandons responded, claiming
Remedy by Appeal or Writ of Error that the Agreement was unconscionable and void for
Party erroneously denied the right to arbitrate fraud, duress, and misrepresentation. In support of their
under the Federal Arbitration Act (FAA) contentions, the Brandons submitted affidavits stating
has no adequate remedy on appeal, and that they were told “we had to sign [the Agreement] or
mandamus relief is appropriate. 9 U.S.C.A. §§ we couldn't finance the house,” and “we had to sign the
1–16. arbitration provision or we could not take possession of
the house.” The Brandons also claimed Oakwood waived
16 Cases that cite this headnote the right to compel arbitration by failing to respond to
their letters requesting an arbitration hearing. The trial
court denied Oakwood's motion to compel arbitration.
The court of appeals concluded that the Brandons'
Attorneys and Law Firms uncontroverted affidavits provided sufficient evidence for
the trial court's summary disposition of the motion to
*572 John A. Seib, Jr., Jeffrey Richard Erler, Shawn K. compel arbitration, and denied Oakwood's petition for
Brady, Dallas, for Relator. mandamus. ––– S.W.2d ––––, 1998 WL 210813. Oakwood
Taylor Hancock, Montgomery, Cami L. Boyd, Dallas, for now petitions this Court for mandamus relief. 2
Respondent.
[1] [2] A party seeking to compel arbitration must
establish the existence of an arbitration agreement, and
show that the claims raised fall within the scope of that
*573 OPINION
agreement. See Cantella & Co. v. Goodwin, 924 S.W.2d
PER CURIAM. 943, 944 (Tex.1996). Once the party establishes a claim
within the arbitration agreement, the trial court must
In this original proceeding, Oakwood Mobile Homes, compel arbitration and stay its own proceedings. Id.
Inc. seeks relief from the denial of its motion to compel
arbitration. Because the trial court abused its discretion in [3] [4] Here, Oakwood met its burden of presenting
denying arbitration, and because Relator has no adequate evidence of an arbitration agreement that governs the
remedy by appeal, we conditionally grant the writ of dispute between the parties. See Weekley Homes, Inc.
mandamus. v. Jennings, 936 S.W.2d 16, 18 (Tex.App.—San Antonio
1996, writ denied) (per curiam). The burden then shifted
Shirley and David Brandon purchased a mobile home to the Brandons to present evidence that the Agreement
from Oakwood. Three days before completing the was procured in an unconscionable manner, induced or
sales transaction, and again on the closing date, the procured by fraud or duress, 3 or that Oakwood had
Brandons signed Oakwood's Arbitration Agreement. This waived arbitration under the Agreement. Id. Oakwood
Agreement required the parties to submit all disputes contends the Brandons presented no evidence to support
arising out of the sale to binding arbitration under their claims; therefore, they did not satisfy their burden
American Arbitration Association rules. When they and the trial court erred in denying arbitration. We agree.
began experiencing problems with the mobile home, the
Brandons twice wrote to Alan Warren and Charles Boyner
of Oak Creek Homes, the manufacturer of the home,
[5] [6] To establish fraud in the formation of an arbitration rights. See In re Bruce Terminix Co., 988
S.W.2d 702, 704 (Tex.1998); Prudential Sec., Inc. v.
arbitration agreement, a party must *574 prove, inter
Marshall, 909 S.W.2d 896, 898 (Tex.1995). Whether a
alia, that (1) a material misrepresentation was made,
party's conduct waives its arbitration rights is a question of
and (2) it was false. See Green Int'l, Inc. v. Solis, 951
law. See In re Bruce Terminix Co., 988 S.W.2d at 703-704.
S.W.2d 384, 390 (Tex.1997); see also Perry v. Thomas,
We should resolve any doubts about waiver in favor of
482 U.S. 483, 492 n. 9, 107 S.Ct. 2520, 96 L.Ed.2d
arbitration. See Moses H. Cone Mem'l Hosp. v. Mercury
426 (1987) (noting that under the FAA, state law
Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d
should be applied to assess the validity of arbitration
765 (1983).
agreements “if that law arose to govern issues concerning
the validity, revocability, and enforceability of contracts
[14] [15] Waiver may be found when it is shown that
generally”). The Brandons' fraud and misrepresentation
a party acted inconsistently with its right to arbitrate
claims rest solely on their contention that Oakwood
and such actions prejudiced the other party. See In re
represented the sale would not go through if they did not
Bruce Terminix Co., 988 S.W.2d at 704. The Brandons
sign the Agreement. Because neither party asserts that
contend Oakwood's failure to respond to their letters
these representations were false, they cannot support the
requesting arbitration was inconsistent with Oakwood's
Brandons' fraud or misrepresentation claims.
right to arbitrate. However, in In re Bruce Terminix Co.,
[7] [8] [9] In support of their claims of we held that, absent an agreement to the contrary, “a
party against whom a claim is asserted does not waive
unconscionability and duress, the Brandons contend the
its right to arbitrate by failing to initiate arbitration of
Agreement “is a classic example of a contract of adhesion
that claim.” In re Bruce Terminix Co., 988 S.W.2d at
where one party ... had absolutely no bargaining power
706. It was never Oakwood's burden under the Agreement
or ability to change the contract terms.” Even if this
to initiate the arbitration process against itself or assist
contention is true, however, adhesion contracts are not
the Brandons in doing so. The Agreement specifically
automatically unconscionable or void. See Dillard v.
provides that the parties shall arbitrate in accordance
Merrill Lynch, Pierce, Fenner & Smith, Inc., 961 F.2d
with “the applicable rules of the American Arbitration
1148, 1154 (5 th Cir.1992), cert. denied, 506 U.S. 1079,
Association.” 4 By agreeing to these rules, the parties
113 S.Ct. 1046, 122 L.Ed.2d 355 (1993) (citing 6A
placed the burden of initiating arbitration on the claimant,
ARTHUR CORBIN, CONTRACTS § 1376, at 20–21
in this instance the Brandons. Accordingly, Oakwood's
(1962) & 7–9 (Supp.1991)). Moreover, “there is nothing
failure to initiate arbitration in response to the Brandons'
per se unconscionable about arbitration agreements.”
letters is not a waiver as a matter of law.
EZ Pawn, 934 S.W.2d at 90; see Emerald Tex., Inc.
v. Peel, 920 S.W.2d 398, 402–403 (Tex.App.—Hous. [1
[16] We conclude that the trial court abused its discretion
Dist.] 1996, no writ) (holding that to find the arbitration
by denying Oakwood's motion to compel arbitration. A
provision unconscionable under the evidence presented
party erroneously *575 denied the right to arbitrate
would negate the public policy in favor of arbitration).
under the FAA has no adequate remedy on appeal, and
The Brandons did not present the trial court with evidence
mandamus relief is appropriate. See Jack B. Anglin Co. v.
of unconscionability or duress in their affidavits. See
Tipps, 842 S.W.2d 266, 272–73 (Tex.1992). Accordingly,
Tenneco Oil Co. v. Gulsby Eng'g, Inc., 846 S.W.2d
without hearing oral argument, TEX.R.APP. P. 2.8(c),
599, 604 (Tex.App.—Hous. [14 Dist.] 1993, writ denied)
we conditionally grant the writ of mandamus. We are
(defining “duress” as “a threat to do some act which the
confident the trial court will grant Oakwood's motion to
threatening party has no legal right to do”). Accordingly,
compel arbitration in accordance with this opinion. We
the Brandons failed to meet their burden.
instruct the clerk to issue the writ only if the trial court
[10] [11] [12] [13] The Brandons next contendfails to do so.
Oakwood waived its right to arbitrate when it failed to
respond to their requests for arbitration. Because public All Citations
policy favors resolving disputes through arbitration, there
is a strong presumption against the waiver of contractual 987 S.W.2d 571, 42 Tex. Sup. Ct. J. 377
Footnotes
1 Although there is some confusion in the record as to which entity, Oak Creek or Oakwood, employed Warren and Boyner,
this determination is not material to our analysis.
2 In Texas, mandamus relief is available to a party who is improperly denied arbitration under an agreement subject to the
Federal Arbitration Act (FAA), 9 U.S.C. §§ 1–16. See EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 88 (Tex.1996). Neither
party disputes the applicability of the FAA.
3 As the court of appeals correctly notes in its opinion, whether the terms and conditions of an arbitration agreement
are themselves unconscionable is a matter which must be submitted to the designated arbitrator. Here, however, the
Brandons complain of procedural unconscionability that relates to the actual making or inducement of the Arbitration
Agreement. Claims of procedural unconscionability are reserved for judicial review. See Prima Paint Corp. v. Flood &
Conklin Mfg. Co., 388 U.S. 395, 403–404, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1966) (relying on FAA, 9 U.S.C. § 4); In re
Foster Mold, Inc., 979 S.W.2d 665, 667–68 (Tex.App.—El Paso 1998) (orig.proceeding).
4 Rule 6(a) of the AAA's Commercial Arbitration Rules states the procedure to be followed by the initiating party or
“claimant.”
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[3] evidence of two invoices from other arbitrations was 3 Cases that cite this headnote
not some evidence in support of finding that arbitration
agreements were unconscionable, and [4] Alternative Dispute Resolution
Preemption
[4] claim that agreement violated Texas Home Solicitation
Alternative Dispute Resolution
Act (THSA) was to be determined by arbitrator.
Operation and Effect
Commerce
Writs granted in part and denied in part. Arbitration
Choice of law provision in contracts between Civil Practice & Remedies Code § 171.002(a)
homeowners and foundation repair company, (2).
stating that disputes arising out of contracts
were to be resolved by mandatory and 11 Cases that cite this headnote
binding arbitration administered pursuant to
arbitration laws in state of homeowners, [6] Alternative Dispute Resolution
did not preclude application of Federal Validity
Arbitration Act (FAA) provision, which
Arbitration agreements are enforceable under
preempted state law that would otherwise
the Federal Arbitration Act (FAA) only if
render arbitration agreements unenforceable
they meet the requirements of the general
in contract involving interstate commerce,
contract law of the applicable state. 9
to provision of Texas General Arbitration
U.S.C.A. § 2.
Act (TAA), which rendered arbitration
agreements unenforceable if they contained 4 Cases that cite this headnote
arbitration clauses for services in which total
consideration to be furnished was not more
[7] Alternative Dispute Resolution
than $50,000 and agreements were not in
What law governs
writing and signed by parties and parties'
counsel, in homeowners' action against When determining whether an agreement
company, absent any provision specifically to arbitrate is valid under the Federal
excluding federal law. 9 U.S.C.A. § 2; Arbitration Act (FAA), state law, whether of
V.T.C.A., Civil Practice & Remedies Code § legislative or judicial origin, is applicable if
171.002(a)(2). that law arose to govern issues concerning
the validity, revocability, and enforceability of
12 Cases that cite this headnote contracts generally. 9 U.S.C.A. § 2.
the circumstances existing when the parties so as to be unconscionable, that party bears
made the contract. the burden of showing the likelihood of
incurring such costs; once met, the burden
6 Cases that cite this headnote shifts to the party seeking arbitration who
must come forward with contrary evidence.
[10] Alternative Dispute Resolution
5 Cases that cite this headnote
Unconscionability
There is nothing per se unconscionable about
arbitration agreements. [14] Alternative Dispute Resolution
Evidence
4 Cases that cite this headnote Evidence of the risk of possible costs of
arbitration is insufficient evidence of the
[11] Alternative Dispute Resolution prohibitive cost of the arbitration forum,
Validity for purposes of determining whether an
arbitration agreement is unconscionable; for
Excessive costs imposed by an arbitration
evidence to be sufficient, it must show that
agreement render a contract unconscionable
excessive arbitration fees are likely to be
if the costs prevent a litigant from effectively
charged.
vindicating his or her rights in the arbitral
forum. 17 Cases that cite this headnote
13 Cases that cite this headnote
[15] Alternative Dispute Resolution
Evidence
[12] Alternative Dispute Resolution
Unconscionability Parties seeking to invalidate an arbitration
agreement on the ground of prohibitive
In determining whether an arbitration
cost of arbitration need not actually
agreement is unconscionable based on
incur the cost of arbitration in order to
the ground that arbitration would be
demonstrate excessiveness, but must at least
prohibitively expensive, the analysis evaluates
provide evidence of the likely cost of
whether the arbitral forum in a particular
their particular arbitration, through invoices,
case is an adequate and accessible substitute
expert testimony, reliable cost estimates, or
to litigation, which in turn requires a case-
other comparable evidence.
by-case analysis that focuses, among other
things, upon the claimant's ability to pay the 11 Cases that cite this headnote
arbitration fees and costs, the expected cost
differential between arbitration and litigation
in court, and whether that cost differential [16] Alternative Dispute Resolution
is so substantial as to deter the bringing of Evidence
claims; the key factor is not where the cost to Evidence of two invoices from similar disputes
pursue the claim goes, but what the total cost showing claims worth between approximately
to the claimant to pursue the claim is. $75,000 to $200,000, and arbitration costs
between approximately $11,000 to $35,000,
15 Cases that cite this headnote did not constitute some evidence to support
finding that homeowners would be charged
[13] Alternative Dispute Resolution excessive fees to arbitrate their claims
Evidence against foundation repair company for
alleged improper foundation repair, as
When a party seeks to invalidate an
required to invalidate arbitration agreements
arbitration agreement on the ground that
between parties on ground of substantive
arbitration would be prohibitively expensive
[17] Alternative Dispute Resolution Olshan Foundation Repair Company filed these petitions
Existence and validity of agreement for writs of mandamus in four different cases in which
three separate trial courts denied Olshan's pleas in
Claim of homeowners, who entered into
abatement, refusing to compel arbitration of consumer
arbitration agreement with foundation repair
claims against it. Three different courts of appeals
company, that agreement violated Texas
also declined to order the disputes to arbitration. We
Home Solicitation Act (THSA) by failing
consolidated these cases for argument and now issue
to include in agreements certain language
a consolidated opinion. Because the Texas General
regarding cancellation and that such violation
Arbitration Act (TAA), and not the Federal Arbitration
rendered agreement and arbitration clauses
Act (FAA), governs the arbitration dispute in one of
void, was to be determined by arbitrator,
the cases (Waggoner, No. 09–0474), we deny Olshan
rather than trial court, in action by
mandamus relief in that case. We conclude that for the
homeowners against company arising out of
other three cases, the trial courts erred in holding that
alleged improper foundation repairs, as trial
the TAA governs the arbitrations, there is no evidence
court could consider only issues relating to
that the arbitration agreements were unconscionable as a
making and performance of agreement to
matter of law, and all other disputed issues are questions
arbitrate. V.T.C.A., Bus. & C. §§ 601.002(a),
for the arbitrator. Because the trial court erred by denying
601.052, 601.053, 601.201.
Olshan's pleas in abatement in the arbitrations governed
2 Cases that cite this headnote by the FAA, we conditionally grant mandamus relief in
those three actions.
*885 Stephan B. Rogers, Rogers & Moore, Boerne, Olshan is a national company that repairs residential
Duncan Roderick MacRae II, Henslee Schwartz, LLP, home foundations. In 1998, Craig and Joy Waggoner
Austin, Mark C. Roberts, Henslee Schwartz, LLP, Dallas, contracted with Olshan to repair their home's foundation.
Jeffrey D. Janota, Henslee Schwartz, *886 LLP, Austin, The Waggoners subsequently discovered new damage to
for Olshan Foundation Repair Company, LLC. the foundation and hired an engineer, Peter De la Mora,
to investigate the problems. In a 2007 report, De la Mora
Robert W. Loree, Edwin Todd Lipscomb, Loree, concluded that Olshan had not properly repaired the
Hernandez & Lipscomb, PLLC, San Antonio, Steven home. The Waggoners filed suit against Olshan for breach
W. Thornton, McCorkle Westerburg & Thornton, P.C., of contract, breach of warranty, negligence, violations of
David M. Walsh IV, Chamblee & Ryan, P.C., Dallas, for the Texas Deceptive Trade Practices Act, and violations
Real Parties in Interest Kenneth Kilpatrick in No. 09– of the Texas Home Solicitation Act.
0432, Charley Tisdale in No. 09–0433, Craig Waggoner in
No. 09–0474.
In three other cases, similar circumstances unfolded. itself was undisputably unenforceable under the Texas
In 2002, Olshan contracted with Vickie and Kenneth Home Solicitation Act.
Kilpatrick, who filed suit against Olshan in 2007. The
Kilpatricks' case was consolidated at the appellate court The trial court denied Olshan's plea in the Waggoners'
level with claims brought by Charley and Gladys Tisdale, action. It held that the TAA applies to the agreement,
again with nearly identical facts. In June 2007, Robert and thus the arbitration agreement was unenforceable
and Marta Tingdale, who initially contracted with Olshan pursuant to Chapter 171 of the Texas Civil Practice and
in 2004, filed another similar case. All plaintiffs are Remedies Code. See TEX. CIV. PRAC. & REM.CODE §
represented by the same counsel, and each case includes 171.002(a)(2) (requiring arbitration agreements in service
a report from De la Mora opining that Olshan had not contracts for less than $50,000 be signed by all parties
properly repaired each home. and their attorneys). The trial court alternatively held
that the prohibitive cost of arbitration rendered the
The four repair contracts were in writing, and each agreement to arbitrate unconscionable. Olshan petitioned
contained arbitration clauses. The arbitration clauses in for mandamus relief with the court of appeals, which
Kilpatrick (No. 09–0432), Tisdale (No. 09–0433), and was denied. The court of appeals held the TAA was
Tingdale (No. 09–0703) provide: not preempted by the FAA, and section 171.002(a)(2)
of the TAA rendered the agreement unenforceable. It
Notwithstanding, any provision in denied Olshan's writ of mandamus without reaching
this agreement to the contrary, the other issues. In the remaining three actions, the
any dispute, controversy, or lawsuit trial courts denied Olshan's pleas in abatement and the
between any of the parties to courts of appeals denied Olshan's petitions for writs of
this agreement about any matter
mandamus. 1
arising out of this agreement,
shall be resolved by mandatory
and *887 binding arbitration
administered by the American II. Standard for Mandamus
Arbitration Association (“AAA”)
pursuant to the arbitration laws in [1] [2] At the time these petitions were filed, there
your state and in accordance with was no method under Texas procedure for parties to
this arbitration agreement and the file interlocutory appeals of a trial court's refusal to
commercial arbitration rules of the compel arbitration under the FAA. 2 Olshan sought relief
AAA.... through petitions for writs of mandamus. See Jack B.
Anglin Co. v. Tipps, 842 S.W.2d 266, 272 (Tex.1992).
(emphasis added). The arbitration clause in the Waggoner Mandamus will not issue unless: (1) the trial judge has
(No. 09–0474) agreement is identical except for the committed a clear abuse of discretion; and (2) there is
language in bold, which states “pursuant to the Texas no adequate remedy on appeal. In re Odyssey Healthcare,
General Arbitration Act.” (emphasis added). None of the *888 Inc., 310 S.W.3d 419, 422 (Tex.2010) (per curiam)
agreements addressed in this opinion was signed by the (citing In re Prudential Ins. Co. of Am., 148 S.W.3d 124,
consumers' attorney or exceeded $50,000 in consideration. 135–36 (Tex.2004)). A trial court abuses its discretion
if it reaches a decision so arbitrary and unreasonable
Olshan filed a plea in abatement in each case and sought it amounts to a clear and prejudicial error of law or it
to compel arbitration under the Federal Arbitration clearly fails to correctly analyze or apply the law. Walker
Act (FAA). The homeowners responded to the pleas, v. Packer, 827 S.W.2d 833, 840 (Tex.1992) (citations
arguing that: (1) the TAA applies to the agreements omitted). The second requirement for mandamus relief,
to the exclusion of the FAA, rendering the arbitration that the relator has no adequate remedy by appeal, “has
agreements unenforceable because the agreements were no comprehensive definition.” See In re Ford Motor
not signed by the homeowners' attorney; and (2) Co., 165 S.W.3d 315, 317 (Tex.2005) (citing Prudential,
arbitration with the AAA is substantively unconscionable 148 S.W.3d at 136). However, we have determined that
because of the expense required and because the contract relators have no adequate remedy by appeal when a trial
judge erroneously refuses to compel arbitration under the
FAA. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 FAA's preemption of non-waiver provision of DTPA);
(Tex.2001). Nexion, 173 S.W.3d at 69 (Tex.2005) (discussing FAA's
preemption of TAA section 171.002(a)(3)).
This Court must decide whether the trial courts abused
their discretion by not compelling arbitration pursuant [3] But the FAA does not “confer a right to compel
to the FAA, as requested in Olshan's pleas in abatement. arbitration of any dispute at any time.” Volt, 489 U.S.
The trial courts abuse their discretion by refusing to at 474, 109 S.Ct. 1248. The FAA policy is simply to
compel arbitration if the FAA preempts the TAA and the “ensur[e] that private agreements to arbitrate are enforced
arbitration agreements are not unconscionable. However, according to their terms.” Id. at 479, 109 S.Ct. 1248. In
the trial courts did not err by denying Olshan's pleas in Volt, the Court upheld the application of a California
abatement if the TAA applies to the agreements or the statute that allowed a stay of arbitration proceedings
agreements are unconscionable. pending resolution of related litigation because the
contract *889 also contained a choice-of-law clause
providing that “[t]he Contract shall be governed by the
law of the place where the Project is located.” Id. at 470,
III. Federal Preemption
109 S.Ct. 1248. The Court reiterated that “the FAA pre-
empts state laws which ‘require a judicial forum for the
A. The FAA and Choice of Law resolution of claims which the contracting parties agreed
to resolve by arbitration.’ ” Id. at 478, 109 S.Ct. 1248
The TAA renders arbitration agreements unenforceable (quoting Southland Corp., 465 U.S. at 10, 104 S.Ct. 852).
if the agreements containing the arbitration clauses are But the FAA does not prevent
agreements for services “in which the total consideration
to be furnished by the individual is not more than the enforcement of agreements to
$50,000” and the agreements are not in writing, signed arbitrate under different rules than
by each party, and each party's attorney. TEX. CIV. those set forth in the Act itself....
PRAC. & REM.CODE § 171.002(a)(2). The homeowners Arbitration under the Act is a
contend that the arbitration agreements are governed by matter of consent, not coercion, and
the TAA and are unenforceable for failure to meet the parties are generally free to structure
two identified TAA requirements. Olshan argues that their arbitration agreements as they
the FAA applies to the agreements and preempts the see fit. Just as they may limit by
TAA's exemption from coverage under section 171.002(a) contract the issues which they will
(2), making the arbitration clauses enforceable. See In arbitrate, so too may they specify by
re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 contract the rules under which that
(Tex.2005) (per curiam) (addressing a similar exemption arbitration will be conducted.... By
under the TAA for personal injury cases). permitting the courts to “rigorously
enforce” such agreements according
Section 2 of the FAA preempts state law that would to their terms, we give effect to the
otherwise render arbitration agreements unenforceable contractual rights and expectations
in a contract involving interstate commerce. 9 U.S.C. § of the parties, without doing
2; Southland Corp. v. Keating, 465 U.S. 1, 10–11, 104 violence to the policies behind by the
S.Ct. 852, 79 L.Ed.2d 1 (1984). “The Act was designed FAA.
to overrule the judiciary's longstanding refusal to enforce
agreements to arbitrate, and place such agreements upon Id. at 479, 104 S.Ct. 852 (citations omitted).
the same footing as other contracts.” Volt Info. Scis.,
Inc. v. Bd. of Trs. of Leland Stanford Junior Univ., 489 Subsequently, in Mastrobuono v. Shearson Lehman
U.S. 468, 474, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989) Hutton, Inc., the Court held that the FAA preempted New
(internal quotations omitted). We have recognized that York's prohibition against arbitral awards of punitive
the FAA preempts parts of the TAA, including section damages despite a choice of law provision in an arbitration
171.002(a)(2) of the Civil Practice and Remedies Code. agreement that stated the agreement “shall be governed
See Jack B. Anglin Co., 842 S.W.2d at 271 (discussing by the laws of the State of New York.” 514 U.S. 52, 63–
64, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995). The Court first containing a general choice-of-law provision stating that
stressed that the agreement would be enforced as written, the entire contract will be governed by “the law of the
stating that “the case before us comes down to what the place where the Project is located,” does not preclude
contract has to say about the arbitrability of petitioners' application of the FAA. Id. The Court observed that the
claim for punitive damages.” Id. at 58, 115 S.Ct. 1212. Project was located in Houston, thus the FAA was part
Where the Court in Volt read the choice-of-law provision of “the law of the place where the Project is located.” Id.;
as definitively choosing state law over federal law, the see also Capital Income Props. v. Blackmon, 843 S.W.2d
Court in Mastrobuono read the provision differently: 22, 23 (Tex.1992) (per curiam) (stating that “[t]he Federal
[Arbitration] Act is part of the substantive law of Texas”).
The choice-of-law provision, when viewed in isolation, When the language of the provision included federal
may reasonably be read as merely a substitute for law, further language specifically excluding application
the conflict-of-laws analysis that otherwise would of the FAA is necessary for a court to apply the TAA
determine what law to apply to disputes arising out of to the FAA's exclusion. “The choice-of-law provision did
the contractual relationship. not specifically exclude the application of federal law,
and absent such an exclusion we decline to read the
...
choice-of-law clause as having such an effect.” L & L
At most, [it] introduces an ambiguity into an Kempwood, 9 S.W.3d at 127–28. Rather, a general choice-
arbitration agreement that would otherwise allow of-law provision “may reasonably be read as merely a
punitive damages awards. substitute for the conflict-of-laws analysis that otherwise
would determine what law to apply to disputes.” Id. at
Id. at 59, 62, 115 S.Ct. 1212. Then, using FAA mandated 127 n. 16 (citing Mastrobuono, 514 U.S. at 59–60, 115
rules of contract construction, the Court concluded that S.Ct. 1212). Courts apply the FAA unless language in the
the provision should be read “to encompass substantive arbitration agreement indicates its exclusion.
principles that New York courts would apply, but not to
include special rules limiting the authority of arbitrators.”
Id. at 62–64, 115 S.Ct. 1212.
C. The Law the Parties Chose
Thus, courts treat arbitration agreements as other [4] Three of the arbitration agreements state that disputes
contracts in applying the legal rules to interpret them. The arising out of the contract “shall be resolved by mandatory
goal is to discern the true intentions of the parties, as the and binding arbitration administered ... pursuant to the
FAA's primary purpose is to ensure private agreements to arbitration laws in your state....” Courts rarely read such
arbitrate are enforced according to their terms, no more, general choice-of-law provisions to choose state law to the
no less. Volt, 489 U.S. at 479, 109 S.Ct. 1248; see also exclusion of federal law. See Mastrobuono, 514 U.S. at 59,
Baravati v. Josephthal, Lyon & Ross, Inc., 28 F.3d 704, 709 115 S.Ct. 1212; L & L Kempwood, 9 S.W.3d at 127 n. 16.
(7th Cir.1994) (Posner, C.J.) (“[S]hort of authorizing trial Further, just as the FAA is part of the substantive law
by battle or ordeal or, more doubtfully, by a panel of three of Texas, the FAA would be part of the arbitration laws
monkeys, ... parties are as free to specify idiosyncratic in Texas. See L & L Kempwood, 9 S.W.3d at 127 n. 15
terms of arbitration as they are to specify any other terms (quoting Capital Income Props., 843 S.W.2d at 23). The
in their contract.”). language of the arbitration clause designating arbitration
pursuant to “the arbitrations laws in your state” includes
the FAA. See id. at 127–28. Thus, the FAA applies to the
B. This Court's Treatment of Choice–of–Law three agreements that include the “arbitration laws in your
Provisions Relating to Arbitration Agreements state” language, and the FAA preempts the provisions of
section 171.002(a)(2) of the TAA that would otherwise
This Court analyzed contractual language in the context render the agreements unenforceable. The trial courts
of the relationship *890 between an arbitration clause abused their discretion in denying Olshan's requests to
and a general choice-of-law provision in In re L & compel arbitration based on the unenforceability of the
L Kempwood Associates, L.P., 9 S.W.3d 125, 127–28 arbitration under section 171.002(a)(2) in the Kilpatrick,
(Tex.1999) (per curiam). We held that an agreement Tisdale and Tingdale cases.
prohibitively expensive, that party bears the burden of differential between arbitration and litigation in court.
showing the likelihood of incurring such costs.” Green Id. (citations omitted). Applying the standard, the court
Tree, 531 U.S. at 92, 121 S.Ct. 513. This Court likewise held the arbitration agreement was not substantively
requires “some evidence that a complaining party will unconscionable where evidence showed the arbitration
likely incur arbitration costs in such an amount as to deter would cost approximately $15,000 to $20,283, plus
enforcement of statutory rights in the arbitral forum.” expenses and other possible fees; the claimant was seeking
Poly–America, 262 S.W.3d at 356; accord In re U.S. Home more than $4,000,000 in compensatory and punitive
Corp., 236 S.W.3d 761, 764 (Tex.2007); FirstMerit Bank, damages; and arbitration costs would range from 11
52 S.W.3d at 756–57. percent to 15 percent of the claimant's gross income. Id. at
*7. The claimant failed to submit any evidence pertaining
[12] The Court in Green Tree did not explain how to the expected cost differential between arbitration and
detailed the showing of prohibitive expense need be to litigation. Id.
invalidate an arbitration agreement. Green Tree, 531 U.S.
at 92, 121 S.Ct. 513 (“How detailed the showing of In applying the unconscionability standard, the crucial
prohibitive expense must be before the party seeking inquiry is whether the arbitral forum in a particular case
arbitration must come forward with contrary evidence is is an adequate and accessible substitute to litigation, a
a matter we need not discuss....”). However, a number forum where the litigant can effectively vindicate his or
of federal courts of appeals, relying on Green Tree, have her rights. With this in mind, we agree that the approach
applied a case-by-case analysis of the effect the arbitration taken by the Fourth Circuit in Bradford effectively pursues
clause has on the particular plaintiff's ability to effectively this inquiry. We note all of the analyses previously
vindicate his rights. 4 The Fourth Circuit's approach discussed correctly assume that litigation allows claimants
in Bradford v. Rockwell Semiconductor Systems, Inc. is to effectively vindicate their rights, despite the expense.
particularly instructive. 238 F.3d 549 (4th Cir.2001). The The desire to avoid steep litigation expense—including
court noted the proper analysis “evaluates whether the the costs of longer proceedings, more complicated appeals
arbitral forum in a particular case is an adequate and on the merits, discovery, investigations, fees, and expert
accessible substitute to litigation.” Id. According to the witnesses—is the purpose of arbitration in the first place.
court, that inquiry requires “a case-by-case analysis that See Jack B. Anglin Co., 842 S.W.2d at 272–73 (“[T]he
focuses, among other things, upon the claimant's ability purpose of [arbitration is] providing a rapid, inexpensive
to pay the arbitration fees and costs, the expected cost alternative to traditional litigation....”). In the absence of
differential between arbitration and litigation in court, unusual animus between the parties or external motives,
and whether that cost differential is so substantial as to plaintiffs continue to pursue claims when the expected
deter the bringing of claims.” Id. (quotations omitted). benefits of the lawsuit outweigh the total cost of bringing
The key factor is not where the cost to pursue the claim it. If the total cost of arbitration is comparable to the total
goes, but what the total cost to the claimant to pursue the cost of litigation, the arbitral forum is equally accessible. 5
claim is. The *894 court “fail[ed] to see how a claimant Thus, a comparison of the total costs of the two forums is
could be deterred from pursuing his statutory rights in the most important factor in determining *895 whether
arbitration simply by the fact that his fees would be paid the arbitral forum is an adequate and accessible substitute
to the arbitrator where the overall cost of arbitration is to litigation. Other factors include the actual cost of
otherwise equal to or less than the cost of litigation in arbitration compared to the total amount of damages the
court.” Id. claimant is seeking and the claimant's overall ability to pay
the arbitration fees and costs. These factors may also show
Likewise, in Honrubia Properties, Ltd. v. Gilliland, the arbitration to be an inadequate and inaccessible forum for
Corpus Christi–Edinburg Court of Appeals essentially the particular claimants to vindicate their rights. However,
accepted Bradford's conceptual framework. Nos. 13– these considerations are less relevant if litigation costs
07–210–CV, 13–07–249–CV, 2007 WL 2949567 at *6 more than arbitration.
(Tex.App.-Corpus Christi–Edinburg Oct. 11 2007, no
pet.) (mem.op.). It considered the party's ability to pay the
arbitration fee, the actual amount of the fee in relation
C. Sufficiency of the Evidence
to the amount of the underlying claim, and the cost
[15] Thus, for evidence to be sufficient, it must show that Administrative fees are based on the size of the claim
the plaintiffs are likely to be charged excessive arbitration and counterclaim in a dispute. They are based only on
fees. While we do not mandate that claimants actually the actual damages and not on any additional damages,
incur the cost of arbitration before they can show its such as attorneys' fees or punitive damages. Portions of
excessiveness, parties must at least provide evidence of these fees are refundable pursuant to the Commercial
the likely cost of their particular arbitration, through Fee Schedule.
invoices, expert testimony, reliable cost estimates, or other
comparable evidence. See Poly–America, 262 S.W.3d at Arbitrator Fees
354–55 (concluding that the plaintiff's “own affidavit and
For cases in which no claim exceeds $75,000, arbitrators
that of an expert witness providing detailed estimates
are paid based on the type of proceeding that is used.
of the likely cost of arbitration in [the plaintiff's] case”
The parties make deposits as set forth below. Any
constituted sufficient evidence); Olshan Found. Repair Co.
unused deposits are returned at the end of the case.
v. Ayala, 180 S.W.3d 212, 215–16 (Tex.App.-San Antonio
2005, pet. denied) (holding invoice for party's share of Desk Arbitration or Telephone Hearing $250 for service
arbitration expenses sufficient). Evidence that merely on the case
speculates about the risk of possible cost is insufficient.
homeowners from effectively pursuing their claim in the analysis would provide an end run around the rule. While
arbitral forum. in some cases this “rule permits a court to enforce an
arbitration agreement in a contract that the arbitrator
later finds to be void[,] ... it is equally true that [the
opposite] approach permits a court to deny effect to an
E. Unconscionability in Light of
arbitration provision in a contract that the court later
the Texas Home Solicitation Act
finds to be perfectly enforceable.” Buckeye, 546 U.S. at
[17] Finally, the homeowners argue that the arbitration 448–49, 126 S.Ct. 1204. This conundrum is solved with a
is unconscionable because the parties will expend time, rule that allocates such decisions to arbitration, which is
energy, *898 and money needlessly going to arbitration consistent with the liberal policy favoring arbitration in
when the arbitrator will find the contract—including the FAA, U.S. Supreme Court decisions, and decisions
the arbitration clause—void, sending the case back to of this Court. The homeowners failed to provide legally
sufficient evidence of the prohibitive cost of arbitration
court. 8 They assert that their contract with Olshan
to prove unconscionability, and this failure cannot be
violated the Texas Home Solicitation Act (THSA), which
remedied by allowing the trial court to determine if it
would render the agreements, including the arbitration
believes the contract itself is void.
clauses, void. The alleged basis for violation of the
THSA is Olshan's failure to include in the agreements
certain language regarding cancellation in at least 10–
point boldfaced type, where the transactions occurred by V. Conclusion
personal solicitation outside Olshan's place of business.
TEX. BUS. & COM.CODE §§ 601.002(a), .052, .053, .201. This Court endeavors to interpret agreements, including
Further, the homeowners contend that there is no dispute those to arbitrate, as they *899 are written. When an
over whether the contract violates the THSA, and the agreement specifically states that it is to be governed
by the Texas General Arbitration Act, we hold that
arbitrator will thus certainly find the contract void. 9
it will be governed by the Act, which may mean that
disputes arising from its terms will be excluded from
It is tempting to avoid the unnecessary costs that would
arbitration. Thus, the TAA applies to the arbitration
accompany an allegedly unnecessary arbitration. But to
agreement between the Waggoners (No. 09–0474) and
do so requires the trial court to make a determination
Olshan and renders it unenforceable. See TEX. CIV.
of issues relating to the contract generally, even if it
PRAC. & REM.CODE § 171.002(a)(2). The trial court did
seems clear that one party or the other will prevail. As
not err by denying Olshan's plea in abatement, and the
the U.S. Supreme Court stated in Prima Paint Corp. v.
court of appeals denied relief. We also deny mandamus
Flood & Conklin Manufacturing Co., when the parties
relief in the Waggoner case.
have contracted for arbitration of their disputes, a trial
court “may consider only issues relating to the making
However, where an arbitration agreement states that it is
and performance of the agreement to arbitrate.” 388 U.S.
to be governed by the law of this state, that law includes
395, 404, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967); see
the Federal Arbitration Act. Because it is proper to apply
also Rent–A–Ctr., W., Inc. v. Jackson, ––– U.S. ––––,
the FAA to the Kilpatrick (No. 09–0432), Tisdale (No.
130 S.Ct. 2772, 2778, 177 L.Ed.2d 403 (2010); Buckeye
09–0433), and Tingdale (No. 09–0703) agreements that
Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 445–
use such language, the FAA preempts the provisions of
46, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006) ( “[U]nless
section 171.002(a)(2) that would otherwise render those
the challenge is to the arbitration clause itself, the issue
agreements unenforceable. And the parties opposing
of the contract's validity is considered by the arbitrator
arbitration in those three cases did not submit legally
in the first instance.”). There is no way to fashion a
sufficient evidence that arbitration of their claims would
standard to determine whether arbitration is unnecessary
be unconscionable. Therefore, the trial court erred by
without giving the trial court some discretion over issues
denying Olshan's pleas in abatement, and we conditionally
relating to the making and performance of the contract
grant mandamus relief in the Kilpatrick, Tisdale, and
generally—exactly what Prima Paint, and later Buckeye
Tingdale cases and remand those cases to the trial court
and Rent–A–Center, sought to avoid. Allowing courts
for further proceedings consistent with this opinion. We
to make this determination under an unconscionability
are confident that the trial courts will comply, and the arbitration. Olshan has cited no authority for either of
these arguments.
writs will issue only if they fail to do so.
Footnotes
1 The Tingdale, Kilpatrick and Tisdale trial courts issued memorandum opinions, which are addressed by the courts of
appeals, respectively, in No. 10–09–00119–CV, 2009 WL 1886648 (Tex.App.-Waco July 1, 2009, orig. proceeding); Nos.
2–08–336–CV, 2–08–342–CV, 2008 WL 4661815 (Tex.App.-Fort Worth Oct. 2, 2008, orig. proceeding).
2 The Legislature recently amended the Texas Civil Practice and Remedies Code to allow an interlocutory appeal “to the
court of appeals from the judgment or interlocutory order of a district court ... under the same circumstance that an
appeal from a federal district court's order or decision would be permitted by 9 U.S.C. Section 16.” TEX. CIV. PRAC.
& REM CODE § 51.016. However, this act is not applicable to appeals of an interlocutory order in an action pending
as of September 1, 2009. Act of June 19, 2009, 81st Leg., R.S., ch. 820, § 2, 2009 Tex. Gen. Laws 2061. Because
all four actions in this consolidated opinion were pending as of September 1, 2009, section 51.016 does not allow an
interlocutory appeal of these causes.
3 We do not believe the choice-of-law provision to be ambiguous.
4 See Musnick v. King Motor Co. of Fort Lauderdale, 325 F.3d 1255, 1259 (11th Cir.2003) (“Since Green Tree, all but one
of the other Circuits that have reconsidered this issue have applied a similar case-by-case approach.”); see also Blair v.
Scott Specialty Gases, 283 F.3d 595, 609–10 (3d Cir.2002); Bradford v. Rockwell Semiconductor Sys., Inc., 238 F.3d
549, 556 (4th Cir.2001); LaPrade v. Kidder, Peabody & Co., Inc., 246 F.3d 702, 708 (D.C.Cir.2001). But see Circuit City
Stores, Inc. v. Adams, 279 F.3d 889, 895 (9th Cir.2002) (holding that plaintiff employees should not “have to pay either
unreasonable costs or any arbitrators' fees or expenses as a condition of access to the arbitration forum”).
5 “Total cost” refers to the total cost of pursuing a claim in either forum, notwithstanding who will be financing the claim.
Some courts have noted the argument that attorneys will be unwilling to represent plaintiffs on a contingency fee basis
in the arbitral forum and that contingent fee arrangements make litigation less expensive for plaintiffs than arbitration.
See Morrison v. Circuit City Stores, Inc., 317 F.3d 646, 664 (6th Cir.2003); Poly–America, 262 S.W.3d at 355. But other
commentators argue that there is no reason why plaintiffs cannot secure the same financing when arbitration is mandated
if both the value of their claim and the cost to pursue it remain constant. See Christopher R. Drahozal, Arbitration Costs
and Contingent Fee Contracts, 59 VAND. L.REV. . 729, 768 (2006) (“On the face of it, there is no reason to expect
contingent fee contracts to treat arbitration costs differently than they treat other litigation expenses.”). We recognize
arbitration is not always a lower-cost, efficient litigation alternative. Forcing consumer plaintiffs into an arbitral forum may
affect their ability to pursue remedies when small claims are at issue. However, this does not excuse parties opposing
arbitration from providing sufficient evidence to demonstrate that excessive costs make arbitration unconscionable in
their particular case.
6 “The filing fee shall be advanced by the party or parties making a claim or counterclaim, subject to final apportionment
by the arbitrator in the award. The AAA may, in the event of extreme hardship on the part of any party, defer or reduce
the administrative fees.” AAA Commercial Arbitration Rule R–49 (2007, 2009). In 2008, when Olshan sought to compel
arbitration, the total initial filing fee and case service fee ranges from $2,550 for claims between $75,000–$150,000 to
$8,500 for claims above $500,000. AAA Commercial Arbitration Administrative Fees, Fees (2007).
7 It is unclear whether this means that the Ayalas requested three arbitrators. That the cost of the arbitrator to the Ayalas
per day of hearing was $3,350, compared to $1,250 per day in the anonymous case, leads us to believe they did.
8 The homeowners concede that the arbitrator and not a court decides a contractual defense to the contract as a whole
as opposed to a contractual defense to just the arbitration provision. See Buckeye Check Cashing, Inc. v. Cardegna,
546 U.S. 440, 445–46, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006); In re Labatt Food Serv., L.P., 279 S.W.3d 640, 647–
49 (Tex.2009).
9 Olshan states in its brief and stated at argument to the contrary that it will present certain defenses to this claim. It is
neither our province nor the province of the trial court to determine the merits of these defenses when the parties have
contracted to arbitrate such disputes.
1 Act of May 18, 1973, 63rd Leg., R.S., ch. 246, § 1, 1973 Tex. Gen. Laws 574, codified as TEX.REV.CIV. STAT. ANN.. art.
5069–13.01, amended by Act of April 4, 1975, 64th Leg., R.S., ch. 59, § 1, 1975 Tex. Gen. Laws 124, and by Act of May
27, 1995, 74th Leg., R.S., ch. 926, § 1, 1995 Tex. Gen. Laws 4649, recodified by Act of May 24, 1997, 75th Leg., R.S.,
ch. 1008, § 3, 1997 Tex. Gen. Laws 3091, 3583, as TEX. BUS. & COM.CODE §§ 39.001–.009, and by Act of May 15,
2007, 80th Leg., R.S., ch. 885, § 2.01, 2007 Tex. Gen. Laws 1905, 2026, as TEX. BUS. & COM.CODE §§ 601.001–.205.
2 Section 601.201, TEX. BUS. & COM.CODE, provides that “[a] sale or contract entered into under a consumer transaction
in violation of ... Subchapter D is void.” Section 601.152, in subchapter D, states: “A merchant may not: (1) at the time the
consumer signs the contract pertaining to a consumer transaction or purchases the goods, services, or real property, fail
to inform the consumer orally of the right to cancel the transaction; or (2) misrepresent in any manner the consumer's right
to cancel.” The prior versions of the Act contained substantively identical provisions. Former TEX. BUS. & COM.CODE.
§ 39.008(a)(3)-(4) & (b); TEX.REV.CIV. STAT. ANN. art. 5069–13.03(a)(3)–(4) & (b).
3 Ante at 898 (citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404, 87 S.Ct. 1801, 18 L.Ed.2d 1270
(1967)).
4 E.g., Brief of Real Parties in Interest Kenneth and Vickie Kilpatrick at 21.
5 See WILLIAM SHAKESPEARE, ROMEO AND JULIET act 2, sc. 4:
“Romeo: Switch and spurs, switch and spurs; or I'll cry a match.
“Mercutio: Nay, if thy wits run the wild-goose chase, I have done; for thou hast more of the wild-goose in one of thy
wits than, I am sure, I have in my whole five.”
6 TEX.R. CIV. P. 14; TEX. CIV. PRAC. & REM.CODE §§ 9.001–.014, 10.001–.006.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[4] users did not show that arbitration agreement's forum [3] Federal Courts
selection clause was unreasonable; Alternative dispute resolution
In determining the contractual validity of
[5] inability to add hotel companies as defendants in
an arbitration agreement under the Federal
arbitration proceeding was not a ground for refusing to
Arbitration Act (FAA), the court applies
enforce arbitration agreement.
ordinary state-law principles that govern the
formation of contracts. 9 U.S.C.A. § 2.
Motion granted.
3 Cases that cite this headnote
[4] Contracts
Elements in general
Under Texas law, a valid contract requires changes to its arbitration policy that have
an offer, acceptance, mutual assent, execution retroactive effect.
and delivery of the contract with the
intent that it be mutual and binding, and Cases that cite this headnote
consideration.
[8] Alternative Dispute Resolution
3 Cases that cite this headnote
In general; formation of agreement
Arbitration and class waiver provisions in
[5] Alternative Dispute Resolution user agreement for online travel company's
Validity of assent website were not illusory, as would render
Users of online travel company's website them unenforceable under Texas law, though
manifested their assent to arbitration company could unilaterally modify or revoke
provisions and class arbitration waiver them, where agreement prohibited company
contained in user agreement, as element for from doing so retroactively; user agreement
enforceable contract under Texas law, where stated that company could at any time
users clicked on a button that said “Agree modify the user agreement and that the user's
and Complete [Your] Reservation,” and the continued use of the website or company's
button was located directly above a notice services would be conditioned upon terms and
explaining that, by clicking the button, the conditions in force “at the time of [the user's]
user agreed to the policies set forth in the use.”
user agreement, which was accessible via
hyperlink; it was impossible to complete a Cases that cite this headnote
transaction on the website in absence of
affirmative assent to user agreement, and [9] Alternative Dispute Resolution
agreement was conspicuously presented. Disputes and Matters Arbitrable Under
Agreement
Cases that cite this headnote
Under Texas law, the broad nature of an
arbitration clause stating that it covers any
[6] Copyrights and Intellectual Property claim where the total amount in controversy is
Contracts less than a certain amount is indicative of the
Browsewrap agreements are distinguishable parties' intent to be bound.
from clickwrap agreements, for purposes of
determining whether an Internet website user Cases that cite this headnote
has manifested his assent to such agreements,
as element for contract under Texas law, in [10] Alternative Dispute Resolution
that a user may download software under Preemption
a browsewrap license prior to manifesting
States
assent to its terms.
Particular cases, preemption or
Cases that cite this headnote supersession
Federal Arbitration Act (FAA) preempts
state law in determining whether a class
[7] Alternative Dispute Resolution
arbitration waiver in a consumer contract is
In general; formation of agreement
enforceable. 9 U.S.C.A. § 2.
Under Texas law, while an arbitration clause
is illusory if one party can avoid its promise 2 Cases that cite this headnote
to arbitrate by amending the provision or
terminating it altogether, the crux of this issue
[11] Alternative Dispute Resolution
is whether the promisor has the power to make
Evidence
[16] Alternative Dispute Resolution
It is the burden of the party seeking to avoid
Validity
arbitration under the Federal Arbitration Act
(FAA) to establish that Congress intended to Class arbitration waiver contained in
preclude arbitration of the disputed statutory arbitration provision of user agreement
claims. 9 U.S.C.A. § 1 et seq. for online travel company's website was
enforceable with respect to users' federal
Cases that cite this headnote antitrust claims alleging company's price
fixing conspiracy with hotel companies, even
if it would not be economically rational
[12] Alternative Dispute Resolution
for users to arbitrate their antitrust claims
Statutory rights and obligations
individually because no individual user could
Federal statutory claims may be litigated in prosecute an antitrust action given the high
the arbitral forum so long as the prospective expert witness and other non-recoverable
litigant effectively may vindicate his or her costs that would be involved; such costs were
statutory cause of action. a result of users' theory of the case, not a result
of being forced to arbitrate.
Cases that cite this headnote
Cases that cite this headnote
[13] Alternative Dispute Resolution
Evidence [17] Alternative Dispute Resolution
Federal policy carries a strong presumption in Contractual or consensual basis
favor of arbitrability. A party may not be compelled under the
Federal Arbitration Act (FAA) to submit to
Cases that cite this headnote
class arbitration unless there is a contractual
basis for concluding that the party agreed to
[14] Alternative Dispute Resolution do so. 9 U.S.C.A. § 1 et seq.
Statutory rights and obligations
Even claims arising under a federal statute 1 Cases that cite this headnote
designed to further important social policies
may be arbitrated, because so long as the [18] Contracts
prospective litigant effectively may vindicate Agreement as to place of bringing suit;
his or her statutory cause of action in the forum selection clauses
arbitral forum, the statute serves its functions. A forum selection clause in a contract is prima
facie valid and should be enforced unless
Cases that cite this headnote
enforcement is shown by the resisting party to
be unreasonable under the circumstances.
[15] Alternative Dispute Resolution
Statutory rights and obligations Cases that cite this headnote
Congressional intent to preclude a waiver
of a judicial forum for a statutory claim [19] Alternative Dispute Resolution
would be discoverable in the text of the Evidence
statute, its legislative history, or an inherent The same burden on the objecting party
conflict between arbitration and the statute's of demonstrating unreasonableness should
underlying purposes. apply to forum selection clauses in a contract
with an arbitration clause.
Cases that cite this headnote
Cases that cite this headnote
Defendants Travelocity.com LP and Sabre Holdings Travelocity filed the instant motion seeking to compel
Corporation 1
(the “Travelocity Defendants” or arbitration pursuant to the terms of the User Agreement
collectively “Travelocity”). Having considered the Motion on April 1, 2013. In response, Plaintiffs filed a Motion
and the filings in this case, the Court finds that it should to Stay Arbitration pending the Supreme Court decision
be and hereby is GRANTED. in American Express Co. v. Italian Colors Restaurant,
Case No. 12–133 (the “Amex case”). That motion also
requested that the Court allow discovery regarding
arbitration and requested that the Court extend the
I. briefing schedule on Travelocity's Motion to Compel
Arbitration. This Court denied Plaintiffs' requests on
BACKGROUND April 21, 2013. Mem. Op. Apr. 24, 2013. Defendants'
Motion to Compel Arbitration is now ripe for disposition.
This consolidated proceeding concerns allegations of
price fixing against certain online travel companies and
hotel companies. Plaintiffs claim that these companies
II.
conspired to set hotel room resale prices and that online
travel websites agreed not to resell hotel rooms below
this fixed price. The central agreement of the alleged LEGAL STANDARD
conspiracy contained most favored nation restrictions
prohibiting hotels from offering *717 lower prices on [1] [2] [3] The Fifth Circuit follows a two-step
rooms through any other distribution channel, including procedure in determining whether to compel arbitration.
their own websites. Plaintiffs assert that this price- Webb v. Investacorp, Inc., 89 F.3d 252, 257–58 (5th
fixing scheme allowed online travel websites to deceive Cir.1996) (per curiam). First, the Court must ascertain
customers by advertising the “best” or “lowest” prices, whether the parties agreed to arbitrate the dispute at
when in fact all companies were offering the same price. issue. Id. at 258. An agreement to arbitrate a dispute is
shown where (1) there exists between the parties a valid
While disputing Plaintiffs' claims, Travelocity also agreement to arbitrate, and (2) the dispute in question
argues that Plaintiffs who booked hotel rooms via falls within the scope of the agreement. Id. Once the
Travelocity's website may not bring their claims in Court is satisfied that the parties agreed to arbitrate the
federal court due to Travelocity's User Agreement dispute, it must then determine whether any external
(“User Agreement”). According to Travelocity, every user legal constraints foreclose arbitration of the dispute. Id.
completing transactions on Travelocity's website as of A court, “[i]n determining the contractual validity of
February 4, 2010 agreed to the User Agreement, which an arbitration agreement, [applies] ordinary state-law
contains a clause requiring arbitration for “[a]ny Claim principles that govern the formation of contracts.” Carter
where the total amount in controversy is less than U.S. v. Countrywide Credit Indus., Inc., 362 F.3d 294, 301 (5th
$10,000.” Travelocity Mot. Compel 3; see also Travelocity Cir.2004).
As such, the Court examines Texas law in determining The second version was in force from April 16, 2010
whether there is a valid agreement to arbitrate. through March 31, 2010. See id. at 18 (Ex. C). The current
version has been in force since February 1, 2011. See id. at
28 (Ex. D). All three versions contain the same arbitration
B. Is the Dispute Governed by a Valid Arbitration provision and class action waiver provision. Travelocity
Agreement? App. 4 (Trejo Decl. 114). Thus, any Plaintiffs who
made bookings on Travelocity's website from February
1. Is there a valid agreement to arbitrate?
4, 2010 through the present were required to assent to
Plaintiffs contend that Travelocity has not shown that
the User Agreement containing the arbitration clause in
there is a valid arbitration agreement, based on their
order to complete each transaction. Id. at ¶ 13. In the
argument that Travelocity has not shown that they
Consolidated Amended Complaint, Plaintiffs Kathleen
assented to the agreement. Plaintiffs also argue that
Brown and Rosemarie Rich both assert claims against
even if they did assent to the User Agreement, it is an
Travelocity arising after the User Agreement entered into
unenforceable and illusory “browsewrap” agreement. The
force on February 4, 2010. See Consol. Am. Compl. ¶¶
Court will address each issue in turn.
17, 28. These plaintiffs, and any other plaintiff whose
claims against Travelocity originated after that date,
assented to the User Agreement by completing the online
i. Did Plaintiffs assent to the User Agreement? transactions. Plaintiffs have produced no evidence to the
contrary. As such, Travelocity has provided sufficient
[4] Under Texas law, a valid contract requires an offer, evidence that Plaintiffs manifested assent to the User
acceptance, mutual assent, execution and delivery of the Agreement, including *719 its arbitration provision and
contract with the intent that it be mutual and binding, class action waiver, even though Travelocity has not
and consideration. Buxani v. Nussbaum, 940 S.W.2d 350, provided transaction-specific evidence as to each plaintiff.
352 (Tex.App.-San Antonio 1997, no writ); McCulley
Fine Arts Gallery, Inc. v. “X” Partners, 860 S.W.2d 473,
477 (Tex.App.-El Paso 1993, no writ). The first issue in
determining the validity of the arbitration agreement in ii. Is the User Agreement unenforceable “browsewrap”?
this case is whether or not Plaintiffs assented to the User
[6] The Court rejects Plaintiffs' argument that the
Agreement.
User Agreement is an unenforceable “browsewrap”
agreement, and finds that the agreement is instead
[5] Plaintiffs assert that their contracts with Travelocity
a “clickwrap” agreement, valid and enforceable under
are not valid because “Travelocity has not submitted any
Texas law. See, e.g., Recursion Software Inc. v.
transaction-specific evidence showing that any Plaintiff
Interactive Intelligence, Inc., 425 F.Supp.2d 756, 783
assented” to the User Agreement. Pls.' Opp'n 5. The
(N.D.Tex.2006); Barnett v. Network Solutions Inc., 38
Court, however, agrees with Travelocity that, to the extent
S.W.3d 200, 204 (Tex.App.-Eastland 2001) (upholding
Plaintiffs' transactions occurred on or after February 4,
a forum selection clause in a clickwrap agreement
2010, Plaintiffs and all Travelocity users did assent to
similar to Travelocity's). Browsewrap agreements are
Travelocity's User Agreement by clicking on a button that
distinguishable from clickwrap agreements in that “a
said “Agree and Complete Reservation.” See Travelocity
user may download software under a browsewrap license
Reply Supp. Mot. Compel (“Travelocity Reply”) at 2;
prior to manifesting assent to its terms.” Recursion, 425
Travelocity App. 6 (Ex. A). This button was located
F.Supp.2d at n. 14; see also Specht v. Netscape Commc'ns
directly above a notice explaining that, by clicking the
Corp., 306 F.3d 17, 22–23 (2d Cir.2002). In the Recursion
button, the user agrees to the policies set forth in the
case, users downloading a software program were taken
User Agreement, which was accessible via hyperlink. See
to a page containing the user license agreement. See
Travelocity Reply 2; Travelocity App. 6 (Ex. A).
Recursion, 425 F.Supp.2d at 781. After scrolling to the
bottom of that page, users were asked if they agreed to
Travelocity has submitted three similar versions of their
the license terms, and could “only download the software
User Agreement that have been in force at different times.
by answering in the affirmative.” Id. By contrast, in the
The first version was in force from February 4, 2010
Specht case, users were able to download a program from
through April 15, 2010. See Travelocity App. 8 (Ex. B).
the website without manifesting unambiguous assent to in Carey, which was silent on the issue of retroactivity,
the license terms. Specht, 306 F.3d at 23. see 669 F.3d at 206–07, Travelocity's clause explicitly
precludes retroactive application of any changes.
In the case at bar, it was impossible to complete a
transaction on the Travelocity website in the absence of Plaintiffs further argue that the modification clause is
affirmative assent to the User Agreement. See Travelocity illusory since it does not provide a notice window and
App. 3–4 (Trejo Decl. ¶ 13). It is not, as Plaintiffs is not accompanied by a savings clause. Pls.' Opp'n 8.
argue, necessary for the User Agreement to have a “scroll However, the case they cite in their brief on this point, In re
through” feature; the central issue is whether or not the Halliburton, is distinguishable from the case at bar because
users were “conspicuously presented with the agreement in that case the parties had a continuing employment
prior to entering into a contract.” See RealPage, Inc. v. relationship, and the dispute arose after the employer had
EPS, Inc., 560 F.Supp.2d 539, 545 (E.D.Tex.2007). In modified the contract. See 80 S.W.3d 566, 568 (Tex.2002)
the RealPage case, users attempting to install software (enforcing arbitration clause in an employment contract
updates were not required to scroll through the clickwrap where the employee was given notice ten days before
license agreement. Id. The RealPage court reasoned that the modification went into effect); see also Armstrong
the Barnett holding, which found a forum selection clause v. Assocs. Int'l Holdings Corp., 242 Fed.Appx. 955, 958
in a clickwrap agreement enforceable, did not require (5th Cir.2007) (per curiam) (arbitration agreement was
a “scroll-through” feature for the contract to be valid, not illusory despite employer's ability to revise, amend,
stating that “[i]t was [the user's] responsibility to read the modify, or discontinue policy at any time because any
electronically-presented contract, and he cannot complain revisions could not take effect until thirty days after notice
if he did not do so.” Id. (quoting Barnett, 38 S.W.3d to employee). By contrast, in this case, any modifications
at 204). Such reasoning is equally applicable here. Since to the User Agreement would require the user to complete
the User Agreement was conspicuously presented and another transaction and again indicate his or her assent by
Plaintiffs assented to the User Agreement by clicking the clicking “Accept.”
“Accept” button to complete each online transaction, it is
a valid clickwrap agreement.
2. Scope of the Agreement
[9] Having found a valid agreement to arbitrate, the
next step is to ascertain whether the dispute in question
iii. Is the User Agreement illusory? falls within the scope of the agreement. Webb, 89 F.3d
at 258. The User Agreement's arbitration provision states
[7] [8] Plaintiffs also argue that since Travelocity could
that “[a]ny Claim where the total amount in controversy
at any time unilaterally modify the User Agreement and
is less than U.S. $10,000 shall be resolved via binding,
substantially change or revoke the arbitration clause, that
non-appearance-based arbitration initiated through the
clause, including its class action waiver, is illusory and
American Arbitration Association (‘AAA’).” Travelocity
unenforceable. Pls.' Opp'n 5. The Court disagrees. While
Mot. 3. Plaintiffs do not contest that the instant dispute
it is true that “an arbitration clause is illusory if one
is included in the scope of this clause. Furthermore, it is
party can avoid its promise to arbitrate by amending
well established that the broad nature of an arbitration
the provision or terminating it altogether,” Carey v. 24
clause like the one in the User Agreement is indicative
Hour Fitness, 669 F.3d 202, 205 (5th Cir.2012) (quoting
of the parties' intent to be bound. See, e.g., Leggett v.
In re 24R, Inc., 324 S.W.3d 564, 567 (Tex.2010)) (internal
America's Servicing Co., No. 3:05–cv–1959–L, 2007 WL
quotation marks omitted), “[t]he crux of this issue is
2398510, at *2 (N.D.Tex. Aug. 22, 2007); Sharju Ltd.
whether [the promisor] has the power to make changes
P'ship v. Choice Hotels Int'l, Inc., No. 3:01–cv–2605–X,
to its arbitration policy that have retroactive effect.” Id.
2002 WL 107171, at *2 (N.D.Tex. Jan. 22, 2002). Holding
Travelocity's User Agreement states that “Travelocity
that the arbitration provision is valid, enforceable, and
may at any time modify this User Agreement and your
within the scope of the agreement, the Court now moves
continued use of this site or *720 Travelocity's services
to the question of whether a federal statute or policy
will be conditioned upon the terms and conditions in force
precludes arbitration in this particular case.
at the time of your use.” Travelocity App. 8 (Ex. B); 18
(Ex. C); 28 (Ex. D) (emphasis added). Unlike the clause
is the Supreme Court's ruling in Stolt–Nielsen S.A. v. are] financially incapable of meeting those costs.” Id.
AnimalFeeds International Corp., which held that “a party (quoting Livingston v. Assocs. Fin. Inc., 339 F.3d 553, 557
may not be compelled under the FAA to submit to (7th Cir.2003)).
class arbitration unless there is a contractual basis for
concluding that the party agreed to do so.” 559 U.S. 662, The other cases cited by Plaintiffs mention only the costs
130 S.Ct. 1758, 1775, 176 L.Ed.2d 605 (2010) (emphasis of arbitration itself, not the expenses of advocating a
in original). In the instant case, the contract explicitly case. See Morrison v. Circuit City Stores, Inc., 317 F.3d
prohibits class proceedings, whereas the contract in Stolt– 646, 669 (6th Cir.2003) (en banc) (finding a cost-splitting
Nielsen was silent on the issue. See id. It follows that provision requiring plaintiff to pay between $500 and $
the Stolt–Nielsen holding carries even greater weight here, 1622 in arbitration costs unenforceable); Shankle v. B–G
where the contract included an explicit provision barring Maintenance Mgmt. of Colo., Inc., 163 F.3d 1230, 1234–
class actions, and the Court emphasizes that it must “give 35 (10th Cir.1999) (finding an arbitration provision where
effect to the intent of the parties.” See id. plaintiff would have to pay $1875 to $5000 in arbitration
fees unenforceable); Paladino *723 v. Avnet Computer
Plaintiffs' main argument rests on the claim that it Techs., Inc., 134 F.3d 1054, 1062 (11th Cir.1998) (finding
would not be economically rational for them to arbitrate arbitration “costs of this magnitude [$2000] a legitimate
their antitrust claims individually because no individual basis for a conclusion that the clause does not comport
plaintiff or class member could prosecute an antitrust with statutory policy”); Cole v. Burns Int'l Sec. Servs., 105
action against Travelocity given the high expert witness F.3d 1465, 1484 (D.C.Cir.1997) (finding arbitrators' fees
and other non-recoverable costs that would be involved. of $500 to $1000 per day prohibitively expensive). The
See Pls.' Opp'n 13–14. The Court in Green Tree, however, only case Plaintiffs cite that has considered the expenses
considered only the “payment of filing fees, arbitrators' of expert testimony and the limited amount of potential
costs, and other arbitration expenses” in determining recovery in determining whether costs are prohibitive, In
whether costs were prohibitive. See 531 U.S. at 84, 121 re American Express Merchants' Litigation, has already
S.Ct. 513. In this case, the total fees for individual been vacated and remanded twice by the Supreme Court.
arbitrations are capped at $200. See Travelocity App. 6 See 667 F.3d 204 (2d Cir.2012). That decision is not
(Ex. A). The American Arbitration Association (“AAA”) controlling here, and the Court rejects its interpretation of
Consumer Arbitration Rules provide that the daily Green Tree. In the instant case, the main costs Plaintiffs
arbitrator fee will be paid by the business seeking to argue would prevent effective vindication of their rights
enforce an arbitration provision against a consumer, such are a result of their theory of the case, not a result of
that in this case Travelocity will pay the daily fee. See id. being forced to arbitrate. Indeed, Plaintiffs would face
Plaintiffs' argument that each individual plaintiff would be similar costs whether this case was in federal court or in
required to pay $750 to the arbitrator in fees, Pls.' Opp'n arbitration. For all of the above reasons, the Court rejects
13, has therefore been mooted by the fact that Travelocity Plaintiffs' prohibitive costs argument.
will bear the cost of compensating the arbitrator, see
Travelocity Reply 5–6. Furthermore, Travelocity has
stated that it would pay “[a]ll expenses of the arbitrator, D. “Non–Financial” Barriers
including required travel and other expenses, and any Furthermore, the Court rejects Plaintiffs' argument that
AAA expenses, as well as the costs relating to proof and the User Agreement “contains a number of inherently
witnesses produced at the direction of the arbitrator ....” unfair provisions that also undermine [their] ability to
See Travelocity Opp'n to Mot. Stay App. 7 (Ex. A). effectively vindicate their federal statutory rights in the
The Fifth Circuit in Carter found that the plaintiffs' chosen arbitral forum.” See Pls.' Opp'n 15. In Plaintiffs'
“prohibitive costs argument ha [d] been mooted by [the view, the provision in the arbitration agreement requiring
defendant's] representation to the district court that it arbitration in Tarrant County, Texas, where Travelocity
would pay all arbitration costs.” 362 F.3d at 300. The maintains its headquarters, and the clause prohibiting in-
same reasoning applies in this case, and as in Carter, person arbitration without Travelocity's permission are
plaintiffs have failed to meet their burden of “provid[ing] unfair and prevent effective vindication of their rights. Id.
some individualized evidence that [they] likely will face at 15–16.
prohibitive costs in the arbitration at issue and that [they
[18] [19] It is settled law that a forum selection [23] Finally, the Court rejects the argument that
clause is “prima facie valid and should be enforced arbitration should be denied on the grounds that doing
unless enforcement is shown by the resisting party to be so would “create an inefficient dual-track process.” See
‘unreasonable’ under the circumstances.” M/S Bremen v. Pls.' Opp'n 16. Although there are no cases from the Fifth
Zapata Off–Shore Co., 407 U.S. 1, 10, 92 S.Ct. 1907, Circuit on this point, the Fourth Circuit held in a similar
32 L.Ed.2d 513 (1972). In Carter, the Fifth Circuit case that it “d [id] not believe that the plaintiffs' inability
held that “the same burden on the objecting party of under the terms of the arbitration clauses to sue both
demonstrating unreasonableness” should apply to forum remaining defendants in a single proceeding affects their
selection clauses in a contract with an arbitration clause. ability to prove a price-fixing conspiracy.” In re Cotton
362 F.3d at 299. Yarn Antitrust Litig., 505 F.3d 274, 283 (4th Cir.2007).
The plaintiffs in that case, yarn purchasers, alleged a
[20] [21] [22] Plaintiffs have failed to demonstrate price-fixing conspiracy against yarn manufacturers. They
that the chosen forum, Tarrant County, would be argued that since they sought damages for “conspiratorial
unreasonable. In Armstrong v. Associates International actions of all the [d]efendants,” they were prevented from
Holding Corp., the Fifth Circuit stated that “generalized vindicating their statutory rights because they could not
attacks on arbitration are out of step with the federal join all defendants in a single proceeding. Id. (emphasis
policy favoring arbitration.” 242 Fed.Appx. at 959 in original). The Cotton Yarn court rejected this argument
(quoting the district court opinion, 2006 WL 2707431, because “co-conspirators are not necessary parties; a
at *4 (N.D.Tex.2006)). The Supreme Court has also plaintiff can prove the existence of a conspiracy in an
firmly rejected such generalized attacks on multiple action against just one of the members of the conspiracy.”
occasions, declaring that it “decline[s] to indulge the Id. at 284; see also Fed.R.Civ.P. 20; Fed.R.Civ.P. 23;
presumption that the parties and arbitral body conducting Wilson P. Abraham Constr. Corp. v. Tex. Indus., Inc.,
a proceeding will be unable or unwilling to retain 604 F.2d 897, 904 & n. 15 (5th Cir.1979) (“Antitrust
competent, conscientious and impartial arbitrators.” coconspirators are jointly and severally liable for all
Gilmer, 500 U.S. at 30, 111 S.Ct. 1647 (quoting Mitsubishi damages caused by the conspiracy to which they were a
Motors, 473 U.S. at 634, 105 S.Ct. 3346). The Court party. A private plaintiff need not sue all coconspirators
reiterates its position that in the case at bar, Plaintiffs but may choose to proceed against any one or more of
have merely offered a generalized attack on the AAA them.”) (citations omitted). The Fourth Circuit also noted
and its arbitrators in Tarrant County. Further, the Court that there is no right under antitrust statutes to proceed
has no reason to believe that requiring arbitration in in a single action against all defendants. Cotton Yarn,
Tarrant County is unusual, given that the county is the 505 F.3d at 283. The Court similarly rejects the argument
location of Travelocity's headquarters and part of the that the joint and several nature of liability would render
Dallas–Fort Worth metropolitan area near where some of plaintiffs' claims non-arbitrable; in fact, “because the
Plaintiffs' own attorneys are located. Plaintiffs have not defendants would be jointly and severally liable, a plaintiff
provided the Court with any persuasive information on who finds pursuing two actions unduly burdensome could
the issue of arbitral forum in their recent briefing, and simply seek to hold one defendant liable for all damages
*724 fail to cite a single case invalidating an arbitration caused by the conspiracy.” Id. at 284.
clause for unfair forum. 3 The Court finds their argument
unpersuasive. In any event, their objections to the forum [24] [25] The Court recognizes that it is possible
and to the prohibition of live appearances at arbitration that classwide arbitration would be less efficient than
have been mooted by Travelocity's agreements to arbitrate proceeding individually, at least for the Plaintiffs. The
“near the claimant's residence (or such other place as efficiency argument was addressed by the Supreme Court
the parties mutually agree) and submit to in-person in AT & T Mobility LLC v. Concepcion, and that court's
arbitration ....” See Travelocity Opp'n Mot. Stay 13. rationale is instructive here. The Concepcion Court noted
The Court sees no reason not to enforce the arbitration the “fundamental” differences between individual and
provision on these grounds, nor does it find it necessary to classwide arbitration, particularly the “additional and
sever any part of that provision. different procedures and ... higher stakes,” the difficulty
of maintaining confidentiality, and the potential lack of
expertise of arbitrators on “often-dominant procedural
aspects of certification, such as the protection of absent Fargo, where the court granted the defendants' motion
to strike allegations of equitable tolling of putative class
parties.” Concepcion, 131 S.Ct. at 1750. After discussing
members at the pleading stage. Id. at *1–2. The Court
these factors, the Court found that when class arbitration
finds that the instant case also calls for claims of absent
is “manufactured” by the courts rather than through
class members to be stricken prior to class certification.
consensual agreement, *725 it “is inconsistent with the
Any claims by absent class members bound by the User
FAA.” See id. at 1751. The Concepcion majority further
Agreement would be impertinent, as those class members
explained that informality, the “principal advantage of
would be bound to individually arbitrate their claims. The
[bilateral] arbitration,” is negated in classwide arbitration
class the Court considers at the certification stage will
because the process becomes slower, more costly, and
not include those claims subject to arbitration pursuant
“more likely to generate procedural morass than final
to this Order. In effectuating the Court's ruling to compel
judgment.” Id. Finally, the Concepcion Court rejected
arbitration, allegations of putative class members subject
the argument that “class proceedings are necessary to
to the User Agreement are hereby stricken from the
prosecute small-dollar claims that might otherwise slip
Consolidated Amended Complaint.
through the legal system,” 4 explaining that a state
“cannot require a procedure that is inconsistent with the
FAA, even if it is desirable for unrelated reasons.” Id. at
1753. Such reasoning is equally applicable here, and the IV.
Court, in its discretion, finds that the separate litigation of
Plaintiffs' conspiracy claims in the arbitral forum does not CONCLUSION
pose substantial difficulties warranting the invalidation of
a valid agreement to arbitrate. For the reasons set forth in this order, the Court
GRANTS Travelocity's Motion to Compel Arbitration.
To the extent any of the Plaintiffs' claims are based
E. Motion to Strike on their *726 booking of hotel rooms via Travelocity
Travelocity has moved to strike claims by absent class on or after February 4, 2010, such claims must be
members from the consolidated amended complaint, arbitrated pursuant to the terms of the User Agreement,
arguing that these claims must be arbitrated pursuant and the parties are hereby ORDERED to arbitrate
to the User Agreement. Travelocity Mot. Compel 11– such claims before an American Arbitration Association-
12. According to Rule 23, “the court may issue orders approved or affiliated arbitrator. Further, the Court
that: ... (D) require that the pleadings be amended hereby STRIKES any allegations of the Consolidated
to eliminate allegations about representation of absent Amended Complaint to the extent they assert claims by
persons and that the action proceed accordingly.” absent class members based on their transactions through
Fed.R.Civ.P. 23(d)(1)(D). Under Rule 12(f), “the court Travelocity on or after February 4, 2010. The parties
may strike from a pleading an insufficient defense or are further ORDERED to submit, in 90–day intervals
any redundant, immaterial, impertinent, or scandalous after the date of entry of this Order, a joint status report
matter.” Fed.R.Civ.P. 12(f). advising the Court on the progress of arbitration.
Footnotes
1 Travelocity.com LP is owned by Sabre Holdings Corporation. Consol. Am. Compl. ¶ 39.
2 As discussed by Travelocity, Travelocity has used three different versions of the User Agreement since February 4, 2010,
all with the same provisions regarding arbitration. See Section 11(B)(1)(i), infra.
3 Plaintiffs cite only one case in the relevant section of their brief, Cole v. Burns, 105 F.3d 1465 (1997), but the court in
that case held that the arbitration clause was enforceable.
4 The Supreme Court was discussing the California Supreme Court's decision in Discover Bank v. Superior Court, which
held that class action waivers in consumer arbitration agreements are unconscionable if: (1) the contract is an adhesion
contract; (2) disputes between the parties will likely involve only small amounts of damages; and (3) “it is alleged that the
party with the superior bargaining power has carried out a scheme to deliberately cheat large numbers of consumers out
of individually small sums of money ....” Concepcion, 131 S.Ct. at 1746 (quoting Discover Bank v. Super. Ct., 36 Cal.4th
148, 162–63, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005)).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Opinion
[9] Alternative Dispute Resolution
Building contracts disputes Justice MEDINA delivered the opinion of the Court.
Claims by purchasers against vendors and
listing agent regarding repairs of home at In this original mandamus proceeding, Relators seek
issue fell within arbitration agreement in to compel arbitration under an arbitration agreement
financing agreement between purchasers and they did not sign. The real parties in interest, who
mortgagee, where listing agent and vendors are signatories to the arbitration agreement, object
were non-signatory parties to arbitration to arbitration and contend that Relators cannot
agreement, agreement broadly covered all compel arbitration because Relators are not parties to
controversies, including real estate sales the arbitration agreement. The trial court apparently
contract and complaint regarding sale, and agreed because it denied Relators' motion to compel
sales contract stated that it could be amended arbitration. The underlying arbitration agreement,
by later writing and arbitration agreement at however, designated certain non-signatories as parties to
issue was executed one month later. the agreement.
5 Cases that cite this headnote We must decide whether the parties who actually agree
to arbitrate may also grant third parties the right to
enforce their arbitration agreement and, if so, whether
[10] Alternative Dispute Resolution
the signatories here intended to grant such rights to
Evidence
these Relators. We conclude that parties to an arbitration
agreement may grant non-signatories the right to compel
arbitration and that the Relators here were granted that is contained, unless all of the parties
right. The trial court therefore erred in denying the motion expressly agree in writing.
to compel arbitration, and we conditionally grant the writ.
The agreement further defined “parties” to include:
[1] The Federal Arbitration Act (FAA) generally governs the existence of a valid arbitration clause between specific
arbitration provisions in contracts involving interstate parties and is therefore a gateway matter for the court
commerce. See 9 U.S.C. § 2; see also In re L & L Kempwood to decide. In re Weekley Homes, L.P., 180 S.W.3d 127,
Assocs., L.P., 9 S.W.3d 125, 127 (Tex.1999) (per curiam). 130 (Tex.2005); Sherer v. Green Tree Servicing LLC, 548
Parties may also expressly agree to arbitrate under the F.3d 379, 381 (5th Cir.2008). Under the FAA, ordinary
FAA. In re AdvancePCS Health L.P., 172 S.W.3d 603, principles of state contract law determine whether there
605–06 & n. 3 (Tex.2005) (per curiam). The arbitration is a valid agreement to arbitrate. In re Kellogg Brown
agreement here expressly provides for arbitration under & Root, Inc., 166 S.W.3d at 738 (citing First Options
the FAA, and although the Salmons oppose arbitration, of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct.
generally, they do not contest the application of the FAA. 1920, 131 L.Ed.2d 985 (1995)). An obligation to arbitrate
not only attaches to one who has personally signed
[2] Under Section 4 of the FAA, “[a] party aggrieved the written arbitration agreement but may also bind
by the alleged failure, neglect, or refusal of another to a non-signatory under principles of contract law and
arbitrate under a written agreement for arbitration may agency. Id. at 738. Generally, however, parties must sign
petition ... for an order directing that such arbitration arbitration agreements before being bound by them. See
proceed in the manner provided for in such agreement.” 9 Grigson v. Creative Artists Agency, L.L.C., 210 F.3d
U.S.C. § 4; see In re Halliburton Co., 80 S.W.3d 566, 573 524, 528 (5th Cir.2000) (noting that “arbitration is a
(Tex.2002). “A party denied the right to arbitrate pursuant matter of contract and cannot, in general, be required
to an agreement subject to the FAA does not have an for a matter involving an arbitration agreement non-
adequate remedy by appeal and is entitled to mandamus signatory”). Although “[a]rbitration agreements apply to
relief to correct a clear abuse of discretion.” In re Labatt nonsignatories only in rare circumstances [,]” the question
Food Serv., L.P., 279 S.W.3d 640, 642–43 (Tex.2009). of “[w]ho is actually bound by an arbitration agreement
is [ultimately] a function of the intent of the parties,
as expressed in the terms of the agreement.” Bridas
S.A.P.I.C. v. Gov't of Turkmenistan, 345 F.3d 347, 355,
III
358 (5th Cir.2003). Here the question is not whether a
[3] A party seeking to compel arbitration under the FAA non-signatory may be compelled to arbitrate but rather
must establish that (1) there is a valid arbitration clause, whether a non-signatory may compel arbitration.
and (2) the claims in dispute fall within that agreement's
scope. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, [8] The Salmons argue that because none of the Rubiolas
737 (Tex.2005). The Rubiolas contend that the arbitration signed the arbitration agreement, except J.C., who signed
agreement, executed during financing, is broad enough only as the representative of Rubiola Mortgage Company,
to cover all of the Salmon's claims against them. The that none of them are entitled to compel the Salmons
Salmons argue, however, that the arbitration agreement to arbitrate. The Salmons thus equate signing with being
extends only to disputes under the financing agreement, as a party to the agreement. The arbitration agreement,
opposed to the real estate *224 sales agreement, and that however, expressly provides that certain non-signatories
its breadth cannot be used by non-signatories to compel are to be parties to the agreement. The agreement defines
arbitration. This disagreement raises two issues: do the parties to include “Rubiola Mortgage Company, and
Rubiolas, as non-signatories to the arbitration agreement, each and all persons and entities that sign this agreement
have authority to compel the Salmons to arbitrate, and, if or any other agreements between or among any of
so, does the arbitration clause cover the Salmons' claims. the parties as part of this transaction.” Parties further
The first issue questions the validity of the arbitration include “individual partners, affiliates, officers, directors,
clause, while the second questions the clause's scope. employees, agents, and/or representatives of any party to
such documents.”
arbitration agreement, and the Rubiola brothers are dispute at issue’ ”). The Rubiolas advance three arguments
clearly officers and representatives of the mortgage for why the arbitration clause covers the Salmons' claims:
company *225 and thus non-signatory parties to the (1) the language of the clause covers the claims, (2) J.C.'s
arbitration agreement under the agreement's terms. alleged actions occurred while he was acting under both
Because the arbitration agreement expressly provides the mortgage and real estate contracts, so his alleged
that certain non-signatories are considered parties, we actions were factually intertwined with the mortgage
conclude that such parties may compel arbitration under agreement, and (3) the two instruments should be read
the agreement. See Sherer, 548 F.3d at 382 (noting that together because they were executed contemporaneously
trial court's application of equitable estoppel to determine as part of the same transaction and because the mortgage
whether non-signatory might compel arbitration, was agreement was essential to the overall deal. The Salmons
unnecessary because the terms of the Loan Agreement argue, on the other hand, that the arbitration clause
clearly identify when a party might be compelled to does not cover their claims because those claims relate
arbitrate with a non-signatory); Bridas, 345 F.3d at 356 only to J.C.'s role as the listing agent to the real estate
(noting that ordinary principles of contract and agency contract. The Salmons further deny that their alleged
law may be called upon to bind a non-signatory to facts intertwine with the mortgage agreement, or that the
an agreement whose terms have not clearly done so); contracts should be construed together because they were
see also Carolyn Lamm, Defining The Party—Who is a signed by different parties at different times and without
Proper Party in an International Arbitration Before the reference to each other.
American Arbitration Association and Other International
Institutions, 34 GEO. WASH. INT'L L.REV.. 711, 720 [11] To determine whether a claim falls within the scope
(2003) (noting that courts prohibit enforcement by non- of the agreement, courts must “focus on the factual
signatories “where (1) the contract does not expressly allegations of the complaint, rather than the legal causes of
grant third parties the ability to participate in the action asserted.” Marshall, 909 S.W.2d at 900. The factual
arbitration; (2) the parties have not contemplated the idea; allegations in the Salmons' complaint center around a
and (3) non-signatory involvement would constitute an variety of alleged misrepresentations that J.C. Rubiola
invasion of the consensual nature of arbitration.”). But made in his capacity as the listing agent to the real
even though the Rubiolas are identified as non-signatories estate *226 transaction. J.C. allegedly promised that
who may compel arbitration, there remains the question certain repairs would be made to the Salmons' satisfaction
whether the Salmons' underlying claims fall within the after closing. When they were not and other serious
arbitration agreement's scope. problems materialized after closing, J.C. allegedly made
more promises to fix the problems or to repurchase the
home if the repairs were not satisfactory.
B
The underlying arbitration agreement defines arbitrable
[9] [10] When deciding whether claims fall within disputes to include “any and all controversies between
an arbitration agreement, courts employ a strong the parties of whatever type or manner, including without
presumption in favor of arbitration. Cantella & Co., limitation, all past, present and/or future credit facilities
Inc. v. Goodwin, 924 S.W.2d 943, 944 (Tex.1996) (per and/or agreements involving the parties.” The Rubiola
curiam) (holding that “[f]ederal and state law strongly brothers were, as we have already concluded, non-
favor arbitration,” and that “a presumption exists in favor signatory parties to the arbitration agreement, which
of agreements to arbitrate under the FAA”); Prudential broadly covers all controversies between the parties and
Sec. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex.1995) all past, present or future agreements involving the parties.
(holding that under the FAA “any doubts as to whether This language indicates that the arbitration agreement was
claims fall within the scope of the agreement must be not limited to the financing part of the transaction but
resolved in favor of arbitration,” and that “[t]he policy in rather extended to the real estate sales contract and the
favor of enforcing arbitration agreements is so compelling Salmons complaints regarding that sale.
that a court should not deny arbitration ‘unless it can be
said with positive assurance that an arbitration clause is The Salmons argue, however, that including the real
not susceptible of an interpretation which would cover the estate sales contract as part of the transaction subject
to arbitration is contrary to the terms of that contract. enforce arbitration as though they signed the agreement
themselves. We further conclude that the underlying
The real estate contract stated that it constituted the
arbitration agreement in this case identified the Rubiolas
entire agreement between the parties and further provided
as parties to the agreement and that they accordingly
that the parties could enforce it in court. The contract,
had the right to compel arbitration. Finally, we conclude
however, also states that it could be amended by a later
that the trial court's order denying arbitration is an abuse
writing. In the arbitration agreement, executed a month
of discretion for which we conditionally grant Relators'
later as part of the process for obtaining financing, the
request for mandamus relief. TEX.R.APP. P. 52.8(c). The
Salmons agreed to arbitrate all controversies between the
writ will issue only if the trial court fails to enforce the
parties and all past agreements involving the parties.
arbitration agreement.
***
All Citations
We conclude that signatories to an arbitration agreement
may identify other parties in their agreement who may 334 S.W.3d 220, 54 Tex. Sup. Ct. J. 654
Footnotes
1 J.C. Rubiola, Gregory Rubiola, Catherine Rubiola, JGL–Design Build, L.L.C., Michael Cortez individually and d/b/a The
Heights Design and Construction are defendants in the underlying suit and Relators in this Court.
2 J.C. and Greg Rubiola are the President and Vice President of Rubiola Mortgage Company. JGL Design Builders L.L.C.
is a Texas limited liability corporation, owned and managed by J.C. and Greg Rubiola. Michael Cortez individually and
d/b/a the Heights Design and Construction was the original contractor hired by the Rubiolas to remediate the mold and
water damage at the property.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
In order to meet their burden to show entitlement to that the economic injury which he claimed related to
arbitration and a stay of the litigation, Ruefer and or arose out of the two agreements, these agreements
American Custom had the burden (1) to establish the creating Bartee's ownership interest and rights, would
existence of an arbitration agreement, and, if so (2) be an essential predicate to support recovery under any
show that the claims raised fall within the scope of of the alleged claims, whether conversion, conspiracy,
the agreements. In Re Oakwood Mobile Homes, Inc. interference with contracts, or other claims set out above.
987 S.W.2d 571, 573 (Tex.1999). Here, they met the Accordingly, as in Oakwood, 987 S.W.2d at 573, we hold
first prong of such burden because the existence of the that Ruefer and American Custom met their burden to
agreements was not in dispute, and Bartee incorporated show the existence of the agreements to arbitrate and,
the agreements into his pleadings. resolving any doubt in favor of arbitration, Prudential
Securities, Inc., 909 S.W.2d at 899, we also hold that
Next, we must determine if Bartee's claims fall within Bartee's claims fell within the scope of the agreements.
the scope of the agreements. Under the Federal Act, any
doubt as to whether the claims fall within the scope of By his amended petition, Bartee did not allege that
the agreements must be resolved in favor of arbitration. Ruefer and American Custom had waived their rights
Prudential Securities, Inc. v. Marshall, 909 S.W.2d 896, to arbitration, but instead alleged that he sought
899 (Tex.1995). Also, in making this determination, we judicial relief because all defendants had not signed
focus on the factual allegations of the pleadings, rather the agreements which provided for arbitration. We do
than the legal causes of action asserted. Id. at 900. The not accept the proposition that a party to a contract
portion of the Joint Owners Agreement containing the containing an arbitration clause may avoid arbitration
arbitration provision commences: by the simple device of joining as defendants in its
lawsuit others with which the party has no such
In case any dispute or disagreement agreement to arbitrate. See Fridl v. Cook, 908 S.W.2d
arises out of this Agreement or 507, 514 (Tex.App.-El Paso 1995, writ dism'd w.o.j.).
in connection with the invention Here, however, by three subpoints, Bartee contends that
or patent application, the parties Ruefer and American Custom waived their right to
shall.... arbitration: (1) because with knowledge of Bartee's claim
for commissions and while negotiations were in progress,
Focusing on the factual allegations, we must determine
Ruefer and American Custom brought about certain sales
if Bartee's numerous claims are so interwoven with the
and transfer of the rights in the agreements to third parties;
agreements that they could not stand alone, or whether
(2) Ruefer and American Custom utilized discovery in
the other claims are completely independent of the
the underlying proceeding; and (3) the transfer of the
agreements and could be maintained without reference
license agreement violated part 1 of the Joint Owners
to the agreements. See Valero Energy Corp. v. Wagner
Agreement, which prohibited any transfer without the
& Brown, 777 S.W.2d 564, 567 (Tex.App.-El Paso 1989,
consent and cooperation of the other party. We will
writ denied). Bartee asserts that his tort claims are outside
review these contentions based on the Supreme Court's
the scope of the agreements; however, in his deposition,
holding in Oakwood, 987 S.W.2d at 574, that based on the
Bartee acknowledged that the economic injuries which he
strong public policy favoring arbitration, “there is a strong
asserted all related to or arose out of what he believed to
presumption against the waiver of contractual arbitration
be breaches of the two agreements.
rights.” The question of waiver is a question of law and
all doubts about waiver are to be resolved in favor of
*4 Moreover, in Jack B. Anglin Co., Inc., 842 S.W.2d at
arbitration. Id.
270, the Court held that despite the nonwaiver provision
of section 17.42 of the Texas Business and Commerce
Bartee was aware in June 1996 that American Custom
Code Annotated, 5 the DTPA claim alleged was also ceased paying royalties pending renegotiation of the
subject to arbitration. Notwithstanding the creative and contract. Also, in February 1997, Bartee's attorney
skillful pleading of Bartee's various claims, his rights as to advised Ruefer and American Custom that he would
all claims have their inception in and arise from the Joint immediately commence arbitration if the dispute could
Owners Agreement or the Patent License Agreement. not be resolved. However, Bartee did not follow through
Moreover, because Bartee acknowledged in his deposition
with his threat to immediately commence arbitration and compel arbitration and the live pleadings of Ruefer and
American Custom specially claimed that Bartee had not
did not file his suit until April 1998. Had Bartee followed
fulfilled all conditions precedent to arbitration and sought
through with his intention to commence arbitration, the
abatement and stay of the action because of the provision
question as to transferability of the rights in the agreement
for arbitration in the agreements. Based upon the strong
would have been presented in arbitration. Also, the
presumption against waiver and resolution of doubts
transfer, which is the basis of Bartee's complaint, might
against waiver of arbitration, Oakwood, 987 S.W.2d at
not have occurred.
574, we conclude that Ruefer and American Custom did
not waive their rights to arbitration.
*5 By his initial petition, Bartee sought to compel
arbitration. By their initial answer, Ruefer and American
Applying Oakwood and Terminix, we conclude the trial
Custom raised the arbitration provisions of the
court abused its discretion in denying the motion of
agreements and raised Bartee's failure to comply with
Ruefer and American Custom to compel arbitration
conditions precedent. Also, they requested that the action
and stay litigation as between Bartee as the plaintiff
be abated until Bartee fulfilled the conditions precedent
and Ruefer and American Custom as defendants in the
for arbitration. No discovery was initiated until late
underlying action. Because the order erroneously denied
October 1998, when Bartee's substitution of counsel
Ruefer and American Custom the right to arbitrate
was initiated. After Bartee amended his petition on
under the Federal Act, they are entitled to mandamus
January 12, 1999, contending, among other things, that
relief. However, because the right to arbitrate disputes
he sought relief against all defendants in the underlying
arises only by way of an agreement between the parties,
action, because some of the defendants had not signed
and there being no agreement between Bartee and the
the agreements providing for arbitration, Ruefer and
remaining defendants, Lifecore Biomedical, Inc., Bridger
American Custom deposed Bartee. Among other things,
Biomed, Inc., and Jeffrey W. Hurt, the stay and order
the deposition established that Bartee had not initiated
to compel arbitration should not affect Bartee's action
arbitration per the rules of the American Arbitration
against those defendants. Because the March 26,1999
Association and his acknowledgment that his economic
order which also constituted a scheduling order as to all
injury arose out of the Joint Owners Agreement and
defendants will require modification, and a severance may
the Patent License Agreement. In Prudential Securities,
be appropriate based upon this decision, we conditionally
Inc., 909 S.W.2d at 899, the Supreme Court held that
grant the writ of mandamus. We are confident that the
invoking the judicial process by engaging in discovery
trial court will grant the motion to compel arbitration
did not constitute a waiver of the right to arbitration.
and stay litigation of Ruefer and American Custom in
Later, in In Re Bruce Terminix Company, 988 S.W.2d 702
(Tex.1998), the Court held that a motion to abate based accordance with this opinion. 6 We instruct the clerk to
on an arbitration provision filed some six months after issue the writ only if the trial court fails to grant the motion
suit was filed was not improper because Terminix had within thirty days.
submitted interrogatories soon after its answer. See also
EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex.1996).
All Citations
Here, however, until Bartee filed his amended petition
on January 12, the live pleadings of Bartee sought to Not Reported in S.W.2d, 1999 WL 371568
Footnotes
1 We do not decide whether the payment of the filing fee under the Commercial Arbitration Rules of the American Arbitration
Association is apportioned in accordance with part 3 of the Joint Owners Agreement.
2 The Patent License Agreement shows the mailing address for notice under the agreement for Ruefer and American
Custom to be 3305 66th Street, Lubbock, Texas, 79413. Other evidence reflects that Bruce Ruefer and Rebecca Ruefer
were officers and shareholders of American Custom and that they moved to Montana in August 1996. They formed a
Montana corporation named Bridger Biomed, Inc., also a named defendant in the underlying lawsuit.
3 The Joint Owners Agreement and the Patent License Agreement were made a part of the amended petition.
4 The March 26 order expressly provided that it was subject to the special appearances of Bridger and Lifecore which
remained pending.
5 Act of May 1, 1987, 70th Leg., R.S., ch. 167, 1987 Tex.Gen.Laws 1338, 1361 (amended 1989) (current version at Tex.Bus.
& Com.Code Ann. § 17.42 (Vernon Pamph. Supp.1999).
6 We express no opinion as to whether Bartee can proceed with discovery as to Ruefer and American Custom as “non-
party” witnesses under Rule 190 et seq. of the amended rules of discovery of the Texas Rules of Civil Procedure in
connection with his action against the remaining defendants.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
was certified that included all SCI shareholders other than immediately renewed their motion to stay discovery in
its officers at the time of the merger. The four defendants, state court, and the federal court granted the motion a few
relators in the proceeding now before us, moved to dismiss days later.
the complaint under Rule 12(b)(6) of the Federal Rules
of Civil Procedure and the Private Securities Litigation Since the federal court had not stayed all proceedings
3
Reform Act of 1995. The parties here tell us that this in state court, the Hunters moved the state court for a
*173 motion remains pending and has the effect of preferential trial setting. In February 2001, the same day
staying proceedings in federal court. that motion was heard, relators and the other defendants
in state court filed a motion to compel arbitration of
James P. Hunter, III, ECI's chairman and chief executive the Hunters' state law claims, based on the following
officer, and the James P. Hunter, III Family Trust provision in the merger agreement between SCI and ECI:
(collectively, “the Hunters”) were major shareholders in
upon the request of any party
ECI and received SCI stock in the merger. The Hunter
(defined for the purpose of this
Family Trust was thus a member of the class in federal
provision to include affiliates,
court, but Hunter himself was excluded because he
principles [sic] and agents of
had become an officer of SCI as part of the merger.
any such party), any dispute,
In November 1999, a little over two months after the
controversy or claim arising out of,
class was certified, the Hunters filed suit in state court
relating to, or in connection with
against SCI and the three individual defendants in the
this Agreement or any agreement
federal action, along with three other SCI officers and
executed in connection herewith or
its accountant, PricewaterhouseCoopers. The Hunters'
contemplated hereby, ... shall be
factual allegations are much like those made in federal
finally resolved by mandatory and
court, but there are differences. For example, an allegation
binding arbitration in accordance
made only in federal court is that SCI failed to disclose
with the terms hereof.
that its pre-need funeral business was a drain on profits.
Also, the Hunters argue that they complain only of In a written response, the Hunters urged that relators had
misrepresentations made near the time of the merger while waived any right to arbitrate by delaying their request
class members who obtained SCI stock independent of for arbitration, opposing a trial setting, and proceeding
the merger may not be able to recover absent proof of in federal court. The Hunters agreed to nonsuit the four
misrepresentations made long before the merger closed. defendants other than relators. At the hearing on relators'
And just as the federal action does not involve any state motion, *174 the Hunter Family Trust also argued
law claims, the state action does not involve any federal that it was not covered by the arbitration agreement,
law claims. an argument it had not made in the written response to
relators' motion. The trial court denied the motion, and
Relators moved the federal court in December 1999 to
the court of appeals denied mandamus relief. 6
stay all discovery in the state action under the Securities
Litigation Uniform Standards Act of 1998, 4 and the The parties agree that the arbitration provision is
court heard the motion in May 2000. At that hearing, in
governed by the Federal Arbitration Act. 7 In the words
response to questions from the court, SCI suggested that
of the United States Supreme Court, “The Arbitration
Hunter be made a member of the class. The court issued
Act establishes that, as a matter of federal law, any
two orders, one amending the class definition to include
doubts concerning the scope of arbitrable issues should
Hunter, and the other staying discovery in the state action
be resolved in favor of arbitration, whether the problem
as relators had requested and also ordering on its own
at hand is the construction of the contract language
initiative that the Hunters litigate all of their claims in the
itself or an allegation of waiver, delay, or a like defense
federal action. The Fifth Circuit vacated the second order
in September 2000, holding that the district court was not to arbitrability.” 8 We have held that under the federal
authorized to prohibit the Hunters from opting out of statute, “Courts will not find that a party has waived its
right to enforce an arbitration clause by merely taking part
the class and pursuing their claims elsewhere. 5 Relators
in litigation unless it has substantially invoked the judicial
process to its opponent's detriment.” 9 There is a strong The Hunters would have a stronger position if the federal
and state claims were more alike. Regarding the similarity
presumption against waiver. 10 We have also held that
of the state and federal claims, the parties have maintained
“[w]hether a party's conduct waives its arbitration rights
flexibility. In opposing a trial setting, relators told the
under the Federal Arbitration Act is a question of law.” 11 state court that the claims are “virtually identical” while
the Hunters characterized them as “quite different”; now
Relators' delay in moving to compel arbitration and their relators tell us that the claims are “different” while
opposition to the Hunters' request for a trial setting do the Hunters embrace relators' earlier view that they are
not amount to a waiver of arbitration. Neither involved “virtually identical”. The truth, as we have noted, is that
a substantial invocation of the state judicial process. the federal and state actions are quite similar, arising as
During the delay relators sought no relief from the state they do out of the same merger transaction, yet different in
court, and their objection to a trial setting reflects an several particular respects. The important thing, however,
intent to avoid the state judicial process, not invoke it. is that almost all of the class members' claims cannot
Moreover, we have held that “[a] party does not waive be arbitrated. Relators should not be forced to arbitrate
a right to arbitration merely by delay; instead, the party the Hunters' federal claims alone of all the other class
urging waiver must establish that any delay resulted in members in order to preserve their right to arbitrate state
prejudice.” 12 To show prejudice from delay, the Hunters claims that only the Hunters have asserted.
argue only that they would not have had to appeal the
federal court order requiring them to try all their claims The Fifth Circuit has held that “a party only invokes the
in federal court had relators earlier asked for arbitration judicial process to the extent it litigates a specific claim it
of the state law claims. But relators did not invoke the subsequently seeks to arbitrate.” 14 We do not read this
federal court issuance of that portion of its order; the to suggest that a party has unlimited freedom to decide
federal court issued that part of the order on its own to arbitrate some interrelated claims and litigate others.
initiative, and it is far from clear that the court would have On the other hand, the arbitration provision involved
ruled differently had arbitration already been requested. here gave parties the right to arbitrate “any dispute,
The Hunters complain that relators defended the federal controversy or claim” related to the merger agreement.
court's order on appeal, and to some extent they did, This provision is broad enough to permit relators to
although the Fifth Circuit noted that relators argued that litigate the Hunters' federal claims with those other class
the federal district court “did not intend [the] effect” its members while insisting on arbitration of the Hunters'
language had. In any event, the detriment to the Hunters state claims.
was caused by the federal court's ruling, not by relators'
defense of it. The Hunter Family Trust argues that it is not subject to
the arbitration provision. It did not raise this argument
*175 The Hunters' principal argument is that relators in its written response to relators' motion to compel but
have waived arbitration of the state law claims by invoking mentioned it at the hearing on the motion. Although
the federal judicial process—specifically, by moving to relators asserted in their motion to compel arbitration that
dismiss the complaint, moving for a stay of state court the provision extended to the Hunter Family Trust, they
discovery, supporting Hunter's inclusion in the class, and now contend that the issue is not before us because it is
otherwise indicating a willingness to litigate in federal not clear that the trial court ruled on it. The issue involves
court. We do not agree. The filing of a motion to dismiss arguments that we think should be addressed by the trial
the claims of class members, almost all of whom are not court in the first instance, and therefore we express no
subject to arbitration, did not waive arbitration. 13 The opinion on the subject. We leave the matter for further
effect of that motion was to stay discovery in federal consideration by the trial court.
court, and federal law authorized a stay of discovery in
state court. Relators' efforts in moving to dismiss and We conclude that as a matter of law relators did not
staying discovery were to avoid litigation, not participate waive their right to arbitrate the Hunters' state law
in it. Including Hunter in the class was the federal court's claims, and *176 that the trial court therefore abused its
suggestion in which relators at most acquiesced. discretion in denying the relators' motion on this basis.
For reasons we have explained in similar contexts, relators
Footnotes
1 They are Robert L. Waltrip, L. William Heiligbrodt, and George R. Champagne.
2 In re Service Corp. Int'l, Civil No. H–99–280 (S.D.Tex.).
3 Pub.L. No. 104–67, 109 Stat. 737 (1995).
4 Pub.L. No. 105–353, 112 Stat. 3227 (1998).
5 In re Service Corp. Int'l, No. 00–20451 (5th Cir., Sept.13, 2000) (per curiam) (unpublished).
6 In re Service Corp. Int'l, No. 09–01–252–CV (Tex.App.-Beaumont, order issued June 29, 2001) (per curiam)
(unpublished).
7 9 U.S.C. §§ 1–307.
8 Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).
9 In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex.1998) (per curiam) (citing Walker v. J.C. Bradford & Co., 938 F.2d
575, 577 (5th Cir.1991)); accord, EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex.1996) (per curiam) (citing Miller
Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir.1986)).
10 Bruce Terminix, 988 S.W.2d at 704 (citing Moses H. Cone, 460 U.S. at 24, 103 S.Ct. 927); EZ Pawn, 934 S.W.2d at 89
(same); Prudential Securities, Inc. v. Marshall, 909 S.W.2d 896, 898 (Tex.1995) (per curiam) (same).
11 Bruce Terminix, 988 S.W.2d at 703–704 (citing Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159 (5th
Cir.1986)).
12 Prudential Securities, 909 S.W.2d at 898–899 (citing Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir.1985)).
13 See Sweater Bee by Banff, Ltd. v. Manhattan Indus., Inc., 754 F.2d 457 (2d Cir.1985).
14 Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 328 (5th Cir.1999) (citing Doctor's Assocs. v. Distajo, 107 F.3d 126,
132–33 (2d Cir.), cert. denied, 522 U.S. 948, 118 S.Ct. 365, 139 L.Ed.2d 284 (1997) (“only prior litigation of the same
legal and factual issues as those the party now wants to arbitrate results in waiver of the right to arbitrate”)).
15 E.g., EZ Pawn, 934 S.W.2d at 90; Prudential, 909 S.W.2d at 900.
16 TEX.R.APP. P. 59.1.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
7 Cases that cite this headnote Scott M. Keller, The Law Offices of Scott M. Keller,
Robert Nathan Grisham, The Law Offices of Robert N.
[7] Insurance Grisham II, Dallas, TX, for Real Party in Interest Grubbs
Waiver or loss of appraisal rights; Infiniti, Ltd.
estoppel
Wade Caven Crosnoe, Thompson Coe Cousins & Irons,
In order to establish that a party to an L.L.P., Austin, TX, for Amicus Curiae Insurance Council
insurance contract has waived its right to an of Texas and Property Casualty Insurers.
appraisal in a dispute over the amount of loss
for a covered claim a party must show that Peter M. Kelly, Kelly Durham & Pittard LLP, Houston,
an impasse was reached, and that any failure TX, George (Tex) Quesada, Sommerman & Quesada,
to demand appraisal within a reasonable time L.L.P., Dallas, TX, James B. Lewis, Lewis & Hildebrand
prejudiced the opposing party. PC, Houston, TX, for Amicus Curiae Texas Trial Lawyers
Association.
36 Cases that cite this headnote
Brendan K. McBride, The McBride Law Firm, San
Antonio, TX, for Amicus Curiae Texas Apartment
[8] Mandamus
Assoc., Inc., Texas Assoc. of School Boards.
Civil proceedings other than actions
Mandamus relief is appropriate to enforce William F. Merlin Jr., Merlin Law Group, P.A., Houston,
an appraisal clause in an insurance contract TX, for Amicus Curiae United Policyholders.
because denying the appraisal would vitiate
the insurer's right to defend its breach of Gardner C. Pate, Locke Lord Bissell & Liddell LLP,
contract claim. Austin, TX, for Amicus Curiae Texas Building Owners
and Managers Association.
16 Cases that cite this headnote
Chief Justice JEFFERSON delivered the opinion of the Four months later, Grubbs sued Universal for
Court. underpayment of its claim, alleging breach of contract,
breach of the duty of good faith and fair dealing, as well
Appraisal clauses, a common component of insurance as violations of the Deceptive Trade Practice–Consumer
contracts, spell out how parties will resolve disputes Protection Act, Insurance Code, and Prompt Payment of
concerning a property's value or the amount of a covered Claims Act. In response, Universal invoked the policy's
loss. When the parties disagree, but neither seeks appraisal appraisal clause, which provides, in pertinent part,
until one has filed suit, has the party demanding appraisal
waived its right to insist on the contractual procedure? [i]f YOU or WE can't agree on the value of the property
Because we conclude that, absent conduct indicating or the amount of YOUR property LOSS, either of us
waiver and a showing of prejudice, it has not, we can demand in writing, an appraisal within 20 days
conditionally grant relief. of such demand. Then, each will select a competent
and disinterested appraiser who will, in turn, select a
competent and disinterested umpire....
I. Background
Grubbs Infiniti, a car dealership in the Dallas–Fort Worth The appraisal shall be then made at a reasonable time
area, suffered hail damage to buildings on its property. and place. Each appraiser will state his appraisal of the
When Grubbs filed a claim with its insurer, *406 value or LOSS. If they can't agree, they will submit their
Universal Underwriters, a claims representative inspected differences to the umpire. The value of the property or
the property. Universal subsequently paid Grubbs amount of the LOSS will be determined by a written
$4,081.95 for the damage. Grubbs asked Universal to agreement of any two of them. Such an agreement is
reinspect the property, contending that the claim had not binding.
been properly investigated or fully paid. Universal sent an
Universal moved to compel an appraisal and to abate
engineer to reinspect the property, after which it issued a
all other proceedings in the interim. Grubbs alleged that
$3,000 supplemental payment to cover scuff marks on the
Universal waived its right to appraisal by not invoking
roof. In November 2008, Universal explained that
it sooner. When the trial court denied the motion,
[i]f you would like to have your roof expert discuss Universal unsuccessfully sought mandamus relief from
the findings with [the engineer], please advise and we the court of appeals. 345 S.W.3d at 412. Universal
will put the two parties in touch with one another. We petitioned this Court, 1 and, after hearing oral argument,
will hold our file open for 15 days pending any further we conditionally grant relief.
contact from you regarding this matter.
S.W.3d 886, 888 (Tex.2009). These clauses are generally Grubbs argues that this delay was unreasonable as a
enforceable, absent illegality or waiver. See id. (“ ‘In matter of law, citing a number of cases in which our courts
the absence of fraud, accident, or mistake, the parties of appeals found appraisal demands untimely when made
having agreed that the amount of loss shall be determined as little as thirty-nine days from the date of disagreement.
in a particular way, we are constrained to hold that See, e.g., Int'l Serv. Ins. Co. v. Brodie, 337 S.W.2d 414, 416
such stipulation is valid.’ ”(quoting Scottish Union & (Tex.Civ.App.-Fort Worth 1960, writ ref'd n.r.e.) (noting
Nat'l Ins. Co. v. Clancy, 71 Tex. 5, 8 S.W. 630, 631 that the parties disputed whether it had been thirty-
(1888))). Appraisals can provide a less expensive, more nine or seventy-two days from the date of disagreement);
efficient alternative to litigation, and we recently held that Boston Ins. Co. v. Kirby, 281 S.W. 275, 276 (Tex.Civ.App.-
they “should generally go forward without preemptive Eastland 1926, no writ) (noting that insurer *408 waited
intervention by the courts.” Id. at 895. fifty-eight days after receiving proof of loss to make
demand for appraisal); Am. Fire Ins. Co. v. Stuart, 38 S.W.
Indeed, appraisals have proceeded for well over a century 395, 396 (Tex.Civ.App.1896, no writ) (“The retention
with little judicial involvement. Id. at 889 (noting that of the proofs of loss by appellant for an unreasonable
only five of our prior decisions involved appraisals). Of time without objection would be a waiver of any defect
our three cases to address waiver of appraisal clauses, therein.”). These decisions, however, were not based solely
only one found that waiver had actually occurred. See on the length of delay, but rather on the parties' conduct,
Del. Underwriters v. Brock, 109 Tex. 425, 211 S.W. 779, as indications of waiver. 3 In Brodie, for example, after
780–81 (1919) (waiver due to insurer's selection of biased several attempts to reach a settlement, the insurer wrote
arbitrator, in violation of the policy); Am. Cent. Ins. Co. to the insured that “[i]t would be superfluous” to further
v. Bass, 90 Tex. 380, 38 S.W. 1119, 1119–20 (1897) (same); enumerate the claims, and that “there appears to be no
Scottish Union, 8 S.W. at 632 (no waiver). In that case, we item that has or will need a point of compromise.” Brodie,
held that an insurer could not claim as a defense that the 337 S.W.2d at 416. The court concluded that “[t]his [wa]s
insured failed to submit to an appraisal because the insurer evidence of a failure to agree. The Company could then
did not nominate a “disinterested appraiser” as the policy pay what Mrs. Brodie demanded, do nothing, or demand
required. Brock, 211 S.W. at 780. an appraisal.” Id. The fact that thirty-nine or seventy-
two days had passed during their negotiations was not
[1] We have explained that determinative of the waiver issue. Instead, the expression
of the parties' unwillingness to negotiate further indicated
[to] constitute waiver the acts relied
that the clause should have been invoked. In other words,
on must be such as are reasonably
while the time period may be instructive in interpreting
calculated to induce the assured to
the parties' intentions, it alone is not the standard by
believe that a compliance by him
which courts determine the reasonableness of a delay. See
with the terms and requirements of
Equitable Life Assurance Soc. v. Ellis, 105 Tex. 526, 152
the policy is not desired, or would be
S.W. 625, 629 (1913) (“A waiver may be created by acts,
of no effect if performed. The acts
conduct, or declarations.” (quotations omitted)); Scottish
relied on must amount to a denial of
Union, 8 S.W. at 632 (describing the kind of “acts relied
liability, or a refusal to pay the loss.
on” that constitute waiver).
Scottish Union, 8 S.W. at 632. Or, as we more recently
concluded, “[w]aiver requires intent, either the intentional
A. Delay must be measured from the point of impasse.
relinquishment of a known right or intentional conduct
[3] Thus, while an unreasonable delay is a factor in
inconsistent with claiming that right.” In re Gen. Elec.
finding waiver, reasonableness must be measured from the
Capital Corp., 203 S.W.3d 314, 316 (Tex.2006) (quotations
point of impasse, as several cases have recognized. See
omitted). 2 In re Slavonic Mut. Fire Ins. Ass'n, 308 S.W.3d 556, 562
(Tex.App.-Houston [14th Dist.] 2010, no pet.) (holding
[2] Grubbs asserts that Universal waived its right to that “the date of disagreement, or impasse, is the point of
invoke appraisal by waiting eight months, from the date reference to determine whether a demand for an appraisal
that Grubbs asked for a reinspection of its property to the is made within a reasonable time”); see also Sanchez v.
date that Grubbs sued, before demanding an appraisal.
Prop. & Cas., Ins. Co. of Hartford, No. H–09–1736, 2010 by the insured and the appraisal
WL 413687, at *5, 2010 U.S. Dist. LEXIS 6295, at *13–14 demand; and (2) whether there
(S.D.Tex. Jan. 27, 2010) (“The proper point of reference would be any prejudice to the other
for determining whether an insurer waived the right to party resulting from the delay in
invoke appraisal by delay is the point at which the insurer demanding an appraisal.
knew the appraisal clause could be invoked because of
a disagreement over the amount of damages, that is, the Id. at 602 (citation omitted). In Terra, despite two and a
point of impasse with the insured.”). That requires an half years of negotiations, “and evident dispute,” id. at
examination of the circumstances and the parties' conduct, 601, the court found that the insurer “had no notice that
not merely a measure of the amount of time involved in an impasse had been reached, because only the filing of
seeking appraisal. [the insured]'s suit demonstrated [the insured]'s unilateral
conclusion that the parties were at an impasse.” Id. at 603.
An impasse is not the same as a disagreement about
the amount of loss. Ongoing negotiations, even when Other courts have relied on Terra to measure the point
the parties disagree, do not trigger a party's obligation of impasse at which parties are to invoke appraisal
to demand appraisal. Nor does an insurer's offer of clauses. See, e.g., Lyon v. Am. Family Mut. Ins. Co.,
money to cover damages necessarily indicate a refusal 617 F.Supp.2d 754, 760 (N.D.Ill.2009); Rebel Tractor
to negotiate further, or to recognize additional damages Parts, Inc. v. Auto–Owners Ins. Co., No. CV206–102, 2006
upon reinspection. See Scottish Union, 8 S.W. at 632. U.S. Dist. LEXIS 86502, at *8 (S.D.Ga. Nov. 28, 2006);
SR Int'l Bus. Ins. Co. Ltd. v. World Trade Ctr. Props.
*409 Texas state and federal courts have cited a federal LLC, No. 01 Civ.9291, 2003 WL 1344882, at *1, 2003
district court case from Iowa, Terra Industries, Inc. v. U.S. Dist. LEXIS 3881, at *4 (S.D.N.Y. Mar. 18, 2003).
Commonwealth Insurance Co. of America, 981 F.Supp. 581 Using the point of “impasse,” rather than the first sign of
(N.D.Iowa 1997), for its analysis of the point of “impasse” disagreement, corresponds with our definition of waiver
in insurance negotiations. See Tran v. Am. Econ. Ins. as an “intentional relinquishment of a known right or
Co., No. H–10–0016, 2010 WL 2680616, at *2–3, 2010 intentional conduct inconsistent with claiming that right.”
U.S. Dist. LEXIS 66283, at *6–7 (S.D.Tex. July 2, 2010); In re GE Capital, 203 S.W.3d at 316 (quotation omitted).
Sanchez, 2010 WL 413687, at *4, 2010 U.S. Dist. LEXIS In other words, both parties must be aware that further
6295, at *11; Laas v. State Farm Mut. Auto. Ins. Co., negotiations would be futile, “or would be of no effect if
No. 14–98–00488–CV, 2000 WL 1125287, at *5–7, 2000 performed.” Scottish Union, 8 S.W. at 632. If one party
Tex.App. LEXIS 5332, at *16–18 (Tex.App.-Houston genuinely believes negotiations to be ongoing, it cannot
[14th Dist.] Aug. 10, 2000, no pet.) (not designated for have intended to relinquish its right to appraisal (unless
publication). The Terra court looked to other jurisdictions it expressly waives it). See Keesling v. W. Fire Ins. Co.,
for insight in determining at what point an insurer has 10 Wash.App. 841, 520 P.2d 622, 627 (1974) (finding
waived its appraisal right and formulated the following no waiver where, “insofar as the record shows, until
factors: the insured filed suit, the frame of mind of both parties
welcomed additional communications and negotiations
In deciding whether a demand rather than confrontation”).
for appraisal was made within a
reasonable time, and consequently The definition of impasse as the apparent breakdown of
has not been waived even if suit good-faith negotiations is supported in another context
was filed before the demand was as well, which we find persuasive in our analysis.
made, courts have considered the Under the National Labor Relations Act, 29 U.S.C.
timeliness of the demand in light § 151, an employer may implement unilateral changes
of the circumstances as they existed in employment terms only after good-faith negotiations
at the time the demand was made. have been exhausted, and the parties have reached an
Pertinent circumstances include (1) “impasse.” Beverly Farm Found. v. NLRB, 144 F.3d 1048,
the time between the breakdown of 1052 (7th Cir.1998); Taft Broadcasting Co., 163 N.L.R.B.
good faith negotiations concerning 475, 478 (1967). The United *410 States Supreme Court
the amount of the loss suffered has defined impasse under these circumstances as “that
point at which the parties have exhausted the prospects of Moreover, Universal stated that it would leave the file
concluding an agreement and further discussions would open should Grubbs want to pursue further discussions.
be fruitless.” Laborers Health & Welfare Trust Fund v. We will not infer waiver where neither explicit language
Advanced Lightweight Concrete Co., 484 U.S. 539, 544, nor conduct indicates that such was the party's intent.
108 S.Ct. 830, 98 L.Ed.2d 936 (1988); see also Beverly
Farm Found., 144 F.3d at 1052 (“The touch-stone for Scottish Union is again instructive. In that case, the insurer
determining whether a genuine ‘impasse’ or ‘deadlock’ conducted an inspection in response to the insured's
existed ... is the absence of any realistic possibility claim and offered its calculation of damages. 8 S.W. at
that continuation of the negotiations would have been 630. When the parties disagreed on their estimates, the
fruitful.”). insurer offered an amount in settlement. Id. The insured
declined the offer, then brought suit. Id. When the insurer
[4] [5] Universal invoked appraisal within a reasonable demanded appraisal, the insured argued that the insurer
time after the parties reached an impasse. The policy had waived its right to do so. Id. at 631. We held that
contained no time limit for the appraisal request, and the insurer's attempt at reaching a settlement did not
Universal never denied liability for the loss. At no point constitute a refusal to pay the loss: “It does not appear
did Grubbs notify Universal that it refused to discuss that [the insurer] at any time denied its liability or refused
the matter further, despite Universal's statement that it to pay whatever amount of loss and damage might be
would leave its file open for further discussions should determined in the manner required by the policy to be
Grubbs care to do so. Whether Universal was aware of due.” Id. at 632. As such, it had not waived its *411
Grubbs' disagreement as to the estimate of damages is appraisal right. The same reasoning applies here.
also irrelevant, since mere disagreement does not in itself
signal an unwillingness to negotiate further. See NLRB v.
Cent. Plumbing Co., 492 F.2d 1252, 1254 (6th Cir.1974) B. Delay alone is not enough; a party must also show
(“[M]ere rejection of a bargaining proposal does not create prejudice.
an impasse.”); Lyon, 617 F.Supp.2d at 759 n. 8 (“[T]he Even if Universal had waited to request appraisal, mere
relevant event is not the existence of a difference of views delay is not enough to find waiver; a party must show
as to the loss amount, but rather the parties' inability that it has been prejudiced. See 15 LEE R. RUSS &
to resolve that difference despite their attempts to do THOMAS F. SEGALLA, COUCH ON INSURANCE
so.”). Once the parties have reached an impasse—that § 210:77 (3d ed. 1999) (“In addition, a waiver will not be
is, a mutual understanding that neither will negotiate declared where there has been no showing of prejudice to
further—appraisal must be invoked within a reasonable the other party by a delay in demanding an appraisal.”);
time. Here Universal sought appraisal approximately one Terra, 981 F.Supp. at 602 (requiring courts to examine
month after Grubbs sued. We conclude that Universal “whether there would be any prejudice to the other party
demanded appraisal within a reasonable time after the resulting from the delay in demanding an appraisal”).
parties reached an impasse. If the insured has suffered no prejudice due to delay,
it makes little sense to prohibit appraisal when it can
[6] Grubbs contends that, because Universal's provide a more efficient and cost-effective alternative
correspondence included a provision alerting the insured to litigation. Of course, prejudice to a party may arise
of the statute of limitations on bringing suit, Universal in any number of ways that demonstrate harm to a
effectively acknowledged that the parties were at an party's legal rights or financial position. See, e.g., Perry
impasse (“... being mindful of the policy requirement that Homes v. Cull, 258 S.W.3d 580, 597 (Tex.2008) (defining
legal action contesting Universal Underwriter's decision prejudice for purposes of waiver of arbitration as “the
on this claim must be brought within 24 months and 1 inherent unfairness in terms of delay, expense, or damage
day from the date you discover the loss ...”). Universal to a party's legal position” (quoting Republic Ins. Co.
counters that its letters included no statements regarding v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th
waiver of appraisal, or any suggestion that it was not open Cir.2004))); see also In re Tyco Int'l Ltd. Sec. Litig., 422
to further negotiation. To the contrary, it “specifically F.3d 41, 47 n. 5 (1st Cir.2005) (“[A] party should not
reserve[d] its rights under both the laws of the State of be allowed purposefully and unjustifiably to manipulate
Texas and the terms of the subject policy of insurance.” the exercise of its arbitral rights simply to gain an unfair
tactical advantage over the opposing party.” (quoted in
Perry Homes, 258 S.W.3d at 597)); Menorah Ins. Co., Ltd. appraisal.”); Sch. Dist. v. Globe & Republic Ins. Co., 146
v. INX Reinsurance Corp., 72 F.3d 218, 222 (1st Cir.1995) Mont. 208, 404 P.2d 889, 893 (Mont.1965) (“Whether a
(finding prejudice where party “incurred expenses as a demand for appraisal has been made within a reasonable
direct result of [opponent's] dilatory behavior”). time depends upon the circumstances of each case. An
examination of the cases involving this issue reveals that
We have, in other instances, required a showing of principally, two factors have been decisive: prejudice
prejudice to establish waiver. See, e.g., In re ADM resulting from the delay, and the breakdown of good-faith
Investor Servs., 304 S.W.3d 371, 374 (Tex.2010) (“A party negotiations concerning the amount of loss.” (citations
waives a forum-selection clause by substantially invoking omitted)). Because the prejudice requirement aligns with
the judicial process to the other party's detriment or our own analysis of waiver in arbitration and other
prejudice.”); In re Fleetwood Homes of Tex., L.P., 257 insurance contexts, we find it useful here as well. In
S.W.3d 692, 694 (Tex.2008) (per curiam) (“ ‘[A] party order to establish waiver, therefore, a party must show
waives an arbitration clause by substantially invoking that an impasse was reached, and that any failure to
the judicial process to the other party's detriment or demand appraisal within a reasonable time prejudiced the
prejudice.’ ” (alteration in original) (quoting Perry Homes, opposing party.
258 S.W.3d at 589–90)); In re Automated Collection Techs.,
156 S.W.3d 557, 559 (Tex.2004) (per curiam) (“ ‘[E]ven Grubbs has not attempted to show prejudice here. Instead,
substantially invoking the judicial process does not waive Grubbs contends that requiring prejudice would be “new
a party's arbitration rights unless the opposing party law,” and because no Texas cases have required such a
proves that it suffered prejudice as a result.’ ” (quoting In showing, we should not impose such a requirement. But
re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex.1998))). waiver is an equitable doctrine, 4 and we have frequently
required a showing of prejudice before concluding that
In the context of waiver of arbitration clauses, which is in rights are waived. See, e.g., In re E.I. du Pont de Nemours
some ways similar to waiver of appraisal, we also require & Co., 92 S.W.3d 517, 524 (Tex.2002) (holding that
a showing of prejudice. See Prudential Sec. v. Marshall, delay did not waive defendant's right to dismissal, as
909 S.W.2d 896, 898–899 (Tex.1995) (“A party does not plaintiffs “failed to show how the delay ... prejudiced
waive a right to arbitration merely by delay; instead, the them in any way”); EZ Pawn Corp. v. Mancias, 934
party urging waiver must establish that any delay resulted S.W.2d 87, 89 (Tex.1996) (per curiam) (noting that party
in prejudice.”). In addition, we require an insurer to show waives right to arbitration only if party seeking to enforce
prejudice before it can deny coverage based on an insured's agreement substantially invoked the judicial process to the
failure to comply with a policy's “as soon as practicable” other party's detriment). Our failure to explicitly require
notice provision. See Prodigy Commc'ns Corp. v. Agric. prejudice is more a function of the paucity of cases in
Excess & Surplus Ins. Co., 288 S.W.3d 374, 382 (Tex.2009) which we have addressed waiver of appraisal than its
(noting that, because the insurer “admitted that it was not inapplicability to the doctrine.
prejudiced by the delay in receiving notice, it could not
deny coverage based on [the insured's] alleged failure to Moreover, it is difficult to see how prejudice could ever
provide notice ‘as soon as practicable’ ”). be shown when the policy, like the one here, gives both
sides the same opportunity to demand appraisal. If a
[7] Other jurisdictions have recognized that there can be party senses that impasse has been reached, it can avoid
no appraisal waiver absent a showing of prejudice to the prejudice by demanding an appraisal itself. This could
other party. See, e.g., *412 Kester v. State Farm Fire short-circuit potential litigation and should be pursued
& Cas. Co., 726 F.Supp. 1015, 1019–20 (E.D.Pa.1989); before resorting to the courts.
Meineke v. Twin City Fire Ins. Co., 181 Ariz. 576,
892 P.2d 1365, 1371 (Ariz.Ct.App.1994) (“Among the
circumstances courts consider are the timing between III. Propriety of mandamus relief
the breakdown of good faith negotiations concerning [8] [9] We have held that mandamus relief is appropriate
the amount of the loss suffered by the insured and the to enforce an appraisal clause because denying the
appraisal demand, and whether any prejudice to the appraisal would vitiate the insurer's right to defend its
other party resulted from the delay in demanding an breach of contract claim. In re Allstate Cnty. Mut. Ins.
Co., 85 S.W.3d 193, 196 (Tex.2002). There, as here, “the the heart of a party's case and cannot be remedied by
appeal”). We are confident the trial court will comply, and
parties ... agreed in the contracts' appraisal clause to
our writ will issue only if it does not.
the method by which to determine whether a breach
has occurred,” and, if the appraisal determined that the
full value was what the insurer offered, there would be
no breach of contract. Id. The same is true here. We Justice LEHRMANN did not participate in the decision.
conditionally grant the writ of mandamus and direct
the trial court to grant Universal's motion to compel All Citations
appraisal. 5 See id. (holding that refusal to order appraisal 345 S.W.3d 404, 54 Tex. Sup. Ct. J. 931
would “den[y] the *413 development of proof going to
Footnotes
1 The Insurance Council of Texas and Property Casualty Insurers Association of America submitted a brief of amici curiae
in support of Universal. The Texas Apartment Association, Inc., the Texas Association of School Boards Legal Assistance
Fund, and the Texas Organization of Rural & Community Hospitals, joined by the Houston Apartment Association,
the Texas Building Owners and Managers Association, and United Policyholders, submitted a brief of amici curiae in
support of Grubbs, as did the Texas Trial Lawyers Association, the Texas Automobile Dealers Association, and the Texas
Community Association Advocates.
2 See also Dwyer v. Fid. Nat'l Prop. & Cas. Ins. Co., 565 F.3d 284, 288 (5th Cir.2009) (“The district court incorrectly homed
in on the interval between the appraisal request and the trial date. The appropriate waiver inquiry examines Fidelity's
knowledge and action—when Fidelity knew that the appraisal clause could be invoked, whether it reacted timely to the
knowledge.”); Round Rock Indep. Sch. Dist. v. First Nat'l Ins. Co., 324 F.2d 280, 284 (5th Cir.1963) (quoting Scottish
Union ); Rolison v. Puckett, 145 Tex. 366, 198 S.W.2d 74, 78 (1946) (“A waiver is the intentional relinquishment of a
known right,—or, ... acts as would warrant inference of the relinquishment of such right.”); In re Slavonic Mut. Fire Ins.
Ass'n, 308 S.W.3d 556, 563 (Tex.App.-Houston [14th Dist.] 2010, no pet.) (quoting Scottish Union ).
3 In Boston Insurance Company v. Kirby, 281 S.W. 275, 276 (Tex.Civ.App.-Eastland 1926, no writ), the court did not
describe what acts may have constituted waiver, but held that “[t]here [wa]s sufficient evidence in the record to support
the finding” of the jury that the delay had been “unreasonable.” Without further elaboration from the Court, we presume
that the evidence presented to the jury included some evidence of the parties' conduct beyond the mere stipulation that
fifty-eight or fifty-nine days had passed from the date that the insurer received proof of loss. To the extent the case may
have been decided on the length of delay alone, we disapprove of that holding.
4 See Pacheco v. Rice, 966 F.2d 904, 906 (5th Cir.1992); Baker v. Fort Worth Mut. Benevolent Ass'n, 115 Tex. 300, 280
S.W. 165, 169 (1926).
5 The trial court's failure to grant the motion to abate is not subject to mandamus, and the proceedings need not be abated
while the appraisal goes forward. See In re Allstate Cnty. Mut. Ins. Co., 85 S.W.3d 193, 196 (Tex.2002).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
1 Cases that cite this headnote 49 Cases that cite this headnote
15 Cases that cite this headnote *760 Wade Caven Crosnoe, Thompson Coe Cousins
& Irons, L.L.P., Austin, J. Richard Harmon, Shawn W.
[8] Alternative Dispute Resolution Phelan, Thompson Coe Cousins & Irons, LLP, Dallas,
Suing or participating in suit Ralph H. Duggins, Cantey & Hanger, L.L.P., David F.
Farris, Lively, Padfield & Stout, Fort Worth, for Vesta
Insurer's parent corporation, its officers, and
Insurance Group Inc.
its agents did not, by litigating for two years
in the trial court, waive right to arbitrate Wade Caven Crosnoe, Thompson Coe Cousins & Irons,
former agent's tortious interference claim; the L.L.P., Austin, for Vesta Fire Insurance Corporation.
former agent's pre-trial costs were largely self-
inflicted since he sent far more discovery Marshall M. Searcy Jr., Brandon T. Hurley, Kelly Hart &
requests than he received and amended Hallman, P.C., Fort Worth, for William Perry Cronin.
his petition at least eleven times, and the
R.H. Wallace Jr., Monika G. Cooper, John Christopher
former agent failed to demonstrate sufficient
Nickelson, Joseph W. Spence, Shannon Gracey Ratliff &
prejudice to overcome the strong presumption
Miller, L.L.P., Fort Worth, for James E. Tait.
against waiver.
William L. Kirkman, Bourland & Kirkman, Fort
Worth, for Robert H. Merrill, National Benefit Advisory
Association, American Administrative Services Inc., [1] On March 1, 2001, Cashion filed suit against
Insurance Consultants of America Inc., American Vesta and two of its corporate officers, James Tait and
Business Management Inc. William Perry Cronin, 3 and against Walker and two
Walker C. Friedman, Christian Douglas Tucker, of his affiliates. 4 Generally, the suit alleged tortious
Friedman Suder & Cooke, P.C., Fort Worth, for Jimmy interference with Cashion's contracts with States General
K. Walker. and with his own subagents. States General (now a Vesta
affiliate) intervened, but later settled with Cashion and
John L. Malesovas, Malesovas & Martin, L.L.P., Waco, is no longer a party. Accordingly, the only remaining
Donald H. Ray, Ray & Wilson, Fort Worth, James party who was a signatory of the arbitration agreement is
A. Baker, Hughes & Luce, LLP, Dallas, for James H. Cashion; the relators who seek to compel arbitration are
Cashion, Jr. all nonsignatories.
a tortious interference claim against its agents. See id. [8] [9] [10] [11] Cashion also asserts that several of the
While legal rules might render such claims unprofitable relators waived any right to arbitration by litigating for
in the long run, in the short run they could be used two years in the trial court. There is a strong presumption
to forestall arbitration. “The FAA directs courts to against waiver under the FAA. See In re Serv. Corp. Int'l,
place arbitration agreements on equal footing with other 85 S.W.3d 171, 174 (Tex.2002). Merely taking part in
contracts.” E.E.O.C. v. Waffle House, Inc., 534 U.S. 279, litigation is not enough unless a party “has substantially
293, 122 S.Ct. 754, 151 L.Ed.2d 755 (2002). Accordingly, invoked the judicial process to its opponent's detriment.”
we must avoid any rule that makes it easier to avoid Id. (internal citations omitted). Delay alone generally does
arbitration clauses than other clauses of a contract. See not establish waiver. Id.
J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 230
n. 2 (Tex.2003) (noting most courts have found illusory According to the affidavit of one of his attorneys, Cashion
any contract allowing one party to unilaterally avoid incurred more than $200,000 in expenses and fees due
arbitration). to “prolonged and extensive discovery” that “would not
have been allowed or occurred in an arbitration.” The
[7] Second, requiring arbitration of such claims complies record shows that Cashion's pre-trial costs were largely
with the rule that “we look first to whether the parties self-inflicted—he sent far more discovery requests than he
agreed to arbitrate a dispute.” Waffle House, 534 U.S. received, and amended his petition at least eleven times.
at 294, 122 S.Ct. 754. When contracting parties agree to The relators did not “shower” him with interrogatories
arbitrate all disputes “under or with respect to” a contract and discovery requests, see Keytrade USA, Inc. v. Ain
(as they did here), they generally intend to include disputes Temouchent M/V, 404 F.3d 891, 898 (5th Cir.2005);
about their agents' actions because “[a]s a general rule, the other than standard requests for disclosure (all requiring
actions of a corporate agent on behalf of the corporation the same responsive information, see TEX. R. CIV. P.
are deemed the corporation's acts.” Holloway, 898 S.W.2d 194.2), they noticed a total of four depositions, and the
at 795. If arbitration clauses only apply to contractual Vesta defendants each sent a request for production.
signatories, then this intent can only be accomplished by Because Cashion offered none of these documents in
having every officer and agent (and every affiliate and its the trial court and presented no details about any
officers and agents) either sign the contract or be listed as a of them, the record does not show whether these
third-party beneficiary. This would not place such clauses requests were limited or extensive, whether they sought
on an equal footing with all other parts of a corporate information for affirmative claims or defensive ones, or
contract. even whether they addressed the merits or merely the
arbitration issue. Further, Cashion does not allege that
Finally, many Texas courts of appeals have held that a the discovery already conducted would not be useful in
tortious interference claim against a signatory's employees arbitration; to the contrary, he concedes it would be useful
or affiliates must be arbitrated, even though the latter whether the case is arbitrated or tried. See In re Bruce
are nonsignatories. 5 Several federal *763 courts have Terminix Co., 988 S.W.2d 702, 704 (Tex.1998) (noting
that even substantial invocation of judicial process does
agreed. 6 We remain mindful of the importance of keeping
not constitute waiver absent proof of prejudice). On this
federal and state law uniform so that arbitrability does
record, Cashion has not demonstrated sufficient prejudice
not depend on where one seeks to compel it. Kellogg, 166
to overcome the strong presumption against waiver.
S.W.3d at 739.
Footnotes
1 9 U.S.C. § 1 et. seq. The parties stipulated that the arbitration clause here is governed by the FAA.
2 The provision stated:
ARBITRATION. The parties intend that any dispute between them under or with respect to this contract shall be
resolved without resort to any litigation.... States and Cashion agree that they will submit such dispute to arbitration
in the manner specified in, and such arbitration proceeding will be conducted in accordance with the rules of the
American Arbitration Association.... This shall be the sole and exclusive method of resolving such disputes.
3 Tait was Vesta's former chief executive officer, and Cronin was Vesta's former chief financial officer.
4 National Benefit Advisory Association, a company Walker owned, and Robert Merill, his business partner.
5 See, e.g., In re Media Arts Group, Inc., 116 S.W.3d 900, 905 n. 4, 908 (Tex.App.-Houston [14th Dist.] 2003, orig.
proceeding [mand. denied] ) (compelling arbitration of suit alleging tortious interference and other claims brought by one
signatory against employees and affiliates of the other); Williams Indus., Inc. v. Earth Dev. Sys. Corp., 110 S.W.3d 131,
137–38 (Tex.App.-Houston [1st Dist.] 2003, no pet.) (same in suit by one signatory against employees and subcontractors
of the other); In re EGL Eagle Global Logistics, L.P., 89 S.W.3d 761, 765–66 (Tex.App.-Houston [1st Dist.] 2002, orig.
proceeding [mand. denied] ) (same in suit by one signatory against subsequent employer of signatory employee, and its
employees); McMillan v. Computer Translation Sys. & Support, Inc., 66 S.W.3d 477, 482–83 (Tex.App.—Dallas 2001,
no pet.) (same in suit by one signatory against chairman and corporate counsel of the other); In re Pennzoil Co., 30
S.W.3d 494, 499 (Tex.App.-San Antonio 2000, orig. proceeding) (same in suit by one signatory against corporation hired
by other signatory as replacement); Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576, 593 (Tex.App.—Houston
[14th Dist.] 1999, no pet.) (same in suit by one signatory against corporate affiliate of the other, as well as the affiliate's
officers and directors); Carlin v. 3V, Inc., 928 S.W.2d 291, 297 (Tex. App–Houston [14th Dist.] 1996, no writ) (same in
suit by one signatory against sister corporation of the other); Valero Energy Corp. v. Wagner & Brown, II, 777 S.W.2d
564, 565 (Tex.App.-El Paso 1989, writ denied) (same in suit by one signatory against other signatory and affiliates);
Lette v. Brooke Corp., No. 13–02–00527–CV, 2004 WL 1797578, at *5–6 (Tex.App.—Corpus Christi, Aug. 12, 2004, pet.
denied) (not designated for publication) (same in suit by one signatory against corporate affiliates of signatory buyer).
But see Fridl v. Cook, 908 S.W.2d 507, 513 (Tex.App.-El Paso 1995, writ dism'd w.o.j.) (refusing to compel arbitration
of suit alleging tortious interference brought by one signatory against sole shareholder and alleged alter ego of the other
because of independent fraud claim).
6 See, e.g., Grigson v. Creative Artists Agency, 210 F.3d 524, 527–28 (5th Cir.2000) (compelling arbitration of suit alleging
tortious interference and other claims brought by one signatory against third parties); Smith/Enron Cogeneration Ltd.
P'ship, Inc. v. Smith Cogeneration Intern., Inc., 198 F.3d 88, 97–99 (2d Cir.1999) (same in suit by one signatory against
corporate affiliates of the other); Sunkist Soft Drinks, Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757–758 (11th Cir.1993)
(same in suit by one signatory against corporate affiliates of the other); J.J. Ryan & Sons, Inc. v. Rhone Poulenc Textile,
S.A., 863 F.2d 315, 320–321 (4th Cir.1988)(same in suit by one signatory against corporate affiliates of the other); Hughes
Masonry Co., Inc. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 839, 841, n. 9 (7th Cir.1981) (same in suit
by one signatory against construction manager hired by the other).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
28 Cases that cite this headnote 9 Cases that cite this headnote
Capacity of trustee to sue and be sued in contract, it cannot later turn its back on the
general portions of the contract, such as an arbitration
Trusts clause, that it finds distasteful.
Parties
13 Cases that cite this headnote
A suit involving a trust generally must be
brought by or against the trustee and can be
binding on the beneficiaries whether they join
it or not.
Attorneys and Law Firms
1 Cases that cite this headnote
*128 Raul A. Gonzalez, Susan Kidwell, Locke Liddell &
Sapp, LLP, Austin, and N. Terry Adams, Beirne Maynard
[16] Alternative Dispute Resolution & Parsons, L.L.P., Houston, for relator.
Persons affected or bound
James Craig Orr Jr. and Spencer P. Browne, Heygood Orr
Alternative Dispute Resolution
& Reyes, L.L.P., Irving, for real party in interest.
Persons entitled to enforce
Direct-benefits estoppel against a nonparty Opinion
avoiding arbitration clause requires a
nonparty's colorable claim to the benefits of *129 Justice BRISTER delivered the opinion of the
the contract; a meddlesome stranger cannot Court.
compel arbitration by merely pleading a claim
We are asked to decide whether Weekley Homes,
that quotes someone else's contract.
L.P., a party to a contract containing an arbitration
25 Cases that cite this headnote clause, can compel arbitration of a personal injury claim
brought by Patricia Von Bargen, a nonparty. We have
previously compelled arbitration by nonparties to an
[17] Alternative Dispute Resolution arbitration agreement when they brought suit “based on a
Persons affected or bound
contract,” 1 which Von Bargen purports to avoid here.
Direct-benefits estoppel against a nonparty
avoiding arbitration clause does not create [1] But as both state and federal courts have recognized,
liability for noncontracting parties that does nonparties may be bound to an arbitration clause when
not otherwise exist. the rules of law or equity would bind them to the contract
generally. Because we find those rules applicable here, we
4 Cases that cite this headnote
conditionally grant mandamus relief.
letter of intent as “purchasers,” and making custom design court concluded the FAA applied, and granted the motion
choices. as to all claims by Forsting and the Trust. But the trial
court refused to compel arbitration of Von Bargen's claim
But only Forsting executed the various financing and because she did not sign the Purchase Agreement.
closing documents on the home, including the Real
Estate Purchase Agreement that contained the following [2] Mandamus relief is proper to enforce arbitration
arbitration clause: agreements governed by the FAA. 3 After the Fifth
Court of Appeals denied Weekley's request for such relief,
Any claim, dispute or cause of action
Weekley filed a similar request in this Court.
between Purchaser and Seller ...,
whether sounding in contract, tort,
or otherwise, shall be resolved by
binding arbitration.... Such claims, II. Governing Law
disputes or causes of action include,
but are not limited to, those [3] Neither party challenges the trial court's conclusion
arising out of or relating to ... the that the FAA governs the arbitration clause here. 4
design, construction, preparation, Under the FAA, absent unmistakable evidence that the
maintenance or repair of the parties intended the contrary, it is the courts rather than
Property. arbitrators that must decide “gateway matters” such as
whether a valid arbitration agreement exists. 5 Whether
Shortly after closing, Forsting transferred the home to the an arbitration agreement is binding on a nonparty is one
Forsting Family Trust, a revocable trust established ten of those gateway matters. 6
years earlier whose sole beneficiary was Von Bargen. At
his deposition, Forsting testified that the only reason he [4] [5] Texas courts apply Texas procedural rules
signed the Purchase Agreement individually rather than
in making that determination. 7 Those rules call for
as trustee was because he “forgot to put [the home] in
the trust.” Forsting and Von Bargen served as the only determination by summary proceedings, 8 with the
trustees of the Trust, the purpose of which was to transfer burden on the moving party to show a valid agreement to
Forsting's property to Von Bargen after his death. arbitrate. 9
According to the plaintiffs' pleadings, numerous problems [6] [7] But as we recently noted, it is not entirely clear
arose with the home after completion. When the family what substantive law governs whether a nonparty must
moved out of the house briefly so Weekley could arbitrate. 10 Generally under the FAA, state law governs
perform some of those repairs, it was Von Bargen
whether a litigant agreed to arbitrate, 11 and federal law
who requested and received reimbursement. Indeed, Von
Bargen admitted handling “almost ... all matters related to governs the scope of an arbitration clause. 12 Whether
the house, the problems and the warranty work and even *131 a nonparty must arbitrate can involve aspects of
the negotiations.” either or both. Pending an answer from the United States
Supreme Court, 13 we apply state law while endeavoring
Unsatisfied with the home and Weekley's efforts to to keep it as consistent as possible with federal law. 14
repair it, Forsting, Von Bargen, and the Trust filed
suit against Weekley in December 2002. Forsting and
the Trust asserted claims for negligence, breach of
contract, statutory violations, and breach of warranty. III. Estoppel and Nonsignatories
Von Bargen sued only for personal injuries, alleging
Texas law has long recognized that nonparties may be
Weekley's negligent repairs caused her to develop asthma.
bound to a contract under various legal principles. 15
Weekley moved to compel arbitration of all claims under Although we have never considered these principles in
the context of arbitration, we recently noted that contract
the Federal Arbitration *130 Act (FAA). 2 The trial
and agency law may bind a nonparty to an arbitration
agreement. 16 Indeed, if Texas law would bind a nonparty waived under the election-of-remedies doctrine. 26 Given
to a contract generally, the FAA would appear to preempt these options, it is not clear at this point that nonparties
an exception for arbitration clauses alone. 17 will always choose to forfeit potentially viable contract
claims solely to avoid arbitration.
In the one case in which we have compelled nonparties
to arbitrate, In re FirstMerit Bank, N.A., 52 S.W.3d 749 [9] [10] In this case, Von Bargen purports to make no
(Tex. 2001) we stated that “a litigant who sues based on a claim on the Weekley contract, claiming only that she
developed asthma from dust created by Weekley's repairs
contract subjects him or herself to the contract's terms.” 18
of the home. While Weekley's duty to perform those
Because the nonparties there asserted claims identical to
repairs arose from the Purchase Agreement, a contractor
the signatories' contract claims, we held all had to be
performing repairs has an independent duty under Texas
arbitrated. 19
tort law not to injure bystanders by its activities, 27 or by
We did not describe in FirstMerit what it means to sue premises conditions it leaves behind. 28 There is nothing
“based on a contract.” Von Bargen asserts a narrow in the sparse record here to suggest Von Bargen's claim is
interpretation that would apply only to explicit contract different from what any bystander might assert, or what
claims, and thus not to hers for personal injury; Weekley she might assert if the contractor were not Weekley.
argues for a broad application to any claim that “arises
from or relates to” the contract involved. [11] [12] But a nonparty may seek or obtain direct
benefits from a contract by means other than a lawsuit. In
We recently adopted an approach between these two some cases, a nonparty may be compelled to arbitrate if
extremes, holding that a nonparty may be compelled it deliberately seeks and obtains substantial benefits from
to arbitrate “if it seeks, through the claim, to derive a the contract itself. 29 The analysis here focuses on the
direct benefit from the contract containing the arbitration *133 nonparty's conduct during the performance of the
provisions.” 20 As we noted, this rule is consistent with contract. 30 Thus, for example, a firm that uses a trade
federal law of “direct benefits estoppel.” 21 name pursuant to an agreement containing an arbitration
clause cannot later avoid arbitration by claiming to have
[8] Under both Texas and federal law, whether a claim been a nonparty. 31 Nor can nonsignatories who received
seeks a direct benefit from a contract containing an lower insurance rates and the ability to sail under the
arbitration *132 clause turns on the substance of the French flag due to a contract avoid the arbitration clause
claim, not artful pleading. 22 Claims must be brought on in that contract. 32
the contract (and arbitrated) if liability arises solely from
the contract or must be determined by reference to it. 23 [13] [14] This Court has never addressed such an
On the other hand, claims can be brought in tort (and in estoppel claim in the arbitration context. 33 But we have
court) if liability arises from general obligations imposed long recognized in other contexts the defensive theory
by law. 24 of promissory estoppel. 34 When a promisor induces
substantial action or forbearance by another, promissory
We question Weekley's conclusion that this rule will estoppel prevents any denial of that promise if injustice
inevitably drive claimants to plead only noncontractual can be avoided only by enforcement. 35 Promissory
claims to avoid arbitration. Nonparties face a choice when estoppel does not create liability where none otherwise
they may plead in either contract or tort, but pleading
exists, 36 but “prevents a party from insisting upon his
the former invokes an arbitration clause broad enough
strict legal rights when it would be unjust to allow him to
to cover both (as most do). If they pursue a claim “on
the contract,” then they must pursue all claims—tort and enforce them.” 37
features, repeatedly demanded extensive repairs to “our grant either a right to sue for breach. 42 Nor do we
understand the doctrine to apply when the benefits
home,” 38 personally requested and received financial
alleged are insubstantial or indirect. But once Von Bargen
reimbursement for expenses “I incurred” while those
deliberately sought substantial and direct benefits from
repairs were made, and conducted settlement negotiations
the contract, and Weekley agreed to comply, equity
with Weekley (apparently never consummated) about
prevents her from avoiding the arbitration clause that was
moving the family to a new home. Having obtained
part of that agreement.
these substantial actions from Weekley by demanding
compliance with provisions of the contract, Von Bargen
We recognize that direct-benefits estoppel has yet to be
cannot equitably object to the arbitration clause attached
endorsed by the United States Supreme Court, and that
to them.
its application and boundaries are not entirely clear. 43
[15] In addition to these benefits, Forsting and the Trust For example, while federal courts often state the test as
have sued Weekley on claims which are explicitly based whether a nonsignatory has “embraced the contract,” 44
on the contract. Under Texas law, a suit involving a trust the *135 metaphor gives little guidance in deciding what
generally must be brought by or against the trustee, and particular conduct embraces or merely shakes hands with
can be binding on the beneficiaries whether they join it it. Indeed, the equitable nature of the doctrine may render
or *134 not. 39 Although Von Bargen did not purport firm standards inappropriate, requiring trial courts to
to sue as either trustee or beneficiary, she was both, and exercise some discretion based on the facts of each case. 45
any recovery will inure to her direct benefit as the sole
beneficiary and equitable titleholder of the home. 40 As [19] But we agree with the federal courts that when
one Texas court has noted, if a trustee's agreement to a nonparty consistently 46 and knowingly 47 insists that
arbitrate can be avoided by simply having the beneficiaries others treat it as a party, it cannot later “turn[ ] its back on
bring suit, “the strong state policy favoring arbitration the portions of the contract, such as an arbitration clause,
would be effectively thwarted.” 41 that it finds distasteful.” 48 A nonparty cannot both have
his contract and defeat it too.
[16] While we based our decision in FirstMerit Bank on
the nonparties' contract-based claims, more was involved While Von Bargen never based her personal injury claim
in that case than the format of the pleadings. Direct- on the contract, her prior exercise of other contractual
benefits estoppel requires a colorable claim to the benefits; rights and her equitable entitlement to other contractual
a meddlesome stranger cannot compel arbitration by benefits prevents her from avoiding the arbitration clause
merely pleading a claim that quotes someone else's here. Accordingly, the trial court abused its discretion in
contract. The nonparties in FirstMerit Bank were the failing to compel arbitration. We conditionally grant the
daughter and son-in-law of the signatories, the actual writ of mandamus and order the trial court to vacate that
occupants of the mobile home, and (according to the part of its order denying Weekley's motion, and to enter a
briefs) the future owners to whom the signatories planned new order compelling arbitration of Von Bargen's claim.
to transfer title. It is hard to see what direct benefits they We are confident the trial court will comply, and our writ
expected from that contract that Von Bargen did not will issue only if it does not.
expect from this one.
Footnotes
1 In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755 (Tex.2001).
25 See, e.g., Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 271 (Tex.1992) (holding DTPA claim was factually intertwined
with contract claim and thus subject to arbitration clause).
26 Bocanegra v. Aetna Life Ins. Co., 605 S.W.2d 848, 851 (Tex.1980) (holding election-of-remedies doctrine prevents pursuit
of inconsistent rights or remedies when result would be manifest injustice); cf. Medina v. Herrera, 927 S.W.2d 597, 598–
99 (Tex.1996) (holding election-of-remedies doctrine barred pursuit of both workers' compensation claim and suit against
employer for intentional act).
27 See Redinger v. Living, Inc., 689 S.W.2d 415, 417 (Tex.1985) (noting general contractor on a construction site in control
of the premises may be subject to direct liability for negligence arising from: (1) a premises defect, or (2) an activity or
instrumentality).
28 Strakos v. Gehring, 360 S.W.2d 787, 790 (Tex.1962).
29 Astra Oil Co., Inc. v. Rover Navigation, Ltd., 344 F.3d 276, 281 (2d Cir. 2003) (holding affiliate of signatories could enforce
arbitration clause as opposing party treated affiliate as part of charter contract during occurrence involved); Am. Bureau
of Shipping v. Tencara Shipyard S.P.A., 170 F.3d 349, 353 (2d Cir. 1999) (holding nonsignatories who received lower
insurance rates and ability to sail under French flag due to contract were bound by arbitration clause in it); see also Matter
of VMS Ltd. P'ship Sec. Litig., 26 F.3d 50, 52 (7th Cir. 1994) (holding wife bound by settlement agreement related to
investment services contract signed only by her husband, but under which she had accepted services as well); see also
InterGen, 344 F.3d at 146 (holding equitable estoppel inapplicable as nonsignatory never sought to derive direct benefits
from contracts during their currency).
30 E.I. DuPont de Nemours & Co. v. Rhone Poulenc Fiber & Resin Intermediates, S.A.S., 269 F.3d 187, 200 n.7 (3d Cir.
2001).
31 Deloitte Noraudit A/S v. Deloitte Haskins & Sells, U.S., 9 F.3d 1060, 1064 (2d Cir. 1993).
32 Tencara Shipyard, 170 F.3d at 353.
33 See Kellogg, 166 S.W.3d at 741 n.9 (reserving question of whether to apply direct-benefits estoppel to benefits obtained
from contract rather than subsequent litigation).
34 See, e.g., ‘Moore’ Burger, Inc. v. Phillips Petroleum Co., 492 S.W.2d 934 (Tex.1972).
35 Trammell Crow Co. No. 60 v. Harkinson, 944 S.W.2d 631, 636 (Tex.1997).
36 Hruska v. First State Bank of Deanville, 747 S.W.2d 783, 785 (Tex.1988).
37 Wheeler v. White, 398 S.W.2d 93, 96 (Tex.1965).
38 In various lists submitted in the months after the sale, Von Bargen demanded repairs to sagging floors, buckling walls
and windows, cracking brick work, as well as replacing the front door, repainting the back door and the kitchen cabinets,
regrouting the bathrooms and entry way, replacing the fireplace screen, closing gaps at carpet seams, removing drainage
problems in the yard, and a noisy garage door.
39 See TEX. PROP. CODEE §§ 111.004(7), 115.011, 115.015; Huie v. DeShazo, 922 S.W.2d 920, 926 (Tex.1996)(holding
trusts are not legal entities); Transamerican Leasing Co. v. Three Bears, Inc., 586 S.W.2d 472, 476–77 (Tex.1979)
(holding beneficiaries were bound by judgment against trust and trustees, as some participated in trial in their capacity
as trustees, and remainder showed neither prejudice, conflict of interest, nor inadequate representation by trustees).
40 Perfect Union Lodge No. 10 v. Interfirst Bank of San Antonio, N.A., 748 S.W.2d 218, 220 (Tex.1988) (holding trust
beneficiaries hold equitable title to trust property); cf. Javitch v. First Union Sec., Inc., 315 F.3d 619, 627 (6th Cir. 2003)
(holding arbitration agreements were binding on receiver who succeeded to interests of entities that signed them); Hays &
Co. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 885 F.2d 1149, 1153–54 (3d Cir. 1989) (holding arbitration agreements
were binding on successor trustee in bankruptcy).
41 Merrill Lynch, Pierce, Fenner & Smith v. Eddings, 838 S.W.2d 874, 879 (Tex.App.-Waco 1992, writ denied).
42 See Sun Oil Co. v. Madeley, 626 S.W.2d 726, 734 (Tex.1981) (holding estoppel based on division orders could not
permanently amend underlying lease).
43 See e.g., J. Douglas Uloth & J. Hamilton Rial, III, Equitable Estoppel as a Basis for Compelling Nonsignatories to Arbitrate
—A Bride Too Far?, 21 REV. LITIG. 593 (2002).
44 See, e.g. InterGen, 344 F.3d at 145; DuPont, 269 F.3d at 200; Peltz ex rel. Peltz v. Sears, Roebuck & Co., 367 F.Supp.2d
711, 721 (E.D.Pa. 2005); In re Universal Serv. Fund Tel. Billing Practices Litig., 300 F.Supp.2d 1107, 1138 (D.Kan. 2003);
Amkor Tech., Inc. v. Alcatel Bus. Sys., 278 F.Supp.2d 519, 521–22 (E.D.Pa. 2003); Cherry Creek Card & Party Shop,
Inc. v. Hallmark Mktg. Corp., 176 F.Supp.2d 1091, 1098 (D.Colo. 2001).
45 See, e.g., Bridas S.A.P.I.C. v. Turkmenistan, 345 F.3d 347, 360 (5th Cir. 2003) (“The use of equitable estoppel is within
a district court's discretion.”); accord, Hill v. G.E. Power Sys., Inc., 282 F.3d 343, 348 (5th Cir. 2002); Grigson v. Creative
Artists Agency, L.L.C., 210 F.3d 524, 528 (5th Cir. 2000).
46 See Int'l Paper, 206 F.3d at 418 (estopping nonsignatory from denying agreement to arbitrate “when he has consistently
maintained that other provisions of the same contract should be enforced to benefit him.”) (emphasis added).
47 See Bridas, 345 F.3d at 361–62 (“Direct[-]benefits estoppel applies when a nonsignatory ‘knowingly exploits the
agreement containing the arbitration clause.’ ”) (emphasis added) (citing DuPont, 269 F.3d at 199); Tencara Shipyard, 170
F.3d at 353 (requiring nonsignatories to arbitrate pursuant to provision in contract they neither requested nor executed,
as they had duty to obtain that contract and received copies of it).
48 DuPont, 269 F.3d at 200; accord Astra Oil Co., 344 F.3d at 281.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Mandamus
Nature of acts to be commanded
171 S.W.3d 374
Court of Appeals of Texas, Mandamus relief is appropriate if the relator
Tyler. demonstrates that the act sought to be
compelled is purely ministerial and that the
In re Raymond WINGFIELD, State relator has no other adequate legal remedy.
Counsel for Offenders and Kim Vernon,
Cases that cite this headnote
Director, State Counsel for Offenders.
conflict of interest, of two indigent inmates Relators Raymond Wingfield, State Counsel for
charged with crimes allegedly committed Offenders (SCFO), and Kim Vernon, SCFO Director,
during escape attempt, and thus, her request seek mandamus relief from two orders signed on
for mandamus relief was premature; Director, December 15, 2004 and April 6, 2005, respectively, by
as attorney who was officer of court, had Respondent, the Honorable Jim Parsons, presiding judge
the right, upon proper motion filed in the of the 3rd Judicial District Court of Houston County,
offended court, to be released on her own Texas, sitting in the 349th Judicial District Court of
personal recognizance pending a de novo Houston County. We conditionally grant the petition in
determination of her guilt or innocence part and deny in part.
by a judge other than the judge of the
offended court. Vernon's Ann.Texas C.C.P.
art. 26.051(g); V.T.C.A., Government Code §
BACKGROUND
21.002(d).
The underlying proceeding is a criminal case brought
1 Cases that cite this headnote
against Wingfield by the State of Texas. Wingfield,
along with his codefendant, Dalton Collins, is charged
[14] Mandamus with multiple serious crimes allegedly committed during
Change of venue and transfer of causes an escape attempt from a prison unit operated by the
Once a finding of contempt has been Texas Department of Criminal Justice. On November 1,
entered against an attorney and the attorney 2004, Respondent signed an order appointing SCFO 1 to
has filed a motion for referral for de represent Wingfield *377 and Collins. Approximately
novo consideration by another judge of the two weeks later, SCFO filed a motion to withdraw as
offended court, the court has a ministerial Wingfield's counsel citing a likely conflict in representing
duty, for mandamus purposes, to make both defendants. On December 15, 2004, without a
the referral. V.T.C.A., Government Code § hearing, Respondent overruled SCFO's motion and
21.002(d). ordered SCFO to take all reasonable steps to erect
a “Chinese Wall” during its dual representation of
Cases that cite this headnote Wingfield and Collins. On February 16, 2005, at SCFO's
request, the trial court set a hearing for April 4 to permit
SCFO to re-urge its motion to withdraw.
Attorneys and Law Firms On February 18, eleven of the thirteen attorneys on
the Houston County indigent defense appointment
*376 Daniel E. Maeso, Adrian L. Young, Austin, for
list filed a plea in intervention. Intervenors alleged
relator.
that the county is to pay $250 of the fee charged
Susan Lea Hays, for respondent. by non-SCFO defense counsel appointed to represent
indigent inmate defendants and that the state comptroller
Mark D. Mullin, Melinda Mayo, Potter County Dist. “shall” pay the remainder that is properly certified.
Atty., Amarillo, Barbara Law, for real party in interest. See TEX.CODE CRIM. PROC. ANN. § 26.051(h)
(Vernon Supp.2004–05). However, Intervenors averred
Panel consisted of WORTHEN, C.J., GRIFFITH, J., and that “[d]espite certification [of the fee] ..., the comptroller
DeVASTO, J. has repeatedly refused to issue payment to court
appointed attorneys in these types of cases in the
past due to insufficient funds available.” Consequently,
OPINION Intervenors concluded, allowing SCFO to withdraw and
appointing any of the intervenors to represent Wingfield
JAMES T. WORTHEN, Chief Justice. would violate appointed counsel's rights under the United
States and Texas constitutions.
On February 21, Respondent signed an order permitting Intervenors argued that the payment system for non-
the intervention “for the limited purpose of representing SCFO counsel requires appointed counsel to undertake
Intervenors' interests at the hearing on the State Counsel representation without adequate, timely compensation
for Offenders Motion to Withdraw.” On April 4, SCFO and is therefore unconstitutional as a taking, a violation
filed a motion to strike the plea in intervention. On the of the equal protection clause, and a violation of a
same day, the court held an evidentiary hearing. defendant's right to effective counsel. At the conclusion
of the hearing, Respondent denied SCFO's motion to
At the hearing, Respondent first heard argument on reconsider his prior order denying SCFO's motion to
SCFO's motion to strike. Respondent then ruled that he withdraw. Respondent also found Director Vernon in
would “leave [Intervenors] in limited to this sole issue with contempt for her “open court admissions” that she had
regard to your withdrawal of my prior order. I view it, taken no steps to erect a Chinese Wall as required by
though, as an amicus curiae. Their participation will not Respondent's prior order. Respondent sentenced Director
in any way help or harm the substantive rights of the Vernon to three days in the Houston County Jail,
defendants involved.” probated until May 6, 2005 at 1:00 p.m., which was
the time set for Wingfield's arraignment. On April 6,
SCFO presented uncontroverted evidence that it could not Respondent signed an order incorporating his rulings
provide conflict-free representation to Wingfield. During on SCFO's motions and Director Vernon's contempt.
Director Vernon's testimony, Respondent asked what Respondent made a finding in the order that appointing
steps had been taken to comply with the Chinese Wall non-SCFO counsel to represent an indigent inmate
portion of the December 15, 2004 order. Director Vernon defendant where the anticipated reasonable fee would
informed Respondent that no steps had been taken. equal or exceed $25,000 would be an appointment without
a reasonable expectation of payment. 2 Respondent
Intervenors pointed out that payments for indigent inmate further concluded that appointment without a reasonable
defense counsel claims are limited to $25,000 per claim expectation of payment violates appointed counsel's
and to $25,000 in cumulative payments to a single
“constitutional privilege against unreasonable taking.” 3
claimant during a biennium. See TEX. GOV'T CODE
This original proceeding followed. We granted SCFO's
ANN. § 403.074(d) (Vernon 2005). If insufficient funds
motion for emergency relief pending our disposition on
are available to pay the claim, it may not be paid
the merits.
until the Legislature provides for payment. See id. §
403.074(d). Intervenors presented evidence that any claim
over $25,000 must be submitted in its entirety to the
Legislature for payment and that the attorney's fee for AVAILABILITY OF MANDAMUS
representing Wingfield could exceed $25,000. Intervenors
also presented evidence that (1) even for claims under [1] [2] Mandamus relief is appropriate if the relator
$25,000, the Legislature has not appropriated dedicated demonstrates that the act sought to be compelled is
funds; (2) the miscellaneous fund from which those claims purely “ministerial” and that the relator has no other
are paid had a balance of approximately $9 on the date adequate legal remedy. State ex rel. Rosenthal v. Poe,
of the hearing; (3) no further claims can be paid from 98 S.W.3d 194, 198 (Tex.Crim.App.2003). For a duty
the miscellaneous fund this fiscal year; (4) additional to be ministerial, the law must “clearly spell [ ] out the
funds will *378 not be available until September 2005, duty to be performed ... with such certainty that nothing
provided the Legislature makes that appropriation; and is left to the exercise of discretion or judgment.” State
(5) the comptroller had no claims pending for attorney's ex rel. Hill v. Court of Appeals for the Fifth District,
fees. Finally, Intervenors presented evidence to support 34 S.W.3d 924, 928 (Tex.Crim.App.2001) (quoting Texas
their contention that “only the very small class of rural Dep't of Corrections v. Dalehite, 623 S.W.2d 420, 424
criminal defense lawyers living in prison counties is (Tex.Crim.App.1981)). In other words, the act must be
bearing the burden of Texas'[s] failure to adequately fund “positively commanded and so plainly prescribed” under
indigent inmate defense.” the law “as to be free from doubt.” State ex rel. Hill, 34
S.W.3d at 928 (quoting Buntion v. Harmon, 827 S.W.2d
945, 949 (Tex.Crim.App.1992)).
[3] [4] [5] The “ministerial act” requirement has also good faith allegation of ineffective assistance of counsel
been described as a requirement that the relator have “a by a trial attorney provided by the board; or
clear right to the relief sought.” State ex rel. Hill, 34
S.W.3d at 928. This means that the relief sought must be (3) any conflict exists under the Texas Disciplinary
clear and undisputable. State ex rel. Rosenthal, 98 S.W.3d Rules of Professional Conduct of the State Bar of Texas
at 198. *379 Thus, its merits must be beyond dispute with that precludes representation by an attorney appointed
nothing left to the exercise of discretion or judgment. Id. If by the board.
there is any discretion or judicial determination attendant
TEX.CODE CRIM. PROC. ANN. art. 26.051(g)
to the act, it is not ministerial, nor is it a ministerial act if
(emphasis added). The plain language of the statute
the trial court must weigh conflicting claims or collateral
requires the trial court to appoint non-SCFO counsel if
matters that require legal resolution. State ex rel. Hill v.
at least one of the three criteria is met. No exceptions
Court of Appeals for the Fifth District, 67 S.W.3d 177,
are stated. Thus, the act of appointing non-SCFO counsel
181 (Tex.Crim.App.2001). Mandamus may be used to
becomes ministerial once SCFO makes the required
correct judicial action that is contrary to well-settled law,
showing.
whether the law is derived from statute, rule, or clear,
binding precedent from a court of superior jurisdiction.
In its motion to withdraw, SCFO alleged that Wingfield's
See State ex rel. Healey v. McMeans, 884 S.W.2d 772, 774
interest in the defense of the respective charges differed
(Tex.Crim.App.1994).
from the interest of his codefendant. For that reason,
SCFO alleged, its judgment in behalf of codefendant
Collins is likely to adversely affect its representation of
DENIAL OF MOTION TO WITHDRAW Wingfield, which necessitated its withdrawal from the
representation. See Almanzar v. State, 702 S.W.2d 653,
[6] Relators first argue that Respondent had a ministerial 655 (Tex.Crim.App.1986) (“We wish to stress how vital
duty to appoint a non-SCFO attorney to represent it is for a defense attorney not to become entangled
Wingfield. See TEX.CODE CRIM. PROC. ANN. art. in a web of conflicting interests between two or more
26.051(g). Relators further contend that they have no defendants.”). The December 15, 2004 order provides in
adequate remedy at law to challenge Respondent's denial pertinent part as follows:
of SCFO's motion to withdraw and, therefore, mandamus
is appropriate. Withdrawal of counsel is a proper subject 5. The creation of a “Chinese Wall” is an adequate
of mandamus. Haley v. Boles, 824 S.W.2d 796, 798 remedy at law, in lieu of withdrawal which is equally
(Tex.App.-Tyler 1992, orig. proceeding). Consequently, convenient, beneficial and effective. The creation of
we must address only whether Relator had a ministerial a “Chinese Wall” will both satisfy the professional
duty to appoint non-SCFO counsel for Wingfield. requirements of independent representation *380
and assure legal counsel for inmate defendants.
Article 26.051(g) provides as follows:
6. The Court has a duty to protect a defendant's
The court shall appoint an attorney other than an right to due process of law under both the United
attorney provided by the [Texas Board of Criminal States and Texas Constitutions. These constitutional
Justice] if the court determines for any of the following considerations override the inconvenience to State
reasons that a conflict of interest could arise from the Counsel for Offenders in the creation of a “Chinese
use of an attorney provided by the board [for an inmate Wall” to prevent the anticipated conflicts in
who is charged with an offense committed while in the representation of multiple defendants.
custody of the Texas Department of Criminal Justice]:
7. Through the creation of a “Chinese Wall” between
(1) the case involves more than one inmate and the defense counsels the preservation of the secrets and
representation of more than one inmate could impair the confidences of respective defendant clients as well
attorney's effectiveness; as the independent professional judgment of defense
counsel may be maintained.
(2) the case is appealed and the court is satisfied that
conflict of interest would prevent the presentation of a
These findings indicate Respondent recognized that a only when expressly made so by statute). 6
conflict could arise from SCFO's dual representation of
Wingfield and Collins and that the conflict could impair [8] Criminal proceedings are governed by the Texas
Code of Criminal Procedure. TEX.CODE CRIM. PROC.
defense counsel's effectiveness. 4 As such, the statutory
ANN. art. 1.02 (Vernon 2005). A “criminal action,” such
prerequisites for appointment of non-SCFO counsel were
as the underlying proceeding, is prosecuted in the name of
satisfied. See TEX.CRIM. PROC. ANN. art. 26.051(g)
the State of Texas against the accused and is conducted
(1). However, that is not the end of the matter.
by some person acting under the authority of the State,
in accordance with its laws. TEX.CODE CRIM. PROC.
ANN. art. 3.02 (Vernon 2005). Unlike the Rules of Civil
DENIAL OF MOTION TO STRIKE Procedure, the Code of Criminal Procedure makes no
PLEA IN INTERVENTION provision for a third party to intervene in a “criminal
action.” In his response to Relators' petition, Respondent
Respondent contends that in making his ruling, he was does not cite authority permitting intervention in a
required to balance the interest asserted by Intervenors criminal action. Intervenors rely on Rule 60, but admit
and Wingfield's right to conflict-free representation, that “there may be some question whether an intervention
which, in turn, necessitated resolution of the conflict per se is permitted in criminal matters, in the absence of
between Code of Criminal Procedure article 26.051(g) and specific authority to do so under the Code of Criminal
Government Code section 403.074. 5 Procedure.” We have been unable to locate any authority
that Rule 60 is an exception to the general rule that the
In response to Relators' mandamus petition, Respondent Texas Rules of Civil Procedure are controlling in criminal
contends that “[t]he appointment of private counsel matters only when expressly made so by statute. See
without reliable compensation raises takings and equal Holloway, 147 Tex.Crim. at 108, 178 S.W.2d at 689.
protection violations for the attorney and adequate
representation issues for the defendant.” Consequently, [9] Additionally, we note that the April 6 order includes
Respondent argues, a “constitutional conundrum” exists findings that Intervenors “had an interest in the issue
and he “made the most palatable decision possible under before the Court, sufficient for them to intervene” and
the difficult circumstances not of the judiciary's making.” that the intervention was “in the nature of an amicus
Relators, on the other hand, contend that no provision curie [sic].” A true amicus curiae is without interest in
or precedent exists in Texas criminal law for pleas in the proceeding in which he appears. Burger v. Burger,
intervention. Therefore, Relators contend, Respondent 156 Tex. 584, 298 S.W.2d 119, 120–21 (Tex.1957). He is
should have granted SCFO's motion to strike. a “bystander” whose mission is to aid the court to act
only for the personal benefit of the court. Id. Neither
[7] Intervention in civil actions has long been permitted in Respondent nor Intervenors have cited any authority
Texas. See Legg v. McNeill, 2 Tex. 428, 430–31 (Tex.1847). permitting one claiming an interest in a proceeding to
In approving the practice, the Texas Supreme Court appear in the proceeding as amicus curiae, and we have
reasoned that “[h]aving in our system but one form of been unable to locate any such authority.
action, we cannot perceive how the interest of parties not
embraced in the suit can always be protected without [10] Based upon the foregoing authority and the absence
allowing them to come in as intervenors....” Id. at 430. of contrary authority, we agree with Relators that
The current rule permits any party to intervene *381 Respondent had no discretion to deny SCFO's motion
to strike the plea in intervention. It therefore follows withdraw from representing an indigent inmate accused
of committing an offense while incarcerated. We are not
that if Respondent had no discretion to deny SCFO's
unsympathetic to the situation. However, our charge is to
motion to strike, he had no discretion to consider the
determine whether the acts Relators seek to compel are
issues raised by Intervenors. Because SCFO satisfied the
ministerial and whether Relators have an adequate legal
statutory prerequisites, Respondent had a ministerial duty
remedy. State ex rel. Rosenthal, 98 S.W.3d at 198.
to grant SCFO's motion to withdraw and appoint non-
SCFO counsel.
We have concluded that Respondent had a ministerial
duty to grant SCFO's motion to withdraw and appoint
non-SCFO counsel to represent Wingfield. Therefore,
CONTEMPT ORDER Respondent had no discretion to order the creation of a
Chinese Wall in lieu of the withdrawal mandated by article
[11] [12] [13] [14] An order of contempt is
26.051(g). We have also concluded that Respondent had
not appealable. Ex parte Gray, 649 S.W.2d 640, 642
no discretion to deny SCFO's motion to strike Intervenors'
(Tex.Crim.App.1983). Generally, if the contemnor has
plea in intervention. Moreover, Wingfield and SCFO have
not been confined, she has no other adequate remedy
no adequate remedy at law. See Haley, 824 S.W.2d at 798.
at law but mandamus. Id. However, as an officer of the
However, Director Vernon has an adequate remedy at law
court, an attorney has a right, upon proper motion filed
for challenging the contempt order.
in the offended court, *382 to be released on her own
personal recognizance pending a de novo determination
We conditionally grant the writ of mandamus as to (1)
of her guilt or innocence by a judge other than the
those portions of the April 6 order overruling SCFO's
judge of the offended court. See TEX. GOV'T CODE
motion to reconsider Respondent's denial of SCFO's
ANN. § 21.002(d) (Vernon 2004); Ex parte Waters,
motion to withdraw and overruling SCFO's motion to
499 S.W.2d 309, 310–11 (Tex.Crim.App.1973). Once a
strike Intervenors' plea in intervention and as to (2) the
finding of contempt has been entered and an attorney
portion of the December 15, 2004 order requiring the
has filed a motion for referral, the trial court has a
creation of a Chinese Wall. We are confident that on
ministerial duty to refer the contempt proceeding to the
or before fifteen days from the date of this opinion
presiding judge of the administrative judicial region in
and corresponding order, Respondent will vacate these
which the alleged contempt occurred for assignment of
provisions of the respective orders and enter an order
a judge to re-adjudicate the issues of guilt or innocence
granting SCFO's motion for reconsideration of its motion
and punishment. TEX. GOV'T ANN.CODE ANN. §
to withdraw and granting SCFO's motion to strike the
21.002(d); see Ex parte Howell, 488 S.W.2d 123, 126
plea in intervention. The writ will issue only if he does
(Tex.Crim.App.1972). Therefore, Director Vernon has an
not. Because Director Vernon has an adequate remedy at
adequate remedy at law for the contempt order, and her
law, she has not shown herself entitled to mandamus relief.
request for mandamus relief is premature. See Ex parte
Therefore, we deny the writ as to the contempt portion of
Waters, 499 S.W.2d at 311.
the April 6 order.
Footnotes
1 SCFO represents indigent inmates who are charged with offenses committed while in the custody of Texas Department
of Criminal Justice, Institutional Division. See TEX.CODE CRIM. PROC. ANN. art. 26.051(e) (Vernon 2004–05).
2 During the hearing, Respondent expressed doubt that the Legislature would approve payment of these claims.
3 On June 20, 2005, Respondent notified this Court by letter that the appropriations bill for the upcoming biennium (fiscal
years 2006–07) provides additional funding for the payment of miscellaneous claims, but the $25,000 statutory cap
remains. Respondent also reiterated his conclusion that “it is only in cases likely to hit the $25,000 statutory cap where
free world counsel does not have a reasonable expectation of payment and thus constitutional takings concerns override.”
4 In this proceeding, Respondent states that “[t]he use of dual representation by the State Counsel even with a Chinese
Wall admittedly raises legitimate conflicted representation concerns.”
5 As an aside, we perceive no conflict between the two statutes. Article 26.051(g) prescribes the circumstances under which
non-SCFO counsel must be appointed for indigent inmate offenders, and section 403.074 creates a payment system for
those appointed. The real issue, as presented by Intervenors at the evidentiary hearing and as argued by Intervenors
and Respondent in this proceeding, is the constitutionality of the payment system.
6 An exception is Texas Rule of Civil Procedure 18a relating to the recusal of judges. See Arnold v. State, 853 S.W.2d 543,
544 (Tex.Crim.App.1993) (holding that Rule 18a, formerly codified in Tex.Rev.Civ. Stat. Ann. art. 200a, § 6 but repealed
by Act of June 12, 1985, 69th Leg., R.S., ch 480, § 26(1), 1985 Gen. Laws 2048, applies in criminal cases).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
compel arbitration is decided would ordinarily involve approved here, the trial court, as well as this court, must
application of the terms of the arbitration agreement accept as true the clear, direct, and positive evidence
to undisputed facts, amenable to proof by affidavit. of an undisputed affidavit, even of a party's agent.
With these considerations in mind, we hold that the See Americana Motel, Inc. v. Johnson, 610 S.W.2d 143
trial court may summarily decide whether to compel (Tex.1980) (uncontroverted testimony by an interested
arbitration on the basis of affidavits, pleadings, discovery, party may support summary judgment when testimony
and stipulations. However, if the material facts necessary is clear, direct, and positive); Whitehead v. Julian, 476
to determine the issue are controverted, by an opposing S.W.2d 844, 845 (Tex.1972) (uncontroverted affidavit
affidavit or otherwise admissible evidence, the trial court must be accepted as true); Great Am. Reserve Ins. Co.
must conduct an evidentiary hearing to determine the v. San Antonio Plumbing Supply Co., 391 S.W.2d 41, 47
disputed material facts. (Tex.1965). The undisputed evidence presented to the trial
court thus established the applicability of the Federal Act.
III.
IV.
[3] [4] [5] Next we consider whether the Federal Act
applies to this dispute. Section 2 of the Federal Act [6] Anglin argues that the trial court erred in excluding
provides in pertinent part: the City's DTPA claims from the order compelling
arbitration. The City responds that its DTPA claims
A written provision in any maritime are not subject to arbitration for two reasons: first,
transaction or a contract evidencing because its DTPA claims do not arise out of the contract
a transaction involving commerce to and therefore are beyond the scope of the arbitration
settle by arbitration a controversy clause, and second, because the DTPA's nonwaiver
thereafter arising out of such provision, TEX.BUS. & COM.CODE ANN. § 17.42
contract or transaction, ... shall be
(Vernon 1987), 7 prevents the City from waiving a
valid, irrevocable, and enforceable,
judicial determination of its DTPA claims. Both of these
save upon such grounds as exist at
contentions are without merit.
law or in equity for the revocation of
any contract.
[7] The DTPA claims arise out of Anglin's alleged
The Federal Act thus applies to all suits in state and misrepresentations regarding the quality of its services
federal court when the dispute *270 concerns a “contract and materials used in its work. 8 Generally, a DTPA
evidencing a transaction involving commerce.” Perry v. *271 claim for misrepresentation is considered separate
Thomas, 482 U.S. 483, 489, 107 S.Ct. 2520, 2525, 96 and distinct from any breach of contract which may
L.Ed.2d 426 (1987); Southland Corp., 465 U.S. at 14– have also occurred. Weitzel v. Barnes, 691 S.W.2d 598,
16, 104 S.Ct. at 860–61; 9 U.S.C. § 1 (“commerce” 600 (Tex.1985); see also Decision Control Systems, Inc.
means commerce “among the several States ...”). Nor v. Personnel Cost Control, Inc., 787 S.W.2d 98, 100
is its application limited solely to interstate shipment (Tex.App.—Dallas 1990, no writ). However, under the
of goods. Prima Paint v. Flood & Conklin Mfg. Co., supremacy clause of the United States Constitution, U.S.
388 U.S. 395, 401 n. 7, 87 S.Ct. 1801, 1805 n. 7, 18 Const. art. VI, cl. 2, the Federal Act preempts all otherwise
L.Ed.2d 1270 (1967); Mesa Operating Ltd. Partnership v. applicable state laws. Perry, 482 U.S. at 489, 107 S.Ct.
Louisiana Intrastate Gas Corp., 797 F.2d 238, 243 (5th at 2525; Southland Corp., 465 U.S. at 14–16, 104 S.Ct. at
Cir.1986); Lost Creek Util. v. Travis Indep. Painter, 827 860–61 (Federal Act creates substantive rules applicable in
S.W.2d 103, 105 (Tex.App.—Austin 1992, writ denied). 6 state and federal courts to prevent states from limiting the
Here, the material evidence before the court consisted of enforceability of arbitration agreements); see also Batton,
the pleadings, the contract, and Jack Anglin's affidavit, 801 S.W.2d at 927 (the Federal Act is substantive and is
which states that Anglin transported materials across state the law of Texas).
lines pursuant to the contract and prepared the billings
for the job in Michigan. Under the procedure we have [8] [9] The primary purpose of the Federal Act is
to require the courts to compel arbitration when the
parties have so provided in their contract, despite any in this regard amounts to a clear abuse of discretion under
state legislative attempts to limit the enforceability of the Walker standard. The remaining question is whether
arbitration agreements. Volt, 489 U.S. at 474, 109 S.Ct. at Anglin has an adequate remedy on appeal.
1253; Shearson/Am. Express, Inc. v. McMahon, 482 U.S.
220, 225, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987); Both the Texas and Federal Acts permit a party to
Perry, 482 U.S. at 490, 107 S.Ct. at 2525; Southland appeal from an interlocutory order granting or denying
Corp., 465 U.S. at 10, 104 S.Ct. at 858. To this end, the a request to *272 compel arbitration. 10 As we have
Federal Act preempts state statutes to the extent they are noted, however, federal procedure does not apply in Texas
inconsistent with that Act. See Volt, 489 U.S. at 478, 109 courts, even when Texas courts apply the Federal Act.
S.Ct. at 1255. We likewise are of the opinion that federal See Southland Corp., 465 U.S. at 16 n. 10, 104 S.Ct. at
law preempts application of the nonwaiver provision of 861 n. 10; NCR Corp. v. Mr. Penguin Tuxedo Rental,
the DTPA to prevent or restrict enforcement of this 663 S.W.2d 107, 108 (Tex.App.—Eastland 1983, writ ref'd
arbitration agreement. See Commerce Park v. Mardian n.r.e.). When a Texas court enforces or refuses to enforce
Construction Co., 729 F.2d 334, 338 (5th Cir.1984) (claim an arbitration agreement pursuant to the Federal Act, we
under Texas Deceptive Trade Practices Act subject to must determine whether that decision should be reviewed
arbitration under Federal Act). 9 by interlocutory appeal or mandamus. 11
Furthermore, Texas law favors the joint resolution of [12] [13] Under Texas procedure appeals may be had
multiple claims to prevent multiple determinations of only from final orders or judgments. TEX.CIV.PRAC.
the same matter. See Valero Energy Corp. v. Wagner &
& REM.CODE § 51.014. 12 Interlocutory orders may
Brown, 777 S.W.2d 564, 567 (Tex.App.—El Paso 1989,
writ denied). The City alleges that Anglin's goods and be appealed only if permitted by statute. 13 Cherokee
services were less than Anglin represented they would be. Water Co. v. Ross, 698 S.W.2d 363, 365 (Tex.1985) (orig.
Evidence to support these allegations will be required to proceeding); Henderson v. Shell Oil, 143 Tex. 142, 182
establish the City's breach of contract claim. Although the S.W.2d 994, 995 (1944). A final judgment is one which
City's misrepresentation claims are grounded in a legal disposes of all legal issues between all parties. Hinde v.
theory distinct from its contract claim, they are factually Hinde, 701 S.W.2d 637, 639 (Tex.1986). An order denying
intertwined, and thus are subject to the arbitration arbitration under the Federal Act meets neither the rule
provision of the contract. For the foregoing reasons, we nor the statutory exceptions. Anglin and other similarly
hold that the City's DTPA claims are arbitrable pursuant situated litigants who allege entitlement to arbitration
to the parties' agreement and shall be arbitrated under the under the Federal Act, and in the alternative, under the
Federal Act. Texas Act, are burdened with the need to pursue parallel
proceedings—an interlocutory appeal of the trial court's
denial under the Texas Act, and a writ of mandamus from
the denial under the Federal Act.
V.
Although we can conceive of no benefit from such an
[10] [11] Finally, we must decide whether a party that
unnecessarily expensive and cumbersome rule, we may not
has been wrongfully denied the benefits of its agreement to
enlarge appellate jurisdiction absent legislative mandate.
arbitrate is entitled to the extraordinary remedy of the writ
In the interests of promoting the policy considerations
of mandamus. Mandamus will issue only to correct a clear
of rigorous and expedited enforcement of arbitration
abuse of discretion or violation of a duty imposed by law
agreements, we urge the legislature to consider amending
when that abuse cannot be remedied by appeal. Walker v.
the Texas Act to permit interlocutory appeals of orders
Packer, 827 S.W.2d 833, 840 (Tex.1992); Johnson v. Fourth
issued pursuant to the Federal Act. Such a procedure,
Court of Appeals, 700 S.W.2d 916, 917 (Tex.1985). In
already available for orders under the Texas Act, is
Walker we stated that “[A] clear failure by the trial court to
preferable to reliance on the writ of mandamus to fill this
analyze or apply the law correctly will constitute an abuse
gap in appellate jurisdiction.
of discretion....” 827 S.W.2d at 840 (citations omitted).
Because we have held that the trial court failed to correctly
apply the Federal Act to the facts of this case, its decision
[14] Although mandamus relief will not issue merely we conditionally grant the writ of mandamus and direct
the trial court to order that all claims, including the City's
because an appellate remedy may be more expensive
DTPA claims, proceed to arbitration under the Federal
and time-consuming than mandamus, it will issue when
Arbitration Act. The clerk is instructed to issue the writ
the failure to do so would vitiate and render illusory
only should the trial court fail to do so.
the subject matter of an appeal. Absent mandamus
relief, Anglin would be deprived of the benefits of the
arbitration clause it contracted for, and the purpose All Citations
of *273 providing a rapid, inexpensive alternative to
traditional litigation would be defeated. 14 Accordingly, 842 S.W.2d 266, 61 USLW 2376
Footnotes
1 Jack Anglin averred that the Anglin Company is a Michigan corporation and that it had transported machinery and
equipment from Michigan to Texas to fulfill its obligations under the contract. He also stated that the billings for the project
were prepared and transmitted to the City from Anglin's offices in Michigan.
2 At least 36 states, including Texas, have adopted all or part of the Uniform Arbitration Act to encourage and facilitate
the use of arbitration.
3 See Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 219, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985) (goal of Federal
Act is the expeditious resolution of claims and avoidance of cost and delay of litigation); Shearson Lehman Hutton, Inc. v.
McKay, 763 S.W.2d 934, 939 (Tex.App.—San Antonio 1989, no writ). See also Hartford Lloyd's Ins. Co. v. Teachworth,
898 F.2d 1058, 1061 (5th Cir.1990) (arbitration aims to submit a dispute to a third party for speedy and efficient resolution
without resort to the courts); Manes, 638 S.W.2d at 145; Jeffrey W. Stempel, Pitfalls of Public Policy: The Case of
Arbitration Agreements, 22 ST. MARY'S L.J. 259, 269 (1990) (“courts tend to take longer, cost more money, and lack
the expert fact finders found in arbitration”).
4 Live testimony may be considered at a special appearance, TEX.R.CIV.P. 120a(3), and on objections to discovery
requests, TEX.R.CIV.P. 166b(4), but not at a summary judgment hearing, TEX.R.CIV.P. 166a(c) or venue hearing,
TEX.R.CIV.P. 87, 88.
5 Commentators agree that a less than plenary hearing is desirable. See M. DOMKE & G. WILNER, COMMERCIAL
ARBITRATION § 17:02 (rev. ed. 1984); R. RODMAN, COMMERCIAL ARBITRATION § 11.7 (1984).
6 Because the undisputed evidence clearly establishes interstate activity, the Federal Act governs arbitration of this dispute.
We need not and do not today define the scope of the “involving commerce” clause. We do note, however, that some
courts have focused on whether the contract itself indicates that the parties contemplated substantial interstate activity, so
that the fortuity of diverse citizenship or ancillary travel across state lines would not alone trigger application of the Federal
Act. Metro Indus. Painting Corp. v. Terminal Constr. Co., 287 F.2d 382, 387 (2d Cir.1961) (Lumbard, C.J. concurring);
Warren v. Jim Skinner Ford, Inc., 548 So.2d 157, 160 (Ala.) cert. denied, 493 U.S. 998, 110 S.Ct. 554, 107 L.Ed.2d 550
(1989); Riverfront Properties, Ltd., v. Max Factor III, 460 So.2d 948, 953 (Fla.Dist.Ct.App.1984); Burke County Pub. Sch.
Bd. of Educ. v. The Shaver Partnership, 303 N.C. 408, 279 S.E.2d 816, 822 (1981); but see Del E. Webb Constr. v.
Richardson Hosp. Auth., 823 F.2d 145, 147–48 (5th Cir.1987) (rejecting the “substantial” contacts test in favor of “relating
to” test in order to implement strong federal policy favoring arbitration).
7 That section provides in pertinent part:
Waivers: Public Policy
Any waiver by a consumer of the provision of this subchapter is contrary to public policy and is unenforceable and
void....
The version of § 17.42 in effect at the time permitted written contractual waiver by certain business consumers. The
legislature broadened the categories of consumers eligible to waive DTPA remedies 1989. TEX.BUS. & COM.CODE
ANN. § 17.42 (VERNON SUPP.1992) (excluding purchase or lease of family residence, waiver permitted by consumers
in transactions exceeding $500,000 who are represented by legal counsel, are not in significantly disparate bargaining
positions, and who, along with their attorneys, sign express waivers in written contracts). John T. Montford, Will G.
Barber, & Robert L. Duncan, 1989 Texas DTPA Reform: Closing the DTPA Loophole in the 1987 Tort Reform Laws
and the Ongoing Quest for Fairer DTPA Laws, 21 ST. MARY'S L.J. 525, 556–562 (1990).
8 Specifically, the City alleges:
The false, misleading or deceptive acts or practices include ...
1. Representing that goods or services were of a particular standard, quality or grade ... if they were that of another;
and/or
2. The failure to disclose information concerning goods or services which were known at the time of the transaction,
and such failure to disclose such information was intended to induce the consumer into a transaction into which the
consumer would not have entered had the information been disclosed.
9 The parties to this arbitration agreement were of relatively equal bargaining strength. We do not foreclose the possibility
of DTPA relief for a party establishing that an agreement to arbitrate was unconscionable and therefore unenforceable
as a matter of law.
10 Article 238–2(A) of the Texas Act affords an aggrieved party a right to an interlocutory appeal from a grant or denial of
arbitration under the Texas Act. Similarly, a party denied arbitration in federal court is entitled to an interlocutory appeal
under federal procedure. See Stedor Enter., Ltd. v. Armtex, Inc., 947 F.2d 727, 730 (4th Cir.1991); see also Arnold v.
Arnold Corp., 920 F.2d 1269, 1274 (6th Cir.1990); 9 U.S.C. § 15 (1988), amended by 9 U.S.C. §§ 15, 16 (Supp.1992).
11 The courts of appeals have variously permitted appeal under the Texas Act, and mandamus or appeal under the
Federal Act. See Merrill Lynch v. Hughes, 809 S.W.2d 679, 680–81 (Tex.App.—Corpus Christi 1991) (Texas Act allows
for interlocutory appeal of order denying motion to compel arbitration), dism'd as moot, 827 S.W.2d 859 (Tex.1992);
Transwestern Pipeline v. Horizon Oil, 809 S.W.2d 589, 591 (Tex.App.—Dallas 1991, writ dism'd w.o.j.) (interlocutory
appeal reversing trial court's order denying motion to compel arbitration); Merrill Lynch v. Wilson, 805 S.W.2d 38 (Tex.App.
—El Paso 1991, no writ); Batton v. Green, 801 S.W.2d 923, 929 (Tex.App.—Dallas 1990, no writ) (Texas law specifically
allows an interlocutory appeal from an order denying an application to compel arbitration or granting an application to stay
arbitration); USX Corp. v. West, 759 S.W.2d 764, 765 (Tex.App.—Houston [1st Dist.] 1988, no writ) (Texas Act “apparently
permits interlocutory review of order denying application to compel arbitration”); Mr. Penguin Tuxedo Rental, 663 S.W.2d
at 108 (when agreement to compel arbitration is unenforceable under the Texas Act, “the interlocutory appeal authorized
by that act is not available”); Central Tex. Clarklift, Inc. v. Simmons, 540 S.W.2d 745, 746 (Tex.Civ.App.—Waco 1976,
no writ) (although order denying motion to compel arbitration “is an interlocutory one, it is expressly appealable under
the provisions of Article 238–2”).
12 Texas does not have a statute comparable to 28 U.S.C. 1292(b), which in effect permits a federal district court to certify
that an appeal is appropriate from an interlocutory order addressing a matter of controlling law.
13 This court has, however, deemed orders relating to sealing or unsealing court records to be final, appealable judgments.
TEX.R.CIV.P. 76a(8).
14 Indeed, the United States Supreme Court has apparently indicated that it will promptly review any state court decision
to the contrary: “For us to delay review of a state judicial decision denying enforcement of the contract to arbitrate until
the state-court litigation has run its course would defeat the core purpose of a contract to arbitrate.” Southland Corp.,
465 U.S. at 7–8, 104 S.Ct. at 857.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
I understand that if I am extended an offer of petition for writ of mandamus, held that the arbitration
employment, I will have to pass a physical examination agreement was illusory, and affirmed the trial court's
as a condition of such employment. If employed, I agree order denying Davidson's motion to compel arbitration.
to abide by and comply with all of the rules, policies 49 S.W.3d 507, 514. One justice dissented, concluding
and procedures of the “Company.” I understand that if that the arbitration agreement was enforceable because
I am employed by the “Company”, such employment both parties mutually agreed to arbitrate workplace
will be “at-will” and that the “Company” may terminate injury disputes. Id. at 519. The dissent observed that
my employment at any time and for any reason. I the reservation language—concerning the company's
understand and agree that, in the event of my separation unilateral right to modify or terminate personnel policies
from any employment with the “Company”, any and without notice—did not render Davidson's promise
all information concerning my employment history may illusory, because it was “separable” from the promise to
be furnished to any other employer with whom I seek arbitrate. Id. at 518.
employment and I hereby release and hold harmless
the “Company”, its affiliates, parents, subsidiaries, and Davidson asks us to reverse the court of appeals' judgment
successors, and its and their officers, directors, trustees, and order the trial court to stay the trial pending binding
employees and agents from and against any and all arbitration pursuant to the Texas Arbitration Act. 1 See
claims and liability for furnishing such information. TEX. CIV. PRAC. & REM. CODE § 171.098.
No supervisor or person other than the President of
the “Company”, can change or otherwise modify any
employment agreement. The “Company” reserves the
right to unilaterally abolish or modify any personnel II
policy without prior notice. I understand that this
application will be considered valid and current for a Standard of Review
period of not more than thirty (30) days.
[1] [2] [3] A party attempting to compel arbitration
In November 1998, Webster was injured at work must first establish that the dispute in question falls within
and subsequently filed a workers' compensation claim. the scope of a valid arbitration agreement. In re Oakwood
Although his condition improved temporarily, his doctor Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex.1999). If
eventually placed him on “no work” status. Shortly the other party resists arbitration, the trial court must
thereafter, Webster's employment with Davidson ceased. determine whether a valid agreement to arbitrate exists.
The parties dispute whether Webster quit or was Id.; TEX. CIV. PRAC. & REM. CODE § 171.021. The
terminated. trial court's determination of the arbitration agreement's
validity is a legal question subject to de novo review. In
Webster sued Davidson for wrongful termination under re Kellogg Brown & Root, 80 S.W.3d 611, 615 (Tex.App.-
section 451 of the Texas Labor Code, alleging he Houston [1st Dist.] 2002, orig. proceeding). If the trial
was terminated in retaliation for filing a workers' court finds a valid agreement, the burden shifts to the
compensation claim. See TEX. LAB. CODE § 451.001. party opposing arbitration to raise an affirmative defense
Davidson denied Webster's allegations and filed a to enforcing arbitration. Oakwood, 987 S.W.2d at 573.
motion to compel binding arbitration under the
company's alternative dispute resolution policy. Webster
*227 responded that the arbitration agreement was III
unenforceable because it was illusory, unconscionable,
and lacked mutuality. Following a hearing, the trial court
denied Davidson's motion without explanation. Analysis
898 (Tex.1995); High Valley Homes, Inc. v. Fudge, 2003 We upheld the arbitration agreement between Halliburton
WL 1882261, at *3 (Tex.App.-Austin April 17, 2003, no and its employee. Id. at 570. We concluded that the
pet.) (memorandum opinion); see also Fleetwood Enters., employee's at-will employment status did not render
Inc. v. Gaskamp, 280 F.3d 1069, 1073 (5th Cir.2002) the agreement illusory because Halliburton did not
(federal policy favoring arbitration does not apply to rely on continued employment as consideration for
the determination of whether there is a valid agreement the agreement. Instead, mutual promises to submit all
to arbitrate; instead, ordinary contract principles are employment disputes to arbitration constituted sufficient
applied). Arbitration agreements are interpreted under consideration, because both parties were bound to the
traditional contract principles. Jenkens & Gilchrist v. promises to arbitrate. Id. at 569.
Riggs, 87 S.W.3d 198, 201 (Tex.App.-Dallas 2002, no
pet.); Pepe Int'l Dev. Co. v. Pub Brewing Co., 915 S.W.2d Halliburton's right to modify or terminate the policy did
925, 930 (Tex.App.-Houston [1st Dist.] 1996, no writ); not allow the employer to avoid its promise to arbitrate
see also First Options of Chicago, Inc. v. Kaplan, 514 because it was limited by express contract provisions. Id.
U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995) at 569–70. First, the policy stated that any changes only
(holding that, when deciding whether the parties agreed applied prospectively to unknown claims. Id. And second,
to *228 arbitrate, “courts generally ... should apply if Halliburton terminated the policy, such termination
ordinary state-law principles that govern the formation of required notice and applied to both Halliburton's and the
contracts”). Thus, an employer attempting to enforce an employees' rights. Id. Therefore, Halliburton could not
arbitration agreement must show the agreement meets all avoid its promise to arbitrate by amending or terminating
requisite contract elements. At-will employment does not the dispute resolution program. Id. Because the express
preclude formation of other contracts between employer terms of the policy provided that both the employee and
and employee, so long as neither party relies on continued Halliburton were bound to their promises to arbitrate, we
employment as consideration for the contract. See Light held the agreement was not illusory. Id. at 570. Here, we
v. Centel Cellular Co., 883 S.W.2d 642, 645 (Tex.1994) are asked to decide whether the terms of the agreement
(because at-will employer always retains the option between Davidson and Webster are distinguishable from
to discontinue employment at any time, the promise Halliburton.
of continued employment is illusory and insufficient
consideration for employee's promise not to compete). Davidson argues that its dispute resolution policy is
Here, the parties dispute whether the reciprocal promises enforceable because, like Halliburton, the agreement
to arbitrate are sufficient consideration to support includes reciprocal promises to waive the right to
enforcing the arbitration agreement. litigation and submit all employment disputes to binding
arbitration. See In re Alamo Lumber Co., 23 S.W.3d
We recently considered whether an arbitration agreement 577, 579–80 (Tex.App.-San Antonio 2000, pet. denied)
between an employer and at-will employee was supported (“Since the parties surrendered their rights to trial by
by sufficient consideration. See In re Halliburton Co., jury, these mutual promises supply valid consideration.”).
80 S.W.3d at 566. We note, however, that the court Thus, Davidson contends there is sufficient consideration
of appeals' decision and both parties' submissions to to support the arbitration agreement. On the other hand,
this Court occurred before we decided Halliburton. In Webster argues that the arbitration agreement is illusory
Halliburton, the employer notified employees of a new because the express terms of the agreement provide that
alternative dispute resolution program that required Davidson was not bound by its terms.
both the employer and the employees to submit all
employment-related disputes to binding arbitration. Id. at *229 [8] It is clear that Davidson and Webster
568. The terms included the employer's right to modify or “mutually agree[d] and contract[ed]” to submit disputes
discontinue the program, but also required the employer to arbitration. At the end of the one-page document
to give its employees notice of changes and stated that any containing their agreement, however, is the following
amendments would apply only prospectively. Id. at 569– statement: “The Company reserves the right to
70. unilaterally abolish or modify any personnel policy
without prior notice.” Our resolution of this case depends
on the relationship between those two provisions.
respond to some of the dissents' concerns. Both dissents City of Dallas, 79 S.W.3d 657, 667 (Tex.App.-Dallas 2002,
assert that the title of the document must be considered pet. denied); Z.A.O., Inc. v. Yarbrough Drive Ctr. Joint
insofar as it references arbitration, but they omit from Venture, 50 S.W.3d 531, 540 (Tex.App.-El Paso 2001, no
consideration that portion of the title, and contents pet.); N. Cent. Oil Corp. v. Louisiana Land & Exploration
of the document, that pertain to personnel policies. Co., 22 S.W.3d 572, 576 (Tex.App.-Houston [1st Dist.]
Justice Smith determines that the document is “primarily 2000, pet. denied); Curbo v. State, 998 S.W.2d 337, 343
devoted to setting forth an arbitration policy,” even (Tex.App.-Austin 1999, no pet.).
though arbitration is discussed in only the first paragraph,
which comprises less than fifty percent of the text (and, Finally, Justice Schneider states that he is reluctant to
as Justice Schneider points out, only two of fifteen send this matter back to the trial court “because [he]
sentences). 128 S.W.3d at 240. The document is set cannot imagine what such a hearing would look like.”
out in full in this opinion, and we need not belabor 128 S.W.3d at 232. It is not necessary to speculate on the
the point. Suffice it to say that—as evidenced by the character of that proceeding: the trial court will conduct
multiple disagreements about its meaning among this an evidentiary *232 hearing to determine the parties'
Court's justices—the agreement is subject to more than intent. See Anglin, 842 S.W.2d at 269 (noting that, “if
one reasonable interpretation. Under our precedent, the the material facts necessary to determine [a motion to
document is ambiguous. Columbia, 940 S.W.2d at 589. compel arbitration] are controverted, by an opposing
affidavit or otherwise admissible evidence, the trial court
Rather than follow this precedent, however, Justice Smith must conduct an evidentiary hearing to determine the
would enforce a deeply flawed agreement that he admits is disputed material facts”); see also Armijo v. Prudential
“far from a model of precise drafting.” 128 S.W.3d at 239. Ins. Co., 72 F.3d 793, 801 (10th Cir.1995) (Jenkins, J.,
Indeed, the one-page document is rife with grammatical concurring) (if arbitration agreement is ambiguous “the
errors, misspellings, and omitted words. Webster waived issue then becomes a factual question, to be decided from
his right to “trail by jury,” even for claims “based external evidence of the parties' intent, unless only one
on the Construction of ... he United States.” He also conclusion can be drawn from the undisputed evidence”);
agreed that “[t]he Arbitration Tribunal shall be the sole Montgomery County Cmty. Coll. Dist. v. Donnell, Inc., 141
and existence of its jurisdiction over all parties and Ohio App.3d 593, 752 N.E.2d 342, 345 (2001) (holding
issues,” whatever that means. While we generally favor that “an ambiguity in the [arbitration] agreement ... must
arbitration agreements, we should not reflexively endorse be resolved by an evidentiary hearing”).
an agreement so lacking in precision that a court must first
edit the document for comprehension, and then rewrite it Because we cannot discern whether Davidson's unilateral
to ensure its enforceability. right to terminate “personnel policies” applies to the
agreement to arbitrate, we conclude that the arbitration
Justice Schneider implies that, because the parties do agreement is ambiguous. We reverse the court of appeals'
not contend the agreement is ambiguous, we may not judgment and remand this case to the trial court for
hold that it is. This is contrary to Texas law. See Sage further proceedings consistent with this opinion. TEX. R.
St. Assoc. v. Northdale Constr. Co., 863 S.W.2d 438, APP. P. 60.2(d).
444–45 (Tex.1993) (holding jury question was presented
by ambiguity in construction agreement; a court may
conclude that a contract is ambiguous even in the
Justice SCHNEIDER filed a dissenting opinion, joined by
absence of such a pleading by either party); Coker, 650
Justice O'NEILL.
S.W.2d at 393 (concluding agreement was ambiguous
even though both parties asserted property settlement Justice SMITH filed a dissenting opinion.
agreement was unambiguous and moved for summary
judgment); Acadian Geophysical Servs., Inc. v. Cameron,
Justice SCHNEIDER, joined by Justice O'NEILL,
119 S.W.3d 290, 302 (Tex.App.-Waco 2003, no pet.
dissenting.
h.); W.W. Laubach Trust/The Georgetown Corp. v. The
I respectfully dissent. The controversy in this case involves
Georgetown Corp./W.W. Laubach Trust, 80 S.W.3d 149,
a company's arbitration policy that an employee agreed to
155 (Tex.App.-Austin 2002, pet. denied); Arredondo v.
sign after beginning his employment. When the company
sought to enforce the arbitration policy, the trial court Dist.] 2003, no pet.). If Davidson had met its burden of
denied the motion to compel arbitration. A divided court proof, then the burden would have shifted to Webster to
of appeals affirmed the trial court's order. The Court says show why the arbitration agreement did not apply. Id.
that the wording in the arbitration policy is ambiguous At the Motion to Compel Arbitration hearing, the trial
and that the case should be sent back to the trial court to court properly considered the pleadings of the parties, the
hear evidence concerning the parties' intent. But I would motion to compel arbitration, and responses. See Jack B.
not be as hasty as the Court to send this matter back to the Anglin Co. Inc. v. Tipps, 842 S.W.2d 266, 269 (Tex.1992)
trial court because I cannot imagine what such a hearing (“the trial court may summarily decide whether to compel
would look like. I would, in the first instance, hold that the arbitration on the basis of affidavits, pleadings, discovery,
policy provisions are not ambiguous. Then, in the second and stipulations.”). But, the trial court heard no live
instance, I would hold the employee is entitled to complete testimony about the ADR Policy. Cf. id. (noting that
relief in this Court. The arbitration promise made by the “if the material facts necessary to determine the issue
company is illusory, and because it is, I would affirm the are controverted,” “the trial court must conduct an
court of appeals' judgment denying the motion to compel evidentiary hearing to determine the disputed material
arbitration. facts”).
appropriate. Id.; see also Nationwide of Bryan, Inc. v. Dyer, re Tenet Healthcare Ltd., 84 S.W.3d 760, 763 (Tex.App.-
969 S.W.2d 518, 520 (Tex.App.-Austin 1998, no pet.); Houston [1st Dist.] 2002, orig. proceeding) (analyzing
Dalton Contractors, Inc., 60 S.W.3d at 353. a legally binding arbitration agreement appearing in
an employee handbook containing personnel policies).
Moreover, the ADR Policy was provided by an employer
*234 B. Construction of the ADR Policy to be signed by an employee, suggesting it is a personnel
policy. It is not only reasonable to believe the arbitration
Under the guise of a de novo review of the trial court's
provision is a personnel policy of the company, it is
legal interpretation of the agreement, the Court may not
unreasonable to reach any other conclusion. The Court
create an agreement for the parties that is different from
seems to suggest that the “personnel policy” must be one
the one they entered. But, the Court attempts to do
or the other—either a policy, or an agreement. Surely a
just that. The ADR Policy expressly reserves Davidson's
reasonable interpretation is that it could be both.
right to “unilaterally abolish or modify any personnel
policy without prior notice.” The Court raises ambiguity
Webster even promises to abide by all of Davidson's
as an issue sua sponte and concludes that this unilateral
“policies” in the ADR Policy, and it is reasonable to
termination provision in the ADR Policy is ambiguous
conclude that Davidson wanted to retain the right to
because “it is not possible to determine from the document
unilaterally terminate all parts of the ADR Policy because
itself whether the unilateral termination right applies to
the policy did not specifically exempt the arbitration
the parties' agreement to arbitrate, or only to ‘personnel
agreement from the unilateral termination right.
policies' concerning the at-will employment relationship.”
128 S.W.3d at 225. But neither Webster, Davidson, the
Finally, neither Davidson nor Webster have ever argued
trial court, nor the Court of Appeals have suggested
that the unilateral termination right did not apply to the
the language quoted above is ambiguous. I would hold
arbitration agreement. The actions of both the parties
that this language regarding the unilateral termination
throughout their litigation reflect the belief that the
right unambiguously applies to the entire agreement,
arbitration policy is a personnel policy. They both came to
including the agreement to arbitrate. Although ultimately
the Motion to Compel Arbitration hearing arguing about
the contract fails for lack of consideration (see discussion
several issues, none of which ever raised the question of
below), it cannot be said that the ADR Policy is
whether the arbitration policy was a personnel policy. All
ambiguous.
of their actions throughout the litigation are consistent
with the notion that the right to unilaterally terminate
1. The ADR Policy is not ambiguous. applied to the arbitration policy.
There are several reasons why the document can be *235 Webster and Davidson do offer different
unambiguously read so that the universal termination interpretations of the unilateral termination clause.
right language applies to the entire document. First, But their differences have nothing to do with factual
the document is entitled “Alternative Dispute Resolution issues; rather, they differ in the legal significance
Policy,” which suggests that the unilateral termination of the arbitration policy. Nevertheless, the fact that
right contained within it would apply to arbitration, as the their explanations differ does not render the contract
title would be applicable to the entire document. See e.g. ambiguous. See Columbia Gas Transmission Corp. v. New
Neece v. A.A.A. Realty Co., 159 Tex. 403, 322 S.W.2d 597, Ulm Gas, Ltd., 940 S.W.2d 587, 589 (Tex.1996) (noting
606 (1959) (Calvert, J., dissenting) (recognizing that the that an ambiguity does not arise simply because parties
title of an agreement can have the legal effect of importing offer conflicting interpretations of the contract). For an
words into the contract). ambiguity to exist, both explanations must be reasonable.
Id. Conversely, a contract is ambiguous if its language
Secondly, the unilateral termination right applies to “any is subject to two or more reasonable interpretations. See
personnel policy,” and it is reasonable to conclude that Monsanto v. Boustany, 73 S.W.3d 225, 229 (Tex.2002).
an arbitration policy would fall under the category of a Here, there is only one reasonable interpretation of
personnel policy. Arbitration agreements are often a part the ADR Policy, and the Court's insistence that it is
of employee manuals or personnel policies. See e.g., In
ambiguous flies in the face of well-established rules of promises are binding on both parties, they may constitute
construction. consideration for a contract. Texas Gas Util. Co. v.
Barrett, 460 S.W.2d 409, 412 (Tex.1970); Johnson v.
Breckenridge–Stephens Title Co., 257 S.W. 223, 225
2. Finding the ADR Policy ambiguous is contrary to well- (Tex.Com.App.1924).
established rules of construction.
But, if the terms of a promise make performance
One of the basic tenets of contract interpretation is
optional, the promise is illusory and cannot constitute
the assumption that the parties intend every part of an
valid consideration. Light v. Centel Cellular Co. of
agreement to mean something. When construing a written
Texas, 883 S.W.2d 642, 645 (Tex.1994) (“When illusory
contract, we are to ascertain the intent of the parties as
promises are all that support a purported bilateral
expressed in the instrument. Nat'l Union Fire Ins. Co.
contract, there is no *236 contract.”); RESTATEMENT
of Pittsburgh, PA. v. CBI Indus. Inc., 907 S.W.2d 517,
(SECOND) OF CONTRACTS §§ 2 cmt. e; 77 cmt.
520 (Tex.1995); 718 Assocs., Ltd. v. Sunwest N.O.P., Inc.,
a. Valid consideration exists if a party reserves the
1 S.W.3d 355, 360 (Tex.App.-Waco 1999, pet. denied)
right to terminate an agreement with notice. See
(courts will enforce an “unambiguous instrument as
RESTATEMENT (SECOND) OF CONTRACTS § 77
written, and ordinarily, the writing alone will be deemed
cmt. b, illus. 5. But, a termination clause that allows a
to express the parties intentions”). Contracts are to be
party to terminate the contract at will makes performance
read as a whole, and an interpretation that gives effect to
optional, and thus, makes any promise illusory. See
every part of the agreement is favored so that no provision
Light, 883 S.W.2d at 645; see also, Tenet Healthcare Ltd.
is rendered meaningless or as surplusage. See Westwind
v. Cooper, 960 S.W.2d 386, 388–89 (Tex.App.-Houston
Exploration Inc. v. Homestate Savings Ass'n., 696 S.W.2d
[14th Dist.] 1998, pet. dism'd w.o.j.).
378, 382 (Tex.1985).
irrelevant that any changes made by Davidson would Additionally, whether an employer has satisfied the
apply to both parties. Hathaway requirements is a separate inquiry from the
determination of whether the arbitration agreement is
Davidson also argues that the promise to arbitrate is enforceable under traditional contract principles. If an
not illusory because, under Halliburton, 80 S.W.3d at employer seeks to change the terms of an employment
570, it is bound to resolve any dispute according to relationship by implementing an agreement to arbitrate
the ADR plan in effect at the time the dispute arises. all disputes, the employer must show the arbitration
However, the express contract terms we relied on to find agreement, standing alone, satisfies all requisite elements
the Halliburton agreement enforceable are missing here. of a valid contract. See Light, 883 S.W.2d at 645–
The plain language of the Halliburton ADR plan required 46; Halliburton, 80 S.W.3d at 569. This showing is
the employer to provide notice before enacting any separate from the employer's duty to meet the Hathaway
modifications or terminating the plan. Davidson suggests requirements of notice and acceptance. Id.
that because the agreement we upheld in Halliburton
required notice and prospective application, the same Davidson's attempts to create consideration via an
protective language can be implied here. I disagree. alternate reading of the language of the agreement are not
reasonable. When the meaning of an agreement is plain
In Halliburton, we relied on the ADR policy's notice and unambiguous, a party's construction is immaterial.
provisions to conclude that Halliburton could not “avoid 718 Associates, Ltd., 1 S.W.3d at 360. I would find
its promise to arbitrate by amending the [policy] or the contract unenforceable because it fails for lack of
terminating it altogether.” Halliburton, 80 S.W.3d at 570. consideration and is illusory.
Here, we cannot imply the obligations that precluded
Halliburton from avoiding its promise to arbitrate.
The agreement's plain language establishes Davidson's 3. The Court incorrectly concludes that the unilateral
unhindered right to modify or terminate the agreement termination right is ambiguous.
without notice. It is not proper to imply terms that
The Court sends this case back for the trial court to
contradict the express contract language. See Haws &
consider parol evidence, finding that a fact issue exists
Garrett Gen. Contractors, Inc. v. Gorbett Bros. Welding
concerning the applicability of the language in question
Co., 480 S.W.2d 607, 609–610 (Tex.1972) (the terms of an
to the arbitration agreement. But, as discussed above,
implied contract are inferred from the circumstances).
the language unambiguously gives Davidson the right to
unilaterally terminate any part of the agreement. Thus,
Davidson further attempts to explain the unilateral
there is no fact issue to be determined by the trial court
termination language as simply acknowledging an
and there is no need for parole evidence to be taken.
employer's right to make changes to at-will employment
terms, as in Hathaway v. Gen. Mills, Inc., 711 S.W.2d 227,
229 (Tex.1986). But, the arbitration agreement's language 4. The unilateral termination right does not only apply
contradicts Davidson's explanation. prospectively.
*237 In Hathaway, we held that an employer may enforce Although I agree with Justice Smith that the contract is
changes to an at-will employment contract if the employer unambiguous and the arbitration agreement is a personnel
unequivocally provides notice of a definite change and the policy subject to Davidson's unilateral termination right, I
employee accepts the change by continuing employment. cannot agree that the right to abolish or modify personnel
Hathaway, 711 S.W.2d at 229. Here, the contract expressly policies only applies prospectively with contemporaneous
allows Davidson to effect a change in the ADR plan's notice. The ADR Policy allows Davidson to unilaterally
terms without notice. Thus, it is inconsistent to explain abolish or modify any personnel policy “without prior
the reservation language as merely restating our holding notice.” Justice Smith looks to England to determine how
in Hathaway, because the arbitration agreement's terms to interpret the phrase “without prior notice.”
contradict the Hathaway requirements.
However, applicable precedent can be found closer to
home. For example, in Shumway v. Horizon Credit Corp.,
801 S.W.2d 890 (Tex.1991), we held that the language Moreover, Justice Smith confuses the Hathaway
“without prior notice” waived the right to all notice. requirements for changes to an at-will employment
801 S.W.2d at 893–94. Similarly, in Musgrave v. HCA agreement with the requirements for a valid, enforceable
Mideast, Ltd., 856 F.2d 690 (4th Cir.1988), the court arbitration agreement. They are two separate inquiries.
interpreted a contract providing that the employer had Even assuming Justice Smith is correct that Davidson
the right to terminate an employee's service “without prior may give contemporaneous notice of a change to the
notice.” The Fourth Circuit concluded that this language terms of Webster's employment terms under Hathaway,
“states simply that [the employee] could be terminated the arbitration clause of the ADR Policy remains illusory
during the probation period without notice.” 856 F.2d and unenforceable. If contemporaneous notice to cancel
at 694. Justice Smith's interpretation that “without prior the arbitration agreement is permissible, Davidson retains
notice” means “with contemporaneous notice” is not the right to discontinue performance at any time. Under
supported—and indeed, is contradicted—by caselaw from this scenario, there is no consideration, as Davidson is
American jurisdictions. not giving up a benefit or suffering a detriment. See e.g.,
In re C & H News Co., No. 13–02–529–CV, ––– S.W.3d
Justice Smith is essentially inserting a qualifying phrase ––––, ––––, 2003 WL 131770 at *4 (Tex.App.-Corpus
into Davidson's unilateral, unqualified right to terminate. Christi 2003, orig. proceeding). Thus, the arbitration
Even *238 though the ADR Policy permits Davidson clause would still be illusory and unenforceable.
to “unilaterally abolish or modify any personnel policy
without prior notice,” Justice Smith interprets this
as requiring contemporaneous notice. The agreement D. Enforceable arbitration agreements must bind both the
contains no such limitation. employer and the employee.
I disagree with the Court's determination that the Ltd. v. Cooper, 960 S.W.2d 386, 388 (Tex.App.-Houston
arbitration agreement is ambiguous. I also believe the [14th Dist.] 1998, pet. dism'd w.o.j.). Similarly, whether a
agreement is illusory. In Halliburton, we said that contract is ambiguous is itself a question of law. Kelley–
an arbitration agreement's terms must bind both the Coppedge, Inc. v. Highlands Ins. Co., 980 S.W.2d 462,
employer and employee if the agreement relies on mutual 464 (Tex.1998). We review questions of law de novo. El
promises to arbitrate for consideration. Davidson's ADR Paso Natural Gas Co. v. Minco Oil & Gas, Inc., 8 S.W.3d
Policy lacks the protections we relied on in Halliburton 309, 312 (Tex.1999). In a de novo review, no deference
to find the promises to arbitrate mutually binding. The is accorded to the lower court decision. Quick v. City of
unilateral right to modify or terminate the agreement Austin, 7 S.W.3d 109, 116 (Tex.1998).
without notice allows Davidson to avoid its promise at
any time. Accordingly, I would hold that the arbitration The one-page contract was the only evidence presented by
agreement between Davidson and Webster fails to bind the parties in the trial court. Accordingly, the only issues
Davidson, and thus, the promise is illusory and the on appeal are the legal questions of whether the contract
agreement is unenforceable for want of consideration. I is ambiguous and illusory. I apply de novo review to both.
would affirm the court of appeals' judgment.
the phrase “any personnel policy” its natural and obvious effect.). Applying the foregoing Texas case law, we must
import. See, e.g., Pagel v. Pumphrey, 204 S.W.2d 58, 64 presume that the parties in this case did not intend for
(Tex.Civ.App.-San Antonio 1947, writ ref'd n.r.e.). the phrase “without prior notice” to mean without any
notice. 2
Applying the foregoing rules of construction, it is clear
that the arbitration policy memorialized in the contract I have been unable to locate any Texas or federal case law
is a “personnel policy” and that the disputed provision specifically addressing whether the phrase “without prior
unambiguously provides that Davidson has the right to notice” should be given the same meaning as “without
abolish or modify its arbitration policy without prior
notice.” 3 However, an English appellate court concluded:
notice. I simply cannot conclude that an arbitration policy
that governs the conditions of employment for personnel
is not encompassed by the phrase “any personnel policy,” A clause providing for termination of the scheme by
particularly when that phrase appears in a contract that is the employer “without prior notice” means without
primarily devoted to setting forth an arbitration policy. notice in advance. Those words do not suggest that
notice does not have to be given to effect termination
of rights under the contract of employment. The clause
III puts the employee on warning that the scheme might not
be permanent and that the employer reserves the right
Justice Schneider asserts, and the Court implies, that to terminate it without giving advance warning, but it
if the disputed termination provision does apply to does not mean that the employer's obligations can end
Davidson's arbitration policy, the contract is illusory. without the employee being told.
Because Davidson retained the ability to unilaterally Bainbridge v. Circuit Foil (UK) Ltd. [1997], Industrial
abolish or modify its arbitration policy at any time, the Relations Law Reports (IRLR) 305 (Eng.C.A.). While
argument goes, it assumed no obligation to Webster, authority authored on this side of the Atlantic is
and therefore Davidson's promise to arbitrate does obviously preferable, an opinion issued by an English
not constitute consideration for Webster's reciprocal appellate court can surely be considered on a question
promise. 1 In my view, the provision's “without prior such as the one presented here that does not involve
notice” language does not disclaim the requirement set interpretation of a statutory or constitutional provision,
forth in Hathaway v. General Mills, Inc., 711 S.W.2d 227 but rather interpretation of three basic English words
(Tex.1986) of contemporaneous notice for modifications contained in a private employment contract.
to the at-will employment relationship. The provision Consistent with the well-established rule that each word
is properly construed as applying only prospectively to in a contract be given effect, the phrase “without prior
disputes arising after contemporaneous notice to Webster notice” contained in the parties' contract should be
of Davidson's decision to abolish or modify its ADR interpreted to mean without notice in advance rather than
policy. without any notice. Therefore, the “without prior notice”
language does not disclaim the contemporaneous notice
It is significant that the word “prior” precedes “notice” that is required by Texas common law to effect a change
in the relevant provision. We must presume that each in the terms of an at-will employment relationship. 4
word in a contract has some significance and meaning.
Gates v. Asher, 154 Tex. 538, 280 S.W.2d 247, 249 (1955). In Hathaway, we held that the party asserting a change to
For example, courts presume that words that follow one an at-will employment contract “must prove two things:
another are not intended to be redundant. See Gulf Metals (1) notice of the change; and, (2) acceptance of the
Indus., Inc. v. Chicago *241 Ins. Co., 993 S.W.2d 800, change.” 711 S.W.2d at 229. We noted that “[t]o prove
805 (Tex.App.-Austin 1999, pet. denied) (in construing notice, an employer *242 asserting a modification must
the phrase “sudden and accidental,” a temporal meaning prove that he unequivocally notified the employee of
was applied to “sudden” because “accidental” describes definite changes in employment terms.” Id. We did not
an unforeseen or unexpected event and ascribing the same indicate when the notice had to be provided, thereby
meaning to “sudden” would render the terms redundant implying it could be given either in advance of or
and violate the rule that each word in a contract be given contemporaneous with the policy change. 5
Footnotes
1 Davidson has not filed a petition for writ of mandamus with this Court under the Federal Arbitration Act, see Jack B. Anglin
Co. v. Tipps, 842 S.W.2d 266, 272–73 (Tex.1992), and does not dispute that the Texas Arbitration Act controls.
2 We note that most courts that have considered this issue have held that, if a party retains the unilateral, unrestricted right
to terminate the arbitration agreement, it is illusory. Dumais v. Am. Golf Corp., 299 F.3d 1216, 1219 (10th Cir.2002) (“We
join other circuits in holding that an arbitration agreement allowing one party the unfettered right to alter the arbitration
agreement's existence or its scope is illusory.”); Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 306, 315–16
(6th Cir.2000) (arbitration agreement was “fatally indefinite” and illusory because employer “reserved the right to alter
applicable rules and procedures without any obligation to notify, much less receive consent from,” other parties) (citing 1
SAMUEL WILLISTON, CONTRACTS § 43, at 140 (3d ed.1957)); Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 939 (4th
Cir.1999) (arbitration agreement unenforceable in part because Hooters, but not employee, could cancel agreement with
30 days notice, and Hooters reserved the right to modify the rules “without notice”; “[n]othing in the rules even prohibits
Hooters from changing the rules in the middle of an arbitration proceeding.”); Gibson v. Neighborhood Health Clinics,
121 F.3d 1126, 1133 (7th Cir.1997) (Cudahy, J., concurring) (promise to arbitrate was illusory in part because employer
retained the right to change or revoke the agreement “at any time and without notice”); Snow v. BE & K Constr. Co., 126
F.Supp.2d 5, 14–15 (D.Maine 2001) (citations omitted)(arbitration agreement illusory because employer “reserve[d] the
right to modify or discontinue [the arbitration] program at any time”; “Defendant, who crafted the language of the booklet,
was trying to ‘have its cake and eat it too.’ Defendant wished to bind its employees to the terms of the booklet, while
carving out an escape route that would enable the company to avoid the terms of the booklet if it later realized the booklet's
terms no longer served its interests.”); Trumbull v. Century Mktg. Corp., 12 F.Supp.2d 683, 686 (N.D.Ohio 1998)(no
binding arbitration agreement because “the plaintiff would be bound by all the terms of the handbook while defendant
could simply revoke any term (including the arbitration clause) whenever it desired. Without mutuality of obligation, a
contract cannot be enforced.”); Simpson v. Grimes, 849 So.2d 740, 748 (La.Ct.App.2003) (arbitration agreement lacked
mutuality, making it “unconscionable and unenforceable”: “By retaining the right to modify at will any and all provisions
of the agreement in question, Argent allows itself an escape hatch from its promise to be similarly bound to arbitrate all
disputes arising between the parties. Argent's ability to modify the specific terms of the agreement at will is not shared
by the potential customer signing the agreement.”); In re C & H News Co., No. 13–02–529–CV, ––– S.W.3d ––––,
–––– – ––––, 2003 WL 131770, *3, 2003 Tex.App. LEXIS 393, *11–*12 (Tex.App.-Corpus Christi January 16, 2003,
orig. proceeding) (employer's right to change, modify, delete, or amend the arbitration agreement “with or without prior
notification to employees” made the arbitration agreement illusory).
1 The ADR Policy Webster signed contained only two paragraphs. The first paragraph had two sentences covering thirteen
lines, and the second paragraph had thirteen sentences and nineteen lines, for a total of fifteen sentences spanning
twenty-seven lines of text. Arbitration is only discussed in two of the fifteen sentences. The body of the document occupied
approximately half of a letter size page. The ADR Policy has the company name, J.M. Davidson, Inc., at the top of the
page in an all capitals, bold face font similar to a company letterhead. The title of the agreement, also in all capital,
bold letters, is “ALTERNATIVE DISPUTE RESOLUTION POLICY.” The sub-title of the document is “EMPLOYMENT
APPLICATION LANGUAGE,” styled in all capitals under the title.
1 However, there is no evidence that Davidson ever attempted to abolish or modify the arbitration agreement or that Webster
ever harbored any doubt that he could compel arbitration for any dispute that arose, including the one before the Court.
2 Neither the Court nor Justice Schneider attributes any meaning to “prior” and both repeatedly refer to the disputed
provision as stating “without notice,” thereby, sub silentio, writing the word “prior” out of the parties' contract.
3 Justice Schneider argues that Shumway v. Horizon Credit Corp., 801 S.W.2d 890 (Tex.1991) and Musgrave v. HCA
Mideast, Ltd., 856 F.2d 690 (4th Cir.1988) are “applicable precedent.” 128 S.W.3d at 234. However, neither case is on
point. In both Shumway and Musgrave, whether the phrase “without prior notice” should be given a different meaning
from “without notice” was not at issue and, therefore, was neither addressed nor decided.
4 Another factor counseling in favor of interpreting the relevant provision as applying only prospectively without disclaiming
Texas common law requiring contemporaneous notice is the use of the word “reserves.” This word choice suggests that
Davidson is memorializing a right that is consistent with its existing legal rights. “This word [reserves] means to keep or
retain; that is to say, to keep what one already has. You do not reserve a right which you do not possess.” Baldwin v.
Bd. of Tax–Roll Corrs., 331 P.2d 412, 414 (Okla.1958).
5 Justice Schneider argues that the relevant provision “contradict [s] the Hathaway requirements.” 128 S.W.3d at 237.
However, in Hathaway we required only notice, not advance notice.
6 This case is distinguishable from the following cases cited in the Court's second footnote in which arbitration agreements
were held to be illusory because the provision at issue allowed one party to terminate the agreement at any time without
any notice. Floss v. Ryan's Family Steak Houses, Inc., 211 F.3d 306, 315–16 (6th Cir.2000) (arbitration agreement was
“fatally indefinite” and illusory because employer reserved the right to alter applicable rules and procedures without any
obligation to notify employee); Gibson v. Neighborhood Health Clinics, 121 F.3d 1126, 1133 (7th Cir.1997) (Cudahy, J.,
concurring) (promise to arbitrate was illusory because employer retained the right to change or revoke the agreement
“at any time and without notice.”).
7 For example, Justice Schneider asserts: “Davidson's right to unilaterally abolish or modify any personnel policy without
prior notice must be given its plain and ordinary meaning. Thus, the unilateral termination language must mean that
Davidson can cancel or alter any personnel policy without informing Webster.” 128 S.W.3d at 235.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Brown subsequently left Kennedy Hodges and assured on a case-by-case basis by assessing the totality of the
Gobellan “he would work out a fee splitting arrangement circumstances. Id. We have considered such factors as
with Kennedy Hodges and that [they] would not be (1) when the movant knew of the arbitration clause; (2)
affected.” The Gobellans retained Brown to represent how much discovery was conducted; (3) who initiated the
them. Kennedy Hodges sued Brown to recover discovery; (4) whether the discovery related to the merits
contingency fees for former clients he took with him (the rather than arbitrability or standing; (5) how much of the
Brown Suit). The Gobellans were not a party to that suit. discovery would be useful in arbitration; and (6) whether
Kennedy Hodges later settled with Brown for a portion of the movant sought judgment on the merits. Id. at 591–
all contingency fees collected from former firm clients who 92. Further, the substantial invocation of the litigation
retained Brown, including the Gobellans. process must also have prejudiced the opposing party. Id.
at 593. In this context, prejudice is “inherent unfairness
In the Gobellan Suit, Gobellan's employer and the in terms of delay, expense, or damage to a party's legal
Gobellans submitted their dispute to arbitration. The position that occurs when the party's opponent forces it
Gobellans obtained an award that was confirmed in a to litigate an issue and later seeks to arbitrate that same
final judgment, which Gobellan's employer satisfied by issue.” Id. at 597.
paying $470,000. Kennedy Hodges sued the Gobellans
in a separate proceeding, and moved for a no-answer Two cases in particular illuminate how we apply this
default judgment. But after conferring with the Gobellans, standard. First, in Cull, the Culls substantially invoked the
Kennedy Hodges pursued its claim in the Gobellan Suit litigation process by initially resisting the opposing party's
by intervening and moving to compel arbitration. The motion to compel arbitration, filing motions to compel
trial court denied the motion, and the court of appeals discovery, conducting extensive discovery about every
affirmed, concluding that Kennedy Hodges substantially aspect of the merits, and waiting until shortly before trial
invoked the litigation process as to the Gobellan fee based to request arbitration. Id. at 595–97. There, we specifically
on the discovery it conducted in the Brown Suit. 433 emphasized the extreme delay the Culls caused, which we
S.W.3d 579, 585. The court also found the Gobellans noted undercuts one of the prime benefits of arbitration:
established prejudice because Kennedy Hodges attempted an expedient and cost-effective dispute resolution process.
to “have it both ways” by switching between litigation Id. at 596. Additionally, our statement that waiver occurs
and arbitration. Id. at 585. As we explain below, the court when a party substantially invokes litigation with “the
of appeals' decision conflicts with our decision in Perry other party[ ]” indicates the party claiming waiver was the
Homes v. Cull, 258 S.W.3d 580 (Tex.2008), on a question other party in the litigation. Id. at 590.
of law material to the disposition of the case, which
confers jurisdiction on this Court over this interlocutory More relevant to our inquiry here, we held in In re
appeal, TEX. CIV. PRAC. & REM.CODE § 171.098(a) Service Corp. International that a party who litigated one
(1); TEX. GOV'T CODE §§ 22.001(a)(2), 22.225(c). claim with an opponent did not substantially invoke the
litigation process for a related yet distinct claim against
The Gobellans argue Kennedy Hodges's litigation in the another party with whom it had an arbitration agreement.
Brown Suit substantially invoked the litigation process 85 S.W.3d 171, 175 (Tex.2002).
against them. Kennedy Hodges counters that the Brown
Suit contained tort and contract claims not involving the [5] Here, Kennedy Hodges's litigation with Brown
Gobellans as parties. We agree with Kennedy Hodges. in the Brown Suit did not substantially invoke the
litigation process with the Gobellans, who were not
*545 [1] [2] [3] [4] Because the parties do not disputeparties to the Brown Suit. The Brown Suit involved
the facts, whether Kennedy Hodges's conduct waived its alleged breaches of Brown's employment agreement with
right to arbitrate is a question of law we review de novo. Kennedy Hodges as well as tort claims. And there was
Cull, 258 S.W.3d at 598 & n. 102. A party waives the right no arbitration agreement between Kennedy Hodges and
to arbitrate “by substantially invoking the judicial process Brown. By contrast, the Gobellan Suit involved an alleged
to the other party's detriment or prejudice.” Id. at 589– breach of the Gobellans' contingency fee agreement with
90. The strong presumption against waiver of arbitration Kennedy Hodges, which contains an arbitration clause.
renders this hurdle a high bar. Id. at 590. We decide waiver By litigating with Brown, Kennedy Hodges did not
litigate with the Gobellans. Our holding in Service Corp. Gobellan Suit and moved to compel their dispute to
arbitration. The firm conducted no discovery. In sum, we
International, compels this conclusion. Id. Additionally,
conclude Kennedy Hodges did not substantially invoke
Kennedy Hodges's litigation with Brown did not prejudice
the litigation process with the Gobellans by intervening
the Gobellans as it did not cause delay, expense, or
and moving to compel arbitration. See Vesta, 192 S.W.3d
damage to the Gobellans' legal position. See Cull, 258
at 763–64.
S.W.3d at 597.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[6] Affidavits
[1] Appeal and Error
Use in evidence
Same effect as verdict
Evidence
In an appeal from a bench trial, the trial
Certificates and affidavits
court's findings of fact have the same weight
as a jury verdict. When an ex parte affidavit presents
evidence beyond the simple authentication
1 Cases that cite this headnote requirements of the rule governing
authentication of business records, the
extraneous portions of the affidavit constitute
[2] Appeal and Error
inadmissible hearsay. Tex. R. Evid. 902.
[8] Assignments *31 On Appeal from County Civil Court at Law No. 2,
Weight and sufficiency Harris County, Texas, Trial Court Case No. 1023048
[10] Evidence
We reverse and render.
Records or decisions in same case
(Tex.1997). If more than a scintilla of evidence exists to One potential source for establishing that Kenny's account
support the finding, the legal sufficiency challenge fails. was assigned to Portfolio Recovery is the affidavit of
Haggar Clothing Co. v. Hernandez, 164 S.W.3d 386, 388 Dreano, a custodian of records for Portfolio Recovery.
(Tex.2005) (citing Formosa Plastics Corp. USA v. Presidio Dreano asserted in the affidavit that Portfolio Recovery
Eng'rs & Contractors, Inc., 960 S.W.2d 41, 48 (Tex.1998)). “is the assignee of HSBC Bank Nevada, N.A./GM and
is the current owner of the account of JOE KENNY
[3] An appellant may not challenge a trial court's (‘Defendant’), account number ending in 9702 (the
conclusions of law for factual sufficiency, but we may ‘Account’).”
review the legal conclusions drawn from the facts to
determine their correctness. BMC Software Belgium, N.V. [5] [6] Unless specifically permitted by statute or rule,
v. Marchand, 83 S.W.3d 789, 794 (Tex.2002). In an appeal affidavits do not constitute evidence at trial. Ortega v.
from a bench trial, we review the conclusions of law Cach, LLC, 396 S.W.3d 622, 630 (Tex.App.–Houston
de novo and will uphold them if the judgment can be [14th Dist.] 2013, no pet.). Dreano's affidavit was offered
sustained on any legal theory supported by the evidence. to authenticate business records, however. Business
Id. “If the reviewing court determines a conclusion of records can be authenticated by an affidavit offered
law is erroneous, but the trial court rendered the proper at trial. See TEX. R. EVID. 803(6), 902(10). “[W]hen
judgment, the erroneous conclusion of law does not an ex parte affidavit presents evidence beyond the
require reversal.” Id. simple authentication requirements of rule 902,” however,
“the extraneous portions of the affidavit constitute
inadmissible hearsay.” Ortega, 396 S.W.3d at 630.
*33 B. Analysis
[4] Portfolio Recovery identifies the claims that it asserted [7] Dreano's assertions regarding assignment of Kenny's
against Kenny as breach of contract, account stated, and account to Portfolio Associates was not relevant to
open account. Each of these causes of action necessarily establishing documents as business records. See TEX. R.
required Portfolio Recovery to establish that Kenny EVID. 803(6), 902(10). Accordingly, this representation
had an obligation—in this case, the obligation to pay went beyond the authentication requirements and
a debt—specifically to Portfolio Recovery. See Winchek constitutes hearsay. Kenny objected to this portion of the
v. Am. Express Travel Related Services Co., Inc., 232 affidavit on the basis that it constituted hearsay. See TEX.
S.W.3d 197, 202 (Tex.App.–Houston [1st Dist.] 2007, no R. EVID. 103(a) (requiring objection to inadmissible
pet.) (requiring, for breach of contract claim, proof of evidence before inadmissibility can be basis for error);
agreement between parties to suit of terms of contract); TEX. R. APP. P. 33.1(a) (same). Because this was a
Busch v. Hudson & Keyse, LLC, 312 S.W.3d 294, 299 bench trial, we presume the trial court disregarded the
(Tex.App.–Houston [14th Dist.] 2010, no pet.) (requiring, inadmissible portion of the business record affidavit. Sw.
for account stated claim, proof of transaction between Bell Media, 825 S.W.2d at 498; Sanchez, 96 S.W.3d at 488.
parties to suit giving rise of indebtedness from one party to Accordingly, this portion of the affidavit cannot be a basis
other party); Eaves v. Unifund CCR Partners, 301 S.W.3d for finding the evidence legally sufficient to show Kenny's
402, 408 (Tex.App.–El Paso 2009, no pet.) (requiring, for account was assigned to Portfolio Recovery.
open account claim, proof of transaction between parties
to suit creating creditor-debtor relationship). [8] One of the exhibits offered and admitted into evidence
was an “Assignment and Bill of Sale” *34 from HSBC
It is undisputed that, through his use of the credit card at Bank Nevada to Portfolio Recovery. This assignment
issue, Kenny created an obligation to repay the debt to assigned the rights to certain accounts from HSBC Bank
HSBC Bank Nevada. Kenny asserts, however, that there Nevada to Portfolio Recovery. The assignment does
is no proof in the record that this obligation to pay the not identify which accounts were transferred, however.
debt has been transferred to Portfolio Recovery. Based Instead, the assignment identifies another document that
on this, Kenny argues that Portfolio Recovery failed to contains the information. That document is not a part of
establish at least one element for all of its claims and that, the record. Accordingly, the assignment cannot be a basis
accordingly, we must reverse the trial court's judgment in for finding the evidence legally sufficient to show Kenny's
Portfolio Recovery's favor. We agree. account was assigned to Portfolio Recovery.
Footnotes
1 Because Kenny's remaining issues cannot provide him greater relief, we do not need to reach them. See TEX. R. APP.
P. 47.1.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Holdings: The Supreme Court, Wallace B. Jefferson, C.J., 39 Cases that cite this headnote
held that:
regarding whether shopper had been using accused to attain monetary redress from the
a shopping cart, were irrelevant when accuser.
determining whether there was legally
sufficient evidence to establish store's lack of 3 Cases that cite this headnote
probable cause to report the shopper as a
suspected shoplifter, as element of malicious [16] Malicious Prosecution
prosecution, where the store employees who Acquittal
reported the shopper to the police had not
Grocery store customer's acquittal, in
spoken to the pharmacy technician.
prosecution for shoplifting, did not establish
1 Cases that cite this headnote that store employees had lacked probable
cause to report her to police as
suspected shoplifter, as element of malicious
[13] Malicious Prosecution prosecution.
Presumptions and Burden of Proof
Grocery store customer's testimony that she Cases that cite this headnote
had not been using a shopping cart was
insufficient to rebut the presumption, in [17] Evidence
customer's action for malicious prosecution, Sufficiency to Support Verdict or Finding
that store's report of customer to police as
Evidence that is so slight as to make any
suspected shoplifter was based on three store
inference a guess is in legal effect no evidence.
employees acting honestly and reasonably on
their observation of customer leaving the store 2 Cases that cite this headnote
with a shopping cart containing items she had
not purchased.
[18] Malicious Prosecution
Cases that cite this headnote Presumptions and Burden of Proof
Unless there is evidence rebutting the
presumption of probable cause for reporting
[14] Criminal Law
a suspect to police, a criminal prosecution
Innocence
resulting from eyewitness identifications that
Criminal Law
turn out to be incorrect or, at least, insufficient
Extent of Burden on Prosecution
to warrant a conviction, does not satisfy the
The criminal law presumes a defendant's exacting requirements for a plaintiff to prevail
innocence and presents the State with a heavy in a malicious prosecution case.
burden of proof for a conviction, because it is
more important that the guilty occasionally go 2 Cases that cite this headnote
free than for the innocent to be jailed.
the legal sufficiency of the evidence regarding trivialities constitute extreme and outrageous
emotional distress, which issue had been conduct.
briefed by the parties, where grocery store
raised the legal sufficiency issue regarding 18 Cases that cite this headnote
emotional distress claim in a supplemental
brief to the Supreme Court. Rules App.Proc., [23] Damages
Rules 47.1, 53.4. Nature of Conduct
5 Cases that cite this headnote Meritorious claims for intentional infliction of
emotional distress are relatively rare precisely
because most human conduct, even that which
[20] Damages causes injury to others, cannot be fairly
Elements in General characterized as extreme and outrageous.
To prevail on a claim for intentional infliction
of emotional distress, plaintiff must prove 14 Cases that cite this headnote
by a preponderance of the evidence that: (1)
defendant acted intentionally or recklessly; [24] Damages
(2) defendant's conduct was extreme and Intentional or Reckless Infliction of
outrageous; (3) defendant's actions caused Emotional Distress; Outrage
plaintiff emotional distress; and (4) the
Despite the danger of fictitious claims, the
emotional distress was severe.
difficulty of measuring damages, and the
48 Cases that cite this headnote indeterminacy of its proscriptions, intentional
infliction of emotional distress can be an
effective cause of action for egregious conduct
[21] Damages that might otherwise go unremedied.
Nature of Conduct
A defendant's conduct is “extreme and 1 Cases that cite this headnote
outrageous,” as element of intentional
infliction of emotional distress, only if it is [25] Damages
so outrageous in character, and so extreme in Particular Cases
degree, as to go beyond all possible bounds of
Conduct of grocery store employees in
decency, and to be regarded as atrocious, and
reporting customer to police as suspected
utterly intolerable in a civilized community.
shoplifter was not extreme and outrageous, as
Restatement (Second) of Torts § 46 cmt. d.
element of intentional infliction of emotional
44 Cases that cite this headnote distress; store employees acted honestly and
reasonably on their observation of customer
leaving store with shopping cart containing
[22] Damages items she had not purchased.
Nature of Conduct
Damages 3 Cases that cite this headnote
Nature of Injury or Threat
Damages
Humiliation, Insults, and Indignities
Attorneys and Law Firms
Conduct that is merely insensitive or rude
is not “extreme and outrageous,” as element *790 Donna C. Peavler, Uloth & Peavler, LLP, Dallas,
of intentional infliction of emotional distress, Amber L. Slayton, Frisco, for Petitioners.
nor do mere insults, indignities, threats,
annoyances, petty oppressions, or other
Chief Justice JEFFERSON delivered the opinion of the Major Belton, another Kroger employee, was bagging
Court, in which Justice HECHT, Justice O'NEILL, Justice groceries when Wier yelled for Suberu to stop. Belton
WAINWRIGHT, Justice BRISTER, Justice GREEN, testified that he looked up and saw Suberu pushing a cart.
and Justice WILLETT joined. He watched as Wier questioned Suberu in the foyer, and,
when Wier called him over to take the cart, he noticed
Theresa Suberu sued Kroger Texas Limited Partnership that it contained mostly unsacked groceries. Robert
and assistant store manager Robert Moody (collectively, Moody, the assistant manager, arrived and discussed the
Kroger) for malicious prosecution and intentional occurrence with Suberu and Wier. Moody asked Suberu
infliction of emotional distress after she was acquitted if she had a receipt, and she replied “No.” Belton then
on misdemeanor theft charges arising from an alleged
wheeled the cart to register three, where Matt Helwig was
shoplifting incident. The jury returned a verdict in working as a checker. Helwig testified that he, too, saw
Suberu's favor on both claims, and the trial court signed Suberu pushing the cart out of the store. Moody and Wier
a judgment in conformity with the verdict. The court escorted Suberu to an office, where Moody directed Wier
of appeals affirmed. Kroger argues that the evidence is to call the police.
legally insufficient to support liability under each claim,
and we agree. Accordingly, we reverse the court of appeals' Police officers arrived ten minutes after receiving Wier's
judgment and render judgment for Kroger. call. Moody explained the events and filled out a
shoplifting incident report. Meanwhile, Wier took the cart
from Helwig's register and scanned *792 the unsacked
I groceries. Moody stapled to his report a printed list
of the scanned items, which totaled $261. While sitting
in the office, Suberu explained that she had been at
Background
the pharmacy and was going outside to get cash from
On the evening of March 1, 1999, Theresa Suberu her vehicle. Despite these pleas, neither the officers nor
went to a Kroger grocery store in Garland to any Kroger employee checked with the pharmacy. 1 The
purchase medication. Karrah Parkey, Kroger's pharmacy officers arrested Suberu and walked her out in handcuffs.
technician, recognized Suberu as a prior customer,
assumed she had come to pick up medicine for her Suberu testified that she felt humiliated and has been
husband, Michael, and placed his medicine on the counter. traumatized as a result of the ordeal. Her husband,
Suberu uses cash for all transactions and did not have Michael, said she was “in a state of shock” when he
enough in her purse to pay for both her medicine and picked her up at the jail four hours after her arrest. Suberu
Michael's. Therefore, she told Parkey she would retrieve could not sleep that night, and was unable to cook, do
money from her vehicle and would return momentarily. laundry, and shop for groceries for several months. At
trial, Michael said he and Suberu were “still working
Suberu was leaving the store when Kellie Wier, the front- through it.”
end manager, yelled “Stop!” According to Wier, Suberu
was pushing a grocery cart full of unsacked goods. Suberu, After a jury acquitted her on misdemeanor theft
however, testified that she has never used a cart to shop for charges, Suberu filed the present suit, alleging malicious
groceries and did not have one that evening. Wier reached prosecution and intentional infliction of emotional
Suberu in the foyer, where the two had a brief quarrel. distress. The trial court rendered judgment on the jury's
verdict, which found in Suberu's favor on both claims award for mental anguish and exemplary damages. 113
and awarded $500 in actual damages for expenses in S.W.3d 588, 596–601. The court resolved all issues against
defending the prosecution, $28,000 for past and future Kroger. Id. at 605. In upholding the jury's finding on
mental anguish, and $50,500 in exemplary damages based probable cause, the court cited Suberu's testimony that she
on the malicious prosecution claim. The jury awarded no was in the store for a few minutes to obtain a prescription,
exemplary damages for intentional infliction of emotional left to get money from her car, and never had a cart. Id.
distress. The court of appeals affirmed. 113 S.W.3d 588. at 598. The court reasoned that it was the province of the
We granted Kroger's petition for review. 47 Tex. Sup.Ct. jury to assess credibility, and the jury apparently found
J. 1197 (Sept. 13, 2004). that Wier never saw Suberu with a cart. Id. at 598–99.
For the reasons considered below, the evidence favorable
to Suberu is legally insufficient to rebut the presumption
that Kroger acted reasonably and with probable cause. As
II
this conclusion is dispositive, we do not reach Kroger's
remaining challenges to malicious prosecution liability
Malicious Prosecution and exemplary damages.
[1] [2] [3] [4] [5] This Court has long recognized
a cause of action for those subjected unjustifiably to
criminal proceedings, but has also made clear that the A
cause of action must sometimes yield to society's greater
interest in encouraging citizens to report crimes, real Standard of Review
or perceived. 2 The elements necessary to prevail on a
[6] [7] [8] In reviewing a verdict for legal sufficiency,
malicious prosecution claim reflect this balance. 3 Thus,
we credit evidence that supports the verdict if reasonable
the plaintiff must prove not only that the defendant
jurors could, and disregard contrary evidence unless
commenced criminal proceedings against her and she
reasonable jurors could not. City of Keller v. Wilson,
is innocent of the crime charged, but also that the
168 S.W.3d 802, 827 (Tex.2005). A challenge to the legal
defendant lacked probable cause and harbored malice
sufficiency of evidence will be sustained when, among
toward her. These latter elements guard against a jury's
other things, the evidence offered to establish a vital fact
natural inclination to punish those who, through error but
does not exceed a scintilla. Id. at 810 (citing Robert W.
not malevolence, commence criminal proceedings against
Calvert, “No Evidence” & “Insufficient Evidence” Points
a person who is ultimately exonerated. 4 The probable of Error, 38 TEX. L. REV. 361, 362–63 (1960)). Evidence
cause element “asks *793 whether a reasonable person does not exceed a scintilla if it is “ ‘so weak as to do no
would believe that a crime had been committed given more than create a mere surmise or suspicion’ ” that the
the facts as the complainant honestly and reasonably fact exists. Ford Motor Co. v. Ridgway, 135 S.W.3d 598,
believed them to be before the criminal proceedings were 601 (Tex.2004) (quoting Kindred v. Con/Chem, Inc., 650
instituted.” Richey v. Brookshire Grocery Co., 952 S.W.2d S.W.2d 61, 63 (Tex.1983)).
515, 517 (Tex.1997) (citing Akin v. Dahl, 661 S.W.2d
917, 920 (Tex.1983), cert. denied, 466 U.S. 938, 104
S.Ct. 1911, 80 L.Ed.2d 460 (1984)). Courts must presume
that the defendant acted reasonably and had probable B
cause to initiate criminal proceedings. Id. To rebut this
presumption, the plaintiff must produce evidence that Application
the motives, grounds, beliefs, or other information upon
which the defendant acted did not constitute probable Suberu points to the following evidence as supporting a
cause. Id. at 518. finding that Kroger lacked probable cause:
she was guilty of shoplifting, because it merely invites RESTATEMENT (SECOND) OF TORTS § 46 cmt.
speculation that Kroger framed her and lied to the d (1965)). Conduct that is merely insensitive or rude
police. This conclusion, however, is no more probable is not extreme and outrageous, nor are “mere insults,
than the proposition that Kroger's employees, each indignities, threats, annoyances, petty oppressions, or
independent of the others, mistakenly believed they other trivialities.” GTE Sw., Inc. v. Bruce, 998 S.W.2d 605,
observed the commission of a crime. We have cautioned 612 (Tex.1999).
that, “[e]vidence that is so slight as to make any inference
a guess is in legal effect no evidence.” Ridgway, 135 [23] [24] Meritorious claims for intentional infliction
S.W.3d at 601 (citing Lozano v. Lozano, 52 S.W.3d 141, of emotional distress are relatively rare precisely because
148 (Tex.2001)). Unless there is evidence rebutting the most human conduct, even that which causes injury to
presumption of probable cause, a prosecution resulting others, cannot be fairly characterized as extreme and
from eyewitness identifications that turn out to be outrageous. See Creditwatch, Inc. v. Jackson, 157 S.W.3d
incorrect or, at least, insufficient to warrant a conviction, 814, 815 n. 1 (Tex.2005) (citing cases in which conduct
does not satisfy the exacting requirements for a plaintiff was not extreme and outrageous). But despite the danger
to prevail in a malicious prosecution case. 7 of fictitious claims, the difficulty of measuring damages,
and the indeterminacy of its proscriptions, intentional
In sum, the jury could reasonably conclude, based on infliction of emotional distress can be an effective “cause
her acquittal and her testimony, that Suberu did not, of action for egregious conduct that might otherwise go
in fact, steal groceries. Without more, however, Suberu's unremedied.” Hoffmann–La Roche, 144 S.W.3d at 447
innocence is insufficient to support a finding that Kroger (quoting Standard Fruit and Vegetable Co. v. Johnson, 985
lacked probable cause. Courts must be especially careful S.W.2d 62, 68 (Tex.1998)); see, e.g., Morgan v. Anthony,
in malicious prosecution cases to ensure that sufficient 27 S.W.3d 928, 930 (Tex.2000) (man who stopped to
evidence supports each element of liability. Otherwise, assist motorist having car trouble on a rural highway
the fourth element (innocence) automatically swallows the repeatedly blocked her escape and harassed her); GTE
fifth (lack of probable cause) and sixth (malice) elements Sw., 998 S.W.2d at 613–14 (supervisor physically and
of this claim. verbally threatened employees over a two-year period).
Applying the standard of review outlined in Part II A, we
turn to the evidence in this case.
subjected her to such distress knowing she was *797 INTENTIONAL PERSONAL TORTS PJC 6.4 (2000).
innocent. Consequently, Suberu's testimony does not We must evaluate the evidence according to the charge
exceed a scintilla of evidence and is legally insufficient to given and the contentions of the parties. Sw. Bell Tel.
support a finding that Kroger's conduct was extreme and Co. v. Garza, 164 S.W.3d 607, 618–19 (Tex.2004) (“In
outrageous. assessing the evidence, we assume that the portions of
the charge just quoted, because they were given without
objection, correctly state the law.”).
IV
I
Conclusion
The instruction as to probable cause tasked the jury, in
The evidence is legally insufficient to support a finding
part, to resolve conflicting testimony as to whether Suberu
that Kroger lacked probable cause to initiate criminal
was exiting the Kroger store with a basket of groceries
proceedings against Suberu for shoplifting, and legally
when she was stopped and detained by Kroger employees.
insufficient to support a finding that Kroger's conduct
As the court of appeals' opinion and the Court's
was extreme and outrageous. Accordingly, we reverse
opinion set out in detail, she testified, unequivocally,
the court of appeals' judgment and render judgment that
“No”; Kroger's employees testified, unequivocally, “Yes.”
Suberu take nothing. See TEX. R. APP. P. 60.2(c).
Under the first sentence of the probable cause instruction
(that part of the instruction defining probable cause), the
jury had to resolve the clearly conflicting testimony to find
Justice JOHNSON filed a dissenting opinion, in which what facts and circumstances existed, and then to find if
Justice MEDINA joined. those facts and circumstances were such that they would
excite belief in a person of “reasonable mind” that Suberu
was guilty of a criminal offense. The second sentence of
Justice JOHNSON, joined by Justice MEDINA and by
the instruction authorized the jury to find that probable
Justice WAINWRIGHT as to Part III, concurring in part
cause existed if a reasonable person would believe Suberu
and dissenting in part.
committed a crime given the facts as Kroger both honestly
In connection with the first jury question, which submitted
and reasonably believed them to be.
Theresa Suberu's malicious prosecution claim, the jury
was instructed, without objection, that:
The Court focuses on Suberu's failure to prove that
“Malice” means ill will, bad or evil motive, or such gross Kroger did not honestly believe that Suberu was leaving
indifference to the rights of others as to amount to a the store with a cart full of groceries for which she had
willful or wanton act. not *798 paid. Even assuming a lack of evidence that
Kroger did not subjectively honestly believe that Suberu
“Probable cause” means the existence of such facts was leaving with a basket of groceries and that Kroger's
and circumstances as would excite belief in a person of witnesses did not subjectively honestly believe Suberu was
reasonable mind, acting on the facts or circumstances leaving with a basket of groceries, an honest belief was not
within his knowledge at the time the prosecution was enough. Under the charge, the jury's finding that Kroger
commenced, that the other person was guilty of a did not have probable cause could have been, and we must
criminal offense. The probable cause determination presume that it was, based on a finding that an honest
asks whether a reasonable person would believe that belief was not reasonable because the credibility conflict
a crime had been committed given the facts as the was resolved in favor of Suberu: she was not leaving with a
complainant honestly and reasonably believed them to basket regardless of Kroger's witnesses' honest belief that
be before the criminal proceedings were instituted. she was.
Wier stopped her was some evidence supporting the jury's manager, did not have an honest, reasonable belief that
Suberu was exiting the store with a basket of unpaid
finding that Kroger's belief in a contrary set of facts was
groceries and was probably committing a crime. I concur
not reasonable regardless of Kroger's subjective sincerity
in the Court's opinion and judgment as to Moody.
in holding that belief. I would hold that the evidence was
legally sufficient to support the jury's finding that Kroger
lacked probable cause. I dissent from the Court's holding
that it was not. III
Footnotes
1 Karrah Parkey testified that, although she does not remember seeing a cart, she heard Suberu “maneuver” a cart over a
bump that joins carpet around the pharmacy with Kroger's tile floor. Suberu's cross examination revealed inconsistencies
in Parkey's testimony but, as explained below, Parkey's testimony is immaterial to our disposition.
2 See, e.g., Sebastian v. Cheney, 86 Tex. 497, 25 S.W. 691, 694 (1894) (“It is important that every citizen should be
protected against malicious prosecutions, and it is equally important that crimes should be punished, in order that the
law-abiding citizen may be secure in life, liberty, and property. To make the citizen liable to be mulcted in damages for an
honest discharge of duty is to give immunity to crime, and to weaken the restraining power of the criminal law, thereby
endangering the security of law-abiding people.”).
3 In its entirety, the claim for malicious criminal prosecution required Suberu to prove by a preponderance of the evidence
that: (1) a criminal prosecution was commenced against her; (2) Kroger initiated or procured that prosecution; (3) the
prosecution terminated in her favor; (4) she was innocent of the charges; (5) Kroger lacked probable cause to initiate
the prosecution; (6) Kroger acted with malice; and (7) she suffered damages. Richey v. Brookshire Grocery Co., 952
S.W.2d 515, 517 (Tex.1997).
4 See RESTATEMENT (SECOND) OF TORTS ch. 29, intro. cmt. (1977) (discussing competing social interests and stating
that “private persons who aid in the enforcement of the law should be given an effective protection against the prejudice
that is likely to arise from the termination of the prosecution in favor of the accused.”).
5 See supra note 3.
6 See supra notes 2, 4.
7 See, e.g., Burrows v. Neiman–Marcus Group, Inc., 976 S.W.2d 784, 788 (Tex.App.—Houston [1st Dist.] 1998, no pet.)
(no evidence that the defendant lacked probable cause where two employees accused the plaintiff of using a customer's
lost credit card to make purchases at nearby stores); Diamond Shamrock Corp. v. Ortiz, 753 S.W.2d 238, 242 (Tex.App.
—Corpus Christi 1988, writ denied) (no evidence that the defendant lacked probable cause where its employees gave
written statements alleging the plaintiff was stealing merchandise); Stringer v. Cross, 564 S.W.2d 121, 122 (Tex.Civ.App.
—Beaumont 1978, no writ) (no evidence of malice where a man injured in a riot identified the plaintiff as a participant);
Deaton v. Montgomery Ward & Co., 159 S.W.2d 969, 972 (Tex.Civ.App.—Beaumont 1942, writ ref'd w.o.m.) (probable
cause was established as a matter of law where the defendant's employees identified the plaintiff as the person who
cashed a forged check).
8 The parties briefed this issue in the court of appeals, but the court did not address it. 113 S.W.3d at 600; TEX. R. APP.
P. 47.1. Because Kroger raised the issue to this Court in a supplemental brief, we have authority to consider it. TEX.
R. APP. P. 53.4; Little v. Texas Dep't of Criminal Justice, 148 S.W.3d 374, 384 (Tex.2004); N. Nat. Gas Co. v. Conoco,
Inc., 986 S.W.2d 603, 609 (Tex.1998).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Cases that cite this headnote Cases that cite this headnote
Under Texas law, fees charged by lender for 1 Cases that cite this headnote
ordinary overhead constitute “interest,” that
$13 filing fee for asserting a lien on her vehicle); Lovick that Lovick failed to state a claim for usury and, therefore,
would pay a $1500 fee to CPCWA for “loan brokerage for the RICO claim premised on it. The district court
or other credit services”; and, for state law purposes, agreed, holding that, because “no improper relationship
the interest rate was ten percent. (The federal truth-in- is presented by the facts in [Lovick's] pleadings [, the
lending disclosures, reflecting a much *437 higher rate of brokerage fee cannot be usurious interest, and] no cause of
approximately 131 percent, are not in issue. Lovick does action is alleged”. It granted Lovick 30 days, however, to
not present a claim under the Truth in Lending Act, 15 plead a factual basis for an improper relationship among
U.S.C. § 1606(a)(1)(A).) defendants. After the second amended complaint was
filed, the court ruled that Lovick still failed to state a claim
The Note stated, in relevant part: and dismissed this action.
In 2003, Lovick filed her complaint against Ritemoney, *438 Lovick contends the district court erroneously
CPCWA, and their respective general partners (SNM, Inc. applied Federal Rule of Civil Procedure 9(b)'s heightened
and GE & CE L.L.C.) (collectively, defendants), claiming pleading standard, applicable to allegations of fraud,
a Racketeer Influenced and Corrupt Organizations Act instead of Rule 8(a)'s notice pleading standard. Rule
(RICO) violation, premised on collection of an unlawful 8(a) does not require pleading specific facts in support
(usurious) debt. 18 U.S.C. § 1962(c); TEX. FIN.CODE of each element of plaintiff's prima facie case; instead,
§§ 342.004, 342.005, 342.051, and 349.403. Essentially, plaintiff must “give the defendant fair notice of what the
Lovick claimed CPCWA's $1500 fee was “disguised plaintiff's claim is and the grounds upon which it rests”.
interest” attributable to Ritemoney; when combined with Swierkiewicz v. Sorema N.A., 534 U.S. 506, 507, 122 S.Ct.
the ten percent interest rate charged by Ritemoney, the 992, 152 L.Ed.2d 1 (2002) (quoting Conley, 355 U.S. at
fee caused interest exceeding the ten percent authorized 47, 78 S.Ct. 99). It appears that in dismissing the operative
by Texas law. See TEX. FIN.CODE § 342.004(a). This second amended complaint, the district court applied Rule
putative class action was on behalf of all persons who 8(a), not Rule 9(b). See Lovick v. Ritemoney, No. H–03–
signed a Note with Ritemoney from 1 September 2002 0218 (Order of Dismissal, 28 August 2003) (“The Court
through the 2003 filing date of this action. finds and holds that the plaintiff has failed to state a cause
of action and the facts as pled do not support the view that
After Lovick filed an amended complaint, defendants a cause of action can be asserted.”). In any event, Rule
moved to dismiss under Rule 12(b)(6), claiming, inter alia,
preparing documents, inspection of B.R. 404 (Bkrtcy.Mich.1982); see also Dickey v. Phoenix
the property to be pledged as Finance Co., 193 Ark. 1145, 104 S.W.2d 806, 808 (1937).
security and attending to the details Further, when a lender has knowledge of an agent's fee,
of closing the loan are legitimate the lender is deemed to have authorized it. See Dodson v.
charges against the lender and will Peck, 75 S.W.2d 461, 464 (Tex.Civ.App.—Amarillo 1934,
not taint the contract with usury. writ denied).
Morris v. Miglicco, 468 S.W.2d 517, 519 (Tex.Civ.App. The primary allegation at issue is: CPCWA is either a
—Houston 1971, writ ref'd n.r.e.) (emphasis added) general agent of, or a joint participant with Ritemoney in,
(citing Nevels v. Harris, 129 Tex. 190, 102 S.W.2d 1046 Ritemoney's automobile title loan business. As discussed,
(1937); Sapphire Homes, Inc. v. Gilbert, 426 S.W.2d 278 the supporting allegations are: CPCWA and Ritemoney
(Tex.Civ.App.—Dallas 1968, writ ref'd n.r.e.); Dewey v. enjoy an exclusive relationship, with Ritemoney extending
American National Bank, 382 S.W.2d 524 (Tex.Civ.App. title loans only through CPCWA and CPCWA brokering
—Amarillo 1964, writ ref'd n.r.e.)). If the brokerage fee is title loans originating only from Ritemoney; CPCWA
not supported by separate and additional consideration, grants title loans only to borrowers paying the required
it may be considered interest, subject to usury laws. brokerage fee; because Ritemoney was aware of the
language in the Note referencing this fee and must have
The general rule is that if a lender,
been aware that the fee was paid from funds loaned to
or the lender's agent with the lender's
the borrower, Ritemoney had knowledge that payment of
knowledge or ratification, requires
the fee was a prerequisite to receiving a title loan; and
the borrower to pay a sum of money
this shows the alleged general agency, or joint participant
designated a brokerage fee to the
relationship, between Ritemoney and CPCWA.
lender or to the lender's agents,
such payment will be considered a
[11] On the other hand, there are no allegations
payment for the use by the borrower
that CPCWA, not Ritemoney, selected the criteria for
of the lender's money. If the sum so
authorizing loans; instead, there are allegations that
paid, together with the interest paid
CPCWA applied certain criteria in making authorization
as provided in the loan contract,
decisions. This relationship (following criteria set by
exceeds the lawful rate of interest
Ritemoney) is consistent with special agency. Texas
the contract will be considered as
law has long recognized that such relationships do not
providing for usurious interest.
transform reasonable fees for broker services into interest
Morris, 468 S.W.2d at 519 (citing Adleson v. B.F. Dittmar attributable to lenders for the purposes of assessing usury.
Co., 124 Tex. 564, 80 S.W.2d 939 (1935)). Under pre- See, e.g., Hughes v. Security Building & Loan Ass'n, 62
CSOA caselaw, the effect of this rule is to treat fees paid to S.W.2d 219 (Tex.Civ.App.1933) (fee charged borrower by
third parties, if they constitute a condition imposed by the agent having only special or limited authority, as opposed
lender (or with the lender's knowledge) on the borrower to general authority, not considered interest and may not
for the loan, as fees paid directly to the lender. Lovick be attributed to lender for purposes of determining usury).
relies on this general agency theory in attributing the In this regard, “[t]he charge made by [the broker] was for
brokerage fee to Ritemoney. See also Federal Mortgage services rendered in connection with the loan. The charge
Co. v. State Nat. Bank of Corsicana, 254 S.W. 1002, 1005 thus made and paid ... regardless of its reasonableness or
(Tex.Civ.App.—Beaumont 1923, writ dism'd) (because not, cannot form the basis for a usury penalty”. Crow v.
payment *440 of brokerage fee to lender's general agent Home Savings Ass'n, 522 S.W.2d 457, 460 (Tex.1975).
is effectively payment to lender for making loan, fee may
be considered usurious interest). [12] [13] [14] As noted, Lovick's claim rests on pre-
CSOA caselaw; moreover, the claim does not consider
Along this line, Lovick notes that several courts have the line of Texas cases requiring the lender to benefit
recognized an extensive or exclusive relationship between from the broker's fee in some way that is not incidental.
a broker and lender as evidencing that the broker is acting As held in Commerce Sav. Ass'n of Brazoria County v.
as the lender's agent. See In the Matter of Dukes, 24 Gge Mgmt. Co., 539 S.W.2d 71, 79–80 (Tex.Civ.App.—
Houston 1976), modified by 543 S.W.2d 862 (Tex.1976), transaction. To the contrary, these are separate services,
for a third party fee to be considered interest, the borrower in consideration for which the broker may charge a
must show: (1) the lender received some benefit from the reasonable fee. Lovick points to Mims v. Fidelity Funding,
additional fee; and (2) the additional fee paid to the third Inc., 275 B.R. 789 (Bkrtcy.N.D.Tex.2002), aff'd in part
party “was a subterfuge to evade the usury statute”. Id. and rev'd in part, 307 B.R. 849 (N.D.Tex.2002), which
at 80. A benefit could include the lender's “receiv[ing] noted that allowing the lender to escape any potential
any part of such fees”, but “incidental benefit[s]” to the usury penalties by “farming out its overhead, which would
lender are insufficient. Id.; see also Groves v. Nat'l Loan otherwise be interest, to a third party, and having the
& Investment Co. of Detroit, Mich., 102 S.W.2d 508, 513 borrower pay that agent directly ... would provide lenders
(Tex.Civ.App.—Ft. Worth 1937) (retention by lender's with an avenue to game the system and defeat the true
agent of part of loan amount did not entitle borrower intent of the usury statutes”. Id. at 800 n. 13. On appeal,
to cancel obligation as usurious unless borrower showed: however, the district court rejected this portion of the
retention was with lender's knowledge and consent; and holding, ruling instead that fees paid to third parties are
lender received benefit of retention ). Lovick has failed to not interest. Mims, 307 B.R. 849. The district court agreed
allege an incidental benefit *441 to Ritemoney, much with the bankruptcy court only with respect to certain
less any direct benefit, such as the flow of all, or part, fees that were retained by the lender (again, there is no
of the brokerage fee from CPCWA to Ritemoney. At allegation that Ritemoney received part of the brokerage
most, Lovick's allegations imply a benefit to Ritemoney fee paid to CPCWA) and for which the lender would not
through its shifting some of its exposure to CPCWA. This show separate and additional consideration for the use,
is insufficient to demonstrate the requisite lender benefit forbearance, or detention of money. Id. at 856–58. Lovick
for general agency. cites no other authority for her overhead-shifting theory
of recovery.
2.
3.
[15] Lovick also alleges Ritemoney shifted its overhead
to CPCWA. Under Texas law, fees charged by a lender Finally, Lovick contends that a broker's performing
for ordinary overhead constitute interest. See, e.g., Trinity many, if not all, of the tasks ordinarily performed by a
Fire Ins. Co. v. Kerrville Hotel Co., 129 Tex. 310, 103 lender evidences that the broker is not a bona fide third
S.W.2d 121, 125 (Tex.1937); Nicewander, Sheen & West, party. General Southwestern Corp. v. State of Texas, 333
TEXAS USURY LAW HANDBOOK § 4:3 (1997) (“any S.W.2d 164, 166–68 (Tex.Civ.App.—Houston 1960, writ
charges for services normally incident to the making of ref'd n.r.e.); Donoghue v. State, 211 S.W.2d 623, 628–29
loans, which are charged to the borrower for the lender's (Tex.Civ.App.—Austin 1948, writ ref'd n.r.e.). Again, the
overhead expenses, are deemed interest for the purpose cited Texas caselaw pre-dates CSOA (enacted in 1987).
of determining usury”). Lovick alleges that Ritemoney
shifted to CPCWA all of Ritemoney's responsibilities In General Southwestern, as here, brokers solicited
normally understood as overhead. Therefore, according customers, performed credit checks, arranged for an
to Lovick, CPCWA cannot contend that fees charged in agreement and note to be signed, and made an initial
consideration for these services are not interest. Lovick advance and collected payments. 333 S.W.2d at 165–
maintains: even though the services are provided by 67. In upholding a temporary injunction against making
the broker, they are effectively lender overhead. Indeed, usurious loans, the court concluded that the proof at
Lovick contends this overhead-shifting to the broker is *442 the injunction hearing indicated a closely integrated
precisely the sort of “device, subterfuge, or pretense” operation that included all of the brokering entities, as well
proscribed by TEX. FIN.CODE § 342.051(b). as the two corporations holding the notes. Id. at 168.
[16] Lovick cites no Texas authority in support of Similarly, in Donoghue, the broker solicited borrowers,
her contention that fees for broker services may be arranged for the execution of an agreement and note,
attributed to the lender to the extent those services could determined security was adequate, and handled collection.
have been part of a lender's overhead in a non-brokered Donoghue, 211 S.W.2d at 624–25. The court held:
although there was an independent broker, the brokerage other things, “obtain[ ] an extension of consumer credit for
fee was a form of interest that rendered the loans usurious a consumer”. TEX. FIN.CODE § 393.001(3)(B). CSOA
because, as the court found, the operation was a joint does not prescribe the amount that may be charged by a
venture between the broker and lender. Id. at 629. CSO for its services. Under the facts alleged, CPCWA is a
valid CSO; Lovick has not alleged that CPCWA failed to
As noted, Lovick rests this premise—that CPCWA is not a comply with any of CSOA's provisions.
bona fide third party—on only two, pre-CSOA cases from
Texas intermediate courts. She offers no explanation for While CSOA regulates CSOs (such as brokers),
her inability to identify more recent Texas authority. Texas' usury statutes regulate lenders. Those statutes
differentiate between loans charging interest rates of
ten percent or less, which are unregulated, see TEX.
FIN.CODE § 302.001 et seq., and those charging more
B.
than ten percent, see TEX. FIN.CODE § 342.001 et seq.
This lack of recent, relevant authority is because the As stated in the Note, CPCWA is a third party providing
Texas Legislature has addressed these and other issues credit services, and Ritemoney is a lender charging ten
through usury statutes and, more recently, CSOA. The percent interest under Texas Financial Code Section
usury statutes originated in Act of 23 May 1967, 60th 302.001.
Leg., R.S., ch. 274, 1967 TEX. GEN. LAWS 608–660,
and are contained in Title 4 of the Texas Financial Code. The usury statutes and CSOA work in harmony,
TEX. FIN.CODE § 301.001 et seq. When enacted in 1987, permitting a CSO to charge a brokerage fee in connection
CSOA was in former Chapter 18 of the Texas Business with its services. *443 Indeed, CSOA's proscribing a CSO
and Commerce Code, Acts 1987, 70th Leg., ch. 764, § from charging a fee for simply referring a customer to a
1; it became part of the Texas Financial Code. TEX. lender, TEX. FIN.CODE § 393.303, cuts against Lovick's
FIN.CODE § 393. (At least 31 States and the District of contentions regarding CPCWA's many services. Lovick
Columbia have credit services organization acts similar to alleges those services imply CPCWA is not a bona fide
the one enacted by Texas. See, e.g., ARIZ.REV.STAT. § third party, or at least that it is performing tasks ordinarily
44–1701 et seq.; ARK.CODE § 4–91–101 et seq.; CAL. understood as part of the lender's overhead. But, under
CIV.CODE § 1789.11 et seq.; COLO.REV.STAT. § 12– CSOA, CSOs are expected to provide valuable services for
14.5–101 et seq.) their fee and are penalized if they provide too few services
(not too many). Id.
The codification of Texas usury law and the enactment
of CSOA governing loan brokers as credit services [17] [18] It goes without saying that, when statutory
organizations (CSOs) has overruled by implication those language is unambiguous, we apply the “plain and
cases interpreting brokerage fees of the type alleged here as common meaning of the words and terms used”; a “court
potentially usurious interest. Again, Lovick cites no post- may not strain on policy grounds to manufacture a
enactment cases. In the light of Texas' more recent usury [modification] of the statutory language to achieve a result
statutes and CSOA, the complaint fails to state a claim. obviously not intended by the legislature”. Moreno v.
Sterling Drug, Inc., 787 S.W.2d 348, 352 n. 2 (Tex.1990)
CSOA authorizes a CSO to charge a “credit service (quoting Morano v. St. Francis Hospital, 100 Misc.2d 621,
fee” by complying with certain requirements, such as: 420 N.Y.S.2d 92, 95 (N.Y.Sup.Ct.1979)). Sections 302
registration, § 393.101; a surety bond, §§ 393.401–393.407; and 393 of the Texas Financial Code are unambiguous.
disclosures, § 393.105; and notice of cancellation, § 393.202 Section 302 permits a lender to charge an interest rate of
(contract may be canceled within three days of date of ten percent or lower; § 393, a CSO to charge a brokerage
transaction). See TEX. FIN.CODE § 393 et seq. A fee fee for arranging a loan.
may not be charged if any of these requirements is not
met, nor may one be charged merely for referring a The allegations in the operative second amended
customer to a retail seller of credit. TEX. FIN.CODE § complaint confirm that CPCWA charged a credit services
393.303. CSOA describes a CSO as follows: an entity that fee and that Ritemoney made a ten percent loan. All of
provides that, for valuable consideration, it will, among the services alleged to have been provided by CPCWA
are consideration for its fee, and there are no allegations types of brokerage fees would amount to a partial repeal
of non-conformity with the requirements for valid CSO by implication of § 342.051(b), which proscribes the use of
status as provided in § 393. The Texas Legislature has not subterfuge or pretense to evade application of the usury
restricted the amount of a CSO service fee in proportion to laws.
the services provided; we cannot substitute our judgment.
In this regard, we are more than well aware that a $1500 fee [21] CSOA expressly or impliedly permits the activities
for a $2000 loan appears quite excessive. Ameliorating this Lovick alleges CPCWA engaged in as a broker. Under
acute concern are two factors. First, Lovick's allegations CSOA, read in conjunction with the usury statutes,
do not provide any data for factors supporting or refuting brokerage fees shared with the lender are interest for
why the amount is, or is not, reasonable. Second, we the purpose of determining usury. Again, Lovick does
obviously cannot rule on issues on the basis of such not allege CPCWA shared its fee with Ritemoney;
concern; we are compelled to follow the law—here, nor does Lovick allege CPCWA and Ritemoney are
CSOA. the same entity. Lovick does not even allege that
CPCWA's charging a fee results in an incidental benefit
Lovick, relying on pre-CSOA precedent, tries to blur the to Ritemoney. Ritemoney and CPCWA complied with
distinction between §§ 302 (governing unregulated loans CSOA, identifying CPCWA as a CSO that would be
charging ten percent interest or less) and 342 (governing charging a fee for its services.
regulated loans charging greater than ten percent), while
ignoring § 393 (governing brokerage fees for CSOs). She Because Texas law does not construe such credit service
does not cite any Texas cases that question, or even fees as disguised interest, Lovick's complaint fails to state
mention, the clear language of §§ 302 and 393, and a claim for usury. Therefore, her RICO claim also fails.
their harmonious relationship. Nor does she cite cases Her complaint was properly dismissed.
from other jurisdictions that have enacted credit services
organization statutes; yet those statutes have been in effect
for many years.
III.
[19] [20] “[U]nder Texas law, there is a specific For the foregoing reasons, the judgment is
presumption against a finding of usurious interest”. C.C.
Port, Ltd. v. Davis–Penn Mortgage Co., 61 F.3d 288, AFFIRMED.
290 (5th Cir.1995) (affirming Rule 12(b)(6) dismissal of
action against lender alleging prepayment premium was
usurious interest). Penal statutes, such as those for usury,
E. GRADY JOLLY, Circuit Judge, dissenting.
are strictly construed under Texas law; recovery of a
I respectfully dissent because I sense that something
penalty must fit within the statutes' terms. E.g., Hight v.
strange may be going on here and there has been no
Jim Bass Ford, Inc., 552 S.W.2d 490, 491 (Tex.Civ.App.
discovery. When the broker is getting 90% of the profit on
—Austin 1977) (holding “doubt as to the intention of
a transaction, it is not unreasonable to think that perhaps
the Legislature to punish the conduct of the party should
the lender is somehow being benefitted; perhaps it is, in
be resolved in favor of the defendant ... [b]ecause the
effect, receiving a usurious rate of interest from whatever
provisions of the Consumer Credit Code are penal in
arrangement it has with the broker. Perhaps the broker
nature ... [and] are to be strictly construed”).
is paying a flat sum to the lender, or a percentage of its
seemingly excessive nominal fee; this may amount to usury
Lovick contends that CSOA's silence on whether
under the facts of this case, or it may suggest a conspiracy
brokerage fees may be considered disguised interest under
to commit usury. Or perhaps nothing untoward is going
certain broker/lender relationships suggests that we *444
on. It may even be probable that this is a completely legal
should not read into CSOA an endorsement of such fees.
and legitimate operation.
Instead, according to Lovick, CSOA provides additional
borrower-protection, beyond that found in prior Texas
Now, I do not disagree with the majority's scholarly
cases holding some third party fees are disguised interest.
analysis of Texas usury law and how it is affected by the
She also contends that interpreting CSOA to permit these
CSOA, but it does seem that Lovick stated a litigable claim
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
requested the panel for a factual and legal Any act by former husband in invoking
determination of whether the partnership arbitration under partnership agreement with
agreement's arbitration clause controlled, former wife did not result in prejudice to
where former husband's acts were generally former wife, and thus husband did not
of a defensive nature, and former husband waive right to arbitration under settlement
expressly took each action subject to his agreement with former wife, despite her
objections to arbitration. allegations that she had to fight in two
forums; former wife initiated the arbitration,
1 Cases that cite this headnote former husband timely filed and repeatedly
stood on objections, requesting discovery only
[20] Alternative Dispute Resolution to support his objections and submitting to
Suing or participating in suit discovery only over objection, and there was
no suggestion that the discovery and costs
To substantially invoke the judicial process
incurred would not inure to the benefit of the
and waive a right to arbitration, a party must
arbitration under the settlement agreement.
make a specific and deliberate act after suit has
been filed that is inconsistent with its right to Cases that cite this headnote
arbitrate.
“AAA Arbitration”) against McReynolds and his current dismissal of the AAA Arbitration, absent an explanation
wife, Judith Bauman (collectively “McReynolds”), from Elston's attorneys regarding why the Partnership
asserting breach of fiduciary duty, breach of contract, Agreement controlled. On May 15, 2006, Boswell again
and fraud. Elston contended that in November 1997, informed the case manager that the AAA Arbitration
McReynolds and his business associate purchased for was improper under the Settlement Agreement and
themselves a 68–acre tract of real property for timber, warned that McReynolds would seek injunctive relief
which was surrounded by the partnership's 242 Tract against Elston if the matter could not be resolved.
and thus landlocked. Elston alleged McReynolds engaged Thereafter, on June 28, 2006, the AAA panel conducted
in the following improper conduct in connection with a “preliminary hearing and initial case management
the purchase: (1) failing to disclose this “partnership conference,” which set dates for both the hearing
opportunity” during the term of the partnership and on McReynolds's objections and the final evidentiary
“potentially” improperly using partnership funds to hearing for Elston's claim. Pursuant to the objections,
acquire the tract, (2) inducing her into executing the neither McReynolds nor Boswell participated in this
Settlement Agreement by denying ownership of any other conference. Rather, on the same day, because of the
property in his deposition for the arbitration resulting AAA's “failure to acknowledge the clear terms of the
in the agreement, (3) in the years after the settlement, Settlement Agreement,” McReynolds filed a declaratory
overcharging her for her share of the partnership expenses judgment action in district court requesting the court to
on the 242 Tract by failing to segregate amounts for the stay the AAA Arbitration and compel Elston to engage in
68–acre tract, and (4) failing to disclose his interest in the arbitration under the Settlement Agreement.
68–acre tract until after he executed a contract with her
for the sale of a larger partnership tract containing the 68– The AAA panel then heard McReynolds's objections
acre tract. on July 28, 2006 and subsequently overruled them.
Thereafter, on September 28, 2006, McReynolds filed
Thereafter, on October 23 or 24, 2005, McReynolds a motion to compel the Goldberg Arbitration pursuant
filed objections to the AAA Arbitration, and, subject to the Settlement Agreement and to dismiss or stay
to the objections, an answer and counterclaims. the AAA Arbitration in district court. He maintained
McReynolds objected (1) that the acquisition of the that he “repeatedly requested that [Elston] submit to
68–acre tract fell outside the scope of the Partnership contractual arbitration in accordance with [the Settlement
Agreement's arbitration clause, requesting “a factual and Agreement], but she has refused.” After a hearing, the
legal determination whether the purported Arbitration court denied the motion on October 24, 2006. 2
Agreement is binding on the parties to this claim,” (2)
to the “involvement” of the AAA, alleging that Elston's McReynolds now challenges the court's denial of his
current husband, an attorney of record in the claim, motion to compel the Goldberg Arbitration and stay
had close ties to the designated three-arbitrator panel the AAA Arbitration, seeking relief through a petition
and other AAA employees, and (3) to the use of a for writ of mandamus, or, alternatively, an interlocutory
three-arbitrator panel instead of a single arbitrator. appeal.
McReynolds's counterclaims included causes of action for
libel, slander, breach of contract, and intentional infliction
of emotional “trauma.”
ANALYSIS
The record reflects that over the next eight months,
I. Mandamus vs. Interlocutory Appeal
McReynolds, through his attorney, John H. Boswell,
[1] We initially address whether we should review
reasserted his objections in correspondence to the case
the interlocutory order denying McReynolds's motion
manager handling the AAA Arbitration. On March
29, 2006, Boswell explained that Elston improperly under our interlocutory 3 or mandamus jurisdiction. The
brought the arbitration before an AAA panel under parties agree that the facts of this case are atypical,
the Partnership Agreement rather than before Daniel if not unique—a party simultaneously seeks to compel
Goldberg under the Settlement Agreement *737 arbitration under one agreement and stay arbitration
(the “Goldberg Arbitration”). Boswell thus sought initiated under another agreement. McReynolds claims
we have interlocutory jurisdiction over denial of the
“motion to compel” relief because the Texas Arbitration 511, 515 (Tex.App.-Houston [1st Dist.] 2002, no pet.). The
Act (“TAA”) expressly grants interlocutory jurisdiction record indicates McReynolds sought not simply to change
over denials of applications to compel arbitration. See arbitrators, but rather to enforce his express contractual
TEX. CIV. PRAC. & REM. CODE ANN. § 171.098(a) right of arbitration under the Settlement Agreement,
(1) (Vernon 2005). McReynolds further contends that, including arbitration before Daniel Goldberg. The motion
because the TAA requires orders compelling arbitration to compel the Goldberg Arbitration constitutes the
to include a stay of other proceedings subject to predominant relief sought in McReynolds's motion, which
the arbitration, we have by extension interlocutory is evidenced by the trial court's order entitled “ORDER
jurisdiction to review a denial of the “motion to stay” DENYING PLAINTIFFS' MOTION TO COMPEL
relief. See *738 id. § 171.021(c) (Vernon 2005). Elston ARBITRATION.” As such, although the trial court's
counters that, because McReynolds's motion sought to order allowed the AAA Arbitration to continue, it denied
stay pending arbitration and compel arbitration before McReynolds's potential contractual right to arbitration
a different arbitrator, the court's order did not deny under the Settlement Agreement.
the “right to arbitration” but merely allowed pending
arbitration to continue. Therefore, Elston reasons, the Moreover, in relation to McReynolds's request to compel
trial court's order does not squarely fall under either the Goldberg Arbitration, he asked the court to stay
TAA section 171.098(a)(1) or section 171.098(a)(2), a related proceeding involving arbitrable issues—the
which provides for appeals from grants of applications AAA Arbitration. Parties moving to compel arbitration
to stay arbitration made under 171.023 section. See often simultaneously request the trial court to stay
id. § 171.098(a)(2) (Vernon 2005). As to mandamus, related proceedings—albeit typically the court's own
McReynolds concedes that he believes his challenge to the litigation proceedings—and thereafter appeal from an
trial court's order is appropriate for interlocutory appeal order denying such relief under Section 171.098. See
but has filed the mandamus proceeding “in an abundance Williams Indus., Inc. v. Earth Dev. Sys. Corp., 110 S.W.3d
of caution.” 131, 133 (Tex.App.-Houston [1st Dist.] 2003, no pet.)
(noting that section 171.098(a)(1) authorizes interlocutory
[2] We will first discuss our interlocutory jurisdiction. appeal from denial of application to compel arbitration
We have jurisdiction to consider appeals of interlocutory and to stay proceedings); see, e.g.,Southwind Group, Inc.
orders only if a statute explicitly so provides. See Stary v. Landwehr, 188 S.W.3d 730, 735–36 (Tex.App.-Eastland
v. DeBord, 967 S.W.2d 352, 352–53 (Tex.1998). The TAA 2006, orig. proceeding); Teal Constr. Co./ Hillside Villas
explicitly provides that a party may file an interlocutory Ltd. v. Darren Casey Interests, Inc., 46 S.W.3d 417, 419
appeal from the denial of an application to compel & n. 1 (Tex.App.-Austin 2001, pet. denied). Accordingly,
arbitration brought under section 171.021. See TEX. under these circumstances, we hold that section 171.098(a)
CIV. PRAC. & REM. CODE ANN. § 171.098(a)(1). (1) of the TAA *739 grants us jurisdiction to review the
Under section 171.021, the court must, upon granting an trial court's denial of McReynolds's motion to compel the
application to compel arbitration, stay “any proceeding Goldberg Arbitration and stay the AAA Arbitration.
subject to Section 171.025.” See id. § 171.021(c). Section
171.025 requires the court to stay a “proceeding that Because we have jurisdiction to hear the interlocutory
involves an issue subject to arbitration,” and such stay appeal under the TAA, and an adequate remedy by appeal
“applies only to the issue subject to arbitration if that issue therefore exists, we accordingly deny McReynolds's
is severable from the remainder of the proceeding.” See id. petition for writ of mandamus. See TMI, Inc. v. Brooks,
§ 171.025 (Vernon 2005). No.14–05–00604–CV, 2007 WL 43814, at *8 (Tex.App.-
Houston [14th Dist.] Jan. 9, 2007, orig. proceeding).
We disagree with Elston's contentions that the trial court's
order did not deny McReynolds the “right to arbitration”
and that an appeal from the denial of his motion does not II. Motion to Compel the Goldberg Arbitration
fall under section 171.098(a)(1) of the TAA. The substance [3] [4] [5] [6] We now turn to the merits of the
and function of the order viewed in the context of the appeal to determine whether the trial court erred in
record controls our interlocutory jurisdiction. See Walker denying McReynolds's motion to compel the Goldberg
Sand, Inc. v. Baytown Asphalt Materials, Ltd., 95 S.W.3d Arbitration and stay the AAA Arbitration. Under the
TAA, a party moving to compel arbitration must establish
(1) the existence of a valid, enforceable arbitration Partnership Agreement, not the Settlement Agreement,
agreement and (2) that the claims asserted fall within the and thus the Partnership Agreement's arbitration clause
scope of that agreement. Valero Energy Corp. v. Teco applies. Alternatively, Elston argues that her claims
Pipeline Co., 2 S.W.3d 576, 581 (Tex.App.-Houston [14th relate to the breach of a duty under the Partnership
Dist.] 1999, no pet.). If the movant establishes that an Agreement “to enhance Partnership Assets or otherwise
arbitration agreement governs the dispute, the burden protect or enhance the business of the Partnership,”
then shifts to the party opposing arbitration to establish a which claims accrued after the parties executed the
defense to the arbitration agreement. See In re Oakwood Settlement Agreement when McReynolds diluted the
Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex.1999) (orig. value of the 242 Tract by selling it along with the 68–
proceeding). A party may revoke the agreement only on acre tract. Elston reasons that, since the 68–acre tract
a ground that exists at law or in equity for the revocation did not constitute a partnership asset and the Settlement
of a contract. TEX. CIV. PRAC. & REM. CODE ANN. Agreement's arbitration clause applies only to claims
§ 171.001 (Vernon 2005). If the trial court concludes related to partnership assets, her claims do not fall under
the movant has met its burden and the party opposing this provision.
arbitration has failed to prove its defenses, the trial court
has no discretion but to compel arbitration. See Brooks, [9] [10] [11] [12] [13] [14] Determining whether a
2007 WL 43814, at *3. claim falls within the scope of an arbitration agreement
involves the trial court's legal interpretation of the
In reviewing a denial of a motion to compel arbitration, agreement, and we review such interpretations de novo.
we review factual conclusions under a legal sufficiency or See Ikon Office Solutions, Inc. v. Eifert, 2 S.W.3d 688,
“no evidence” standard and legal conclusions de novo. See 694 (Tex.App.-Houston [14th Dist.] 1999, no pet.) (orig.
Valero, 2 S.W.3d at 581. When the legal interpretation of proceeding). In our review, we focus on the factual
the arbitration clause, and no fact issue is before the court, allegations of the complaint rather than the legal causes
de novo review is appropriate. See id. at 582. of action asserted. Prudential Sec. Inc. v. Marshall,
909 S.W.2d 896, 900 (Tex.1995) (orig. proceeding).
[7] The parties do not dispute the existence of the The burden lies with the party opposing arbitration
Settlement Agreement's arbitration clause. 4 They instead to show that the claims fall outside the scope of the
disagree over whether Elston's claims fall within the scope arbitration agreement. Id. There is a presumption favoring
of this clause and whether McReynolds waived his right arbitration, which generally requires that we resolve
to compel the Goldberg Arbitration and stay the AAA doubts as to the scope of the agreements in favor
Arbitration. We address each issue in turn. of coverage. See Valero, 2 S.W.3d at 590. Thus, a
court should not deny arbitration unless it can be said
with positive assurance that an arbitration clause is not
A. Scope of the Settlement Agreement's Arbitration susceptible of an interpretation that would cover the
Clause dispute at issue. Williams Indus., Inc., 110 S.W.3d at
[8] McReynolds contends that Elston's claims fall under 137. “The presumption of arbitrability is particularly
the scope of the Settlement Agreement's arbitration applicable where the clause is broad; that is, it provides
clause because the clause purports to cover “any for arbitration of ‘any dispute arising between the parties,’
dispute under this Settlement Agreement or any matter or ‘any controversy or claim arising out of or relating
relating hereto,” which language courts have interpreted to the contract thereof,’ or ‘any controversy concerning
broadly. McReynolds further maintains the Settlement the interpretation, performance or application of the
*740 Agreement, because it provides “final closure of contract.’ ” Babcock & Wilcox Co. v. PMAC, Ltd., 863
the Partnership” and contains broad release language, S.W.2d 225, 230 (Tex.App.-Houston [14th Dist.] 1993,
superseded the Partnership Agreement either entirely writ denied). However, the presumption is not without
or to the extent the arbitration clauses conflict. Thus, limits and cannot serve to stretch a contractual clause
he concludes the arbitration clause in the Settlement beyond the scope intended by the parties or authorize
Agreement controls. Elston responds that, because the an arbitrator to disregard or modify the plain and
dispute turns on whether the 68–acre tract constitutes unambiguous provisions of the agreement. Id.
a partnership asset, the arbitrator(s) must interpret the
We conclude that Elston, in contending that her claims USA Corp. v. Leroy, 105 S.W.3d 190, 195–96 (Tex.App.-
fall under the Partnership Agreement's arbitration clause, Houston [14th Dist.] 2003, orig. proceeding); see also
failed to meet her burden to show that her claims Pennzoil Exploration & Prod. Co. v. Ramco Energy
fall outside the scope of the Settlement Agreement's Ltd., 139 F.3d 1061, 1067 (5th Cir.1998) (noting that
arbitration clause. The totality of the language in such language is “capable of expansive reach”). Each of
the Settlement Agreement reveals that it supersedes Elston's allegations involve, either directly or indirectly,
the Partnership Agreement, at least to the extent the the acquisition, sale, and distribution of partnership
two agreements conflict. For example, the Partnership assets, which clearly relate to, touch upon, and are
Agreement generally discusses the liquidation and factually intertwined with the Settlement Agreement's
distribution of partnership assets, while the Settlement subject matter. See Marshall, 909 S.W.2d at 900; Dewey
Agreement specifically outlines how each asset should v. Wegner, 138 S.W.3d 591, 602–03 (Tex. App.-Houston
be liquidated and includes a broad residual clause [14th Dist.] 2004, no pet.). As such, given the breadth
covering all other partnership assets not expressly of the Settlement Agreement and its arbitration clause,
addressed. Indeed, the Settlement Agreement expressly and the strong presumption in favor of arbitration, we
states that the transfers are intended to “effect” the cannot say with positive assurance that such clause is not
liquidation and dissolution of the Partnership, which susceptible of an interpretation covering Elston's claims.
was the “sole intent and purpose” of the Partnership
Agreement. Moreover, the Settlement Agreement broadly
releases claims *741 “relating to” the Partnership and B. Waiver
“all other matters relating to assets or liabilities of [15] [16] [17] [18] Elston further contends
McReynolds, Elston, or the Partnership.” Accordingly, McReynolds waived his right to stay the pending
to the extent the Settlement Agreement's arbitration arbitration by “participating in the arbitration for a year
clause conflicts with the Partnership Agreement's clause before filing the motion [to stay the AAA arbitration].”
—by requiring arbitration before Daniel Goldberg—the McReynolds counters that he expressly took each
Settlement Agreement controls. See Transcore Holdings, action in the AAA Arbitration “subject to” his original
Inc. v. Rayner, 104 S.W.3d 317, 322–23 (Tex.App.-Dallas objections, which he filed less than twenty days after
2003, pet. denied) (orig. proceeding) (holding that parties Elston initiated the proceeding. Whether a party has
did not intend to be bound by arbitration agreement in waived its right to arbitrate presents a question of law that
prior agreement, given that later agreement contained we review de novo. Sedillo v. Campbell, 5 S.W.3d 824, 826
broad release of “any and all claims” and provision (Tex.App.-Houston [14th Dist.] 1999, orig. proceeding).
requiring parties to bring any action “arising out of, Waiver of an arbitration right must be intentional. EZ
or relating to” later agreement in court); Courage Co., Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex.1996)
L.L.C. v. Chemshare Corp., 93 S.W.3d 323, 333 (Tex.App.- (orig. proceeding). Merely taking part in litigation is not
Houston [14th Dist.] 2002, no pet.) (holding that when enough unless a party has (1) substantially invoked the
later contract deals with same subject matter as initial judicial process (2) to its opponent's prejudice. In re Vesta
contract made by same parties, but does not specify Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex.2006) (orig.
whether or to what extent it is intended to operate proceeding). 5 Because *742 of the strong federal and
in discharge or substitution, both contracts must be state policies favoring arbitration, a presumption exists
interpreted together, and, to extent they are inconsistent, against the waiver of a contractual right to arbitration. See
later one prevails). Marshall, 909 S.W.2d at 898.
the AAA and complying with AAA panel's order to responsive pleading containing claims on merits because
produce documents, (4) allowing the AAA to pre-screen claims on merits were brought subject to court's ruling
arbitrators and objecting to arbitrators chosen for the on jurisdictional objections). Further, the documents
panel, (5) participating in a conference call to discuss McReynolds requested pertained to Elston's husband's
the appointment of the panel, scheduling, discovery, and potential conflict *743 with the AAA panel, indicating
other parameters of the arbitration, and (6) requesting that such request was defensive and made in support of
the AAA panel for a factual and legal determination of his objections. Also, even if McReynolds complied with
whether the Partnership Agreement's arbitration clause the panel's order to produce documents relating to the 68–
controlled. acre tract, which is unclear from the record, engaging in
minimal discovery does not alone establish waiver. See In
[20] [21] [22] [23] To substantially invoke the judicialre D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex.2006)
process, a party must make a specific and deliberate act (orig. proceeding); In re Vesta Ins. Group, Inc., 192
after suit has been filed that is inconsistent with its right to S.W.3d at 763. In addition, to the extent Elston suggests
arbitrate. Sedillo, 5 S.W.3d at 827. Thus, a party does not McReynolds's objections to the arbitrators amounted to
demonstrate an intent to waive arbitration by consistently participating in the selection of arbitrators, such actions
and timely seeking to invoke its contractual right to were made in the context of his objections and request
arbitration. See Marshall, 909 S.W.2d at 898. Similarly, that the AAA panel dismiss the arbitration; thus, they
purely defensive measures do not substantially invoke the were defensive in nature. Cf. Bergquist Co. v. Sunroc
judicial process. See Transwestern Pipeline Co. v. Horizon Corp., 777 F.Supp. 1236, 1251 (E.D.Pa.1991) (finding
Oil & Gas Co., 809 S.W.2d 589, 593 (Tex.App.-Dallas party did not waive objections to arbitration proceeding
1991, writ dism'd w.o.j.) (citing filing of general denial to by participating in selection of arbitrators under express
preclude default judgment and filing of protective order protest that matter was not subject to arbitration).
in response to discovery request as examples of defensive Accordingly, we cannot say that McReynolds's actions in
measures); see also In re Serv. Corp. Int'l, 85 S.W.3d 171, the AAA Arbitration were inconsistent with his right to
174 (Tex.2002) (orig. proceeding) (holding that objecting arbitrate under the Settlement Agreement.
to trial setting showed intent to avoid rather than to
judicial process). Delay alone generally does not establish
waiver. In re Vesta Ins. Group, Inc., 192 S.W.3d at 763. 2. Prejudice to Elston
[24] [25] [26] Finally, we note that even if McReynolds
We disagree that McReynolds's actions substantially substantially invoked the AAA Arbitration, Elston has
invoked the AAA Arbitration. Elston asserts that not shown prejudice sufficient to establish waiver. 6
McReynolds waited nearly a year from the time she Elston claims she has suffered prejudice due to
filed the AAA Arbitration to file a motion to stay McReynolds's delay in filing the motion to stay the AAA
that proceeding and only after the panel had ruled Arbitration and “simply by having to fight McReynolds
on his objections. Notwithstanding that McReynolds in two forums.” Loss of time alone does not constitute
filed a declaratory judgment seeking a stay of the sufficient prejudice to establish waiver. See In re BP Am.
arbitration before the hearing on his objections, courts Prod. Co., 97 S.W.3d 366, 372 (Tex.App.-Houston [14th
have held that delays in asserting contractual rights to Dist.] 2003, orig. proceeding). Moreover, generalized
arbitration far longer than one year do not constitute complaints about delay and expense, absent explanation
waiver. See id. (holding that litigating in court for two and evidentiary support, will not establish prejudice. See
years did not amount to waiver). Moreover, the record id.; Williams Indus., Inc., 110 S.W.3d at 139.
is replete with correspondence and other documents
supporting McReynolds's position that he took each Furthermore, the cases on which Elston relies are
action expressly subject to his objections or in an distinguishable. See Cent. Nat'l Ins. Co. of Omaha v.
otherwise defensive posturing. McReynolds expressly Lerner, 856 S.W.2d 492, 495 (Tex.App.-Houston [1st
filed his answer and counterclaims “subject [to]” the Dist.] 1993, orig. proceeding); Marble Slab Creamery,
objections in the same pleading. See Courage Co., L.L.C., Inc. v. Wesic, Inc., 823 S.W.2d 436, 438–39 (Tex.App.-
93 S.W.3d at 337 (finding no waiver where party made Houston [14th Dist.] 1992, no writ). Those cases involve
jurisdictional objections and sought dismissal in same parties who filed claims or counterclaims and conducted
extensive pretrial discovery unavailable in arbitration, already conducted would not be useful in arbitration);
Transwestern Pipeline Co., 809 S.W.2d at 593 (in finding
causing the opposing parties to incur significant discovery
no prejudice, noting that nothing in record showed that
costs and attorney's fees. See Lerner, 856 S.W.2d at
litigation expenses would not have been incurred during
495; Wesic, 823 S.W.2d at 438. Here, McReynolds did
arbitration or would not have provided benefit to party
not initiate the AAA Arbitration and thereafter make
opposing arbitration in resolving dispute in arbitration).
extensive discovery requests. Rather, Elston initiated the
AAA Arbitration, and McReynolds timely filed and
repeatedly stood on objections, requesting discovery only
to support his objections and submitting to discovery only CONCLUSION
over objection. Therefore, any costs Elston has incurred
are “self-inflicted” in the sense that she incurred them We conclude the trial court erred in denying McReynolds's
not in response to McReynolds's actions but, rather, motion to compel the Goldberg Arbitration and stay
largely in her prosecution of the AAA Arbitration over the AAA Arbitration. Elston's claims fall under the
McReynolds's repeated objections. See In re Vesta Ins. scope of the Settlement Agreement's arbitration provision
Group, Inc., 192 S.W.3d at 763 (finding no prejudice because of the broad nature of the clause and the
where party sent far more discovery requests than Settlement Agreement. McReynolds did not waive his
received); Transwestern Pipeline Co., 809 S.W.2d at 593 right to the Goldberg Arbitration because he did not
(finding no prejudice where party voluntarily incurred and substantially invoke the AAA Arbitration to Elston's
assumed liability for legal fees in deciding to initiate and prejudice. Therefore, we sustain McReynolds's issues, and
prosecute lawsuit). Moreover, Elston does not suggest we reverse and remand the trial court's interlocutory order
that the discovery and *744 costs incurred in the AAA for proceedings consistent with this opinion.
Arbitration would not inure to the benefit of the Goldberg
Arbitration. See In re Vesta Ins. Group, Inc., 192 S.W.3d
All Citations
at 763 (in finding no prejudice, noting that party opposing
arbitration made no allegation that pretrial discovery 222 S.W.3d 731
Footnotes
1 The Settlement Agreement also contains the following release language:
Elston ... does hereby RELEASE, ACQUIT AND FOREVER DISCHARGE [McReynolds] and the Partnership of and
from any and all claims, demands, causes of action, damages, loss, or expense, of whatsoever kind or character,
in tort or in contract, under the statutes, constitutions, or the common law, state or federal, including, but not limited
to, causes of action that may be created or recognized after this date by court decision, statute or regulation, which
have been or could have been asserted as one of Elston's Claims, whether known or unknown, existing as of the
date of execution hereof and not including Claims arising out of this Settlement Agreement.
2 McReynolds then filed an emergency motion for temporary relief with this court, seeking a stay of the AAA Arbitration set
for November 7, 2006. We granted his motion on November 3, 2006, pending our final resolution of this proceeding.
3 Neither arbitration agreement specifies whether the Texas Arbitration Act or the Federal Arbitration Act governs; however,
the parties agree that because neither agreement invokes interstate commerce, the federal act does not apply. See In re
Educ. Mgmt. Corp., 14 S.W.3d 418, 422 (Tex.App.-Houston [14th Dist.] 2000, orig. proceeding) (holding that question of
whether transaction affects interstate commerce, and thus whether federal act governs, is one of fact where arbitration
agreement is silent as to application of federal or Texas act). Therefore, we address whether we have interlocutory
jurisdiction only under the Texas Arbitration Act.
4 Elston makes passing reference to her “fraud in the inducement” claim in her briefing on the scope of the Settlement
Agreement's arbitration clause. She appears to refer to her claim that McReynolds fraudulently induced her into signing
the Settlement Agreement by both failing to disclose and affirmatively denying his ownership of other property, namely
the 68–acre tract. We construe this as an argument that McReynolds's alleged fraud induced her to enter the entire
agreement, not the arbitration clause itself. Accordingly, we conclude that the arbitrators, not this court, should properly
decide this issue. See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 756 (Tex.2001) (orig. proceeding); Dewey v. Wegner,
138 S.W.3d 591, 602 (Tex.App.-Houston [14th Dist.] 2004, no pet.). Therefore, to the extent she attempts to challenge the
existence of the Settlement Agreement's arbitration clause by attacking the validity of the entire agreement, we overrule
her contention.
5 We recognize that both state and federal waiver cases typically involve an allegation that a party waived its contractual
right to arbitration by substantially invoking the “judicial” process in parallel litigation. Nevertheless, we find such cases
applicable in this unusual but analogous context, involving an allegation that a party waived its contractual right to
arbitration by substantially invoking the arbitration process in a parallel or competing arbitration. Cf. Bergquist Co.
v. Sunroc Corp., 777 F.Supp. 1236, 1251 (E.D.Pa.1991) (holding that party challenging arbitration award for lack of
agreement to arbitrate did not agree to arbitrate or waive its objection to arbitration proceeding by participating in initial
phases of arbitration process because party “had no other choice”).
6 We acknowledge that this and other courts have held that, although waiver is a question of law, the predicate element
of prejudice is a question of fact, and courts differ over which standard of review to apply to this question. See Williams
Indus., Inc., 110 S.W.3d at 136 & n. 8. Because these issues do not affect our conclusion, we need not address them.
See generally id. at 136.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Supreme Court, Special Term, Kings County Motions numbered 28, 87, 108 and 109 of the March 18,
2226/83, 3916 1983 calendar are consolidated for the purposes of this
May 24, 1983 decision. In brief these motions seek the following types
of relief:
CITE TITLE AS: Mendelsohn v A & D Catering Corp.
(1) motion number 28 is brought by petitioners, Jacob
HEADNOTES Mendelsohn and Mordchai Z. Greenfield, pursuant to
CPLR 7503 (subd [b]) seeking to permanently stay the
Arbitration arbitration demanded by respondent;
Violation of Statute
Waiver of Right to Arbitrate (2) motion number 87 is brought by the respondent, A & D
Catering Corporation, for an order staying the petitioners
from proceeding with a landlord and tenant action in the
([1]) The fact that the agreement between the parties in
Civil Court, Kings County (index No. 40911/83) pending
connection with the purchase and operation of a catering
the outcome of the arbitration between these parties;
business whereby the parties agreed that respondent,
the purchaser of the business, would utilize the liquor
(3) motion number 108 is brought by the respondent for
license issued to the entity that formerly operated the
an order seeking to punish petitioners for contempt for
business is in violation of the law and against public policy
*582 failing to abide by the order of Hon. Frank Pino,
(Alcoholic Beverage Control Law, § 111) does not render
dated March 8, 1983 which enjoined the petitioners from
the broad arbitration clauses contained in the lease and
proceeding with the landlord and tenant proceeding in the
management agreements void so as to bar arbitration of
Civil Court, Kings County, under index No. 40911/83;
the other disputes that have arisen between the parties
as a result of petitioners' refusal to maintain the liquor
(4) motion number 109 is brought by the respondent
license since respondent is no longer seeking to impose
for an order directing the law firm of Regosin, Edward,
any obligation upon petitioners to procure a liquor license
Stone & Feder to turn over to respondent's attorneys all
and, in any event, any violation of the Alcoholic Beverage
files relating to the matters in controversy between the
Control Law, although technically a “criminal violation”,
petitioners and respondents.
does not rise to the level of a pervasive scheme of
legislation which would oust an arbitrator from exercising
jurisdiction on public policy grounds; respondent did not BACKGROUND
waive its right to arbitration by commencing a prior Sometime prior to February 1, 1976 respondent purchased
action for specific performance with respect to petitioners' a catering business known as the Aperion Manor from
obligations to maintain the liquor license and resorting Joseph and Moshe Pruzansky, the then landlords of 813
to discovery proceedings by serving a notice to admit Kings Highway, Brooklyn, New York, and the principals
since respondent's actions were precipitated solely by the of W & L Caterers, Inc. In connection with this purchase,
nonpayment proceeding commenced against it and only numerous documents were executed between the parties,
manifested an intention to maintain the status quo rather including a lease for a 10-year term. Article 30 of said lease
than forsake its rights under arbitration. provides as follows:
license to serve liquor at the demised premises and will On January 17, 1983 petitioners served a notice of
diligently prosecute such application by furnishing and termination of tenancy upon the respondent alleging
filing all information and all documents required by such violation of subdivision 7-a of section 3, section 64, section
authority. 67 (subd 1, par [b]), subdivision 3 of section 110 and
section 111 of the Alcoholic Beverage Control Law. That
“30.2 Pending approval or disapproval of this lease by the same date, respondent replied by demanding arbitration
State Liquor Authority and the issuance or denial of an pursuant to the terms of the lease and management
appropriate liquor license to the Lessee, the Lessee shall agreement. On February 28, 1983 petitioners commenced
operate a catering establishment at the demised premises a holdover proceeding in the Civil Court, Kings County,
but shall in no manner or form serve liquor at the demised under index No. 40911/83. This proceeding was stayed
premises. In the event that any customer requests liquor to pursuant to the temporary restraining order of Hon.
be served at an affair then such request shall be submitted Justice Pino on March 8, 1983. Finally, on March 14,
to W & L Caterers, Inc. and independent arrangements 1983, respondent served petitioners with a notice to admit
shall be made between the customer and W & L Caterers, pursuant to CPLR 408 and 3123.
Inc., or the customer may bring in his own liquor, at the
customer's option.
ARBITRATION
“30.3 In the event that the State Liquor Authority does The threshold issue to be decided by this court is whether
not approve an appropriate liquor license to the Lessee or not the dispute between these parties which arose in
then the arrangement provided for in Section 30.2 shall *584 connection with the maintenance of a liquor license
continue during the term of the lease.” *583 is amenable to arbitration. In this respect petitioners argue
that the strong public policy of this State precludes the
Additionally, article 31 of this lease provided for a broad use of a forum in arbitration where the dispute involves
arbitration clause. Finally a management agreement violations of the Alcoholic Beverage Control Law. In
which the Pruzanskys signed contemporaneously with the alternative, petitioners contend that respondent's
the lease also provided for arbitration of any disputes. institution of an action on or about December 17, 1981
Pursuant to these various agreements respondent constitutes a waiver of its rights to arbitration.
operated a catering establishment utilizing the liquor
license issued to W & L Caterers, Inc. On August 15, It is by now a settled proposition that this State favors
1978 the demised premises were sold to the petitioners who and encourages arbitration as a means of conserving the
assumed all of the obligations of the Pruzanskys. time and resources of the courts and the contracting
parties (Matter of Nationwide Gen. Ins. Co. v Investors
Subsequently, relations between the respondent and the Ins. Co. of Amer., 37 NY2d 91, 95; Matter of Maye
Pruzanskys began to sour, with the Pruzanskys refusing [Bluestein], 40 NY2d 113). In furtherance of the laudable
to sign the necessary papers for maintaining the liquor purposes served by permitting consenting parties to
license of W & L Caterers, Inc. This dispute ultimately lead submit controversies to arbitration the law has adopted
petitioners to institute a nonpayment action on December a policy of noninterference, with few exceptions, in this
9, 1981 (index No. 123260/81). Respondent countered mode of dispute resolution (Matter of Sprinzen [Nomberg],
immediately by securing a temporary restraining order on 46 NY2d 623, 629). Clearly, arbitration is a recognized
December 17, 1981, which stayed the landlord and tenant and favored means by which parties expeditiously and
proceeding. Concomitant with this relief, respondent efficiently may settle disputes which might otherwise take
commenced an action, seeking specific performance years to resolve.
against the petitioners with respect to their obligations
to maintain the liquor license. Both of these proceedings What must be untangled, however, is the nettlesome
were thereafter discontinued and the parties proceeded to question of whether the public policy of this State
arbitrate their disputes in front of a rabbinical court. On or precludes arbitration of the present dispute. In this respect
about March, 1982, that court issued a sealed arbitration the statement has been bandied about that excluded from
award. the ambit of arbitration have been questions of violations
of the criminal law (see, e.g., 8 Weinstein-Korn-Miller,
NY Civ Prac, par 7501.19; Harris v Shearson Hayden
Stone, 82 AD2d 87, 92). At the outset, it should be the dispute over the liquor license there remains a plethora
noted that there is no quarrel with the proposition that of unresolved issues between these parties. Accordingly,
the proprietary operation by one entity as a catering there is an element of respondent's dispute which may
establishment by utilizing the liquor license issued to properly be resolved by arbitration.
another entity would be in violation of law and against
public policy (Alcoholic Beverage Control Law, § 111; Furthermore, the alleged violation of the Alcoholic
Matter of South Shore Yacht Club v State Liq. Auth., 34 Beverage Control Law should not deprive respondent
AD2d 794; Smith v Pope, 72 AD2d 913). Respondent of its right to arbitration. Thus, in Matter of *586
has taken the position, that notwithstanding what has National Equip. Rental (American Pecco Corp.) (supra),
happened in the past, it is not presently using nor will it the purchaser of two terminal container loaders sought
attempt to utilize the liquor license of W & L Caterers, to avoid arbitration by alleging that the installation of
Inc., in the operation of its catering enterprise. It is this equipment violated applicable rules and regulations
not readily apparent, however, whether a violation of of the New York City Fire Department. In rejecting this
the Alcoholic Beverage Control Law *585 ipso facto attempt to thwart arbitration the Appellate Division, First
mandates the denial of an arbitration forum. Put another Department, declared (supra, p 135) that, “it may be
way, does the label of criminal violation so envelop the assumed that the arbitrators will not render an award
proceeding that the underlying contract of arbitration is which would require the doing of an act prohibited by law
rendered null and void? Notwithstanding the practicable or offensive to public policy. If there is such an award, the
utility of denominating a breach of statute as being court has the power to vacate it.” Generally, exceptions to
a “criminal violation” (see, e.g., Alcoholic Beverage arbitration are narrowly confined to rights and remedies
Control Law, § 130, making any violation thereof a created by State regulatory statutes, and represent a
“misdemeanor”), such labeling ought not to prevent a determination that the public interest is best served by
court from analyzing the various public policies involved maintaining access to the remedies which the Legislature
in either allowing a dispute to proceed to arbitration or has provided (Keating v Superior Ct. of Alameda County,
barring the parties from this remedy. 31 Cal 3d 584, 601-602; see, also, Kamakazi Music Corp.
v Robbins Music Corp., 684 F2d 228, 231). In these
Consequently, it is for the courts to decide, as a threshold exceptional cases arbitration is forbidden not because
question, whether the enforcement of an agreement matters of public interest are involved, but because
to arbitrate a particular matter would so contravene statutes require that the decisions be made by certain
an important public policy that arbitration should not specified authorities. Over the years, therefore, a small
proceed (Matter of Board of Educ. [Buffalo Council of number of problems have been recognized as so interlaced
Supervisors & Administrators], 52 AD2d 220, 225; Matter with strong public policy considerations that they have
of National Equip. Rental [American Pecco Corp.], 35 been placed beyond the reach of the arbitrators (Matter
AD2d 132, 135, affd 28 NY2d 639; Durst v Abrash, 22 of Associated Teachers of Huntington v Board of Educ., 33
AD2d 39, 44, affd 17 NY2d 445). Obviously, the function NY2d 229, 235).
which W & L Caterers, Inc. was required to perform under
the lease was to act as a conduit for respondent's use Consequently, such public policy exceptions to arbitration
of its liquor license. If this was the sole issue in dispute have been limited to controversies involving antitrust
between these parties, this court would properly construe law (Matter of Aimcee Wholesale Corp. [Tomar Prods.],
that purported agreement as being against public policy 21 NY2d 621; Matter of Allied Van Lines [Hollander
and invalid. On the other hand, a too rigorous application Express & Van Co.], 29 NY2d 35), liquidation of insolvent
of this prohibition would impinge upon and weaken the insurance companies (Matter of Knickerbocker Agency
broad public policy favoring arbitration. Thus, the law [Holz], 4 NY2d 245), and usurious loans (Durst v Abrash,
will not presume an agreement void as illegal or against 22 AD2d 39, supra). The area of public policies which
public policy when it is capable of a construction which preclude the arbitration forum is not easily defined.
would make it consistent with the laws and valid (Curtis However, it seems apparent that in those cases where the
v Gokey, 68 NY 300, 304; Bigelow v Benedict, 70 NY 202, public policy pendulum has swung away from arbitration
204-205; Lorillard v Clyde, 86 NY 384, 387; Shedlinsky v the guiding criteria have been the pervasiveness of the
Budweiser Brewing Co., 163 NY 437, 439). In addition to regulatory scheme rather than the label of criminal
violation. Accordingly, in Matter of Kingswood Mgt. Petitioners argue in the alternative that by previously
Corp. (Salzman) (272 App Div 328), the court held that resorting to litigation of this very dispute, respondent has
the Emergency Price Control Act *587 was adopted from waived its right to arbitration. In this respect petitioners
urgent reasons of public policy which the Congress did not point to the commencement by respondent of its specific
intend to turn over to private arbitrators to administer. performance action on or about December 17, 1981 as
Again in Matter of Kramer & Uchitelle (Eddington Fabrics manifesting an unequivocal intention to forego any right
Corp.) (288 NY 467) the Court of Appeals found that an to arbitration. It is well established that an arbitration
agreement to arbitrate was put to an end by the presence provision in a contract like any other provision of a
of the Office of Price Administration. Finally, in Matter contract may be waived or abandoned by the parties, and
of Goldmar Hotel Corp. (Morning-side Studios) (283 App such waiver may be evidenced by their conduct in seeking
Div 935), the Appellate Division prevented a tenant from judicial relief instead of arbitration (Esquire Inds. v East
arbitrating its obligation to make repairs to the demised Bay Textiles, 68 AD2d 845). Moreover, a party entitled
premises where violations of the Multiple Dwelling Law to demand arbitration waives that right by bringing an
existed. In this latter case, the court was obviously action involving the same claim (Matter of Spirs Trading
more concerned with the health, safety and welfare of Co. v Occidental Yarns, 73 AD2d 542). Consequently, the
the citizenry (Multiple Dwelling Law, § 2) rather than courts have held that the right to compel arbitration is
with any attendant criminal violations (Multiple Dwelling waived by taking any action in a litigation that is deemed
Law, § 304). For this reason the court stated (supra, p 935) unequivocal and a sufficient use of the judicial process so
that, “The Municipal Court will be concerned solely with as to be inconsistent with the intention to arbitrate (Jade
the question of whether there were violations which were Press v Packard, 91 Misc 2d 820). Finally, it has been
not removed in time. It will not be concerned with any held that where there has been an intention to abandon
question as to whether repairs were otherwise necessary or the right to arbitration, that right is irrevocably lost (see
required by virtue of the contract between the parties.” Zurich Ins. Co. v Evans, 89 Misc 2d 717, 720; Matter of
Young v Crescent Dev. Co., 240 NY 244, 251).
It is, of course, the function of the courts to pass upon the
legality of the provision sought to be arbitrated and the Despite the myriad number of situations whereby
courts will deny arbitration where the performance which arbitration may be waived (i.e., participating in prior
is the subject of the demand for arbitration is prohibited litigation [Van Den Bogaerde v Staub, Warmbold & Assoc.
by statute (Matter of Dairymen's League Co-op. Assn. Int., 80 AD2d 517], seeking arrears in Family Court
[Conrad], 18 AD2d 321). This is not to say however that [Salisbury v Salisbury, 83 AD2d 990]) it is nevertheless
the mere mouthing of a criminal violation will suffice essential that a court find an intention to proceed in a
to invalidate an arbitration agreement. Rather, the court judicial arena. A review of the facts herein reveals that
will weigh the public policy considerations against the such an intention was not manifested by the respondent
parties' agreement to resolve their dispute outside of when it commenced the prior action for specific
the judicial forum. Since it is alleged by the respondent performance. It is quite clear that respondents' actions
that it no longer seeks to impose any obligation upon at that time were precipitated solely by the nonpayment
W & L Caterers, Inc. to procure a liquor license, any proceeding commenced against them on December 9, 1981
violations of the Alcoholic Beverage Control Law have and limited to the extent of seeking specific performance
been rendered moot. In any event, any violation of those with respect to petitioners' obligations to maintain the
laws, although concededly a “criminal violation” (see liquor license. What respondent intended was to maintain
Alcoholic Beverage Control Law, § 130), does not rise to the status quo rather than *589 forsaking its rights under
the level of a pervasive scheme of legislation which would arbitration. Most significantly that dispute was ultimately
oust an arbitrator from exercising jurisdiction on public resolved by arbitration in a rabbinical court.
policy grounds. This type of statutory violation simply
does not fit into the small category *588 of cases that Petitioners also emphasize the fact that respondent has
have been excepted from the parameters of arbitration on resorted to discovery proceedings in the instant litigation
public policy grounds. by serving a notice to admit. All of the actions taken
together, petitioners argue, bring the respondent within
the ambit of De Sapio v Kohlmeyer (35 NY2d 402) and
mandate a finding that the right to arbitration has been Moreover, the action taken by the plaintiff in Preiss/
Breismeister was no different in either quality or quantity
waived. In that case plaintiff, a block trader on the
than those taken by the respondent herein. Secondly, the
stock exchange, sued his former employer for defamation
case of De Sapio v Kohlmeyer (35 NY2d 402, supra) was
(supra, p 403). Although the defendant raised arbitration
relied on by the dissent in Preiss/Breismeister. Finally, the
as an affirmative defense, it obtained a deposition of
notice to admit which was served by the respondent on
plaintiff prior to moving for a stay of the action based
March 14, 1983, albeit one of the discovery mechanisms,
on arbitration (supra, p 404). On these facts the Court
which can be indicative of an intent to waive arbitration,
of Appeals held that the actions by defendant were “a
may not be so construed under the circumstances of
sufficiently affirmative use of the judicial process so as to
this case. Although the delineation between an intent
be inconsistent with a later motion to stay” (supra, p 406).
to waive the arbitration process and efforts to maintain
the status quo can rarely be made with absolute clarity,
Notwithstanding the raison d'etre of De Sapio v Kohlmeyer
the totality of circumstances herein does not warrant
(supra), that decision is not determinative in a situation
a finding that there was a waiver. There can be little
where the party attempting to enforce arbitration rights
doubt that respondent commenced the action for specific
has resorted to the judicial forum solely for the purpose
performance in 1981 solely to protect its status as a
of maintaining the status quo. In this respect the Court
tenant in the demised premises. Furthermore, the notice to
of Appeals has recently observed that there is neither
admit does little more than seek verification of petitioners'
waiver nor an election of remedies, where, as here, plaintiff
obligations under the various contractual agreements
moves in court for protective relief in order to preserve the
between respondent and the Pruzansky brothers as well
status quo while at the same time exercising its right under
as reiterating respondent's right to arbitration. For all
the contract to demand arbitration. (Preiss/Breismeister
of these reasons, the court finds that respondent did not
Architects v Westin Hotel Co. -- Plaza Hotel Div., 56 NY2d
waive the right to arbitrate this matter.
787.) For several cogent reasons this court holds that
Preiss/Breismeister is controlling on the issue of waiver.
Accordingly, petitioners' motion to stay arbitration is
denied in all respects. Respondent's motion to stay the
In the first place, the plaintiff therein commenced an
Civil Court from proceeding with the holdover action
action seeking an injunction and declaratory relief in order
under index No. 40911/83 pending the outcome of
to recover 80 architectural drawings alleged seized by that
arbitration is granted on condition that respondents
defendant. Thereafter that plaintiff served a deposition
continue to pay any and all moneys due under the lease.
notice, followed several days later by a demand for
Such payments may be accepted by petitioners without
arbitration. At the Appellate Division, Justice Silverman
prejudice to any rights they may have to the ultimate
writing for the dissent argued that “[having] decided
possession of the premises. Finally, both the motion to
against arbitration and in favor of court action with
punish petitioners for contempt and the motion seeking
respect to some portion of the relief to which plaintiff
a turn over of files in the possession of the law firm of
deems itself entitled *590 by reason of the same matters
Regosin, Edward, Stone & Feder are denied in all respects.
'arising out of, or relating to this Agreement or the breach
*591
thereof,' plaintiff has waived the right to arbitration as
to those matters” (Preiss/Breismeister Architects v Westin
Hotel Co. -- Plaza Hotel Div., 86 AD2d 844, 847). Needless Copr. (C) 2017, Secretary of State, State of New York
to say, this argument was rejected by the Court of Appeals.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Nature and Elements of Injury competitor's font technology did not establish
To make out a claim for direct copyright that any of competitor's licensees used
infringement, plaintiff must establish that (1) competitor's product to copy distributors'
it owns a copyright for a work and (2) there fonts, and thus did not establish direct
was unauthorized copying of the elements of infringement component of distributors'
the work that are original. contributory copyright infringement claim
against competitor; although distributors
4 Cases that cite this headnote contended that exhibits showed that
infringing acts occurred in the creation of
webpages, mere presence of webpages on
[6] Copyrights and Intellectual Property
their respective websites did not prove that
Certificate as Prima Facie Proof, in
proposition.
General
Certified copy of registration and statutory 1 Cases that cite this headnote
deposit for distributors' font software
provided prima facie evidence of distributors'
[9] Copyrights and Intellectual Property
ownership and validity of copyright in
Discovery
such font software for purposes of
distributors' claim against competitor for Expert could not, in action for contributory
alleged contributory copyright infringement. copyright infringement, testify at trial to his
17 U.S.C.A. § 410(c). opinion that graphics depicted in webpages
offered as exhibits demonstrated that acts
1 Cases that cite this headnote infringing on copyrights of font software
distributors necessarily occurred, given that
neither opinion nor its underlying basis
[7] Copyrights and Intellectual Property
was disclosed in expert's report. Fed.Rules
Other Works
Civ.Proc.Rule 26(a)(2), 28 U.S.C.A.
Printout of spreadsheet purporting to indicate
status of various trademarks and copyrights Cases that cite this headnote
held by font software distributors did
not establish distributors' ownership of
[10] Copyrights and Intellectual Property
valid copyright, given that, under cross-
Other Works
examination, distributors' witness testified
that although he believed printout was Testimony about respective number of
accurate at the time he printed it, he did competitor's fonts and non-competitor fonts
not know when that occurred, and could not available for competitor's customers to
testify as to when trademarks and copyrights use with its character shape recorder did
were registered or even if they were alive or not establish customers' direct copyright
dead either at the time of trial or at the time infringement of distributors' font software
printout was printed. for purposes of distributors' claim for
contributory copyright infringement, given
2 Cases that cite this headnote absence of evidence to tie that ratio to
proportion of such fonts that competitor's
customers actually used with character shape
[8] Copyrights and Intellectual Property
recorder.
Other Works
Webpage exhibits purporting to be tutorial Cases that cite this headnote
demonstrating use of distributors' font and
trademark with competitor's font technology
[11] Copyrights and Intellectual Property
and article providing example of use
Persons Liable
of distributors' font and trademark with
[24] Trademarks
[21] Trademarks Contributory Liability
Factors Considered in General Even if competitor's licensees were directly
Under test to determine likelihood of infringing trademarks of font software
confusion for purposes of trademark distributors, distributors failed to show that
infringement claim, court considers (1) the competitor either intentionally induced its
similarity of the marks, (2) the similarity of licensees to infringe distributors' marks or
the products, (3) the area and manner of licensed its font technology with actual or
concurrent use, (4) the degree of care likely constructive knowledge that its licensees
to be used by consumers, (5) the strength were using it to infringe on distributors'
of plaintiffs' mark, (6) whether any actual marks, precluding competitor's liability for
confusion exists, and (7) defendant's intent to contributory trademark infringement.
palm off its goods as those of the plaintiffs;
test is an equitable balancing test, with no Cases that cite this headnote
[27] Copyrights and Intellectual Property Cases that cite this headnote
Other Works
Competitor of font software distributors did
[33] Trademarks
not violate provision of Digital Millennium
Alphabetical Listing
Copyright Act (DMCA) barring distribution
of copies of works knowing that copyright ITC USHERWOOD.
management information was removed or
Cases that cite this headnote
altered without authority, inasmuch as there
was no evidence that competitor's licensees
used competitor's font technology with [34] Trademarks
distributors' fonts, and thus that competitor Alphabetical Listing
or its licensees engaged in proscribed conduct, TEMPUS.
or that, if licensees did use competitor's
product with distributors' fonts, competitor Cases that cite this headnote
TrueDoc technology “captures the character shapes that [3] [4] The capability of substantial noninfringing uses
result from executing the fonts.” (Id.) Another component of copying equipment may be a defense to liability
of the TrueDoc software called the Character Shape for contributory copyright infringement. Sony Corp. v.
Player uses data describing the character shapes in the Universal City Studios, 464 U.S. 417, 442, 104 S.Ct. 774,
PFR file to generate images for display or printing on an 78 L.Ed.2d 574 (1984). Even with evidence of substantial
output device. (Id. ¶ 14.) lawful use, however, “one who distributes a device with
the object of promoting its use to infringe copyright, as
shown by clear expression or other affirmative steps taken
IV. Bitstream's Licensing Of TrueDoc to foster infringement, is liable for the resulting acts of
A Bitstream licensee can use TrueDoc with Bitstream's infringement by third parties.” *884 Metro-Goldwyn-
fonts, as well as with the fonts of other vendors. (Id. Mayer Studios Inc. v. Grokster, Ltd., --- U.S. ----, ---- - ----,
¶ 15.) Bitstream developed the TrueDoc technology so 125 S.Ct. 2764, 2778-79, --- L.Ed.2d ---- (2005).
that it could license it with its own fonts or the fonts
of others who allowed their use with the TrueDoc
software. (Id. ¶ 16.) Bitstream did not design its TrueDoc A. Whether Bitstream's Licensees Have Directly
technology with the intent that Bitstream's licensees would Infringed Plaintiffs' Copyrights
use it with Plaintiffs' fonts absent permission. (Id. ¶ 17.) As a threshold matter, to establish liability for
Each of Bitstream's products containing the TrueDoc contributory copyright infringement, Plaintiffs must
technology has been marketed and licensed by Bitstream demonstrate that the licensees of the TrueDoc technology
with Bitstream's fonts, and it has been Bitstream's practice are themselves engaged in direct copyright infringement
to offer licenses to its own fonts when licensing this of Plaintiffs' copyrighted font software. See Sony Corp.,
technology. (Id. ¶ 18.) In most cases, Bitstream's current 464 U.S. at 434, 104 S.Ct. 774, 78 L.Ed.2d 574 (1984)
TrueDoc technology includes only pre-created PFR files (“To prevail, the [copyright owners] have the burden of
and the Character Shape Player for displaying the typeface proving that users of the Betamax have infringed their
designs stored in the PFR files. (Id. ¶ 20.) There is copyrights and that Sony should be held responsible for
no credible evidence of Bitstream's licensees using the that infringement”); A & M Records, Inc. v. Napster, Inc.,
TrueDoc technology with any of Plaintiffs' fonts. 239 F.3d 1004, 1013 n. 2 (9th Cir.2001) (citations omitted)
(“Secondary liability for copyright infringement does not
exist in the absence of direct infringement by a third
party”).
ANALYSIS
I. Monotype's Contributory Copyright Infringement [5] To make out a claim for direct copyright
infringement, a plaintiff must establish that (1) it owns
Claim 3
a copyright for a work and (2) there was unauthorized
[1] [2] To support a claim for contributory copyright
copying of the elements of the work that are original.
infringement, a plaintiff must demonstrate (1) direct
Aimster, 252 F.Supp.2d at 648.
infringement by a primary infringer, (2) the defendant's
knowledge of the infringement, and (3) the defendant's
material contribution to the infringement. Marobie-Fl, 1. Monotype's Ownership Of Its Copyrights
Inc. v. National Ass'n of Fire Equip. Distrib. & Northwest [6] Plaintiffs introduced into evidence Exhibit 24, a
Nexus, Inc., 983 F.Supp. 1167, 1178 (N.D.Ill.1997) (citing certified copy of the registration and statutory deposit for
Fonovisa, Inc. v. Cherry Auction, Inc., 76 F.3d 259, 264 font software identified as Tempus Sans. This registration
(9th Cir.1996)). A defendant is liable for contributory is prima facie evidence of Plaintiffs' ownership and validity
copyright infringement when it “with knowledge of of the copyright in the Tempus Sans font software. See 17
the infringing activity, induces. causes, or materially U.S.C. § 410(c); MyWebGrocer, LLC v. Hometown Info,
contributes to the infringing conduct of another.” In Inc., 375 F.3d 190, 192 (2d Cir.2004).
re Aimster Copyright Litig., 252 F.Supp.2d 634, 649
(N.D.Ill.2002); aff'd, 334 F.3d 643 (7th Cir.2003). [7] Plaintiffs also introduced Exhibit 1, a printout of a
spreadsheet purporting to indicate the status of various
trademarks and copyrights of Plaintiffs. Under cross
examination, however, Plaintiffs' witness testified that proposition. 6 Plaintiffs' counsel argued that these exhibits
while he felt that Exhibit 1 was accurate at the time are similar to crime scene photos, and therefore admissible
he printed it, he had no idea when he actually printed for this purpose. Adopting Plaintiffs' counsel's analogy,
it. (Tran. 247: 7-248:10.) Further, the witness could to the extent crime scene photos would be admissible in
not testify as to when the trademarks and copyrights a case, such photos alone typically show the existence of
were registered or even whether the trademarks and the results of a crime, for instance a dead body. In order
copyrights were alive or dead either at the time of trial or to prove that a murder occurred, the party admitting the
when the document was printed. (Tran. 249:20-268:123.) crime scene photos would need additional evidence to link
Accordingly, the Court gives very little weight to Exhibit the presence of that body to acts of homicide.
1. Plaintiffs have failed to prove ownership of a valid
copyright for any mark other than those for which it [9] Perhaps recognizing that the Court's limited
provided certificates of registration as discussed above. admission of Exhibits 15 and 17 did not prove that
the alleged underlying acts of infringement took place,
Plaintiffs attempted to elicit testimony from their expert
2. Whether There Is Sufficient Evidence Of Direct
that in his opinion, in order for the graphics of Exhibits 15
Infringement
and 17 to exist, infringing acts necessarily must have taken
[8] The Court agrees with Bitstream that Plaintiffs
place. Plaintiffs, however, could not point to any location
have failed to prove that a Bitstream licensee ever used
in Mr. Levantovsky's expert opinion where he had
the Character Shape Recorder to copy Plaintiffs' fonts.
disclosed this opinion, or its underlying basis, pursuant
As alleged evidence of such use, Plaintiffs submitted
to Rule 26(a)(2). FED.R.CIV.P. 26(a)(2). Accordingly,
Exhibits 15 and 17. Exhibit 15 purports to be a tutorial
the Court sustains Defendants' objection and strikes Mr.
demonstrating the use of Plaintiffs' Tempus Sans font and
Levantovsky's testimony related to his opinion that the
trademark with TrueDoc. Exhibit 17 purports to be an
graphics of Exhibits 15 and 17 demonstrate the infringing
article providing an example of the use of Plaintiffs' ITC
acts must have taken place, pursuant to Federal Rule of
Highlander font and trademark with TrueDoc. Plaintiffs
sought to admit into evidence the diagrams contained in Civil Procedure 26(a)(2). 7
Exhibit 15, along with the entirety of Exhibit 17. Plaintiffs
do not offer any other evidence related to these exhibits *886 Absent any evidence in the record to support the
other than the exhibits themselves and the testimony assertion that Exhibits 15 and 17 prove that Bitstream's
of their expert, Vladimir Levantovksy, who printed the Character Shape Recorder made copies of Plaintiffs fonts,
documents from the Internet. In particular, Plaintiffs do these exhibits do not establish by a preponderance of
not offer any testimony from the purported creators of the evidence that any direct copyright infringement has
occurred.
the websites evidenced by Exhibits 15 and 17. 4 The Court
refused to admit Exhibits 15 and 17 for the truth of the
[10] Besides the web tutorials, Plaintiffs also attempted
matter *885 asserted in them because these exhibits are
to prove instances of direct infringement by eliciting
inadmissible hearsay. The Court admitted Exhibits 15
testimony about the respective number of Bitstream
and 17 only for the limited purpose of proving that the
fonts and non-Bitstream fonts that were available for its
diagrams in those exhibits were displayed on the respective
customers to use with the Character Shape Recorder.
websites on the dates indicated on the exhibits. 5 Plaintiffs, however, did not offer any evidence to
tie that ratio to the proportion of such fonts that
The mere presence of Exhibits 15 and 17 on the web does Bitstream's customers actually used with the Character
not prove that any licensee used Bitstream's Character Shape Recorder. For example, while Plaintiffs proved that
Shape Recorder with Plaintiffs' fonts. Indeed, after a there are far more non-Bitstream fonts than Bitstream
full trial, it was plain that Plaintiffs were not arguing fonts generally available on websites owned by Bitstream,
that Exhibits 15 and 17, themselves, constituted acts of Plaintiffs never proved that the use of fonts with the
infringement. Rather, Plaintiffs introduced Exhibits 15 Character Shape Recorder mirrored that distribution
and 17 to demonstrate infringing acts that occurred in the of fonts. Accordingly, Plaintiffs did not prove that a
creation of those webpages. The mere presence of these
documents on their respective websites does not prove this
Bitstream licensee ever used any of their fonts with the any non-Bitstream font for which the distributor had
Character Shape Recorder. 8 not granted permission. Ms. Chagnon and Dr. Collins
further explained that Bitstream's statements that its
licensees could use TrueDoc with any font, reflected the
B. Whether Bitstream Had Knowledge Of The technical capabilities of the software, not how Bitstream
Infringement intended its licensees to use it. Further, they testified that
[11] [12] The knowledge element for contributory the reason for indicating that TrueDoc could be used
copyright infringement is met in those cases where a with any font, not just Bitstream fonts, was to entice
party has been notified of specific infringing uses of other font distributors to license their fonts to Bitstream
its technology and fails to act to prevent future such such that those non-Bitstream fonts could be used
infringing uses, or willfully blinds itself to such infringing with TrueDoc. (Tran. 121:6-20; 129:2-9; 131:11-132:6;
uses. Aimster, 334 F.3d at 650; Fonovisa, 76 F.3d at 264. 134:9-136:2; 658:16-18; 665:6-8; 665:19-666:4.)
interests to increase any infringement of other parties' test; no single factor is dispositive and courts may assign
fonts using TrueDoc. Rather, by distributing TrueDoc varying weights to each of the factors depending on the
along with Bitstream's own fonts, Bitstream sought to facts presented. CAE, 267 F.3d at 678 (citing Barbecue
increase sales of its fonts. Accordingly, there is no evidence Marx, Inc. v. 551 Ogden, Inc. 235 F.3d 1041, 1044 (7th
in the record 12 that supports that Bitstream acted with Cir.2000)). The Seventh Circuit has recognized, however,
the requisite intent to make it liable under Grokster's that the similarity of the marks, the defendant's intent, and
actual confusion are the “most important” factors. Id. at
intentional inducement of infringement cause of action. 13
686 (citing Eli Lilly, 233 F.3d at 462).
meet their burden of proving a likelihood of confusion. Plaintiffs' font names, there is no credible evidence that
With respect to the alleged uses of Plaintiffs' trademarks Corel did so under a license from Bitstream. Absent such
in Exhibits 15 and 17, there is no evidence related to the evidence, Plaintiffs have not proven that Bitstream in any
majority of the Seventh Circuit's likelihood of confusion way contributed to or induced any direct infringement.
factors. Promatek Indus., 300 F.3d at 812. 15 Accordingly,
Plaintiffs have failed to prove any instances of direct [24] Furthermore, even assuming that Bitstream's
licensees were infringing Plaintiffs' trademarks, Plaintiffs
infringement of Plaintiffs' trademarks. 16
failed to prove that Bitstream either intentionally induced
its licensees to infringe Plaintiffs' marks or that it licensed
Plaintiffs also introduced testimony from Mr.
TrueDoc with actual or constructive knowledge that its
Levantovsky that he used certain Corel products
licensees were using it to infringe Plaintiffs' marks. See
containing TrueDoc along with Plaintiffs' fonts. (Tran.
558-563.) This testimony, however, was outside the scope Inwood Labs., 456 U.S. at 854-55, 102 S.Ct. 2182. 18
of Mr. Levantovksy's expert report and the Court only Analyzing Bitstream's conduct related to its licensees'
admitted such testimony as fact testimony. Given the alleged use of Plaintiffs' trademarks demonstrates that
nature of Mr. Levantovsky's testimony, as discussed in Bitstream is not liable for such infringement. As discussed
footnotes 7 and 9 above, the Court gives little weight to above in Section I.B. and I.D., Plaintiffs rely on numerous
this evidence. Further, while Mr. Levantovksy testified statements in Bitstream documents that TrueDoc could
that the “name of the font that is used is readily available be used with any font. (See e.g., Ex. 45 at 1.) The
and accessible by the user” on Corel's Word Perfect credible testimony of Anna Chagnon and John Collins
software, he did not identify, nor did Plaintiffs submit explained that these statements reflected the technical
any evidence, to show the appearance of the font name. capabilities of the software, not how Bitstream intended
(Tran. 559:16-560:19.) Absent any other specific evidence, its licensees to use it. The reason for indicating that
the Court cannot find that the font name is likely to cause TrueDoc could be used with any font, not just Bitstream
fonts, was to entice other font distributors to license
consumer confusion. 17
their fonts to Bitstream such that those non-Bitstream
fonts could be used with TrueDoc. (Tran. 121:6-20;
B. Whether Bistream Intentionally Induced Its 129:2-9; 131:11-132:6; 134:9-136:2; 658:16-18; 665:6-8;
Licensees' Infringement 665:19-666:4.)
[23] Alternatively, even if Exhibits 15 or 17 did
evidence instances of direct infringement of Plaintiffs'
III. Monotype's DMCA Claim
trademarks, Plaintiffs failed to prove that those exhibits
[25] 17 U.S.C. § 1202(b) concerns the removal or
evidence infringements by Bitstream's licensees. Absent
alteration of copyright management information without
any evidence of the party *892 committing the alleged
the authority of the copyright owner or the law. Copyright
direct infringements in Exhibits 15 and 17, there is no
management information includes “the information set
evidence of any relationship between Bitstream and the
forth in a notice of copyright.” 17 U.S.C. § 1202(c). Section
alleged infringer and therefore no evidence of Bitstream's
1202(b) provides:
contribution to or inducement of that infringement.
No person shall, without the authority of the copyright
Additionally, regarding Mr. Levantovksy's alleged owner or the law-
viewing of Plaintiffs' font names on Corel's Word Perfect,
Plaintiffs never submitted any evidence that Bitstream (1) intentionally remove or alter any copyright
licensed the specific use of Plaintiffs' font names on Word management information,
Perfect. While Plaintiffs introduced testimony from Ms.
Chagnon that Bitstream licensed TrueDoc to Corel, she []
also plainly explained that she was not sure which specific
(3) distribute ... copies of works ... knowing that
Corel programs were included in that license. (Tran.
copyright management information has been removed
177:9-179:9.) In particular, Ms. Chagnon was uncertain
or altered without authority of the copyright owner or
whether TrueDoc was incorporated into Word Perfect.
the law,
(Id.) Therefore, even if Corel's Word Perfect does display
knowing, or, with respect to civil remedies under have used the Character Shape Recorder with any of
Plaintiffs' fonts, Plaintiffs have failed to show that
section 1203, having reasonable *893 grounds to
Bitstream, or its licensees, have “distribute[d].... copies
know, that it will induce, enable, facilitate, or conceal
of works .... knowing that copyright management
an infringement of any right under this title.
information has been removed or altered without
17 U.S.C. § 1202(b). Section 1202(b)(1) applies only to authority of the copyright owner or the law [and] knowing,
the removal of copyright management information on (or or, [ ] having reasonable grounds to know, that it will
from) a plaintiff's product or original work. Kelly v. Arriba induce, enable, or facilitate, or conceal an infringement
Soft Corp., 77 F.Supp.2d 1116, 1122 (C.D.Cal.1999); aff'd of any right under this title.” See 17 U.S.C. § 1202(b)
in part, rev'd in part, 280 F.3d 934 (9th Cir.2002). (3). Further, as discussed above in Section I.B of this
Analysis, even if Bitstream's licensees did use TrueDoc
with Plaintiffs' fonts, there is no evidence that Bitstream
A. Section 1202(b)(1) knowingly or intentionally contributed to such use.
[26] As discussed in Section I.A.2. of this Analysis,
Plaintiffs have failed to show that Bitstream's licensees
have used the Character Shape Recorder with any of
CONCLUSION
Plaintiffs' fonts. Therefore, Plaintiffs have failed to show
that Bitstream, or any of its licensees, “intentionally For the reasons discussed above, Bitstream is not liable
remove[d] or alter [ed] any copyright management
under any of Plaintiffs' claims of contributory copyright
information [ ] knowing, or, [ ] having reasonable grounds infringement, contributory trademark infringement, or
to know that it will induce, enable, facilitate or conceal an infringement under the DMCA. Because the Court finds
infringement of any right under this title.” See 17 U.S.C. that Bitstream is not liable under any of Plaintiffs' claims,
§ 1202(b). Moreover, as discussed above in Section I.B of the Court denies as moot Bitstream's motion to dismiss
this Analysis, even if Bitstream's licensees did use TrueDoc Plaintiffs' copyright claim and its motion for judgment on
with Plaintiffs' fonts, there is no evidence that Bitstream partial findings.
knowingly or intentionally contributed to such use.
All Citations
B. Section 1202(b)(3)
[27] As with the Section 1202(b)(3) analysis, because 376 F.Supp.2d 877, 77 U.S.P.Q.2d 1424
Plaintiffs have failed to show that Bitstream's licensees
Footnotes
1 Plaintiffs agree that the “typeface,” the design and appearance of the executed “font,” is not copyrightable and is not the
subject of this litigation. (Tran. 9:9-14.) When the parties referred to the “font,” on the other hand, they referred to the
underlying computer code, that when used on appropriate hardware and software, generated a human-readable version
of the typeface design. Plaintiffs contend that the unauthorized copying of this “font,” constitutes copyright infringement.
(Tran. 9:22-10:1.)
2 Plaintiffs concede that they do not allege infringement against the TrueDoc software when it is licensed without the
Character Shape Recorder, as is typically the case. (Tran. 29:5-17.)
3 Bitstream also argues that Plaintiffs copyright infringement claim should be dismissed because it never alleged that it has
registered the asserted copyrights. Because the Court finds that Plaintiffs have failed to prove their copyright infringement
claim, the Court does not reach the issue of whether Plaintiffs failure to allege copyright registration in its pleadings is
fatal to its claims at trial.
4 Both in a motion in limine, (R. 86-1; Def.'s Mot), and at trial, Bitstream objected to Exhibits 15-17 for lack of authenticity,
as inadmissible hearsay, and as irrelevant. The Court denied Bitstream's motion in limine without prejudice because it
was not clear how Plaintiffs intended to use Exhibits 15-17 at trial. At trial, Bitstream renewed its objections. The Court
allowed Plaintiffs counsel to question Plaintiffs' expert witness, Vladimir Levantovsky, on the exhibits in order to lay the
proper foundation.
5 The Court does not reach the issue of whether Exhibits 15 and 17 are irrelevant because they evidence alleged
infringements that occurred outside the relevant statute of limitations. As discussed in the Court's Order of June 17, 2005,
the relevant statute of limitations does not begin to run until the Plaintiff is aware of its cause of action. (R. 101-1; Ct.'s
Minute Order of June 17, 2005.) Because the Court finds that Bitstream is not liable under any of Plaintiffs' claims, the
Court need not reach Bitstream's laches defense and therefore does not reach the issue of when Plaintiffs became aware
of their claims against Bitstream.
6 Exhibits 15 and 17 also lack authentication to the extent they were being offered to show anything more than what was
present on the respective websites on the respective dates. While Mr. Levantovsky testified that Exhibits 15 and 17 were
true and accurate copies of what was present on those websites at those times, he was not in a position to confirm the
authenticity of the actual information on those websites, i.e., the alleged steps taken by an author of the tutorials and the
functioning of TrueDoc. Courts have recognized that printouts from websites should be closely scrutinized for reliability.
United States v. Jackson, 208 F.3d 633, 637 (7th Cir.2000) (“[A]ny evidence procured off the Internet is adequate for
almost nothing, even under the most liberal interpretations of the hearsay exception rules”) (quoting St. Clair v. Johnny's
Oyster & Shrimp, Inc., 76 F.Supp.2d 773, 775 (S.D.Tex.1999)).
7 In their closing argument, Plaintiffs asserted that Mr. Levantovsky's comparison of fonts was not expert testimony, but
rather fact testimony. To the extent Mr. Levantovsky was merely comparing fonts based on his personal experience with
those fonts, the Court accepts that testimony as Mr. Levantovky's lay opinion. Nonetheless, based on the nature of the
fonts at issue, and Mr. Levantovky's admitted difficulty in viewing the fonts due to the poor quality of the copied exhibits,
the Court gives this fact testimony little weight. (Tran. 537:1-538:5.)
8 Plaintiffs also argued that Bitstream admitted to the alleged direct infringement in its Local Rule 56.1 statement during
the summary judgment stage. (Pl.'s Ex. 69A at F28, AF13.) These statements do not constitute admissions on the part
of Bitstream. With respect to Bitstream's Fact No. 28, Bitstream is attacking the nature of certain instances that Plaintiffs
“point” to. Bitstream is not admitting that those specific instances in fact occurred. Additionally, Plaintiffs' denied this fact
and actually pointed out that Bitstream was making an argument, not setting forth a fact. Regarding Bitstream's response
to Plaintiffs' Additional Fact No. 13, Bitstream again attacked the nature of the alleged instances. While Bitstream does not
specifically dispute that the instances occurred, there is no indication that Bitstream is admitting that they did. Further, the
Court admitted the underlying documents cited by Plaintiffs as supporting their Additional Fact No. 13 for limited purposes.
As admitted, those documents, Exhibits 15 and 17, are insufficient to substantiate Plaintiffs' Additional Fact No. 13.
9 In general, the Court questioned the credibility of Plaintiffs' expert, Vladimir Levantovsky's. The Court bases this finding
on the demeanor of Mr. Levantovksy as he testified, (See e.g., Tran. 586:22-24; 590:6-13; 597:2-19), his documented
involvement and interest in discussing with other potential witnesses how they could answer certain likely questions in
this litigation, (See Def.'s Ex. 106; Tran. 581:17-584:1), his bias given that he is a Monotype employee and served as
Monotype's corporate representative during trial, and the lack of corroborating documentary evidence.
10 Plaintiffs failed to provide any reliable estimate of the magnitude of infringing uses compared to noninfringing uses of the
Character Shape Recorder. Under Seventh Circuit law, such an estimate is necessary. See Aimster, 334 F.3d at 649
(“What is true is that when a supplier is offering a product or service that has noninfringing as well as infringing uses,
some estimate of the respective magnitudes of these uses is necessary for a finding of contributory infringement”).
11 Napster was a competing file-sharing service, prior to it losing its own court fight regarding copyright infringement. See A
& M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir.2001). The district court in Grokster, found that the defendants
specifically made plans to attract Napster's customer base in the event the courts either shutdown Napster or required it
to change it service to avoid copyright infringement. Grokster, Ltd., 545 U.S. 913, 125 S.Ct. 2764, 162L.Ed.2d 781.
12 The finding of no intent to induce infringement is especially appropriate here after a full bench trial. In Grokster, the
Supreme Court was analyzing the evidence in the light most favorable to the defendants to determine whether the
evidence of intent was sufficient to survive defendants' motion for summary judgment of no liability.
13 To the extent Plaintiffs argue that Bitstream should have known of the alleged infringing uses of TrueDoc and therefore
had constructive knowledge of such infringement, the Supreme Court expressly exempted such a state of mind from its
intentional inducement cause of action. Grokster, 545 U.S. 913, ---- - ----, 125 S.Ct. 2764, 2779-80, 162L. Ed.2d 781
(“mere knowledge of infringing potential or of actual infringing uses would not be enough here to subject a distributor
to liability”.)
14 The other trademarks for which Plaintiffs provided federal registrations were: ITC TEMPUS, registered June 11, 2002 (Ex.
25), TEMPUS, registered September 10, 2002 (Ex. 26), ITC MENDOZA ROMAN (Ex. 28), March 23, 1993, GALLIARD,
registered July 15, 2003 (Ex. 29), ITC SLIMBACH, registered February 7, 1989 (Ex. 30), and ITC USHERWOOD,
registered April 22, 1986 (Ex. 31).
15 In particular, without evidence of how the authors of Exhibits 15 and 17 were using the marks, there is no evidence of
the similarity of the products, the area and manner of concurrent use, the degree of care likely to be used by consumers,
actual confusion, or defendant's intent to palm off its good as those of the plaintiffs. Balancing the factors, there is no
likelihood of confusion in the specific uses allegedly evidenced in Exhibits 15 and 17.
16 Also as discussed in Section I.A.2 in this Analysis, to the extent Plaintiffs seek to prove direct trademark infringement by
proving the relative proportion of non-Bitstream and Bitstream fonts available on the market, Plaintiffs failed to tie that
relationship to that of the fonts actually used with the Character Shape Recorder.
17 Plaintiffs did not offer any evidence from third parties such as Corel. There is also no evidence that Plaintiffs ever even
attempted to seek discovery from third parties such as Corel.
18 Indeed, in Sony, the Supreme Court recognized that the doctrine of indirect trademark infringement was more narrow
than the doctrine of contributory copyright infringement. See Sony, 464 U.S. at 439 n. 19, 104 S.Ct. 774. Therefore, given
that the Court has found that Bitstream is not liable for contributory infringement of Plaintiffs copyrighted font software, it
is unlikely that Bitstream could simultaneously be liable for contributorily infringing Plaintiffs trademarks associated with
that font software. Id.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Decision whether to dismiss federal action Decision whether to stay litigation among
because of parallel state court litigation does nonarbitrating parties pending outcome of
not rest on mechanical checklist, but on arbitration is left to district court, or to state
careful balancing of important factors as they trial court under applicable state procedural
apply in given case, with balance heavily rules, as matter of its discretion to control its
weighted in favor of exercise of jurisdiction. docket. 9 U.S.C.A. §§ 1 et seq., 4.
1244 Cases that cite this headnote 455 Cases that cite this headnote
563 Cases that cite this headnote 2117 Cases that cite this headnote
construction of contract language itself or Even though only issue formally appealed to
allegation of waiver, delay, or like defense to Court of Appeals was propriety of district
arbitrability. 9 U.S.C.A. § 2. court's order staying action seeking order
compelling arbitration under Arbitration Act,
4068 Cases that cite this headnote pending resolution of state court suit, Court of
Appeals acted within its authority in deciding
[14] Courts that contractual dispute was arbitrable under
Scope and effect of proceedings pending Arbitration Act and contract, where court had
in state court briefs and evidentiary submissions from both
parties on merits of arbitrability. 9 U.S.C.A.
Presence of federal law issues must always
§ 4.
be a major consideration weighing against
surrender of federal jurisdiction out of 325 Cases that cite this headnote
deference to parallel litigation brought in state
court.
**929 Syllabus *
[15] Alternative Dispute Resolution
Stay of Proceedings Pending Arbitration *1 Petitioner, a hospital located in North Carolina,
State courts, as much as federal courts, are entered into a contract with respondent contractor, an
obliged to grant stays of litigation under Alabama corporation, for construction of additions to the
section of Arbitration Act referring to suit hospital building. Contract disputes were to be initially
“in any of the courts of the United States.” 9 referred to the architect who was hired to design and
U.S.C.A. § 3. oversee the construction project. Disputes decided by
the architect or not decided within a specified time
127 Cases that cite this headnote could be submitted to binding arbitration under an
arbitration clause in the contract. Subsequently, during
construction, respondent submitted claims to the architect
[16] Action
for extended overhead or increase in construction costs
Actions in state and federal courts
due to petitioner's delay or inaction. But the claims
Fact that district court stayed federal court
were not resolved, and petitioner refused to pay them.
action rather than dismissing it outright
Petitioner then filed an action in a North Carolina
did not render inapplicable exceptional
state court against respondent and the architect, seeking
circumstances test for determining propriety
a declaratory judgment that there was no right to
of district court decision to defer to parallel
arbitration, that petitioner was not liable to respondent,
litigation brought in state court.
and that if it was liable it would be entitled to indemnity
222 Cases that cite this headnote from the architect. A few days later petitioner obtained
an ex parte injunction from the state court forbidding
respondent to take any steps toward arbitration, but when
[17] Federal Courts respondent objected the stay was dissolved. Respondent
In general; necessity then filed a diversity-of-citizenship action in Federal
Ordinarily, Court of Appeals is not expected District Court, seeking an order compelling arbitration
to pass on issues not decided in district court. under § 4 of the United States Arbitration Act. The
District Court stayed the action pending resolution of
6 Cases that cite this headnote the state-court suit because the two suits involved the
identical issue of the arbitrability of respondent's claims.
[18] Federal Courts The Court of Appeals, holding that it had jurisdiction
Matters of Substance under 28 U.S.C. § 1291, reversed the *2 District Court's
stay order and remanded the case with instructions to (c) There was no showing of the requisite exceptional
enter an order to arbitrate. circumstances to justify the District Court's stay order.
Concededly, there was no assumption by either court of
Held: jurisdiction over any res or property or any contention
that the federal court was any less convenient to the parties
1. The District Court's stay order was appealable as a than the state court. The other factors—avoidance of
“final decision” to the Court of Appeals under 28 U.S.C. piecemeal litigation and the order in which the current
§ 1291. Since the order was based on the conclusion that forums obtained jurisdiction—rather than supporting the
the federal and state actions involved the identical issue stay, counsel against it. The fact that if respondent obtains
of arbitrability, and this issue was the only substantive an arbitration order, petitioner will be forced to resolve
issue present in the federal action, a stay of the federal *3 the dispute with respondent and the related dispute
action pending resolution of the state action meant that with the architect in different forums is not the result of
there would be no further litigation in the federal court. any choice between federal and state courts but occurs
Thus, respondent was “effectively out of court” so that because the relevant federal law, the Arbitration Act,
the stay order amounted to a dismissal of the federal requires piecemeal resolution when necessary to give
action. Moreover, even if the stay order was not final effect to an arbitration agreement. Hence, the decision to
for appealability purposes, it was nevertheless appealable allow the issue of arbitrability to be decided in the state
within the finality rule exception that applies where rather than in the federal court does not cause piecemeal
an order conclusively determines the disputed question, resolution of the parties' underlying disputes. And the fact
resolves an important issue completely separate from the that the state-court suit was filed before the federal suit
merits, and is effectively unreviewable on appeal from a is not sufficient reason to justify the stay order, where
final judgment. Cohen v. Beneficial Corp., 337 U.S. 541, because petitioner's refusal to arbitrate did not occur until
69 S.Ct. 1221, 93 L.Ed. 1528. Pp. 933–935. less than a day before it filed its state suit, respondent
had no reasonable opportunity to file its federal suit first.
2. The District Court abused its discretion in granting the Moreover, priority should not be measured exclusively by
stay. Pp. 935–943. which complaint was filed first, but rather in terms of how
much progress has been made in the two actions. Here, no
(a) A federal district court may decline to exercise substantial proceedings had taken place in the state suit
its jurisdiction because of parallel state-court litigation at the time of the District Court's stay order, whereas in
only in exceptional circumstances; only the clearest of the federal suit the parties had taken most of the steps
justifications will warrant dismissal. Colorado River Water necessary to a resolution of the arbitrability issue. The stay
Conservation District v. United States, 424 U.S. 800, order thus frustrated the Arbitration Act's policy of rapid
818–819, 96 S.Ct. 1236, 1246–47, 47 L.Ed.2d 483. The and unobstructed enforcement of arbitration agreements.
decision whether to stay or dismiss a federal action on Pp. 938–941.
grounds of wise judicial administration does not rest on
a mechanical checklist, but on a careful balancing of the (d) The fact that federal law in the terms of the Arbitration
important factors (which court first assumed jurisdiction Act governs the issue of the arbitrability of the dispute
over property involved in the litigation, inconvenience between petitioner and respondent in either the state or
of the federal forum, avoidance of piecemeal litigation, the federal court is another factor militating against the
and the order in which the concurrent forums obtained District Court's stay order. See Calvert, supra. Pp. 941–
jurisdiction) relevant to the decision as they apply in a 942.
given case, with the balance heavily weighted in favor of
the exercise of jurisdiction. Ibid. Pp. 935–937. (e) Finally, an important reason against allowing a stay
is the probable inadequacy of the state suit to protect
**930 (b) The exceptional-circumstances test set forth respondent's rights, since it is doubtful that respondent
in Colorado River, supra, was not undermined by Will v. could obtain from the state court an order compelling
Calvert Fire Insurance Co., 437 U.S. 655, 98 S.Ct. 2552, 57 petitioner to arbitrate. Pp. 942–943.
L.Ed.2d 504. Pp. 937–938.
(f) The fact that the District Court stayed the federal business in Alabama. In July 1975, Mercury and the
action rather than dismissing it outright does not Hospital entered into a contract for the construction of
render the Colorado River exceptional-circumstances test additions to the Hospital building. The contract, drafted
inapplicable. P. 943. by representatives of the Hospital, included provisions for
resolving disputes arising out of the contract or its breach.
3. The Court of Appeals acted within its authority in All disputes involving interpretation of the contract or
deciding that the contractual dispute was arbitrable under performance of the construction work were to be referred
the Arbitration Act and the contract, where the court had in the first instance to J.N. Pease Associates (“Architect”),
briefs and evidentiary submissions from both parties on an independent architectural firm hired by the Hospital
the merits of arbitrability. Pp. 943–944. to design and oversee the construction project. With
certain *5 stated exceptions, 1 any dispute decided by the
656 F.2d 933 (CA4 1981), affirmed. Architect (or not decided by it within a stated time) could
be submitted by either party to binding arbitration under
a broad arbitration clause in the contract:
Attorneys and Law Firms
the Architect discussed the claims over several months, arbitration. Mercury objected, and the stay was dissolved
substantially reducing the amount of the claims. on October 27. As soon as the stay was lifted, Mercury
According to the Hospital, it first learned of the filed the present action in the District Court, seeking an
existence of Mercury's claims in April 1980; its lawyers order compelling arbitration under § 4 of the Arbitration
assumed active participation in the claim procedure in Act, 9 U.S.C. § 4. 4 Jurisdiction was based on diversity of
May. The parties differ in their characterizations of citizenship. On the Hospital's motion, the District Court
the events of the next few months—whether there were stayed Mercury's federal-court suit pending resolution of
“ongoing negotiations,” or merely an “investigation” by the state-court suit because the two suits involved the
the Hospital. In any event, it appears from the record that identical issue of the arbitrability of Mercury's claims.
lawyers for the Hospital requested additional information App. to Pet. for Cert. A–38.
concerning Mercury's claims. As a result, on August 12,
1980, Mercury gave a detailed presentation of its claims *8 Mercury sought review of the District Court's stay
at a meeting attended by Mercury's representatives and by both a notice of appeal and a petition for mandamus.
lawyers, the Hospital's representatives and lawyers, and A panel of the Court of Appeals for the Fourth Circuit
representatives of the Architect. Mercury agreed to send heard argument in the case, but before the panel issued
copies of its files to an expert hired by the Hospital, and any decision, the Court informed the parties that it would
the parties agreed to meet again on October 13. consider the case en banc. After reargument, the en banc
Court held that it had appellate jurisdiction over the case
On October 6, Mercury's counsel telephoned the under 28 U.S.C. § 1291. It reversed the District Court's
Hospital's counsel to confirm that the scheduled meeting stay order and remanded the case to the **933 District
would go forward. The Hospital's counsel said he would Court with instructions for entry of an order to arbitrate.
call back the next day. When he did, he informed
Mercury's counsel that the Hospital would pay nothing on
Mercury's claim. He also said that the Hospital intended
to file a declaratory judgment action in North Carolina II
state court.
Before we address the propriety of the District Judge's
stay order, we must first decide whether that order was
*7 True to its word, the Hospital filed an action on
appealable to the Court of Appeals under 28 U.S.C. §
the morning of October 8 in the Superior Court of
Guilford County, North Carolina, naming Mercury and 1291. 5
the Architect as defendants. The complaint alleged that
Mercury's claim was without factual or legal basis and [1] [2] Mercury sought appellate review through two
that it was barred by the statute of limitations. It alleged alternative routes—a notice of appeal under § 1291, and a
that Mercury had lost any right to arbitration under the petition for mandamus under the All Writs Act, 28 U.S.C.
contract due to waiver, laches, estoppel, and failure to § 1651. 6 Mercury expressly stated that its appeal was
make a timely demand for arbitration. The complaint also based only on § 1291, and not on 18 U.S.C. § 1292 (relating
alleged various delinquencies on the part of the Architect. to interlocutory appeals). The Hospital contends that the
As relief, the Hospital sought a declaration that there was order appealed from was not a “final decision” within §
no right to arbitration; a stay of arbitration; a declaration 1291. We *9 disagree and hold that the stay order was
that the Hospital bore no liability to Mercury; and a final for purposes of appellate jurisdiction.
declaration that if the Hospital should be found liable in
any respect to Mercury, it would be entitled to indemnity Idlewild Liquor Corp. v. Epstein, 370 U.S. 713, 82 S.Ct.
from the Architect. The complaint was served on Mercury 1294, 8 L.Ed.2d 794 (1962), is instructive in this regard.
on October 9. On that same day, Mercury's counsel mailed There the plaintiff brought a federal suit challenging the
a demand for arbitration. constitutionality of a state statute. The District Judge
declined to convene a three-judge court and stayed the
On October 15, without notice to Mercury, the Hospital federal suit under the Pullman abstention doctrine. 7
obtained an ex parte injunction from the state court We held that the District Court's action was final and
forbidding Mercury to take any steps directed toward therefore reviewable by the Court of Appeals, stating:
[4] *11 In any event, if the District Court order were not We turn now to the principal issue to be addressed, namely
final for appealability purposes, it would nevertheless be the propriety of the District Court's decision to stay this
appealable within the exception to the finality rule under federal suit out of deference to the parallel litigation
Cohen v. Beneficial Loan Corp., 337 U.S. 541, 69 S.Ct. brought in state court. Colorado River Water Conservation
1221, 93 L.Ed. 1528 (1949). The factors required to show District v. United States, 424 U.S. 800, 96 S.Ct. 1236,
finality under this exception have been summarized as 47 L.Ed.2d 483 (1976), provides persuasive guidance in
follows: deciding this question.
Shortly thereafter, a defendant in that suit *14 sought federal relations, the circumstances permitting the
to join the United States in a state-court proceeding for dismissal of a federal suit due to the presence of a
the comprehensive adjudication and administration of all concurrent state proceeding for reasons of wise judicial
water rights within the river system that was the subject administration are considerably more limited than the
of the federal-court suit. The District Court dismissed the circumstances appropriate for abstention. The former
federal suit, holding that the abstention doctrine required circumstances, though exceptional, do nevertheless
deference to the state-court proceedings. The Court of exist.” Id., at 818, 96 S.Ct., at 1246.
Appeals for the Tenth Circuit reversed, holding that the We declined to prescribe a hard and fast rule for
suit of the United States was within the District Court's dismissals of this type, but instead described some of the
jurisdiction under 28 U.S.C. § 1345 and that abstention factors relevant to the decision.
was inappropriate. We reversed the judgment of the Court
of Appeals and affirmed the judgment of the District “It has been held, for example,
Court dismissing the complaint. that the court first assuming
jurisdiction over property may
We began our analysis by examining the abstention exercise that jurisdiction to
doctrine in its various forms. We noted: **937 the exclusion of other
courts.... In assessing the
“Abstention from the exercise of federal jurisdiction is appropriateness of dismissal in
the exception, not the rule. ‘The doctrine of abstention, the event of an exercise of
under which a District Court may decline to exercise concurrent jurisdiction, a federal
or postpone the exercise of its jurisdiction, is an court may also consider such
extraordinary and narrow exception to the duty of a factors as the inconvenience
District Court to adjudicate a controversy properly of the federal forum; the
before it. Abdication of the obligation to decide desirability of avoiding piecemeal
cases can be justified under this doctrine only in the litigation; and the order in which
exceptional circumstances where the order to the parties jurisdiction was obtained by the
to repair to the State court would clearly serve an concurrent forums. No one factor
important countervailing interest.’ ” 15 is necessarily determinative; a
carefully considered judgment
After canvassing the three categories of abstention, we taking into account both the
conclude that none of them applied to the case at hand. obligation to exercise jurisdiction
*16 and the combination of
424 U.S., at 813–817, 96 S.Ct., at 1244–46. 16
factors counselling against that
exercise is required. Only the
Nevertheless, we held that the District Court's dismissal
clearest of justifications will
was proper on another ground—one resting not on
warrant dismissal.” d., at 818–819,
considerations of state-federal comity or on avoidance
96 S.Ct., at 1246–47 (emphasis
of constitutional *15 decisions, as does abstention,
added; citations omitted).
but on “considerations of ‘[w]ise judicial administration,
giving regard to conservation of judicial resources and [5] As this passage makes clear, the decision whether
to dismiss a federal action because of parallel state-
comprehensive disposition of litigation.’ ” 17 We noted
court litigation does not rest on a mechanical checklist,
that “ ‘the pendency of an action in the state court is no bar
but on a careful balancing of the important factors as
to proceedings concerning the same matter in the Federal
they apply in a given case, with the balance heavily
court having jurisdiction,’ ” and that the federal courts
weighted in favor of the exercise of jurisdiction. The
have a “virtually unflagging obligation ... to exercise the
weight to be given to any one factor may vary greatly
jurisdiction given them.” 18 We continued: from case to case, depending on the particular setting
of the case. Colorado River itself illustrates this principle
in operation. By far the most important factor in our
“Given this obligation, and the absence of weightier
decision to approve the dismissal there was the “clear
considerations of constitutional adjudication and state-
agreement: a stay of litigation in any case raising a dispute signed a contract containing an arbitration clause, but one
referable to arbitration, 9 U.S.C. § 3, and an affirmative party alleged that there had been fraud in the inducement
order to engage in arbitration, § 4. Both of these sections of the entire contract (although the alleged fraud did
call for an expeditious and summary hearing, with only not go to the arbitration clause in particular). The issue
restricted inquiry into factual issues. 27 Assuming that the before us was whether the issue of fraud in the inducement
state **941 court would *23 have granted prompt relief was itself an arbitrable controversy. We held that the
language and policies of the Act required the conclusion
to Mercury under the Act, 28 there still would have been
that the fraud issue was arbitrable. Id., at 402–404, 87
an inevitable delay as a result of the District Court's stay.
S.Ct., at 1805–06. Although our holding in Prima Paint
The stay thus frustrated the statutory policy of rapid and
extended only to the specific issue presented, the courts of
unobstructed enforcement of arbitration agreements.
appeals have since consistently concluded that questions
of arbitrability must be addressed with a healthy regard
for the federal policy favoring arbitration. We agree. The
C Arbitration Act establishes that, as a matter of federal
law, any doubts concerning the scope of arbitrable issues
Besides the four factors expressly discussed in Colorado *25 should be resolved in favor of arbitration, whether
River, there is another that emerges from Calvert the problem at hand is the construction of the contract
—the fact that federal law provides the rule of language itself or an allegation of waiver, delay, or a like
decision on the merits. The state-versus-federal-law factor
defense to arbitrability. 31
was of ambiguous relevance in Colorado River. 29 In
Calvert, however, both the four-vote dissenting opinion **942 [14] To be sure, the source-of-law factor has less
and Justice BLACKMUN's opinion concurring in the significance here than in Calvert, since the federal courts'
judgment pointed out that the case involved issues jurisdiction to enforce the Arbitration Act is concurrent
of federal law. 437 U.S., at 667, 98 S.Ct., at 2559
with that of the state courts. 32 But we emphasize that our
(BLACKMUN, J., concurring in the judgment); *24
task in cases such as this is not to find some substantial
id., at 667–668, 98 S.Ct., at 2560–64 (BRENNAN, J.,
reason for the exercise of federal jurisdiction by the
dissenting). See also Colorado River, 424 U.S., at 815, n.
district court; rather, the task is to ascertain whether
21, 96 S.Ct., at 1245, n. 21. It is equally apparent that this
there exist “exceptional” circumstances, the “clearest of
case involves federal issues.
justifications,” that can suffice under Colorado *26 River
to justify the surrender of that jurisdiction. Although in
[12] [13] The basic issue presented in Mercury's federal
some rare circumstances the presence of state-law issues
suit was the arbitrability of the dispute between Mercury
may weigh in favor of that surrender, see n. 29, supra,
and the Hospital. Federal law in the terms of the
the presence of federal-law issues must always be a major
Arbitration Act governs that issue in either state or federal
court. Section 2 is the primary substantive provision of consideration weighing against surrender. 33
the Act, declaring that a written agreement to arbitrate
“in any maritime transaction or a contract evidencing
a transaction involving commerce ... shall be valid, D
irrevocable, and enforceable, save upon such grounds
as exist at law or in equity for the revocation of any [15] Finally, in this case an important reason against
contract.” 9 U.S.C. § 2. 30
Section 2 is a congressional allowing a stay is the probable inadequacy of the state-
declaration of a liberal federal policy favoring arbitration court proceeding to protect Mercury's rights. We are
agreements, notwithstanding any state substantive or not to be understood to impeach the competence or
procedural policies to the contrary. The effect of the procedures of the North Carolina courts. Moreover, state
section is to create a body of federal substantive law courts, as much as federal courts, are obliged to grant stays
of arbitrability, applicable to any arbitration agreement of litigation under § 3 of the Arbitration Act. 34 It is less
within the coverage of the Act. In Prima Paint Corp. clear, however, whether the same is true of an order to
v. Flood & Conklin Mfg. Corp., 388 U.S. 395, 87 S.Ct. compel arbitration under § 4 of the Act. 35 We need not
1801, 18 L.Ed.2d 1270 (1967), for example, the parties had resolve that question here; it suffices to say that there was,
at a minimum, substantial room for doubt that Mercury dismisses. See 17 C. Wright, A. Miller & E. Cooper,
could obtain from the state court an order compelling Federal Practice and Procedure § 4247, at 517–519 (1978).
*27 the Hospital to arbitrate. 36 In many cases, no doubt,
a § 3 stay is quite **943 adequate to protect the right Moreover, assuming that for some unexpected reason
to arbitration. But in a case such as this, where the party the state forum does turn out to be inadequate in some
opposing arbitration is the one from whom payment or respect, the Hospital's argument fails to make out any
performance is sought, a stay of litigation alone is not genuine difference between a stay and a dismissal. It is
enough. It leaves the recalcitrant party free to sit and do true that Mercury could seek to return to federal court
nothing—neither to litigate nor to arbitrate. If the state if it proved necessary; but that would be equally true if
court stayed litigation pending arbitration but declined the District Court had dismissed the case. It is highly
to compel the Hospital to arbitrate, Mercury would have questionable whether this Court would have approved a
no sure way to proceed with its claims except to return dismissal of a federal suit in Colorado River (or in any of
to federal court to obtain a § 4 order—a pointless and the abstention cases, see supra, at 936–937) if the federal
wasteful burden on the supposedly summary and speedy courts did not remain open to a dismissed plaintiff who
procedures prescribed by the Arbitration Act. later demonstrated the inadequacy of the state forum.
E *29 V
[16] The Hospital argues that the Colorado River test In addition to reversing the District Court's stay, the
is somehow inapplicable because in this case the District Court of Appeals decided that the underlying contractual
Court merely stayed the federal litigation rather than dispute between **944 Mercury and the Hospital is
dismissing the suit outright, as in Colorado River. It arbitrable under the Arbitration Act and the terms
contends that Mercury remains free to seek to reopen the of the parties' arbitration agreement. It reversed the
federal suit on a showing that the state suit has failed to District Court's judgment and remanded the case “with
adjudicate its rights, and that a stay is less onerous than instructions to proceed in conformity herewith.” 656 F.2d,
a dismissal. We have already rejected this distinction, for at 946. In effect, the Court of Appeals directed the District
purposes of this case, in discussing appellate jurisdiction. Court to enter a § 4 order to arbitrate.
Supra, at 935. We reject it in this context for the same
reasons. [17] [18] In this Court, the Hospital does not contest the
substantive correctness of the Court of Appeals's holding
*28 We have no occasion in this case to decide whether on arbitrability. It does raise several objections to the
a dismissal or a stay should ordinarily be the preferred procedures the Court of Appeals used in considering and
course of action when a district court properly finds that deciding this case. In particular, it points out that the only
Colorado River counsels in favor of deferring to a parallel issue formally appealed to the Court of Appeals was the
propriety of the District Court's stay order. Ordinarily,
state-court suit. 37 We can say, however, that a stay is
we would not expect the Court of Appeals to pass on
as much a refusal to exercise federal jurisdiction as a
issues not decided in the District Court. In the present
dismissal. When a district court decides to dismiss or stay
case, however, we are not disposed to disturb the Court's
under Colorado River, it presumably concludes that the
discretion in its handling of the case in view of the special
parallel state-court litigation will be an adequate vehicle
interests at stake and the apparent lack of any prejudice
for the complete and prompt resolution of the issues
to the parties. 28 U.S.C. § 2106 gives a court of appeals
between the parties. If there is any substantial doubt as to
some latitude in entering an order to achieve justice in the
this, it would be a serious abuse of discretion to grant the
circumstances. The Arbitration Act calls for a summary
stay or dismissal at all. See supra, at Part IV D; McNeese
and speedy disposition of motions or petitions to enforce
v. Board of Education, 373 U.S. 668, 674–676, 83 S.Ct.
arbitration clauses. The Court of Appeals had in the
1433, 1437–38, 10 L.Ed.2d 622 (1963). Thus, the decision
record full briefs and evidentiary submissions from both
to invoke Colorado River necessarily contemplates that the
parties on the merits of arbitrability, and held that there
federal court will have nothing further to do in resolving
were no disputed issues of fact requiring a jury trial before
any substantive part of the case, whether it stays or
a § 4 order could issue. Under these circumstances, the by the parties in five days or five months, or to take a
Court acted within its authority in deciding the legal issues case under advisement rather than render an immediate
presented in order to facilitate the prompt arbitration that decision **945 from the bench. Such a possibility did not
Congress envisaged. magically change that character of the order the district
judge entered in this case.
Affirmed.
Section 1291 of the Judicial Code is a Congressional
command to the federal courts of appeals not to
interfere with the district courts' management of ongoing
*30 Justice REHNQUIST, with whom THE CHIEF
proceedings. Unless the high standards for a writ of
JUSTICE and Justice O'CONNOR join, dissenting.
mandamus can be met, or the district court certifies an
In its zeal to provide arbitration for a party it thinks
interlocutory appeal pursuant to § 1292(b), Congress has
deserving, the Court has made an exception to established
directed that the district courts be permitted to conduct
rules of procedure. The Court's attempt to cast the District
their cases as they see fit. The reason for this rule is simple:
Court's decision as a final judgment fails to do justice to
the meaning of the word “final”, to the Act of Congress “Since the right to a judgment from more than one
that limits the jurisdiction of the courts of appeals, or to court is a matter of grace and not a necessary ingredient
the district judges who administer the laws in the first of justice, Congress from the very beginning has, by
instance. forbidding piecemeal disposition on appeal of what
for practical purposes is a single controversy, set itself
If the District Court had not stayed the proceeding, but against enfeebling judicial administration. Thereby is
had set a trial date two months away, there would be no avoided the obstruction to just claims that would come
doubt that its order was interlocutory, subject to review from permitting the harassment and cost of a succession
only by mandamus or pursuant to 28 U.S.C. § 1292(b). of separate appeals from the various rulings to which
This would be true even though § 4 of the Arbitration Act a litigation may give rise, from its initiation to entry of
provides that “the court shall proceed summarily” to trial, judgment. To be effective, judicial administration must
because an order setting a trial date only guides the course not be leaden-footed. Its momentum would be arrested
of litigation, and does not, of its own force, dispose of it on by permitting separate reviews of the component
the merits. Such an order is tentative; that is, it is subject elements in a unified cause.” Cobbledick v. United
to change at any time on the motion of a party or by the States, 309 U.S. 323, 325, 60 S.Ct. 540, 541, 84 L.Ed.
court, sua sponte. 783 (1940) (Frankfurter, J., for a unanimous court).
The order the District Court actually entered is no more The Court's decision places an unwarranted limitation
final. It delayed further proceedings until the completion upon the power of district courts to control their own
of pending litigation in the state courts. This order was cases. The Court's opinion does not establish a broad
also tentative; it was subject to change on a showing that exception to § 1291, see ante, at 934, n. 11, but it does
the state proceedings were being delayed, either by the create uncertainty about when a district court order in
Hospital or by the court, or that the state courts were not a pending case can be appealed. This uncertainty gives
applying the federal act, or that some other reason for litigants opportunities to disrupt or delay proceedings by
a change had arisen. This order did not dispose of the taking colorable appeals from interlocutory *32 orders,
case on the merits. If the state court had found that there not only in cases nearly identical to this but in cases which
was no agreement to arbitrate within the meaning of the the ingenuity of counsel disappointed by a district court's
Federal Arbitration Act, the District Court would have ruling can analogize to this one. Section 1291 established
been bound by that finding. But res judicata or collateral a policy that district judges should conduct their own
estoppel would apply if the state court reached a decision cases from beginning to end. The occasional injustice to
before the District Court in the absence of a stay. The a litigant that results from an erroneous district court
likelihood that a state court of competent jurisdiction may decision is far outweighed by the far greater systemic
enter a judgment that may determine some issue in a case disruption created by encouraging parties to attempt
does not render final a federal district court's decision to interlocutory appeals. The former attracts the Court's
take a two day recess, or to order additional *31 briefing attention because the legal error it perceives is apparent
on the surface of the case. The latter receives inadequate violating the statute and challenging it in an enforcement
attention because it does not appear in published decisions proceeding in state court.
or in petitions for certiorari. It is, rather, obscured by
the “merits” of cases and hidden among statistics on the More importantly, however, the decision in Idlewild
cost and seeming interminable nature of litigation. Both cannot be good law after Coopers, supra. The Court
respect for district judges and concern for the course of describes Coopers as holding only that the collateral-order
litigation generally should make the Court hesitate before doctrine of Cohen v. Beneficial Loan Corp., 337 U.S. 541,
creating another exception, however narrow, to § 1291. 69 S.Ct. 1221, 93 L.Ed. 1528 (1949), does not apply to
a class decertification order under Fed.R.Civ.P. 23(c)(1).
The Court has acknowledged the importance of the rule Ante, at 935, n. 14. We did hold that “the collateral-order
of finality as recently as Coopers & Lybrand v. Livesay, doctrine is not applicable to” a decertification order. 437
437 U.S. 463, 98 S.Ct. 2454, 57 L.Ed.2d 351 (1978), U.S., at 468–469, 98 S.Ct., at 2458. We then went on
which rejected the so called “death-knell” exception to § to reject the argument that the decertification order was
1291. In Coopers, a putative representative plaintiff whose final under the so-called “death-knell” doctrine, holding
motion for class certification had been denied by the that an order does not become final simply because the
district court sought to appeal under § 1291. We accepted plaintiff will be unable to pursue his claim if the order
his argument that this order effectively put him out of stands. Id., at 469–477, 98 S.Ct., at 2458–62. We declined
court, id., at 470, 98 S.Ct., at 2458, but held that this to attach any importance to the fact that the plaintiff in
circumstance did not justify an exception to the statute. Coopers was just as “effectively out of court” as Idlewild or
“[A]llowing appeals of right from non-final orders that Mercury. We noted that “if the ‘death knell’ doctrine has
turn on the facts of a particular case thrusts appellate merit, it would apply equally to the many interlocutory
courts indiscriminately into the trial process and thus orders in ordinary litigation ... that may have such tactical
defeats one vital purpose of the final-judgment rule—‘that economic significance that a defeat is tantamount to a
of maintaining the appropriate relationship between the ‘death knell’ for the entire case.” Id., at 470, 98 S.Ct., at
respective courts.... This goal, in the absence of most 2459. We also noted that 28 U.S.C. § 1292(b) provides
compelling reasons to the contrary, is very much worth for review *34 of certain nonfinal orders, and that the
preserving.’ ” Id., at 476, 98 S.Ct., at 2462 (quoting “death knell” doctrine circumvents its restrictions. Id., at
Parkinson v. April Industries, Inc., 520 F.2d 650, 654 (CA2 474–475, 98 S.Ct., at 2460–61. By ignoring this discussion
1975) (concurring opinion) ). and holding from Coopers, the Court has created an
unjustified exception to § 1291.
*33 The Court has not given any sound, principled
justification for permitting the Court of Appeals to thrust The Court also states that the stay order in this case is
itself into the trial process in this case. It begins by citing appealable under Cohen, supra. It quotes the formulation
**946 Idlewild Liquor Corp. v. Epstein, 370 U.S. 713, 82 of the Cohen collateral order doctrine from Coopers :
S.Ct. 1294, 8 L.Ed.2d 794 (1962). There the District Court
had stayed an action challenging the constitutionality of “[T]he order must conclusively determine the disputed
a state statute “to give the state courts an opportunity question, resolve an important issue completely
to pass upon the constitutional issues presented, although separate from the merits of the action, and be effectively
there was no relevant litigation then pending in the state unreviewable on appeal from a final judgment.” 437
courts.” Id., at 714, 82 S.Ct., at 1296. This court held U.S., at 468, 98 S.Ct., at 2458, quoted, ante, at 935.
that the order was appealable because the plaintiff “was
The District Court's order did not “conclusively determine
effectively out of court.” Id., at 715, n. 2, 82 S.Ct., at 1296,
the disputed question” for the reasons stated above.
n. 2. Idlewild does not control this case.
The Court's assertion to the contrary, ante, at 935, is
nothing short of sheer speculation about the state of
First, Mercury is less “effectively out of court” than
mind of the District Judge. Such speculation is hardly
was Idlewild. There was no pending state proceeding
that might have resolved the issues in the case, and the “practical rather than ... technical construction” *
Idlewild might well have been obliged to take the risk of of § 1291 contemplated by Cohen, supra, 337 U.S., at
546, 69 S.Ct., at 1225. In Cohen itself, the District Court
denied the defendant's motion to require the plaintiff to
post a bond on the ground that the statute requiring the instituted.”). I do not understand how the Court can say
bond did not apply. That order “conclusively determined” that the Court of Appeals had discretion to perform a non-
the question whether a bond was required because no appellate act.
conceivable change of circumstances could affect the basis
of the District Court's decision. In this case, any number of *36 The Court relies on 28 U.S.C. § 2106, which provides
plausible events might have convinced the District Court that a court of appeals:
that a necessary basis of its decision—that the state court
would proceed promptly and fairly to adjudicate the issue “may affirm, modify, vacate, set
**947 of the existence of an agreement to arbitrate—no aside or reverse any judgment,
longer applied. decree, or order of a court lawfully
brought before it for review, and
*35 Furthermore, I am not as certain as is the Court may remand the case and direct the
that by staying this case the District Court resolved entry of such appropriate judgment,
“an important issue.” An issue should not be deemed decree, or order, or require such
“important” for these purposes simply because the court further proceedings to be had as may
of appeals or this Court thinks the appellant should be just under the circumstances.”
prevail. The issue here was whether the factual question
This statute does not grant the courts of appeals authority
whether there was an agreement to arbitrate should be
to constitute themselves as trial courts. Section 4 of the
adjudicated in a state or federal court. Unless there is
Arbitration Act gives the Hospital a right to a jury trial.
some reason to believe that the state court will resolve this
See ante, at 940, n. 27. By deciding that there were no
factual question wrongly, which the Court quite rightly
disputed issues of fact, the Court of Appeals seems to
disclaims, ante, at 942, I do not see how this issue is more
have decided a motion for summary judgment that was
important than any other interlocutory order that may
not before it. This is the kind of issue that district judges
place a litigant at a procedural disadvantage.
decide every day in the ordinary course of business. It is
not the kind of issue that Courts of Appeals determine.
For these reasons, I do not believe the District Court's
The Court of Appeals did have before it the memoranda
order was appealable. Interlocutory orders are committed
filed in the District Court but, contrary to the Court's
by statute to the judgment of the District Courts, and
intimation, ante, at 943, this issue was not argued in the
this Court ill-serves the judges of those courts and the
Court of Appeals. See 656 F.2d 933, 948, n. 1 (Hall, J.,
overwhelming majority of litigants by devising exceptions
dissenting) (“No one argued that this court should decide
to the statute when it believes a particular litigant has been
that issue.”).
wronged.
All Citations
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
1 The Architect was given final say on “matters relating to artistic effect.” App. 28–29. The contract also excluded arbitration
on any claim waived by the making or acceptance of final payment. App. 29. Neither of these exceptions is asserted
to apply in this case.
2 The contract provided that no demand for arbitration could be made later than thirty days after the Architect's written final
decision. In the case of arbitrable disputes not subject to submission to the Architect, the demand was required to be
made “within a reasonable time after the claim ... has arisen,” and in no event after the applicable statute of limitations
had run. App. 29–30.
The contract also set a starting time limit for arbitration demands. No demand could be made earlier than ten days after
presentation of evidence to the Architect, unless the Architect rendered a written decision before that time. App. 29.
3 The completion date, originally set as November 14, 1978, was extended to October 1979 by agreement of the parties.
4 Simultaneously, Mercury filed a petition for removal of the Hospital's state-court action. The District Court remanded the
removed case on the ground that, because the Hospital and the Architect are both North Carolina corporations, there
was no complete diversity. The propriety of the removal or remand is not before this Court.
5 Section 1291 provides in relevant part:
“The courts of appeals shall have jurisdiction of appeals from all final decisions of the district courts
of the United States, ... except where a direct review may be had in the Supreme Court.”
6 The Hospital argues that because Mercury's filing in the Court of Appeals was styled a petition for mandamus first and
a notice of appeal only “in the alternative,” the Hospital was somehow entitled to have the Court of Appeals apply the
stricter standards of review that obtain under the mandamus procedure before considering any appeal. Brief for Petitioner
30–31. We do not understand why this order of proceeding would be of any benefit to the Hospital; but in any event the
contention is frivolous. In the first place, Mercury also filed a proper notice of appeal in the District Court, see Fed.Rule
App.Proc. 3(a). More fundamentally, a court of appeals has no occasion to engage in extraordinary review by mandamus
“in aid of [its] jurisdictio[n],” 28 U.S.C. § 1651, when it can exercise the same review by a contemporaneous ordinary
appeal. See, e.g., Hines v. D'Artois, 531 F.2d 726, 732, and n. 10 (CA5 1976).
7 Railroad Commission v. Pullman Co., 312 U.S. 496, 61 S.Ct. 643, 85 L.Ed. 971 (1941).
8 The plaintiff in Idlewild had requested injunctive relief against enforcement of the state statute. Nevertheless, it is clear
that neither the Court of Appeals nor this Court based the holding of appealability on the argument that the District Court
had effectively denied injunctive relief. See generally 28 U.S.C. § 1292(a)(1); Carson v. American Brands, Inc., 450 U.S.
79, 101 S.Ct. 993, 67 L.Ed.2d 59 (1981). Section 1292 in terms applies only to interlocutory orders, and therefore could
hardly have been the basis for a holding that the orders were “final.”
There is no basis for the dissent's attempt, post, at 945–946, to distinguish Idlewild on the basis that in that case there
was no pending state-court action when the District Court's stay issued. Neither the Court of Appeals nor this Court
suggested in Idlewild that the state court's doors were anything but wide open to the plaintiff. “[E]ffectively out of court”
means effectively out of federal court—in keeping with the fact that the decision under appeal is the refusal to exercise
federal jurisdiction.
Moreover, the dissent's resolution of the appealability issue would yield the odd result that Pullman abstention orders
would be immediately appealable in Texas but not in the other 49 states. Compare American Trial Lawyers Assn. v.
New Jersey Supreme Court, 409 U.S. 467, 93 S.Ct. 627, 34 L.Ed.2d 651 (1973) (stays appropriate in Pullman cases),
with Harris County Commissioners Court v. Moore, 420 U.S. 77, 88–89, and n. 14, 95 S.Ct. 870, 877–78, and n. 14,
43 L.Ed.2d 32 (1975) (dismissal permissible to accommodate Texas jurisdictional requirements). This oddity illustrates
the artificiality of resting appealability on an otherwise substanceless distinction between stays and dismissals in the
present context. See infra, at Part IV E.
9 See England v. Medical Examiners, 375 U.S. 411, 84 S.Ct. 461, 11 L.Ed.2d 440 (1964).
10 See, e.g., Ultracashmere House, Ltd. v. Meyer, 664 F.2d 1176, 1183–1184 (CA11 1981); Merrill Lynch, Pierce, Fenner
& Smith, Inc. v. Haydu, 637 F.2d 391, 397–398 (CA5 1981).
11 See In re Mercury Construction Corp., 656 F.2d 933, 937–938, and n. 6 (CA4 1981), citing as dispositive Amdur v. Lizars,
372 F.2d 103, 105–106 (CA4 1967). See also Federman v. Empire Fire & Marine Insurance Co., 597 F.2d 798, 808, and
n. 15 (CA2 1979); Baltimore Bank for Cooperatives v. Farmers Cheese Cooperative, 583 F.2d 104, 108–109 (CA3 1978);
Sun Oil Co. v. FEA, 572 F.2d 867 (Em.App.1978); Rancho Palos Verdes Corp. v. Laguna Beach, 547 F.2d 1092, 1093,
n. 1 (CA9 1976); Hines v. D'Artois, 531 F.2d 726, 730–732 (CA5 1976); Drexler v. Southwest Dubois School Corp., 504
F.2d 836, 838 (CA7 1974) (en banc); Druker v. Sullivan, 458 F.2d 1272, 1274, n. 3 (CA1 1972). But see Acton Corp. v.
Borden, Inc., 670 F.2d 377, 380–382 (CA1 1982); State Farm Mutual Automobile Insurance Co. v. Scholes, 601 F.2d
1151, 1153–1154 (CA10 1979); Frederick L. v. Thomas, 578 F.2d 513, 515–516 (CA3 1978) (dictum).
Of course, as these cases recognize, Idlewild does not disturb the usual rule that a stay is not ordinarily a final decision
for purposes of § 1291, since most stays do not put the plaintiff “effectively out of court.” See, e.g., Amdur, 372 F.2d, at
105–106. Idlewild 's reasoning is limited to cases where (under Colorado River, abstention, or a closely similar doctrine)
the object of the stay is to require all or an essential part of the federal suit to be litigated in a state forum.
This answers the dissent's argument, post, at 945–946, that Idlewild was overruled by that part of Coopers & Lybrand
v. Livesay, 437 U.S. 463, 469–477, 98 S.Ct. 2454, 2458–62, 57 L.Ed.2d 351 (1978), which rejected the “death knell”
doctrine of appealability. The death knell doctrine rested on the argument that in some situations an interlocutory
decision (such as a refusal to certify a class) might terminate a suit as a practical matter because the named plaintiff
would lack an economic incentive to pursue his individual claim. In a death knell case, however, the order sought to be
appealed had no legal effect on the named plaintiff's ability to proceed with his individual claim in federal court. There
is an obvious difference between a case in which the plaintiff himself may choose not to proceed, and a case in which
the district court refuses to allow the plaintiff to litigate his claim in federal court. Appeal from a stay on abstention or
Colorado River grounds, therefore, presents no prospect of “appeals of right that turn on the facts of a particular case,”
as in Coopers & Lybrand, 437 U.S., at 476, 98 S.Ct., at 2462. We foresee no great difficulty in determining when a
district court has surrendered jurisdiction over a federal lawsuit.
For much the same reason, the dissent errs in likening the stay in this case to an ordinary delay in the interest of docket
control, post, at 944–945. We do not hold that an order becomes final merely because it may have the practical effect
of allowing a state court to be the first to rule on a common issue. We hold only that a stay order is final when the sole
purpose and effect of the stay is precisely to surrender jurisdiction of a federal suit to a state court.
12 Accord, Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 375, 101 S.Ct. 669, 674, 66 L.Ed.2d 571 (1981); United
States v. MacDonald, 435 U.S. 850, 854–855, 98 S.Ct. 1547, 1549–50, 56 L.Ed.2d 18 (1978); Abney v. United States,
431 U.S. 651, 658–659, 97 S.Ct. 2034, 2039–40, 52 L.Ed.2d 651 (1977).
13 The “completely separate from the merits” requirement is a distillation of the principle that there should not be piecemeal
review of “steps towards final judgment in which they will merge.” Cohen v. Beneficial Loan Corp., 337 U.S. 541, 546,
69 S.Ct. 1221, 1225, 93 L.Ed. 1528 (1949). In this case, of course, there is no step towards final judgment, but a refusal
to proceed at all.
14 See Fed.Rule Civ.Proc. 54(b); 18 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 4478, at 788–
792 (1981).
Coopers & Lybrand held that the Cohen rule did not apply to a class decertification order because, among other
reasons, such an order is “inherently tentative” under Federal Rule of Civil Procedure 23(c)(1), which provides that
such an order may be “altered or amended before the decision on the merits.” 437 U.S., at 469, and n. 11, 98 S.Ct.,
at 2458, and n. 11. Of course, as Rule 54(b) provides, virtually all interlocutory orders may be altered or amended
before final judgment if sufficient cause is shown; yet that does not make all pretrial orders “inherently tentative” in the
sense of that phrase in Coopers & Lybrand. The rationale behind Rule 23(c)(1) is that a certification decision should be
made “[a]s soon as practicable,” even though later events or discoveries may mandate a different result. Many other
orders, by contrast, are made with the expectation that they will be the final word on the subject addressed. Certainly
that was true of the order at issue in this case. The reasoning of Coopers & Lybrand does not reach all pretrial orders
that are formally subject to revision, but only those as to which some revision might reasonably be expected in the
ordinary course of litigation.
15 Colorado River Water Conservation District v. United States, 424 U.S. 800, 813, 96 S.Ct. 1236, 1244, 47 L.Ed.2d 483
(1976), quoting County of Allegheny v. Frank Mashuda Co., 360 U.S. 185, 188–189, 79 S.Ct. 1060, 1062–63, 3 L.Ed.2d
1163 (1959).
16 There is no contention here that any of the categories of the abstention doctrine apply to this case.
17 Colorado River, 424 U.S., at 817, 96 S.Ct., at 1246, quoting Kerotest Mfg. Co. v. C–O–Two Fire Equipment Co., 342
U.S. 180, 183, 72 S.Ct. 219, 221, 96 L.Ed. 200 (1952).
18 Colorado River, 424 U.S., at 817, 96 S.Ct., at 1246, quoting McClellan v. Carland, 217 U.S. 268, 282, 30 S.Ct. 501,
504, 54 L.Ed. 762 (1910).
19 Our decision in Colorado River came down after the District Court's stay order in Calvert but before the Court of Appeals
issued its mandamus in that case.
20 On remand from our decision in Calvert, the District Court and Court of Appeals concluded that the stay should be
continued, but rested that decision on a ground not addressed in the prior Court of Appeals decision (Calvert Fire
Insurance Co. v. Will, 560 F.2d 792 (CA7 1977)) or in any of this Court's opinions in the case. They concluded that
the filing of the federal suit was a “defensive tactical maneuver” based on a contrived federal claim; hence, a stay was
called for as “a means to deter vexatious use of the federal courts.” The courts also noted that, in the interim, the basis
for the plaintiff's assertion of exclusive federal jurisdiction had vanished. Calvert Fire Insurance Co. v. American Mutual
Reinsurance Co., 600 F.2d 1228, 1234–1236 (CA7 1979), aff'g 459 F.Supp. 859 (ND Ill.1978). The case did not come
before this Court for review a second time.
The Court of Appeals in this case relied on similar reasoning. It concluded that, despite chronological priority of filing, the
Hospital's state-court suit was a contrived, defensive reaction to Mercury's expected claim for relief and for arbitration.
656 F.2d, at 944–945.
The reasoning of the Courts of Appeals in this case and in Calvert —that the vexatious or reactive nature of either the
federal or the state litigation may influence the decision whether to defer to a parallel state litigation under Colorado
River —has considerable merit. We need not rely on such reasoning here, however, for we conclude infra that even if
the Hospital acted in complete good faith there were no exceptional circumstances warranting the District Court's stay.
21 The Court of Appeals in Calvert had held that it lacked jurisdiction to entertain an ordinary appeal, apparently because a
portion of the federal litigation was the subject of exclusive federal jurisdiction and would therefore remain to be disposed
of in federal court after the conclusion of state-court proceedings. Calvert Fire Insurance Co. v. Will, 560 F.2d 792, 794
(CA7 1977), citing Cotler v. Inter-County Orthopaedic Assn., 526 F.2d 537, 540 (CA3 1975). Cf. Drexler v. Southwest
Dubois School Corp., 504 F.2d 836, 838 (CA7 1974) (en banc) (stay of litigation pending exhaustion of state remedies
is final under Idlewild ). The issue of appellate jurisdiction was not presented to this Court in Calvert.
22 This provides a sharp contrast with the key statute at issue in Colorado River —the McCarran Amendment. There, as
we stressed, the primary policy of the statute was the avoidance of piecemeal litigation. 424 U.S., at 819–820, 96 S.Ct.,
at 1247.
23 E.g., C. Itoh & Co. v. Jordan International Co., 552 F.2d 1228, 1231–1232 (CA7 1977); Acevedo Maldonado v. PPG
Industries, Inc., 514 F.2d 614, 617 (CA1 1975); Hamilton Life Insurance Co. v. Republic National Life Insurance Co.,
408 F.2d 606, 609 (CA2 1969).
In some cases, of course, it may be advisable to stay litigation among the non-arbitrating parties pending the outcome
of the arbitration. That decision is one left to the district court (or to the state trial court under applicable state procedural
rules) as a matter of its discretion to control its docket. See generally Landis v. North American Co., 299 U.S. 248,
254–255, 57 S.Ct. 163, 165–66, 81 L.Ed. 153 (1936).
24 Of course we do not mean to say that the state court's injunction could properly have been applied to prevent Mercury
from filing or prosecuting a federal lawsuit. See General Atomic Co. v. Felter, 434 U.S. 12, 98 S.Ct. 76, 54 L.Ed.2d 199
(1977); Donovan v. City of Dallas, 377 U.S. 408, 84 S.Ct. 1579, 12 L.Ed.2d 409 (1964). Mercury was not obliged, however,
to put itself in danger of contempt sanctions merely in order to cut short the period of the Hospital's priority of filing.
25 See also n. 20, supra.
26 Under § 6 of the Arbitration Act, 9 U.S.C. § 6, Mercury's application for a § 4 order was properly treated procedurally
as a motion. Mercury submitted affidavits, legal briefs, and documentary evidence in support of the order sought. The
Hospital responded with full briefing and extensive evidentiary submissions on the arbitrability issue, and it requested oral
argument and a jury trial. At the same time, it made its successful motion for a stay. It is readily apparent that if the District
Court had denied the stay, it doubtless could and should have gone on to decide the arbitrability point in very short order.
27 Section 3 provides that if a suit is brought on the merits of a dispute covered by an arbitration agreement,
“the court in which such suit is pending, upon being satisfied that the issue involved in such suit or proceeding is
referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action
until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay
is not in default in proceeding with such arbitration.” 9 U.S.C. § 3.
Section 4 provides that a district court must enter an order to arbitrate “upon being satisfied that the making of the
agreement for arbitration or the failure to comply therewith is not in issue.” If either of these points is in issue, § 4
provides that “the court shall proceed summarily” to a trial on that point. Section 6 further provides that a request for
relief under either § 3 or § 4 is to be treated procedurally as a motion.
Moreover, the policy of the Arbitration Act requires a liberal reading of arbitration agreements, see infra, at 941. As
a result, some issues that might be thought relevant to arbitrability are themselves arbitrable—further speeding the
procedure under §§ 3 and 4. See, e.g., Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801,
18 L.Ed.2d 1270 (1967).
28 See n. 34, infra; but cf. nn. 35–36, infra.
29 Although the dissenting Justices in Colorado River relied on this point, see 424 U.S., at 825–826, 96 S.Ct., at 1250, the
majority concluded that the federal/state law point was not controlling for two reasons. First, there was an affirmative policy
in federal law expressly approving litigation of federal water rights in state court—the McCarran Amendment. Second,
although the water rights of the United States and the Indian tribes were governed in part by federal law, the bulk of the
litigation would necessarily revolve around the state-law water rights of the thousand nonfederal parties in the case—a
factor on which we expressly relied in approving the District Court's stay. 424 U.S., at 820, 96 S.Ct., at 1247.
30 “Maritime transaction” and “commerce” are defined in § 1 of the Arbitration Act, 9 U.S.C. § 1.
31 E.g., Dickinson v. Heinold Securities, Inc., 661 F.2d 638, 643 (CA7 1981); Wick v. Atlantic Marine, Inc., 605 F.2d 166, 168
(CA5 1979); Becker Autoradio U.S.A., Inc. v. Becker Autoradiowerk GmbH, 585 F.2d 39, 43–45 (CA3 1978); Hanes Corp.
v. Millard, 174 U.S.App.D.C. 253, 266, 531 F.2d 585, 598 (1976); Acevedo Maldonado v. PPG Industries, Inc., 514 F.2d
614, 616–617 (CA1 1975); Germany v. River Terminal R. Co., 477 F.2d 546, 547 (CA6 1973); Coenen v. R.W. Pressprich
& Co., 453 F.2d 1209, 1211–1212 (CA2 1972); Hart v. Orion Insurance Co., 453 F.2d 1358, 1360–1361 (CA10 1971).
32 See n. 34, infra.
The Arbitration Act is something of an anomaly in the field of federal-court jurisdiction. It creates a body of federal
substantive law establishing and regulating the duty to honor an agreement to arbitrate, yet it does not create any
independent federal-question jurisdiction under 28 U.S.C. § 1331 (1976 ed., Supp. IV) or otherwise. Section 4 provides
for an order compelling arbitration only when the federal district court would have jurisdiction over a suit on the
underlying dispute; hence, there must be diversity of citizenship or some other independent basis for federal jurisdiction
before the order can issue. E.g., Commercial Metals Co. v. Balfour, Guthrie, & Co., 577 F.2d 264, 268–269 (CA5
1978), and cases cited. Section 3 likewise limits the federal courts to the extent that a federal court cannot stay a
suit pending before it unless there is such a suit in existence. Nevertheless, although enforcement of the Act is left
in large part to the state courts, it nevertheless represents federal policy to be vindicated by the federal courts where
otherwise appropriate.
We need not address whether a federal court might stay a state-court suit pending arbitration under 28 U.S.C. § 2283.
33 Cf. n. 20, supra.
34 Although § 3 refers ambiguously to a suit “in any of the courts of the United States,” the state courts have almost
unanimously recognized that the stay provision of § 3 applies to suits in state as well as federal courts, requiring them
to issue the same speedy relief when a dispute is referable to arbitration. (The North Carolina Supreme Court has so
held, although not until after the District Court ordered this stay. Burke County Public Schools Board of Education v.
Shaver Partnership, 303 N.C. 408, 279 S.E.2d 816 (1981).) This is necessary to carry out Congress's intent to mandate
enforcement of all covered arbitration agreements; Congress can hardly have meant that an agreement to arbitrate can
be enforced against a party who attempts to litigate an arbitrable dispute in federal court, but not against one who sues
on the same dispute in state court. See also Prima Paint, 388 U.S., at 404, 87 S.Ct., at 1806.
35 Section 4, unlike § 3, speaks only of a petition to “any United States district court.” Nonetheless, at least one state court
has held that § 4 does require state courts to issue § 4 orders to arbitrate where the section's conditions are met. Main
v. Merrill Lynch, Pierce, Fenner & Smith Inc., 67 Cal.App.3d 19, 24–25, 136 Cal.Rptr. 378, 380–381 (1977).
36 As a historical matter, there was considerable doubt at the time of the District Court's stay that the North Carolina court
would have granted even a § 3 stay of litigation. The then-controlling precedent in North Carolina was to the effect that a
contract such as that between Mercury and the Hospital was not subject to the Arbitration Act at all, on the reasoning that
a construction project is not “commerce” within the meaning of §§ 1 and 2 of the Act. Burke County Public Schools Board
of Education v. Shaver Partnership, 46 N.C.App. 573, 265 S.E.2d 481 (1980); Bryant-Durham Electric Co. v. Durham
County Hospital Corp., 42 N.C.App. 351, 256 S.E.2d 529 (1979). The North Carolina Supreme Court has, however, since
repudiated those decisions. Burke County Public Schools Board of Education v. Shaver Partnership, 303 N.C. 408, 279
S.E.2d 816 (1981).
37 This reservation, of course, applies only to cases under Colorado River. Cf., e.g., American Trial Lawyers Assn. v.
New Jersey Supreme Court, 409 U.S. 467, 93 S.Ct. 627, 34 L.Ed.2d 651 (1973) (stay rather than dismissal in Pullman
abstention).
* As a practical matter, it is not at all clear to me that the Court of Appeals's course would have provided arbitration more
quickly than that of the District Court, even if this Court had not granted certiorari. If the Court of Appeals was correct that
this dispute is plainly arbitrable, there is no reason to expect that the state courts would not have resolved that issue in
the 11 months during which the case was before the Court of Appeals.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Affirmed.
[5] Alternative Dispute Resolution
Disputes and Matters Arbitrable Under
See also, 645 F.Supp. 20.
Agreement
Arbitration clause covering “any controversy,
claim, counterclaim, defense, dispute,
difference or misunderstanding arising out
of or relating to this agreement or breach District court, which had stayed declaratory
thereof” was broad enough to cover dispute judgment action brought by municipal energy
over whether agreement terminated. agency against electrical company pending
arbitration, did not abuse its discretion in
6 Cases that cite this headnote refusing to enjoin electrical company from
proceeding in another United States district
[6] Alternative Dispute Resolution court with petition to compel arbitration. 9
Severability U.S.C.A. §§ 3, 4.
Arbitration clause is separable from contract 3 Cases that cite this headnote
in which it is embedded.
9 Cases that cite this headnote The district court stayed the declaratory judgment action
of the Municipal Energy Agency of Mississippi (MEAM)
against Big Rivers Electric Corporation (Big Rivers)
[9] Alternative Dispute Resolution pending arbitration. The district court also refused to
Remedies and Proceedings for enjoin Big Rivers from proceeding in another U.S. district
Enforcement in General court with a petition to compel arbitration. MEAM
There is no requirement under Federal appeals from the orders. We affirm.
Arbitration Act that petition to compel
arbitration be made in action in which motion
to stay arbitration is made. 9 U.S.C.A. §§ 3, 4.
*340 I.
5 Cases that cite this headnote
MEAM is a joint agency of the State of Mississippi formed
by several Mississippi cities to provide electric power.
[10] Alternative Dispute Resolution On June 1, 1984, MEAM entered into a Power Supply
Particular cases Agreement with Big Rivers, a Kentucky Rural Electric
Cooperative. MEAM agreed to purchase 50 megawatts
of electric power from Big Rivers from June 1, 1984, misunderstanding shall be settled by arbitration to be
through September 30, 1984, at the rate of 85 cents per conducted in accordance with the following procedure.
kilowatt per week. For power supplied from October 1, MEAM shall select one arbitrator, Big Rivers shall
1984, through September 30, 1995, the rate increased to select one arbitrator, and the two arbitrators appointed
$11.55 per kilowatt per month. by MEAM and Big Rivers respectively shall select a
third arbitrator. The arbitration shall be conducted in
Big Rivers could not supply the power directly to accordance with the rules of the American Arbitration
MEAM because the transmission systems of Big Rivers Association then in effect, and judgment upon any
and MEAM do not interconnect. Big Rivers' system award rendered by the arbitrators may, if permitted
interconnects with the system of the Tennessee Valley by law, be entered in any court having jurisdiction
Authority (TVA). MEAM's system interconnects with the thereof. This provision shall survive the termination of
system of Mississippi Power & Light Co. (MP & L), this agreement. The parties expressly agree that this
which interconnects with TVA's system. The Agreement provision shall constitute a condition precedent to the
therefore required MEAM to contract with MP & L institution of any proceedings in any court relating to
and Big Rivers to contract with TVA for transmission the subject matter thereof.
services for the ten years beginning October 1, 1985. If the
necessary transmission agreements were not reached, the MEAM and Big Rivers both entered into their respective
Power Supply Agreement would terminate. The relevant agreements before October 1, 1985, and MEAM paid the
portion of the termination provision reads as follows: higher rate for the electricity supplied by Big Rivers. In
March 1986, however, MEAM received a copy of the
SECTION 9—CONDITIONS OF TERMINATION: transmission agreement between Big Rivers and TVA and
determined that the agreement failed to satisfy the Power
This agreement shall terminate in its entirety, unless
Supply Agreement. On March 28, 1986, MEAM notified
otherwise agreed to in writing, and be without further
Big Rivers that it considered the Power Supply Agreement
force and effect without any liability of either party
terminated because the transmission agreement *341
hereto to the other (except for the obligation to
between Big Rivers and TVA allowed either party to
make payments for any power supplied prior to such
terminate the agreement on three years notice MEAM
termination for which payment has not been made) in
also stopped purchasing power from Big Rivers.
the event the parties are unable through no fault of their
own in completing on or before October 1, 1985, the
MEAM filed the present declaratory judgment action on
following:
April 2, 1986, in the United States District Court for the
1. Firm transmission services sufficient to transmit the Northern District of Mississippi. Jurisdiction was based
contracted power during the full term hereof are secured on diversity of citizenship. 28 U.S.C. § 1332. MEAM
by Big Rivers and MEAM, as follows: Big Rivers will sought a declaratory judgment that the Power Supply
obtain the required commitment for firm transmission Agreement had terminated and sought repayment of
services from the Tennessee Valley Authority and amounts it paid to Big Rivers after October 1, 1985 in
MEAM will acquire the required transmission services excess of 85 cents per kilowatt per week. On April 17,
from Mississippi Power and Light Company (MP & L). 1986, Big Rivers filed in the United States District Court
for the Western District of Kentucky a petition to compel
The Power Supply Agreement also contained the arbitration against MEAM pursuant to 9 U.S.C. § 4.
following arbitration clause: On April 18, 1986, Big Rivers filed a motion to dismiss
in the Mississippi action under Federal Rule of Civil
SECTION 4—ARBITRATION: Procedure 12(b)(6). In the alternative, Big Rivers moved
the Mississippi court to stay the proceedings pending
To the extent permitted by law applicable to MEAM
arbitration pursuant to 9 U.S.C. § 3. MEAM then sought
and in force and effect at the time there arises
to have the Mississippi district court enjoin Big Rivers
any controversy, claim, counterclaim, defense, dispute,
from proceeding in the Kentucky action by motion dated
difference or misunderstanding arising out of or relating
June 5, 1986, on the ground that the issues in the two
to this agreement or breach thereof, such controversy,
actions were the same and the Mississippi action was filed
claim, counterclaim, defense, dispute, difference or
earlier. In its June 5 motion MEAM also asked the district Gilbane, 732 F.2d 444, 445 (5th Cir.1984). MEAM
court to expedite hearing on all motions then pending. characterizes its action as a suit for breach of contract to
recover money damages, which is an action at law, Coastal
On June 6, 1986, the Mississippi district court concluded Industries, Inc. v. Automatic Steam Products Corp., 654
that “the issue of contract termination falls within the F.2d 375, 377 n. 1 (5th Cir.1981) (Unit B).
scope of the arbitration clause of the parties' contract,
and is, thus, referable to arbitration.” It granted Big [2] In this case, however, we do not need to “resort to
Rivers' motion to stay pending arbitration and denied archaic distinctions between law and equity,” Mar-Len,
MEAM's motion to enjoin Big Rivers from proceeding in 732 F.2d at 446 (Rubin, J., dissenting), because here there
the Kentucky action. MEAM appeals. is an alternative basis of appellate jurisdiction. MEAM
appeals not only the stay but also the district court's denial
of *342 its motion to enjoin Big Rivers from proceeding
in the Kentucky action. This order is appealable under
II.
28 U.S.C. § 1292(a)(1). Cf. A. & E. Plastik Pak Co. v.
[1] Big Rivers initially challenges the jurisdiction of Monsanto Co., 396 F.2d 710, 713 (9th Cir.1968) (denial
this court to hear MEAM's appeal. An order granting a of motion to enjoin arbitration is appealable); Petroleum
stay pending arbitration is not a final order, so it is not Helicopters, Inc. v. Boeing-Vertol Co., 606 F.2d 114,
appealable under 28 U.S.C. § 1291. See Jackson Brewing 114 (5th Cir.1979). Since this denial properly brings the
Co. v. Clarke, 303 F.2d 844, 845 (5th Cir.), cert. denied, order before us, we can also review the order staying the
371 U.S. 891, 83 S.Ct. 190, 9 L.Ed.2d 124 (1962). The proceedings pending arbitration. Mercury Motor Express,
order may be appealable under 28 U.S.C. § 1292(a)(1) as Inc. v. Brinke, 475 F.2d 1086, 1091 (5th Cir.1973). This
an interlocutory order granting or refusing an injunction, court has jurisdiction over this appeal.
but
a national policy in favor of arbitration. Southland Corp. Corp., 455 F.Supp. 211, 216–20 (S.D.N.Y.1978), is
v. Keating, 465 U.S. 1, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 misplaced. Moreover, MEAM's claim that the arbitration
(1984). Congressional intent was “to move the parties to clause terminated when the rest of the contract allegedly
an arbitrable dispute out of court and into arbitration as terminated is contradicted by the express language of the
quickly and easily as possible.” Moses H. Cone Memorial arbitration clause, which provides that “[t]his provision
Hospital v. Mercury Construction Corp., 460 U.S. 1, 22, shall survive the termination of this agreement.” MEAM
103 S.Ct. 927, 940, 74 L.Ed.2d 765 (1983). As such, the does not suggest any meaning of this language other than
district court should grant a 9 U.S.C. § 3 application for the obvious. This specific provision controls the more
a stay pending arbitration when the arbitration clause on general provisions of the termination clause. See Western
its face covers a dispute. Seaboard Coast Line Railroad Oil Fields, Inc. v. Pennzoil United, Inc., 421 F.2d 387, 389
Co. v. National Rail Passenger Corp., 554 F.2d 657, 660 (5th Cir.1970).
(5th Cir.1977). If the dispute is within the scope of the
arbitration clause, the court may not delve further into the The parties contracted to arbitrate the issue of contract
merits of the dispute. City of Meridian v. Algernon Blair, termination. See Houston General Insurance Co. v. Realex
Inc., 721 F.2d 525, 528 (5th Cir.1983). Group, N.V., 776 F.2d 514, 516 (5th Cir.1985). The
district court properly stayed its own proceedings pending
[5] The language of the arbitration clause in the Power arbitration. In addition, the unambiguous language of
Supply Agreement is broad enough to cover a dispute over the arbitration clause made it unnecessary for the district
whether the Agreement terminated. The arbitration clause court to hold an evidentiary hearing. Commerce Park
covers “any controversy, claim, counterclaim, defense, v. Mardian Construction Co., 729 F.2d 334, 340–41 (5th
dispute, difference or misunderstanding arising out of or Cir.1984). 1
relating to this agreement or breach thereof.” MEAM
does not dispute the broad language of the clause. Rather,
MEAM argues that the arbitration clause was no longer
binding on the parties at the time the dispute arose. B.
“As between federal district courts, ... the general principle had no reasonable opportunity to
is to avoid duplicative litigation.” Colorado River Water file its § 4 petition first.
Conservation District v. United States, 424 U.S. 800, 817,
96 S.Ct. 1236, 1246, 47 L.Ed.2d 483 (1976) (dictum). Id. at 21, 103 S.Ct. at 939. Similarly, in this case Big
Often the case filed first will be allowed to proceed. West Rivers had no reasonable opportunity to file its petition
Gulf Maritime Association v. ILA Deep Sea Local 24, 751 to compel arbitration before MEAM filed its declaratory
F.2d 721, 729–30 (5th Cir.1985). But we will reverse a judgment action in the district court. MEAM did not
district court's decision not to enjoin another proceeding notify Big Rivers of its intention to treat the contract as
only if the district court abused its discretion. Cowden terminated until at most five days before filing suit.
Manufacturing Co. v. Koratron Co., 422 F.2d 371, 372 (6th
Cir.), cert. denied, 398 U.S. 959, 90 S.Ct. 2173, 26 L.Ed.2d The fact that the court in Dupuy-Busching treated the
544 (1970) (finding no abuse of discretion in refusal to answer and counterclaim asserting a section 4 petition
enjoin later-filed *344 petition to compel arbitration in to compel arbitration in New Jersey as a compulsory
another U.S. district court). counterclaim does not alter our conclusion. The holding
in Dupuy-Busching was that a district court in Mississippi
[9] The district court did not abuse its discretion in could compel arbitration in New Jersey notwithstanding
refusing to enjoin Big Rivers from proceeding in the the requirement of section 4 that the hearing and
Kentucky action. No part of the language of these two proceedings under the arbitration agreement “be within
sections of the Arbitration Act indicates that a section 4 the district in which the petition for an order directing
petition to compel arbitration must be made in an action such arbitration is filed.” 524 F.2d at 1278. The
characterization of the defendant's answer *345 and
in which a section 3 motion to stay is made. 2 Indeed,
counterclaim as a compulsory counterclaim in that suit
section 4 provides that a petition to compel arbitration
was collateral to that holding. The characterization is
may be made in “any United States district court which,
not controlling here either on a procedural or substantive
save for such agreement, would have jurisdiction under
basis. Procedurally, we note that in Dupuy-Busching the
Title 28.” 9 U.S.C. § 4.
defense was presented as part of an answer, whereas in
the present case Big Rivers filed a 12(b)(6) motion to
We find further guidance in the United States Supreme
dismiss. The time for filing an answer and counterclaim
Court's discussion in Moses H. Cone Memorial Hospital
in the present suit had not arrived. In the present case
v. Mercury Construction Corp., 460 U.S. 1, 103 S.Ct.
Big Rivers never filed an answer; thus it would not be
927, 74 L.Ed.2d 765 (1983). Although Moses H. Cone
barred in a subsequent suit from raising any compulsory
involved duplicate federal and state proceedings, we find it
counterclaim. Fed.R.Civ.P. 13(a); Lawhorn v. Atlantic
equally useful in analyzing the allegedly duplicate federal
Refining Co., 299 F.2d 353, 356–57 (5th Cir.1962).
proceedings in this case. The Court makes clear in Moses
H. Cone that the section 3 stay and the section 4 order to
Substantively, the Dupuy-Busching court distinguished its
arbitrate are “parallel devices for enforcing an arbitration
holding from decisions of the Third and Ninth Circuits by
agreement.” Id. at 22, 103 S.Ct. at 940. Moreover, the
pointing out that the party invoking the jurisdiction of the
Court in Moses H. Cone rejected an argument that the
district court in the suit before it was seeking to avoid, not
state action should have been allowed to proceed because
enforce, arbitration; whereas, in the other circuit actions,
it was filed first.
the party seeking arbitration had initiated the action.
[T]his argument disregards the Therefore, Dupuy-Busching could, without conflict, hold
obvious reason for the Hospital's that the defensive actions of the party seeking to enforce
priority in filing. An indispensable arbitration did not constitute a waiver of the defendant's
element of Mercury's cause of action right to secure arbitration in another arena. Big Rivers, the
under § 4 for an arbitration order is party seeking arbitration in the instant action, did nothing
the Hospital's refusal to arbitrate.... in the litigation initiated by MEAM, the party seeking to
That refusal did not occur until less avoid arbitration, which would invoke the jurisdiction of
than a day before the Hospital filed the Mississippi court or waive Big Rivers' right to arbitrate
its state suit. Hence, Mercury simply in Kentucky.
[10] Finally MEAM appears to be arguing that because it the parties are not bound by the arbitration clause. It
would stand reason on its head to allow MEAM to dictate
filed this action in Mississippi, Big Rivers must petition to
the choice of forum for arbitration by seeking to avoid
compel arbitration in Mississippi, and that the Mississippi
arbitration. The district court did not abuse its discretion
district court erred when it did not compel the arbitration
in refusing to enjoin Big Rivers.
MEAM seeks to avoid to be held in Mississippi. MEAM
hopes its contract action established Mississippi as the
The orders appealed from are
forum for arbitration by clarifying the arbitration clause
which does not specify the forum in which arbitration is
AFFIRMED.
to be held. But MEAM's action is an attempt to avoid its
contractual obligation to arbitrate. See Southland Corp.
v. Keating, 465 U.S. 1, 104 S.Ct. 852, 856, 79 L.Ed.2d 1 All Citations
(1984). Indeed, in opposing Big Rivers' section 3 motion
to stay pending arbitration, MEAM has asserted that 804 F.2d 338
Footnotes
1 MEAM also asserts that the district court erred in failing to rule on Big Rivers' motion to dismiss. MEAM expressly
requested the district court to rule on this motion and the district court declined. Given its actions in staying the proceedings
pending arbitration, the district court did not abuse its discretion.
2 Section 3 provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration
under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied that
the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on application
of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of
the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
In relevant part, section 4 provides:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for
arbitration may petition any United States district court which, save for such agreement, would have jurisdiction
under Title 28, in a civil action or in admiralty of the subject matter of a suit arising out of the controversy between
the parties, for an order directing that such arbitration proceed in the manner provided for in such agreement. Five
days' notice in writing of such application shall be served upon the party in default. Service thereof shall be made
in the manner provided by the Federal Rules of Civil Procedure. The court shall hear the parties, and upon being
satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue, the court
shall make an order directing the parties to proceed to arbitration in accordance with the terms of the agreement.
The hearing and proceedings, under such agreement, shall be within the district in which the petition for an order
directing such arbitration is filed.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
However, when a party has “substantially invoked the *2 And while federal policy promotes arbitration, See: 9
litigation machinery”, waiver will be implied. E.C. Ernst, U.S.C. § 4, neither this policy not RICO itself reasonably
Inc. v. Manhattan Construction Co. of Texas, 559 F.2d contemplates the arbitration of criminal activity. As the
268 (5th Cir.1977). While the defendant here did not Supreme Court states in Mitsubishi Motors Corp. v. Soler
instigate the judicial process as the defendant did in Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346 (July 2,
Midwest Window, like in Midwest Window the defendant
1985), “just as it is the congressional policy manifested in in which the policy towards arbitration is outweighed by
clear countervailing congressional intent and sound policy
the Federal Arbitration Act that requires courts liberally
reasons.
to construe the scope of arbitration agreements covered
by the Act, it is the congressional intention expressed in
Accordingly, the defendant's motion to compel
some other statute on which the courts must rely to identify
arbitration of the RICO count is denied, and arbitration
any category of claims as to which agreements to arbitrate
as to both counts is deemed waived.
will be held unenforceable.” Id. at 3355. (emphasis added)
Here the statutory intent to provide judicial protection to
the litigants, while not expressly stated, is clearly manifest All Citations
by RICO's placement in the criminal code and by its
legislative history. Under Mitsubishi, then, this is a case Not Reported in F.Supp., 1986 WL 3329
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
No. 04–10–00644–CV.
| [2] Alternative Dispute Resolution
April 27, 2011. Disputes and Matters Arbitrable Under
Agreement
Synopsis
Lender was entitled to compel individual
Background: On behalf of a purported class, borrower
arbitration of borrower's purported class
sued credit services organization and lender for usury,
action claims for violation of the Deceptive
violation of the Deceptive Trade Practices Act, and
Trade Practices Act, and violation of the
violation of the Credit Services Organization Act. Lender
Credit Services Organization Act, where the
filed a motion to compel individual arbitration, to strike
parties' arbitration agreement committed any
borrower's request for class action certification, and to
claim, which it defined as any legal dispute
stay the litigation pending completion of arbitration.
between borrower, on the one hand, and credit
The 150th Judicial District Court, Bexar County,
services organization and/or lender, on the
Antonia Arteaga, J., denied lender's motion to compel
other hand, to the arbitrator, and the clear
individual arbitration and permitted borrower to seek
language of the parties' agreement expressly
class certification before the arbitrator. Lender appealed.
forbade class certification in arbitration.
V.T.C.A. Bus. & C., § 17.41 et seq.
Holdings: The Court of Appeals, Sandee Bryan Marion, 1 Cases that cite this headnote
J., held that:
[2] lender was entitled to compel individual arbitration of *152 Bryan James Wick, Jeffrey Wallace Hellberg Jr.,
borrower's claims. Wick Phillips, LLC, Dallas, TX, for Appellants.
to this contract or the relationships which result from could seek class certification in arbitration. Id. The court
this contract ... shall be resolved by binding arbitration of appeals issued a writ of mandamus directing the
by one arbitrator selected by [Green Tree] with consent trial court to vacate its second order and determine
of [the Bazzles].’ ” Id. at 448, 123 S.Ct. 2402 (emphasis whether the parties' agreement permitted class arbitration.
in original). The Bazzles subsequently sued Green Tree Id. However, the Texas Supreme Court concluded the
in South Carolina state court for violation of the South decision in Green Tree was “directly on point” and held
Carolina Consumer Protection Code and asked the trial the court of appeals erred in directing the trial court
court to certify their claim as a class action. Id. at 449, to determine the class certification issue. Id. at 369–
123 S.Ct. 2402. The trial court certified a class and entered 70. According to the unanimous Texas Supreme Court,
an order compelling arbitration. Id. Affirming the trial “when the contracts at issue commit[ ] all disputes arising
court's order, the South Carolina Supreme Court held out of the agreement to the arbitrator,” the arbitrator
class arbitration was authorized because the contract was must decide class certification issues. Id. at 368.
silent on the matter. Id. at 450, 123 S.Ct. 2402.
Recently, a majority of the United States Supreme
A plurality of the United States Supreme Court vacated Court recognized Green Tree did not garner a majority
the South Carolina Supreme Court's ruling, holding on the question of whether the trial court or the
that in certain limited circumstances, courts must decide arbitrator must decide class certification questions. *155
“gateway” arbitration-related matters, “such as whether Stolt–Nielsen, ––– U.S. ––––, 130 S.Ct. 1758, 1772,
the parties have a valid arbitration agreement at all or 176 L.Ed.2d 605 (2010). However, the Stolt–Nielsen
whether a concededly binding arbitration clause applies to majority declined to resolve this unsettled question
a certain type of controversy.” Id. at 452, 123 S.Ct. 2402. because the parties' agreement expressly assigned the class
However, the Court concluded the question involved certification question to the arbitration panel. Id. Instead,
in Green Tree—whether the parties' contract forbade the Court turned to the question the Green Tree Court did
class arbitration—did not fall into that narrow exception not address—the standard to be applied when determining
because it concerned neither the validity of the arbitration whether a contract permits class arbitration. Id. The Court
clause nor the clause's applicability to the underlying held that “a party may not be compelled ... to submit
dispute. Id. According to the Court, whether the parties' to class arbitration unless there is a contractual basis for
contract forbade class arbitration was a question of what concluding that the party agreed to do so.” Id. at 1775
kind of arbitration the parties agreed to—a matter of (emphasis in original). Because the parties conceded their
contract interpretation and arbitration procedures. Id. at agreement was silent on the matter of class certification,
452–53, 123 S.Ct. 2402. Given that “[a]rbitrators are well the Court found the arbitration panel's certification of
suited to answer” questions of contract interpretation, and a class “fundamentally at war with the foundational ...
that the parties' contract contained “sweeping language principle that arbitration is a matter of consent.” Id.
concerning the scope of the questions committed to
arbitration,” the Court held the matter should be decided Here, the arbitration agreement expressly assigns “any
by the arbitrator, not the trial court. Id. at 453, 123 S.Ct. dispute about the validity, effect or enforceability of the
2402. prohibitions against class proceedings” to the trial court,
not the arbitrator. Accordingly, because the contract at
Expressly relying upon the United States Supreme Court's issue here did not commit all disputes to the arbitrator,
ruling in Green Tree, the Texas Supreme Court also held but rather expressly assigned disputes involving the class
the arbitrator, not the trial court, must rule on class action waiver provision to the trial court, the trial
certification issues. In re Wood, 140 S.W.3d 367, 368 court was required to rule on NCP's motion to compel
(Tex.2004) (per curiam). In Wood, an attorney and three individual arbitration.
of his clients signed fee agreements providing that all
disputes arising from the agreements would be submitted [2] Turning to whether the trial court's denial of NCP's
to binding arbitration. Id. When the clients sued the motion was correct in light of recent precedent, we
attorney over a fee dispute, the trial court ordered the must conclude it was not. The clear language of the
case to arbitration and signed a second order specifically parties' agreement expressly forbids class certification in
authorizing the arbitrator to decide whether the clients arbitration. Because the United States Supreme Court
recently held in Stolt–Nielsen that a party cannot be We reverse the trial court's order and remand this matter
to the trial court for proceedings consistent with this
compelled to submit to class arbitration absent its express
opinion.
consent, the trial court erred by denying NCP's motion to
compel individual arbitration and by permitting Escatiola
to seek class certification before the arbitrator. All Citations
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
KeyCite Yellow Flag - Negative Treatment Judgment of Court of Appeals reversed, arbitration award
Distinguished by RSL Funding, LLC v. Pippins, Tex., July 1, 2016 vacated, and case remanded.
258 S.W.3d 580
Supreme Court of Texas. O'Neill, J., concurred and filed opinion.
PERRY HOMES, A Joint Venture, Home Johnson, J., concurred in part, dissented in part, and filed
Owners Multiple Equity, Inc., and Warranty opinion in which Jefferson, C.J., and Green, J., joined.
Underwriters Insurance Company, Petitioners,
v. Willett, J., concurred in part, dissented in part, and filed
Robert E. CULL and S. Jane Cull, Respondents. opinion.
No. 05–0882.
|
Argued March 20, 2007. West Headnotes (42)
|
Delivered May 2, 2008. [1] Alternative Dispute Resolution
| Suing or participating in suit
Rehearing Denied Aug. 29, 2008.
A party can not substantially invoke
Synopsis the litigation process and then switch to
Background: Homeowners moved to confirm arbitration arbitration on the eve of trial.
award against home builder and warranty companies
5 Cases that cite this headnote
on faulty construction claim. The 236th District Court,
Tarrant County, Thomas Wilson Lowe III, J., granted
motion. Defendants appealed. The Fort Worth Court of [2] Alternative Dispute Resolution
Appeals, 173 S.W.3d 565,affirmed as modified to delete Evidence
duplicative interest. Defendants' petitioned for review. There is a strong presumption against waiver
of arbitration, but it is not irrebuttable.
Parties may file suit in order to compel turning around and seeking arbitration with
arbitration. V.T.C.A., Civil Practice & the spoils.
Remedies Code § 171.021(a).
5 Cases that cite this headnote
1 Cases that cite this headnote
[17] Estoppel
[22] Estoppel
Nature and Application of Estoppel in
Nature and elements of waiver
Pais
Waiver is essentially unilateral in its character
Estoppel is a defensive theory barring parties
and no act of the party in whose favor it is
from asserting a claim or defense when
made is necessary to complete it.
their representations have induced action or
forbearance of a definite and substantial 1 Cases that cite this headnote
character and injustice can be avoided only by
enforcement.
[23] Estoppel
3 Cases that cite this headnote Prejudice to person setting up estoppel
Estoppel includes a prejudice requirement.
[18] Alternative Dispute Resolution Cases that cite this headnote
Suing or participating in suit
A party who enjoys substantial direct benefits
[24] Alternative Dispute Resolution
by gaining an advantage in the pretrial
Waiver or Estoppel
litigation process should be barred from
question home builder's attorneys' authority The Plaintiffs argue—and we agree—that sending them
to speak for the warranty companies, they back to the trial court not only deprives them of a
should have done so by sworn motion. substantial award but also wastes the time and money
spent in arbitration. But they knew of this risk when
1 Cases that cite this headnote they requested arbitration at the last minute because all
of the Defendants objected. Accordingly, we vacate the
arbitration award and remand the case to the trial court
for a prompt trial.
Attorneys and Law Firms
arbitration, parties may also waste resources appealing for the NASD arbitrator because “the NASD arbitrators,
every referral when a quick arbitration might settle the comparatively more expert about the meaning of their
matter. Frequent pre-arbitration review would inevitably own rule, are comparatively better able to interpret and to
frustrate Congress's intent “to move the parties to an apply it.” 24 By contrast, when waiver turns on conduct in
arbitrable dispute out of court and into arbitration as court, the court is obviously in a better position to decide
quickly and easily as possible.” 16 We recognize the whether it amounts to waiver. 25 “Contracting parties
potential for waste, but that is a risk a party must take would expect the court to decide whether one party's
if it moves for arbitration after substantially invoking the
conduct before the court waived the right to arbitrate.” 26
litigation process.
Second, the Howsam court specifically stated that “parties prejudice. 36 Due to the strong presumption against
to an arbitration contract would normally expect a waiver of arbitration, this hurdle is a high one. 37 To date,
forum-based decisionmaker to decide forum-specific we have never found such a waiver, holding in a series of
procedural gateway matters.” 23 Thus, the NASD's six- cases that parties did not waive arbitration by:
year limitations rule in that case was a gateway matter
• filing suit; 38 • how much pretrial activity related to the merits rather
than arbitrability or jurisdiction; 51
39
• moving to dismiss a claim for lack of standing;
• how much time and expense has been incurred in
• moving to set aside a default judgment and requesting litigation; 52
40
a new trial;
• whether the movant sought or opposed arbitration
• opposing a trial setting and seeking to move the earlier in the case; 53
litigation to federal court; 41
• whether the movant filed affirmative claims or
• moving to strike an intervention and opposing dispositive motions; 54
42
discovery;
• what discovery would be unavailable in arbitration; 55
• sending 18 interrogatories and 19 requests for
production; 43 • whether activity in court would be duplicated in
arbitration; 56 and
• requesting an initial round of discovery, noticing (but
not taking) a single deposition, and agreeing to a trial • when the case was to be tried. 57
resetting; 44 or Of course, all these factors are rarely presented in a single
case. Federal courts have found waiver based on a few, or
• seeking initial discovery, taking four depositions, and
even a single one. 58
moving for dismissal based on standing. 45
These cases well illustrate the kind of conduct that falls [11] We agree waiver must be decided on a case-by-
short. But because none amounted to a waiver, they are case basis, and that courts should look to the totality of
less instructive about what conduct suffices. We have the circumstances. Like the federal courts, this Court has
stated that “allowing a party to conduct full discovery, file considered factors such as:
motions going to the merits, and seek arbitration only on
the eve of trial” would be sufficient. 46 But what if (as in • when the movant knew of the arbitration clause; 59
this case) only two out of these three are met? And how
much is “full discovery”?
*592 • how much discovery has been conducted; 60
We begin by looking to the standards imposed by
the federal courts. They decide questions of waiver by • who initiated it; 61
applying a totality-of-the-circumstances test on a case-by-
• whether it related to the merits rather than arbitrability
case basis. 47 In doing so, they *591 consider a wide
variety of factors including: or standing; 62
[14] [15] We also disagree with the Defendants although that conduct must be unequivocal. 77 And in
that different standards should apply to plaintiffs and close cases, the “strong presumption against waiver”
defendants. As parties may begin arbitration without a
should govern. 78
court order, it is certainly relevant that a plaintiff chose
to file suit instead. But Texas procedure also contemplates
that parties may file suit in order to compel arbitration. 67
Thus, while the movant's status is a factor to consider, it V. Is a Showing of Prejudice Required?
does not alone justify a finding of waiver or change the
Although convinced that the Culls had substantially
basic nature of the totality-of-the-circumstances test. 68 invoked the litigation process, the trial court compelled
arbitration because the Defendants did not prove an
[16] We recognize, as we have noted before, “the arbitrator would not have allowed the same discovery.
difficulty of uniformly applying a test based on nothing “Even substantially invoking the judicial process does not
more than the totality of the circumstances.” 69 But waive a party's arbitration rights unless the opposing party
there appears to be no better test for “substantial proves that it suffered prejudice as a result.” 79 On at
invocation.” 70 As the United States Supreme Court least eight occasions, we have said prejudice is a necessary
has said about minimum contacts, tests based on requirement of waiver by litigation *594 conduct. 80
“reasonableness” are never susceptible to mechanical
application—“few answers will be written in black and [22] The Defendants ask us to reconsider this
white [;] [t]he greys are dominant *593 and even requirement. They point out that Texas law does not
among them the shades are innumerable.” 71 How much require a showing of prejudice for waiver, but only an
litigation conduct will be “substantial” depends very much intentional relinquishment of a known right. 81 Waiver “is
on the context; three or four depositions may be all the essentially unilateral in its character” and “no act of the
discovery needed in one case, 72 but purely preliminary in party in whose favor it is made is necessary to complete
another. 73 it.” 82 Thus, they argue we cannot impose a waiver rule for
arbitration contracts that does not apply to all others. 83
[17] [18] Moreover, this test is quite similar to
one we have long recognized and recently applied to We decline the Defendants' invitation based on both
arbitration—estoppel. Estoppel is a defensive theory federal and state law. The Defendants say the federal
barring parties from asserting a claim or defense when courts are split on the issue, but the split is not very wide.
their representations have induced “action or forbearance Of the twelve regional circuit courts, ten require a showing
of a definite and substantial character” and “injustice
of prejudice, 84 and the other two treat it as a factor
74
can be avoided only by enforcement.” In arbitration
to consider. 85 We have noted before the importance of
cases, we have held a nonparty who enjoys substantial
direct benefits from a contract may be estopped from keeping federal and state arbitration law consistent. 86
severely limiting both pretrial discovery and post-trial it enacted the FAA. 96 Indeed, one dissent cannot even
review. Having enjoyed the benefits of extensive discovery bring itself to say the Culls substantially invoked the
for 14 *597 months, the Culls could not decide only then litigation process. If the litigation conduct here is not
that they were in a hurry. enough, it is hard to imagine what would be.
[28] [29] [30] It is also unquestionably true that this [31] [32] The dissents make several mistakes in their
conduct prejudiced the Defendants. “Prejudice” has many analyses. First, they misconstrue the standard of review.
meanings, but in the context of waiver under the FAA it Every *598 abuse-of-discretion review is not identical
relates to inherent unfairness—that is, a party's attempt because “a trial judge's discretion may be applied to
to have it both ways by switching between litigation and
scores of situations and in many different ways.” 97
arbitration to its own advantage:
Reviewing a declaratory judgment fee award (where trial
[F]or purposes of a waiver of an judges have broad discretion) 98 is not the same as
arbitration agreement[,] prejudice reviewing admission of hearsay (where trial judges follow
refers to the inherent unfairness in detailed rules), 99 even though an abuse-of-discretion
terms of delay, expense, or damage
standard applies to both. 100 Moreover, a totality-of-
to a party's legal position that occurs
the-circumstances test presumes a multitude of potential
when the party's opponent forces it
factors and a balancing of evidence on either side;
to litigate an issue and later seeks to
if appellate courts must affirm every time there is
arbitrate that same issue. 93 some factor that was not negated or some evidence on
either side, then no ruling based on the totality-of-the-
Thus, “a party should not be allowed purposefully and circumstances could ever be reversed. That standard of
unjustifiably to manipulate the exercise of its arbitral review would be the same as no review at all. By applying
rights simply to gain an unfair tactical advantage over the such a standard, both dissents would allow trial judges to
opposing party.” 94 send any case to arbitration no matter what has occurred
in court.
Here, the record before the trial court showed that the
Culls objected to arbitration initially, and then insisted [33] [34] Under a proper abuse-of-discretion review,
on it after the Defendants acquiesced in litigation. They waiver is a question of law for the court, 101 and we do
got extensive discovery under one set of rules and then not defer to the trial court on questions of law. 102 We do
sought to arbitrate the case under another. They delayed defer to a trial court's factual findings if they are supported
disposition by switching to arbitration when trial was
by evidence, 103 but there was no factual dispute here
imminent and arbitration was not. They got the court to
regarding whether the Culls initially opposed arbitration,
order discovery for them and then limited their opponents'
whether they conducted extensive merits discovery, or
rights to appellate review. Such manipulation of litigation
whether they sought arbitration late in the litigation
for one party's advantage and another's detriment is
process. This leaves only the conclusion whether such
precisely the kind of inherent unfairness that constitutes
conduct constitutes prejudice, a legal question we cannot
prejudice under federal and state law.
simply abandon to the trial court. 104
most agreements can be waived by the parties' conduct, 95 federal courts, 105 they impose what appears to be an
arbitration contracts should not be more enforceable than irretrievable-loss standard. One dissent would go so far
other contracts. That is not what Congress intended when as to hold that no amount of discovery, no matter how
extensive, can show prejudice if the fees incurred might
be compensated in the final arbitration award, even if to demand arbitration affects the
erroneously. 106
No one could ever show prejudice under burden placed upon the party
this standard, because even if a contract allowed no opposing waiver. When a timely
demand for arbitration was made,
reimbursement of discovery costs (as in this case), 107 it
the burden of proving waiver falls
is always hypothetically possible that a rogue arbitrator
even more heavily on the shoulders
might reimburse costs regardless. The same dissent would
of the party seeking to prove
find no prejudice from extensive discovery without proof
waiver. A demand for arbitration
that an arbitrator would have prohibited it. That again is
puts a party on notice that
impossible; arbitrators have almost unbridled discretion
arbitration may be forthcoming, and
regarding discovery, so no one can predict what they
therefore, affords that party the
might do in advance. Presuming (as the dissents do)
opportunity to avoid compromising
that broad discovery is generally available in arbitration
its position with respect to
simply ignores one of its most distinctive features. 108 arbitrable and nonarbitrable claims.
In contrast, where a party fails
[36] [37] Third, both dissents quibble with the to demand arbitration ... and in
Defendants' proof of prejudice because it was the meantime engages in pretrial
insufficiently detailed. 109 This confuses proof of the fact activity inconsistent with an intent
of prejudice with proof of its extent; the Defendants had to arbitrate, the party later opposing
to show substantial invocation that prejudiced them, not a motion to compel arbitration
precisely how much it all was. Referral to arbitration may more easily show that its
should be decided summarily with the evidence limited to position has been compromised, i.e.,
disputed facts; 110 as the Culls did not dispute that the prejudiced. 111
parties had conducted more than a dozen depositions and
other extensive discovery on the merits, requiring proof [40] It is these other circumstances that make this
of each one would have merely made the referral hearing
case different from In re Vesta. 112 The parties seeking
longer and more *600 expensive. The pre-arbitration
arbitration in Vesta had not opposed arbitration from the
record proved that discovery was extensive; the evidence
outset and then invoked it after getting all the discovery
demanded by the dissents would have merely showed how
much it cost. they wanted. 113 Nor was the Vesta case close to trial, as
was the case here. The parties in Vesta had taken four
[38] [39] Finally, the dissents' focus on discovery depositions (rather than 15); they had also exchanged
ignores all the other circumstances that the totality-of- standard requests for disclosure and one request for
the-circumstances test requires us to consider. Because production, but only one of those documents was in the
we must consider all the circumstances, the amount of record so there was no evidence whether this limited
discovery needed to show prejudice will vary depending on discovery related to the merits (as the extensive discovery
what the other circumstances are. As the Fifth Circuit has here clearly did). 114 And while the party opposing
held, prejudice should be easier to show against a party arbitration in Vesta allegedly incurred more than $200,000
that initially opposed arbitration than against one who in expenses, most of that was incurred in getting discovery
sought it from the start: rather than providing it; 115 a party who requests lots of
discovery is not prejudiced by getting it and taking it to
While the mere failure to assert the
arbitration in the same way that a party who produces
right to demand arbitration does
lots of discovery outside the stricter discovery limits in
not alone translate into a waiver of
that right, such failure does bear on arbitration. 116
the question of prejudice, and may,
along with other considerations, Applying the proper standard of review and the proper
require a court to conclude that definition of prejudice, we disagree with the dissents that
waiver has occurred. The failure the Defendants have failed to show prejudice here.
when it substantially invokes the judicial process to the existing right, benefit, or advantage held by a party; (2)
other party's detriment.”). We review a trial court's order the party's actual or constructive knowledge *603 of its
compelling arbitration for an abuse of discretion. See In existence; and (3) the party's actual intent to relinquish the
re Bruce Terminix Co., 988 S.W.2d at 705. That standard right or intentional conduct inconsistent with the right.
is in accord with the general practice of reviewing a See Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640,
trial court's actions for an abuse of discretion when a 643 (Tex.1996). The Culls' actions and their attorneys'
trial court has discretion to grant or deny relief based statements in court, taken as a whole, present compelling
on its factual determinations. See Bocquet v. Herring, evidence of those elements.
972 S.W.2d 19, 20–21 (Tex.1998) (noting that the abuse
of discretion standard of review as to a trial court's Waiver as that term is used in regard to arbitration
factual determinations applies when a trial court has agreements subject to the FAA, however, requires more
discretion either to grant or deny relief based on its factual than is required for general waiver—it requires proof that
determinations). The test for abuse of discretion is not the party asserting waiver as a defense to arbitration has
whether, in the opinion of the reviewing court, the trial suffered detriment. 258 S.W.3d at 589–90; In re Bank
court's ruling was proper, but whether the trial court One, 216 S.W.3d at 827. So, when the Culls finally moved
acted without reference to guiding rules and principles. to compel arbitration and proved applicability of an
See Cire v. Cummings, 134 S.W.3d 835, 838–39 (Tex.2004). arbitration agreement, Defendants unquestionably had
The trial court's ruling should be reversed only if it was the burden to raise and prove their defense of waiver,
arbitrary or unreasonable. Id. at 839. Generally, if there including prejudice, if they wanted to avoid arbitration. In
is any evidence to support the trial court's ruling then the re Bruce Terminix Co., 988 S.W.2d at 704.
court did not abuse its discretion. See In re BP Prods. N.
Am., Inc., 244 S.W.3d 840, 848 (Tex.2008) (citing Butnaru Defendants recognized that to avoid arbitration they
v. Ford Motor Co., 84 S.W.3d 198, 211 (Tex.2002)). That had to prove a defense to the arbitration agreement. As
is because it is only when the evidence is such that the part of their response to the Culls' motion to compel
trial court could have made but one decision, yet made arbitration, Defendants pled that (1) after suit was filed,
another, that we say the trial court abused its discretion. all parties conducted written and oral discovery, (2) the
Id. Our decisions affording deference to trial court rulings Culls filed several motions and obtained two hearings and
when evidence supports those rulings comport with the court rulings on discovery-related issues, and (3) a trial
standard of review utilized by the United States Fifth setting was imminent. Defendants conceded applicability
Circuit Court of Appeals in regard to whether a party of the arbitration clause, then cited authorities for and
has suffered prejudice for purposes of waiving arbitration took the position that “Plaintiffs have waived arbitration
rights subject to the FAA. The Fifth Circuit's position because they substantially invoked the judicial process to
is that trial court findings on which the legal conclusion the detriment of Defendants.” Subsequently, Defendants
of waiver is based are predicate questions of fact “which more clearly detailed the detriment they were claiming:
may not be overturned unless clearly erroneous.” Price v.
Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159 (5th In this case, the costs incurred
Cir.1986); see also Republic Ins. Co. v. Paico Receivables, by Defendants in responding to the
LLC, 383 F.3d 341, 347 (5th Cir.2004) (“[T]he district motions to compel filed by Plaintiffs
court's finding that PRLLC would suffer prejudice if would not have been incurred during
arbitration was compelled is not clearly erroneous.”). the course of arbitration. Similarly,
defendants are prejudiced by the
The waiver issue in this matter is not determined by fact that it [sic] was required to
general waiver elements, but by waiver as that term comply with the Court's orders
is used in regard to avoiding arbitration agreements on such motions to compel, when
subject to the FAA. Generally, “waiver” is the intentional such means and methods would not
relinquishment of a right actually or constructively have been available in arbitration.
known, or intentional conduct inconsistent with claiming Because of Plaintiffs' delay in
that right. See Jernigan v. Langley, 111 S.W.3d 153, seeking arbitration, coupled with
156 (Tex.2003). The elements of waiver include (1) an the resulting prejudice by Defendants
being required to respond to multiple
discovery motions and comply with Court has no alternative but to order the case abated for
orders thereon, Plaintiffs cannot arbitration purposes.
now rely on the Limited Warranty
Agreement to compel arbitration. And, [counsel for Defendants], all I have heard from
you insofar as what is the prejudice suffered by
(Emphasis added). A second part of Defendants' response people you represent is that they have participated
was a motion for continuance of trial to complete in litigation activities that may or may not have
discovery. been required by the arbitrator. So without anything
further, I'm going to grant the motion to abate the
At the hearing on the Culls' motion to compel arbitration, case for arbitration. 2
the trial judge, who noted at the end of the hearing (Emphasis added).
that “I just finished [an arbitration] with the American
Arbitration Association,” admitted all the evidence Perry Homes filed a motion for reconsideration. In their
offered, and took judicial notice of the court file as motion, Perry Homes again asserted that “all parties have
requested by Defendants. After evidence was introduced conducted written and oral discovery under the Texas
at the hearing, Defendants again argued that there were Rules of Civil Procedure” but did not complain that they
two factors involved: “whether or not the parties have had been denied any discovery. Perry Homes' motion
acted inconsistently with the agreement to arbitrate and recapped the prejudice they were claiming:
then whether those actions and the actions that were taken
actually worked to the detriment or prejudice of the party Defendants have in fact been
that's opposing transference to arbitration.” prejudiced by Plaintiffs' last-minute
attempt to disclaim their election
During the hearing, the trial judge expressed considerable to file suit and instead choose
concern over the Culls' conduct. He discussed the Culls' arbitration. In this case, the costs
testimony that they had knowledge of the arbitration incurred by Defendants—including
clause before suit was filed, the extended time for attorneys' fees and man hours
which the case had been filed, and the impending trial —in attending 16 depositions,
setting. He also discussed the arbitration provision itself, 1 responding to multiple sets of
its mandatory nature, and pressed *604 the Culls' written discovery and responding
attorney about the reason for the delay in requesting to the motions to compel filed
arbitration. Finally, he asked about a provision in by Plaintiffs would not have been
the arbitration provision that provided “if any party incurred during the course of
commences litigation in violation of this Agreement, such arbitration. Similarly, Defendants
party shall reimburse the other parties to the litigation for are prejudiced by the fact that
their costs and expenses including attorney's fees incurred they were required to comply with
in seeking dismissal of such litigation.” The Culls' attorney the Court's orders on such motions
acknowledged the provision and asserted that it would be to compel, when such means and
up to the arbitrator to determine whether the Culls would methods would not have been
be responsible for such fees and costs of Defendants. available in arbitration. The amount
Defendants did not dispute the Culls' position. Then, of attorney time Perry Homes
agreeing with the assertions of the parties, the trial has invested in responding to
judge did not address whether the judicial process had Plaintiffs' discovery requests and
been substantially invoked; rather, the court concluded related motions thus far is 122
Defendants had not shown the prejudice they claimed and attorney hours and 20 paralegal
granted the Culls' motion: hours.
motions. 3 The hours were not broken down and no dates, when the next setting actually would have been, much less
times, or tasks were set out. There was no specification when the case would have gone to trial if the motion for
as to time spent on actions Defendants claimed as continuance had been granted. The Court speculates that
prejudice—responding to motions to compel discovery trial would have occurred sooner than arbitration took
and complying with court orders compelling discovery place. To the extent a resetting or actual future trial date
that would not have been available in arbitration. The should be considered, however, the trial court was in the
docket sheet reflects that the trial court denied the motion, best position to determine when any new setting would
but the record contains neither a transcript from the have occurred—whether days, weeks, or months in the
hearing nor an order ruling on the motion. future—and to determine the weight to give the setting and
a potential trial date along with the other factors.
The Court agrees that the standard of review applicable
to the trial court's order compelling arbitration is abuse of *606 Further, the Court discounts evidence of a
discretion, but its holding that the Culls waived their right contractual provision in the arbitration clause requiring
to arbitrate misses the mark. In reaching its conclusion, any party that commenced litigation in violation of the
the Court says the question of prejudice is a matter of law arbitration clause to reimburse other parties' litigation
because all the relevant facts were undisputed. It seems to expenses and costs. The clause is not a model of clarity as
me that (1) there was evidence requiring the trial court to to exactly what was recoverable:
make evidentiary determinations as to prejudice, and (2)
Inasmuch as this Agreement
Defendants did not prove that they were prejudiced or that
provides for mandatory arbitration
the Culls obtained an advantage because of the litigation
of disputes, if any party commences
process.
litigation in violation of this
Agreement, such party shall
As to the evidence that the trial court was required to
reimburse the other parties to
weigh and make evidentiary determinations on, the record
the litigation for their costs and
reveals that Defendants took depositions and engaged in
expenses including attorney's fees
written discovery, as did the Culls. Yet Defendants did
incurred in seeking dismissal of such
not claim prejudice due to the Culls somehow reaping
litigation.
an unfair advantage through discovery. The trial court
could have considered the advantages accruing to all
parties by depositions and bilateral written discovery It was the trial court's goal, just as it is ours, to ascertain
and determined that no prejudice was shown because the true intent of the parties to the agreement. See J.M.
all parties were more fully prepared to proceed with Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex.2003).
dispute resolution by knowing what the testimony of The language used in the agreement is the primary
witnesses would be, and that such knowledge would evidence of that intent. See id.; National Union Fire Ins.
shorten arbitration and reduce further costs. Co. of Pittsburgh, Pa. v. CBI Indus., Inc., 907 S.W.2d 517,
520 (Tex.1995). If the contract is subject to two or more
Next, at the time of the hearing on the motion to compel reasonable interpretations after applying the pertinent
there was an imminent trial setting. But Defendants did rules of construction, the contract is ambiguous, creating
not claim they had spent time preparing to go to trial at the a fact issue on the parties' intent. See J.M. Davidson, 128
December 10 setting and that those hours would be wasted S.W.3d at 229.
unless they went to trial immediately. At the December
6 hearing on the motion to compel, the parties agreed The Court construes the clause as allowing reimbursement
the case would not be ready for trial at the December 10 for expenses and attorneys' fees incurred in seeking
setting, and the Culls' attorney stated that, according to dismissal of the lawsuit, but not for expenses and fees
the court clerk, the case probably would not be reached in preparing the suit for trial. However, the clause can
for trial. In any event, a trial setting and actually going also be read as requiring reimbursement of all litigation
to trial are different matters. Even though Defendants costs and expenses, including but not limited to attorneys'
moved for a continuance and requested the case to be fees incurred in seeking dismissal of the litigation. And
reset in two months, there is nothing in the record to show that, apparently, is how the parties interpreted the
agreement. The trial court questioned the Culls' attorney requires our deferring to the trial court's findings and
about whether the Culls would be responsible for the order when the standard of review is abuse of discretion.
Defendants' attorneys' fees and costs. When the Culls'
attorney replied that it was an issue for the arbitrator, Despite evidentiary matters the trial court had before
the Defendants' attorney did not contend otherwise. See it which warrant our deferring to its implied and
Mathis v. Lockwood, 166 S.W.3d 743, 744–45 (Tex.2005); stated findings, the Court sets out factors that
Banda v. Garcia, 955 S.W.2d 270 (Tex.1997). The Culls' were uncontroverted, then concludes, without ever
attorney's representations and lack of protestation by saying exactly how, that Plaintiffs were advantaged or
Defendants' attorney is the only evidence in the hearing Defendants were prejudiced by the “inherent unfairness”
record about the parties' intent as to the language in of it all:
the clause. 4 Under the abuse of discretion standard by
Here, the record before the trial
which we review the trial court's order, the reimbursement
court showed that the Culls objected
clause and the attorneys' respective representations and
to arbitration initially, and then
silence is part of the entire record which we must consider
insisted on it after the Defendants
in determining whether the trial court followed guiding
acquiesced in litigation. They got
rules and principles. See Chrysler Corp. v. Blackmon, 841
extensive discovery under one set of
S.W.2d 844, 852 (Tex.1992); Walker v. Packer, 827 S.W.2d
rules and then sought to arbitrate
833, 839–40 (Tex.1992).
the case under another. They
delayed disposition by switching to
But even if the Court is right and the reimbursement
arbitration when trial was imminent
clause does not allow for *607 recovery of all Defendants'
and arbitration was not. They got
litigation attorney's fees, an arbitration award would not
the court to order discovery for them
be subject to being vacated if an arbitrator interpreted
and then limited their opponents'
the clause to allow recovery of all the fees. If arbitrators
rights to appellate review. Such
simply misinterpret a contractual clause such as the
manipulation of litigation for one
reimbursement clause, that type of error is not one which
party's advantage and another's
will justify setting aside an award. 5 See Wise v. Wachovia detriment is precisely the kind of
Securities, LLC, 450 F.3d 265, 269 (7th Cir.2006) (noting inherent unfairness that constitutes
that in reviewing an arbitration award under the FAA, prejudice under federal and state
“the issue for the court is not whether the contract law.
interpretation is incorrect or even wacky but whether
the arbitrators had failed to interpret the contract at 258 S.W.3d at 597. No one (but the Culls and their
all”). Under the circumstances, it was proper for the attorneys) could seriously disagree that the Culls' conduct
trial court to weigh, and the record shows it did, the smacks of inequity. But even disregarding the evidentiary
reimbursement provision and the parties' representations questions the trial court had to resolve as set out above,
in deciding that Defendants had not proved they suffered when the record is searched for evidence that Defendants
prejudice. Regardless of the trial court's interpretation suffered prejudice as Defendants *608 claimed—by
of what costs and expenses would be recoverable under incurring expenses in discovery proceedings, responding
the reimbursement provision, the mere existence of the to discovery motions, and complying with court orders on
provision and its reimbursement requirement comprise discovery when that type of activity would not be available
evidence supporting the decision to order arbitration and in arbitration—there is none. Nor is there evidence that
properly leave construction and application of the clause the Culls were unfairly advantaged. The fact of the matter
to the arbitrator. is that all parties took part in litigation discovery as part
of the process to resolve their dispute. The Court discusses
In sum, there were decisions for the trial court to make at length how the facts are undisputed, how ordering the
based upon weighing evidence, drawing inferences from it parties to arbitration resulted in “inherent unfairness”
in light of the parties' contentions, determining what the to Defendants, and that such “inherent unfairness”
evidence and inferences proved, and drawing a conclusion equates to prejudice to Defendants, or conversely, unfair
as to Defendants' claims of prejudice. That situation advantage to the Culls. However, the authorities used
to support the Court's statements do not cut nearly so court. Defendants claimed prejudice because of discovery
broadly as the Court indicates. The cases cited incorporate and court hearings that would not have occurred in
elements such as delay, expense, damage to a party's legal arbitration. But contrary to the Court's conclusion that
position, or “tactical advantage” by which to measure discovery would have been limited in arbitration, the
prejudice to one party or unfairness to the other party. 258 broad arbitration clause did not preclude any particular
S.W.3d at 597 n. 94 (citing In re Tyco Int'l Ltd. Sec. Litig., type or level of discovery. It provided that arbitration
422 F.3d 41, 46 n. 5 (1st Cir.2005) (“[A] party should not would be conducted according to the arbitrator's rules so
be allowed purposefully and unjustifiably to manipulate long as they did not conflict with the FAA. Specifically,
the exercise of its arbitral rights simply to gain an unfair and by way of example, Defendants did not claim
tactical advantage over the opposing party.” (emphasis prejudice from or prove that (1) delay because of litigation
added))); Doctor's Assocs. v. Distajo, 107 F.3d 126, 134 (2d interfered with *609 their business activities, caused
Cir.1997) (“[P]rejudice as defined by our cases refers to the them loss of evidence, or interfered with their ability to
inherent unfairness—in terms of delay, expense, or damage arbitrate; (2) if an arbitrator had ordered the lawsuit
to a party's legal position—that occurs when the party's discovery pursuant to the arbitration clause, the order
opponent forces it to litigate an issue and later seeks to would have violated the arbitration clause; (3) had
arbitrate that same issue.” (emphasis added)). the litigation discovery been requested in arbitration,
Defendants would have agreed to it and conferences
The following passage embodies the substance of the with the arbitrator would not have been necessary; (4)
Court's opinion as to prejudice or unfair advantage: the litigation discovery was not useable in arbitration;
(5) Defendants had already begun trial preparations or
It is also unquestionably true that [the Cull's] conduct taken other litigation related actions that would have
prejudiced the Defendants. “Prejudice” has many been wasted effort if the case went to arbitration; or (6)
meanings, but in the context of waiver under the FAA it Defendants suffered compromise of their legal position on
relates to inherent unfairness—that is, a party's attempt the merits of the Culls' claims.
to have it both ways by switching between litigation and
arbitration to its own advantage: There was not an offer of proof such as by expert
testimony, Defendants themselves, their attorneys or
[F]or purposes of a waiver of an arbitration
otherwise, that all, some, or any arbitrators probably
agreement[,] prejudice refers to the inherent
would not have allowed the discovery, that their
unfairness in terms of delay, expense, or damage to
agreement or a rule limited discovery in arbitration, or
a party's legal position that occurs when the party's
Defendants wasted any litigation discovery effort. And to
opponent forces it to litigate an issue and later seeks
boot, arbitrators do not come free. Disclosure conferences
to arbitrate that same issue.
in arbitration might well have cost more than discovery
Thus, “a party should not be allowed purposefully and hearings in litigation because arbitrators generally charge
unjustifiably to manipulate the exercise of its arbitral for preparing for and attending conferences while trial
rights simply to gain an unfair tactical advantage over judges do not. Nor have Defendants claimed that their
the opposing party.” attorneys would not have charged fees for arbitration
discovery activities. So the possibility exists that the
... Such manipulation of litigation for one party's disclosure process in arbitration could have ended up
advantage and another's detriment is precisely the kind costing more than litigation discovery.
of inherent unfairness that constitutes prejudice under
federal and state law. The Court questions whether broad discovery is generally
available in arbitration, but the parties here do not argue
258 S.W.3d at 597 (citations omitted). As noted that it is. What is argued here is that the parties' contract
previously, the Court does not specify how Defendants provided how the arbitration was to be conducted—
proved, at the hearing on the Culls' motion to compel through adherence to the arbitrator's rules so long as those
arbitration, detriment from delay, damage to Defendants' rules do not conflict with the FAA—and that Defendants
legal position or a tactical advantage achieved by the did not prove any litigation discovery that would have
Culls, which perhaps is just as well because Defendants been in violation of the contract. The Court says that
did not claim those types of prejudice in the trial
as of the time of the hearing on the Culls' motion to Evidence at the hearing on the Culls' motion to compel
compel arbitration, what discovery an arbitrator would arbitration consisted only of testimony by the Culls
allow was purely speculative. But arbitration is not and five documents they introduced: the earnest money
new; Defendants could have at least attempted to prove contract, the application for warranty, the limited
the custom and practice, if any, of arbitrators as to warranty agreement containing the arbitration provision,
discovery in arbitration, even though each arbitration a letter from the warranty company, and a copy of one
is governed by the particular agreement between the of Defendants' original answers. The Culls acknowledged
parties. Even if such evidence might have been ruled in their testimony that discovery and depositions had
speculative, as the Court concludes it would have been, occurred, but they were unsure of how many depositions
the obligation to overcome the burden of proof still lay and how much discovery. Defendants requested the trial
with Defendants. See Borg–Warner Corp. v. Flores, 232 court to take judicial notice of “five separate motions
S.W.3d 765, 772–74 (Tex.2007) (recognizing difficulties of to compel discovery and two separate orders on some,
proving asbestos claims against individual defendants, yet but not all, of the motions to compel.” The court took
requiring plaintiffs to meet that burden). notice of “its file,” which at that time mostly consisted
of copies of pleadings and discovery requests attached
The Court says that “a party who enjoys substantial as exhibits to motions. The file contained only one or
direct benefits by gaining an advantage in the pretrial two of the documents actually produced in discovery.
litigation process should be barred from turning around There were two orders on the Culls' motions to compel
and seeking arbitration with the spoils.” 258 S.W.3d at discovery. The second order referred only to the Kunkel
593. I agree with that statement. The problem is that the defendants who were not ordered to arbitration. Because
Court does not apply the statement in its entirety to this the Kunkel defendants were not ordered to arbitration,
case. The Court assumes, without requiring Defendants to the trial court could have determined that any orders or
prove, that the Culls obtained some advantage or caused motions relating solely to them should not be considered
detriment to Defendants by both parties having engaged in regard to prejudice as to the other Defendants. In short,
in discovery activities. It is hard to see how discovery the record on which the trial court ruled on December
of facts, witness names, documents, and testimony about 6 was not extensive, and although it showed what the
the controversy can prejudice either party. See Jampole Culls requested, practically none of the record was of
v. Touchy, 673 S.W.2d 569, 573 (Tex.1984) (noting that what Defendants produced in discovery, which was filed
discovery is done so disputes may be decided by what the later when Defendants sought to set aside the arbitration
facts are, not by what facts are concealed). Defendants award. And Defendants did not allege in the trial court
neither alleged nor proved that they were prejudiced that some or even any of the discovery would not be
because some privileged, proprietary, or confidential useful in arbitration, only that the discovery would not be
matter had been disclosed. Discovery in both judicial available in arbitration.
proceedings and in arbitration facilitates just *610 and
reasonable resolutions of disputes and helps prevent Last, the Court says that requiring Defendants to file
unjust and unreasonable resolutions because of ambush, detailed proof of the discovery would have made the
surprise, or concealment of relevant, nonprotected, record more cumbersome and would have entailed more
nonprivileged evidence which could sway the outcome. expense, and that to show prejudice, Defendants only had
Furthermore, I disagree with the idea that merely making to show substantial wasted effort anyway. The Court then
discovery disclosures is evidence of wasted effort or other concludes that the record before the trial court at the time
prejudice. Although the extent to which a party engages in of the hearing showed substantial wasted effort, and thus
litigation discovery plays a significant part in determining detriment, to Defendants. But in In re Vesta Ins. Group,
whether that party substantially engaged the litigation Inc., 192 S.W.3d 759 (Tex.2006), the Court declined to
process, disclosure of relevant, nonprivileged evidence, determine that waiver of the right to arbitrate occurred
names of witnesses, and information makes just and when the party opposing arbitration failed to introduce
reasonable dispute resolution more likely regardless of any of the discovery documents, present details about
whether disclosure is strictly voluntary or is made in them, or contend that the discovery would not be useful
judicial discovery proceedings or arbitration proceedings. in arbitration. The record, the Court stated,
on an arbitration law issue, but on a much more old- arbitration. I believe in waiver-by-conduct, but Perry
Homes bore the threshold responsibility of building a
fashioned ground—the applicable standard of review.
record upon which the trial court could find prejudice. The
record on appeal is far more extensive than what the trial
The Court properly acknowledges that a trial court's order
court considered (and the arguments far more refined),
compelling arbitration is reviewed for abuse of discretion.
but I agree with JUSTICE JOHNSON that the trial court
Under this standard, we will reverse the trial court only
—sitting where it sat, seeing what it saw, hearing what
when “it acts in an arbitrary or unreasonable manner,
it heard, reviewing what it reviewed—did not abuse its
without reference to any guiding rules or principles.” 3 I
discretion in concluding “no prejudice.” Trial courts do
agree with the Court, and the trial judge for that matter,
not have carte blanche “to send any case to arbitration
that the record clearly shows that the Culls substantially
no matter what has occurred in court,” 4 but I cannot
invoked the judicial process. I also agree with the Court
conclude that this trial court acted “without reference to
that the cost-reimbursement provision in the arbitration
agreement does not prevent Perry Homes from showing any *613 guiding rules or principles” 5 in ruling that
prejudice resulting from the Culls' arbitration flip-flop. Perry Homes fell short of building a trial-court record that
JUSTICE JOHNSON is comforted by the possibility that showed prejudice. This is admittedly a close call, and the
an arbitrator might (mis)construe this provision to award Court makes the best possible case for going the other
Perry Homes all its litigation-related costs and fees, but way. Given the relevant record, however, I have a difficult
I am not. The provision limits reimbursement to “costs time saying the trial court acted arbitrarily or disregarded
and expenses including attorney's fees incurred in seeking all guiding standards in not reaching the opposite result.
dismissal of such litigation,” and we cannot plausibly say Accordingly, I dissent from the Court's decision vacating
Perry Homes fails on prejudice because an arbitrator may the arbitration award and remanding for trial.
misread the agreement.
All Citations
Having said all that, I cannot conclude, as does the Court,
that the trial court abused its discretion by compelling 258 S.W.3d 580, 51 Tex. Sup. Ct. J. 819
Footnotes
1 See L.H. Lacy Co. v. City of Lubbock, 559 S.W.2d 348, 351 (Tex.1977).
2 See Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 348 (5th Cir.2004); Com–Tech Assocs. v. Computer
Assocs. Int'l, Inc., 938 F.2d 1574, 1576–77 (2d Cir.1991); Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1160
(5th Cir.1986); In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 764 (Tex.2006).
3 See, e.g., In re Vesta, 192 S.W.3d at 763; In re Bruce Terminix Co., 988 S.W.2d 702, 704–05 (Tex.1998); EZ Pawn Corp.
v. Mancias, 934 S.W.2d 87, 89–90 (Tex.1996).
4 The warranty provided:
Any “unresolved dispute” (defined below) that you may have with [Perry Homes or the warranty companies] shall
be submitted to binding arbitration governed by the procedures of the Federal Arbitration Act, 9 U.S.C. § 1 et seq....
The dispute will be submitted to the American Arbitration Association, or such other independent arbitration service
as is agreeable to the [warranty administrator] and you....
5 Perry Homes sought mandamus in the court of appeals on April 11, 2002, and was denied 7 days later. It refiled in this
Court on April 26, and was denied 13 days later.
6 173 S.W.3d 565, 568.
7 Chambers v. O'Quinn, 242 S.W.3d 30, 32 (Tex.2007).
8 In re Prudential Ins. Co. of Am., 148 S.W.3d 124, 135–36 (Tex.2004); Walker v. Packer, 827 S.W.2d 833, 840 (Tex.1992).
9 See Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 89, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000); Chambers, 242
S.W.3d at 31; see also Gulf Oil Corp. v. Guidry, 160 Tex. 139, 327 S.W.2d 406, 408 (1959) (invalidating portion of award
regarding nonarbitrable issues); Fortune v. Killebrew, 86 Tex. 172, 23 S.W. 976, 978 (1893) (same).
10 Pope v. Stephenson, 787 S.W.2d 953, 954 (Tex.1990) (“The decision not to pursue the extraordinary remedy of
mandamus does not prejudice or waive a party's right to complain on appeal.”); accord, City of San Benito v. Rio Grande
Valley Gas Co., 109 S.W.3d 750, 756 (Tex.2003); Walker v. Packer, 827 S.W.2d 833, 842 n.9 (Tex.1992).
11 See 9 U.S.C. § 16(b)(2); see also TEX. CIV. PRAC. & REM.CODE § 171.098 (providing for interlocutory appeal only of
orders denying motion to compel arbitration).
12 See David D. Siegel, Appeals from Arbitrability Determinations, Practice Commentary to 9 U.S.C. § 16 (“The mission
of § 16 is to assure that if the district court does determine that arbitration is called for, the court system's interference
with the arbitral process will terminate then and there, leaving the arbitration free to go forward. To accomplish this, §
16 provides in general that there may be no appeal from the pro-arbitration determination until after the arbitration has
gone forward to a final award.”); see also CHARLES ALAN WRIGHT, ARTHUR R. MILLER & EDWARD H. COOPER,
FEDERAL PRACTICE AND PROCEDURE § 3914.17 (2d ed.1992).
13 In re Palacios, 221 S.W.3d 564, 565 (Tex.2006). Courts may review an order compelling arbitration if the order also
dismisses the underlying litigation so it is final rather than interlocutory. See Green Tree Fin. Corp.-Ala., 531 U.S. at 87
n.2, 121 S.Ct. 513; Childers v. Advanced Found. Repair, L.P., 193 S.W.3d 897, 898 (Tex.2006). As we noted in Palacios,
the Fifth Circuit has indicated it may review a district court's decision to stay rather than dismiss if a petitioner shows
“clearly and indisputably that the district court did not have the discretion to stay the proceedings pending arbitration.” Id.
(citing Apache Bohai Corp., LDC v. Texaco China, B.V., 330 F.3d 307, 310–11 (5th Cir.2003)).
14 See 9 U.S.C. § 10(a).
15 First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 947–48, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995). The Court noted that
a different rule would apply if the parties clearly and unmistakably indicated in the arbitration contract that the arbitrator
should decide arbitrability, id., but there is no such indication in this contract.
16 Preston v. Ferrer, 552 U.S. 346, 128 S.Ct. 978, 169 L.Ed.2d 917 (2008) (quoting Moses H. Cone Mem'l Hosp. v. Mercury
Constr. Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)).
17 In re Serv. Corp. Int'l, 85 S.W.3d 171, 174 (Tex.2002); In re Bruce Terminix Co., 988 S.W.2d 702, 703–04 (Tex.1998);
accord, In re Citigroup, Inc., 376 F.3d 23, 26 (1st Cir.2004); Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d
102, 104 (2d Cir.2002); Ivax Corp. v. B. Braun of Am., Inc., 286 F.3d 1309, 1316 n. 18 (11th Cir.2002); Price v. Drexel
Burnham Lambert, Inc., 791 F.2d 1156, 1159 (5th Cir.1986).
18 See In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex.2007) (finding no waiver under FAA); In re D. Wilson Constr. Co.,
196 S.W.3d 774, 783 (Tex.2006) (same); In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 764 (Tex.2006) (same); In re Serv.
Corp. Int'l, 85 S.W.3d at 174 (same); In re Bruce Terminix Co., 988 S.W.2d at 704–05 (same); In re Oakwood Mobile
Homes, Inc., 987 S.W.2d 571, 574 (Tex.1999) (same); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89–90 (Tex.1996)
(same); Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex.1995).
19 See, e.g., Creative Solutions Group, Inc. v. Pentzer Corp., 252 F.3d 28, 32–34 (1st Cir.2001); Doctor's Assocs., Inc.
v. Distajo, 66 F.3d 438, 456 (2d Cir.1995); Wood v. Prudential Ins. Co. of Am., 207 F.3d 674, 680 (3d Cir.2000); Am.
Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 96 (4th Cir.1996); Subway Equip. Leasing Corp. v.
Forte, 169 F.3d 324, 329 (5th Cir.1999); Germany v. River Terminal Ry. Co., 477 F.2d 546, 547 (6th Cir.1973); Ernst &
Young LLP v. Baker O'Neal Holdings, Inc., 304 F.3d 753, 758 (7th Cir.2002); Ritzel Commc'ns v. Mid–American Cellular,
989 F.2d 966, 969–71 (8th Cir.1993); Martin Marietta Aluminum, Inc. v. Gen. Elec. Co., 586 F.2d 143, 146 (9th Cir.1978);
Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1489–90 (10th Cir.1994); Ivax Corp., 286 F.3d at 1316;
Nat'l Found. for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 777–78 (D.C.Cir.1987).
20 537 U.S. 79, 84, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002) (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)).
21 See, e.g., Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 447, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003) (holding whether
arbitration could proceed by class action was question for arbitrator); John Wiley & Sons, Inc. v. Livingston, 376 U.S.
543, 557, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964) (holding question whether steps of grievance procedure prerequisite to
arbitration had been completed was for arbitrator); Sleeper Farms v. Agway, Inc., 506 F.3d 98, 104 (1st Cir.2007) (noting
question whether breach of contract voided arbitration clause would normally be for arbitrator); United Steelworkers of
Am. v. Saint Gobain Ceramics & Plastics, Inc., 505 F.3d 417, 422 (6th Cir.2007) (holding question of timely demand
for arbitration was for arbitrator); Ansari v. Qwest Commc'ns Corp., 414 F.3d 1214, 1220–21 (10th Cir.2005) (holding
question whether plaintiffs waived forum selection clause by filing suit elsewhere was for arbitrator); Pro Tech Indus.,
Inc. v. URS Corp., 377 F.3d 868, 871–72 (8th Cir.2004) (holding questions of timely demand and waiver by failing to
initiate arbitration were for arbitrator); Glass v. Kidder Peabody & Co., 114 F.3d 446, 457 (4th Cir.1997) (holding question
of timely demand for arbitration was for arbitrator); Great W. Mortgage Corp. v. Peacock, 110 F.3d 222, 231–32 (3d
Cir.1997) (holding question of waiver of substantive state law rights was for arbitrator).
22 See Howsam, 537 U.S. at 81–82, 123 S.Ct. 588.
23 Id. at 86, 123 S.Ct. 588.
Nat'l Found. for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 774 (D.C.Cir.1987); Tenneco Resins,
Inc. v. Davy Int'l, AG, 770 F.2d 416, 420 (5th Cir.1985).
48 Grumhaus, 223 F.3d at 650; see also Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir.1995).
49 PAICO, 383 F.3d at 346; In re Citigroup, Inc., 376 F.3d 23, 26 (1st Cir.2004); Metz v. Merrill Lynch, Pierce, Fenner &
Smith, Inc., 39 F.3d 1482, 1489 (10th Cir.1994); Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912, 926 (3d Cir.1992).
50 Brown v. Dillard's, Inc., 430 F.3d 1004, 1012 (9th Cir.2005); Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc.,
380 F.3d 200, 206 (4th Cir.2004).
51 PAICO, 383 F.3d at 346; Kelly v. Golden, 352 F.3d 344, 349 (8th Cir.2003); Hoxworth, 980 F.2d at 926; Gilmore v.
Shearson/American Express Inc., 811 F.2d 108, 112 (2d Cir.1987); Sedco, Inc. v. Petroleos Mexicanos Mexican Nat'l
Oil Co., 767 F.2d 1140, 1150–51 (5th Cir.1985).
52 PAICO, 383 F.3d at 346; Patten Grading, 380 F.3d at 205; In re Citigroup, 376 F.3d at 26; Metz, 39 F.3d at 1489;
Hoxworth, 980 F.2d at 927.
53 Hoxworth, 980 F.2d at 927; Com–Tech Assocs. v. Computer Assocs. Int'l, Inc., 938 F.2d 1574, 1577 (2d Cir.1991); E.C.
Ernst, Inc. v. Manhattan Constr. Co., 551 F.2d 1026, 1040–41 (5th Cir.1977); Blake Constr. Co. v. U.S. for Use and
Benefit of Lichter, 252 F.2d 658, 662 (5th Cir.1958).
54 In re Citigroup, 376 F.3d at 26; Metz, 39 F.3d at 1489.
55 In re Citigroup, 376 F.3d at 26; Kelly, 352 F.3d at 349; Metz, 39 F.3d at 1489.
56 Kelly, 352 F.3d at 349; Metz, 39 F.3d at 1489.
57 Leadertex, Inc. v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 25 (2d Cir.1995); Peterson v. Shearson/American
Express, Inc., 849 F.2d 464, 468 (10th Cir.1988) (finding waiver as movant waited until five weeks before trial date to
move to compel).
58 See, e.g., Restoration Preserv. Masonry, Inc. v. Grove Eur. Ltd., 325 F.3d 54, 62 (1st Cir.2003) (finding three-year delay
alone sufficient to establish waiver); Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir.1995)
(finding removal to federal court alone sufficient to establish waiver).
59 See EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 88–89 (Tex.1996) (finding no waiver as defendant did not discover
existence of arbitration agreement for almost a year).
60 In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex.2006).
61 Id.
62 Id.
63 Id.; In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex.1998).
64 In re Bruce Terminix Co., 988 S.W.2d at 704.
65 173 S.W.3d at 570.
66 See In re Bruce Terminix Co., 988 S.W.2d at 704.
67 See, e.g., TEX. CIV. PRAC. & REM.CODE § 171.021(a) (“A court shall order the parties to arbitrate on application of a
party showing: (1) an agreement to arbitrate; and (2) the opposing party's refusal to arbitrate.”).
68 In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex.2006); accord, United Computer Sys., Inc. v. AT & T Corp., 298
F.3d 756, 764 (9th Cir.2002).
69 See R.R. St. & Co. v. Pilgrim Enters., Inc., 166 S.W.3d 232, 242–43 (Tex.2005) (quotation marks omitted) (applying
totality-of-the-circumstances test in determining whether party “otherwise arranged” to dispose of hazardous waste).
70 See Burton–Dixie Corp. v. Timothy McCarthy Constr. Co., 436 F.2d 405, 407–08 (5th Cir.1971) (“There is no set rule,
however, as to what constitutes a waiver or abandonment of the arbitration agreement. The question depends upon
the facts of each case and usually must be determined by the trier of facts.”); Joel E. Smith, Annotation, Defendant's
Participation in Action as Waiver of Right to Arbitration of Dispute Involved Therein, 98 A.L.R.3d 767, 771 (1980) (“In
those cases involving the issue of whether the defendant's participation in an action constitutes a waiver of the right to
arbitrate the dispute involved therein, no general rules are readily apparent for determining waiver other than the general
adherence by the courts to the principle that waiver is to be determined from the particular facts and circumstances of
each case....”).
71 Kulko v. Superior Court of Cal., 436 U.S. 84, 92, 98 S.Ct. 1690, 56 L.Ed.2d 132 (1978) (quoting Estin v. Estin, 334 U.S.
541, 545, 68 S.Ct. 1213, 92 L.Ed. 1561 (1948)).
72 See, e.g., TEX.R. CIV. P. 190.2(c)(2) (limiting parties in Level 1 cases to six hours of depositions).
73 See, e.g., In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex.2006) (holding four depositions did not waive arbitration
as record did not show whether they were limited or extensive or whether they addressed merits or merely arbitrability).
74 Trammell Crow Co. No. 60 v. Harkinson, 944 S.W.2d 631, 636 (Tex.1997); see English v. Fischer, 660 S.W.2d 521, 524
(Tex.1983); Moore Burger, Inc. v. Phillips Petroleum Co., 492 S.W.2d 934, 936–37 (Tex.1972); Wheeler v. White, 398
S.W.2d 93, 96 (Tex.1965); RESTATEMENT (SECOND) OF CONTRACTS § 90 (1979).
75 In re Weekley Homes, L.P., 180 S.W.3d 127, 133–35 (Tex.2005); accord, Meyer v. WMCO–GP, LLC, 211 S.W.3d 302,
305 (Tex.2006).
76 First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 943, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).
77 See Van Indep. Sch. Dist. v. McCarty, 165 S.W.3d 351, 353 (Tex.2005); First Valley Bank of Los Fresnos v. Martin, 144
S.W.3d 466, 471 (Tex.2004); Jernigan v. Langley, 111 S.W.3d 153, 156 (Tex.2003); Equitable Life Assurance Soc'y of
U.S. v. Ellis, 105 Tex. 526, 152 S.W. 625, 628 (1913).
78 In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex.2006); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex.1996).
79 In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex.1998).
80 In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex.2007); In re D. Wilson Constr. Co., 196 S.W.3d at 783; In re Vesta
Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex.2006); In re Serv. Corp. Int'l, 85 S.W.3d 171, 174 (Tex.2002); In re Bruce
Terminix Co., 988 S.W.2d at 704; In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574 (Tex.1999); EZ Pawn Corp.,
934 S.W.2d at 89; Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898–99 (Tex.1995).
81 See In re Gen. Elec. Capital Corp., 203 S.W.3d 314, 316 (Tex.2006); Sun Exploration & Prod. Co. v. Benton, 728 S.W.2d
35, 37 (Tex.1987); Bocanegra v. Aetna Life Ins. Co., 605 S.W.2d 848, 851 (Tex.1980); Mass. Bonding & Ins. Co. v.
Orkin Exterminating Co., 416 S.W.2d 396, 401 (Tex.1967); Texas & P. Ry. Co. v. Wood, 145 Tex. 534, 199 S.W.2d
652, 656 (1947); Kennedy v. Bender, 104 Tex. 149, 135 S.W. 524, 526 (1911); see also Cabinetree of Wis., Inc. v.
Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir.1995) (citing authorities showing that contract law generally holds
waiver effective without proof of detrimental reliance).
82 Mass. Bonding & Ins. Co. v. Orkin Exterminating Co., 416 S.W.2d 396, 401 (Tex.1967).
83 See Doctor's Assocs., Inc. v. Casarotto, 517 U.S. 681, 686–87, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996); Allied–Bruce
Terminix Cos. v. Dobson, 513 U.S. 265, 281, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995).
84 In re Citigroup, Inc., 376 F.3d 23, 26 (1st Cir.2004) (“We have emphasized that, to succeed on a claim of waiver, plaintiffs
must show prejudice.”); Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d 102, 105 (2d Cir.2002); Hoxworth v.
Blinder, Robinson & Co., 980 F.2d 912, 925 (3d Cir.1992) (“[P]rejudice is the touchstone for determining whether the
right to arbitrate has been waived....”); Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 206
(4th Cir.2004) ( “[T]he dispositive question is whether the party objecting to arbitration has suffered actual prejudice.”)
(internal quotations and italics omitted); Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir.2004)
(“In addition to the invocation of the judicial process, there must be prejudice to the party opposing arbitration before we
will find that the right to arbitrate has been waived.”); O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345, 356 (6th
Cir.2003); Kelly v. Golden, 352 F.3d 344, 349 (8th Cir.2003) (“The actions must result in prejudice to the other party for
waiver to have occurred.”); Brown v. Dillard's, Inc., 430 F.3d 1004, 1012 (9th Cir.2005); Metz v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 39 F.3d 1482, 1490 (10th Cir.1994); Ivax Corp. v. B. Braun of Am., Inc., 286 F.3d 1309, 1316 (11th
Cir.2002) (“[W]e look to see whether, by [invoking the litigation process], that party has in some way prejudiced the other
party.”) (internal quotations omitted).
85 St. Mary's Med. Ctr. of Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d 585, 590–91 (7th Cir.1992); Nat'l Found.
for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 777 (D.C.Cir.1987) (holding “a court may consider
prejudice to the objecting party as a relevant factor among the circumstances that the court examines in deciding whether
the moving party has taken action inconsistent with the agreement to arbitrate”).
86 In re Weekley Homes, L.P., 180 S.W.3d 127, 130–31 (Tex.2005); In re Kellogg Brown & Root, Inc., 166 S.W.3d 732,
738–39 (Tex.2005); see also Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 87, 123 S.Ct. 588, 154 L.Ed.2d 491
(2002) (Thomas, J., concurring) (suggesting Supreme Court sometimes looks to federal law and sometimes law chosen
by parties); Wash. Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260, 267 n. 6 (5th Cir.2004) (noting that whether state or
federal law of arbitrability applies “is often an uncertain question”).
87 Trammell Crow Co. No. 60 v. Harkinson, 944 S.W.2d 631, 636 (Tex.1997); see English v. Fischer, 660 S.W.2d 521,
524 (Tex.1983); Moore Burger, Inc. v. Phillips Petroleum Co., 492 S.W.2d 934, 936 (Tex.1972); Wheeler v. White, 398
S.W.2d 93, 96 (Tex.1965); RESTATEMENT (SECOND) OF CONTRACTS § 90 (1979).
88 RESTATEMENT (SECOND) OF CONTRACTS § 87(2) (1981) (“An offer which the offeror should reasonably expect to
induce action or forbearance of a substantial character on the part of the offeree before acceptance and which does
induce such action or forbearance is binding as an option contract to the extent necessary to avoid injustice.”).
89 Because we limit our review to the record before the trial judge, we do not consider the Defendants' additional seven
volumes of discovery exhibits filed after the arbitration award.
90 173 S.W.3d 565, 570; see also Green Tree Fin. Corp.-Ala. v. Randolph, 531 U.S. 79, 89, 121 S.Ct. 513, 148 L.Ed.2d
373 (2000) (holding that unconscionable arbitration fee would render clause unenforceable).
91 See In re Tyco Int'l Ltd. Sec. Litig., 422 F.3d 41, 46 (1st Cir.2005) (holding defendant's objections to arbitration before
criminal trial waived his right to arbitration); Gilmore v. Shearson/American Exp. Inc., 811 F.2d 108, 112 (2d Cir.1987)
(holding party's withdrawal of its prior motion to compel arbitration constituted express waiver of that right).
92 See In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 764 (Tex.2006) (citing Com–Tech Assocs. v. Computer Assocs. Int'l,
Inc., 938 F.2d 1574, 1576–77 (2d Cir.1991), in which arbitration was waived by request that did not come until 18 months
after filing and 4 months before trial).
93 Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir.2004) (punctuation omitted); accord, In re Tyco,
422 F.3d at 46 n. 5 (“[A] party should not be allowed purposefully and unjustifiably to manipulate the exercise of its arbitral
rights simply to gain an unfair tactical advantage over the opposing party.”); In re Citigroup, Inc., 376 F.3d 23, 28 (1st
Cir.2004); Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 327 (5th Cir.1999); PPG Indus., Inc. v. Webster Auto
Parts, Inc., 128 F.3d 103, 107 (2d Cir.1997); Doctor's Assocs. v. Distajo, 107 F.3d 126, 134 (2d Cir.1997) (“[P]rejudice as
defined by our cases refers to the inherent unfairness-in terms of delay, expense, or damage to a party's legal position-
that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue.”).
94 In re Tyco, 422 F.3d at 46 n. 5.
95 See, e.g., Tenneco Inc. v. Enter. Prods. Co., 925 S.W.2d 640, 643 (Tex.1996) (holding companies waived contractual
right to approve assignments by treating assignee as full partner); Ford v. State Farm Mut. Auto. Ins. Co., 550 S.W.2d
663, 666 (Tex.1977) (holding insurer waived contractual right to consent to settlement by denying liability under policy).
96 See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n. 12, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967) (“[T]he
purpose of Congress in 1925 was to make arbitration agreements as enforceable as other contracts, but not more so.”).
97 W. Wendell Hall, Standards of Review in Texas, 38 ST. MARY'S L.J . 43, 67 (2006).
98 TEX. CIV. PRAC. & REM.CODE § 37.009 (“In any proceeding under this chapter, the court may award costs and
reasonable and necessary attorney's fees as are equitable and just.” (emphasis added)).
99 See TEX.R. EVID. 801–806.
100 See Nat'l Liab. and Fire Ins. Co. v. Allen, 15 S.W.3d 525, 529 (Tex.2000) (hearsay); Bocquet v. Herring, 972 S.W.2d
19, 21 (Tex.1998) (declaratory fee award).
101 In re Serv. Corp. Int'l, 85 S.W.3d 171, 174 (Tex.2002); In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574
(Tex.1999); In re Bruce Terminix Co., 988 S.W.2d 702, 703–04 (Tex.1998).
102 Brainard v. State, 12 S.W.3d 6, 30 (Tex.1999) (holding that in abuse-of-discretion standard “we defer to the trial court's
factual determinations if they are supported by the evidence and review its legal determinations de novo”); Walker v.
Packer, 827 S.W.2d 833, 840 (Tex.1992) (“A trial court has no ‘discretion’ in determining what the law is or applying the
law to the facts. Thus, a clear failure by the trial court to analyze or apply the law correctly will constitute an abuse of
discretion ....”); see Hall, supra note 97, at 284 (“When the trial court's findings involve [mixed] questions of law and fact,
the appellate court reviews the trial court's decision for an abuse of discretion. In applying the standard, the reviewing
court defers to the trial court's factual determinations if supported by the evidence and reviews its legal determinations
de novo.”); cf. Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 484 (5th Cir.2002) (“This court reviews
de novo a district court's dismissal of a claim that a party waived its right to arbitrate.”); accord, Ivax Corp. v. B. Braun of
Am., Inc., 286 F.3d 1309, 1316 (11th Cir.2002); Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 326 (5th Cir.1999).
103 Brainard, 12 S.W.3d at 30; Walker, 827 S.W.2d at 840; see Hall, supra note 97, at 284; cf. Gulf Guar., 304 F.3d at 484;
accord, Ivax Corp., 286 F.3d at 1316; Subway Equip., 169 F.3d at 326.
104 See Reliance Nat'l Indem. Co. v. Advance'd Temps., Inc., 227 S.W.3d 46, 50 (Tex.2007) (“What might otherwise be a
question of fact becomes one of law when the fact is not in dispute or is conclusively established.”); Hall, supra note 97,
at 284 (“[A] trial court abuses its discretion [if the court] ... fails to properly apply the law to the undisputed facts....”).
105 See supra Part VI.A.
106 258 S.W.3d at 606–07 (“But even if the Court is right and the reimbursement clause does not allow for recovery of all
Defendants' litigation attorney's fees, an arbitration award would not be subject to being vacated if an arbitrator interpreted
it to allow recovery of all the fees.”).
107 The parties contract limited reimbursement to costs incurred in “seeking dismissal” of litigation, not costs incurred in
preparing it for trial:
Inasmuch as this Agreement provides for mandatory arbitration of disputes, if any party commences litigation in
violation of this Agreement, such party shall reimburse the other parties to the litigation for their costs and expenses
including attorney's fees incurred in seeking dismissal of such litigation.
(emphasis added).
108 See Preston v. Ferrer, 552 U.S. 346, 128 S.Ct. 978, 986, 169 L.Ed.2d 917 (2008) (“A prime objective of an agreement to
arbitrate is to achieve streamlined proceedings and expeditious results.”); Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry,
Inc., 50 F.3d 388, 391 (7th Cir.1995) (noting that “the discovery provisions of the Federal Rules of Civil Procedure are
more generous than those of the American Arbitration Association”); cf. Price v. Drexel Burnham Lambert, Inc., 791 F.2d
1156, 1160 (5th Cir.1986) (finding prejudice due to discovery as “discovery—whether meaningful or otherwise—is not
available in arbitration”); Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 498 (5th Cir.1986) (“A party to
arbitration does not have a right to the pre-trial discovery procedures that are used in a case at law.”); Developments in the
Law–Discovery, 74 HARV. L.REV. 940, 943 (1961) (noting expense of discovery as inconsistent with desire to arbitrate).
109 The court of appeals affirmed on this basis. 173 S.W.3d at 570 (“Appellants did not provide any evidence of the work
done, time spent, or costs incurred that would not have been done or incurred in anticipation of an arbitration hearing.”).
110 TEX. CIV. PRAC. & REM.CODE § 171.021(b); see Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 269 (Tex.1992).
111 Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir.2004) (internal citations and punctuation
omitted).
112 In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (Tex.2006).
113 Two of the numerous defendants in Vesta initially objected to the remaining defendants' motion to compel arbitration, but
withdrew that objection before the hearing on the motion.
114 Id. at 763.
115 Id.
116 The defendants in Vesta had stipulated that all discovery obtained so far could be used in arbitration.
117 See TEX.R. CIV. P. 12.
1 In relevant part, the provision provided for the homeowners, the builder, the administrator of the warranty program, and
the warranty insurer to submit to arbitration
all claims, demands, disputes, controversies, and differences that may arise between the parties to this Agreement
of whatever kind or nature, including without limitation, disputes: (1) as to events, representations, or omissions
which pre-date this Agreement; (2) arising out of this Agreement or other action performed or to be performed by
the Builder, the Administrator or the Insurer pursuant to this Agreement.
As to procedures in arbitration, the arbitration provision provided that “The Arbitration shall be conducted in accordance
with the Arbitrator's rules and regulations to the extent that they are not in conflict with the Federal Arbitration Act.”
2 The trial court did not order arbitration as to defendants Jerald W. Kunkel, the foundation engineer, and his firm. The Culls
agreed the Kunkel defendants were not covered by the arbitration agreement. The Kunkel defendants are not parties
to this appeal.
3 Defendants referenced depositions in their motion for rehearing. They did not take the position or offer proof at the hearing
on the Culls' motion to compel arbitration that depositions would not have occurred in arbitration either by permission
of the arbitrator or by agreement.
4 Although not before the trial court when it ordered arbitration, the arbitration record now before us shows that Defendants
considered the clause to provide for recovery of all litigation costs and attorneys' fees, not just those incurred in seeking
dismissal of the lawsuit. The arbitration record shows Defendants claimed that pursuant to the reimbursement clause
they were “entitled to recover or setoff [their] attorney's fees from [the Culls], which were incurred in connection, with the
litigation.” Perry Homes' attorney submitted an affidavit to the arbitrator in support of the claim for attorneys' fees recovery
or setoff. The affidavit mirrored the affidavit submitted as part of Defendants' motion for reconsideration that was earlier
filed in the lawsuit. The arbitration affidavit claimed that
Prior to the Court's order compelling arbitration, Perry Homes incurred one-hundred-twenty-two (122) attorney
hours and twenty (20) paralegal hours responding to Claimants' discovery requests and discovery-related motions.
Accordingly, Perry Homes is entitled to an offset in the amount of $26,400.00 against any damages awarded to
Claimants, due to their violation of the arbitration agreement.
5 The Federal Arbitration Act provides that an arbitration award may be set aside for limited reasons:
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown,
or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the
rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite
award upon the subject matter submitted was not made.
9 U.S.C. § 10(a).
6 Of course, that argument cuts against the idea that discovery was not usable in arbitration.
1 See Chambers v. O'Quinn, 242 S.W.3d 30 (Tex.2007); In re U.S. Home Corp., 236 S.W.3d 761 (Tex.2007). This case
is the third.
2 In re Great Western Drilling, Ltd., 211 S.W.3d 828 (Tex.App.–Eastland 2006), pet. granted, 51 Tex. Sup.Ct. J. 77 (Nov.
2, 2007); Werline v. E. Tex. Salt Water Disposal Co., 209 S.W.3d 888 (Tex.App.–Texarkana 2006), pet. granted, 51 Tex.
Sup.Ct. J. 77 (Nov. 2, 2007); Bison Bldg. Materials v. Aldridge, 2006 WL 2641280 (Tex.App.–Houston [1st Dist.] 2006),
pet. granted, 51 Tex. Sup.Ct. J. 77 (Nov. 2, 2007); Forest Oil Corp. v. McAllen, 2005 WL 3435061 (Tex.App.–Corpus
Christi 2005), pet. granted, 51 Tex. Sup.Ct. J. 667 (Apr. 27, 2007).
3 In re Nitla, 92 S.W.3d 419, 422 (Tex.2002) (citing Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241–42
(Tex.1985)).
4 258 S.W.3d at 598.
5 Nitla, 92 S.W.3d at 422.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Persons entitled to seek review or assert *483 Appellee brought suit in California Superior Court
arguments; parties against his former employer **2522 and appellants, two
Resolution in favor of parties seeking to of its employees, alleging breach of contract and related
compel arbitration that they had standing causes of action arising from a dispute over commissions
to enforce arbitration agreement was not on securities sales. After appellee refused to arbitrate,
prerequisite to parties' having constitutional appellants filed a petition to compel arbitration under §§
standing to maintain appeal to United 2 and 4 of the Federal Arbitration Act, which respectively
States Supreme Court; rather, standing provide that contractual arbitration provisions are valid
argument presented straight forward issue of and enforceable and mandate their judicial enforcement.
contract interpretation of whether arbitration The demand for arbitration was based on a provision in a
provision inured to benefit of parties in form appellee executed in connection with his employment
question, and whether agreement could be application, whereby he agreed to arbitrate any dispute
construed to cover dispute that arose between with his employer. Appellee opposed arbitration on the
them. U.S.C.A. Const. Art. 3, § 1 et seq. ground that his suit was authorized by California Labor
Code § 229, which provides that wage collection actions
310 Cases that cite this headnote may be maintained without regard to the existence of
any private agreement to arbitrate. The court refused
to compel arbitration, characterizing as “controlling
[6] Federal Courts
authority” Merrill Lynch, Pierce, Fenner & Smith, Inc. v.
Review of state courts
Ware, 414 U.S. 117, 94 S.Ct. 383, 38 L.Ed.2d 348 which
Question of whether arbitration agreement
upheld § 229 in the face of a Supremacy Clause preemption
constituted unconscionable, unenforceable
challenge premised on an arbitration requirement in a
contracts of adhesion would not be addressed
New York Stock Exchange rule, which was promulgated
by Supreme Court, where issue was not
pursuant to § 6 of the Securities & Exchange Act of 1934
decided by lower courts.
(1934 Act). The State Court of Appeals affirmed. Both
35 Cases that cite this headnote lower courts refused to consider appellee's argument that
appellants lacked “standing” to enforce the arbitration
agreement since they were not parties to it.
[7] Alternative Dispute Resolution
Unconscionability Held:
Alternative Dispute Resolution
Construction 1. Under the Supremacy Clause, § 2 of the Federal
Court may not, in assessing rights of litigants Arbitration Act pre-empts § 229 of the California Labor
to enforce arbitration agreement, construe Code. In enacting § 2, Congress declared a national
that agreement in matter different from that policy favoring arbitration and withdrew the States'
in which it otherwise construes nonarbitration power to require a judicial forum for the resolution
agreement under state law; nor may court rely of claims that contracting parties agreed to resolve by
on uniqueness of agreement to arbitrate as arbitration. Ware is distinguishable on the ground that the
basis for state-law holding that enforcement language and policies of the 1934 Act and the regulations
would be unconscionable. 9 U.S.C.A. § 1 et promulgated thereunder evidenced no clear federal intent
seq. to require arbitration. The oblique reference to the Federal
Arbitration Act in footnote 15 of Ware cannot fairly
313 Cases that cite this headnote be read as a definitive holding that that Act does not
pre-empt § 229, since the footnote was concerned with
federally created rights and did not address the issue of
federal pre-emption of state-created rights. Pp. 2525–2526.
enforce the agreement to arbitrate is a prerequisite under commissions on the sale of securities. Thomas alleged
Article III of the Constitution to their maintenance of breach of contract, conversion, civil conspiracy to commit
this appeal is rejected. Appellee's “standing” argument— conversion, and breach of *485 fiduciary duty, for which
which this Court does not reach because the lower courts he sought compensatory and punitive damages. After
did not address it—simply presents the straightforward Thomas refused to submit the dispute to arbitration,
contract interpretation issue whether the arbitration the defendants sought to stay further proceedings in the
provision inures to appellants' benefit and may be Superior Court. Perry and Johnston filed a petition in the
construed to cover the present dispute. That issue may be Superior Court to compel arbitration; Kidder, Peabody
resolved on remand, and its status as an alternative ground invoked diversity jurisdiction and filed a similar petition in
for denying arbitration does not prevent this Court from Federal District Court. Both petitions sought arbitration
reviewing the lower courts' holdings on the pre-emption under the authority of §§ 2 and 4 of the Federal Arbitration
question. Pp. 2526–2527. Act. 1
under the Supremacy Clause, U.S. Const., Art. VI, cl. compulsory arbitration, notwithstanding the existence
2. Thomas maintained that the decision in Ware stood of an arbitration agreement. App. 140a–141a. Like
for the proposition that the State's interest in protecting the Superior Court, the Court of Appeal also rejected
**2524 wage earners outweighs the federal interest in appellants' argument, based on this Court's decision in
uniform dispute resolution. Dean Witter Reynolds Inc. v. Byrd, 470 U.S. 213, 105 S.Ct.
1238, 84 L.Ed.2d 158 (1985), that the ancillary claims
The Superior Court denied appellants' petition to for conversion, civil conspiracy, and breach of fiduciary
compel arbitration. 3 Thomas v. Kidder Peabody & Co., duty were severable from the breach-of-contract claim
Civ.Action No. C529105 (Los Angeles County, Apr. and should be arbitrated. App. 142a. Finally, **2525 the
23, 1985) (reprinted at App. 128a–129a). The court Court of Appeal refused to consider Thomas' argument
characterized Ware as “controlling authority” which that Perry and Johnston lacked “standing” to enforce the
held that, “in accordance with California Labor Code arbitration agreement. The court concluded that Thomas
Section 229, actions to collect wages may be pursued had raised this argument for the first time on appeal. 6 Id.,
without regard to private arbitration agreements.” Id., at at 140a, n. 1.
129a. It further concluded that since Thomas' claims for
conversion, civil conspiracy, and breach of fiduciary duty *489 The California Supreme Court denied appellants'
were ancillary to his claim for breach of *487 contract petition for review. Id., at 144a. We noted probable
and differed only in terms of the remedies sought, they jurisdiction, 7 479 U.S. 982, 107 S.Ct. 567, 93 L.Ed.2d 572
should also be tried and not severed for arbitration. Id., at (1986), and now reverse.
128a–129a. The Superior Court did not address Thomas'
contention that Perry and Johnston were “not parties” to
the arbitration agreement, id., at 78a, and therefore lacked
a contractual basis for asserting the right to arbitrate, an II
argument Thomas characterizes as one of “standing.” 4 [1] [2] “Section 2 is a congressional declaration of
a liberal federal policy favoring arbitration agreements,
Before the California Court of Appeal, appellants argued notwithstanding any state substantive or procedural
that Ware resolved only the narrow issue whether § 229 policies to the contrary. The effect of the section is to
was pre-empted by Rule 347's provision for arbitration, create a body of federal substantive law of arbitrability,
given the promulgation of that Rule by the NYSE applicable to any arbitration agreement within the
pursuant to § 6 of the Securities Exchange Act of 1934 coverage of the Act.” Moses H. Cone Memorial Hospital
(1934 Act), 48 Stat. 885, as amended, 15 U.S.C. § 78f, and v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct.
the authority of the Securities and Exchange Commission 927, 941, 74 L.Ed.2d 765 (1983). Enacted pursuant to
(SEC) to review and modify the NYSE Rules pursuant to the Commerce Clause, U.S. Const., Art. I, § 8, cl. 3, this
§ 19 of the 1934 Act, 15 U.S.C. § 78s. 5 See 414 U.S., at body of substantive law is enforceable in both state and
135. It was appellants' contention that, despite an indirect federal courts. Southland Corp. v. Keating, 465 U.S. 1,
reference to the Federal Arbitration *488 Act in footnote 11–12, 104 S.Ct. 852, 858–859, 79 L.Ed.2d 1 (1984) (§ 2
15 of the Ware opinion, the pre-emptive effect of § 2 of the held to pre-empt a provision of the California Franchise
Act was not at issue in that case. Investment Law that California courts had interpreted to
require judicial consideration of claims arising under that
In an unpublished opinion, the Court of Appeal law). As we stated in Keating, “[i]n enacting § 2 of the
affirmed. Thomas v. Perry, 2d Civ. No. B014485 (2d federal Act, Congress declared a national policy favoring
Dist., Div. 5, Apr. 10, 1986) (reprinted at App. 139a– arbitration and withdrew the power of the states to require
142a). It read Ware 's single reference to the Federal a judicial forum for the resolution of claims which the
Arbitration Act to imply that the Court had refused to contracting parties agreed to resolve by arbitration.” Id.,
hold § 229 pre-empted by that Act and the litigants' at 10, 104 S.Ct., 858. “Congress intended to foreclose
agreement to arbitrate disputes pursuant to Rule 347. state legislative attempts to undercut the enforceability of
Thus, the Court of Appeal held that a claim for arbitration agreements.” Id., at 16, 104 S.Ct. 861 (footnote
unpaid wages brought under § 229 was not subject to omitted). Section 2, therefore, embodies a clear federal
policy of requiring arbitration unless the agreement to
arbitrate is not part of a contract evidencing interstate 3353, 87 L.Ed.2d 444 (1985). This clear federal policy
commerce or is revocable “upon such grounds as exist at places § 2 of the Act in unmistakable conflict with
law or in equity for the revocation of any contract.” 9 California's § 229 requirement that litigants be provided
U.S.C. § 2. “We see nothing in the Act indicating that the a judicial forum for resolving wage disputes. Therefore,
broad principle of enforceability *490 is subject to any under the Supremacy Clause, the state statute must give
additional limitations under state law.” Keating, supra, at way.
11, 104 S.Ct., 858.
The oblique reference to the Federal Arbitration Act in
In Ware, which also involved a dispute between a footnote 15 of the Ware decision, 414 U.S., at 135, 94
securities broker and his former employer, we rejected S.Ct., at 393, cannot fairly be read as a definitive holding
a Supremacy Clause challenge to § 229 premised in to the contrary. There, the Court noted a number of
part on the contention that, because the 1934 Act had decisions as having “endorsed the suitability of arbitration
empowered the NYSE to promulgate rules and had given to resolve federally created rights.” Ibid. (emphasis added).
the SEC authority to review and modify these rules, Footnote 15 did not address the issue of federal pre-
a private agreement to be bound by the arbitration emption of state-created rights. Rather, the import of the
provisions of NYSE Rule 347 was enforceable as a matter footnote was that the reasoning—and perhaps result—in
of federal substantive law, and pre-empted state laws Ware might have been different if the 1934 Act “itself ha[d]
requiring resolution of the dispute in court. But the federal provided for arbitration.” Ibid. 8
substantive law invoked in Ware emanated from a specific
federal regulatory statute **2526 governing the securities [4] [5] [6] [7] *492 Our holding that § 2 of the Federal
industry—the 1934 Act. We examined the language and Arbitration Act preempts § 229 of the California Labor
policies of the 1934 Act and found “no Commission rule or Code obviates any need to consider whether our decision
regulation that specifie[d] arbitration as the favored means in **2527 Byrd, supra, 470 U.S., at 221, 105 S.Ct., at
of resolving employer-employee disputes,” 414 U.S., at 1242, would have required severance of Thomas' ancillary
135, 94 S.Ct., at 393, or that revealed a necessity for claims for conversion, civil conspiracy, and breach of
“nationwide uniformity of an exchange's housekeeping fiduciary duty from his breach-of-contract claim. We
affairs.” Id., at 136, 94 S.Ct., at 394. The fact that NYSE likewise decline to reach Thomas' contention that Perry
Rule 347 was outside the scope of the SEC's authority and Johnston lack “standing” to enforce the agreement
of review militated against finding a clear federal intent to arbitrate any of these claims, since the courts below
to require arbitration. Id., at 135–136, 94 S.Ct., at 393– did not address this alternative argument for refusing
94. Absent such a finding, we could not conclude that to compel arbitration. However, we do reject Thomas'
enforcement of California's § 229 would interfere with the contention that resolving these questions in appellants'
federal regulatory scheme. Id., at 139–140, 94 S.Ct., at favor is a prerequisite to their having standing under
395–96. Article III of the Constitution to maintain the present
appeal before this Court. As we perceive it, Thomas'
[3] By contrast, the present appeal addresses the “standing” argument simply presents a straightforward
pre-emptive effect of the Federal Arbitration Act, a issue of contract interpretation: whether the arbitration
statute that embodies Congress' intent to provide for provision inures to the benefit of appellants and may be
the enforcement of arbitration agreements within the full construed, in light of the circumstances surrounding the
reach of the Commerce Clause. Its general applicability litigants' agreement, to cover the dispute that has arisen
reflects that “[t]he preeminent concern of Congress in between them. This issue may be resolved on remand; its
passing the Act was to enforce private agreements into status as an alternative ground for denying arbitration
which parties had entered....” Byrd, 470 U.S., at 221, does not prevent us from reviewing the ground exclusively
105 S.Ct., at 1242. We have accordingly held that
relied upon by the courts below. 9
these agreements must be “rigorously enforce [d].” Ibid.;
see Shearson/American Express Inc. v. McMahon, 482
U.S. 220, 226, 107 S.Ct. 2332, ––––, 96 L.Ed.2d 185
(1987); *491 Mitsubishi Motors Corp. v. Soler Chrysler- *493 III
Plymouth, Inc., 473 U.S. 614, 625–626, 105 S.Ct. 3346,
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
1 Section 2 provides, in relevant part:
“A written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy
thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, ... shall
be valid, irrevocable and enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract.” 9 U.S.C. § 2.
Section 4 mandates judicial enforcement of arbitration agreements where a party has failed, neglected, or refused to
arbitrate. 9 U.S.C. § 4.
2 Section 200(a) of the California Labor Code defines “wages” to include amounts earned on a “commission basis.”
Cal.Lab.Code Ann. § 200(a) (West 1971). The California Superior Court and the California Court of Appeal held below
that the commissions at issue in this case fall within the statutory definition. App. 128a, 140a.
3 The Federal District Court gave this ruling preclusive effect and entered a final order dismissing Kidder, Peabody's petition
in the parallel proceeding. Kidder, Peabody & Co. v. Thomas, Civ.Action No. 85–1257RJK (CD Cal., Sept. 29, 1986)
(reprinted at App. 245a); id., at 235a.
4 Having concluded that this Court's decision in Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 94
S.Ct. 383, 38 L.Ed.2d 348 (1973), was dispositive, the California Superior Court also did not address Thomas' alternative
argument that the arbitration agreement in this case constitutes an unconscionable, unenforceable contract of adhesion
because “(a) the selection of arbitrators is made by the New York Stock Exchange and is presumptively biased in favor
of management; and (b) the denial of meaningful ... discovery is unduly oppressive and frustrates an employee's claim
for relief.” App. 74a.
5 The Court of Appeal rejected appellants' contention that amendments to the 1934 Act since this Court's decision in Ware
removed the theoretical underpinnings of that decision by expanding the scope of the SEC's authority under § 19 to
review and modify NYSE rules. See 15 U.S.C. § 78s(c). Appellants continue to make this argument, in their appeal before
this Court, as an alternative basis for distinguishing Ware. Brief for Appellants 17–20 (citing S.Rep. No. 94–75, pp. 22–
38 (1975), U.S.Code Cong. & Admin.News 1975, p. 179; Drayer v. Krasner, 572 F.2d 348, 356–359 (CA2), cert. denied,
436 U.S. 948, 98 S.Ct. 2855, 56 L.Ed.2d 791 (1978)). However, because we rest our decision exclusively on the Federal
Arbitration Act, we decline to consider the pre-emptive effect of the amended 1934 Act as it relates to Thomas' agreement
to be bound by NYSE Rule 347.
6 Objecting to appellants' request for a formal Statement of Decision from the Superior Court following summary denial
of their motion to compel, Thomas argued that appellants had “no standing” to seek an order compelling arbitration.
App. 120a. Perry and Johnston replied that their “standing” to seek arbitration inhered in their status as agents and
employees of Kidder, Peabody, and as beneficiaries of the agreement between Kidder, Peabody and Thomas. Id., at
124a. In response, Thomas simply argued that Perry and Johnston had submitted no supporting evidence to show they
had acted as agents for Kidder, Peabody. Id., at 132a. The Superior Court did not amend a Proposed Statement of
Decision, see id., at 128a–129a, to address these arguments, and it was formally adopted as the Statement of Decision
from which Perry and Johnston appealed. Id., at 135a.
Having based its decision “squarely on Ware,” the Court of Appeal also declined to reach Thomas' alternative ground
for supporting the Superior Court's decision not to compel arbitration: his contention that the arbitration provision
constitutes an unconscionable, unenforceable contract of adhesion. Id., at 141a, n. 3; see n. 4, supra.
7 Jurisdiction over this appeal is provided by 28 U.S.C. § 1257(2). See Southland Corp. v. Keating, 465 U.S. 1, 6–8, 104
S.Ct. 852, 856–857, 79 L.Ed.2d 1 (1984).
8 First among the decisions cited in footnote 15 was Wilko v. Swan, 346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953), in
which the Court resolved a conflict between the Federal Securities Act of 1933 and the Federal Arbitration Act by holding
that the policies of the former prevailed and that an arbitration agreement, for which enforcement was sought under the
latter, was invalid. No federal pre-emption question was presented.
Only the unexplained citation to Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d
1270 (1967), could be construed as a reference to principles of federal pre-emption. However, that case provides no
support for Thomas' position. It arose as a diversity action in which one party to a contract containing an arbitration
clause asserted a right under state law to judicial resolution of his claim of fraud in the inducement of the contract. The
Court held that, while § 2 of the Federal Arbitration Act authorized judicial determination of a claim that the arbitration
clause itself had been procured through fraud, a court could not decide whether fraud had induced the making and
performance of the contract generally since this claim fell within the broad scope of the agreement to arbitrate. Id., at
404, 87 S.Ct., at 1806. The Court dismissed the argument that the asserted right to judicial resolution adhered in state
substantive law which a federal court sitting in diversity was bound to follow under the rule of Erie R. Co. v. Tompkins,
304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188 (1938). It reasoned instead that Congress had enacted the substantive
provisions of the Federal Arbitration Act pursuant, in part, to its constitutional power to regulate interstate commerce,
388 U.S., at 404–405, 87 S.Ct., at 1806, a distinction which endows these provisions with pre-emptive force under
the Supremacy Clause.
9 We also decline to address Thomas' claim that the arbitration agreement in this case constitutes an unconscionable,
unenforceable contract of adhesion. This issue was not decided below, see nn. 4 and 6, supra, and may likewise be
considered on remand.
We note, however, the choice-of-law issue that arises when defenses such as Thomas' so-called “standing” and
unconscionability arguments are asserted. In instances such as these, the text of § 2 provides the touchstone for
choosing between state-law principles and the principles of federal common law envisioned by the passage of that
statute: An agreement to arbitrate is valid, irrevocable, and enforceable, as a matter of federal law, see Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983), “save
upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2 (emphasis added). Thus
state law, whether of legislative or judicial origin, is applicable if that law arose to govern issues concerning the validity,
revocability, and enforceability of contracts generally. A state-law principle that takes its meaning precisely from the
fact that a contract to arbitrate is at issue does not comport with this requirement of § 2. See Prima Paint, supra, 388
U.S., at 404, 87 S.Ct., at 1806; Southland Corp. v. Keating, 465 U.S., at 16–17, n. 11, 104 S.Ct., at 861, n. 11. A
court may not, then, in assessing the rights of litigants to enforce an arbitration agreement, construe that agreement
in a manner different from that in which it otherwise construes nonarbitration agreements under state law. Nor may a
court rely on the uniqueness of an agreement to arbitrate as a basis for a state-law holding that enforcement would be
unconscionable, for this would enable the court to effect what we hold today the state legislature cannot.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
PHH CORPORATION, et al., Petitioners Petition for review granted and CFPB order vacated and
v. remanded.
CONSUMER FINANCIAL
PROTECTION BUREAU, Respondent Randolph, Senior Circuit Judge, filed concurring opinion.
3 Cases that cite this headnote 1 Cases that cite this headnote
of the Act shall not be affected, and Act Congress has explicitly provided for severance
would still have been fully operative and by including a severability clause in the
CFPB would have been able to regulate the statute.
offering and provision of consumer financial
products if for-cause removal provision was Cases that cite this headnote
removed. U.S. Const. art. 2; 12 U.S.C.A. §§
5302, 5491(c)(3). [15] Statutes
Effect of Partial Invalidity; Severability
4 Cases that cite this headnote
In determining whether the unconstitutional
portion of a statute is severable, courts must
[11] Statutes look at the balance of the legislation to assess
Effect of Partial Invalidity; Severability whether the statute is capable of functioning
Generally speaking, when confronting a without the offending provisions in a manner
constitutional flaw in a statute, courts try to consistent with the intent of Congress, which
limit the solution to the problem, severing in essence turns on whether the truncated
any problematic portions while leaving the statute is fully operative as a law.
remainder intact.
2 Cases that cite this headnote
2 Cases that cite this headnote
Regulations in general
Consumer Credit
West Codenotes
Pleading and evidence
Proving that a mortgage insurer paid more Held Unconstitutional
than reasonable market value for reinsurance 12 U.S.C.A. § 5491(c)(3)
provided by a mortgage lender affiliated
with the reinsurer, and thus made a *4 On Petition for Review of an Order of the Consumer
disguised payment for the lender's referral Financial Protection Bureau (CFPB File 2014–CFPB–
to the reinsurer, is an element of the 0002)
kickback offense, under provision of Real
Attorneys and Law Firms
Estate Settlement Procedures Act (RESPA)
prohibiting kickbacks in real estate settlement Theodore B. Olson argued the cause for petitioners. With
agreements, that the Consumer Financial him on the briefs were Helgi C. Walker, Mitchel H. Kider,
Protection Bureau (CFPB) has the burden of David M. Souders, Thomas M. Hefferon, and William M.
proving by a preponderance of the evidence. Jay.
Real Estate Settlement Procedures Act of
1974 § 8, 12 U.S.C.A. § 2607(c)(2); 12 C.F.R. C. Boyden Gray, Adam J. White, Gregory Jacob, Sam
§ 1081.303(a). Kazman, and Hans Bader were on the brief for amici
curiae State National Bank of Big Spring, et al. in support
1 Cases that cite this headnote of petitioners.
Opinion
Of course, the President executes the laws with the
assistance of subordinate executive officers who are
Opinion for the Court filed by Circuit Judge Kavanaugh, appointed by the President, often with the advice and
with whom Senior Circuit Judge Randolph joins, and with consent of the Senate. To carry out the executive
whom Circuit Judge Henderson joins as to Parts I, IV, and power and be accountable for the exercise of that
V. power, the President must be able to control subordinate
officers in executive agencies. In its landmark decision
Concurring opinion filed by Senior Circuit Judge in Myers v. United States, 272 U.S. 52, 47 S.Ct. 21, 71
Randolph. L.Ed. 160 (1926), authored by Chief Justice and former
President Taft, the Supreme Court therefore recognized
Opinion concurring in part and dissenting in part filed by
the President's Article II authority to supervise, direct,
Circuit Judge Henderson.
and remove at will subordinate officers in the Executive
Kavanaugh, Circuit Judge: Branch.
commissioners, directors, or board members who act as headed not by a multi-member commission but rather by
checks on one another. Each independent agency has a single Director.
traditionally been established, in the Supreme Court's
words, as a “body of experts appointed by law and Because the CFPB is an independent agency headed by a
informed by experience.” Humphrey's Executor, 295 U.S. single Director and not by a multi-member commission,
at 624, 55 S.Ct. 869 (internal quotation marks omitted). the Director of the CFPB possesses more unilateral *7
The multi-member structure reduces the risk of arbitrary authority—that is, authority to take action on one's own,
decisionmaking and abuse of power, and thereby helps subject to no check—than any single commissioner or
protect individual liberty. board member in any other independent agency in the
U.S. Government. Indeed, as we will explain, the Director
In other words, to help preserve individual liberty under enjoys more unilateral authority than any other officer in
Article II, the heads of executive agencies are accountable any of the three branches of the U.S. Government, other
to and checked by the President, and the heads of than the President.
independent agencies, although not accountable to or
checked by the President, are at least accountable to At the same time, the Director of the CFPB possesses
and checked by their fellow commissioners or board enormous power over American business, American
members. No head of either an executive agency or an consumers, and the overall U.S. economy. The Director
independent agency operates unilaterally without any unilaterally enforces 19 federal consumer protection
check on his or her authority. Therefore, no independent statutes, covering everything from home finance to
agency exercising substantial executive authority has ever student loans to credit cards to banking practices. The
been headed by a single person. Director alone decides what rules to issue; how to enforce,
when to enforce, and against whom to enforce the law; and
Until now. what sanctions and penalties to impose on violators of the
law. (To be sure, judicial review serves as a constraint on
In the Dodd–Frank Act of 2010, Congress established illegal actions, but not on discretionary decisions within
a new independent agency, the Consumer Financial legal boundaries; therefore, subsequent judicial review
Protection Bureau. As proposed by then-Professor of individual agency decisions has never been regarded
and now-Senator Elizabeth Warren, the CFPB was as sufficient to excuse a structural separation of powers
to be another traditional, multi-member independent violation.)
agency. See Elizabeth Warren, Unsafe at Any Rate:
If It's Good Enough for Microwaves, It's Good That combination of power that is massive in scope,
Enough for Mortgages. Why We Need a Financial concentrated in a single person, and unaccountable to the
Product Safety Commission, Democracy, Summer 2007, President triggers the important constitutional question at
at 8, 16–18. The initial Executive Branch proposal issue in this case.
in 2009 likewise envisioned a traditional, multi-
member independent agency. See DEPARTMENT OF The petitioner here, PHH, is a mortgage lender and was
THE TREASURY, FINANCIAL REGULATORY the subject of a CFPB enforcement action that resulted
REFORM: A NEW FOUNDATION: REBUILDING in a $109 million order against it. In seeking to vacate
FINANCIAL SUPERVISION AND REGULATION the order, PHH argues that the CFPB's status as an
58 (2009). The House-passed bill sponsored by independent agency headed by a single Director violates
Congressman Barney Frank and championed by Speaker Article II of the Constitution.
Nancy Pelosi also contemplated a traditional, multi-
member independent agency. See H.R. 4173, 111th Cong. The question before us is whether we may extend
§ 4103 (as passed by House, Dec. 11, 2009). the Supreme Court's Humphrey's Executor precedent to
cover this novel, single-Director agency structure for an
But Congress ultimately departed from the Warren and independent agency. To analyze that issue, we follow the
Administration proposals, and from the House bill. history-focused approach long applied by the Supreme
Congress established the CFPB as an independent agency Court in separation of powers cases where, as here, the
constitutional text alone does not resolve the matter.
[1] As those two cases illustrate, history and tradition are In light of the consistent historical practice under
critical factors in separation *8 of powers cases where the which independent agencies have been headed by
constitutional text does not otherwise resolve the matter. multiple commissioners or board members, and in
As Justice Breyer wrote for the Court in Noel Canning, light of the threat to individual liberty posed by a
that bedrock principle—namely, that the “longstanding single-Director independent agency, we conclude that
practice of the government can inform our determination Humphrey's Executor cannot be stretched to cover this
of what the law is”—is “neither new nor controversial.” novel agency structure. We therefore hold that the CFPB
Id. at 2560 (internal quotation marks and citation omitted) is unconstitutionally structured.
(quoting McCulloch v. Maryland, 17 U.S. 4 Wheat. 316,
401, 4 L.Ed. 579 (1819) and Marbury v. Madison, 5 U.S. 1 What is the remedy for that constitutional flaw? PHH
Cranch 137, 177, 2 L.Ed. 60 (1803)). contends that the constitutional flaw means that we must
shut down the entire CFPB (if not invalidate the entire
In this case, the single-Director structure of the CFPB Dodd–Frank Act) until Congress, if it chooses, passes
represents a gross departure from settled historical new legislation fixing the constitutional flaw. But Supreme
practice. Never before has an independent agency Court precedent dictates a narrower remedy. To remedy
exercising substantial executive authority been headed by the constitutional flaw, we follow the Supreme Court's
just one person. precedents, including Free Enterprise Fund, and simply
sever the statute's unconstitutional for-cause provision
from the remainder of the statute. Here, that targeted
remedy will not affect the ongoing operations of the thereby making disguised payments for referrals in
CFPB. With the for-cause provision severed, the President contravention of Section 8. PHH claims, however, that
now will have the power to remove the Director at will, much of the alleged misconduct occurred *10 outside
and to supervise and direct the Director. The CFPB of the three-year statute of limitations and therefore
therefore will continue to operate and to perform its may not be the subject of a CFPB enforcement action.
many duties, but will do so as an executive agency akin The CFPB responds that, under Dodd–Frank, there is
to other executive agencies headed by a single person, no statute of limitations for any CFPB administrative
such as the Department of Justice and the Department of actions to enforce any consumer protection law. In
the Treasury. Those executive agencies have traditionally the alternative, the CFPB contends that there is no
been headed by a single person precisely because *9 the statute of limitations for administrative actions to enforce
agency head operates within the Executive Branch chain Section 8 of the Real Estate Settlement Procedures Act.
of command under the supervision and direction of the We disagree with the CFPB on both points. First of
President. The President is a check on and accountable for all, the Dodd–Frank Act incorporates the statutes of
the actions of those executive agencies, and the President limitations in the underlying statutes enforced by the
now will be a check on and accountable for the actions of CFPB in administrative proceedings. And under the
the CFPB as well. Real Estate Settlement Procedures Act, a three-year
statute of limitations applies to all CFPB enforcement
Because the CFPB as remedied will continue operating, actions to enforce Section 8, whether brought in court or
we must also address the statutory issues raised by PHH administratively.
in its challenge to the $109 million order against it. 1 PHH
raises three main statutory arguments. In sum, we grant PHH's petition for review, vacate the
CFPB's order against PHH, and remand for further
First, PHH argues that the CFPB incorrectly interpreted proceedings consistent with this opinion. On remand,
Section 8 of the Real Estate Settlement Procedures the CFPB may determine among other things whether,
Act to bar so-called captive reinsurance arrangements within the applicable three-year statute of limitations, the
involving mortgage lenders such as PHH and their relevant mortgage insurers paid more than reasonable
affiliated reinsurers. In a captive reinsurance arrangement, market value to the PHH-affiliated reinsurer.
a mortgage lender (such as PHH) refers borrowers to a
mortgage insurer. In return, the mortgage insurer buys In so ruling, we underscore the important but limited real-
reinsurance from a mortgage reinsurer affiliated with (or world implications of our decision. As before, the CFPB
owned by) the referring mortgage lender. We agree with will continue to operate and perform its many critical
PHH that Section 8 of the Act allows captive reinsurance responsibilities, albeit under the ultimate supervision and
arrangements so long as the amount paid by the mortgage direction of the President. Section 8 will continue to mean
insurer for the reinsurance does not exceed the reasonable what it has traditionally meant: that captive reinsurance
market value of the reinsurance. agreements are permissible so long as the mortgage insurer
pays no more than reasonable market value for the
Second, PHH claims that, in any event, the CFPB reinsurance. And the three-year statute of limitations that
departed from the consistent prior interpretations issued has traditionally applied to agency actions to enforce
by the Department of Housing and Urban Development, Section 8 will continue to apply.
and that the CFPB then retroactively applied its new
interpretation of the Act against PHH, thereby violating With apologies for the length of this opinion, we now
PHH's due process rights. We again agree with PHH: The turn to our detailed explanation and analysis of these
CFPB's order violated bedrock principles of due process. important issues.
require certain homebuyers to obtain mortgage insurance. mortgage insurers who in turn purchased reinsurance
Mortgage insurance protects lenders by covering part from a reinsurer affiliated with the lender. But another
of the lenders' losses if homebuyers default on their provision of the Real Estate Settlement Procedures Act,
mortgages. Homebuyers pay monthly premiums to the Section 8(c), carved out a series of expansive exceptions,
mortgage insurer for the insurance. qualifications, and safe harbors related to Section 8(a).
Of relevance here, Section 8(c) provides: “Nothing in
In turn, mortgage insurers may obtain mortgage this section shall be construed as prohibiting ... (2)
reinsurance. In the same way that mortgage insurance the payment to any person of a bona fide salary or
protects lenders, mortgage reinsurance protects mortgage compensation or other payment for goods or facilities
insurers. Reinsurers assume some of the risk of insuring actually furnished or for services actually performed....”
the mortgage. In exchange, mortgage insurers pay a fee Id. § 2607(c).
(usually a portion of the homebuyers' monthly insurance
premiums) to the reinsurers. Before the creation of the CFPB in 2010, the Department
of Housing and Urban Development, known as HUD,
In 1994, PHH established a wholly owned subsidiary interpreted Section 8(c) to establish a safe harbor allowing
known as Atrium Insurance Corporation. Atrium bona fide transactions between a lender and a mortgage
provided reinsurance to the mortgage insurers that insurer (or between a mortgage insurer and a lender-
insured mortgages generated by PHH. In return, PHH affiliated reinsurer), so long as the mortgage insurer
often referred borrowers to mortgage insurers that used did not pay the lender for a referral. HUD therefore
Atrium's reinsurance services. That is known as a “captive interpreted Section 8(c) to allow captive reinsurance
reinsurance” arrangement, which was not uncommon in arrangements so long as the mortgage insurer paid no
the industry at the time. According to PHH, the mortgage more than reasonable market value for the reinsurance. If
insurers did not pay more than reasonable market value the mortgage insurer paid more than reasonable market
to Atrium for the reinsurance. value for the reinsurance, then a presumption would arise
that the excess payment was indeed a disguised payment
Originally passed by Congress and signed by President for the referral, which is impermissible under Section 8(a).
Ford in 1974, the Real Estate Settlement Procedures Act HUD repeatedly reaffirmed that interpretation, and the
is a broad statute governing real estate transactions. One mortgage lending industry relied on it.
of its stated purposes was “the elimination of kickbacks or
referral fees that tend to increase unnecessarily *11 the When Congress created the CFPB in 2010, Congress
costs of certain settlement services.” 12 U.S.C. § 2601(b) provided that the CFPB would take over enforcement of
(2). Section 8 from HUD. By regulation, the CFPB carried
forward HUD's rules, policy statements, and guidance,
To achieve that objective, Section 8(a) of the Act, which subject of course to any future change by the CFPB.
is titled “Prohibition against kickbacks and unearned
fees,” provides: “No person shall give and no person Therefore, under Section 8(c), as authoritatively
shall accept any fee, kickback, or thing of value pursuant interpreted by the Federal Government, PHH as a
to any agreement or understanding, oral or otherwise, mortgage lender could refer customers to mortgage
that business incident to or a part of a real estate insurers who obtained reinsurance from Atrium—so long
settlement service involving a federally related mortgage as the mortgage insurers paid Atrium no more than
loan shall be referred to any person.” Id. § 2607(a). In plain reasonable market value for the reinsurance.
English, Section 8(a) prohibits, as relevant here, paying
for a referral—for example, a mortgage insurer's paying a Or so PHH thought. In 2014, notwithstanding Section
lender for the lender's referral of homebuying customers 8(c) and HUD's longstanding interpretation, the CFPB
to that mortgage insurer. initiated an administrative enforcement action against
PHH. The CFPB alleged that PHH's captive reinsurance
Standing alone, Section 8(a) perhaps might have been arrangement with the mortgage insurers violated Section
construed by government enforcement agencies to cast 8.
doubt on a mortgage lender's referrals of customers to
Under the CFPB's newly minted interpretation, Section As the Supreme Court has explained, our Constitution
8 prohibits most referrals made by lenders to mortgage “was adopted to enable the people to govern themselves,
insurers in exchange for the insurer's purchasing through their elected leaders,” and the Constitution
reinsurance from a lender-affiliated reinsurer. The CFPB “requires that a President chosen by the entire Nation
said that Section 8 bars such a captive reinsurance oversee the execution of the laws.” Free Enterprise Fund
arrangement even when the mortgage insurer pays no v. Public Company Accounting Oversight Board, 561 U.S.
more than reasonable market value to the reinsurer for the 477, 499, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010). Under
reinsurance. the text of Article II, the President alone is responsible
for exercising the executive power. The first 15 words
*12 In its order in this case, the CFPB thus discarded of Article II of the Constitution provide: “The executive
HUD's longstanding interpretation of Section 8 and, Power shall be vested in a President of the United States of
for the first time, pronounced its new interpretation. America.” U.S. CONST. art. II, § 1. And Article II assigns
And then the CFPB applied its new interpretation of the President alone the authority and responsibility to
Section 8 retroactively against PHH, notwithstanding “take Care that the Laws be faithfully executed.” Id. § 3.
PHH's reliance on HUD's prior interpretation. The CFPB Article II makes “emphatically clear from start to finish”
sanctioned PHH for previous actions that PHH had taken that “the president would be personally responsible
in reliance on HUD's prior interpretation, even though for his branch.” AKHIL REED AMAR, AMERICA'S
PHH's conduct had occurred before the CFPB's new CONSTITUTION: A BIOGRAPHY 197 (2005); see
interpretation of Section 8. The CFPB ordered PHH to also Neomi Rao, Removal: Necessary and Sufficient
pay $109 million in disgorgement and enjoined PHH from for Presidential Control, 65 Ala. L. Rev. 1205, 1215
entering into future captive reinsurance arrangements. (2014) (“The text and structure of Article II provide the
President with the power to control subordinates within
PHH petitioned this Court for review. A motions panel the executive branch.”).
of this Court (Judges Henderson, Millett, and Wilkins)
previously granted PHH's motion for a stay of the CFPB's To exercise the executive power, the President must have
order pending resolution of the merits in this case. the assistance of subordinates. See Free Enterprise Fund,
561 U.S. at 483, 130 S.Ct. 3138. The Framers therefore
provided for the appointment of executive officers and the
creation of executive departments to assist the President
II
“in discharging the duties of his trust.” Id. (internal
[2] In challenging the enforcement action against it, PHH quotation marks omitted); see U.S. CONST. art. II, § 2.
raises a fundamental constitutional objection to the entire
proceeding. According to PHH, the CFPB's structure In order to maintain control over the exercise of executive
violates Article II of the Constitution because the CFPB power and take care that the laws are faithfully executed,
operates as an independent agency headed by a single the President must be able to supervise and direct those
Director. PHH argues that, to comply with Article II, subordinate executive officers. *13 See Free Enterprise
either (i) the agency's Director must be removable at will Fund, 561 U.S. at 498–502, 130 S.Ct. 3138. As James
by the President, meaning that the CFPB would operate Madison stated during the First Congress, “if any power
as a traditional executive agency; or (ii) if structured as an whatsoever is in its nature Executive, it is the power of
independent agency, the agency must be structured as a appointing, overseeing, and controlling those who execute
multi-member commission. We agree. the laws.” 1 ANNALS OF CONGRESS 463 (Madison)
(1789) (Joseph Gales ed., 1834).
Synar, 478 U.S. 714, 726, 106 S.Ct. 3181, 92 L.Ed.2d exclusive power of removal.” Myers, 272 U.S. at 122, 47
583 (1986) (“Once an officer is appointed, it is only the S.Ct. 21.
authority that can remove him, and not the authority
that appointed him, that he must fear and, in the A few years later, based on his reading of Article II and
performance of his functions, obey.”) (internal quotation the Court's 1926 decision in Myers, President Franklin
marks omitted). The Article II chain of command depends Roosevelt vigorously contested the idea that Congress
on the President's removal power. As James Madison could create independent agencies and thereby prevent the
explained: “If the President should possess alone the President from controlling the executive power vested in
power of removal from office, those who are employed those independent agencies. President Roosevelt did not
in the execution of the law will be in their proper object to the existence of the agencies; rather, he objected
situation, and the chain of dependence be preserved; the to the *14 President's lack of control over these agencies,
lowest officers, the middle grade, and the highest, will which after all were exercising important executive power.
depend, as they ought, on the President, and the President
on the community.” 1 ANNALS OF CONGRESS 499 The issue came to a head in President Roosevelt's dispute
(Madison). The Supreme Court recently summarized the with William E. Humphrey, a commissioner of the Federal
Article II chain of command this way: “The Constitution Trade Commission. Commissioner Humphrey was a
that makes the President accountable to the people for Republican holdover from the Hoover Administration
executing the laws also gives him the power to do so. who, in President Roosevelt's view, was too sympathetic to
That power includes, as a general matter, the authority to big business and hostile to the Roosevelt Administration's
remove those who assist him in carrying out his duties. regulatory agenda. Asserting his authority under Article
Without such power, the President could not be held fully II, President Roosevelt fired Commissioner Humphrey.
accountable for discharging his own responsibilities; the Humphrey contested his removal, arguing that he was
buck would stop somewhere else.” Free Enterprise Fund, protected against firing by the statute's for-cause removal
561 U.S. at 513–14, 130 S.Ct. 3138. provision, and further arguing that Congress possessed
authority to create such independent agencies without
In the late 1800s and the early 1900s, as part of the violating Article II. The case reached the Supreme Court
Progressive Movement and an emerging belief in expert, in 1935.
apolitical, and scientific answers to certain public policy
questions, Congress began creating new expert agencies At its core, the case raised the question whether Article
that were independent of the President but that exercised II permitted Congress to create independent agencies
executive power. The heads of those independent agencies whose heads were not removable at will and would
were removable by the President only for cause, not at will, operate free of the President's supervision and direction.
and were neither supervised nor directed by the President. Representing President Roosevelt, the Solicitor General
Some early examples included the Interstate Commerce argued that the case was straightforward and controlled
Commission (1887) and the Federal Trade Commission by the text and history of Article II and the Court's
(1914). Importantly, the independent agencies were all 1926 decision in Myers. But notwithstanding Article
multi-member bodies: They were designed as non-partisan II and the decision in Myers, the Supreme Court
expert bodies that would neutrally and impartially issue upheld the constitutionality of independent agencies—
rules, bring law enforcement actions, and resolve disputes a decision that so incensed President Roosevelt that it
in their respective jurisdictions. helped trigger his ill-fated court reorganization plan in
1937. See Humphrey's Executor v. United States, 295
In a 1926 decision written by Chief Justice and former U.S. 602, 624, 631–32, 55 S.Ct. 869, 79 L.Ed. 1611
President Taft, the Supreme Court ruled that, under (1935). In allowing independent agencies, the Humphrey's
Article II, the President must be able to supervise, direct, Executor Court found it significant that the Federal Trade
and remove at will certain executive officers. The Court Commission was intended “to be non-partisan,” to “act
stated: “[W]hen the grant of the executive power is with entire impartiality,” and “to exercise the trained
enforced by the express mandate to take care that the judgment of a body of experts appointed by law and
laws be faithfully executed, it emphasizes the necessity informed by experience.” Id. at 624, 55 S.Ct. 869 *15
for including within the executive power as conferred the (internal quotation marks omitted). Those characteristics,
—who is not supervised, directed, or checked by the hearings that consumer protection regulation would put
President or by other directors. safety and soundness at risk.”); see also Todd Zywicki, The
Consumer Financial Protection Bureau: Savior or Menace?,
Because the Director alone heads the agency without 81 Geo. Wash. L. Rev. 856, 875 (2013) (“[S]ubstantive
Presidential supervision, and in light of the CFPB's checks on the CFPB can be triggered ... only under the
broad authority over the U.S. economy, the Director extreme circumstance of a severe *17 threat to the safety
enjoys significantly more unilateral power than any single and soundness of the American financial system. It is
member of any other independent agency. By “unilateral likely that this extreme test will rarely be satisfied in
power,” we mean power that is not checked by the practice.”); Recent Legislation, Dodd–Frank Act Creates
President or by other colleagues. Indeed, other than the the Consumer Financial Protection Bureau, 124 Harv. L.
President, the Director of the CFPB is the single most Rev. 2123, 2129 (2011) (“[T]he high standard for vetoing
powerful official in the entire United States Government, regulations ... will be difficult to establish.”). The veto
at least when measured in terms of unilateral power. That power could not have been used in this case to override the
is not an overstatement. What about the Speaker of the Director's determination regarding Section 8, for example.
House, you might ask? The Speaker can pass legislation As with the consultation requirement, the Act's limited
only if 218 Members agree. The Senate Majority Leader? veto provision falls far short of making the CFPB the
The Leader needs 60 Senators to invoke cloture, and needs equivalent of a multi-member independent agency.
a majority of Senators (usually 51 Senators or 50 plus
the Vice President) to approve a law or nomination. The Finally, the Act technically makes the CFPB part of the
Chief Justice? The Chief Justice must obtain four other Federal Reserve for certain administrative purposes. See,
Justices' votes for his or her position to prevail. The Chair e.g., 12 U.S.C. § 5491(a); see also id. § 5493. But that
of the Federal Reserve? The Chair needs the approval of is irrelevant to the present analysis because the Federal
a majority of the Federal Reserve Board. The Secretary of Reserve may not supervise, direct, or remove the Director.
Defense? The Secretary is supervised and directed by the
President. On any decision, the Secretary must do as the In short, when measured in terms of unilateral power,
President says. So too with the Secretary of State, and the the Director of the CFPB is the single most powerful
Secretary of the Treasury, and the Attorney General. official in the entire U.S. Government, other than the
President. Indeed, within his jurisdiction, the Director of
To be sure, the Dodd–Frank Act requires the Director to the CFPB can be considered even more powerful than the
establish and consult with a “Consumer Advisory Board.” President. It is the Director's view of consumer protection
See id. § 5494. But the advisory board is just that: advisory. law that prevails over all others. In essence, the Director
Nothing requires the Director to heed the Board's advice. is the President of Consumer Finance. The concentration
Without the formal authority to prevent unilateral action of massive, unchecked power in a single Director marks
by the Director, the Advisory Board does not come close a departure from settled historical practice and makes the
to equating to the check provided by the multi-member CFPB unique among traditional independent agencies, as
structure of traditional independent commissions. we will now explain.
• Federal Energy Regulatory Commission (1977) First, the CFPB cited and primarily relied on the
example of the Social Security Administration, which
• Federal Mine Safety and Health Review Commission is an independent agency headed by a single Social
(1977) Security Commissioner. See 42 U.S.C. §§ 901(a), 902(a).
But the current structure of the agency is relatively
• Federal Labor Relations Authority (1978)
recent. The Social Security Administration long existed
• Merit Systems Protection Board (1978) first as a multi-member independent agency and then
as a single-Director executive agency within various
• Defense Nuclear Facilities Safety Board (1988) executive departments, most recently the Department of
Health and Human Services. Only in 1994 did Congress
• National Indian Gaming Commission (1988)
change the Social Security Administration to a single-
*18 • Chemical Safety and Hazard Investigation Director independent *19 agency. Importantly, when
Board (1990) the agency structure was altered in 1994, President
Clinton issued a signing statement expressing his
• Surface Transportation Board (1995) view that the change in the agency's structure was
constitutionally problematic. See President William J.
• Independent Payment Advisory Board (2010). 4 Clinton, Statement on Signing the Social Security
Independence and Program Improvements Act of 1994,
Have there been any independent agencies headed by a 2 Pub. Papers 1471, 1472 (Aug. 15, 1994). The status
single person? Prior to oral argument, in an effort to of that agency's structure therefore is constitutionally
be comprehensive, the Court issued an order asking the contested. In those circumstances, the historical precedent
CFPB for all historical or current examples it could find of counts for little because it is not settled. Cf. Noel Canning,
independent agencies headed by a single person removable 134 S.Ct. at 2563–64, 2567 (discounting prior example
of appointments during “fictitious” inter-session recess Congress passed subsequent legislation regarding the
because of Senate Committee's strong opposition to those Office of Special Counsel, President Reagan vetoed the
appointments); INS v. Chadha, 462 U.S. 919, 942 n.13, bill due to “serious constitutional concerns” about the
103 S.Ct. 2764, 77 L.Ed.2d 317 (1983) (discounting prior Office's status as an independent agency. See President
statutory legislative veto provisions because Presidents Ronald Reagan, Memorandum of Disapproval on a
had objected to those provisions). If anything, when Bill Concerning Whistleblower Protection, 2 Pub. Papers
considered against the “settled practice,” the Social 1391, 1392 (Oct. 26, 1988). The history of the Office
Security example only highlights the “anomal[y]” of an of Special Counsel confirms what one Special Counsel
independent agency headed by a single person. Noel himself has acknowledged: the agency is “a controversial
Canning, 134 S.Ct. at 2567. anomaly in the federal system.” K. William O'Connor,
Foreword to SHIGEKI J. SUGIYAMA, PROTECTING
Moreover, the Social Security Administration is not a THE INTEGRITY OF THE MERIT SYSTEM: A
precedent for the CFPB because the Social Security LEGISLATIVE HISTORY OF THE MERIT SYSTEM
Commissioner does not possess unilateral authority to PRINCI *20 PLES, PROHIBITED PERSONNEL
bring law enforcement actions against private citizens, PRACTICES AND THE OFFICE OF THE SPECIAL
which is the core of the executive power and the primary COUNSEL, at v (1985). The status of the agency
threat to individual liberty posed by executive power. remains constitutionally contested and does not supply a
See Morrison v. Olson, 487 U.S. 654, 706, 108 S.Ct. persuasive historical precedent for the CFPB's structure.
2597, 101 L.Ed.2d 569 (1988) (Scalia, J., dissenting). The Cf. Noel Canning, 134 S.Ct. at 2563–64, 2567; Chadha, 462
Social Security Administration does not have unilateral U.S. at 942 n.13, 103 S.Ct. 2764.
power to impose fines or penalties on private citizens
in Social Security benefits cases. Instead, the bulk of Moreover, the Office of Special Counsel is not a precedent
the Social Security Administration's authority involves for the CFPB because the Office of Special Counsel is
supervision of the adjudication of private claims for primarily responsible for enforcing personnel laws against
benefits. Although the agency does possess limited power government agencies and government employees. Unlike
to seek civil sanctions against those who file improper the CFPB, the Office of Special Counsel does not have
claims, the Commissioner may initiate such a proceeding authority to enforce laws against private citizens, and does
“only as authorized by the Attorney General”—who is an not have power to impose fines and penalties on private
executive officer accountable to the President. 42 U.S.C. citizens. 5
§ 1320a–8(b).
Third, the CFPB cited Congress's 2008 creation of a single
Second, the CFPB also cited the example of the Office head of the new Federal Housing Finance Agency. See
of Special Counsel, an independent agency headed by Housing and Economic Recovery Act of 2008, Pub. L.
a single Special Counsel. The Office has a narrow No. 110–289, § 1101, 122 Stat. 2654, 2662 (codified at 12
jurisdiction and mainly enforces certain personnel rules U.S.C. §§ 4511–4512). That agency is a contemporary of
against government employers and employees, such the CFPB and merely raises the same question we confront
as the prohibition against improper political activity here. A body created only in 2008 obviously does not
by government employees. Like the Social Security constitute a historical precedent for the CFPB.
Administration, the Office of Special Counsel lacks
deep historical roots. Its single-Director structure was Although not a regulatory agency precedent and not an
established in 1978. Also like the Social Security example cited by the CFPB as precedent for its single-
Administration, the constitutionality of the Special Director structure (for good reason), there is at least one
Counsel has been contested since its creation. Under other modern example of an independent entity headed
President Carter, the Department of Justice opined by one person. It is the now-defunct independent counsel
that the Special Counsel “must be removable at will law that was upheld in Morrison v. Olson, 487 U.S. 654,
by the President” and expressed opposition to a for- 108 S.Ct. 2597, 101 L.Ed.2d 569 (1988). But that decision
cause removal restriction for the Special Counsel. did not expressly consider whether an independent agency
Memorandum Opinion for the General Counsel, Civil could be headed by a single director. The independent
Service Commission, 2 Op. O.L.C. 120, 120 (1978). When counsel, moreover, had only a limited jurisdiction for
particular defined investigations. Id. at 671–72, 108 S.Ct. Oversight and Government Reform, 112th Cong. 77
2597. In addition, the independent counsel experiment (2011) (statement of Andrew Pincus) (“Dodd–Frank
ended with nearly universal consensus that the experiment sets up for the Bureau an unprecedented structure that
had been a mistake and that Justice Scalia had been right consolidates more power in the director than in the head
back in 1988 to view the independent counsel system as of any other agency that regulates private individuals
an unconstitutional departure from historical practice and and entities.”); Recent Legislation, Dodd–Frank Act
a serious threat to individual liberty. See id. at 699, 108 Creates the Consumer Financial Protection Bureau, 124
S.Ct. 2597 (Scalia, J., dissenting) (“this wolf comes as Harv. L. Rev. 2123, 2130 (2011) (“[T]he CFPB's design
a wolf”); see also Stanford Lawyer, Spring 2015, at 4 is troubling because of its unprecedented nature.”);
(quoting Justice Kagan's statement that Justice Scalia's Note, Independence, Congressional Weakness, and the
dissent in Morrison is “one of the greatest dissents ever Importance of Appointment: The Impact of Combining
written and every year it gets better”). The independent Budgetary Autonomy with Removal Protection, 125 Harv.
counsel experience, if anything, strongly counsels caution L. Rev. 1822, 1824 n.15 (2012) (CFPB's lack of a multi-
with respect to single-Director independent agencies. 6 member board is “atypical for independent agencies and
will amplify the Director's independence”); Todd Zywicki,
So that's all the CFPB has, and that's not much. As The Consumer Financial Protection Bureau: Savior or
Justice Breyer stated when *21 facing a similar (actually, Menace? 81 Geo. Wash. L. Rev. 856, 899 (2013) (“[T]he
a more robust) historical record in Noel Canning, the agency structure Congress chose for the CFPB—a single-
few examples offered by the CFPB are “anomalies.” 134 director structure, devoid of accountability, and with
S.Ct. at 2567. Or as the Court put it in Free Enterprise vast, ill-defined powers—appears to be unique in recent
Fund when confronting a novel structure, a “handful of American history.”). 7
isolated” examples does not count for much when assessed
against an otherwise settled historical practice. 561 U.S.
at 505, 130 S.Ct. 3138. To be sure, in “all the laws
C
enacted since 1789, it is always possible that Congress”
created some other independent agencies like the CFPB The CFPB's departure from historical practice matters.
“that exercise[ ] traditional executive functions” but are A long line of Supreme Court precedent tells us that
headed by single Directors. Free Enterprise Fund v. Public history and tradition are important guides in separation
Company Accounting Oversight Board, 537 F.3d 667, 699 of powers cases that, like this one, are not resolved by the
n.8 (D.C. Cir. 2008) (Kavanaugh, J., dissenting); see also constitutional text alone. As Justice Breyer wrote for the
Noel Canning, 134 S.Ct. at 2567 (“There may be others *22 Supreme Court in Noel Canning, the “longstanding
of which we are unaware.”). But “the research of the practice of the government can inform our determination
parties and the Court has not found such a needle in of what the law is.” NLRB v. Noel Canning, ––– U.S.
the haystack.” Free Enterprise Fund, 537 F.3d at 699 n.8 ––––, 134 S.Ct. 2550, 2560, 189 L.Ed.2d 538 (2014)
(Kavanaugh, J., dissenting). “Even if such an example (internal quotation marks and citation omitted). Justice
were uncovered,” there is no question that this kind Breyer quoted James Madison's statement that it was
of single-Director independent agency “has been rare at “foreseen at the birth of the Constitution, that difficulties
best.” Id. and differences of opinion might occasionally arise in
expounding terms & phrases necessarily used in such a
The bottom line is that there is no settled historical charter ... and that it might require a regular course of
practice of independent agencies headed by single practice to liquidate & settle the meaning of some of
Directors who possess the substantial executive authority them.” Id. (internal quotation marks omitted). Justice
that the Director of the CFPB enjoys. The CFPB Breyer explained, moreover, that the Court “has treated
is exceptional in our constitutional structure and practice as an important interpretive factor even when the
unprecedented in our constitutional history. See Who's nature or longevity of that practice is subject to dispute,
Watching the Watchmen? Oversight of the Consumer and even when that practice began after the founding era.”
Financial Protection Bureau: Hearing Before the Id.
Subcomm. on TARP, Financial Services and Bailouts
of Public and Private Programs of the H. Comm. on
All of this, Justice Breyer stated, is “neither new nor Curtiss–Wright Export Corp., 299 U.S. 304, 327–28,
controversial.” Id. Consider the following: 57 S.Ct. 216, 81 L.Ed. 255 (1936).
• “In separation-of-powers cases this Court has often • “Long settled and established practice is a
put significant weight upon historical practice.” consideration of great weight in a proper
Zivotofsky v. Kerry, ––– U.S. ––––, 135 S.Ct. 2076, interpretation of constitutional provisions of this
2091, 192 L.Ed.2d 83 (2015) (internal quotation character.” The *23 Pocket Veto Case, 279 U.S.
marks omitted) (quoting Noel Canning, 134 S.Ct. at 655, 689, 49 S.Ct. 463, 73 L.Ed. 894 (1929).
2559).
• “Such long practice under the pardoning power and
• “We therefore conclude, in light of historical practice, acquiescence in it strongly sustains the construction
that a recess of more than 3 days but less than 10 days it is based on.” Ex parte Grossman, 267 U.S. 87, 118–
is presumptively too short to fall within the Clause.” 19, 45 S.Ct. 332, 69 L.Ed. 527 (1925).
Noel Canning, 134 S.Ct. at 2567.
• “[A] page of history is worth a volume of logic.” New
• “Perhaps the most telling indication of the severe York Trust Co. v. Eisner, 256 U.S. 345, 349, 41 S.Ct.
constitutional problem with the [agency] is the lack of 506, 65 L.Ed. 963 (1921).
historical precedent for this entity.” Free Enterprise
Fund v. Public Company Accounting Oversight Board, • “[I]n determining the meaning of a statute or the
561 U.S. 477, 505, 130 S.Ct. 3138, 177 L.Ed.2d 706 existence of a power, weight shall be given to the
(2010) (internal quotation marks omitted). usage itself—even when the validity of the practice is
the subject of investigation.” United States v. Midwest
• “[W]hen we face difficult questions of the Oil Co., 236 U.S. 459, 473, 35 S.Ct. 309, 59 L.Ed. 673
Constitution's structural requirements, longstanding (1915).
customs and practices can make a difference.”
Commonwealth of Puerto Rico v. Sanchez Valle, ––– • “[W]here there is ambiguity or doubt [in the words
U.S. ––––, 136 S.Ct. 1863, 1884, 195 L.Ed.2d 179 of the Constitution], or where two views may well
(2016) (Breyer, J., dissenting). be entertained, contemporaneous and subsequent
practical construction are entitled to the greatest
• “[T]raditional ways of conducting government give weight.” McPherson v. Blacker, 146 U.S. 1, 27, 13
meaning to the Constitution.” Mistretta v. United S.Ct. 3, 36 L.Ed. 869 (1892).
States, 488 U.S. 361, 401, 109 S.Ct. 647, 102 L.Ed.2d
714 (1989) (internal quotation marks and alteration • “[A] doubtful question, one on which human reason
omitted) (quoting Youngstown Sheet & Tube Co. v. may pause, and the human judgment be suspended,
Sawyer, 343 U.S. 579, 610, 72 S.Ct. 863, 96 L.Ed. in the decision of which the great principles of
1153 (1952) (Frankfurter, J., concurring)). liberty are not concerned, but the respective powers
of those who are equally the representatives of
• “Deeply embedded traditional ways of conducting the people, are to be adjusted; if not put at
government cannot supplant the Constitution or rest by the practice of the government, ought to
legislation, but they give meaning to the words of a receive a considerable impression from that practice.”
text or supply them.” Youngstown, 343 U.S. at 610, McCulloch v. Maryland, 17 U.S. 4 Wheat. 316, 401,
72 S.Ct. 863 (Frankfurter, J., concurring). 4 L.Ed. 579 (1819).
• “A legislative practice such as we have here, evidenced [3] [4] Stated simply, in separation of powers cases
not by only occasional instances, but marked by not resolved by the constitutional text alone, historical
the movement of a steady stream for a century and practice matters a great deal in defining the constitutional
a half of time, goes a long way in the direction
limits on the Executive and Legislative Branches. 8 The
of proving the presence of unassailable ground for
Supreme Court's recent decisions in Noel Canning and
the constitutionality of the practice, to be found in
Free Enterprise Fund illustrate how *24 the Court
the origin and history of the power involved, or in
its nature, or in both combined.” United States v. considers historical practice in this context. 9
id. at 721, 106 S.Ct. 3181 (“The declared purpose of Chair of the Federal Trade Commission has explained,
separating and dividing the powers of government, of it takes “a consensus decision of at least a majority of
course, was to ‘diffus[e] power the better to secure liberty.’ commissioners to authorize, or forbear from, action.”
”) (quoting Youngstown Sheet & Tube Co. v. Sawyer, Edith Ramirez, The FTC: A Framework for Promoting
343 U.S. 579, 635, 72 S.Ct. 863, 96 L.Ed. 1153 (1952) Competition and Protecting Consumers, 83 Geo. Wash. L.
(Jackson, J., concurring)). When describing Article II, Rev. 2049, 2053 (2015). In a multi-member agency, even
Justice Scalia put the point this way: “The purpose of the though each individual commissioner is not accountable
separation and equilibration of powers in general, and to or checked by the President, each commissioner is at
of the unitary Executive in particular, was not merely least still accountable to his or her fellow commissioners
to assure effective government but to preserve individual and needs the assent of a majority of commissioners to
freedom.” Morrison v. Olson, 487 U.S. 654, 727, 108 S.Ct. take significant action.
2597, 101 L.Ed.2d 569 (1988) *26 (Scalia, J., dissenting).
In addition, unlike single-Director independent agencies,
The basic constitutional concern with independent multi-member independent agencies “can foster more
agencies is that the agencies are unchecked by the deliberative decision making.” Kirti Datla & Richard
President, the official who is accountable to the people L. Revesz, Deconstructing Independent Agencies (and
and who is made responsible by Article II for the Executive Agencies), 98 Cornell L. Rev. 769, 794 (2013).
exercise of executive power. Recognizing the broad and Relatedly, multi-member independent agencies benefit
unaccountable power wielded by independent agencies, from diverse perspectives and different points of view
Congress has traditionally required multi-member bodies among the commissioners and board members. The
at the helm of independent agencies. In the absence multiple voices and perspectives make it more likely
of Presidential control, the multi-member structure of that the costs and downsides of proposed decisions
independent agencies acts as a critical substitute check on will be more fully ventilated. See Marshall J. Breger &
the excesses of any individual independent agency head Gary J. Edles, Established by Practice: The Theory and
—a check that helps to prevent arbitrary decisionmaking Operation of Independent Federal Agencies, 52 Admin. L.
and abuse of power, and thereby to protect individual Rev. 1111, 1113 (2000) (independent agencies “are also
liberty. multi-member organizations, a fact that tends toward
accommodation of diverse or extreme views through
But this new agency, the CFPB, lacks that critical check the compromise inherent in the process of collegial
and structural constitutional protection. And the lack of decisionmaking”); Jacob E. Gersen, Administrative Law
the traditional safeguard threatens the individual liberty Goes to Wall Street: The New Administrative Process, 65
protected by the Constitution's separation of powers. Admin. L. Rev. 689, 696 (2013) (“[A] multimember board
allows for a representation of divergent interests *27 in
How do multi-member independent agencies fare better a way that a single decisionmaker simply cannot.”); Glen
than single-Director independent agencies in protecting O. Robinson, On Reorganizing the Independent Regulatory
individual liberty? As compared to single-Director Agencies, 57 Va. L. Rev. 947, 963 (1971) (“It is not
independent agencies, multi-member independent bipartisanship as such that is important; it is rather the
agencies help prevent arbitrary decisionmaking and safeguards and balanced viewpoint that can be provided
abuses of power, and thereby help protect individual by plural membership.”); cf. Harry T. Edwards, The
liberty, because they do not concentrate power in Effects of Collegiality on Judicial Decision Making, 151
the hands of one individual. The point is simple U. Pa. L. Rev. 1639, 1645 (2003) (“[C]ollegiality plays an
but profound. In a multi-member independent agency, important part in mitigating the role of partisan politics
no single commissioner or board member possesses and personal ideology by allowing judges of differing
authority to do much of anything. Before the agency perspectives and philosophies to communicate with, listen
can infringe your liberty in some way—for example, to, and ultimately influence one another in constructive
initiating an enforcement action against you or issuing a and law-abiding ways.”).
rule that affects your liberty or property—a majority of
commissioners must agree. That in turn makes it harder In short, the deliberative process and multiple viewpoints
for the agency to infringe your liberty. As the current in a multi-member independent agency can help ensure
that a commission is required.” 51 Cong. Rec. 11,092 balances were the foundation of a structure of government
(1914). In his leading study of independent commissions, that would protect liberty.” Bowsher, 478 U.S. at 722, 106
Robert Cushman, former staff member of President S.Ct. 3181.
Franklin Roosevelt's Committee on Administrative
Management, analyzed the creation of the Federal Of course, the one exception to the Constitution's division
Trade Commission and explained: “The two ideas, a of power among multiple parties within the branches
commission and independence for the commission, were is the President, who is the lone head of the entire
inextricably bound together. At no point was it proposed Executive Branch. But the President is the exception
that a commission ought to be set up unless it be that proves the rule. For starters, the Framers were
independent or that an independent officer should be concerned that dividing the executive power among
created rather than a commission.” CUSHMAN, THE multiple individuals would render the Executive Branch
INDEPENDENT REGULATORY COMMISSIONS, too weak as compared to the more formidable Legislative
at 188; see also THE PRESIDENT'S COMMITTEE Branch. See THE FEDERALIST NO. 48, at 309–10
ON ADMINISTRATIVE MANAGEMENT, REPORT (James Madison) (Clinton Rossiter ed., 1961) (“[I]t is
OF THE COMMITTEE WITH STUDIES OF against the enterprising ambition” of the Legislative
ADMINISTRATIVE MANAGEMENT IN THE Branch “that the people ought to indulge all their
FEDERAL GOVERNMENT 216 (1937) (noting jealousy and exhaust all their precautions. The legislative
“popular belief that important rule-making functions department derives a superiority in our governments....”).
ought to be performed by a group rather than by a single The Framers sought “energy in the executive.” THE
officer, by a commission rather than by a department FEDERALIST NO. 70, at 424 (Alexander Hamilton).
head” as one reason “for the establishment of independent
regulatory agencies”). At the same time, the Framers certainly recognized the risk
that a single President could lead to tyranny or arbitrary
Examining the consistent historical practice here, we decisionmaking. To mitigate the risk to liberty from a
can see, moreover, that the consistent historical practice single President, the Framers ensured that the President
reflects the deep values of the Constitution. The had “a due dependence on the people.” Id. The President is
Constitution as a whole embodies the bedrock principle nationally elected by the people. In choosing the President,
that dividing power among multiple entities and persons “the whole Nation has a part, making him the focus of
helps protect individual liberty. The Framers created a public hopes and expectations.” Youngstown, 343 U.S. at
federal system with the national power divided among 653, 72 S.Ct. 863 (Jackson, J., concurring). Presidential
three branches. The Framers “viewed the principle of candidates are put through the wringer precisely because
separation of powers as the absolutely central guarantee of the power they may someday wield. In other words,
of a just Government.” Morrison v. Olson, 487 U.S. at 697, the Framers concentrated executive power in a single
108 S.Ct. 2597 (Scalia, J., dissenting). President on the condition that the President would be
nationally elected and nationally accountable.
*29 And to protect liberty, the same kind of checks
and balances principle also influenced how the Framers The President is therefore the exception to the ordinary
allocated power within the three national branches. For constitutional practice of dividing power among multiple
example, the Framers divided the Legislative Branch into entities and persons. Apart from the President, the
two houses, each with multiple members. No one person Constitution reflects the basic commonsense principle
operates as the Legislator–in–Chief. Rather, 535 Members that multi-member bodies—the House, the Senate, the
of Congress do so, divided among two Houses. Likewise, Supreme Court—do better than single-member bodies
the Framers established “one supreme Court” composed in avoiding arbitrary decisionmaking and abuses of
of multiple “Judges” rather than a single judge. No one power, and thereby protecting individual liberty. That
person operates as the lone Justice of the Supreme Court. background constitutional principle further supports the
Rather, the Court consists of one Chief Justice and several conclusion here that a single-Director independent agency
Associate Justices, all of whom have equal votes on cases. lies outside the norm and poses a risk to individual liberty.
“Even a cursory examination of the Constitution reveals After all, the Director of the CFPB is not elected by the
the influence of Montesquieu's thesis that checks and
people and is of course not remotely comparable to the Barkow, Insulating Agencies, 89 Tex. L. Rev. at 26;
President in terms of accountability to the people. see also PETER L. STRAUSS, AN INTRODUCTION
TO ADMINISTRATIVE JUSTICE IN THE UNITED
Having identified the ways in which multi-member STATES 15 (1989) (defining “independent regulatory
independent agencies surpass single-Director independent commission[s]” as “governmental agencies headed by
agencies in protecting liberty, we must acknowledge that multi-member boards acting collegially on the regulatory
multi-member independent agencies do not always meet matters within their jurisdiction”) (internal quotation
that potential. For example, some members of multi- marks omitted); Bressman & Thompson, The Future
member independent agencies may occasionally move of Agency Independence, 63 Vand. L. Rev. at 610
in lockstep, thereby diminishing the benefits of multi- (independent agencies, unlike Executive Branch agencies,
member bodies. It can be *30 harder to find five highly are “generally run by multi-member commissions
qualified commissioners than just one highly qualified or boards”); Dodd–Frank Act Creates the Consumer
commissioner. Moreover, multi-member bodies are often Financial Protection Bureau, 124 Harv. L. Rev. at
not as efficient as single-headed agencies and can be beset 2128 (“Most independent agencies have multimember
by contentious relations among the members. See Breger boards....”); Paperwork Reduction Act of 1980, Pub. L.
& Edles, Established by Practice, 52 Admin. L. Rev. at No. 96–511, 94 Stat. 2812, 2814 (defining “independent
1181 (“even a single member” can throw a wrench into regulatory agency” by reference to 17 multi-member
the works); Datla & Revesz, Deconstructing Independent agencies) (internal quotation marks omitted).
Agencies, 98 Cornell L. Rev. at 794 (“The downside
that accompanies increased deliberation is the slowness
inherent in group action.”) (internal quotation marks
E
omitted). That said, “[c]onvenience and efficiency are not
the primary objectives—or the hallmarks—of democratic To sum up so far: In order to preserve individual liberty
government.” Bowsher, 478 U.S. at 736, 106 S.Ct. 3181 and ensure accountability, Article II of the Constitution
(internal quotation marks omitted). Indeed, so as to avoid assigns the executive power to the President. The President
falling back into the kind of tyranny that they had declared operates with the assistance of subordinates, but the
independence from, the Framers often made trade-offs President acts as a critical check on those subordinates.
against efficiency in the interest of enhancing liberty. That check provides accountability and protects against
arbitrary decisionmaking by executive agencies, thereby
In any event, notwithstanding some failings and helping to safeguard individual liberty. Article II has been
downsides, multi-member independent agencies are interpreted by the Supreme Court to allow independent
superior to single-Director independent agencies in agencies in certain circumstances. Independent agencies
preventing arbitrary decisionmaking and abuse of power, lack the ordinary constitutional checks and balances that
and thereby protecting individual liberty. come from Presidential supervision and direction. But
to ensure some check against arbitrary decisionmaking
For that reason and others, both before and and to *31 help preserve individual liberty, independent
after Humphrey's Executor, Congress has structured agencies have traditionally been structured as multi-
independent agencies as multi-member agencies. Indeed, member bodies where the commissioners or board
the multi-member agency form has become “synonymous members can check one another. The check from other
with independence.” Breger & Edles, Established by commissioners or board members substitutes for the check
Practice, 52 Admin. L. Rev. at 1137. As Justice by the President. As an independent agency with just a
Breyer noted in Free Enterprise Fund: “Agency single Director, the CFPB represents a sharp break from
independence is a function of several different factors ... historical practice, lacks the critical internal check on
includ[ing] ... its composition as a multimember bipartisan arbitrary decisionmaking, and poses a far greater threat to
board....” Free Enterprise Fund v. Public Company individual liberty than does a multi-member independent
Accounting Oversight Board, 561 U.S. 477, 547 (2010) agency. All of that raises grave constitutional doubts
(Breyer, J., dissenting). Likewise, Professor Barkow
about the CFPB's single-Director structure. 12
has explained that “multimember design” is one of
the “[t]raditional [l]odestars” of agency independence.
Before rendering a final conclusion on the CFPB's of its constitutional duties.”) (internal quotation marks
constitutionality as currently structured, however, we omitted). And to take an obvious example of the point, if
must address several other arguments. Congress enacted legislation converting the Department
of Justice into an independent agency, there would be
First, in considering precedents for the single-Director no formal congressional aggrandizement. But there is
structure of the CFPB, one might wonder about all of little doubt that such legislation would violate Article
the executive departments and agencies headed by a single II. See Morrison v. Olson, 487 U.S. 654, 695, 108
person. Why don't they provide a precedent for the CFPB? S.Ct. 2597, 101 L.Ed.2d 569 (1988) (Congress may not
Consider for example the Department of Justice, the impair the President in performance of constitutionally
Department of the Treasury, the Department of State, the assigned functions). Congressional aggrandizement is not
Department of Defense, and the EPA, all headed by a a necessary condition for an Article II violation in this
single person. context.
[5] As should be clear by now, the distinction, of course, [7] Relatedly, one might think that a single head of an
is that those departments and agencies are executive independent agency might actually be more responsive
agencies. They operate within the Executive Branch chain to the President than multiple heads of an independent
of command under the supervision and direction of the agency are, thereby reducing the risk of arbitrary
President, and those agency heads are removable at will by decisionmaking and mitigating the Article II concern
the President. The President is a check on those agencies. with a novel single-Director independent agency. But
Those agencies are accountable to the President. The there is no meaningful difference in responsiveness and
President in turn is accountable to the people of the United accountability to the President. Whether headed by
States for the exercise of executive power in the executive one, three, or five members, an independent agency
agencies. So a single person at the helm of an executive is not supervised or directed by the President, and
agency is perfectly constitutional. 13 its heads are not removable at will by the President.
With independent agencies, the President is limited in
By contrast, independent agencies are unaccountable to essence to indirect cajoling. Cf. Elena Kagan, Presidential
the President and pose a greater threat to individual Administration, 114 Harv. L. Rev. 2245, 2323 (2001) (“[A]
liberty because they operate free of the President's for-cause removal provision would buy little substantive
supervision and direction. Therefore, they traditionally independence if the President, though unable to fire an
have been headed by multiple members who check one official, could command or, if necessary, supplant his
another. An independent agency operates as “a body of every decision.”). 14 As Justice Scalia once memorably
experts appointed by law and informed by experience.” noted, an attempt by the President to direct (or threaten
Humphrey's Executor v. United States, 295 U.S. 602, 624, to remove) the head of an independent agency with
55 S.Ct. 869, 79 L.Ed. 1611 (1935) (internal quotation respect to a particular substantive decision is statutorily
marks omitted). *33 impermissible and likely to trigger “an impeachment
motion in Congress.” Tr. of Oral Arg. at 60, Free
[6] Second, some may say that Congress's creation of the Enterprise Fund, 561 U.S. 477, 130 S.Ct. 3138, 177 L.Ed.2d
single-Director structure is unlikely to give Congress any 706. That is true whether there are one, three, or five
greater influence over the CFPB than Congress possesses heads of the independent agency. The independent status
over a multi-member independent agency. That is of an independent agency erects a high barrier between
perhaps true, although perhaps not. Either way, however, the President and the independent agency, regardless of
the Supreme Court has emphasized that congressional how many people head the independent agency on the
aggrandizement is not a necessary feature of a separation other side of the barrier. So a structure with a single
of powers violation in this context. The Court squarely independent agency head entails no meaningful benefit
said as much in Free Enterprise Fund. See Free Enterprise over a multi-member independent agency in terms of
Fund v. Public Company Accounting Oversight Board, 561 Presidential control over the independent agency.
U.S. 477, 500, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010) *32
(“Even when a branch does not arrogate power to itself, Although the single-Director structure does not
therefore, it must not impair another in the performance necessarily give more control to the President over
an independent agency, one might say from the other See Morrison v. Olson, 487 U.S. at 727, 108 S.Ct. 2597
direction that the structure at least does not diminish (Scalia, J., dissenting) (“The purpose of the separation
the President's power beyond the diminishment already and equilibration of powers in general, and of the unitary
caused by Humphrey's Executor, and thus should not Executive in particular, was not merely to assure effective
form the basis of an Article II violation. In other words, government but to preserve individual freedom.”).
some might say that Humphrey's Executor already greatly
reduced Presidential power, and this novel structure is So the single-Director independent agency—which, as
merely a variation on Humphrey's Executor rather than we have explained, is a *34 structure that departs
a further diminishment of Presidential power. To begin from settled historical practice and threatens individual
with, that may not be true. A President may be stuck liberty far more than a multi-member independent
for his or her entire four-year term with a single Director agency does—poses a constitutional problem even if
appointed by a prior President with different views. it does not occasion any additional diminishment of
Generally, the members of multi-member agencies serve Presidential power beyond the significant diminishment
staggered terms, and the President will at least have an already caused by Humphrey's Executor itself. 15
opportunity to appoint some new commissioners over the
course of his or her first term. Third, in considering the constitutionality of the CFPB's
structure, some might speak of the CFPB as a one-off
In any event, although it is true that Article II violations congressional experiment and say we should let it go as
often involve diminishment of Presidential power, neither a matter of judicial restraint. But even apart from the
Humphrey's Executor nor any later case gave Congress a fundamental point that our job as judges is to enforce the
free pass, without any boundaries, to create independent law, not abdicate to the political branches, cf. Boumediene
agencies that depart from history and threaten individual v. Bush, 553 U.S. 723, 765–66, 128 S.Ct. 2229, 171
liberty. Humphrey's Executor does not mean that anything L.Ed.2d 41 (2008), we cannot think of this as a one-
goes. See Free Enterprise Fund, 561 U.S. at 514, 130 S.Ct. off case because we could not cabin the consequences
3138. In that respect, keep in mind (in case we have in any principled manner if we were to uphold the
not mentioned it enough already) that the Constitution's CFPB's single-Director structure. As the Supreme Court
separation of powers is not solely or even primarily has warned: “Slight encroachments create new boundaries
concerned with preserving the powers of the branches. from which legions of power can seek new territory
The separation of powers is primarily designed to protect to capture.” Stern, 564 U.S. at 503, 131 S.Ct. 2594
individual liberty. See Stern v. Marshall, 564 U.S. 462, (internal quotation marks omitted). Justice Frankfurter
483, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (“Yet the captured it well in his opinion in Youngstown: “The
dynamic between and among the branches is not the accretion of dangerous power does not come in a day.
only object of the Constitution's concern. The structural It does come, however slowly, from the generative force
principles secured by the separation of powers protect the of unchecked disregard of the restrictions that fence in
individual as well.”) (internal quotation marks omitted) even the most disinterested assertion of authority.” 343
(quoting Bond v. United States, 564 U.S. 211, 222, 131 U.S. at 594, 72 S.Ct. 863 (Frankfurter, J., concurring).
S.Ct. 2355, 180 L.Ed.2d 269 (2011)); Bowsher v. Synar, That fairly describes what a ruling upholding the CFPB's
478 U.S. 714, 721, 106 S.Ct. 3181, 92 L.Ed.2d 583 (1986) single-Director structure would mean. As the CFPB
(“The declared purpose of separating and dividing the acknowledged at oral argument, a ruling in its favor would
powers of government, of course, was to ‘diffus[e] power necessarily allow all extant independent agencies to be
the better to secure liberty.’ ”) (quoting Youngstown Sheet headed by one person. Tr. of Oral Arg. at 18–19. We
& Tube Co. v. Sawyer, 343 U.S. 579, 635, 72 S.Ct. 863, would be green-lighting Congress to make other heads
96 L.Ed. 1153 (1952) (Jackson, J., concurring)); Clinton of independent agencies a single Director rather than a
v. City of New York, 524 U.S. 417, 450, 118 S.Ct. multi-member commission. A single-Director SEC, with
2091, 141 L.Ed.2d 393 (1998) (Kennedy, J., concurring) the power to unilaterally impose $500 million penalties? A
(“Liberty is always at stake when one or more of the single-Director FCC, *35 with the power to unilaterally
branches seek to transgress the separation of powers.”). require “net neutrality”? A single-Director NLRB, with
As with the broader separation of powers, moreover, a the power to unilaterally supervise employer-employee
key purpose of Article II is to preserve individual liberty. relations nationwide? That's what we would be ushering
in with a ruling upholding the CFPB's single-Director has identified no congressional hearings studying the
structure. question. Congress apparently stumbled into this single-
Director structure as a compromise or landing point
[8] [9] At a more general level, however, some might between the original Warren multi-member independent
think that judges should simply defer to the elected agency proposal and a traditional executive agency
branches' design of the administrative state. But that headed by a single person.
hands-off attitude would flout a long, long line of Supreme
Court precedent. Agreement by the two elected branches Fourth, one might argue that the CFPB's decisions are
at a particular moment or period in time has never been a checked by the courts, so we should not worry about the
ground for the courts to simply defer regardless of whether single-Director structure. But much of what an agency
the legislation violates the Constitution's separation of does—determining what rules to issue within a broad
powers. Far from it. See Free Enterprise Fund, 561 U.S. at statutory authorization and when, how, and against
497, 508, 130 S.Ct. 3138 (invalidating structure of Public whom to bring enforcement actions to enforce the law—
Company Accounting Oversight Board); Boumediene, occurs in the twilight of judicially unreviewable discretion.
553 U.S. at 765–66, 792, 128 S.Ct. 2229 (invalidating Those discretionary actions have a critical impact on
provision of Military Commissions Act); Clinton, 524 individual liberty. And courts do not review or only
U.S. at 448–49, 118 S.Ct. 2091 (invalidating Line Item deferentially review such exercises of agency discretion.
Veto Act); Metropolitan Washington Airports Authority See Chevron U.S.A. Inc. v. Natural Resources Defense
v. Citizens for the Abatement of Aircraft Noise, Inc., 501 Council, Inc., 467 U.S. 837, 844–45, 104 S.Ct. 2778, 81
U.S. 252, 266–69, 111 S.Ct. 2298, 115 L.Ed.2d 236 (1991) L.Ed.2d 694 (1984); *36 Motor Vehicle Manufacturers
(invalidating structure of Metropolitan Washington Association of U.S., Inc. v. State Farm Mutual Automobile
Airports Authority Board of Review); Bowsher, 478 Insurance Co., 463 U.S. 29, 41–43, 103 S.Ct. 2856, 77
U.S. at 733–34, 106 S.Ct. 3181 (invalidating Comptroller L.Ed.2d 443 (1983); Heckler v. Chaney, 470 U.S. 821, 831–
General's powers under “reporting provisions” of 33, 105 S.Ct. 1649, 84 L.Ed.2d 714 (1985). Therefore, the
Balanced Budget and Emergency Deficit Control Act); probability of judicial review of some agency action has
INS v. Chadha, 462 U.S. 919, 942 n.13, 957, 103 S.Ct. never excused or mitigated an otherwise extant Article
2764, 77 L.Ed.2d 317 (1983) (invalidating legislative II problem in the structure of the agency. See, e.g., Free
veto provision of Immigration and Nationality Act); Enterprise Fund, 561 U.S. 477, 130 S.Ct. 3138, 177 L.Ed.2d
Buckley v. Valeo, 424 U.S. 1, 134–35, 140, 96 S.Ct. 706; Buckley, 424 U.S. 1, 96 S.Ct. 612, 46 L.Ed.2d 659.
612, 46 L.Ed.2d 659 (1976) (invalidating structure of
Federal Election Commission); Myers v. United States, From another direction, one might argue that the CFPB
272 U.S. 52, 47 S.Ct. 21, 71 L.Ed. 160 (1926) (invalidating is checked by Congress through Congress's oversight
provision requiring Senate consent to President's removal and ultimate control over appropriations. To begin with,
of executive officer). In that same vein, even though Congress does not have the power to direct the Director
a particular President might accept a novel practice or to remove the Director at will. Congress cannot
that violates Article II, “the separation of powers does supervise or direct the Director regarding what rules to
not depend on the views of individual Presidents, nor issue, what enforcement actions to bring (or decline to
on whether the encroached-upon branch approves the bring), or how to resolve adjudications. More to the
encroachment.” Free Enterprise Fund, 561 U.S. at 497, point, by further impairing the President's control over
130 S.Ct. 3138 (internal quotation marks and citation the Executive Branch, day-to-day congressional control
omitted). A President cannot “choose to bind his over an executive or independent agency generally would
successors by diminishing their powers.” Id. exacerbate, rather than mitigate, any Article II problem
with the structure of the agency. To satisfy Article II,
In this case, moreover, it bears mention that Congress's the check on an agency must come from the President or
choice of a single-Director CFPB was not an especially from other internal Executive Branch or agency checks,
considered legislative decision. There are no committee not from Congress. The bottom line, as the Supreme
reports, nor substantial legislative history, delving into Court said in Bowsher, is that the “separated powers of
the benefits of single-Director independent agencies our Government cannot be permitted to turn on judicial
versus multi-member independent agencies. The CFPB assessment of whether an officer exercising executive
power is on good terms with Congress.” 478 U.S. at 730, law.” Id. at 509, 130 S.Ct. 3138 (internal quotation marks
106 S.Ct. 3181. “The Framers did not rest our liberties omitted).
on such bureaucratic minutiae.” Free Enterprise Fund, 561
U.S. at 500, 130 S.Ct. 3138. 16 [13] [14] First, in considering Congress's intent with
respect to severability, courts must decide—or often
In sum, the CFPB departs from settled historical speculate, truth be told—whether Congress would “have
practice regarding the structure of independent agencies. preferred what is left of its statute to no statute at all.”
And that departure makes a significant difference for Ayotte v. Planned Parenthood of Northern New England,
the individual liberty protected by the Constitution's 546 U.S. 320, 330, 126 S.Ct. 961, 163 L.Ed.2d 812
separation of powers. Applying the Supreme Court's (2006); see also Alaska Airlines, Inc. v. Brock, 480 U.S.
separation of powers precedents, we therefore conclude 678, 685, 107 S.Ct. 1476, 94 L.Ed.2d 661 (1987) (“[T]he
that the CFPB is unconstitutionally structured because it unconstitutional provision must be severed unless the
statute created in its absence is legislation that Congress
is an independent agency headed by a single Director. 17
would not have enacted.”). Importantly, courts need
not speculate and can presume that Congress wanted
to retain the constitutional remainder of the statute
*37 III when “Congress has explicitly provided for severance by
including a severability clause in the statute.” Alaska
[10] Having concluded that the CFPB is Airlines, 480 U.S. at 686, 107 S.Ct. 1476; see also id.
unconstitutionally structured because it is an independent (“[T]he inclusion of such a clause creates a presumption
agency headed by a single Director, we must decide on that Congress did not intend the validity of the statute
the appropriate remedy. When the constitutional problem in question to depend on the validity *38 of the
involves a provision of a statute, the legal term for constitutionally offensive provision.”).
that question is severability. In light of this one specific
constitutional flaw in the Dodd–Frank Act, must we strike In this case, as was the case in Free Enterprise Fund,
down that whole Act? Or must we strike down at least “nothing in the statute's text or historical context makes it
those statutory provisions creating the CFPB and defining evident that Congress, faced with the limitations imposed
the CFPB's duties and authorities? Or do we just narrowly by the Constitution, would have preferred no” CFPB at
strike down and sever the one for-cause removal provision all (or no Dodd–Frank Act at all) to a CFPB whose
that is the source of the constitutional problem? Director is removable at will. 561 U.S. at 509, 130
S.Ct. 3138 (internal quotation marks omitted). Indeed,
Not surprisingly, PHH wants us, at a minimum, to strike the Dodd–Frank Act itself all but answers the question
down the CFPB and prevent its continued operation, if of presumed congressional intent through its express
not strike down the entire Dodd–Frank Act. But Supreme severability clause, which instructs: “If any provision” of
Court precedent on severability demands a narrower the Act “is held to be unconstitutional, the remainder of”
remedy for the CFPB's constitutional flaw. the Act “shall not be affected thereby.” 12 U.S.C. § 5302. It
will be the rare case when a court may ignore a severability
[11] [12] “Generally speaking, when confronting a provision set forth in the text of the relevant statute. See
constitutional flaw in a statute, we try to limit the solution Alaska Airlines, 480 U.S. at 686, 107 S.Ct. 1476. We have
to the problem, severing any problematic portions while no reason or basis to tilt at that windmill in this case.
leaving the remainder intact.” Free Enterprise Fund v.
Public Company Accounting Oversight Board, 561 U.S. [15] Second, we also must look at “the balance of the
477, 508, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010) (internal legislation” to assess whether the statute is capable
quotation marks omitted). The “normal rule is that “of functioning” without the offending provisions “in
partial, rather than facial, invalidation is the required a manner consistent with the intent of Congress.” Id.
course.” Id. (internal quotation marks omitted). That is at 684–85, 107 S.Ct. 1476 (emphasis omitted); see also
true so long as we conclude that (i) Congress would have United States v. Booker, 543 U.S. 220, 227, 125 S.Ct.
preferred the law with the offending provision severed 738, 160 L.Ed.2d 621 (2005) (“[T]wo provisions ... must
over no law at all; and (ii) the law with the offending be invalidated in order to allow the statute to operate
provision severed would remain “fully operative as a
IV
To be sure, one might ask whether, instead of severing
the for-cause removal provision, we should rewrite and Because our constitutional ruling will not halt the CFPB's
add to the Dodd–Frank Act by restructuring the CFPB ongoing operations or the CFPB's ability to uphold the
as a multi-member independent *39 agency. But doing $109 million order against PHH, we must also consider
so would require us to create a variety of new offices, PHH's statutory objections to the CFPB enforcement
designate one of the offices as Chair, and specify various action in this case.
administrative details of the reconstituted agency. All
of that “editorial freedom” would take us far beyond In its enforcement action against PHH, the CFPB alleged
our judicial capacity. Free Enterprise Fund, 561 U.S. at that PHH violated Section 8 of the Real Estate Settlement
510, 130 S.Ct. 3138. In addition, that approach would Procedures *40 Act. Passed by Congress and signed by
thwart the ongoing operations of the CFPB unless and President Ford in 1974, the Act dramatically reformed the
until the President nominated and the Senate confirmed real estate industry. One of the textually stated purposes
new members, potentially shutting the agency down of the Act was “the elimination of kickbacks or referral
for months if not years. No Supreme Court case in fees that tend to increase unnecessarily the costs of certain
comparable circumstances has adopted such an approach. settlement services.” 12 U.S.C. § 2601(b)(2).
We may not do so here. Of course, if Congress prefers
to restructure the CFPB as a multi-member independent To further that purpose, Section 8(a) of the Act bans
agency rather than as a single-Director executive agency, payments for referrals in the real estate settlement process.
Congress may enact new legislation that creates a Bureau Section 8(a) provides: “No person shall give and no person
headed by multiple members instead of a single Director. shall accept any fee, kickback, or thing of value pursuant
Cf. id. (“Congress of course remains free to pursue any of to any agreement or understanding, oral or otherwise, that
these options going forward.”). business incident to or a part of a real estate settlement
service involving a federally related mortgage loan shall be alternative, PHH argues that the CFPB violated bedrock
referred to any person.” Id. § 2607(a). 20 due process principles by retroactively applying its new
interpretation of the statute against PHH. We agree with
Importantly for this case, however, Section 8(c) contains PHH on both points.
a series of qualifications, exceptions, and safe harbors.
Of relevance here, Section 8(c) carves out a safe
harbor against overly broad interpretations of Section A
8(a): “Nothing in this section shall be construed as
prohibiting ... (2) the payment to any person of a bona [16] The basic statutory question in this case is not a close
fide salary or compensation or other payment for goods call. The text of Section 8(c) permits captive reinsurance
or facilities actually furnished or for services actually arrangements where mortgage insurers pay no more than
performed.” Id. § 2607(c)(2). reasonable market value for the reinsurance. Section 8(c)
contains a broad range of exceptions, qualifications, and
In 1995, PHH, a mortgage lender, began participating safe harbors to Section 8(a). As relevant here, Section
in so-called captive reinsurance agreements. PHH would 8(c) creates a safe harbor, stating: “Nothing” in Section 8
refer borrowers to certain mortgage insurers. Those “shall be construed as prohibiting” the “payment to any
mortgage insurers, in turn, would purchase mortgage person of a bona fide salary or compensation or other
reinsurance from Atrium, a wholly owned subsidiary payment for goods or facilities actually furnished or for
of PHH. According to PHH, this was not a problem services actually performed.” See 12 U.S.C. § 2607(c)(2).
under Section 8 because the mortgage insurers would Nothing means nothing.
pay no more than reasonable market value to Atrium
for the reinsurance they purchased. PHH argues that the Section 8(a) prohibits, in this context, payment by a
mortgage insurers were thus paying reasonable market mortgage insurer to a lender for the lender's referral of a
value for reinsurance from Atrium, as allowed by the customer to the mortgage insurer. But Section 8(a) and
statute's safe harbor, and were not paying anything for 8(c) do not prohibit bona fide payments by the mortgage
the referrals made by PHH, which would have been insurer to the lender for other services that the lender (or
unlawful. 21 the lender's subsidiary or affiliate) actually provides to the
mortgage insurer.
Many other mortgage lenders did the same thing as PHH.
They did so in part because the U.S. Department of How do we determine whether the mortgage insurer's
Housing and Urban Development, known as HUD, the payment to the lender was a bona fide payment for
federal government agency responsible for enforcing this the reinsurance rather than a disguised payment for the
real estate law, repeatedly said (beginning in 1997) that lender's referral of a customer to the insurer? As HUD
captive reinsurance arrangements were permissible under had long explained, the answer is commonsensical: If the
Section 8 so long as the mortgage insurer paid no more payment to the lender-affiliated reinsurer is more than the
than reasonable market value for the reinsurance. reasonable market value of the reinsurance, then we may
presume that the excess payment above reasonable market
In this action against PHH, however, the CFPB changed value was not a bona fide payment for the reinsurance
course and, for the first time, interpreted Section 8 but was a disguised payment for a referral. Otherwise,
to prohibit captive reinsurance agreements even if the there is no basis to treat payment of reasonable market
mortgage insurers pay no more than reasonable market value for the reinsurance as a prohibited payment for the
value to the reinsurers. The CFPB then retroactively referral—assuming, of course, that the reinsurance was
applied that new interpretation against PHH based on actually provided. In other words, in the text and context
conduct that PHH engaged in before the CFPB issued its of this statute, a bona fide payment means a payment of
new interpretation. reasonable market value. 22
*41 PHH advances two alternative and independent To be sure, one might say that the mortgage insurer
arguments on the statutory issue. First, PHH argues that —although paying reasonable market value for the
the CFPB misinterpreted Section 8(c). Second, in the reinsurance—would have preferred not to purchase
reinsurance at all or to purchase it from a different adopted a rule, Regulation X, under which captive
reinsurer. In that sense, the lender's actions create a kind reinsurance arrangements were permitted so long as the
of tying arrangement in which the lender says to the insurer paid reasonable market value for the reinsurance.
mortgage insurer: We will refer customers to you, but See 24 C.F.R. § 3500.14(g) (2011); see also 24 C.F.R. §
only if you purchase another service from our affiliated 3500.14(e)–(f) (1992). That regulation remains in place
reinsurer, albeit at reasonable market value. But the as a CFPB regulation. See 12 C.F.R. § 1024.14 (2016).
statute does not proscribe that kind of arrangement. Yet in its decision here and its argument to this Court,
As relevant here, Section 8(a) proscribes payments for the CFPB has not adhered to the regulation. On the
referrals. Period. It does not proscribe other transactions contrary, the CFPB now says the opposite of what HUD's
between the lender and mortgage insurer. Nor does prior interpretations and Regulation X all say. In the
it proscribe a tying arrangement, so long as the only next section, we will consider the due process implications
payments exchanged are bona fide payments for services of the CFPB's retroactive application of its about-face.
and not payments for referrals. For now, we simply note that the CFPB's interpretation
flouts not only the text of the statute but also decades of
The CFPB says, however, that the mortgage insurer's carefully and repeatedly considered official government
payment for the reinsurance is not “bona fide” if it was interpretations.
part of a tying *42 arrangement. That makes little sense.
Tying arrangements are ubiquitous in the U.S. economy. Our interpretation of the text also accords with the
To be sure, tying arrangements are outlawed in certain statute's multiple purposes, as revealed by the text. One
circumstances, but they were not outlawed by Section 8 goal of the statute was to eliminate payments for referrals
in the circumstances at issue here. 23 A payment for a because “referral fees ... tend to increase unnecessarily the
service pursuant to a tying arrangement does not make the costs of certain settlement services.” 12 U.S.C. § 2601(b)
payment any less bona fide, so long as the payment for (2). Another purpose of the statute, as the text shows,
the service reflects reasonable market value. A bona fide was to allow market participants to refer customers to
payment means a payment of reasonable market value. other *43 service providers, albeit without demanding
or receiving payment for the referral. Id. § 2607(a).
Recognizing, however, that an aggressive government After all, such referrals often enhance the efficiency
enforcement agency or court might interpret other of the homebuying process. Another purpose was to
transactions between businesses in the real estate market assure market participants that they could engage in
as connected to, conditioned on, or tied to referrals, and transactions—other than payments for referrals—so long
might try to sweep such transactions within the scope as reasonable payments were made for services actually
of Section 8(a)'s prohibition, Congress explicitly made performed. Id. § 2607(c); see also Glover v. Standard
clear in Section 8(c) that those other transactions were Federal Bank, 283 F.3d 953, 964 (8th Cir. 2002); Geraci
lawful so long as reasonable market value was paid and v. Homestreet Bank, 347 F.3d 749, 751 (9th Cir. 2003).
the services were actually performed. In other words, If payments for services actually performed reflect the
Section 8(c) specifically bars the aggressive interpretation reasonable market value of the services, as they must to
of Section 8(a) advanced by the CFPB in this case. Section fall within Section 8(c), then they square with the Act's
8(c) was designed to provide certainty to businesses in various purposes.
the mortgage lending process. The CFPB's interpretation
flouts that statutory goal and upends the entire system of Our interpretation of the text also aligns with how
unpaid referrals that has been part of the market for real key Members of Congress intended Sections 8(a) and
estate settlement services. 8(c) to work together. When the Real Estate Settlement
Procedures Act was reported out of the Senate Committee
Our interpretation of the text accords with the on Banking, Housing and Urban Affairs in 1974, the
longstanding interpretation of the Department of accompanying committee report stated: “Reasonable
Housing and Urban Development. For decades, HUD payments in return for services actually performed
explained to mortgage lenders that captive reinsurance or goods actually furnished are not intended to be
arrangements where reasonable market value was paid prohibited.” S. Rep. No. 93–866, at 6 (1974). Note the
were entirely permissible under Section 8. Indeed, HUD Senate Committee's use of the word “reasonable.” Here,
the CFPB has argued that the phrase “bona fide payment” questions are whether the payment from the mortgage
in the statute somehow means something different from insurer to the lender-affiliated reinsurer is bona fide—
“reasonable payment.” CFPB Br. 29 & n.18. But the that is, commensurate with the reasonable market value
Senate Committee, following the commonsense meaning, of the reinsurance—and whether the services were actually
expressly equated the two terms. Contrary to the CFPB's performed. If so, then the payment is permissible, as HUD
strained interpretation, the committee report indicates had long stated.
that those Members of Congress intended Sections 8(a)
and 8(c) to mean what they say and to say what they mean: The CFPB obviously believes that captive reinsurance
Payments for referrals are proscribed, but payments for arrangements are harmful and should be illegal. But
other services actually performed are permitted, so long as the decision whether to adopt a new prohibition on
the payments reflect reasonable market value. captive reinsurance arrangements is for Congress and the
President when exercising the legislative authority. It is not
[17] [18] In seeking to defend its interpretation, a decision for the CFPB to make unilaterally. See King v.
the CFPB argues that its interpretation of the Real Burwell, ––– U.S. ––––, 135 S.Ct. 2480, 2496, 192 L.Ed.2d
Estate Settlement Procedures Act is entitled to Chevron 483 (2015) (“In a democracy, the power to make the law
deference. But Chevron instructs us at step one to rests with those chosen by the people.”).
first employ all of the traditional tools of statutory
interpretation, as we have done. See Chevron U.S.A. Inc. We hold that Sections 8(a) and 8(c) of the Real Estate
v. Natural Resources Defense Council, Inc., 467 U.S. 837, Settlement Procedures Act allow captive reinsurance
843 n.9, 104 S.Ct. 2778, 81 L.Ed.2d 694 (1984). After arrangements so long as the mortgage insurance
we employ those tools, only if an ambiguity remains do companies pay no more than reasonable market value to
we defer to the agency, if its interpretation is at least the reinsurers for services actually provided. On remand,
reasonable. Here, we conclude at Chevron step one that the the CFPB may determine whether the relevant mortgage
statute permits captive reinsurance arrangements. Indeed, insurers in fact paid more than reasonable market value
Section 8(c) eliminates any potential ambiguity that might to the reinsurer Atrium for the reinsurance. 24
have existed if all we had were Section 8(a) alone. Section
8(c) clearly permits captive reinsurance arrangements so
long as the mortgage insurer pays reasonable market
value for reinsurance actually provided. So the CFPB's B
interpretation fails at Chevron step one. Cf. Kingdomware
[19] [20] [21] Even if the CFPB's interpretation of
Technologies, Inc. v. United States, –––U.S. ––––, 136
Section 8 were permissible, it nonetheless represented
S.Ct. 1969, 1979, 195 L.Ed.2d 334 (2016); FERC v.
a complete about-face from the Federal Government's
Electric Power Supply Association, ––– U.S. ––––, 136
longstanding prior interpretation of Section 8. Agency
S.Ct. 760, 773 n.5, 193 L.Ed.2d 661 (2016); Adams Fruit
change is not a fatal flaw in and of itself, so long as
Co. v. Barrett, 494 U.S. 638, 642, 110 S.Ct. 1384, 108
the change is reasonably explained and so long as the
L.Ed.2d 585 (1990); Loving v. IRS, 742 F.3d 1013, 1021–
new interpretation is consistent with the statute. See FCC
22 (D.C. Cir. 2014). For those same reasons, if we reached
v. Fox Television Stations, Inc., 556 U.S. 502, 514–16,
Chevron step two, we would conclude that the CFPB's
129 S.Ct. 1800, 173 L.Ed.2d 738 (2009). But change
interpretation is not a reasonable interpretation of the
becomes a problem—a fatal one—when the Government
statute in light of the statute's text, history, context, and
decides to turn around and retroactively apply that new
purposes.
interpretation to proscribe conduct that occurred before
the new interpretation was issued. Therefore, even if the
The policy and ethics of captive reinsurance arrangements
CFPB's new interpretation were consistent with the statute
no doubt can be debated, as can the policy and ethics of
(which it is not), the CFPB violated due process by
the wide variety of similar tying and referral arrangements
retroactively applying that new interpretation to PHH's
that are ubiquitous in the American economy. But the
conduct that occurred before the date of the CFPB's new
initial question before us (and that was before the CFPB)
interpretation.
*44 is not one of policy or ethics. The question is one
of law. Under Section 8(a) and Section 8(c), the relevant
Before the creation of the CFPB in 2010, the Department or services performed, the excess is not for services
of Housing and Urban Development administered the actually rendered and may be considered a kickback or
Real Estate Settlement Procedures Act. In 1997, HUD referral fee proscribed by RESPA section 8.” 24 C.F.R.
sent a letter to a mortgage company. The mortgage § 3500.14(e) (1977). Regulation X was slightly reworded
company had requested that HUD clarify the application in 1992: “If the payment of a thing of value bears no
of Section 8 of the Real Estate Settlement Procedures Act reasonable relationship to the market value of the goods
to captive reinsurance arrangements. or services provided, then the excess is not for services
or goods actually performed or provided.” 24 C.F.R. §
In the letter, HUD analyzed the relationship between 3500.14(g)(3) (1993). Regulation X described “bona fide”
Sections 8(a) and 8(c). HUD said that “Subsection payments for services actually performed as payments that
8(c) of RESPA sets forth various exemptions from “Section 8 of RESPA permits.” Id. § 3500.14(g)(1). After
these prohibitions.” Letter from Nicolas P. Retsinas, the CFPB inherited HUD's enforcement and rulemaking
Assistant Secretary for Housing, Department of Housing authority under the Act, the CFPB itself codified HUD's
and Urban Development, to Countrywide Funding Regulation X provisions governing Section 8. See 12
Corporation 3 (Aug. 6, 1997) (J.A. 251–58). HUD further C.F.R. § 1024.14(g) (2012).
stated that its “view of captive reinsurance” was that
“the arrangements are permissible” if “the payments to In our Court, the CFPB acknowledges that, at the time of
the reinsurer: (1) are for reinsurance services ‘actually PHH's conduct, Regulation X stated “that, if a payment
furnished or for services performed’ and (2) are bona bears no reasonable relationship to the value of the
fide compensation that does not exceed the value of such services provided, then the excess may be a payment for
services.” Id. (J.A. 253). a referral.” CFPB Br. 31 n.23. But the CFPB argues
that “this does not mean that, if the payment does bear
*45 The 1997 HUD letter was widely disseminated and a reasonable relationship to the value of the services
relied on in the industry. In 2004, a title association again provided, then those payments are never for referrals.” Id.
asked HUD about the legality of captive reinsurance The CFPB's interpretation is a facially nonsensical reading
programs under the Real Estate Settlement Procedures of Regulation X. As Regulation X made clear, if an insurer
Act. HUD restated the position it had taken in 1997 makes a payment at reasonable market value for services
with respect to captive mortgage reinsurance. As it had in actually provided, that payment is not a payment for a
1997, HUD wrote that captive reinsurance agreements are referral.
permissible if the payments made to the reinsurer (1) are
“for reinsurance services actually furnished or for services HUD's consistent and repeated interpretation of Section
performed” and (2) are “bona fide compensation that 8 was widely known and relied on in the mortgage
does not exceed the value of such services.” Letter from lending industry. It was reflected in the leading treatise
John P. Kennedy, Associate General Counsel for Finance on the Act. See JAMES H. PANNABECKER & DAVID
and Regulatory Compliance, Department of Housing and STEMLER, THE RESPA MANUAL: A COMPLETE
Urban Development, to American Land Title Association GUIDE TO THE REAL ESTATE SETTLEMENT
1 (Aug. 12, 2004) (J.A. 259). PROCEDURES ACT § 8.04[6] [a] (2013). And courts
had acknowledged and approved HUD's interpretation.
In accord with those letters, HUD's Real Estate See, e.g., Glover v. Standard Federal Bank, 283 F.3d
Settlement Procedures Act regulations were set forth in 953, 964 (8th Cir. 2002) (the “permissive language of
Regulation X, which was first issued in 1976 and updated, Section 8(c) ... clearly states that reasonable payments
as relevant here, in 1992. See 24 C.F.R. §§ 3500.01–3500.14 for goods, facilities or services actually furnished are not
(1977); see also 24 C.F.R. § 3500.14 (1993). As it initially prohibited by RESPA, even when done in connection
read, Regulation X stated: “The payment and receipt of with the referral of a particular loan to a particular
a thing of value that bears a reasonable relationship to lender”); cf. Carter v. Welles–Bowen Realty, Inc., 736 F.3d
the value of the goods or services received by the person 722, 728 (6th Cir. 2013) (Section 8(c)(2) is a *46 “safe
or company making the payment is not prohibited by harbor[ ]” from Section 8(a)'s “ban on referral fees”);
RESPA section 8. To the extent the thing of value is Geraci v. Homestreet Bank, 347 F.3d 749, 751 (9th Cir.
in excess of the reasonable value of the goods provided 2003) (describing Section 8(c)(2) as a “safe harbor” and
noting that HUD, when evaluating whether payments (“A fundamental principle in our legal system is that laws
from mortgage lenders to mortgage brokers fall within which regulate persons or entities must give fair notice
Section 8(c), considers whether the payments for services of conduct that is forbidden or required.”); cf. United
“are reasonably related to the value of the ... services thatStates v. Pennsylvania Industrial Chemical Corp., 411 U.S.
were actually performed”). 655, 674, 93 S.Ct. 1804, 36 L.Ed.2d 567 (1973) (“Thus,
to the extent that the regulations deprived PICCO of fair
At the time PHH engaged in its captive reinsurance warning as to what conduct the Government intended
arrangements, everyone knew the deal: Captive to make criminal, we think there can be no doubt that
reinsurance arrangements were lawful under Section 8 so traditional notions of fairness inherent in our system of
long as the mortgage insurer paid no more than reasonable criminal justice prevent the Government from proceeding
market value to the reinsurer for reinsurance actually with the prosecution.”); Cox v. Louisiana, 379 U.S. 559,
furnished. 571, 85 S.Ct. 476, 13 L.Ed.2d 487 (1965) (“[U]nder all
the circumstances of this case, after the public officials
In 2015, however, the CFPB decided that captive acted as they did, to sustain appellant's later conviction
reinsurance agreements were prohibited by Section 8. for demonstrating where they told him he could would
The CFPB then applied its new interpretation of Section be to sanction an indefensible sort of entrapment by the
8 retroactively against PHH, ruling against PHH based State—convicting a citizen for exercising a privilege which
on conduct that had occurred as far back as 2008. The the State had clearly told him was available to him. The
retroactive application of the CFPB's new interpretation Due Process Clause does not permit convictions to be
violated the Due Process Clause. obtained under such circumstances.”) (internal quotation
marks and citation omitted); Bouie v. City of Columbia,
[22] The Due Process Clause limits the extent to 378 U.S. 347, 350–51, 84 S.Ct. 1697, 12 L.Ed.2d 894
which the Government may retroactively alter the legal (1964) *47 (Due Process Clause violated when state
consequences of an entity's or person's past conduct. punished defendants “for conduct that was not criminal
That anti-retroactivity principle “is deeply rooted in our at the time they committed it” because the “underlying
jurisprudence, and embodies a legal doctrine centuries principle” of fair warning dictates that “no man shall be
older than our Republic.” Landgraf v. USI Film Products, held criminally responsible for conduct which he could
511 U.S. 244, 265, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994); not reasonably understand to be proscribed”) (internal
see also Eastern Enterprises v. Apfel, 524 U.S. 498, 547, quotation marks omitted); Raley v. Ohio, 360 U.S. 423,
118 S.Ct. 2131, 141 L.Ed.2d 451 (1998) (Kennedy, J., 438–39, 79 S.Ct. 1257, 3 L.Ed.2d 1344 (1959) (“There was
concurring in the judgment and dissenting in part) (“[F]or active misleading. The State Supreme Court dismissed the
centuries our law has harbored a singular distrust of statements of the Commission as legally erroneous, but
retroactive statutes.”). the fact remains that at the inquiry they were the voice
of the State most presently speaking to the appellants.
[23] [24] Retroactivity—in particular, a new agency We cannot hold that the Due Process Clause permits
interpretation that is retroactively applied to proscribe convictions to be obtained under such circumstances.”)
past conduct—contravenes the bedrock due process (internal citation omitted). 25
principle that the people should have fair notice of
what conduct is prohibited. As the Supreme Court has In SmithKline, for example, the Supreme Court refused to
emphasized, “individuals should have an opportunity to defer to the Department of Labor's changed interpretation
know what the law is and to conform their conduct of a regulation because the regulated industry “had little
accordingly.” Landgraf, 511 U.S. at 265, 114 S.Ct. 1483. reason to suspect that its longstanding practice” violated
Due process therefore requires agencies to “provide the law. 132 S.Ct. at 2167. Neither the relevant statute nor
regulated parties fair warning of the conduct a regulation any regulations provided clear notice of the Department
prohibits or requires.” Christopher v. SmithKline Beecham of Labor's new interpretation. “Even more important,”
Corp., –––U.S. ––––, 132 S.Ct. 2156, 2167, 183 L.Ed.2d the Court said, was that “despite the industry's decades-
153 (2012) (internal quotation marks and alteration long practice,” the “DOL never initiated any enforcement
omitted); see also FCC v. Fox Television Stations, Inc., ––– actions” or “otherwise suggested that it thought the
U.S. ––––, 132 S.Ct. 2307, 2317, 183 L.Ed.2d 234 (2012) industry was acting unlawfully.” Id. at 2168.
enjoin violations” of Section 8. Id. § 2607(d)(4). As it administrative enforcement does not.” CFPB Br. 38
now reads, the Real Estate Settlement Procedures Act also (emphasis added). Because the CFPB challenged PHH's
provides that “actions” brought by various government conduct through an administrative action rather than in
agencies, including the CFPB, to enforce Section 8 “may court, the CFPB concludes that there is no applicable
be brought within 3 years from the date of the occurrence statute of limitations.
of the violation.” Id. § 2614.
Importantly, the CFPB's Dodd–Frank-based argument
The CFPB says that no statute of limitations applies to —if accepted here—would apply not only to actions to
its case against PHH. CFPB Br. 38. The CFPB advances enforce Section 8 of the Real Estate Settlement Procedures
two primary arguments. First, the CFPB contends it is Act. The CFPB's argument that it is not bound by any
broadly authorized to bring enforcement actions under statute of limitations in administrative proceedings would
the Dodd–Frank Act, and the CFPB says that the extend to all 19 of the consumer protection laws that
Dodd–Frank Act contains no statute of limitations on Congress empowered the CFPB to enforce. Cf. Integrity
CFPB enforcement actions brought in an administrative Advance, LLC, 2015–CFPB–0029, Doc. No. 33, CFPB
proceeding, as opposed to in court. Notably, that broad Opposition to Motion to Dismiss, at 12 (arguing no
argument would apply to all 19 of the consumer protection statute of limitations applies to CFPB administrative
statutes that the CFPB enforces, and would mean that action to enforce the Truth in Lending Act and the
no statute of limitations applies to CFPB administrative Electronic Fund Transfer Act).
actions enforcing any of those statutes.
[27] The CFPB's argument misreads the enforcement
*51 Second, if the Dodd–Frank Act does not override provisions of the Dodd–Frank Act. Section 5563
the statutes of limitations in all of the underlying statutes authorizes the CFPB “to conduct hearings and
enforced by the CFPB, meaning that the CFPB must abide adjudication proceedings ... in order to ensure or
by the statutes of limitations in the underlying statutes, the enforce compliance with” 19 federal consumer protection
CFPB contends that the statute at issue here—the Real laws, in addition to other rules, regulations, and
Estate Settlement Procedures Act—imposes a three-year orders. 12 U.S.C. § 5563(a). But Congress limited the
statute of limitations only on those enforcement actions enforcement power granted in Section 5563. The CFPB
that the CFPB brings in court. According to the CFPB, the may enforce those federal laws “unless such Federal
Real Estate Settlement Procedures Act does not impose law specifically limits the Bureau from conducting a
any statute of limitations for those enforcement actions hearing or adjudication proceeding.” Id. § 5563(a)(2)
that the CFPB brings in administrative proceedings. (emphasis added). Obviously, one such “limit” is a statute
of limitations. By its terms, then, Section 5563 ties the
Neither of the CFPB's arguments is correct. CFPB's administrative adjudications to the statutes of
limitations of the various federal consumer protection
First, the CFPB argues that we should ignore any statute laws it is charged with enforcing. 28 The Dodd–Frank
of limitations contained in the Real Estate Settlement Act therefore makes clear that in its enforcement action
Procedures Act. Instead, the CFPB claims that we against PHH, the CFPB was bound *52 by any statute
should look to the general enforcement provisions of the of limitations located in the Real Estate Settlement
Dodd–Frank Act because those Dodd–Frank provisions, Procedures Act.
according to the CFPB, trump the statutes of limitations
in the underlying statutes enforced by the CFPB. Second, as to the Real Estate Settlement Procedures Act
itself, the CFPB argues that the three-year limitations
Under the Dodd–Frank Act, the CFPB may bring an period in Section 2614 of that Act applies only to CFPB
enforcement action either in an administrative action actions to enforce Section 8 in court, not to CFPB
or in court. See 12 U.S.C. §§ 5563–5564. According administrative actions to enforce Section 8 before the
to the CFPB, that choice matters for statute of agency. We again disagree. Section 2614 supplies the
limitations purposes. The CFPB says that the Dodd– appropriate statute of limitations period not only for
Frank “provision that authorizes court actions includes CFPB actions to enforce Section 8 that are brought in
a statute of limitations,” but the “provision authorizing
court, but also for CFPB actions to enforce Section 8 that administrative action has *53 been instituted by or
are brought administratively. 29 on behalf of the Bureau....”); id. § 5565(c) (subsection
entitled “Civil money penalty in court and administrative
The first part of Section 2614 specifies a general one-year actions”). The same can be said for various provisions
statute of limitations for any “action pursuant to” Section scattered throughout the U.S. Code. See, e.g., 7
8 “brought in the United States district court or in any U.S.C. § 2279d (“Such liability shall apply to any
other court of competent jurisdiction.” Id. § 2614. administrative action brought before October 21, 1998,
but only if the action is brought within the applicable
The second part of Section 2614 supplies a longer, three- statute of limitations....”); 15 U.S.C. § 78u–6(a)(1)
year statute of limitations for “actions” to enforce Section (“The term ‘covered judicial or administrative action’
8 “brought by the Bureau, the Secretary, the Attorney means any judicial or administrative action brought
General of any State, or the insurance commissioner of by the Commission under the securities laws that
any State.” Id. In this second part of Section 2614, the results in monetary sanctions exceeding $1,000,000.”);
term “actions” is not limited to actions brought in court. 42 U.S.C. § 9628(b)(1)(B) (“The President may bring an
Section 2614 does not specify a jurisdiction or forum for administrative or judicial enforcement action under this
actions by the Bureau, the Secretary, the Attorney General chapter....”); 49 U.S.C. § 60120(a)(1) (“The maximum
of any State, or the insurance commissioner of any State. amount of civil penalties for administrative enforcement
Section 2614 simply requires that those actions be brought actions under section 60122 shall not apply to enforcement
within a three-year limitations period. actions under this section.”).
On its face, the statute of limitations for actions under The CFPB also cites BP America Production Co. v.
Section 8 is therefore straightforward: Private plaintiffs Burton, 549 U.S. 84, 127 S.Ct. 638, 166 L.Ed.2d 494
can bring actions under Section 8 only in court. Private (2006). There, the Supreme Court ruled that 28 U.S.C.
plaintiffs cannot bring administrative actions. For those § 2415(a)—a civil statute of limitations provision for
private-party suits, a one-year statute of limitations “every action for money damages” brought by the
applies. The relevant government enforcement agencies Government—encompassed only court actions, and not
—including the CFPB—may bring actions to enforce agency enforcement actions. BP America, 549 U.S. at 89,
Section 8 in courts or in administrative proceedings. For 101, 127 S.Ct. 638 (internal quotation marks and emphasis
those cases, a three-year statute of limitations applies. omitted). To arrive at that conclusion, the Court looked
to a wide array of textual and structural clues in that
In response, the CFPB claims that the term “actions” statutory scheme. For example, the Court noted that the
in Section 2614 refers only to court actions, not to “key terms in th[e] provision—‘action’ and ‘complaint’—
administrative actions. The CFPB argues that Congress are ordinarily used in connection with judicial, not
uses the word “proceedings” rather than “actions” when administrative, proceedings.” Id. at 91, 127 S.Ct. 638. That
it wants to refer to administrative actions. That is conclusion was reinforced by Congress's use of the word
flatly wrong. Indeed, the Dodd–Frank Act itself, which “action” as part of the term “action for money damages,”
amended Section 2614 to its current form, directly which is “generally used to mean pecuniary compensation
contradicts the CFPB's assertion about the meaning or indemnity, which may be recovered in the courts.” Id. at
of the term “action.” The Dodd–Frank Act repeatedly 91–92, 127 S.Ct. 638 (internal quotation marks omitted).
uses the term “action” to encompass court actions The Supreme Court also noted Congress's use of the term
and administrative proceedings. See, e.g., id. § 5497(d) “right of action” in the same provision, which is defined
(1) (“If the Bureau obtains a civil penalty against as the “right to bring suit; a legal right to maintain an
any person in any judicial or administrative action action, with suit meaning any proceeding ... in a court of
under Federal consumer financial laws....”); id. § 5537(b) justice.” Id. at 91, 127 S.Ct. 638 (internal quotation marks
(1) (establishing grant program for States “to hire omitted) (quoting BLACK'S LAW DICTIONARY 1488,
staff to identify, investigate, and prosecute (through 1603 (4th ed. 1951)).
civil, administrative, or criminal enforcement actions)
cases involving misleading or fraudulent marketing”); At the very most, BP America articulated a presumption
id. § 5538(b)(6) (“Whenever a civil action or an that the term “action” means court proceedings. But it is
at most a presumption. BP America certainly never said Moreover, “Congress ‘does not, one might say, hide
that the term “actions” always means actions in court. elephants in mouseholes.’ ” Puerto Rico v. Franklin
Far from it. Indeed, Supreme Court cases interpret the California Tax–Free Trust, –––U.S. ––––, 136 S.Ct. 1938,
term “actions” to encompass administrative actions. See 1947, 195 L.Ed.2d 298 (2016) (quoting Whitman v.
West v. Gibson, 527 U.S. 212, 220–21, 119 S.Ct. 1906, American Trucking Associations, Inc., 531 U.S. 457, 468,
144 L.Ed.2d 196 (1999); Pennsylvania v. Delaware Valley 121 S.Ct. 903, 149 L.Ed.2d 1 (2001)). If by means of
Citizens' Council for Clean Air, 478 U.S. 546, 557–60, 106 the Dodd–Frank Act, “Congress intended to alter” the
S.Ct. 3088, 92 L.Ed.2d 439 (1986). fundamental details of the statutes of limitations for
enforcement of this critical consumer protection law, “we
The question of whether the term “actions” in a particular would expect the text of the amended” statute “to say so.”
statute encompasses administrative actions thus turns Id. (internal quotation marks omitted). In other words,
on the overall text, context, purpose, and history of we would expect Congress to actually say that there is
the statute. Here, the textual and contextual clues no statute of limitations for CFPB administrative actions
convincingly demonstrate that administrative actions are to enforce Section 8, especially given that the CFPB has
covered. Unlike in BP America, the key part of Section full discretion to pursue administrative actions instead of
2614—which refers to “actions” brought by the CFPB— court proceedings and can obtain all of the same remedies
speaks of an “action” generically and is not limited to through administrative actions that it can obtain in court.
an “action for money damages.” Section 2614 also lacks But the text of Dodd–Frank says no such thing. Nor,
other “key terms” like “complaint” or “right of action” moreover, has the CFPB cited any legislative history that
that were present in the statute at issue in BP America. says anything like that.
The broader purpose and history of the Dodd–Frank Of course, there is good reason Congress did not say that
Act strongly reinforce the conclusion that the CFPB the CFPB need not comply with any statutes of limitations
is bound by a three-year statute of limitations in its when enforcing the Real Estate Settlement Procedures
administrative *54 actions to enforce Section 8. Before Act administratively. That would be absurd. Why would
2010, HUD could not bring administrative enforcement Congress allow the CFPB to bring administrative actions
actions to enforce Section 8. HUD could sue only in for an indefinite period, years or even decades after the
court. The CFPB acknowledges that a three-year statute fact? Why would Congress create such a nonsensical
of limitations applied to all of those HUD actions to dichotomy between CFPB court actions and CFPB
enforce Section 8. When passing the Dodd–Frank Act administrative actions? The CFPB has articulated no
in 2010, Congress empowered the CFPB (taking over remotely plausible reason why Congress would have
for HUD) to enforce Section 8 not just in courts, but done so. See Griffin v. Oceanic Contractors, Inc., 458
also in administrative actions. Importantly, the CFPB has U.S. 564, 575, 102 S.Ct. 3245, 73 L.Ed.2d 973 (1982)
complete discretion to institute enforcement actions in (“absurd results are to be avoided” where “alternative
courts or through administrative actions. See 12 U.S.C. interpretations consistent with the legislative purpose
§§ 5563–5564. And the CFPB can obtain administratively are available”). The CFPB's interpretation is especially
all of the remedies that it could obtain in court. Id. § alarming because the agency can seek civil penalties
5565(a)(2). The CFPB's theory is that Congress—for some in these administrative actions. 12 U.S.C. § 5565(a)(2).
unstated reason—did not carry forward the three-year But the Supreme Court has emphatically stressed the
statute of limitations for CFPB administrative actions to importance of statutes of limitations in civil penalty
enforce Section 8. Under the CFPB's theory, the agency provisions. As the Supreme Court stated in Gabelli: “Chief
therefore can always circumvent the three-year statute Justice Marshall used particularly forceful language in
of limitations simply by bringing the enforcement action emphasizing the importance of time limits on penalty
administratively rather than in court. But Congress did actions, stating that it ‘would be utterly repugnant to
not suggest that by transferring authority from HUD to the genius of our laws' if actions for penalties could
the CFPB, it intended to relax the longstanding three-year ‘be brought at any distance of time.’ ” 133 S.Ct. at
statute of limitations. 1223 (quoting Adams, 6 U.S. at 342); see also 3M Co.
v. Browner, 17 F.3d 1453, 1457 (D.C. Cir. 1994) *55
(“Justice Story, sitting as a circuit justice in a civil penalty
case, made the same point as Chief Justice Marshall: ‘it hearing and issued a recommended decision, concluding
would be utterly repugnant to the genius of our laws, that petitioners had violated the Real Estate Settlement
to allow such prosecutions a perpetuity of existence.’ ”) Procedures Act of 1974. In the administrative appeal,
(quoting United States v. Mayo, 26 F.Cas. 1230, 1231, the Director “affirm[ed]” the ALJ's conclusion that
(No. 15754) (C.C.D. Mass. 1813)). petitioners violated the Act.
The absurdity of the CFPB's position is illustrated by I believe that the ALJ who presided over the hearing was
its response to a hypothetical question about the CFPB's an “inferior Officer” within the meaning of Article II,
bringing an administrative enforcement action 100 years section 2, clause 2 of the Constitution. That constitutional
after the allegedly unlawful conduct. Presented with provision requires “inferior Officers” to be appointed
that question, the CFPB referenced its prosecutorial by the President, the “Courts of Law,” or the “Heads
discretion. But “trust us” is ordinarily not good enough. of Departments.” This ALJ was not so appointed.
Cf. McDonnell v. United States, ––– U.S. ––––, 136 Pursuant to an agreement between the Bureau and the
S.Ct. 2355, 2372–73, 195 L.Ed.2d 639 (2016) (declining Securities and Exchange Commission, the SEC's Chief
to construe a statute “on the assumption that the Administrative Law Judge assigned him to the case.
Government will use it responsibly”) (internal quotation This in itself rendered the proceedings against petitioners
marks omitted). The CFPB also suggested that the unconstitutional.
equitable defense of laches might apply to such a case,
and that “a court would look askance at a proceeding” To me, the case is indistinguishable from Freytag v.
initiated 100 years after the challenged conduct occurred. Commissioner of Internal Revenue, 501 U.S. 868, 111
CFPB Br. 38 n.28. We need not wait for an enforcement S.Ct. 2631, 115 L.Ed.2d 764 (1991). My reasoning is set
action 100 years after the fact. This Court looks askance *56 forth in Landry v. Federal Deposit Insurance Corp.,
now at the idea that the CFPB is free to pursue an 204 F.3d 1125, 1140–44 (D.C. Cir. 2000) (Randolph,
administrative enforcement action for an indefinite period J., concurring in part and concurring in the judgment).
of time after the relevant conduct took place. A much There is no need to repeat what I wrote there. The
more logical, predictable interpretation of the agency's majority opinion in Landry disagreed with my position,
authority is that the three-year limitations period in but petitioners have preserved the issue for review by this
Section 2614 applies equally to CFPB court actions and court en banc or by the Supreme Court on certiorari. Pet.
CFPB administrative actions. And most importantly for Br. 51 n.8. The Bureau, in its brief, argues that petitioners
our purposes, that is what the relevant statutes actually waived the issue because they did not raise it before the
say. 30 ALJ or on appeal to the Bureau's Director. But the Freytag
petitioners also raised their constitutional objection to the
*** appointment of the special trial judge for the first time on
appeal. See Freytag, 501 U.S. at 892–95, 111 S.Ct. 2631
We grant PHH's petition for review, vacate the CFPB's (Scalia, J., concurring). There is no difference between this
order, and remand for further proceedings consistent case and Freytag, except that in light of Landry it would
with this opinion. On remand, the CFPB may determine, have been futile to object, a point that cuts in petitioners'
among other things, whether, consistent with the favor.
applicable three-year statute of limitations, the relevant
mortgage insurers paid more than reasonable market
Karen Lecraft Henderson, Circuit Judge, concurring in
value to Atrium.
part and dissenting in part:
In no uncertain terms, PHH has asked this Court to vacate
So ordered.
the CFPB's order, outlining three distinct reasons why it is
entitled to that relief. As my colleagues ably demonstrate,
PHH's statutory arguments are sufficient to accomplish
Randolph, Senior Circuit Judge, concurring: its goal—I agree that: (1) the Bureau's interpretation of
After the enforcement unit of the Consumer Financial section 8(c)(2) contravenes the language of the statute;
Protection Bureau filed a Notice of Charges against (2) “action” in 12 U.S.C. § 2614 includes enforcement
petitioners, an Administrative Law Judge held a nine-day proceedings brought by the Bureau for a violation of
section 8(a) and a three-year statute of limitations applies party “all the relief it seeks”). Federal Rule of Appellate
to those proceedings; (3) the Bureau's interpretation of Procedure 28(a)(9) makes this simple, as it requires that
section 8(c)(2) is a new interpretation retroactively applied the party's brief include “a short conclusion stating
against PHH without fair notice; and (4) although the the precise relief sought.” Fed. R. App. Pro. 28(a)
Bureau has the authority to order disgorgement as a (9) (emphasis added). PHH makes its requested relief
sanction under 12 U.S.C. § 5565(a)(2)(D), the amount of quite clear: “the appropriate remedy ... is vacatur.” 2
any disgorgement award must be reduced by the amount Petitioners' Br. at 61.
the captive reinsurer paid the insurers for their reinsurance
claims. 1 But my colleagues don't stop there. Instead, The next question, then, is whether the court can provide
they unnecessarily reach PHH's constitutional challenge, the requested relief—to its fullest extent—on statutory
thereby rejecting one of the most fundamental tenets of grounds. See Nw. Austin Mun. Util. Dist. No. One, 557
judicial decisionmaking. With respect, I cannot join them U.S. at 205, 129 S.Ct. 2504. If so, we are to leave any
in this departure from longstanding precedent. constitutional question for another day. See Ashwander,
297 U.S. at 347, 56 S.Ct. 466 (Brandeis, J., concurring)
Although courts remain resolute in “our duty as the (“The Court will not pass upon a constitutional question
bulwar[k] of a limited constitution against legislative although properly presented by the record, if there is
encroachments,” at the same time we recognize “a well- also present some other ground upon which the case may
established principle governing the prudent exercise of be disposed of.”). Indeed, my colleagues conclude that
this Court's jurisdiction that normally the Court will not vacatur is warranted on statutory grounds. Maj. Op. at
decide a constitutional question if there is some other Parts IV, V. Because the statutory holding is sufficient, I
ground upon which to dispose of the case.” Nw. Austin believe our analysis should begin and end there. United
Mun. Util. Dist. No. One v. Holder, 557 U.S. 193, 205, States v. Wells Fargo Bank, 485 U.S. 351, 354, 108 S.Ct.
129 S.Ct. 2504, 174 L.Ed.2d 140 (2009) (quoting THE 1179, 99 L.Ed.2d 368 (1988) (“[O]ur established practice
FEDERALIST No. 78, p. 526 (J. Cooke ed. 1961) (A. is to resolve statutory questions at the outset where to
Hamilton); Rostker v. Goldberg, 453 U.S. 57, 64, 101 do so might obviate the need to consider a constitutional
S.Ct. 2646, 69 L.Ed.2d 478 (1981)) (internal quotations issue.”).
omitted). An unbroken line of Supreme Court cases
teaches that “[i]t is not the habit of the court to decide My colleagues, however, insist that the constitutional
questions of a constitutional nature unless absolutely issues be addressed before the statutory ones because
necessary to a decision of the case.” Ashwander v. Tenn. resolution of the former could afford PHH broader relief.
Valley Auth., 297 U.S. 288, 347, 56 S.Ct. 466, 80 L.Ed. 688 Maj. Op. at 9 n. 1. Notwithstanding their approach turns
(1936) (Brandeis, J., concurring); accord Bond v. United on its head the “fundamental rule of judicial restraint”
States, ––– U.S. ––––, 134 S.Ct. 2077, 2087, 189 L.Ed.2d 1 that “[p]rior to reaching any constitutional questions,
(2014); Union Pac. R. Co. v. Bhd. of Locomotive Engineers federal courts must consider nonconstitutional grounds
& Trainmen Gen. Comm. of Adjustment, Cent. Region, 558 for decision,” Jean v. Nelson, 472 U.S. 846, 854, 105 S.Ct.
U.S. 67, 80, 130 S.Ct. 584, 175 L.Ed.2d 428 (2009); Greater 2992, 86 L.Ed.2d 664 (1985); Gulf Oil Co. v. Bernard,
New Orleans Broad. Ass'n, Inc. v. United States, 527 U.S. 452 U.S. 89, 99, 101 S.Ct. 2193, 68 L.Ed.2d 693 (1981);
173, 184, 119 S.Ct. 1923, 144 L.Ed.2d 161 (1999); *57 Mobile v. Bolden, 446 U.S. 55, 60 (1980); Kolender v.
Dep't of Commerce v. U.S. House of Representatives, 525 Lawson, 461 U.S. 352, 361, n. 10, 103 S.Ct. 1855, 75
U.S. 316, 343, 119 S.Ct. 765, 142 L.Ed.2d 797 (1999); Blum L.Ed.2d 903 (1983), it misses the point—our focus should
v. Bacon, 457 U.S. 132, 137, 102 S.Ct. 2355, 72 L.Ed.2d be on providing the full relief requested by the prevailing
728 (1982). party, not the broadest relief implicated by its claim.
See Nw. Austin Mun. Util. Dist. No. One, 557 U.S. at
Determining the applicability of this judicial restraint 205, 129 S.Ct. 2504. In fact, in Nw. Austin Mun. Util.
principle is not a difficult task; indeed, a two-step inquiry Dist. No. One, the Supreme Court rejected the argument
decides whether constitutional analysis is necessary. First, that resolving the case solely on statutory grounds
we ask what relief a party seeks. See Nw. Austin Mun. “would not afford [a plaintiff] all the relief it seeks”—
Util. Dist. No. One, 557 U.S. at 205, 129 S.Ct. 2504 even though the plaintiff's constitutional challenge, if
(determining whether statutory remedy affords aggrieved successful, would provide broader relief—because the
plaintiff had “expressly describe[d] its constitutional year term concluded and without cause. 295 U.S. at 618–
challenge ... *58 as ‘being in the alternative’ to its 19, 55 S.Ct. 869. Humphrey then sought back pay. Id.
statutory argument.” Id. at 205–06, 129 S.Ct. 2504; cf. The Court could not decide his back pay claim without
Zobrest v. Catalina Foothills School Dist., 509 U.S. 1, first addressing the validity of Humphrey's for-cause only
7–8, 113 S.Ct. 2462, 125 L.Ed.2d 1 (1993) (reaching removal restriction on the President's Article II removal
Establishment Clause argument despite statutory ground power. Id. at 626–31, 55 S.Ct. 869.
because “[r]espondent did not urge any statutory grounds
for affirmance upon the Court of Appeals ... [and] [i]n The holdings in Morrison v. Olson, 487 U.S. 654, 108
the District Court, too, the parties chose to litigate the S.Ct. 2597, 101 L.Ed.2d 569 (1988), and Free Enter. Fund
case on the federal constitutional issues alone”). Similarly, v. Pub. Co. Accounting Oversight Bd., 561 U.S. 477, 130
PHH has expressly relied on “three independent reasons” S.Ct. 3138, 177 L.Ed.2d 706 (2010), are equally inapposite.
why vacatur is appropriate, treating its constitutional In Morrison, the appellees sought to quash subpoenas
arguments as alternatives to its statutory counterparts. issued on behalf of the independent counsel by challenging
Petitioners' Br. at 23. Thus, our duty is quite clear: “[A] the constitutionality of the legislation providing for
federal court should not decide federal constitutional appointment of an independent counsel removable by
questions where a dispositive nonconstitutional ground the Attorney General for cause only. 487 U.S. at 668–
is available.” Jean v. Nelson, 472 U.S. at 854, 105 S.Ct. 69, 108 S.Ct. 2597. Other than the collateral issue of the
2992 (1985); Spector Motor Serv. v. McLaughlin, 323 U.S. proper scope of review of a contempt order, id. at 669–
101, 105, 65 S.Ct. 152, 89 L.Ed. 101 (1944) (“If there is 70, 108 S.Ct. 2597, the only challenges the appellees made
one doctrine more deeply rooted than any other in the throughout the litigation were constitutional in nature. Id.
process of constitutional adjudication, it is that we ought at 668–70, 108 S.Ct. 2597. Accordingly, although there
not to pass on questions of constitutionality ... unless such were several grounds on which the appellees could have
adjudication is unavoidable.”). won their requested relief (quashing the subpoenas), each
required *59 consideration of a constitutional issue.
Nevertheless, my colleagues conclude that we must decide
the constitutional issue because it involves “a fundamental Free Enterprise Fund is perhaps the closest precedent yet
constitutional challenge to the very structure or existence it too is distinguishable. The Public Company Accounting
of an agency enforcing the law against it.” Maj. Op. at Oversight Board (PCAOB) investigated an accounting
9 n. 1. I again believe prudential considerations counsel firm for potential violations of statutes and regulations
against our reaching out to invalidate the for cause relating to the auditing of public companies. Free
removal provision. See Spector Motor Serv., 323 U.S. at Enterprise Fund v. Pub. Co. Accounting Oversight Bd., No.
105, 65 S.Ct. 152. 06–0217, 2007 WL 891675, at *2 (D.D.C. March 21, 2007).
The PCAOB issued a report detailing the result of its
First, the Supreme Court's leading removal caselaw is preliminary investigation and plaintiffs Free Enterprise
distinguishable. In both Myers v. United States, 272 Fund and its accounting-firm member brought suit to
U.S. 52, 106–07, 47 S.Ct. 21, 71 L.Ed. 160 (1926), and enjoin the ongoing disciplinary proceedings. Id. They
Humphrey's Executor v. United States, 295 U.S. 602, 618– sought a declaratory judgment “that the provisions of the
19, 55 S.Ct. 869, 79 L.Ed. 1611 (1935), the suit was brought Act establishing the PCAOB are unconstitutional” and
by the officer removable for cause only and only after he “an order enjoining the Board from taking any further
had been removed from office. In Myers, the President, action against [the accounting firm].” Id. Thus, the only
through the Postmaster General, removed a postmaster challenge was a facial one to the constitutionality of the
(Myers). 272 U.S. at 106, 47 S.Ct. 21. Myers protested PCAOB—there was no statutory ground on which to
the removal and eventually brought suit for back pay. Id. reverse any PCAOB action because it had not yet taken
After determining that laches did not prevent Myers from action against the firm. Id. at *6, 113 S.Ct. 2462. On
challenging his removal, the Court had to resolve whether review, we addressed the “facial challenge” that “Title
the President had lawfully removed him. Id. at 106–07, I of the Sarbanes–Oxley Act of 2002 ... violates the
47 S.Ct. 21. Humphrey's Executor presented a similar Appointments Clause of the Constitution and separation
question—the President removed a member (Humphrey) of powers because it does not permit adequate Presidential
of the Federal Trade Commission (FTC) before his seven- control of the [PCAOB].” Free Enterprise Fund v. Pub. Co.
Accounting Oversight Bd., 537 F.3d 667, 668 (D.C. Cir. Commodity Future Trading Commission v. Schor, 478 U.S.
833, 851, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986), the
2008). Likewise, the Supreme Court granted relief on the
Supreme Court has recently clarified that it remains within
constitutional removal power ground. 3 561 U.S. at 510–
our discretion whether to reach such a challenge. See B&B
14, 130 S.Ct. 3138.
Hardware, Inc. v. Hargis Industries, Inc., ––– U.S. ––––,
135 S.Ct. 1293, 1304, 1305 n.2, 191 L.Ed.2d 222 (2015)
This case does not fit the Court's removal precedents.
(declining to consider Article III structure challenge not
Myers and Humphrey's Executor raised only constitutional
properly briefed); Wellness International Network, Ltd. v.
questions. And unlike the challenges in Morrison and in
Sharif, ––– U.S. ––––, 135 S.Ct. 1932, 1942, 1948–49, 191
Free Enterprise Fund, PHH has challenged—successfully
L.Ed.2d 911 (2015) (reversing Seventh Circuit decision
—the Bureau's exercise of its statutory authority. Again,
holding that Article III structural challenge could not
PHH can obtain full relief without our addressing
be forfeited and remanding to determine forfeiture vel
the Bureau's challenged structure. 4 Although I agree non); Plaut, 514 U.S. at 231–32, 115 S.Ct. 1447 (noting
that “[w]hen constitutional questions are ‘indispensably Schor Court “cho[se] to consider [Schor's] Article III
necessary’ to resolving the case at hand, ‘the court must challenge” notwithstanding [his] consent to jurisdiction
meet and decide them.’ ” Citizens United v. FEC, 558 U.S. in the Article I tribunal and waiver of that challenge).
310, 375, 130 S.Ct. 876, 175 L.Ed.2d 753 (Roberts, C.J., Because resolution of the constitutionality of the Bureau's
concurring) (quoting Ex parte Randolph, 20 F.Cas. 242, structure is unnecessary in providing PHH full relief and
254 (No. 11, 558) (C.C.Va. 1833) (Marshall, C.J.)), I do because the Supreme Court's removal jurisprudence does
not believe that it is “indispensably necessary” to resolve not lead to a contrary result, I believe we should stay our
the for-cause removal issue here. hand. Greater New Orleans Broad. Ass'n, Inc. v. United
States, 527 U.S. 173, 184, 119 S.Ct. 1923, 144 L.Ed.2d 161
To the extent the majority concludes that judicial (1999) (“It is ... an established part of our constitutional
restraint is irrelevant because PHH raises a structural jurisprudence that we do not ordinarily reach out to
constitutional issue, Supreme Court precedent on waiver make novel or unnecessarily broad pronouncements on
of structural constitutional arguments advises otherwise. constitutional issues when a case can be fully resolved on
It is settled that a nonjurisdictional constitutional a narrower ground.”).
argument, including an Article III structural claim, can
be waived. See, e.g., Plaut v. Spendthrift Farm, Inc., Accordingly, I respectfully dissent from Parts II and III
514 U.S. 211, 231–32, 115 S.Ct. 1447, 131 L.Ed.2d of the majority opinion. In addition, I do not join the
328 (1995) ( “[T]he proposition that legal defenses Introduction and Summary to the extent it “hold[s] that
based upon doctrines central to the courts' structural the CFPB is unconstitutionally structured.” Maj. Op. at 8.
independence can never be waived simply *60 does not
accord with our cases.”); see also Al Bahlul v. United
States, 792 F.3d 1, 33 (D.C. Cir. 2015) (Henderson, All Citations
J., dissenting) (“[T]he only nonforfeitable argument is
839 F.3d 1, Fed. Sec. L. Rep. P 99,434
subject-matter jurisdiction.”). Although waiver of an
Article III structural challenge “cannot be dispositive,”
Footnotes
* Chief Judge Garland did not participate in this matter.
1 If PHH fully prevailed on its constitutional argument, including with respect to severability, the CFPB could not continue
operating unless and until Congress enacted new legislation. As a result, we could not and would not remand to the
CFPB for any further proceedings in this case. By contrast, even if PHH fully prevails on the statutory issues, we still
will have to remand to the CFPB for the agency to conduct the proceeding in accordance with the appropriate statutory
requirements, under which PHH may still be liable for certain alleged wrongdoing. In other words, PHH's constitutional
and severability argument, if accepted, would afford it full relief from any CFPB enforcement action and thus would afford
it broader relief than would its statutory arguments. For that reason, we have no choice but to address the constitutional
issue first. The constitutional issue cannot be avoided in any principled way. We therefore respectfully but firmly disagree
with Judge Henderson's suggestion in her separate opinion that the constitutional issue can be avoided. In our view,
failing to decide the constitutional issue here would be impermissible judicial abdication, not judicial restraint.
Moreover, apart from that necessity in this case, when a litigant raises a fundamental constitutional challenge to the
very structure or existence of an agency enforcing the law against it, the courts ordinarily address that issue promptly,
at least so long as jurisdictional requirements such as standing are met. See, e.g., Free Enterprise Fund, 561 U.S. at
490–91, 130 S.Ct. 3138; Morrison v. Olson, 487 U.S. at 669–70, 108 S.Ct. 2597; Buckley v. Valeo, 424 U.S. 1, 12, 96
S.Ct. 612, 46 L.Ed.2d 659 (1976). That was the approach we took in both Intercollegiate Broadcasting System, Inc. v.
Copyright Royalty Board, 684 F.3d 1332, 1334, 1336–37 (D.C. Cir. 2012), and Raymond J. Lucia Cos. v. SEC, 832
F.3d 277, 283–84 (D.C. Cir.2016). It can be irresponsible for a court to unduly delay ruling on such a fundamental and
ultimately unavoidable structural challenge, given the systemic ramifications of such an issue.
2 To cabin the effects of Humphrey's Executor on the Presidency, some have proposed reading the standard for-cause
removal restrictions in the statutes creating independent agencies to allow for Presidential removal of independent agency
heads based on policy differences. But Humphrey's Executor itself rejected that interpretation. As the Supreme Court
recently explained, Humphrey's Executor refuted the idea that “simple disagreement” with an agency head's “policies
or priorities could constitute ‘good cause’ for its removal.” Free Enterprise Fund, 561 U.S. at 502, 130 S.Ct. 3138. The
correct reading of the “for-cause” restrictions, the Court stated in Free Enterprise Fund, is that they “mean what they say”
and preclude removal except in cases of inefficiency, neglect of duty, or malfeasance in office. Id.
3 The independent agencies have been designed, moreover, to avoid “the suspicion of partisan direction.” Humphrey's
Executor, 295 U.S. at 625, 55 S.Ct. 869. The independent agency heads are appointed by the President with the advice
and consent of the Senate (or appointed for a temporary period by the President alone in appropriate Senate recesses).
By statute, certain independent agencies must include members of both major political parties. See, e.g., 15 U.S.C.
§ 41 (Federal Trade Commission); 15 U.S.C. § 78d(a) (Securities and Exchange Commission); 15 U.S.C. § 2053(c)
(Consumer Product Safety Commission); 42 U.S.C. § 7171(b)(1) (Federal Energy Regulatory Commission).
4 In general, an agency without a for-cause removal statute is an executive agency, not an independent agency, because
the President can supervise, direct, and remove at will the heads of those agencies. That said, in the period from
Myers (1926) to Humphrey's Executor(1935), Congress created several multi-member agencies that did not include for-
cause provisions, apparently because Congress believed that Myers had outlawed making agencies independent. Those
agencies included the FCC and the SEC. After Humphrey's Executor, those multi-member agencies were nonetheless
treated as independent agencies. Cf. Free Enterprise Fund v. Public Company Accounting Oversight Board, 561 U.S.
477, 487, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010) (deciding case on assumption that SEC is an independent agency);
Wiener v. United States, 357 U.S. 349, 352–54, 78 S.Ct. 1275, 2 L.Ed.2d 1377 (1958). But because those agencies'
statutes do not contain express for-cause provisions, some suggest that those agencies should be treated as executive
agencies. See Kirti Datla & Richard L. Revesz, Deconstructing Independent Agencies (and Executive Agencies), 98
Cornell L. Rev. 769, 834–35 (2013); Note, The SEC Is Not an Independent Agency, 126 Harv. L. Rev. 781, 801 (2013).
We need not tackle that question in this case and do not imply an answer one way or the other about the executive or
independent status of the multi-member agencies without express for-cause removal provisions.
5 Because the Social Security Administration and the Office of Special Counsel do not exercise the core executive power
of bringing law enforcement actions and because they have narrow jurisdiction, a holding invalidating the single-Director
structure of the CFPB would not necessarily invalidate the single-Director structure of the Social Security Administration
and the Office of Special Counsel. That said, if those two agencies are unconstitutionally structured, the remedy would
presumably be the same remedy as in Free Enterprise Fund: severing the for-cause provision so that the agencies would
continue to fully operate, albeit as traditional executive agencies rather than independent agencies. Cf. infra pp. 37–39.
We do not address those questions here.
6 Some have suggested that the CFPB Director is similar to the Comptroller of the Currency. But unlike the Director,
the Comptroller is not independent. The Comptroller is removable at will by the President. See 12 U.S.C. § 2 (“The
Comptroller of the Currency shall be appointed by the President, by and with the advice and consent of the Senate, and
shall hold his office for a term of five years unless sooner removed by the President, upon reasons to be communicated
by him to the Senate.”).
7 The historical practice is further illustrated by the quorum provisions that are applicable to independent agencies. Those
quorum provisions reinforce the settled understanding that independent agencies are to have multiple members. Cf. New
Process Steel, L.P. v. NLRB, 560 U.S. 674, 130 S.Ct. 2635, 177 L.Ed.2d 162 (2010); Marshall J. Breger & Gary J. Edles,
Established by Practice: The Theory and Operation of Independent Federal Agencies, 52 Admin. L. Rev. 1111, 1182 &
app. (2000) (summarizing independent agency quorum requirements).
8 The Supreme Court has heavily relied on historical practice as a guide not just in separation of powers cases, but also in
federalism cases. In several federalism cases in the last 25 years, the Court has invalidated novel congressional statutes
that alter the traditional federal-state balance. See New York v. United States, 505 U.S. 144, 177, 112 S.Ct. 2408, 120
L.Ed.2d 120 (1992) (“The take title provision appears to be unique. No other federal statute has been cited which offers
a state government no option other than that of implementing legislation enacted by Congress.”); Printz v. United States,
521 U.S. 898, 905, 117 S.Ct. 2365, 138 L.Ed.2d 914 (1997) (“[I]f, as petitioners contend, earlier Congresses avoided use
of this highly attractive power, we would have reason to believe that the power was thought not to exist.”); Alden v. Maine,
527 U.S. 706, 744, 119 S.Ct. 2240, 144 L.Ed.2d 636 (1999) (“Not only were statutes purporting to authorize private suits
against nonconsenting States in state courts not enacted by early Congresses; statutes purporting to authorize such
suits in any forum are all but absent from our historical experience. ... The provisions of the FLSA at issue here, which
were enacted in the aftermath of Parden, are among the first statutory enactments purporting in express terms to subject
nonconsenting States to private suits.”); United States v. Windsor, ––– U.S. ––––, 133 S.Ct. 2675, 2692, 186 L.Ed.2d
808 (2013) (“DOMA, because of its reach and extent, departs from this history and tradition of reliance on state law to
define marriage.”); cf. National Federation of Independent Business v. Sebelius, ––– U.S. ––––, 132 S.Ct. 2566, 2586,
183 L.Ed.2d 450 (2012) (binding opinion of Roberts, C.J.) (“But Congress has never attempted to rely on that power to
compel individuals not engaged in commerce to purchase an unwanted product.”); id. at 2649 (joint dissent of Scalia,
Kennedy, Thomas, and Alito, JJ.) (“[T]he relevant history is not that Congress has achieved wide and wonderful results
through the proper exercise of its assigned powers in the past, but that it has never before used the Commerce Clause
to compel entry into commerce.”).
9 Of course, if the constitutional text is sufficiently clear, then the existence of any historical practice departing from that
text is not persuasive. See, e.g., INS v. Chadha, 462 U.S. 919, 944–46, 103 S.Ct. 2764, 77 L.Ed.2d 317 (1983); Powell
v. McCormack, 395 U.S. 486, 546–47, 89 S.Ct. 1944, 23 L.Ed.2d 491 (1969). Here, the question concerns the scope of
Humphrey's Executor—which, depending on one's perspective, requires either an analysis of a court-created exception
to Article II or an analysis of ambiguous constitutional text in Articles I and II. Either way, in resolving those kinds of
separation of powers questions, history and tradition play a critical role. See Noel Canning, 134 S.Ct. at 2559–60; Free
Enterprise Fund, 561 U.S. at 505–06, 130 S.Ct. 3138.
10 Justice Scalia concurred in the judgment for four Justices in Noel Canning, arguing as relevant here that the text of the
Constitution rendered intra-session recess appointments unconstitutional even in Senate recesses of 10 or more days.
But Justice Scalia did not disagree with the Court's claim that historical practice often matters in separation of powers
cases, which is the relevant point for our purposes. See Noel Canning, 134 S.Ct. at 2594 (Scalia, J., concurring in the
judgment) (“Of course, where a governmental practice has been open, widespread, and unchallenged since the early
days of the Republic, the practice should guide our interpretation of an ambiguous constitutional provision.”). Rather,
Justice Scalia stated that the constitutional text in that case was sufficiently clear and dispositive that resort to historical
practice was unnecessary and unwarranted. See id. at 2592; see generally John F. Manning, Separation of Powers as
Ordinary Interpretation, 124 Harv. L. Rev. 1939 (2011).
11 Justice Breyer dissented for four Justices in Free Enterprise Fund. But importantly, he dissented not because he
disagreed with the Court's point that historical practice matters, but rather primarily because he did not see a meaningful
difference—in practical, analytical, or constitutional terms—between one and two levels of for-cause removal. See Free
Enterprise Fund, 561 U.S. at 525–26, 130 S.Ct. 3138 (Breyer, J., dissenting).
12 In identifying and cataloging the problems with a single-Director independent agency, we do not in any way question
the integrity of the current Director, a man of substantial accomplishment and of longstanding and dedicated devotion to
public service and the public good. Cf. Morrison v. Olson, 487 U.S. 654, 731, 108 S.Ct. 2597, 101 L.Ed.2d 569 (1988)
(Scalia, J., dissenting) (similarly describing the Special Division judges and independent counsel at issue in that case).
But the constitutionality of an agency structure “must be adjudged on the basis of what it permits to happen.” Id.
13 Congress may of course establish executive agencies that are headed by multiple individuals (although it rarely does so),
but each member must be removable at will by the President for the agency to maintain its status as an executive agency.
14 The for-cause removal restrictions attached to independent agencies ordinarily prohibit removal except in cases of
inefficiency, neglect of duty, or malfeasance. Those restrictions have significant impact both in law and in practice.
See Free Enterprise Fund, 561 U.S. at 502, 130 S.Ct. 3138 (for-cause restrictions “mean what they say”); Freytag v.
Commissioner of Internal Revenue, 501 U.S. 868, 916, 111 S.Ct. 2631, 115 L.Ed.2d 764 (1991) (Scalia, J., concurring in
part and concurring in the judgment) (“independent regulatory agencies such as the Federal Trade Commission and the
Securities and Exchange Commission” are “specifically designed not to have the quality ... of being subject to the exercise
of political oversight and sharing the President's accountability to the people”) (internal quotation marks and alteration
omitted); Mistretta v. United States, 488 U.S. 361, 411, 109 S.Ct. 647, 102 L.Ed.2d 714 (1989) (for-cause provisions are
“specifically crafted to prevent the President from exercising coercive influence over independent agencies”) (internal
quotation marks omitted). Humphrey's Executor and Wiener v. United States show, for example, that for-cause removal
requirements prohibit dismissal by the President due to lack of trust in the administrator, see Humphrey's Executor, 295
U.S. at 625–26, 55 S.Ct. 869, differences in policy outlook, id. or the mere desire to install administrators of the President's
choosing, Wiener, 357 U.S. 349, 356, 78 S.Ct. 1275, 2 L.Ed.2d 1377 (1958). In Morrison v. Olson, the Court therefore
took it as a given that “the degree of control exercised by the Executive Branch over an independent counsel is clearly
diminished in relation to that exercised over other prosecutors, such as the United States Attorneys, who are appointed
by the President and subject to termination at will.” 487 U.S. at 696 n.34, 108 S.Ct. 2597; see also Buckley v. Valeo, 424
U.S. 1, 133, 96 S.Ct. 612, 46 L.Ed.2d 659 (1976) ( “The Court in [Humphrey's Executor] carefully emphasized that ...
the members of such agencies were to be independent of the Executive in their day-to-day operations....”); Humphrey's
Executor, 295 U.S. at 628, 55 S.Ct. 869 (independent agencies “cannot in any proper sense be characterized as an arm
or an eye of the executive”).
15 In its brief, PHH has expressly preserved the argument that Humphrey's Executor should be overruled. The reasoning
of Humphrey's Executor of course was inconsistent with the reasoning in the Court's prior decision in Myers. See
Humphrey's Executor, 295 U.S. at 626, 55 S.Ct. 869 (“In so far as” the expressions in Myers are “out of harmony with
the views here set forth, these expressions are disapproved.”). The Humphrey's Executor decision subsequently has
received significant criticism. See Geoffrey P. Miller, Independent Agencies, 1986 Sup. Ct. Rev. 41, 93 (“Humphrey's
Executor, as commentators have noted, is one of the more egregious opinions to be found on pages of the United States
Supreme Court Reports.”); Peter L. Strauss, The Place of Agencies in Government: Separation of Powers and the Fourth
Branch, 84 Colum. L. Rev. 573, 611–12 (1984) (“Remarkably, the Court did not pause to examine how a purpose to create
a body ‘subject only to the people of the United States'—that is, apparently, beyond control of the constitutionally defined
branches of government—could itself be sustained under the Constitution.”). Moreover, the reasoning of Humphrey's
Executor is in tension with some of the reasoning of the Supreme Court's recent decision in Free Enterprise Fund. See In
re Aiken County, 645 F.3d 428, 444–46 (D.C. Cir. 2011) (Kavanaugh, J., concurring); Neomi Rao, Removal: Necessary
and Sufficient for Presidential Control, 65 Ala. L. Rev. 1205, 1208 (2014). Of course, overruling Humphrey's Executor
would not mean the end of the agencies that are now independent. The agencies would simply transform into executive
agencies supervised and directed by the President. So the question is not the existence of the agencies; the question is
the President's control over the agencies and the resulting accountability of those agencies to the people. In any event,
as a lower court, we of course must follow Supreme Court precedent. It is not our job to decide whether to overrule
Humphrey's Executor. But it is emphatically our job to make sure that Humphrey's Executor is applied in a manner
consistent with settled historical practice and the Constitution's protection of individual liberty.
16 On top of the Director's unilateral power to issue rules and take enforcement actions to enforce 19 separate consumer
protection statutes, the CFPB is not subject to the ordinary annual appropriations process. Instead, the Dodd–Frank
Act requires the Board of Governors of the Federal Reserve to transfer “from the combined earnings of the Federal
Reserve System” the amount “determined by the Director,” not to exceed 12 percent of the “total operating expenses of
the Federal Reserve System.” 12 U.S.C. § 5497(a)(1)–(2). As those who have labored in Washington well understand, the
appropriations process brings at least some measure of oversight by Congress. According to PHH, the CFPB's exemption
from that process enhances the concern in this case about the massive power lodged in a single, unaccountable Director.
That said, the single Director would constitute a constitutional problem even if the CFPB were subject to the usual
appropriations process. The CFPB's exemption from the ordinary appropriations process is at most just “extra icing on”
an unconstitutional “cake already frosted.” Yates v. United States, –––U.S. ––––, 135 S.Ct. 1074, 1093, 191 L.Ed.2d 64
(2015) (Kagan, J., dissenting). In any event, Congress can always alter the CFPB's funding in any appropriations cycle
(or at any other time). Section 5497 is not an entrenched statute shielded from future congressional alteration, nor could
it be. See, e.g., Manigault v. Springs, 199 U.S. 473, 487, 26 S.Ct. 127, 50 L.Ed. 274 (1905).
17 Nothing in our opinion casts any doubt on traditional structures under which Congress may establish a process for
designating the Chair of an independent board or independent commission, and for assigning the Chair various additional
administrative responsibilities. Those responsibilities are distinct from substantive authority. A Chair may not unilaterally
issue a rule, unilaterally bring an enforcement action, or unilaterally decide an adjudication. See Marshall J. Breger & Gary
J. Edles, Established by Practice: The Theory and Operation of Independent Federal Agencies, 52 Admin. L. Rev. 1111,
1166–67 (2000) (“As our survey of some thirty federal multi-member agencies suggests, all of the reorganization statutes
and their progeny fundamentally assign substantive authority to the agency as a whole and administrative authority to
the chairman.”). We note, moreover, that many Chairs traditionally are removable at will by the President from their
position as Chair, albeit not from the commission. See Rachel E. Barkow, Insulating Agencies: Avoiding Capture Through
Institutional Design, 89 Tex. L. Rev. 15, 38 & n.124 (2010).
Nor does our decision cast any doubt on the independent status of administrative law judges who are protected by
for-cause provisions. Those judges conduct only adjudications (of a sort) and are not covered or affected in any way
by our decision here.
18 The Dodd–Frank Act contains a five-year tenure provision for the Director, see 12 U.S.C. § 5491(c)(1), akin to the similar
10-year tenure provision for the Director of the FBI and the 5-year tenure provision for the Commissioner of the IRS. See
Crime Control Act of 1976, § 203, reprinted in 28 U.S.C. § 532 note (FBI Director “may not serve more than one ten-year
term”); 26 U.S.C. § 7803(a)(1)(B) (term of the IRS Commissioner “shall be a 5-year term”). But under Supreme Court
precedent, such tenure provisions do not prevent the President from removing at will a Director at any time during the
Director's tenure. See Parsons v. United States, 167 U.S. 324, 343, 17 S.Ct. 880, 42 L.Ed. 185 (1897). Therefore, we
need not invalidate and sever the tenure provision. If such a provision did impair the President's ability to remove the
Director at will, then it too would be unconstitutional, and it would be invalidated and severed.
19 We need not here consider the legal ramifications of our decision for past CFPB rules or for past agency enforcement
actions. We note, however, that this is not an uncommon situation. For example, in just the last few years, the NLRB,
the Public Company Accounting Oversight Board, and the Copyright Royalty Board have all been on the receiving end
of successful constitutional and statutory challenges to their structure and legality. See NLRB v. Noel Canning, ––– U.S.
––––, 134 S.Ct. 2550, 189 L.Ed.2d 538 (2014); New Process Steel, L.P. v. NLRB, 560 U.S. 674, 130 S.Ct. 2635, 177
L.Ed.2d 162 (2010); Free Enterprise Fund, 561 U.S. 477, 130 S.Ct. 3138, 177 L.Ed.2d 706; Intercollegiate Broadcasting
System, Inc., 684 F.3d 1332. Without major tumult, the agencies and courts have subsequently worked through the
resulting issues regarding the legality of past rules and of past or current enforcement actions. See, e.g., Noel Canning
v. NLRB, 823 F.3d 76, 78–80 (D.C. Cir. 2016); Intercollegiate Broadcasting System, Inc. v. Copyright Royalty Board,
796 F.3d 111, 118–19 (D.C. Cir. 2015). Because, as we will explain in the next section, the CFPB's enforcement action
against PHH in this case must be vacated in any event, we need not consider any such issues at this time.
20 Section 8 of the Act is codified at 12 U.S.C. § 2607. For consistency, we refer to Section 8 rather than Section 2607.
21 It is worth noting that Sections 8(a) and 8(c), as relevant here, do not speak directly to transactions between mortgage
lenders and homebuyers. Instead, those two provisions speak to the transactions between the mortgage lender and
mortgage insurer. The sections prohibit one specific kind of activity in that market: payment to the lender by the mortgage
insurer for the lender's referral of a customer to the mortgage insurer.
Although not required by Section 8(c)(2), PHH nonetheless typically provided its borrowers with a disclosure. The
disclosure said that if a borrower selected a mortgage insurer with which PHH had a referral arrangement, the insurer
would pay a reinsurance fee to Atrium, which was affiliated with PHH. See J.A. 332.
22 When we use the phrase “reasonable market value” in this opinion, we use that phrase as shorthand for a payment that
bears a reasonable relationship to the market value of the services performed or products provided, as HUD has long
explained it. We do not opine on what constituted reasonable market value for the reinsurance at issue in this case. That
factual question is not before us.
23 Tying arrangements are rarely prohibited in the American economy, unless the party doing the tying has market power.
Otherwise, tying arrangements can be beneficial to consumers and the economy by enhancing efficiencies and lowering
costs. As the Supreme Court has stated, “Many tying arrangements ... are fully consistent with a free, competitive market.”
Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28, 45, 126 S.Ct. 1281, 164 L.Ed.2d 26 (2006); see also
National Fuel Gas Supply Corp. v. FERC, 468 F.3d 831, 840 (D.C. Cir. 2006). In this context, moreover, the Real Estate
Settlement Procedures Act allows vertical integration of lenders and other settlement service providers under its affiliated
business provisions. If such vertical integration is allowed, it would not make much sense to conclude that similar vertical
contractual relationships are proscribed.
24 If a mortgage insurer did pay more than reasonable market value for reinsurance, the disgorgement remedy is the amount
that was paid above reasonable market value.
25 In the criminal context, Article I's two Ex Post Facto Clauses bar retroactive criminal statutes. That principle is so
fundamental to the protection of individual liberty that the Framers included it in the original Constitution, and made it
applicable against both the National and State governments. See U.S. CONST. art. I, § 9, cl. 3; id. art. I, § 10, cl. 1.
The Framers well understood that a free society could not function if retroactive punishment were tolerated. See id.; see
also Landgraf v. USI Film Products, 511 U.S. 244, 266–67, 114 S.Ct. 1483, 128 L.Ed.2d 229 (1994); THE FEDERALIST
NO. 84, at 511–12 (Alexander Hamilton) (Clinton Rossiter ed., 1961) (“[T]he subjecting of men to punishment for things
which, when they were done, were breaches of no law, and the practice of arbitrary imprisonments, have been, in all
ages, the favorite and most formidable instruments of tyranny.”); cf. GEORGE ORWELL, 1984, at 40 (1949) (“Day by
day and almost minute by minute the past was brought up to date. ... [N]or was any item of news, or any expression of
opinion, which conflicted with the needs of the moment, ever allowed to remain on record.”).
26 To be clear, Section IV–A and Section IV–B of this opinion represent alternative holdings on the question of whether
the CFPB permissibly determined that PHH violated Section 8. As alternative holdings, both holdings constitute binding
precedent of the Court. See Association of Battery Recyclers, Inc. v. EPA, 716 F.3d 667, 673 (D.C. Cir. 2013).
27 Proving that the mortgage insurer paid more than reasonable market value—and thus made a disguised payment for
the referral—is an element of the Section 8 offense that the CFPB has the burden of proving by a preponderance
of the evidence. See 12 C.F.R. § 1081.303(a) (2016); see also Director, Office of Workers' Compensation Programs,
Department of Labor v. Greenwich Collieries, 512 U.S. 267, 271, 276, 114 S.Ct. 2251, 129 L.Ed.2d 221 (1994) (APA's
use of “burden of proof” in 5 U.S.C. § 556 places both burden of persuasion and burden of production on proponent
of order); 12 U.S.C. § 5563(a) (CFPB is authorized to conduct adjudication proceedings “in the manner prescribed by
chapter 5 of title 5,” which includes Administrative Procedure Act burden of proof requirements in 5 U.S.C. § 556). The
CFPB characterizes this issue as an affirmative defense. That is wrong. If there were express payments in exchange for
referrals in this case, and PHH was trying to argue that the payments nonetheless were justified under some exception,
that might potentially fit within the affirmative defense box. But here, there were no such express payments in exchange
for referrals. It is the CFPB's burden to prove that the payments for reinsurance were more than reasonable market value
and were disguised payments for referrals.
28 Similarly, for actions the CFPB brings in court under any of the 18 pre-existing consumer protection statutes, the CFPB
may only “commence, defend, or intervene in the action in accordance with the requirements of that provision of law,
as applicable.” 12 U.S.C. § 5564(g)(2)(B).
29 In full, Section 2614 provides: “Any action pursuant to the provisions of section 2605, 2607, or 2608 of this title may
be brought in the United States district court or in any other court of competent jurisdiction, for the district in which the
property involved is located, or where the violation is alleged to have occurred, within 3 years in the case of a violation
of section 2605 of this title and 1 year in the case of a violation of section 2607 or 2608 of this title from the date of
the occurrence of the violation, except that actions brought by the Bureau, the Secretary, the Attorney General of any
State, or the insurance commissioner of any State may be brought within 3 years from the date of the occurrence of the
violation.” 12 U.S.C. § 2614. Note that the referenced Section 2607 of Title 12 is Section 8 of the Real Estate Settlement
Procedures Act.
30 We do not here decide whether each alleged above-reasonable-market value payment from the mortgage insurer to
the reinsurer triggers a new three-year statute of limitations for that payment. We leave that question for the CFPB on
remand and any future court proceedings.
1 Accordingly, I concur in Parts I, IV and V of the majority opinion.
2 My colleagues state that “PHH wants us, at a minimum, to strike down the CFPB and prevent its continued operation.”
Maj. Op. at 37. Besides describing, if anything, the maximum relief available, they stray from the relief requested in
PHH's brief—vacatur. Petitioners' Br. at 61. To the extent PHH changed its requested relief at oral argument, I believe
we are to choose its writing over its speech. See, e.g., Whitehead v. Food Max of Mississippi, Inc., 163 F.3d 265, 270
(5th Cir. 1998) (citing Fed. R. App. Pro. 28) (limiting relief to that requested in appellate brief rather than alternate relief
first proposed at oral argument).
3 The Court separately affirmed the district court's jurisdiction based on a direct review provision of the Sarbanes–Oxley
Act. 561 U.S. at 489–90, 130 S.Ct. 3138.
4 I do not suggest that the Bureau is immune from challenge. A deposed director or a regulated party could challenge the
constitutionality of the Bureau, either in a stand-alone constitutional challenge as in Free Enterprise Fund or as part of
an appeal of a Bureau enforcement proceeding if the statutory remedy did not provide full relief. And in all likelihood, that
challenge will be before this Court relatively quickly. See, e.g., State Nat'l Bank of Big Spring v. Lew, No. CV 12–1032,
2016 WL 3812637, at *1 (D.D.C. July 12, 2016) (holding in abeyance resolution of challenge to CFPB's constitutionality
until the decision here).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
PILOT TRAVEL CENTERS, LLC, Appellant [7] employee did not qualify as “transportation worker”
v. within meaning of FAA provision exempting contracts of
Joan McCRAY, James McCray, and employment of workers engaged in foreign or interstate
commerce from FAA's coverage.
Shamekia Gullatte, as Next Friend
of Brandon Gullatte, Appellees.
Reversed and remanded.
No. 05–13–00002–CV.
|
Nov. 5, 2013.
West Headnotes (30)
Synopsis
Background: Wrongful death beneficiaries of employee
who died as a result of injuries sustained within course [1] Alternative Dispute Resolution
and scope of his employment as a maintenance worker Review
brought wrongful death action against employer, alleging Employer who sought to compel arbitration
that employer's negligence proximately caused employee's in wrongful death action brought by estate of
death. Employer filed motion to compel arbitration and deceased employee was entitled to extension
to stay litigation. The 298th Judicial District Court, of time limit for filing interlocutory appeal
Dallas County, Emily G. Tobolowsky, J., denied motion. from trial court's order denying employer's
Employer appealed. motion to compel arbitration, pursuant to rule
extending time within which to file appeal
when a party does not receive notice or
knowledge of the judgment within 20 days
Holdings: The Court of Appeals, Fillmore, J., held that:
after judgment was signed, where employer
obtained requisite finding from trial court
[1] valid agreement to arbitrate all claims arising from
that it did not receive notice of trial court's
a work-related injury or illness under the Federal
original order within 20 days after order was
Arbitration Act (FAA) existed between employer and
signed. Rules App.Proc., Rule 4.2; Vernon's
employee;
Ann.Texas Rules Civ.Proc., Rule 306a(5).
[2] employee's wrongful death beneficiaries were bound by 2 Cases that cite this headnote
employee's agreement to arbitrate;
[3] mere inequality of bargaining power was not [2] Appeal and Error
sufficient render arbitration agreement procedurally Extension of Time
unconscionable; In order to invoke benefit of rule extending
time within which to file appeal when a party
[4] fee provision of arbitration agreement, which required does not receive notice or knowledge of the
that party seeking arbitration pay filing fee and that judgment within 20 days after judgment was
arbitrators' costs and fees be borne equally by the parties, signed, party must obtain an order from the
was not substantively unconscionable; trial court that reflects the date the party or the
party's attorney first either received notice or
[5] provision of arbitration agreement limiting amount acquired actual knowledge that the order was
of discovery to be conducted was not substantively signed. Vernon's Ann.Texas Rules Civ.Proc.,
unconscionable; Rules 306a(4, 5).
2 Cases that cite this headnote 3 Cases that cite this headnote
merits, and whether the movant sought to Delay alone generally does not establish
compel arbitration on the eve of trial. waiver of right to arbitration.
2 Cases that cite this headnote Cases that cite this headnote
Cases that cite this headnote Cases that cite this headnote
denying Pilot Travel's motion to compel arbitration was (1) the existence of a valid, enforceable arbitration
signed by the trial court. Therefore, pursuant to rule of agreement and (2) that the claims at issue fall within
civil procedure 306a(4) and rule of appellate procedure that agreement's scope. In re Kellogg Brown & Root, Inc.,
4.2(a)(1), the twenty-day deadline for filing Pilot Travel's 166 S.W.3d 732, 737 (Tex.2005) (orig. proceeding); see
notice of appeal of the denial of its motion to compel also J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223,
arbitration and for stay began on December 11, 2012. See 227 (Tex.2003) (although there is strong presumption
TEX.R. CIV. P. 306a(4); TEX.R.APP. P. 4.2(a)(1). favoring arbitration, presumption arises only after party
seeking to compel arbitration proves a valid arbitration
Pilot Travel's notice of appeal was filed December 28, agreement exists). The party seeking to avoid arbitration
2012, within twenty days from the date Pilot Travel then bears the burden of raising an affirmative defense to
or its attorney first received notice or acquired actual enforcement of the otherwise valid arbitration provision.
knowledge of a signed order denying its motion to compel In re AdvancePCS Health, 172 S.W.3d at 607. A court
arbitration and for stay. Thus, Pilot Travel's notice of has no discretion and must compel arbitration if it is
appeal was timely perfected and this Court has jurisdiction established that there is a valid arbitration agreement and
over the accelerated appeal. the claims raised fall within the scope of that agreement. In
re Tenet Healthcare, Ltd., 84 S.W.3d 760, 765 (Tex.App.-
Houston [1st Dist.] 2002, orig. proceeding). “An order
to arbitrate should not be denied unless it can be said
*177 Motion to Compel Arbitration
with positive assurance that the arbitration cause is not
and to Stay Trial Court Proceedings
susceptible of an interpretation that covers the asserted
In a single issue, Pilot Travel asserts that, because a dispute.” Hou–Scape, Inc. v. Lloyd, 945 S.W.2d 202,
valid arbitration agreement exists that is applicable to 205 (Tex.App.-Houston [1st Dist.] 1997, no writ) (citing
appellees' pleaded claims, the trial court erred in denying United Steelworkers v. Warrior & Gulf Navigation Co.,
its motion to compel arbitration and to stay the trial court 363 U.S. 574, 582–83, 80 S.Ct. 1347, 4 L.Ed.2d 1409
proceedings. (1960)). To determine if a claim falls within the scope of an
arbitration agreement, we focus on the facts alleged, not
[3] [4] The arbitration agreement provides that the the causes of action asserted. Hou–Scape, 945 S.W.2d at
FAA applies to and governs any matter submitted to 205.
arbitration. See In re AdvancePCS Health, L.P., 172
S.W.3d 603, 605–06 & n. 3 (Tex.2005) (orig. proceeding) We review de novo whether an enforceable agreement to
(per curiam) (FAA governs arbitration in Texas if arbitrate exits. In re Jindal Saw, Ltd., 264 S.W.3d 755, 761
parties expressly contracted for FAA's application); In re (Tex.App.-Houston [1st Dist.] 2008, orig. proceeding). We
ReadyOne Indus., Inc., 294 S.W.3d 764, 769 (Tex.App.- defer to the trial court's factual determinations if they
El Paso 2009, orig. proceeding) (if parties expressly are supported by evidence, but we review the trial court's
choose for arbitration agreement to be governed by FAA, legal determinations de novo. In re Labatt Food Serv.,
agreement should be enforced regardless of parties' nexus L.P., 279 S.W.3d 640, 643 (Tex.2009) (orig. proceeding);
to interstate commerce). When a party asserts a right see also J.M. Davidson, 128 S.W.3d at 227 (whether an
to arbitrate under the FAA, the question of whether agreement imposes a duty to arbitrate is question of law
the dispute is subject to arbitration is determined under which is reviewed de novo); Trammell v. Galaxy Ranch
federal law. Prudential Secs. Inc. v. Marshall, 909 S.W.2d Sch., L.P., 246 S.W.3d 815, 820 (Tex.App.-Dallas 2008,
896, 899 (Tex.1995). As a matter of federal law, any no pet.). “This *178 standard is the same as the abuse
doubts concerning the scope of arbitrable issues are of discretion standard of review and we will apply that
resolved in favor of arbitration, whether pertaining to the standard of review to interlocutory appeals under section
construction of the contract or a defense to arbitrability. 51.016.” Sidley Austin Brown & Wood, LLP v. J.A. Green
See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., Dev. Corp., 327 S.W.3d 859, 863 (Tex.App.-Dallas 2010,
460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). no pet.).
Ultimately, appellees' argument fails because their As used in this Plan, “Claim,” “Controversy,”
response in opposition to Pilot Travel's motion to “Dispute” or “Difference” means any claim, dispute,
compel arbitration is unverified. Appellees have cited no disagreement, contention, or grievance arising from
authority, and we are aware of none, requiring Pilot a work related injury or illness which an Employee
Travel in this circumstance to “authenticate” Tony's has with the Company, or the Company has with the
signature on the arbitration agreement. See TEX.R. CIV. Employee, which could normally be made the basis of a
P. 93(7) (pleading setting up denial of execution of
lawsuit in a State or Federal Court. This pertains only to arbitration bears the burden to prove unconscionability.
those claims, controversies, disputes or differences for See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 756
work related injuries and illnesses. (Tex.2001); see also In re Oakwood Mobile Homes, Inc.,
987 S.W.2d 571, 573 (Tex.1999) (orig. proceeding) (per
This Plan DOES NOT provide for resolution of curiam) (once party establishes a claim within scope
disputes arising from any claim, dispute, disagreement, of an arbitration agreement, trial court must compel
contention or grievance other than those arising from a arbitration unless other party presents evidence agreement
work related injury or illness. was procured in unconscionable manner, induced or
procured by fraud or duress, or waived), abrogated in
(Emphasis in original.)
part on other grounds by In re Halliburton, 80 S.W.3d
at 572. Unconscionability of an arbitration agreement
The Texas Supreme Court has held that wrongful death
may exist in one or both of two forms: (1) procedural
beneficiaries, as derivative claimants, are bound by the
unconscionability, which refers to the circumstances
decedent's agreement to arbitrate. In re Golden Peanut
surrounding the adoption of the arbitration provision,
Co., 298 S.W.3d 629, 630 (Tex.2009) (orig. proceeding);
and (2) substantive unconscionability, which refers to
In re Labatt Food Serv., 279 S.W.3d at 646 (decedent's
the fairness of the arbitration provision itself. In re
pre-death arbitration agreement binds his wrongful death
Halliburton, 80 S.W.3d at 571. Whether a contract is
beneficiaries because, under Texas law, the wrongful
unconscionable at the time it is formed is a question of law.
death cause of action is entirely derivative of the decedent's
In re Poly–America, L.P., 262 S.W.3d 337, 349 (Tex.2008)
rights); Arredondo v. Dugger, 347 S.W.3d 757, 764
(orig. proceeding). A trial court has no discretion to
(Tex.App.-Dallas 2011) (citing In re Golden Peanut Co.,
determine what the law is or to apply the law incorrectly,
298 S.W.3d at 631), aff'd on other grounds, Dugger v.
and a failure to properly analyze or apply the law of
Arredondo, 408 S.W.3d 825 (Tex.2013). 5 unconscionability constitutes an abuse of discretion. Id.
Court has recognized that an employer may make no event would an employee be assessed more than one-
precisely such a “take it or leave it” offer to its at- half of the arbitration fees (except attorney fees) and
will employees. See In re Halliburton, 80 S.W.3d at costs.” An agreement that provides for fee-splitting is not,
572 (rejecting argument that disparity in bargaining by itself, unconscionable. In re Weeks Marine, Inc., 242
power between employer and employee rendered S.W.3d 849, 860 (Tex.App.-Houston [14th Dist.] 2007,
arbitration agreement procedurally unconscionable) orig. proceeding). There is no evidence in the record that
(citing Hathaway v. Gen. Mills, Inc., 711 S.W.2d 227, 228– appellees do not have the financial ability to pay a portion
29 (Tex.1986)). Mere inequality of bargaining power is of the arbitrator's fees. Appellees admit in their brief
not a sufficient reason to hold an arbitration agreement that appellee James McCray makes a living wage and
unenforceable in the employment context. Gilmer v. that “Appellee Shamekia Gullatte is a registered nurse.”
Interstate/Johnson Lane Corp., 500 U.S. 20, 33, 111 Appellees cannot point to evidence of severe monetary
S.Ct. 1647, 114 L.Ed.2d 26 (1991). On this record, constraints that would effectively preclude participation
nothing about the specific circumstances surrounding the in arbitration. Further, there is no evidence in the record
adoption of the arbitration agreement shows it to be supporting appellees' assertion an arbitration will be more
procedurally unconscionable. costly than litigating appellees' wrongful death claims in
state court.
substantially invoked when the party seeking arbitration USA, Inc. v. Ain Temouchent M/V, 404 F.3d 891, 897
has taken specific and deliberate actions, after the filing (5th Cir.2005)). Pilot Travel filed its motion to compel
of the suit, that are inconsistent with the right to arbitration and for stay of the trial court proceedings
arbitrate or has actively tried, but failed, to achieve a against it on September 6, 2012. Appellees filed their
satisfactory result through litigation before turning to response to Pilot Travel's motion to compel arbitration on
arbitration. In re Vesta Ins. Group, Inc., 192 S.W.3d at 763. October 11, 2012.
Factors considered in determining whether a movant has
substantially invoked the judicial process include when *184 Appellees assert they have expended considerable
the movant knew of the arbitration clause, how much time and resources responding to Pilot Travel's “actions
discovery has been initiated and who initiated it, the in litigation.” According to appellees, Pilot Travel gained
extent to which discovery related to the merits rather valuable information “during discovery,” especially from
than arbitrability or standing, how much of the discovery depositions that “potentially” would not have been
would be useful in arbitration, whether the movant sought available in arbitration. Appellees also state their “pretrial
judgment on the merits, and whether the movant sought strategy would have been substantially different” had
to compel arbitration on the “eve of trial.” Perry Homes, Pilot Travel filed its motion to compel arbitration earlier.
258 S.W.3d at 590–92. Appellees state they have “endured two years of litigation
including being deposed, answering interrogatories,
[25] In addition to their burden of showing Pilot Travel interstate traveling and so forth.”
substantially invoked the judicial process, appellees had
the burden to show prejudice. See id. at 595 (“waiver of [27] With regard to appellees' argument that Pilot Travel
arbitration requires a showing of prejudice”). “Prejudice” waived arbitration by its delay in seeking an order
in the context of waiver of contractual arbitration rights from the trial court compelling arbitration, delay alone
“refers to the inherent unfairness in terms of delay, generally does not establish waiver. See In re Vesta Ins.
expense, or damage to a party's legal position that occurs Group, 192 S.W.3d at 763. The record shows a period
when the party's opponent forces it to litigate an issue and of approximately one year between the time Pilot Travel
later seeks to arbitrate that same issue.” Id. at 597 (quoting answered the lawsuit and the time it filed its motion to
Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d compel arbitration. Greater delays in moving to compel
341, 346 (5th Cir.2004)). “Thus, ‘a party should not be arbitration have been insufficient to constitute waiver of
allowed purposefully and unjustifiably to manipulate the arbitration rights. See, e.g., id. (litigating for two years in
exercise of its arbitral rights simply to gain an unfair trial court insufficient to overcome presumption against
tactical advantage over the opposing party.’ ” Id. (quoting waiver). We must consider this delay in the context of
In re Tyco Inti'l Ltd. Sec. Litig., 422 F.3d 41, 46 n. 5 (1st other factors affecting the litigation process. Small, 310
Cir.2005)). S.W.3d at 639.
legal fees, etc.” We question whether this argument was daily” and. “[b]y extension, workers who maintain the
made before the trial court. In their response to Pilot parking lots and facilities that service these trucks as
Travel's motion to compel arbitration, appellees state well as providing other services to these truckers and
Pilot Travel delayed in moving to compel arbitration their trucking companies are directly engaged in interstate
which resulted in appellees “expending considerable time commerce.”
and resources.” Assuming this argument can be construed
to comport with appellees' argument on appeal, the record [30] Appellee's argument that “nothing in the FAA
is void of evidence relating to legal fees and expenses applies to employment contracts of workers engaged in
incurred as a result of Pilot Travel's allegedly invoking interstate commerce” has been previously rejected by the
the litigation process to appellees' detriment. See id. United States Supreme Court and by this Court. The
Further, although appellees argue their “pretrial strategy” United States Supreme Court has held that “[s]ection 1
would have been “substantially different” had Pilot Travel exempts from the FAA only contracts of employment of
filed its motion to compel arbitration earlier, appellees transportation workers.” *187 Circuit City Stores, Inc.
have not established how their legal position has been v. Adams, 532 U.S. 105, 119, 121 S.Ct. 1302, 149 L.Ed.2d
prejudiced. Appellees have not carried their burden to 234 (2001). Many years prior to the decision in Adams, this
establish expense or damage to their legal position as a Court concluded that section 1's exemption related only
result of Pilot Travel's alleged invoking the judicial process to employment contracts of workers “actually engaged
to appellees' detriment. in the movement of goods in interstate commerce.”
White–Weld & Co. Inc. v. Mosser, 587 S.W.2d 485, 487
(Tex.Civ.App.-Dallas 1979, writ ref'd n.r.e.) (employee
who sold government bonds not engaged in movement of
Conclusion
goods in interstate commerce for purposes of section 1
On this record and considering the totality of the exclusion) (citing Dickstein v. duPont, 443 F.2d 783, 785
circumstances in this case, we conclude appellees have (1st Cir.1971)).
not met their heavy burden of establishing Pilot Travel
waived arbitration by substantially invoking the judicial While appellees also argue that workers who maintain
process, nor have they demonstrated sufficient prejudice parking lots and facilities at a truck stop are “by
to overcome the strong presumption against waiver of extension” engaged in interstate commerce, there is no
arbitration. evidence in this record to support an argument Tony was a
transportation worker actually engaged in the movement
of goods in interstate commerce within the meaning of
the exemption of section 1 of the FAA. See Adams, 532
Section 1 of the FAA U.S. at 119, 121 S.Ct. 1302; Mosser, 587 S.W.2d at 487.
Instead, the record indicates Tony was employed as a
[29] According to appellees, the arbitration agreement
truck stop maintenance worker, and as a maintenance
is unenforceable under section 1 of the FAA. Section
worker Tony was no more engaged in the movement of
1 is an exemption provision and it provides the FAA
goods in interstate commerce than a clerk in a truck stop
does not apply “to contracts of employment of seamen,
convenience store or wait staff in a truck stop restaurant.
railroad employees, or any other class of worker engaged
The facts on this record are insufficient to trigger the
in foreign or interstate commerce.” 9 U.S.C.A. § 1
exemption in section 1 of the FAA. See Cole v. Burns Int'l
(West 2009). Appellees argued to the trial court in their
Sec. Servs., 105 F.3d 1465, 1472 (D.C.Cir.1997) (security
response to Pilot Travel's motion to compel arbitration
guard at Union Station in Washington, D.C. not engaged
that “nothing in the FAA applies to employment contracts
in transportation of goods in commerce for purposes of
of workers engaged in interstate commerce.” More
section 1 exclusion). Accordingly, we are not persuaded
specifically, appellees argued to the trial court that Tony
by appellees' defense to Pilot Travel's motion to compel
was a maintenance worker for Pilot Travel and a large
arbitration based on section 1 of the FAA.
portion of Pilot Travel's business “involves providing fuel,
rest facilities, food, etc. for truck drivers of 18–wheeler
tractor trailers.” According to appellees, “these drivers
and their trucks are engaged in interstate commerce
Section 171.002 of the Texas Arbitration Act Travel does not contend Tony was represented by an
attorney at the time of signing the arbitration agreement
The arbitration agreement provides the FAA shall apply or that an attorney *188 for Tony signed the arbitration
to and govern any matter submitted to arbitration agreement. However, as discussed above, we conclude
pursuant to Pilot Travel's Benefit Plan, and that in the section 1 of the FAA does not exempt this matter from
event or to the extent the FAA may be determined arbitration. Therefore, appellees' argument that section
to be inapplicable, “and only in such an event,” the 171.002 of the TAA exempts this matter from arbitration
Texas General Arbitration Act (TAA) shall apply. In is unpersuasive.
defense to Pilot Travel's motion to compel arbitration,
appellees assert that because section 1 of the FAA
does not apply to employment contracts of workers Conclusion
engaged in interstate commerce, section 171.002 of the
TAA applies and exempts this matter from arbitration. The trial court abused its discretion by refusing to compel
Section 171.002 of the TAA excludes claims for personal arbitration of appellees' claims against Pilot Travel. Under
injury from arbitration under the TAA unless each the FAA, a trial court must stay the litigation of issues
party to the claim, on the advice of counsel, agrees in that are subject to arbitration. See 9 U.S.C.A. § 3 (West
writing to arbitrate and the agreement is signed by each 2009). The trial court's order denied Pilot Travel's motion
party and each party's attorney. TEX. CIV. PRAC. & to compel arbitration and for stay in “all respects.”
REM.CODE ANN. § 171.002(a)(3), (c) (West 2011); see Therefore, it appears the trial court, in addition to denying
also In re Nexion Health at Humble, Inc., 173 S.W.3d Pilot Travel's motion to compel arbitration, also denied
67, 69 (Tex.2005) (orig. proceeding) (TAA interfered Pilot Travel's motion to stay further litigation of appellees'
with enforceability of arbitration agreement governed by claims against it. Having concluded the trial court erred in
FAA by adding requirement of signature of a party's failing to compel arbitration of appellees' claims asserted
counsel to arbitration agreements in personal injury cases, against Pilot Travel, the trial court also erred in failing
and FAA preempts the TAA); Doctor's Assocs., Inc. v. to stay further litigation of those claims. See Courtland
Casarotto, 517 U.S. 681, 686–87, 116 S.Ct. 1652, 134 Bldg. Co., Inc. v. Jalal Family P'ship, Ltd., 403 S.W.3d
L.Ed.2d 902 (1996) (“Courts may not, however, invalidate 265, 276 (Tex.App.-Houston [14th Dist.] 2012, no pet.).
arbitration agreements under state laws applicable only to Accordingly, we reverse the order of the trial court
arbitration provisions.”). Here, the parties do not dispute denying Pilot Travel's motion to compel arbitration and
that appellees' wrongful death claims arc personal injury for stay of the trial court proceedings and remand the case
claims. See TEX. CIV. PRAC. & REM.CODE ANN. § to the trial court for further proceedings consistent with
71.002(b) (West 2008) (person is liable for damages arising this opinion.
from an injury that causes an individual's death if injury
was caused by person's or his agent's or servant's wrongful
act, neglect, carelessness, unskillfulness, or default). Pilot All Citations
Footnotes
1 The record indicates James Antonio McCray signed his name on Pilot Travel employment documents as “James McCray.”
In this opinion, we refer to James Antonio McCray as “Tony” in order to avoid confusion with our references to Tony's
father, appellee James McCray.
2 The January 16, 2013 Order states the trial court considered appellees' “Motion for Judgment Nunc Pro Tunc, and the
response thereto.” However, the record contains no motion for judgment nunc pro tunc, nor any response by Pilot Travel
to such a motion. See TEX.R. CIV. P. 316 (permits trial court to correct mistakes and incorrect recitals in judgments but
only after reasonable notice of any application for correction is given to opposing party).
3 In its objection to the January 16, 2013 order and motion to vacate that order, Pilot Travel stated it was never served
with a motion for judgment nunc pro tunc.
4 On appeal, the parties do not dispute the trial court conducted a hearing on Pilot Travel's motion to compel arbitration on
November 16, 2012, However, no reporter's record containing a transcript of the November 16, 2012 hearing has been
filed with this Court, Even assuming the November 12, 2012 date of signature on the order was incorrect and should have
been November 16, 2012, the deadline for filing a notice of accelerated appeal of a November 16, 2012 order denying
Pilot Travel's motion to compel arbitration and for stay would have been December 6, 2012.
5 Appellees assert that even if this Court concludes the arbitration agreement is enforceable, appellees' loss of consortium
claims are not subject to the arbitration agreement. As was explained in In re Labatt Food Service, a tort action seeking
damages for loss of consortium arises from nonfatal injuries to a parent or child and are not entirely derivative as are
wrongful death claims. 279 S.W.3d at 646. However, “[a] wrongful death action is different than a loss of consortium
claim because the Wrongful Death Act expressly conditions the beneficiaries' claims on the decedent's right to maintain
suit for his injuries.” Id.
6 According to appellees, because of a lack of complete diversity jurisdiction, the federal case was remanded to state
court. The record contains no evidence of when the case was removed to federal court or remanded to state court. The
docket sheet from the state court litigation references removal and remand. However, docket sheets are not part of the
record. See Energo Int'l Corp. v. Modern Indus. Heating. Inc., 722 S.W.2d 149, 151 & n. 2 (Tex.App.-Dallas 1986, no
writ) (docket sheet entries are not part of the record which may be considered because they lack the formality of orders
and judgments; rather, docket sheet entry is a memorandum made for the convenience of the trial court and clerk).
7 Appellees state in their response to Pilot Travel's motion to compel arbitration that the case was set for trial on July 23,
2012. However, appellees do not argue that Pilot Travel invoked the judicial process by seeking a continuance of that
trial setting.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Surety Industries, 538 S.W.2d 198, 199 (Tex.Civ.App.— ADR Act does not deal with private, contractually agreed-
Dallas 1976, no writ). upon provisions for arbitration.
Accordingly, our order granting Porter & Clements' The present case does not involve court-ordered referral
motion for leave to file petition for writ of mandamus of pending litigation to an ADR procedure. Rather,
was improvidently granted. We withdraw our order and the parties contractually agreed to arbitration before the
overrule the motion for leave to file. We will apply the current dispute ever arose. As such, the current dispute is
Texas Arbitration Act 3 to this case. governed by the Texas Arbitration Act, not the ADR Act.
*220 The fee agreement between Porter & Clements and [4] The Rabalais also argue that the plain language of the
the Rabalais indicated that the law firm would represent arbitration agreement requires nonbinding arbitration.
the Rabalais in their suit against Sam's and the firm We note that neither party contends the agreement is
would be paid a contingency fee. The fee agreement also ambiguous; therefore, we will construe its meaning as a
contained the following arbitration clause: matter of law. Manes v. Dallas Baptist College, 638 S.W.2d
143, 145 (Tex.App.—Dallas 1982, writ ref'd n.r.e.).
Should any dispute arise regarding
the terms or conditions of this [5] [6] An arbitration agreement need not be in any
contract or the fees, costs, or particular form, but no party is under a duty to arbitrate
expenses payable thereunder, all unless by clear language he has so agreed, and it must
parties hereby agree that the dispute clearly appear that the intention of the parties was to
shall be referred to arbitration by an submit their dispute to the arbitrators and to be bound
arbitrator appointed by the senior by that decision. Wetzel v. Sullivan, King & Sabom, P.C.,
United States District Judge for 745 S.W.2d 78, 81 (Tex.App.—Houston [1st Dist.] 1988,
the Southern District of Texas. For no writ); Manes, 638 S.W.2d at 145. A clause requiring
example, if you receive intangible arbitration is interpreted under contract principles, and
or illiquid assets such as contract the language contained within will be enforced according
or lease provisions by way of to its plain meaning unless this would defeat the intention
settlement, and if we are unable of the parties. Pepe Int'l Dev. Co. v. Pub Brewing Co.,
to agree on their fair value, an 915 S.W.2d 925, 930 (Tex.App.—Houston [1st Dist.]
arbitrator will set fair value for 1996, no writ). Historically, the settlement of disputes by
division purposes. arbitration has been favored in Texas law. L.H. Lacy
Co. v. City of Lubbock, 559 S.W.2d 348, 351 (Tex.1977);
Both Porter & Clements and the Rabalais agree that Massey v. *221 Galvan, 822 S.W.2d 309, 316 (Tex.App.
an arbitration agreement exists and that the agreement —Houston [14th Dist.] 1992, writ denied).
encompasses the claims asserted. The only issue is whether
the arbitration is to be binding. [7] In McKee v. Home Buyers Warranty Corp. II, 45
F.3d 981, 983–85 (5th Cir.1995), the court construed
[3] The Rabalais first argue that only nonbinding the Louisiana arbitration statute, which is similar to the
arbitration is required because section 154.027 of the Texas statute. There the court considered whether the
parties to a contract had agreed to binding arbitration.
Texas Alternative Dispute Resolution Act (ADR Act) 4
The clause at issue provided that the parties would
requires the parties to an arbitration to stipulate in
submit any dispute to “an arbitration to be conducted
advance if they intend for an arbitration award to be
binding. by the American Arbitration Association (A.A.A.).” 5
The plaintiffs argued that the agreement did not
The Rabalais' reliance on section 154.027 of the ADR contemplate “binding” arbitration. Id. at 983. The court
Act is misplaced because the ADR Act only deals with held that under Louisiana law, binding arbitration was
court-ordered referrals of pending litigation to alternative required because arbitration, by definition, was a binding
dispute resolution procedures. TEX.CIV.PRAC. & procedure. Id. at 985.
REM.CODE ANN. § 154.021 (Vernon Supp.1996). The
arbitrator “will set fair value” of intangible assets received denying Porter & Clements' motion to compel binding
arbitration.
in any settlement. The use of the term “will set,” like the
use of the term “resolve” in McDonnell Douglas, indicates
We sustain Porter & Clements' sole point of error.
that the arbitrator's decision will be final. The arbitration
clause does not provide for any appeal mechanism.
We reverse the judgment of the trial court and remand for
further proceedings consistent with this opinion.
We hold that the mere omission of the term “binding”
from an arbitration agreement does not automatically
transform it into a nonbinding arbitration agreement. The All Citations
arbitration agreement in the present case provides for
binding arbitration. Therefore, the trial court erred by 935 S.W.2d 217
Footnotes
1 9 U.S.C. § 2.
2 TEX.CIV.PRAC. & REM.CODE ANN. § 171.001–171.023 (Vernon Supp.1996).
3 The Texas Arbitration Act reads, in relevant part:
§ 171.001. A written agreement to submit any existing controversy to arbitration or a provision in a written contract to
submit to arbitration any controversy thereafter arising between the parties is valid, enforceable and irrevocable....
§ 171.002(a). On application of a party showing an agreement described in section 171.001, and the opposing party's
refusal to arbitrate, the Court shall order the parties to proceed with arbitration....
§ 171.003. If the arbitration agreement provides a method of appointment of arbitrators, this method shall be followed....
§ 171.011 (b). The making of an agreement described in section 171.001 and to which that section is applicable ...
which provides for or authorizes an arbitration in this state, confers jurisdiction on the Court to enforce the agreement
under this chapter and to enter judgment on an award thereunder.
§ 171.013. Upon application of a party, the Court shall confirm an award....
4 The ADR Act provides:
(a) Nonbinding arbitration is a forum in which each party and counsel for the party present the position of the party
before an impartial third party, who renders a specific award.
(b) If the parties stipulate in advance, the award is binding and is enforceable in the same manner as any contract
obligation. If the parties do not stipulate in advance that the award is binding, the award is not binding and serves
only as a basis for the parties' further settlement negotiations.
TEX.CIV.PRAC.& REM.CODE ANN. § 154.027 (Vernon Supp.1996).
5 The complete text of the arbitration agreement in McKee provided:
Should the Builder of Homebuyer(s) disagree with the Insurer's decision to deny the claim as recommended by
the Service, the contesting party shall call for conciliation with the Service or an arbitration to be conducted by the
American Arbitration Association (A.A.A.), or other mutually agreeable arbitration service at the Service's expense....
The conciliation and/or arbitration process will be conducted in accordance with the warranty conditions described
herein and the rules and regulations of the A.A.A. or other mutually agreeable arbitration service. The dispute
settlement process shall precede any litigation attempted by either party on items that are specifically included in
this warranty.... The dispute will be resolved or an award rendered by the arbitrator within 40 days from the time the
form is received by the arbitration service.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Agreement declared null and void and to reinstate the arbitration provisions. 20 Accordingly, the FAA governs
March Operating Agreement. Plaintiffs also seek damages this Court's determination regarding the arbitrability of
arising from the defendants' alleged breach of the March this dispute.
Operating Agreement.
The FAA expresses a strong presumption favoring
arbitration of disputes and “all doubts concerning the
LAW AND ANALYSIS arbitrability of claims should be resolved in favor of
arbitration.” Primerica Life Insurance Co. v. Brown, 304
The Federal Arbitration Act (“FAA”) applies to written F.3d 469, 471 (5 th Cir.2002). “By its terms, the Act leaves
arbitration provisions contained in contracts involving no place for the exercise of discretion by a district court,
commerce and “its reach is coextensive with the but instead mandates that district courts shall direct the
Congressional power to regulate under the Commerce parties to proceed to arbitration on issues as to which
Clause.” Trapp Chevrolet–Oldsmobile–Cadillac, Inc. v. an arbitration agreement has been signed.” Dean Witter
General Motors Corporation, 2002 WL 11633611, *2 Reynolds, Inc. v. Byrd, 470 U.S. 614, 625–26, 105 S.Ct.
(E.D.La.5/31/02). Specifically, Section 2 of the FAA 1238, 1241, 84 L.Ed.2d 158 (1985)(emphasis added). In
provides: determining whether the parties should be compelled to
arbitrate a dispute, the Court performs a two-step inquiry.
A written provision in any maritime
Primerica Life Insurance Co. v. Brown, 304 F.3d 469, 471
transaction or a contract evidencing
a transaction involving commerce to (5 th Cir.2002). “First, the court must determine whether
settle by arbitration a controversy the parties agreed to arbitrate the dispute. 21 Once the
thereafter arising out of such court finds that the parties agreed to arbitrate, it must
contract or transaction, or the consider whether any federal statute or policy renders
refusal to perform the whole or the claims nonarbitrable.” Id. In conducting this two
any part thereof, or an agreement step analysis, “courts must not consider the merits of the
in writing to submit to arbitration underlying action.” Downer v. Siegel, 2002 WL 31106920,
an existing controversy arising out *2 (E.D .La. 9/19/02).
of such a contract, transaction, or
refusal, shall be valid, irrevocable, *3 Here, plaintiffs do not deny that both the March
and enforceable, save upon such and November operating agreements at issue contain
grounds as exist at law or in equity an identical arbitration clause requiring “any dispute”
for the revocation of any contract. under the agreement to be arbitrated in New York. 22
Likewise, plaintiffs do not contest that their claims
9 U.S.C. § 2. The term “commerce” refers to “commerce
for breach of the original operating agreement (i.e.
among the several States or with foreign nations” 17 and
the March Operating Agreement) fall within the broad
it is to be broadly construed. Atlantic Aviation, Inc. v.
scope 23 of the arbitration clause. 24 Rather, plaintiffs
EBM Group, Inc., 11 F.3d 1276, 1280 (5 th Cir.1994).
sole argument is that they should not be compelled to
Furthermore, it is well established that although the
arbitrate at all because both the March and November
FAA is substantive law, the Act applies “in diversity
agreements are invalid as a whole as a result of fraudulent
cases because Congress ha[s] so intended.” 18 Allied Bruce
misrepresentations by the defendants . 25 Specifically,
Terminex Companies, Inc. v. Dobson, 513 U.S. 265, 271,
plaintiffs contend “that the entire consent to form the
115 S.Ct. 834, 838, 130 L.Ed.2d 753 (1995).
contract initially was obtained by the fraud, manipulation
and misrepresentation” 26 of facts by the defendants
In this case, none of the parties dispute that the operating
“upon which the plaintiffs relied, and without which the
agreements between the parties are contracts involving
entire contract, including the arbitration clause, would
commerce within the meaning of 9 U.S.C. § 2. 19
never have been entered into or agreed to.” 27
Moreover, it is also undisputed that both the March
and November operating agreements contain written
The Court notes that plaintiffs' arguments, legally and Arnoldo Talavera in matters arising out of the
actionable as they may be, do not render their claims Lease and Operating Agreement; and by their conscious
nonarbitrable. At no time have plaintiffs asserted that and deliberate efforts to violate, illegally modify and
there was fraud in the inducement or misrepresentations undermine the operation of DELASA/Delaware and
relative to the arbitration clause alone. 28 In Prima Paint the proper operation of Puerto Cabezas under the
Corporation v. Flood & Conklin Mfg. Co., 388 U.S. 395, Lease. 34
403–04, 87 S.Ct. 1801, 1806, 18 L.Ed.2d 1270 (1967), “Waiver of arbitration is not a favored finding and there
the United States Supreme Court specifically held that is a presumption against it.” Lawrence v. Comprehensive
pursuant to the FAA, “ ‘if the claim is fraud in the Bus. Servs. Co ., 833 F.2d 1159, 1164 (5 th Cir.1987);
inducement of the arbitration clause itself—an issue which Subway Equipment Leasing v. Forte, 169 F.3d 324, 326
goes to the ‘making’ of the agreement to arbitrate—the
(5 th Cir.1999)(“There is a strong presumption against
federal court may proceed to adjudicate it,' but the federal
waiver of arbitration”); Walker v. J .C. Bradford &
court cannot consider claims of fraud in the inducement of
the contract itself.” Downer v. Siegel, 2002 WL 31106920, Co., 938 F.2d 575, 577 (5 th Cir.1991)(“In general, we
*2 (E.D.La.9/19/02)(citing Prima Paint, 388 U.S. at 403– hesitate to find that a party has waived its contractual
04, 87 S.Ct. at 1806)). Thus, unless a defense relates right to arbitration.”); Moses H. Cone Mem'l Hosp.,
solely to the arbitration clause, it must be submitted to 460 U.S. 1, 24–25, 103 S.Ct. 927, 941, 74 Led.2d 765
the arbitrator for consideration as part of the underlying (1983)(“[A]ny doubts concerning the scope of arbitrable
issues should be resolved in favor of arbitration, whether
dispute between the parties. 29 Primerica Life Insurance
the problem at hand is the construction of the contract
Co. v. Brown, 304 F.3d 469, 471–72 (5 th Cir.2002). itself or an allegation of waiver, delay, or a like defense
to arbitrability”). Accordingly, a party asserting waiver
Plaintiffs in this case seek a declaratory judgment that of arbitration bears a heavy burden of proof. Subway,
the November operating agreement is “null, void, ultra
169 F.3d at 326 (5 th Cir.1999). “Waiver will be found
vires, in violation of the Original Consent and Terms of
when the party seeking arbitration substantially invokes
the Operating Agreement, and of no effect whatsoever”
the judicial process to the detriment or prejudice of
as a result of alleged fraudulent misrepresentations by
the other party.” Miller v. Brewing Co. v. Forth Worth
the defendants. 30 In their opposition to the motion to
Distrib. Co., 781 F.2d 494, 497 (5 th Cir.1986). Waiver
compel arbitration, the plaintiffs further allege that “even
requires a showing of “both a substantial invocation of
th[e] March 29 Operating Agreement was manipulated by
the judicial process and either detriment or prejudice to
defendants” and should be voided. 31 As plaintiffs' fraud
the other party.” 35 Consorcio Rive v. Briggs of Cancun,
defense relates to the operating agreements generally,
Inc., 134 F.Supp.2d 789, 795 (E.D.La.2001). Finally,
the jurisprudence and the FAA mandate that plaintiffs'
it is well established that “a party only invokes the
claims, including the fraud in the inducement defense, be
judicial process to the extent it litigates a specific claim
resolved by the arbitrator. 32 See Prima Paint, 388 U.S. it subsequently wants to arbitrate.” Subway, 169 F.3d at
395, 404, 87 S.Ct. 1801, 1806; Rushe, 2002 WL 575706 at
328; Doctor's Associates v. Distajo, 107 F.3d 126, 134 (2 nd
*7.
Cir.1997)(“[O]nly prior litigation of the same legal and
factual issues as those the party now wants to arbitrate
Plaintiffs next argue that arbitration should be denied
results in a waiver of the right to arbitrate”).
in this case because defendants sought the intervention
of the judicial system in Nicaragua rather than resorting
Defendants' filing of alleged civil and/or criminal matters
to arbitration, thereby waiving their right to compel
in Nicaragua against Talavera and Wheelock did not
arbitration. 33 Specifically, in their supplemental and amount to a substantial invocation of the judicial process
amending complaint plaintiffs aver: and it was not inconsistent with the defendants' desire
to arbitrate the present claims arising out of the parties'
operating agreement. With respect to the alleged civil
*4 Defendants have waived any right to arbitration
and criminal proceedings against Talavera, plaintiffs have
of this claim both by their filing or causing the filing
presented no evidence that Talavera was a member of
of civil and criminal litigation against John Wheelock
*5 Similarly, the Court finds that the alleged filing of IT IS FURTHER ORDERED that the Clerk of Court
38 mark this action closed for statistical purposes and place
criminal charges against Wheelock did not amount to
a waiver of defendants' right to arbitrate. Federal courts this matter in a Civil Suspense File;
have held that the FAA, while promoting arbitration, does
not contemplate the arbitration of criminal activity. See IT IS FURTHER ORDERED that the Court shall retain
Myers v. Rosenberg, 1986 WL 3329, *2 (N.D.Ill.3/7/86). jurisdiction and the matter shall be restored to the trial
Therefore, defendants' alleged filing of criminal charges docket if circumstances change this action, upon motion
cannot be held to be inconsistent with their desire to of a party, within thirty (30) days of any such change of
arbitrate. Nor can it be held to have resulted in any circumstances, so that it may proceed to final disposition.
detriment or prejudice to the plaintiffs, particularly in light This order shall not prejudice the rights of the parties to
of the fact that Wheelock “was convicted in absentia, being this litigation.
out of the Country of Nicaragua at the time, never having
been formally faced with his accusers, never having been
All Citations
permitted to go to trial.” 39 Accordingly, plaintiffs fail to
meet their burden of proving a waiver of the arbitration. Not Reported in F.Supp.2d, 2002 WL 31528463
Footnotes
1 Plaintiffs, Prescott–Follett & Associates, Inc. and Latin American Energy Development, Inc. d/b/a Delasa, are both
Louisiana corporations. Alma Finance Group and Arete LLC are foreign companies. R. Doc. No. 1, ¶ 1.
2 R. Doc. No. 18, Memorandum, p. 2.
The purpose of the project was “the commercial, long-term development and privatization of Puerto Cabezas, as a
major port in Nicaragua, on the Atlantic coast, serving the North Atlantic Autonomous Region of Nicaragua.” R. Doc.
No. 1, ¶ 8.
3 Id. at pp. 2–3.
4 R. Doc. No. 5, Exhibit D–1, Article XXII, § 22.1.
5 R. Doc. No. 18, Exhibit 1, Operating Agreement, Article 10, § 10.1.
6 R. Doc. No. 18, Memorandum, p. 3.
7 Id.
8 Id. at p. 4.
9 Id.
10 John Wheelock is the principal of Latin American Energy Development d/b/a Delasa, and a member of the Delaware
Company. R. Doc. No. 1, ¶ 8–9.
11 R. Doc. No. 18, p. 4. Plaintiffs dispute that Wheelock wrongfully deposited money into this account.
12 R. Doc. No. 18, p. 5; R. Doc. No. 5, Exhibits M–1, M–2, and N.
13 R. Doc. No. 18, p. 5; R. Doc. No. 32, p. 2.
14 According to the record, the judge ordered that an “instructive of law” be opened against Wheelock. R. Doc. No. 32, p. 5.
15 R. Doc. No. 18, p. 5 and Exhibit 2.
16 R. Doc. No. 23, p. 12. Plaintiffs further argue that the conviction was subsequently overturned by the judge who held that
the charges against Wheelock were civil in nature. Id. However, plaintiffs arguments are unsupported by any evidence
in the record.
17 9 U.S.C. § 1.
18 In fact, the U.S. Supreme Court has made it clear that the FAA preempts state law. Id., 513 U.S. at 272, 115 S.Ct. at 838.
19 R. Doc. No. 18, Memorandum, p. 6; R. Doc. No. 23, pp. 1, 6–7. Although the parties dispute whether the March or
November operating agreement should apply, it is clear that both agreements “involve commerce” as the parties to the
agreements are residents of different states and the agreements relate to the operations of a Delaware Company whose
business was the development of a major foreign port in Nicaragua. As such, they fall under the coverage of the FAA. See
Rushe v. NMTC, Inc., 2002 WL 575706, *5 (E.D.La.4/16/02)(holding that where distributorship agreement was between
residents of different states and involved the distribution of products from outside the State of Louisiana and “where the
claims and allegations of the suit involve[d] meetings and communications which took place between Ohio and Louisiana,”
the agreement was one which involved commerce within the meaning of the FAA).
20 R. Doc. No. 18, Memorandum, p. 6; R. Doc. No. 1, p. 1.
21 This determination involves two considerations: “(1) whether there is a valid agreement to arbitrate between the parties;
and (2) whether the dispute in question falls within the scope of that arbitration agreement.” Webb v. Investacorp, Inc.,
th
89 F.3d 252, 258 (5 Cir.1996).
22 R. Doc. No. 5, Exhibit D–1, Operating Agreement, Article XXII, § 22.1; R. Doc. No. 18, Exhibit 1, Article 10, § 10.1.
23 The Fifth Circuit has differentiated between arbitration clauses which are “broad” and those which are “narrow.” Rushe,
2002 WL 575706 at *5. “Where an arbitration clause is ‘broad,’ the action should be stayed and the arbitrator permitted
to decide if the dispute falls within the clause. Whereas in cases where the clause is ‘narrow,’ the case is not referred
to arbitration or stayed, unless the Court determines that the dispute falls within the clause.” Id. (citing In Re Complaint
th
of Hornbeck Offshore Corp., 981 F.2d 752, 755 (5 Cir.1993)).
Clauses which contain the term “any dispute” have been held to be “broad.” Id.; see also Pennzoil, 139 F.3d at 1067;
th
Mesa Operating Limited Partnership v. Louisiana Intrastate Gas Corporation, 797 F.2d 238, 244 (5 Cir.1986)(finding
that arbitration clause requiring arbitration of “any controversy between the parties ... arising under this Contract” was
th
broad); Rojas v. TK Communications, Inc., 87 F.3f 745 (5 Cir.1996)(“any other dispute” was sufficiently broad); In Re
Complaint of Hornbeck, 981 F.2d at 755 (holding that arbitration clause in towage agreement providing for reference
to arbitration of “any dispute” arising between the parties was broad); Sedco v. Petroleos Mexicanos Mexican Nat'l Oil,
th
767 F.2d 1140, 1144 (5 Cir.1985)(finding that clause providing for arbitration of “any dispute or difference between
th
the parties” was sufficiently broad); Neal v. Hardee's Food Systems, Inc., 918 F.2d 34, 38 (5 Cir.1990)(clause
governing “any and all disputes” between the parties was broad). In this case, both the March and November Operating
Agreements contain identical arbitration provisions requiring arbitration of “any dispute under this Agreement.” The
Court finds that regardless of which operating agreement is applied, the clauses are of the “broad” type. Therefore, in
accordance with the jurisprudence, the matter should be stayed and submitted to arbitration.
24 In fact, plaintiffs do not even address this issue in their opposition memorandum.
25 R. Doc. No. 23, p. 7–10. The Court notes that plaintiffs' original and first supplemental and amending complaints assert
only that the November Operating Agreement should be voided. R. Doc. No. 1, R. Doc. No. 5. On September 19, 2002,
plaintiffs requested leave to file a second supplemental and amending complaint wherein they asserted claims that the
March operating agreement should also be rescinded on the same basis as the November agreement. R. Doc. No. 27.
Although the Court denied plaintiffs request for leave, the Court, in the interest of justice, nevertheless considers plaintiffs'
arguments with respect to the March Operating Agreement as these are raised in opposition to the present motion to
compel arbitration.
26 R. Doc. No. 23, p. 14.
27 Id. at p. 7.
28 Plaintiffs' contention that the arbitration clause should be voided because the entire contract is null and void is not a
challenge to the arbitration clause, itself, but a challenge to the entire contract, including the arbitration clause.
29 th
See Primerica Life Insurance Company v. Brown, 304 F.3d 469, 471–72 (5 Cir.2002)(holding that where defendant's
capacity defense was a defense to the entire agreement and not a specific challenge to the arbitration clause, the defense
was part of the underlying dispute between the parties which must be submitted to the arbitrator); Snap–On Tools Corp.
th
v. Mason, 18 F .3d 1261, 1267–68 (5 Cir.1994)(submitting allegations of fraud in the inducement to arbitration because
allegations did not concern arbitration clause specifically, but rather was a challenge to the contract in its entirety);
th
Lawrence v. Comprehensive Business Services Company, 833 F.2d 1159, 1162 (5 Cir.1987)(submitting defense of
illegality of the contract to arbitration because it was not a challenge to the arbitration clause, itself, but rather to the
th
contract as a whole); Mesa Operating Limited Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d 238, 244 (5
Cir.1986)(submitting to arbitration a defense that contract was void from its inception because defendant did not argue
“that the agreement to arbitrate [was] invalid separately from the entire contract).
30 R. Doc. No. 1, ¶ 21,
31 R. Doc. No. 23, p. 2.
32 Plaintiffs cite George Engine Co., Inc. v. Southern Shipbuilding Corp., 350 So.2d 881 (La.1977) in support of their
contention that the district court, not the arbitrator, has jurisdiction to decide the issue of fraud in the inducement of a
contract containing an arbitration clause. Id. at 884. In George Engine, the Louisiana Supreme Court declined to follow
Prima Paint. However, in Rushe and Downer, the federal district courts, faced with the same argument presented by the
plaintiffs herein, rejected the holding in George Engine, explaining that in George Engine the Louisiana Supreme Court
“was interpreting the Louisiana Arbitration Act §§ 4201, 4203, not the FAA.” Rushe, 2002 WL 575706 at *6; Downer,
2002 WL 31106920 at *3, n. 3.
33 R. Doc. No. 23, p. 11.
34 R. Doc. No. 5, ¶ 50.
35 “Substantial” invocation of the judicial process requires “active participation in a lawsuit or some other type of act
inconsistent with the desire to arbitrate.” Consorcio Rive v. Briggs of Cancun, Inc., 134 F.Supp.2d 789, 795 (E.D.La.2001).
With respect to the requirement of “prejudice,” the Fifth Circuit has held that, “[w]hen one party reveals a disinclination to
resort to arbitration on any phase of a lawsuit involving all parties, those parties are prejudiced by being forced to bear
the expenses of a trial ... Arbitration is designed to avoid this very expense. Substantially invoking the litigation machinery
qualifies as the kind of prejudice ... that is the essence of waiver.” Id. (quoting E.C. Ernst, Inc. v. Manhattan Construction
th
Co. of Texas, 559 F.2d 268, 269 (5 Cir.1977)).
36 To the contrary, the Operating Agreements themselves show that the only parties to the operating agreements and the
only entities/individuals having an ownership interest in the Delaware Company are Alma Finance (through its principal,
Kris N. Mahabir), Arete LLC (through its principal, Mary A. Wright), Delasa, Inc. (through its principal John F. Wheelock),
Prescott Follett and Associates, Inc. (through its principal, Prescott Follett), Michael Beaury, and Todd Esse. See R. Doc.
No. 18, Exhibit 1, Schedule A.
37 Clearly, as a non-party to the agreement, there was no duty owed to Talavera to resolve any disputes arising out of the
agreement through arbitration.
38 The Court notes that although plaintiffs argue that civil charges were also filed against Wheelock, the evidence submitted
by plaintiffs to the Court do not reveal the filing of any such civil matters. See R. Doc. No. 5, Exhibits M–1, M–2 and N.
To the contrary, a review of the documents submitted by plaintiffs show that the only matter against Wheelock is/was
pending before the Criminal District Court of Puerto Cabezas. R. Doc. No. 5, Exhibit M–2. Accordingly, any arguments
by plaintiff that a civil lawsuit was filed against Wheelock or, alternatively, that the criminal charges “were purely civil in
nature,” R. Doc. No. 23, p. 12, are merely speculative and unsupported by any evidence in the record.
39 R. Doc. No. 23, p. 12. Because Wheelock was convicted in absentia, there was no “active participation in a lawsuit”
sufficient to amount to substantial invocation of the judicial process. Consorcio Rive, 134 F.Supp.2d at 795.
40 R. Doc. No. 23, p. 2.
41 R. Doc. No. 23, p. 1.
42 In Re Complaint of Hornbeck Offshore Corp., 981 F.2d at 755 (“[A]rbitration clauses containing the ‘any dispute’
language ... are of the broad type.”).
43 th
Id.; Sedco, Inc. v. Petroleos Mexicanos Mexican National Oil Co., 767 F.2d 1140, 1148 (5 Cir.1985)(“ ‘[a]bsent
allegations of fraud in the inducement of the arbitration clause itself, arbitration must proceed when an arbitration clause
on its face appears broad enough to encompass the party's claims.” ’)(quoting Life of America Insurance Co. v. Aetna
th
Life Insurance Co., 744 F.2d 409, 413 (5 Cir.1984)).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
197 Cases that cite this headnote (a) The issue is not whether the FAA preempts the TAA
wholesale. Instead, the question is simply who decides
—the arbitrator or the Labor Commissioner—whether
Preston acted as an unlicensed talent agent in violation of
West Codenotes the TAA, as Ferrer claims, or as a personal manager not
governed by the TAA, as Preston contends. P. 983.
Preempted
West's Ann.Cal Labor Code §§ 1700.44(a), 1700.45. (b) FAA § 2 “declare[s] a national policy favoring
arbitration” when the parties contract for that mode
of dispute resolution. Southland Corp. v. Keating, 465
**978 Syllabus *
U.S. 1, 10, 104 S.Ct. 852, 79 L.Ed.2d 1. That national
A contract between respondent Ferrer, who appears policy “appli[es] in state as well as federal courts” and
on television as “Judge **979 Alex,” and petitioner “foreclose[s] state legislative attempts to undercut the
Preston, an entertainment industry attorney, requires enforceability of arbitration agreements.” Id., at 16, 104
arbitration of “any dispute ... relating to the [contract's] S.Ct. 852. The FAA's displacement of conflicting state law
terms ... or the breach, validity, or legality thereof ... has been repeatedly reaffirmed. See, e.g., Buckeye, 546
in accordance with [American Arbitration Association U.S., at 445–446, 126 S.Ct. 1204; Allied–Bruce Terminix
(AAA) ] rules.” Preston invoked this provision to gain Cos. v. Dobson, 513 U.S. 265, 272, 115 S.Ct. 834, 130
fees allegedly due under the contract. Ferrer thereupon L.Ed.2d 753. A recurring question under § 2 is who should
petitioned the California Labor Commissioner (Labor decide whether “grounds ... exist at law or in equity” to
Commissioner) for a determination that the contract invalidate an arbitration agreement. In Prima Paint Corp.
was invalid and unenforceable under California's Talent v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403–404, 87
Agencies Act (TAA) because Preston had acted as a S.Ct. 1801, 18 L.Ed.2d 1270, which originated in federal
talent agent without the required license. After the Labor court, this Court held that attacks on an entire contract's
Commissioner's hearing officer denied Ferrer's motion validity, as distinct from attacks on the arbitration clause
to stay the arbitration, Ferrer filed suit in state court alone, are within the arbitrator's ken. Buckeye held that
seeking to enjoin arbitration, and Preston moved to the same rule applies in state court. See 546 U.S., at 446,
compel arbitration. The court denied Preston's motion 126 S.Ct. 1204.
and enjoined him from proceeding before the arbitrator
unless and until the Labor Commissioner determined Buckeye largely, if not entirely, resolves the present
she lacked jurisdiction over the dispute. While Preston's dispute. The contract at issue clearly “evidenc[ed] a
appeal was pending, this Court held, in Buckeye Check transaction involving commerce” under § 2, and Ferrer
Cashing, Inc. v. Cardegna, 546 U.S. 440, 446, 126 S.Ct. has never disputed that the contract's written arbitration
1204, 163 L.Ed.2d 1038, that challenges to the validity provision falls within **980 § 2's purview. Ferrer sought
of a contract requiring arbitration of disputes ordinarily invalidation of the contract as a whole. He made no
“should ... be considered by an arbitrator, not a court.” discrete challenge to the validity of the arbitration clause,
Affirming the judgment below, the California Court of and thus sought to override that clause on a ground
Appeal held that the TAA vested the Labor Commissioner Buckeye requires the arbitrator to decide in the first
with exclusive original jurisdiction over the dispute, and instance. Pp. 983 – 984.
in Buckeye alleged that the contracts they signed, which unlicensed person's contract with an artist to provide the
contained arbitration clauses, were illegal under state law services of a talent agency is illegal and void.” Ibid. 4
and void ab initio. Id., at 443, 126 S.Ct. 1204. Relying on
Southland, we held that the plaintiffs' challenge was within **985 [3] Section 1700.44(a) of the TAA states:
the province of the arbitrator to decide. See 546 U.S., at
446, 126 S.Ct. 1204. “In cases of controversy arising
under this chapter, the parties
*354 Buckeye largely, if not entirely, resolves the dispute involved shall refer the matters in
before us. The contract between Preston and Ferrer dispute to the Labor Commissioner,
clearly “evidenc[ed] a transaction involving commerce,” 9 who shall hear and determine the
U.S.C. § 2, and Ferrer has never disputed that the written same, subject to an appeal within
arbitration provision in the contract falls within the 10 days after determination, to the
purview of § 2. Moreover, Ferrer sought invalidation of superior court where the same shall
the contract as a whole. In the proceedings below, he made be heard de novo.”
no discrete challenge to the validity of the arbitration
clause. See 145 Cal.App.4th, at 449, 51 Cal.Rptr.3d, Absent a notice of appeal filed within ten days, the Labor
Commissioner's determination becomes final and binding
at 635 (Vogel, J., dissenting). 3 Ferrer thus urged the
on the parties. REO Broadcasting Consultants v. Martin,
Labor Commissioner and California courts to override
69 Cal.App.4th 489, 495, 81 Cal.Rptr.2d 639, 642–643
the contract's arbitration clause on a ground that Buckeye
requires the arbitrator to decide in the first instance. (1999). 5
see Doctor's Associates, Inc., 517 U.S., at 687, 116 S.Ct. [4] A prime objective of an agreement to arbitrate
1652. is to achieve “streamlined proceedings and expeditious
results.” *358 Mitsubishi Motors Corp. v. Soler Chrysler–
Plymouth, Inc., 473 U.S. 614, 633, 105 S.Ct. 3346, 87
L.Ed.2d 444 (1985). See also Allied–Bruce Terminix Cos.,
B
513 U.S., at 278; Southland Corp., 465 U.S., at 7, 104 S.Ct.
Ferrer contends that the TAA is nevertheless compatible 852. That objective would be frustrated even if Preston
with the FAA because § 1700.44(a) merely postpones could compel arbitration in lieu of de novo Superior Court
arbitration until after the Labor Commissioner has review. Requiring initial reference of the parties' dispute
exercised her primary jurisdiction. Brief for Respondent to the Labor Commissioner would, at the least, hinder
14, 40. The party that loses before the Labor speedy resolution of the controversy.
Commissioner may file for de novo review in Superior
Court. See § 1700.44(a). At that point, Ferrer asserts, Ferrer asks us to overlook the apparent conflict
either party could move to compel arbitration under between the arbitration clause and § 1700.44(a)
Cal.Civ.Proc.Code Ann. § 1281.2 (West 2007), and because proceedings before the Labor Commissioner
thereby obtain an arbitrator's determination prior to are administrative rather than judicial. Brief for
judicial review. See Brief for Respondent 13. Respondent 40–48. Allowing parties to proceed directly to
arbitration, Ferrer contends, would undermine the Labor
That is not the position Ferrer took in the California Commissioner's ability to stay informed of potentially
courts. In his complaint, he urged the Superior Court illegal activity, id., at 43, and would deprive artists
to *357 declare that “the [c]ontract, including in protected by the TAA of the Labor Commissioner's
particular the issue of the validity of the [c]ontract, is expertise, id., at 41–43.
not subject to arbitration,” and he sought an injunction
stopping arbitration “unless and until, if ever, the In Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20,
Labor Commissioner determines that he/she has no 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991), we considered and
jurisdiction over the parties' dispute.” App. 29 (emphasis rejected a similar argument, namely, that arbitration of
added). Ferrer also told the Superior Court: “[I]f ... the age discrimination claims would undermine the role of the
Commissioner rules that the [c]ontract is void, Preston Equal Employment Opportunity Commission (EEOC)
may appeal that ruling and have a hearing de novo before in enforcing federal law. The “mere involvement of an
this Court.” Appellant's **986 App. in No. B188997 administrative agency in the enforcement of a statute,” we
(Cal.App.), p. 157, n. 1 (emphasis added). held, does not limit private parties' obligation to comply
with their arbitration agreements. Id., at 28–29, 111 S.Ct.
Nor does Ferrer's current argument—that § 1700.44(a) 1647.
merely postpones arbitration—withstand examination.
Section 1700.44(a) provides for de novo review in Superior Ferrer points to our holding in EEOC v. Waffle House,
Inc., 534 U.S. 279, 293–294, 122 S.Ct. 754, 151 L.Ed.2d
Court, not elsewhere. 6 Arbitration, if it ever occurred
755 (2002), that an arbitration agreement signed by an
following the Labor Commissioner's decision, would
employee who becomes a discrimination complainant
likely be long delayed, in contravention of Congress' intent
does not bar the EEOC from filing an enforcement suit
“to move the parties to an arbitrable dispute out of court
in its own name. He further emphasizes our observation
and into arbitration as quickly and easily as possible.”
in Gilmer that individuals who agreed to arbitrate their
Moses H. Cone Memorial Hospital v. Mercury Constr.
discrimination claims would “still be free to file a
Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).
charge with the EEOC.” 500 U.S., at 28, 111 S.Ct.
If Ferrer prevailed in the California courts, moreover, he
1647. Consistent with these decisions, Ferrer argues, the
would no doubt argue that judicial findings of fact and
arbitration clause in his contract **987 with Preston
conclusions of law, made after a full and fair de novo
leaves undisturbed the Labor Commissioner's *359
hearing in court, are binding on the parties and preclude
independent authority to enforce the TAA. See Brief for
the arbitrator from making any contrary rulings.
Respondent 44–48. And so it may. 7 But in proceedings
under § 1700.44(a), the Labor Commissioner functions
not as an advocate advancing a cause before a tribunal Volt Information Sciences and Stanford University
authorized to find the facts and apply the law; instead, the were parties to a construction contract containing an
Commissioner serves as impartial arbiter. That role is just arbitration clause. When a dispute arose and Volt
what the FAA-governed agreement between Ferrer and demanded arbitration, Stanford sued Volt and two other
Preston reserves for the arbitrator. In contrast, in Waffle companies involved in the construction project. Those
House and in the Gilmer aside Ferrer quotes, the Court other companies were not parties to the arbitration
addressed the role of an agency, not as adjudicator but agreement; Stanford sought indemnification from them
as prosecutor, pursuing an enforcement action in its own in the event that Volt prevailed against Stanford.
name or reviewing a discrimination charge to determine At Stanford's request, the Superior Court stayed the
whether to initiate judicial proceedings. arbitration. The California Court of Appeal affirmed the
stay order. Volt and Stanford incorporated § 1281.2(c)
Finally, it bears repeating that Preston's petition presents into their agreement, the appeals court held. They did so
precisely and only a question concerning the forum in by stipulating that the contract—otherwise silent **988
which the parties' dispute will be heard. See supra, at 983. on the priority of suits drawing in parties not subject
“By agreeing to arbitrate a statutory claim, a party does to arbitration—would be governed by California law.
not forgo the substantive rights afforded by the statute; it Board of Trustees of Leland Stanford Junior Univ. v. Volt
only submits to their resolution in an arbitral ... forum.” Information Sciences, Inc., 240 Cal.Rptr. 558, 561 (1987)
Mitsubishi Motors Corp., 473 U.S., at 628, 105 S.Ct. 3346. (officially depublished). Relying on the Court of Appeal's
So here, Ferrer relinquishes no substantive rights the TAA interpretation of the contract, we held that the FAA did
or other California law may accord him. But under the not bar a stay of arbitration pending the resolution of
contract he signed, he cannot escape resolution of those Stanford's Superior Court suit against Volt and the two
rights in an arbitral forum. companies not bound by the arbitration agreement.
[5] In sum, we disapprove the distinction between judicial *361 Preston and Ferrer's contract also contains a
and administrative proceedings drawn by Ferrer and choice-of-law clause, which states that the “agreement
adopted by the appeals court. When parties agree to shall be governed by the laws of the state of California.”
arbitrate all questions arising under a contract, the FAA App. 17. A separate saving clause provides: “If there is any
supersedes state laws lodging primary jurisdiction in conflict between this agreement and any present or future
another forum, whether judicial or administrative. law,” the law prevails over the contract “to the extent
necessary to bring [the contract] within the requirements
of said law.” Id., at 18. Those contractual terms, according
to Ferrer, call for the application of California procedural
*360 V
law, including § 1700.44(a) 's grant of exclusive jurisdiction
Ferrer's final attempt to distinguish Buckeye relies on Volt to the Labor Commissioner.
Information Sciences, Inc. v. Board of Trustees of Leland
Stanford Junior Univ., 489 U.S. 468, 109 S.Ct. 1248, 103 Ferrer's reliance on Volt is misplaced for two discrete
L.Ed.2d 488 (1989). Volt involved a California statute reasons. First, arbitration was stayed in Volt to
dealing with cases in which “[a] party to [an] arbitration accommodate litigation involving third parties who were
agreement is also a party to a pending court action ... strangers to the arbitration agreement. Nothing in the
[involving] a third party [not bound by the arbitration arbitration agreement addressed the order of proceedings
agreement], arising out of the same transaction or series of when pending litigation with third parties presented the
related transactions.” Cal.Civ.Proc.Code Ann. § 1281.2(c) prospect of inconsistent rulings. We thought it proper,
(West 2007). To avoid the “possibility of conflicting in those circumstances, to recognize state law as the gap
rulings on a common issue of law or fact,” the statute gives filler.
the Superior Court authority, inter alia, to stay the court
proceeding “pending the outcome of the arbitration” or Here, in contrast, the arbitration clause speaks to the
to stay the arbitration “pending the outcome of the court matter in controversy; it states that “any dispute ...
action.” Ibid. relating to ... the breach, validity, or legality” of the
contract should be arbitrated in accordance with the
American Arbitration Association (AAA) rules. App. 18. in particular Rule 7(b), weighs against inferring from
the choice-of-law clause an understanding shared by
Both parties are bound by the arbitration agreement; the
Ferrer and Preston that their disputes would be heard,
question of Preston's status as a talent agent relates to the
in *363 the first instance, by the Labor Commissioner.
validity or legality of the contract; there is no risk that
Following the guide Mastrobuono provides, the “best way
related litigation will yield conflicting rulings on common
to harmonize” the parties' adoption of the AAA rules and
issues; and there is no other procedural void for the choice-
their selection of California law is to read the latter to
of-law clause to fill.
encompass prescriptions governing the substantive rights
and obligations of the parties, but not the State's “special
Second, we are guided by our more recent decision in
rules limiting the authority of arbitrators.” 514 U.S., at
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S.
63–64, 115 S.Ct. 1212.
52, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995). Although the
contract in Volt provided for “arbitration in accordance
with the Construction Industry Arbitration Rules of the
American Arbitration Association,” 489 U.S., at 470, n. ***
1, 109 S.Ct. 1248 (internal quotation marks omitted), Volt
never argued that incorporation of those rules trumped For the reasons stated, the judgment of the California
the choice-of-law clause contained in the contract, see Court of Appeal is reversed, and the case is remanded for
Brief for *362 Appellant, and Reply Brief, in Volt further proceedings not inconsistent with this opinion.
Information Sciences, Inc. v. Board of Trustees of Leland
Stanford Junior Univ., O.T. 1988, No. 87–1318. Therefore, It is so ordered.
neither our decision in Volt nor the decision of the
California appeals court in that case addressed the import
of the contract's incorporation by reference of privately JUSTICE THOMAS, dissenting.
promulgated arbitration rules. As I have stated on many previous occasions, I believe
that the Federal Arbitration Act (FAA), 9 U.S.C. §
In Mastrobuono, we reached that open question while 1 et seq. (2000 ed. and Supp. V), does not apply to
interpreting a contract with both a New York choice- proceedings in state courts. See Allied–Bruce Terminix
of-law clause and a clause providing for arbitration in Cos. v. Dobson, 513 U.S. 265, 285–297, 115 S.Ct. 834,
accordance with the rules of the National Association of 130 L.Ed.2d 753 (1995) (dissenting opinion); see also
Securities Dealers (NASD). 514 U.S., at 58–59, 115 S.Ct. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440,
1212. 8 The “best **989 way to harmonize” the two 449, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006) (same);
clauses, we held, was to read the choice-of-law clause “to Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 460,
encompass substantive principles that New York courts 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003) (same); Doctor's
would apply, but not to include [New York's] special rules Associates, Inc. v. Casarotto, 517 U.S. 681, 689, 116 S.Ct.
limiting the authority of arbitrators.” Id., at 63–64, 115 1652, 134 L.Ed.2d 902 (1996) (same). Thus, in state-court
S.Ct. 1212. proceedings, the FAA cannot displace a state law that
delays arbitration until administrative proceedings are
Preston and Ferrer's contract, as noted, provides for completed. Accordingly, I would affirm the judgment of
arbitration in accordance with the AAA rules. App. the Court of Appeal.
18. One of those rules states that “[t]he arbitrator shall
have the power to determine the existence or validity
of a contract of which an arbitration clause forms a All Citations
part.” AAA, Commercial Arbitration Rules ¶ R–7(b)
552 U.S. 346, 128 S.Ct. 978, 169 L.Ed.2d 917, 76 USLW
(2007), online at http://www.adr.org/sp.asp? id=22440
3437, 76 USLW 4097, 27 IER Cases 257, 08 Cal. Daily
(as visited Feb. 15, 2008, and in Clerk of Court's
Op. Serv. 2100, 2008 Daily Journal D.A.R. 2511, 21 Fla.
case file). The incorporation of the AAA rules, and
L. Weekly Fed. S 77, 28 A.L.R. Fed. 2d 681
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Timber & Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 50
L.Ed. 499.
1 The TAA uses the term “talent agency” to describe both corporations and individual talent agents. We use the terms
“talent agent” and “talent agency” interchangeably.
2 Although Ferrer urges us to overrule Southland, he relies on the same arguments we considered and rejected in Allied–
Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995). Compare Brief for Respondent 55–
59 with Brief for Attorney General of Alabama et al. as Amici Curiae in Allied–Bruce Terminix Cos. v. Dobson, O.T.1994;
No. 93–1001, pp. 11–19. Adhering to precedent, we do not take up Ferrer's invitation to overrule Southland.
3 Ferrer's petition to the Labor Commissioner sought a declaration that the contract “is void under the [TAA].” App. 23. His
complaint in Superior Court seeking to enjoin arbitration asserted: “[T]he [c]ontract is void by reason of [Preston's] attempt
to procure employment for [Ferrer] in violation of the [TAA],” and “the [c]ontract's arbitration clause does not vest authority
in an arbitrator to determine whether the contract is void.” Id., at 27. His brief in the appeals court stated: “Ferrer does not
contend that the arbitration clause in the [c]ontract was procured by fraud. Ferrer contends that Preston unlawfully acted
as an unlicensed talent agent and hence cannot enforce the [c]ontract.” Brief for Respondent in No. B188997, p. 18.
4 Courts “may void the entire contract” where talent agency services regulated by the TAA are “inseparable from
[unregulated] managerial services.” Marathon Entertainment, Inc. v. Blasi, 42 Cal.4th 974, 998, 174 P.3d 741, 744 (2008).
If the contractual terms are severable, however, “an isolated instance” of unlicensed conduct “does not automatically bar
recovery for services that could lawfully be provided without a license.” Ibid.
5 To appeal the Labor Commissioner's decision, an aggrieved party must post a bond of at least $1,000 and up to twice
the amount of any judgment approved by the Commissioner. § 1700.44(a).
6 From Superior Court an appeal lies in the Court of Appeal. Cal. Civ. Proc. Code Ann. § 904.1(a) (West 2007); Cal. Rule
of Court 8.100(a) (Appellate Rules) (West 2007 rev. ed.). Thereafter, the losing party may seek review in the California
Supreme Court, Rule 8.500(a)(1) (Appellate Rules), perhaps followed by a petition for a writ of certiorari in this Court,
28 U.S.C. § 1257. Ferrer has not identified a single case holding that California law permits interruption of this chain of
appeals to allow the arbitrator to review the Labor Commissioner's decision. See Tr. of Oral Arg. 35.
7 Enforcement of the parties' arbitration agreement in this case does not displace any independent authority the
Labor Commissioner may have to investigate and rectify violations of the TAA. See Brief for Respondent 47 (“[T]he
Commissioner has independent investigatory authority and may receive information concerning alleged violations of the
TAA from any source.” (citation omitted)). See also Tr. of Oral Arg. 13–14.
8 The question in Mastrobuono was whether the arbitrator could award punitive damages. See Mastrobuono v. Shearson
Lehman Hutton, Inc., 514 U.S. 52, 53–54, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995). New York law prohibited arbitrators, but
not courts, from awarding such damages. Id., at 55, 115 S.Ct. 1212. The NASD rules, in contrast, authorized “damages
and other relief,” which, according to an NASD arbitration manual, included punitive damages. Id., at 61, 115 S.Ct. 1212
(internal quotation marks omitted). Relying on Volt, respondents argued that the choice-of-law clause incorporated into
the parties' arbitration agreement New York's ban on arbitral awards of punitive damages. Opposing that argument,
petitioners successfully urged that the agreement to arbitrate in accordance with the NASD rules controlled.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
be submitted to the arbitrator as part of the underlying 110, 112 (Miss.1976) (stating that a contract made by
dispute. an incompetent “may be avoided on the ground of
insanity”). Similarly, when a party contracting with
This court has applied the Prima Paint rule on numerous an incompetent has knowledge of the incompetent's
occasions. See Snap-On Tools Corp., 18 F.3d at 1267-68 condition, the contract “will be *473 rescinded.” Id. at
(submitting fraudulent inducement defense to arbitration 112-13 (emphasis added).
because allegations of fraud did not specifically relate
to the arbitration clause); R.M. Perez & Assoc., Inc., Against this backdrop, I note the grounds on which this
960 F.2d at 538-39 (submitting allegations of fraud in Court will vacate a decision of an arbitrator: (1) the award
obtaining signatures to contract to arbitration because is contrary to public policy, (2) the award is arbitrary and
defense was not specific to the arbitration agreement); capricious, (3) the award fails to draw its essence from
Lawrence v. Comprehensive Business Serv. Co., 833 F.2d the underlying contract, and (4) the award is in manifest
1159, 1162 (5th Cir.1987) (submitting illegality defense disregard of the law. See Williams v. Cigna Fin. Advisors
to arbitration because it did not specifically relate to Inc., 197 F.3d 752, 758, 761-62 (5th Cir.1999). Hence, if the
arbitration clause); Mesa Operating Ltd. Partnership v. facts are as they appear to be on the record before us, I can
Louisiana Intrastate Gas Corp., 797 F.2d 238, 244 (5th conceive of no way in which the contract underlying this
Cir.1986) (submitting claim that contract was void ab action could be enforced against the profoundly retarded
initio to arbitration because parties failed to demonstrate and incompetent Mr. Brown.
that the arbitration agreement was “invalid separately
from the entire contract”). Finally, with regard to the broad statement that “unless
a defense relates specifically to the arbitration agreement,
As in each of these cases, Brown's capacity defense is a it must be submitted to the arbitrator as part of the
defense to his entire agreement with CitiFinancial and not underlying dispute” and the related footnote two, I
a specific challenge to the arbitration clause. Therefore, note that this circuit has not considered the authority
Brown's capacity defense is part of the underlying dispute of other circuits applying the Prima Paint rule to
between the parties which, in light of Prima Paint and its the distinction between voidable contracts and those
progeny, must be submitted to the arbitrator. 2 We need contracts deemed not to have existed. We have decided
not reach the other issues raised by the parties. that the question of whether a contract as a whole was
illegal must be submitted to arbitration. See Lawrence
v. Comprehensive Bus. Servs. Co., 833 F.2d 1159 (5th
Cir.1987); Mesa Operating Ltd. P'ship v. Louisiana
CONCLUSION Intrastate Gas Corp., 797 F.2d 238 (5th Cir.1986). But
we have not yet thoroughly analyzed or squarely decided
For the reasons stated above, we REVERSE the judgment
whether challenges going to the very existence of a
of the district court and REMAND for proceedings
contract must be submitted to arbitration. Other circuits
consistent with this opinion.
have split on this question. See, e.g., Three Valleys Mun.
Water Dist. v. E.F. Hutton & Co., 925 F.2d 1136 (9th
Cir.1991) (no); I.S. Joseph Co. v. Michigan Sugar Co., 803
DENNIS, Circuit Judge, concurring: F.2d 396 (8th Cir.1986) (no); Cancanon v. Smith Barney,
I concur in the judgment of the majority opinion. I Harris, Upham & Co., 805 F.2d 998 (11th Cir.1986) (no);
write separately to note the district court's finding, which Unionmutual Stock Life Ins. Co. v. Beneficial Life Ins. Co.,
the parties apparently do not dispute, that Mr. Brown 774 F.2d 524 (1st Cir.1985) (yes); Par-Knit Mills, Inc. v.
“has been profoundly retarded since birth.” The district Stockbridge Fabrics Co., 636 F.2d 51 (3d Cir.1980) (no).
court also found that the loan agency “required him Because it is not necessary for us to reach that question
to sign the loan agreement containing the arbitration here, the majority opinion's statements thereon are dicta,
clause by printing his name on a piece of paper and in which I do not join.
having him copy it on the appropriate line.” Under
Mississippi law, contracts entered into by incompetent
persons are voidable. See Williams v. Wilson, 335 So.2d
All Citations
Footnotes
1 Brown also argues that arbitration costs render the arbitration clause “substantively unconscionable.” The Supreme Court,
in Green Tree Financial Corp. v. Randolph, 531 U.S. 79, 91-92, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000), explained that
“a party seeking to avoid arbitration on the ground that arbitration would be prohibitively expensive” bears the burden of
showing the likelihood of incurring prohibitive costs. Brown has failed to carry this burden. Brown also suggests that the
arbitration agreement is “procedurally unconscionable” on other grounds. This argument is without merit.
2 The district court determined that the Prima Paint rule applied to defenses which render a contract voidable, but did not
apply to defenses which render a contract void. This distinction is inconsistent with Mesa Operating, which applied the
Prima Paint rule to a defense which, if proven, would have rendered the contract containing the arbitration clause “void
as never having been entered into.” 797 F.2d at 244; see also Lawrence, 833 F.2d at 1162 (following Mesa Operating
and submitting illegality defense to arbitrator).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[2] company's arbitration agreements with borrowers did [4] Alternative Dispute Resolution
not provide clear and unmistakable evidence to overcome Evidence
presumption that litigation-conduct waiver of right to Given the strong presumption in favor of
arbitration was issue for court; arbitration, waiver of the right to arbitration
is not to be lightly inferred.
[3] company waived its right to arbitrate; and
Cases that cite this headnote
[4] company was not entitled to differentiation of
borrowers' claims in context of determining waiver. [5] Alternative Dispute Resolution
Arbitrability of dispute
Affirmed.
process, negligent hiring, supervision, and This is an appeal from an order denying a motion
retention, negligence, civil conspiracy, and to compel arbitration. The district court held that the
violation of fair debt collection laws; company moving party waived its right to arbitrate by litigating
did not make claim to trial court before that collection claims against its borrowers to default judgment
court entered its order denying company's in justice court. We must decide whether the district
second motion to compel arbitration. court erred in addressing waiver, instead of referring the
question to the arbitrator. We hold that litigation-conduct
2 Cases that cite this headnote waiver is presumptively for the court to decide, unless
the arbitration agreement clearly commits the question to
[13] Alternative Dispute Resolution the arbitrator, which the agreements here do not. On the
Suing or participating in suit merits, we uphold the district court's finding of waiver and
therefore affirm.
Payday loan company was not entitled
to differentiation of claims borrowers,
against whom company had received default
judgments, brought, in context of determining I.
whether company waived right to arbitration,
in borrowers' class action against company
A.
and its process server, alleging fraud upon
the court, abuse of process, negligent hiring, Appellant Rapid Cash is a payday loan company
supervision, and retention, negligence, civil that provided short-term, high-interest loans to the
conspiracy, and violation of fair debt named plaintiffs Mary Dungan, Cassandra Harrison,
collection laws; claims concerned, at their
and Concepcion Quintino, among others. 2 The named
core, validity of default judgments company
plaintiffs and other borrowers did not repay their loans,
obtained against borrowers.
prompting Rapid Cash, over a seven-year period, to
2 Cases that cite this headnote file more than 16,000 individual collection actions in
justice court in Clark County, Nevada. Rapid Cash
hired Maurice Carroll, d/b/a On–Scene Mediations, as
its process server. Relying on On–Scene's affidavits
of service, Rapid Cash secured thousands of default
Attorneys and Law Firms
judgments against the named plaintiffs and other
*690 Lewis Roca Rothgerber, LLP, and Daniel F. borrowers who *691 failed to appear and defend the
Polsenberg, Joel D. Henriod, and Ryan T. O'Malley, Las collection lawsuits.
Vegas; Gordon Silver and Mark S. Dzarnoski and William
M. Noall, Las Vegas, for Appellants. At some point, a justice of the peace noticed that
On–Scene's affidavits attested to an improbably high
Kemp, Jones & Coulthard, LLP, and J. Randall Jones, number of same-day receipts and service of process, and
Jennifer C. Dorsey, and Carol L. Harris, Las Vegas; Legal initiated an investigation. The investigation revealed that
Aid Center of Southern Nevada, Inc., and Dan L. Wulz, Carroll and On–Scene had engaged in “sewer service”—
Venicia Considine, and Sophia A. Medina, Las Vegas, for the practice of accepting summonses and complaints for
Respondents. service, failing to serve them, then falsely swearing in
court-filed affidavits that service had been made when
Before the Court En Banc. 1 it was not. Carroll and On–Scene were cited for serving
process without a license, and a cease and desist order
was entered against them. Ultimately, Carroll was charged
OPINION with and convicted of 17 counts of forgery and offering
false instruments.
By the Court, PICKERING, J.:
Carroll's criminal convictions involved false affidavits of and us (including “related parties”
service for clients other than Rapid Cash. Nonetheless, identified below) that arises from
Carroll and On–Scene were Rapid Cash's exclusive agent or relates in any way to Services
for service of process in southern Nevada, and the you request or we provide, now,
named plaintiffs sued Rapid Cash, On–Scene, and others in the past or in the future; the
in district court, alleging that Rapid Cash improperly Application (or any prior or future
obtained its default judgments against them and other application); any agreement relating
similarly situated borrowers without their knowledge via to Services (“Services Agreement”);
On–Scene's “sewer service.” The first amended complaint any of our marketing, advertising,
is styled as a class action and asserts claims for fraud solicitations and conduct relating
upon the court, abuse of process, negligent hiring/ to your request for Services; our
supervision/retention, negligence, civil conspiracy, and collection of any amounts you owe;
violation of Nevada's fair debt collection laws. The relief our disclosure of or failure to
requested includes declaratory relief deeming the justice protect any information about you;
court default judgments void and uncollectable; injunctive or the validity, enforceability or
relief; disgorgement, restitution, or a constructive trust for scope of this Arbitration Provision.
funds already collected; forfeiture by Rapid Cash of all “Claim” is to be given the broadest
loan amounts; return of all principal, interest, charges, possible meaning and includes
or fees associated with the loans; punitive damages and claims of every kind and nature,
statutory penalties; and attorney fees and costs. The first including but not limited to, initial
amended complaint disavows claims for individual tort or claims, counterclaims, cross-claims
consequential damages, stating: and third-party claims, and claims
based on any constitution, statute,
This Class action does not seek regulation, ordinance, common law
to, nor will it, actually litigate any rule (including rules relating to
additional claims for compensatory contracts, negligence, fraud or other
damage, which may include but intentional wrongs) and equity. It
not be limited to damage to credit includes disputes that seek relief of
reputation, fear, anxiety, mental any type, including damages and/
and emotional distress, nor damages or injunctive, declaratory or other
arising from wrongful garnishment equitable relief.
or attachment, such as bank fees,
bounced check fees, finance charges The Dungan/Harrison form of agreement specifies that
or interest on bills which would have litigating one claim does not waive arbitration as to other
otherwise been paid, and the like. claims:
(and not class) mediation.” If mediation does not resolve Justice Court ... must be resolved consistent with ... the
the dispute, then the “Arbitration Agreement” controls: Arbitration Agreement.”
If you and we are not able Both forms of agreement state that they are “made
to resolve a Claim in mediation, pursuant to a transaction involving interstate commerce”
then you and we agree that such and shall “be governed by the Federal Arbitration Act, 9
Claim will be resolved by neutral, U.S.C. Sections 1–16, as amended,” or the “FAA.” They
binding individual (and not class) also include class-action and class-arbitration waivers.
arbitration. You and we may
not initiate arbitration proceedings The district court denied Rapid Cash's motions to compel
without first complying with the arbitration of the claims asserted in the original and first
Mediation Agreement. amended complaints. It held that Rapid Cash waived its
right to an arbitral forum by bringing collection actions in
The Quintino form of agreement also defines “Claims”
justice court, employing Carroll and On–Scene as its agent
broadly:
for service of process, and obtaining default judgments
“Claims” means any and all allegedly based on On–Scene's falsified affidavits of
claims, disputes or controversies service. Rapid Cash appeals. We have jurisdiction under
that arise under common law, NRS 38.247(1)(a) and 9 U.S.C. § 16(a)(1)(B) (2012), which
federal or state statute or regulation, allow interlocutory appeals from orders denying motions
or otherwise, and that we or to compel arbitration, and affirm.
our servicers or agents have
against you or that you have
against us, our servicers, agents, II.
directors, officers and employees.
“Claims” also includes any and all
claims that arise out of (i) the A.
validity, scope and/or applicability
[1] [2] As the loan documents stipulate, the arbitration
of this Mediation Agreement or the
agreements evidence transactions involving commerce,
Arbitration Agreement appearing
so the Federal Arbitration Act (FAA) applies. See
below, (ii) your application for a
Tallman v. Eighth Judicial Dist. Court, ––– Nev. ––––,
Loan, (iii) the Agreement, (iv) any
359 P.3d 113, 121–22 (2015). Under the FAA, arbitration
prior agreement between you and
agreements “shall be valid, irrevocable, and enforceable,
us, including any prior loans we
save upon such grounds as exist at law or in equity
have made to you[,] or (v) our
for the revocation of any contract.” 9 U.S.C. § 2.
collection of any Loan. “Claims”
This provision expresses “both a liberal federal policy
also includes all claims asserted as
favoring arbitration, and the fundamental principle that
a representative, private attorney
general, member of a class or in any arbitration is a matter of contract.” 3 AT&T Mobility
other representative capacity, and LLC v. Concepcion, 563 U.S. 333, 339, 131 S.Ct. 1740,
all counterclaims, cross-claims and 179 L.Ed.2d 742 (2011) (quotations and internal citations
third party claims. omitted). Because arbitration is fundamentally a matter
of contract, *693 “[w]hether enforcing an agreement
The Quintino agreement specifies that either party may to arbitrate or construing an arbitration clause, courts
“bring a Claim in a small claims or the proper Las and arbitrators must ‘give effect to the contractual rights
Vegas Justice Court, as long as the Claim is within the and expectations of the parties.’ ” Stolt–Nielsen S.A. v.
jurisdictional limits of that court,” without submitting the AnimalFeeds Int'l Corp., 559 U.S. 662, 682, 130 S.Ct. 1758,
claim to mediation or arbitration, but that “[a]ll Claims 176 L.Ed.2d 605 (2010) (quoting Volt Info. Scis., Inc. v.
that cannot be brought in small claims court or Las Vegas Bd. of Trs. of Leland Stanford Junior Univ., 489 U.S. 468,
479, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989)).
Mortg. Corp., 402 F.3d 1, 11–12 (1st Cir.2005) (noting contractual conditions precedent to arbitration.” Grigsby,
the First Circuit's “long history of deciding such waiver 664 F.3d at 1353 (internal quotation marks omitted).
claims itself” and observing that “[t]his was in accord That Howsam presumed the arbitrator would decide the
with the overwhelming weight of pre-Howsam authority, NASD time-limit bar makes sense: The NASD arbitrator
which held that waiver due to litigation conduct was was “comparatively better able to interpret and to apply”
generally for the court and not for the arbitrator”); see the NASD's procedural rule, so the parties would have
Nev. Gold & Casinos, Inc. v. Am. Heritage, Inc., 121 Nev. expected that issue to go to the arbitrator as the decision-
84, 90, 110 P.3d 481, 485 (2005) (judicially addressing maker with the better comparative expertise. Howsam, 537
litigation-conduct waiver without questioning whether U.S. at 85, 123 S.Ct. 588. 4 But litigation- *695 conduct
the arbitrator should have decided the matter); see also “waiver implicates courts' authority to control judicial
Tallman, ––– Nev. ––––, 359 P.3d at 123 (upholding procedures or to resolve issues ... arising from judicial
order rejecting litigation-conduct waiver claim but noting conduct.” Ehleiter, 482 F.3d at 219. Arbitrators are not
that all parties assumed “that waiver was for the court, comparatively better able than courts to interpret and to
not the arbitrator to decide”). After Howsam, courts apply litigation-conduct waiver defenses, see Grigsby, 664
have divided on who decides litigation-conduct waiver. F.3d at 1354 (stating that a court is “the decisionmaker
Compare Marie, 402 F.3d at 14 (“We hold that the with greater expertise in recognizing and controlling
Supreme Court in Howsam ... did not intend to disturb abusive forum-shopping”), and, thus, it is reasonable to
the traditional rule that waiver by conduct, at least assume that “parties would expect the court to decide
where due to litigation-related activity, is presumptively [litigation-conduct waiver] itself.” Ehleiter, 482 F.3d at
an issue for the court.”), Ehleiter v. Grapetree Shores, 219.
Inc., 482 F.3d 207, 221 (3d Cir.2007) (“[W]aiver of the
right to arbitrate based on litigation conduct remains Litigation-conduct waiver questions commonly arise out
presumptively an issue for the court to decide [even] in of proceedings before the court being asked to compel
the wake of Howsam.”), and Grigsby & Assocs., Inc. v. arbitration. Having the court assess waiver not only
M Sec. Inv., 664 F.3d 1350, 1353 (11th Cir.2011) (“[I]t comports with party expectations but also is more efficient
is presumptively for the courts to adjudicate disputes than reconstructing the litigation history before the
about whether a party, by earlier litigating in court, has arbitrator and deferring the question to the arbitral forum,
waived the right to arbitrate.”), with Nat'l Am. Ins. Co. v. only to have the dispute return if the arbitrator finds
Transamerica Occidental Life Ins. Co., 328 F.3d 462, 466 waiver.
(8th Cir.2003) (summarily holding that Howsam mandates
that the court refer all waiver challenges to the arbitrator, Questions of litigation-conduct waiver are best resolved
even litigation-conduct waiver). by a court that “has inherent power to control its docket
and to prevent abuse in its proceedings (i.e. forum
Howsam considered a procedural rule of the contractually shopping),” which has “more expertise in recognizing
chosen arbitral forum, the National Association of such abuses, and in controlling ... them,” and which
Securities Dealers (NASD), which provided that “no could most efficiently and economically decide the issue
dispute ‘shall be eligible for submission to arbitration ... as “where the issue is waiver due to litigation activity,
where six (6) years have elapsed from the occurrence or by its nature the possibility of litigation remains, and
event giving rise to the ... dispute.’ ” Howsam, 537 U.S. referring the question to an arbitrator would be an
at 81, 123 S.Ct. 588 (quoting NASD Code of Arbitration additional, unnecessary step.”
Procedure § 10304 (1984)). The “waiver” Howsam deemed
the province of the arbitrator, not the court, thus did See Am. Gen. Home Equity, Inc. v. Kestel, 253 S.W.3d 543,
not grow out of litigation conduct but, rather, delay in 551–52 (Ky.2008) (internal footnote omitted) (quoting
initiating arbitration, a procedural matter the NASD rules David LeFevre, Note, Whose Finding Is It Anyway?: The
controlled. The courts that have retained the traditional Division of Labor Between Courts and Arbitrators With
rule that litigation-conduct waivers are for the court Respect to Waiver, 2006 J. Disp. Resol. 305, 313–14
to decide have distinguished Howsam by limiting its (2006)); see UAA of 2000, § 6, cmt. 5, 7 U.L.A., part
waiver pronouncement to the context in which it arose, 1A 28 (2009) (stating that litigation-conduct “[w]aiver
specifically, waiver “arising from non-compliance with is one area where courts, rather than arbitrators, often
make the decision as to enforceability of an arbitration
clause,” and noting that “[a]llowing the court to decide to the arbitrator under First Options and its progeny.
this issue of arbitrability comports with the separability See Rent–A–Center, W., Inc. v. Jackson, 561 U.S. 63,
doctrine because in most instances waiver concerns only 66, 130 S.Ct. 2772, 177 L.Ed.2d 403 (2010) (upholding
the arbitration clause itself and not an attack on the district court's referral of substantive unconscionability
underlying contract” and that “[i]t is also a matter of defense to the arbitrator based on a delegation clause that
judicial economy to require that a party, who pursues an sent to the arbitrator questions as to the “applicability,
action in a court proceeding but later claims arbitrability, enforceability or formation of this Agreement including,
be held to a decision of the court on waiver”). but not limited to any claim that all or any part of
this Agreement is void or voidable” (internal quotation
We therefore hold, as the majority of courts have, omitted)). Rapid Cash argues that Quintino's agreement,
that Howsam's reference to “waiver, delay, or a like too, delegates litigation-conduct waiver to the arbitrator,
defense” being for the arbitrator encompasses “defenses since Quintino's waiver challenge amounts to a defense to
arising from non-compliance with contractual conditions the “applicability” of her arbitration agreement. We do
precedent to arbitration, such as the NASD time limit not agree.
rule at issue in that case, [but] not ... claims of waiver
based on active litigation in court.” Ehleiter, 482 F.3d at [8] [9] [10] “An issue that is presumptively for
219 (internal quotations omitted); see Marie, 402 F.3d the court to decide will be referred to the arbitrator
at 14. A party to an arbitration agreement likely would for determination only where the parties' arbitration
expect a court to determine whether the opposing party's agreement contains ‘clear and unmistakable evidence’ of
conduct in a judicial setting amounted to waiver of the such an intent.” Ehleiter, 482 F.3d at 221 (quoting First
right to arbitrate. Thus, even post-Howsam, litigation- Options, 514 U.S. at 944), 115 S.Ct. 1920; see also Rent–
conduct waiver remains a matter presumptively for the A–Center, 561 U.S. at 70 n. 1, 130 S.Ct. 2772. The
court to decide. general language in both forms of Rapid Cash agreements
falls short of the “clear and unmistakable evidence”
required to overcome the presumption that litigation-
conduct waiver is for the court to decide. The presumption
C.
that courts decide litigation-conduct waiver is rooted
[7] We still must consider Rapid Cash's argument that in presumed party intent and probable expectations.
its arbitration agreements provide for the arbitrator to The agreements between Rapid Cash and its borrowers
decide litigation-conduct waiver, notwithstanding any provide specifically for litigation of some claims in some
presumption to the contrary. See First Options, 514 U.S. at courts without loss of the right to arbitrate other claims
943, 115 S.Ct. 1920 (“Just as the arbitrability of the merits in other courts, yet are silent on the issue of who decides
of a dispute depends upon whether the parties agreed on which side of the line such later-asserted claims fall.
to arbitrate that dispute, so the question ‘who has the A corollary of the First Options rule requiring “clear and
primary power to decide arbitrability’ turns upon what unmistakable evidence” of contrary intent to overcome
the parties agreed about that matter.” (internal citations a division-of-labor presumption is the rule that “silence
omitted)). In this regard, the Dungan/Harrison form of or ambiguity” is resolved against the party seeking to
agreement requires arbitration of “any claim, dispute or overcome the presumption. First Options, 514 U.S. at 944–
controversy ... that arises from or relates in any way to ... 45, 115 S.Ct. 1920. Had Rapid Cash intended to delegate
the validity, enforceability or scope of this Arbitration litigation-conduct waiver to the arbitrator, rather than the
Provision,” while the Quintino form of agreement *696 court, the agreements could and should have been written
requires the parties to arbitrate “any and all claims that to say that explicitly. Absent an explicit delegation,
arise out of ... the validity, scope and/or applicability of litigation-conduct waiver remains a matter for the court to
this ... Arbitration Agreement.” (Emphases added.). resolve. See Marie, 402 F.3d at 15 (declining to interpret
agreement delegating “arbitrability” determinations to
Rapid Cash argues that the district court's finding of the arbitrator as “evinc[ing] a clear and unmistakable
litigation-conduct waiver defeats the “enforceability” of intent to have waiver issues decided by the arbitrator” and
its arbitration agreements and so, at minimum, Dungan's holding that “[n]either party should be forced to arbitrate
and Harrison's waiver challenge should have been referred
the issue of waiver by conduct without a clearer indication arbitrate results in waiver of the right to arbitrate.”
in the agreement that they have agreed to do so”). 5 Doctor's Assocs., Inc. v. Distajo, 107 F.3d 126, 133 (2d
Cir.1997); see MicroStrategy, Inc. v. Lauricia, 268 F.3d
Here, as in Ehleiter, “[l]itigants would expect the court, 244, 250 (4th Cir.2001); Subway Equip. Leasing Corp.
not an arbitrator, to decide the question of waiver based v. Forte, 169 F.3d 324, 328 (5th Cir.1999); Cottonwood
on litigation conduct, and the Agreement ... does not Fin., Ltd. v. Estes, 339 Wis.2d 472, 810 N.W.2d 852,
manifest a contrary intent.” 482 F.3d at 222. We thus 860–61 (App.2012). The reasoning underlying these
“cannot interpret the Agreement's silence regarding who cases is that litigating one claim is not necessarily
decides the waiver issue here ‘as giving the arbitrators that inconsistent with seeking to arbitrate another, separate
power, for doing so ... [would] force [an] unwilling part[y] claim and does not prejudice rights of the opposing
to arbitrate a matter he reasonably would have thought a party that the arbitration agreement protects. See Distajo,
judge, not an arbitrator, would decide.’ ” Id. (alteration in 107 F.3d at 133 (“Finding waiver where a party has
original) (quoting First Options, 514 U.S. at 945, 115 S.Ct. previously litigated an unrelated yet arbitrable dispute
1920). would effectively abrogate an arbitration clause once a
party had litigated any issue relating to the underlying
contract containing the arbitration clause.”). Thus, the
franchisor in Distajo did not waive its right to arbitrate its
D. franchisees' claims for breach of the franchise agreement
by obtaining eviction orders against its franchisees in state
[11] We turn to Rapid Cash's contention that the district
court because the eviction actions did not prejudice rights
court erred in finding it waived its right to arbitrate.
secured by the arbitration agreement, as required to find
Waiver is not a *697 favored finding and should not be
waiver of arbitration rights under the FAA. 107 F.3d at
lightly inferred. Coca–Cola Bottling, 242 F.3d at 57; Clark
134 (“[P]rejudice as defined by our [waiver] cases refers
Cty., 98 Nev. at 491, 653 P.2d at 1219. “A party seeking to
to the inherent unfairness—in terms of delay, expense, or
prove the waiver of a right to arbitrate must demonstrate
damage to a party's legal position—that occurs when the
these elements: knowledge of an existing right to compel
party's opponent forces it to litigate an issue and later
arbitration; acts inconsistent with that existing right;
seeks to arbitrate that same issue.”). Similarly, the payday
and prejudice to the party opposing arbitration resulting
lender in Cottonwood Financial did not waive its right to
from such inconsistent acts.” 3 Thomas H. Oehmke,
compel arbitration of its borrower's counterclaim alleging
Commercial Arbitration § 50:28, at 28–29 (3d ed. Supp.
violation of the Wisconsin Consumer Act by bringing a
2015); see Nev. Gold, 121 Nev. at 90, 110 P.3d at 485.
collection action in small claims court; the arbitration
agreement provided that a small claims action did not
Rapid Cash knew of its arbitration rights and
waive the right to compel arbitration of other claims and
acknowledges that it waived its right to arbitrate its
the borrower's counterclaim converted the case from a
collection claims by bringing them in justice court. Its
small to a large claims action, triggering the arbitration
point is that the claims the named plaintiffs have asserted
agreement. 810 N.W.2d at 860–61; see Fid. Nat'l Corp. v.
against Rapid Cash in district court are separate and
Blakely, 305 F.Supp.2d 639, 642 (S.D.Miss.2003) (holding
distinct from the collection claims Rapid Cash sued on in
lender's state-court collection action did not waive its right
justice court. Especially since its arbitration agreements
to seek arbitration of counterclaim asserting tort claims
permit it to litigate a collection claim in justice court
associated with the transaction).
without losing the right to arbitrate other, distinct claims,
Rapid Cash sees no inconsistency in enforcing arbitration
This case differs from the cases just cited in one crucial
of the named plaintiffs' claims despite its prior litigation
respect: The claims the named plaintiffs have asserted
in justice court. Rapid Cash also disputes whether the
in district court arise out of, and are integrally related
class representatives have made a sufficient showing of
to, the litigation Rapid Cash conducted in justice court.
prejudice to justify a finding of waiver.
By initiating a collection action in justice court, Rapid
Cash waived its right to arbitrate to the extent of inviting
Consistent with the policy disfavoring waiver, caselaw
its borrower to appear and defend on the merits of that
teaches that “only prior litigation of the same legal
claim. The entry of default judgment based on a falsified
and factual issues as those the party now wants to
affidavit of service denied the defendant borrower that judgment and allow the party or
invited opportunity to appear and defend. Allowing the the party's legal representatives to
borrower to litigate its claim to set aside the judgment and answer to the merits of the original
be heard on the merits comports with the waiver Rapid action,
Cash initiated. If the judgment Rapid Cash obtained
was the product of fraud or criminal misconduct and and that all other claims should be dismissed or sent to
is unenforceable for that reason, it would be *698 arbitration. Rapid Cash did not make this argument to the
unfairly prejudicial to the judgment debtor to require district court before that court entered its order denying
arbitration of claims seeking to set that judgment aside, Rapid Cash's second motion to compel arbitration, and
to enjoin its enforcement, and otherwise to remediate thus, this argument is not properly before us on appeal.
its improper entry. We recognize that the arbitration See Old Aztec Mine, Inc. v. Brown, 97 Nev. 49, 52, 623
agreements specify that bringing one claim does not result P.2d 981, 983 (1981) (“A point not urged in the trial
in waiver of the right to arbitrate another, but a no- court ... is deemed to have been waived and will not be
waiver clause can itself be waived, see Silver Dollar Club considered on appeal.”). 6 More to the point, while we do
v. Cosgriff Neon Co., 80 Nev. 108, 111, 389 P.2d 923, not pass upon the validity of any of the named plaintiffs'
924 (1964), and should not be applied to sanctify a fraud claims and we recognize that the FAA “requires that we
upon the court allegedly committed by the party who itself rigorously enforce agreements to arbitrate, even if the
elected a litigation forum for its claim. Cf. S & R Co. of result is ‘piecemeal’ litigation,” Dean Witter Reynolds, Inc.
Kingston v. Latona Trucking, Inc., 159 F.3d 80, 86 (2d v. Byrd, 470 U.S. 213, 221, 105 S.Ct. 1238, 84 L.Ed.2d
Cir.1998) (declining to enforce a “no waiver” clause where 158 (1985), we do not accept Rapid Cash's view of their
to do so would hamper a judge's authority to control the separability for waiver purposes. The named plaintiffs'
proceedings and correct any abuse in them); Gen. Elec. claims all concern, at their core, the validity of the
Capital Corp. v. Bio–Mass Tech, Inc., 136 So.3d 698, 703 default judgments Rapid Cash obtained against them in
(Fla.Dist.Ct.App.2014) (holding that an “antiwaiver or justice court, as to which issue the district court correctly
‘no waiver’ provision is not itself determinative and does concluded that Rapid Cash waived its right to an arbitral
not operate as a complete bar to finding a waiver of the forum.
right to arbitration”).
We therefore affirm.
E.
We concur: HARDESTY, DOUGLAS, CHERRY, and
[12] [13] Rapid Cash urges us to differentiate among GIBBONS, JJ.
the claims the named plaintiffs have brought, arguing
that the named plaintiffs have an adequate remedy under
Rule 60(c) of the Nevada Justice Court Rules of Civil SAITTA, J., concurring:
Procedure, which provides: In large part, I agree with the majority's opinion.
However, I disagree with the majority's inclusion as
When a default judgment shall have dicta of two cases, Cottonwood Financial, Ltd. v. Estes,
been taken against any party who 339 Wis.2d 472, 810 N.W.2d 852 (App.2012), and
was not personally served with Fidelity National Corp. v. Blakely, 305 F.Supp.2d 639
summons and complaint, either in (S.D.Miss.2003). The Cottonwood court based its decision
the State of Nevada or in any on its interpretation of the arbitration clause in that
other jurisdiction, and who has not case and did not perform an analysis of whether the
entered a general appearance in the “same legal and factual issues” were at issue in the
action, the court, after notice to the lender's collection action as the borrower's counterclaim.
adverse party, upon motion made Compare Cottonwood Financial, 810 N.W.2d at 860–61,
within six months after the date of with Majority Opinion at 697 (holding that “ ‘only prior
service of written notice of entry litigation of the same legal and factual issues as those
of such judgment may vacate such the party now wants to arbitrate results in waiver of the
right to arbitrate.’ ” *699 (quoting Doctor's Assocs., Inc. claims associated with the transaction). Therefore, I am
puzzled by its inclusion in the majority's opinion.
v. Distajo, 107 F.3d 126, 133 (2d Cir.1997))). Therefore,
I believe that Cottonwood is inapposite to the majority's
Lastly, I note that the above caselaw originates from the
analysis under the standard it set out in its opinion.
Wisconsin Court of Appeals and a federal district court in
Mississippi. Thus, beyond the issue of their applicability
In the case of Blakely, I respectfully note that the holding
to the current case, I question their persuasiveness as
in that case directly contradicts the majority's holding
authority in Nevada. Therefore, although I concur with
in the current case. Compare Blakely, 305 F.Supp.2d at
most of the majority's opinion, I do not join with them as
642 (holding lender's state court collection action did
to the use of those two cases as dicta.
not waive its right to seek arbitration of counterclaim
asserting tort claims associated with the transaction), with
Majority Opinion at 698 (holding that lender's state-court All Citations
collection action waived its right to seek arbitration of
366 P.3d 688, 132 Nev. Adv. Op. 2
Footnotes
1 The Honorable Ron D. Parraguirre, Chief Justice, voluntarily recused himself from participation in the decision of this
matter.
2 We refer to appellants collectively as “Rapid Cash,” the name by which they are all alleged to do business.
3 Nevada has adopted the Uniform Arbitration Act of 2000(UAA), see NRS 38.206, which expresses Nevada's similarly
fundamental policy favoring the enforceability of arbitration agreements as written. See NRS 38.219(1); Tallman, –––
Nev. ––––, 359 P.3d at 119 (“As a matter of public policy, Nevada courts encourage arbitration and liberally construe
arbitration clauses in favor of granting arbitration.” (quoting State ex rel. Masto v. Second Judicial Dist. Court, 125 Nev.
37, 44, 199 P.3d 828, 832 (2009))).
4 The Court's quotation of Howsam's waiver language in BG Group, 572 U.S. at ––––, 134 S.Ct. at 1207, is not inconsistent
with the distinction Grigsby and other post-Howsam cases have drawn between waiver by litigation-conduct and waiver
by failure to comply with procedural prerequisites to arbitration. In BG Group, the Supreme Court deemed a foreign
sovereign's local litigation provision the province of the arbitrators because it constituted “a purely procedural requirement
—a claims-processing rule that governs when the arbitration may begin, but not whether it may occur or what its
substantive outcome will be on the issues in dispute.” Id. at ––––, 134 S.Ct. at 1207.
5 Rent–A–Center is not to the contrary. In Rent–A–Center, the party opposing arbitration conceded that the text of the
delegation clause—referring to the arbitrator claims that the arbitration agreement was “void or voidable” and so not
enforceable or applicable—encompassed his substantive unconscionability challenge. See Rent–A–Center, 561 U.S. at
66, 130 S.Ct. 2772 (internal quotation omitted). In this case, by contrast, the parties opposing arbitration hotly contest the
delegation clauses in their agreements, which, unlike the Rent–A–Center clause, stop at “enforceability” and “applicability”
without adding a description of what the term means.
6 A separate proceeding regarding this issue whereby Rapid Cash seeks original writ relief from the district court's orders
partially granting class certification and declining to dismiss certain claims for relief is pending before this court as Principal
Investments, Inc. v. Eighth Judicial District Court, Docket No. 61581.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
PER CURIAM.
[9] Alternative Dispute Resolution
Evidence Prudential Securities Incorporated, John Rhoades, Kevin
Burden was upon plaintiffs as parties O'Friel, Kent Varner, Joe Nittolo, and Mike McClain
opposing contractual arbitration of their seek mandamus relief from a trial court order denying
claims to show that their claims fell outside arbitration of several libel and slander claims asserted
scope of arbitration agreement. against them by the real parties in interest, former
Prudential stockbrokers Edwin Troy Hawkins and
77 Cases that cite this headnote Francis Moise. Because we conclude that the claims are
within the scope of arbitration agreements Hawkins and
[10] Mandamus Moise entered into with Prudential, we conditionally grant
Remedy by Appeal or Writ of Error the relief requested.
[2] [3] Arbitration of disputes is strongly favored under Lyman v. Takacs, 774 F.Supp. 885, 887 (S.D.N.Y.1991);
federal and state law. Moses H. Cone Memorial Hosp. Home Club, Inc. v. Barlow, 818 S.W.2d 192, 193 (Tex.App.
v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. —San Antonio 1991, orig. proceeding). The defendants'
927, 941–42, 74 L.Ed.2d 765 (1983); Brazoria County opposition to Moise's discovery was based on their
v. Knutson, 142 Tex. 172, 176 S.W.2d 740, 743 (1943). contention that his requests were overbroad or oppressive,
Accordingly, a presumption exists against the waiver of a or sought privileged material. While we do not address
contractual right to arbitration. See Moses H. Cone, 460 the merits of the defendants' position in the discovery
U.S. at 24–25, 103 S.Ct. at 941–42. The record before us disputes, their opposition is not inconsistent with an intent
in this case does not overcome that presumption. Instead, to invoke contractual arbitration rights. We therefore
the record indicates that the defendants consistently hold that the defendants did not waive their rights to
and timely sought to invoke any contractual rights to arbitration.
arbitration they might have. The first responsive pleading
the defendants filed to Hawkins' petition in this case was [6] On the merits, the defendants argue that the factual
their Motion to Stay All Proceedings and to Compel allegations in Hawkins' and Moise's petitions on their
Arbitration and Original Answer Subject Thereto. After face establish that the claims fall within the scope of
Moise filed his petition in intervention, the defendants the arbitration agreements, and that the trial court thus
moved to strike his intervention; within three days of the abused its discretion by declining to compel arbitration of
date the trial court overruled the motion to strike, they all of the claims and stay the trial court proceedings. We
moved to compel arbitration of Moise's claims. agree.
[4] [5] A party does not waive a right to arbitration Under the Federal Arbitration Act, any doubts as to
merely by delay; instead, the *899 party urging waiver whether Hawkins' and Moise's claims fall within the scope
must establish that any delay resulted in prejudice. See of the agreement must be resolved in favor of arbitration.
Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Moses H. Cone, 460 U.S. at 24–25, 103 S.Ct. at 941–42.
Cir.1985); Transwestern Pipeline Co. v. Horizon Oil & Gas The policy in favor of enforcing arbitration agreements
Co., 809 S.W.2d 589, 592 (Tex.App.—Dallas 1991, writ is so compelling that a court should not deny arbitration
dism'd w.o.j.). Similarly, parties do not waive their right to “unless it can be said with positive assurance that an
arbitration by invoking the judicial process in the absence arbitration clause is not susceptible of an interpretation
of prejudice to the opposing party. See Miller Brewing which would cover the dispute at issue.” Neal v. Hardee's
Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 496–97 (5th Food Sys., Inc., 918 F.2d 34, 37 (5th Cir.1990) (quoting
Cir.1986). Commerce Park at DFW Freeport v. Mardian Constr. Co.,
729 F.2d 334, 338 (5th Cir.1984)) (emphasis added).
Hawkins asserts no prejudice as a result of the defendants'
conduct in this litigation. Moise, on the other hand, [7] When a party asserts a right to arbitration under the
contends that the defendants' “dilatory tactics” have Federal Arbitration Act, the question of whether a dispute
prejudiced him, apparently referring to various discovery is subject to arbitration is determined under federal law.
disputes in the trial court. These tactics, Moise alleges, See Genesco, Inc. v. T. Kakiuchi & Co., 815 F.2d 840,
have cost him time and money and prevented him from 845 (2d Cir.1987). The federal courts have interpreted the
earning a living as a broker. The record provided us, arbitration provision of Rule 347 of the Stock Exchange
however, contains no discovery requests served by the to include any dispute involving significant aspects of
defendants on Moise. Instead, the record evidences a the employment relationship or depending upon the
dispute, spanning a period of a little more than a month, evaluation of the employee's performance as a broker. See
arising from Moise's efforts to obtain certain discovery Fleck v. E.F. Hutton Group, Inc., 891 F.2d 1047, 1053
from the defendants and a law firm that had previously (2d Cir.1989). Applying that standard, claims very similar
represented Moise and Prudential in connection with to those raised by Hawkins and Moise have been held
a Securities and Exchange Commission investigation. to be arbitrable. See, e.g., id. (holding that defamation
We cannot conclude, based upon this record, that the claim based upon statement that broker was “basically
defendants' efforts to resist discovery overcome the strong a criminal” was subject to arbitration); Smith Barney
presumption in favor of arbitration. See Steinberg & Shearson, Inc. v. Finstad, 888 S.W.2d 111, 117 (Tex.App.
—Houston [1st Dist.] 1994, no writ) (holding that claims upon their performance as brokers, making the claims
referable to arbitration. See Mitsubishi Motors Corp. v.
based upon statement that fired broker was “unethical”
Soler Chrysler–Plymouth, Inc., 473 U.S. 614, 624 n. 13, 105
were subject to arbitration to the extent statement related
to broker's business practices, as opposed to his sexual S.Ct. 3346, 3352 n. 13, 87 L.Ed.2d 444 (1985). 1
mores).
[10] [11] Mandamus will issue only to correct a clear
*900 [8] [9] In determining whether a claim falls within abuse of discretion when the abuse cannot be remedied by
the scope of an arbitration agreement, we focus on the appeal. Walker v. Packer, 827 S.W.2d 833, 840 (Tex.1992).
factual allegations of the complaint, rather than the legal In this case, the trial court abused its discretion because
causes of action asserted. See Jack B. Anglin Co. v. Tipps, it misapplied the Federal Arbitration Act to the facts
842 S.W.2d 266, 271 (Tex.1992); Genesco, Inc., 815 F.2d of this case. See Jack B. Anglin, 842 S.W.2d at 271. A
at 846. The burden was upon Hawkins and Moise to show party who is erroneously denied the right to arbitration
that their claims fell outside the scope of the arbitration has no adequate remedy at law because the fundamental
agreement. See Merrill Lynch, Pierce, Fenner, and Smith purpose of arbitration—to provide a rapid, less expensive
v. Longoria, 783 S.W.2d 229, 231 (Tex.App.—Corpus alternative to traditional litigation—would be defeated.
Christi 1989, orig. proceeding). Id.
On this record, we cannot conclude with positive Because the claims at issue in this lawsuit are within the
assurance that the statements at issue here are not at least scope of Hawkins' and Moise's agreements to arbitrate, we
“factually intertwined” with the arbitrable claims. See conditionally grant the writ of mandamus and direct the
Jack B. Anglin, 842 S.W.2d at 271. Hawkins and Moise's trial court to order that all claims proceed to arbitration.
contention that their claims are outside the scope of the The clerk is instructed to issue the writ only if the trial
arbitration agreement is inherently inconsistent with their court fails to do so.
allegations that the statements were uttered to further a
conspiracy to blackball them from the securities industry
All Citations
and tended to injure them in their professions as brokers.
In order to injure the plaintiffs' professional reputations, 909 S.W.2d 896, 39 Tex. Sup. Ct. J. 116
the statements must, as a matter of logic, at least touch
Footnotes
1 The defendants also rely on arbitration requirements imposed by the regulations of the National Association of Securities
Dealers, the constitution of the New York Stock Exchange, and a “Financial Adviser in Training Agreement” signed by
Hawkins. Because we conclude that the disputes between the parties in this case fall within the scope of Rule 347 of the
Stock Exchange, we do not address the reach of the other arbitration provisions.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Ann. § 74.001(22); Tex. Occ. Code Ann. §§ that negligence in compounding the drug
551.003(16), 551.003(43), 562.151(1), 562.152. and inclusion of inadequate warnings and
instructions caused her injuries was clearly a
Cases that cite this headnote claim that pharmacy and employees departed
from accepted standards of health care. Tex.
[11] Health Civ. Prac. & Rem. Code Ann. § 74.001(10),
Actions and Proceedings (13), (22).
Products Liability Cases that cite this headnote
Drugs in general
Products Liability
Actions
Pharmacy and its employees were engaged *614 ON PETITION FOR REVIEW FROM
in “the dispensing of prescription medicines” THE COURT OF APPEALS FOR THE SECOND
when they compounded injectable lipoic DISTRICT OF TEXAS
acid that physician administered to patient,
as necessary to be “pharmacists” within Attorneys and Law Firms
meaning of Texas Medical Liability Act,
E. Lee Parsley, E. Lee Parsley, P.C., Jay B. Stewart,
despite contention that lipoic acid was not
Hance Scarborough, LLP, Austin, TX, for Amicus Curiae
a prescription medication; Pharmacy Act
Alliance of Independent Pharmacists—Texas.
provisions governing compounding provided
that compounded drugs could not be given to Miguel S. Rodriguez, Taylor, Dunham, L.L.P., Austin,
a patient absent a doctor's order, making the TX, for Amicus Curiae Southwest Pharmacy Solutions.
compounded injectable lipoic acid ordered by
physician a prescription medicine. Tex. Civ. Mark A. Keene, Keene & Seibert, P.C., Austin, TX, for
Prac. & Rem. Code Ann. § 74.001(22); Tex. Amicus Curiae Texas Pharmacy Association.
Occ. Code Ann. §§ 551.003(1), 551.003(9),
551.003(18)(B), 551.003(36), 551.003(37)(A). Erin E. Lunceford, Sprott, Rigby, Newson, Robbins &
Lunceford, PC, Michele Quattlebaum, Sprott Newsom
Cases that cite this headnote Lunceford Quattlebaum Messenger, Houston TX, for
Petitioner Randol Mill Pharmacy.
the defendants' motion to dismiss, and the court of appeals Miller's claims with prejudice for failure to serve an
affirmed. We disagree and reverse the court of appeals' expert report within 120 days of her filing suit, see id. §
judgment. 74.351. The trial court denied the motion, and a divided
court of appeals affirmed, 2 holding that the pharmacist
defendants were not health care providers, that the claims
I. Background against them were not health care liability claims, and
that the Medical Liability Act therefore did not apply. 413
In 2011, Dr. Ricardo Tan treated Miller for symptoms S.W.3d 844 (Tex.App.–Fort Worth 2013). We granted the
related to her previously diagnosed Hepatitis C. pharmacist defendants' petition for review.
He prescribed and administered weekly intravenous
injections of 200 mg/ml lipoic acid, an antioxidant
supplement. According to Miller's petition, she underwent
II. Analysis
nine weeks of treatment without incident. However, she
suffered a severe adverse reaction while receiving a lipoic- [1] This case presents issues of statutory interpretation,
acid treatment on December 5, 2011. She alleged that, as which we review de novo. Zanchi v. Lane, 408 S.W.3d
a result, she was hospitalized for several weeks, received 373, 376 (Tex.2013). In construing statutes, we start with
multiple blood transfusions, and is now permanently the “ordinary meaning of the statutory text.” In re Ford
blind in both eyes. Randol Mill Pharmacy, a licensed Motor Co., 442 S.W.3d 265, 271 (Tex.2014). We analyze
compounding pharmacy in Arlington, compounded the that language in context, considering the specific sections
particular vial of lipoic acid to which Miller reacted. It at issue as well as the statute as a whole. CHCA Woman's
was prepared as part of an order Dr. Tan had placed with Hosp. v. Lidji, 403 S.W.3d 228, 231–32 (Tex.2013).
Randol Mill for twenty-three 30–ml vials of lipoic acid for
office use, without reference to any particular patient.
*615 Miller and her husband sued Dr. Tan, Randol A. Relevant Provisions of the Texas Medical Liability Act
Mill, and several licensed pharmacists in Randol Mill's
[2] [3] [4] [5] The Texas Medical Liability Act
employ. 1 The claims against Dr. Tan were dismissed and provides a comprehensive statutory framework governing
severed. As to Randol Mill and the individual pharmacists health care liability claims. Id. at 232. It is intended to
(collectively, the pharmacist defendants), Miller alleged strike “a careful balance between eradicating frivolous
that, “because of negligence in compounding, inadequate [health care liability] claims and preserving meritorious
and inappropriate warnings and instructions for use, the ones.” Leland v. Brandal, 257 S.W.3d 204, 208 (Tex.2008).
compounded Lipoic Acid was defective, ineffective and A key component of the Act's framework is its
unreasonably dangerous.” Miller also alleged that the requirement that the plaintiff serve expert reports early
pharmacist defendants “breached their implied warranties in the litigation process “for each physician or health
in the design, manufacture, inspection, marketing, and/or care provider against whom a [health care] liability
distribution” of the lipoic acid. Miller more specifically claim is asserted.” TEX. CIV. PRAC. & REM. CODE
alleged that they: failed to confirm the identity, strength,
§ 74.351(a). 3 Failure to comply with this *616
and sterility of the lipoic acid prior to its release;
requirement results in dismissal of the claim with prejudice
failed to implement a reasonably safe design; failed to
upon the health care provider's motion. Id. § 74.351(b).
manufacture the lipoic acid in a reasonably safe condition;
Miller and the pharmacist defendants dispute whether
and failed to accompany the lipoic acid with proper
her claims constitute health care liability claims such that
warnings regarding possible adverse side effects and with
the Medical Liability Act generally, and the expert-report
adequate information to medical care providers regarding
appropriate use. requirement specifically, applies. 4
Taking the position that Miller had asserted health [6] The Act defines “health care liability claim” as
care liability claims governed by the Texas Medical
a cause of action against a
Liability Act, see TEX. CIV. PRAC. & REM. CODE §§
health care provider or physician
74.001–.507, the pharmacist defendants moved to dismiss
for treatment, lack of treatment, the State of Texas to provide health care,” id. § 74.001(12)
or other claimed departure from (A); (2) Randol Mill thus meets the definition of health
accepted standards of medical care provider under the Act; and (3) as employees of
care, or health care, or safety Randol Mill, the individual defendants are also health
or professional or administrative care providers regardless of whether they meet the Act's
services directly related to health definition of pharmacist, id. § 74.001(12)(B)(ii).
care, which proximately results in
injury to or death of a claimant, [8] [9] This argument has appeal when the Act's
whether the claimant's claim or definitions are viewed in isolation, but our well-settled
cause of action sounds in tort or rules of statutory interpretation require us to “examine the
contract. entire act to glean its meaning” and to “presume that ‘the
entire statute is intended to be effective.’ ” Meritor Auto.,
Id. § 74.001(13). Thus, only claims brought against Inc. v. Ruan Leasing Co., 44 S.W.3d 86, 90 (Tex.2001)
physicians or health care providers may qualify as (quoting TEX. GOV'T CODE § 311.021(2)). Further, we
health care liability claims. A “health care provider” may not interpret a statute in a way that renders any part
is “any person, partnership, professional association, of it meaningless. Crosstex Energy Servs., L.P. v. Pro Plus,
corporation, facility, or institution duly licensed, certified, Inc., 430 S.W.3d 384, 390 (Tex.2014). When analyzed in
registered, or chartered by the State of Texas to provide this manner, the statute cannot have the meaning Randol
health care, including ... a pharmacist.” Id. § 74.001(12) Mill proposes.
(A)(iv). Employees and independent contractors of health
care providers who are acting within the scope of the More specifically, Randol Mill's interpretation renders
employment or contractual relationship also qualify as the definition of pharmacist wholly superfluous because
health care providers. Id. § 74.001(12)(B)(ii). Finally, the defendants who are licensed under chapter 551 of
Act defines “pharmacist” as the Occupations Code—the first requirement to meet
the pharmacist definition—automatically fall within the
one licensed under Chapter 551,
broader definition of health care provider. But the
Occupations Code, who, for the
remainder of the pharmacist definition expressly narrows
purposes of this chapter, performs
the circumstances in which such defendants may be
those activities limited to the
considered health care providers, principally by limiting
dispensing of prescription medicines
the qualifying activities to “the dispensing of prescription
which result in health care liability
medicines that result in health care liability claims.”
claims and does not include any
TEX. CIV. PRAC. & REM. CODE § 74.001(22). And
other cause of action that may
the referenced chapter 551 of the Occupations Code,
exist at common law against them,
which is the first chapter of the Texas Pharmacy Act,
including but not limited to causes of
encompasses the licensing of both pharmacies like Randol
action for the sale of mishandled or
Mill and individual pharmacists. See TEX. OCC. CODE
defective products.
§§ 551.002(c), .003(3)–(7), (28). Accordingly, both Randol
Id. § 74.001(22). Mill and the individual defendants in this case qualify as
health care providers under the Medical Liability Act only
if they meet the Act's definition of pharmacist.
in agreement—and often the parties do not dispute— a prescription from a physician or other authorized
that the Act applies and an expert report is required. prescriber.” Michael Snow, Note, Seeing Through the
See, e.g., Walgreen Co. v. Hieger, 243 S.W.3d 183, 185– Murky Vial: Does the FDA Have the Authority to Stop
86 (Tex.App.–Houston [14th Dist.] 2007, pet. denied) Compounding Pharmacies from Pirate Manufacturing?,
(analyzing the sufficiency of an expert report in a claim 66 VAND. L. REV. 1609, 1611 (Oct.2013); see also
alleging the pharmacy incorrectly filled a prescription Thompson, 535 U.S. at 361, 122 S.Ct. 1497 (“Pharmacists
with the wrong medication); HEB Grocery Co. v. Farenik, may provide compounded drugs to patients only upon
243 S.W.3d 171, 173 (Tex.App.–San Antonio 2007, no receipt of a valid prescription from a doctor....” (citing
pet.) (same); see also Gingrich v. Scarborough, No. 09– state pharmacy regulations)).
09–00211–CV, 2010 WL 1711067, at *5 (Tex.App.–
Beaumont April 29, 2010, no pet.) (mem. op.) (holding Texas is one of “[m]any States” that “specifically regulate
that the plaintiff's expert report was insufficient as to a compounding practices as part of their regulation of
claim that the pharmacy negligently filled a prescription pharmacies.” Thompson, 535 U.S. at 361, 122 S.Ct. 1497.
for “excessive” medications that led to drug toxicity). To that end, both the Texas Pharmacy Act and the
Unlike those cases, this case implicates a pharmacy's associated regulations governing compounding services
compounding services, and so we begin with a discussion define compounding as
of that practice.
the preparation, mixing, assembling, packaging, or
labeling of a drug or device:
Pharmacy Act also defines “manufacturing” and expressly the specific identity of the ultimate user. Further, and
states that “[t]he term does not include compounding.” importantly, when a drug is dispensed for office use,
TEX. OCC. CODE § 551.003(23). With this background it means that the practitioner will be administering the
in mind, we turn to the issues at hand. drug to the patient. Id. § 562.151(1) (defining “office
use”). The limitations on this practice are thus designed
to ensure that the compounded drug is administered in
a health care setting *620 directly to the patient to
2. Randol Mill Was Dispensing Prescription Medicines
whom the drug is ultimately prescribed. We cannot agree
As noted above, licensed pharmacists and pharmacies with the effect of the distinction drawn by the court of
are health care providers for purposes of the Medical appeals, which effectively held that “a pharmacist who is
Liability Act with respect to “those activities limited to compounding prescription drugs for individuals does fall
the dispensing of prescription medicines which result in within the [Medical Liability Act's] statutory definition of
health care liability claims.” TEX. CIV. PRAC. & REM. a pharmacist,” while a pharmacist who is compounding
CODE § 74.001(22). They are not considered health care prescription drugs for a practitioner's office use does
providers with respect to “any other cause of action that not. 413 S.W.3d at 850–51 (emphasis partially omitted).
may exist at common law against them, including but not Accordingly, we hold that a pharmacist who compounds
limited to causes of action for the sale of mishandled or a drug for office use pursuant to a practitioner's lawful
defective products.” Id. The parties dispute whether the order, as authorized by the Pharmacy Act, is “dispensing”
pharmacist defendants' act of compounding the injectable the drug whether or not the order identifies the patients to
lipoic acid that Dr. Tan administered to Miller constituted whom the drug will be administered.
“the dispensing of prescription medicines.” We hold that
it did. [11] Miller alternatively argues that the pharmacy
defendants do not fall within the Medical Liability Act's
[10] The Medical Liability Act does not define the word definition of pharmacist because the compounded lipoic
“dispense,” but the Pharmacy Act does: “ ‘Dispense’ acid that Randol Mill delivered to Dr. Tan is not
means to prepare, package, compound, or label, in the a prescription medicine. TEX. CIV. PRAC. & REM.
course of professional practice, a prescription drug or CODE § 74.001(22) (defining “pharmacist” to extend
device for delivery to an ultimate user or the user's agent to “activities limited to the dispensing of prescription
under a practitioner's lawful order.” TEX. OCC. CODE § medicines”). As with the term “dispense,” the Medical
551.003(16). An “ultimate user” is “a person who obtains Liability Act does not define “prescription medicines.”
or possesses a prescription drug ... for the person's own Neither does the Pharmacy Act, although that Act does
use.” Id. § 551.003(43). The court of appeals recognized define the term “prescription drug” as
that a doctor or nurse administering the drug to the
(A) a substance for which federal or state law requires
ultimate user, such as Dr. Tan, may qualify as the “user's
a prescription before the substance may be legally
agent.” 413 S.W.3d at 851. However, the court held
dispensed to the public;
that Randol Mill did not compound the lipoic acid “for
delivery to an ultimate user or the user's agent” because (B) a drug or device that under federal law is required,
Dr. Tan's order did not specify the particular patient or before being dispensed or delivered, to be labeled with
patients for whom the drug was intended. Id. at 849. We the statement:
disagree.
(i) “Caution: federal law prohibits dispensing without
As noted above, a pharmacist may “dispense and deliver prescription” or “Rx only” or another legend that
a reasonable quantity of a compounded drug to a complies with federal law; or
practitioner for office use.” TEX. OCC. CODE § 562.152.
Because a “reasonable quantity” is an amount that (ii) “Caution: federal law restricts this drug to use by
the practitioner “anticipates may be used” before the or on the order of a licensed veterinarian”; or
drug's expiration date, the Pharmacy Act specifically
(C) a drug or device that is required by federal or state
contemplates that a pharmacist may “dispense” a
statute or regulation to be dispensed on prescription or
compounded drug to a practitioner without knowing
that is restricted to use by a practitioner only.
To that end, the Pharmacy Act's provisions governing 3. Miller's Claims Are Health Care Liability Claims
compounding confirm that compounded drugs may not
be given to a patient absent a doctor's order. Unless [12] Finally, we determine whether the pharmacist
incident to research, “compounding” occurs only (1) as defendants' complained-of “activities ... result[ed] in
the result of a prescription drug order, (2) in anticipation health care liability claims.” Id. We thus consider whether
of a prescription drug order, or (3) “for administration to Miller has asserted causes of action “for treatment, lack
a patient by a practitioner as the result of a practitioner's of treatment, or other claimed departure from accepted
initiative.” Id. § 551.003(9). The first two categories standards of medical care, or health care, or safety or
professional or administrative services directly related
expressly *621 require a prescription drug order, 8 and
to health care, which proximately result[ed] in injury to
as to the third category, only “prescription drugs” are
“administer[ed].” Id. § 551.003(1) (“ ‘Administer’ means [Miller].” 10 Id. § 74.001(13) (defining “health care liability
to directly apply a prescription drug to the body of a claim”). The Medical Liability Act broadly defines “health
patient by any means, including injection, inhalation, care” as “any act or treatment performed or furnished,
or ingestion, by: (A) a person authorized by law to or that should have been performed or furnished, by any
administer the drug, ... or (B) the patient at the direction health care provider for, to, or on behalf of a patient
of a practitioner.”). The language of the above-discussed *622 during the patient's medical care, treatment, or
provisions governing compounding for office use is confinement.” Id. § 74.001(10).
also instructive; specifically, the Pharmacy Act allows a
pharmacy to “dispense and deliver” a compounded drug In this case, Dr. Tan ordered compounded injectable
to a practitioner for office use in accordance with certain lipoic acid for office administration to his patients, and
requirements. Id. § 562.152. Turning to the definitions the pharmacist defendants compounded the lipoic acid
of “dispense” and “deliver,” only a “prescription drug for that purpose. Dr. Tan administered the lipoic acid
or device” is dispensed, and only a “prescription drug to Miller in the course of her treatment for Hepatitis C
or device or controlled substance” is delivered. Id. § symptoms. Miller asserts that the pharmacist defendants'
551.003(13), (16). negligence in compounding the drug and their inclusion
of inadequate warnings and instructions regarding its
use proximately caused her injuries. Whether stated as
negligence or breach of warranty, these claims rather compounding and manufacturing. TEX. OCC. CODE §
clearly allege that the pharmacist defendants departed 551.003(23) (“The term [manufacturing] does not include
from accepted standards of health care. See Marks v. compounding.”). Unlike manufacturing, compounding
St. Luke's Episcopal Hosp., 319 S.W.3d 658, 665–66 qualifies as “dispensing prescription medicines.”
(Tex.2010) (“Determining whether a pleading states a
health care liability claim ... depends on its underlying At their core, Miller's claims call into question Randol
substance, not its form.”). Mill's compliance with professional standards of care
applicable to pharmacies that perform compounding
Miller asserts, however, that her claims are in the nature services, which implicates a host of complex regulations
of product-liability claims and are excluded from the governing compounding practices in Texas. See generally
Medical Liability Act's umbrella because, while the Act 22 TEX. ADMIN. CODE §§ 291.131, .133. Determining
defines pharmacist to include “activities limited to the whether the pharmacist defendants complied with these
dispensing of prescription medicines which result in health standards will inevitably require the testimony of experts
care liability claims,” it “does not include any other in the field. See *623 Garland Cmty. Hosp. v. Rose,
cause of action that may exist at common law against 156 S.W.3d 541, 546 (Tex.2004) (noting, in holding that
[pharmacists], including but not limited to causes of a negligent credentialing claim against a hospital was a
action for the sale of mishandled or defective products.” health care liability claim, that such a claim “involves a
TEX. CIV. PRAC. & REM. CODE § 74.001(22). We specialized standard of care” requiring expert testimony).
cannot construe this exclusion as broadly as Miller We cannot allow Miller to “recast [her] malpractice claim”
suggests because, so construed, it would swallow the as breach-of-warranty and products-liability claims to
Act's application to causes of action involving negligent avoid the Medical Liability Act's strictures. See, e.g.,
compounding that otherwise qualify as health care Murphy v. Russell, 167 S.W.3d 835, 839 (Tex.2005) (per
liability claims. curiam) (holding that a plaintiff's DTPA claim stemming
from an allegation that her physician misrepresented that
We note that subsection 74.001(22) references the “sale” he would not sedate her was a health care liability claim);
of defective products. Presumably this would extend to see also Yamada v. Friend, 335 S.W.3d 192, 197 (Tex.2010)
a pharmacy's liability as a “retailer or other member of (“[I]f the gravamen or essence of a cause of action is
the marketing chain” of a defective product, as well as a health care liability claim, then allowing the claim to
its right to indemnity from the manufacturer where the be split or spliced into a multitude of other causes of
pharmacy “is merely a conduit for the defective product.” action with differing standards of care, damages, and
Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 432 procedures would contravene the Legislature's explicit
(Tex.1984); see also SSP Partners v. Gladstrong Invs. requirements.”). Accordingly, we hold that the pharmacist
(USA) Corp., 275 S.W.3d 444, 446–47 (Tex.2009) (“In defendants are “pharmacists” under the Medical Liability
Texas, the seller of a defective product is subject to strict Act for purposes of this lawsuit and that Miller has
liability for damages the product causes even though asserted health care liability claims against them.
the defect was not his fault, but he is generally entitled
to indemnity from the manufacturer by statute and by
common law.”). But the pharmacist defendants have not
III. Conclusion
been sued merely as retailers of a defective product. Nor,
importantly, have they been sued as manufacturers of In sum, we hold that the Medical Liability Act applies to
a defective product, notwithstanding the petition's use Miller's claims against the pharmacist defendants. Under
of the “manufacturing” label to describe the pharmacist the applicable version of that Act, she was required to
defendants' activity. See Loaisiga v. Cerda, 379 S.W.3d serve the defendants with an expert report within 120 days
248, 255 (Tex.2012) (noting that, in analyzing whether of filing suit. Because it is undisputed that she failed to do
a cause of action is a health care liability claim, courts so, her claims must be dismissed. Accordingly, we reverse
must “focus[ ] on the facts underlying the claim, not the the court of appeals' judgment and remand the case to
form of, or artfully-phrased language in, the plaintiff's the trial court for further proceedings consistent with this
pleadings”). As noted above, the Pharmacy Act and opinion.
its associated regulations expressly distinguish between
All Citations
Footnotes
1 The individual defendants are Gary G. Daley, John Wayne Bailey, James Robert Forsythe, Kevin Lynn Heide, Julie
Knowlton Lubbert, and Cara Morrell. Defendant KVG Enterprises, Inc. is the corporation doing business as Randol Mill.
2 Although a court of appeals' judgment is generally final in an interlocutory appeal, we have jurisdiction when that court's
justices “disagree on a question of law material to the decision.” TEX. GOV'T CODE § 22.225(b)(3), (c).
3 The version of the statute applicable to this case required the reports to be served “not later than the 120th day after the
date the original petition was filed.” Act of May 18, 2005, 79th Leg., R.S., ch. 635, § 1, sec. 74.351(a), 2005 Tex. Gen.
Laws 1590, 1590. The statute has since been amended to require service of the reports “not later than the 120th day
after the date each defendant's original answer is filed.” Act of May 26, 2013, 83d Leg., R.S., ch. 870, § 2, sec. 74.351(a),
2013 Tex. Gen. Laws 2217, 2217.
4 Miller's live pleading alleges that notice was sent to the pharmacist defendants pursuant to section 74.051 of the Act,
which requires a person asserting a health care liability claim to send written notice “to each physician or health care
provider against whom such claim is being made at least 60 days before” suit is filed. Citing our opinion in Horizon/CMS
Healthcare Corp. v. Auld, 34 S.W.3d 887 (Tex.2000), the pharmacist defendants argue that this allegation constitutes
a judicial admission that they are health care providers and that no proof thereof is necessary. A judicial admission
“occurs when an assertion of fact is conclusively established in live pleadings.” Id. at 905. The consequence of a judicial
admission is that “jury questions concerning the fact need not be submitted.” Id. (holding that the live pleading's assertion
that the plaintiff had complied with both the notice and expert-report provisions of the Medical Liability Act's predecessor
constituted a judicial admission that the defendant was a health care provider and relieved the defendant of the burden
to offer evidence at trial or obtain a jury finding). The issue here is not whether a jury finding is required; the case is at its
preliminary stages and the sole issue in dispute is whether Miller has asserted health care liability claims. At this stage
of the litigation, we decline to hold that Miller's allegation that she provided notice under the Act, by itself, constitutes a
dispositive judicial admission.
5 A “reasonable quantity” of a compounded drug “does not exceed the amount a practitioner anticipates may be used in the
practitioner's office before the expiration date,” “is reasonable considering the intended use of the compounded drug and
the nature of the practitioner's practice,” and does not exceed “an amount the pharmacy is capable of compounding in
compliance with [applicable] pharmaceutical standards for identity, strength, quality, and purity” of the drug. TEX. OCC.
CODE § 562.151(3).
6 “Office use” is defined in pertinent part as the “administration of a compounded drug to a patient by a practitioner in the
practitioner's office or by the practitioner in a health care facility or treatment setting.” Id. § 562.151(1); 22 TEX. ADMIN.
CODE § 291.133(b)(32).
7 The U.S. Pharmacopoeia is “an independent compendium of drug standards.” Med. Ctr. Pharmacy v. Mukasey, 536 F.3d
383, 388 (5th Cir.2008).
8 “Prescription drug order” is defined in pertinent part as “an order from a practitioner or a practitioner's designated agent
to a pharmacist for a drug or device to be dispensed.” TEX. OCC. CODE § 551.003(37)(A).
9 The regulations do allow compounding of commercially available products at a practitioner's request under narrow
circumstances when the “product is not reasonably available from normal distribution channels in a timely manner to
meet the patient's needs.” 22 TEX. ADMIN. CODE §§ 291.131(d)(1)(C), .133(d)(1)(C).
10 The statutory language is somewhat circular because one of the elements of a health care liability claim is that it is
asserted against a health care provider, and one of the requirements for a defendant to qualify as a pharmacist—and
thus as a health care provider—is that the conduct for which it is sued results in a health care liability claim. TEX. CIV.
PRAC. & REM. CODE § 74.001(13), (22).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Procedure 23. Id. On April 16, 2010, defendants filed Defendants assert that even though Ranzy did not file any
a motion for more definitive statement. Dkt. 39. On claims specifically involving fraud or mistake, her usury
February 15, 2011, Ranzy moved for leave to file her and lending, CSOA, DTPA, and FDCPA claims must
third amended complaint. Dkt. 85. The court granted be pled with particularity because these claims “sound in
Ranzy's motion and denied Defendants' motion for more fraud, or at the very least allege mistake.” Dkt. 104–2.
definitive statement as moot. Dkt. 88. Ranzy also moved Additionally, even though Ranzy did not officially plead
for class certification. Dkt. 84. The court recently denied an alter ego theory, Defendants assert that her claim that “
the motion for class certification. Dkt. 116. ‘Defendants used their enterprise to operate at the surface
as if there were separate entities' “ is “predicated on some
*2 On April 29, 2011, Ranzy moved for summary type of alter ego theory,” which Defendants state must
judgment on her usury claims against Extra Cash and be pled with particularity under Texas law. Id. (quoting
Amigo Financial, 2 her breach of contract claims against Dkt. 28). Ranzy responds that she has not alleged fraud
Extra Cash, her claims under the Texas Credit Service or mistake and that Defendants' motion must therefore be
Organization Act (“CSOA”) against Extra Cash, her denied. Dkt. 115.
claims under the Texas Deceptive Trade Practices Act
(“DTPA”) against Extra Cash, and her claims under the
1. Legal Standard
Federal Fair Debt Collections Practices Act (“FDCPA”)
“Federal Rule of Civil Procedure 8(a)(2) requires only ‘a
against Extra Cash. Dkt. 103. Ranzy also requests the
short and plain statement of the claim showing that the
court to rule that, because Edmundo Tijerina failed to pay
pleader is entitled to relief,’ in order to ‘give the defendant
Extra Cash's franchise tax at times relevant to this action,
fair notice of what the ... claim is and the grounds upon
he is personally liable for Ranzy's damages. Id. Finally,
which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544,
Ranzy moves for an injunction barring Extra Cash's use
545, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) (quoting
of the CSO agreement form that it used with her because
Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80
she contends it violates the CSOA.
(1957)). Under Federal Rule of Civil Procedure 12(b)(6), a
party may move for dismissal of a complaint if it believes
On May 2, 2011, Defendants moved for leave to file a
that the plaintiff fails to state a claim upon which relief
motion for more definitive statement, motion to dismiss,
may be granted. Fed.R.Civ.P. 12(b)(6); Aschroft v. Iqbal,
and motion for partial summary judgment. Dkt. 104. The
566 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009);
court granted Defendants' motion for leave to the extent
Twombly, 550 U.S. at 545. The court accepts as true all
that it requested leave to file a motion for more definite
facts alleged in a complaint, and views the facts in the
statement, and deemed the attached motion filed, but
light most favorable to the plaintiff. In re Katrina Canal
the court denied the motion to the extent it sought leave
Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007). The
to file additional dispositive motions. Dkt. 114. While
court does not look beyond the face of the pleadings when
the motion requests a more definite statement, dismissal
determining whether the plaintiff has stated a claim under
under Rule 9(b), 12(b)(6), or summary judgment under
Rule 12(b)(6). Spivey v. Robertson, 197 F.3d 772, 774 (5th
Rule 56, the motion's central contention is that even
Cir.1999). A plaintiff's complaint survives a Rule 12(b)(6)
though Ranzy did not assert a claim for fraud, all of her
motion to dismiss if it includes facts sufficient “to raise a
claims sound in fraud and thus should be subject to the
right to relief above the speculative level.” In re Katrina
Rule 9(b) pleading standard. Dkt. 104–2.
Canal Breaches Litig., 495 F.3d 191, 205 (5th Cir.2007).
In order to survive a motion to dismiss, the complaint
The court will first discuss Defendants' motion for a more
must contain sufficient factual matter, accepted as true,
definite statement, dismissal, or summary judgment, and
to “state a claim to relief that is plausible on its face.”
it will then address Ranzy's motion for partial summary
Twombly, 550 U.S. at 547. The supporting facts must
judgment.
be plausible—enough to raise a reasonable expectation
that discovery will reveal further supporting evidence. Id.
This plausibility standard requires the plaintiff to plead
II. ANALYSIS facts sufficient to allow the court to “draw the reasonable
inference that the defendant is liable for the misconduct
A. Defendants' Motion alleged.” Iqbal, 129 S.Ct. at 1949 (quoting Twombly,
or course of business relating to the offer or sale of Patel v. Holiday Hospitality Franchising, Inc., 172
the services of the organization”). Section 393.201(a) F.Supp.2d 821, 825 (N.D.Tex.2001) (finding the plaintiffs'
states “[e]ach contract for the purchase of the services DTPA claims were based on fraudulent and negligent
of a credit services organization by a consumer must be misrepresentations); Frith v. Guardian Life Ins. Co.,
in writing, dated, and signed by the consumer.” Tex. 9 F.Supp.2d 734, 741–42 (S.D.Tex.1998) (finding the
Fin.Code Ann. § 393.201(a). Section 393.201(b) sets forth plaintiffs' DTPA claims were based on common-law
various requirements for the content of CSO agreements, fraud, fraudulent inducement, fraudulent concealment,
including requiring each CSO agreement to “contain the and negligent misrepresentation). More applicable to
name and address of the organization's agent in this state the instant case is Prophet v. Myers, 645 F.Supp.2d
authorized to receive service of process.” § 393.201(b). 614 (S.D.Tex.2008). In Prophet, the court noted that
Section 393.204 makes a breach of a CSO agreement by a the plaintiff's DTPA claims were based on violations
CSO a violation of the CSOA. § 393.204. Section 393.502 of the FDCPA, which are not subject to Rule 9(b),
allows courts to enjoin further violations of the CSOA. and determined that the plaintiff's DTPA claims should
§ 393.502. Finally, section 393.503 states: “A consumer therefore not be subject to Rule 9(b). Id. at 617–18. Like
injured by a violation of this chapter is entitled to recover: the claims in Prophet, Ranzy's claims under the DTPA are
(1) actual damages in an amount not less than the amount based on her claims under the portions of a statute not
the consumer paid the credit services organization; (2) subject to Rule 9(b) specificity. Because Ranzy's CSOA
reasonable attorney's fees; and (3) court costs.” § 393.503. claims are not subject to Rule 9(b), neither are her DTPA
Because these sections of the Finance Code simply refer claims. Defendants' motion for a more definite statement
to contractual deficiencies, rather than fraud, Ranzy's of, dismissal of, or summary judgment on Ranzy's DTPA
claims under the CSOA are not subject to the heightened claim is DENIED.
specificity requirements of Rule 9(b). She has plausibly
asserted her CSOA claim; therefore, Defendants' motion
for a more definite statement of, dismissal of, or summary 5. FDCPA Violations
judgment on Ranzy's CSOA claim is DENIED. Defendants similarly claim that Ranzy's FDCPA claims
should be pled with particularlity. However, as noted
in Prophet, claims under the FDCPA are not subject
4. DTPA Violations to the heightened specificity requirements of Rule 9(b).
Defendants also assert that Ranzy's DTPA claims, which Prophet, 645 F.Supp.2d at 617. The plaintiff's claims in
are linked to her CSOA claims, should be pled with Prophet were based on section 1692e of the FDCPA,
particularity. However, Ranzy's claims under the DTPA which prohibits debt collectors from “us[ing] any false,
are not subject to Rule 9(b) because they are based on deceptive, or misleading representation or means in
her claims under the CSOA, which are themselves not connection with the collection of any debt.” 15 U.S.C.
subject to Rule 9(b). Section 393.504 of the Texas Finance § 1692e (2006). The Prophet court determined that,
Code states “[a] violation of [the CSOA] is a deceptive even though section 1692e involved allegations of false
trade practice actionable under Subchapter E, Chapter representations, Rule 9(b) still did not apply because
17, Business & Commerce Code.” Tex. Fin.Code Ann. § establishing a violation section 1692e was substantially
393.504. Subchapter E of Chapter 17 is the codification different than establishing common law fraud. Prophet,
of the DTPA. A consumer may bring a claim under 645 F.Supp.2d at 617. Here, Ranzy's claims under the
the DTPA if she is granted that right by another law, FDCPA are based on section 1692f(1), which prohibits
such section 393.504 of the Finance Code. Tex. Bus. & “[t]he collection of any amount (including any interest,
Com.Code Ann. § 17.50(h). fee, charge, or expense incidental to the principal
obligation) unless such amount is expressly authorized
*5 There are cases that have applied Rule 9(b)'s by the agreement creating the debt or permitted by
heightened specificity requirements to claims under law.” § 1692f(1). Establishing a violation of this section,
the DTPA, but in those cases the underlying claims like section 1692e, would be substantially different
involved fraud. See, e.g., Berry v. Indianapolis Life than establishing common law fraud. For this reason,
Ins. Co., 608 F.Supp.2d 785, 800 (N.D.Tex.2009) Ranzy's claims under the FDCPA are not subject to the
(finding that the plaintiffs' DTPA claims were based requirements of Rule 9(b), and Defendants' motion for a
on the same facts as their underlying fraud claims); more particular statement of, dismissal of, or summary
judgment on these claims because they are not pled with law with regard to portions of her CSOA claim and DTPA
particularity is DENIED. claim against Extra Cash.
393.504. A consumer may bring a claim under the DTPA, Ranzy has failed to show that there is no issue of
as codified in the Texas Business and Commerce Code, if material fact with regard to Extra Cash's status as a
she is granted that right by another law, such as section “debt collector.” She argues that Extra Cash was either
393.504 of the Finance Code. Tex. Bus. & Com.Code attempting to collect Amigo Financial's debt or, if it
Ann. § 17.50(h); see, e .g., Watson v. Citimortgage, Inc., was merely collecting its CSO fee and not the loan
814 F.Supp.2d 726, 2011 WL 4526980, *6 (E.D.Tex.2011) amount, it was using a name other than its own—“Check
(finding that violations of the Texas DTPA are deceptive Fraud Investigations.” Dkt. 103. However, she presents
trade practices that “tie into” the DTPA). no evidence that the fees Extra Cash attempted to collect
were not merely the CSO fees due to Extra Cash, and she
Because Ranzy has shown that her agreement with Extra presents no evidence that Extra Cash was using another
Cash violates the CSOA, and because the CSOA provides name to collect the debt other than a conclusory statement
consumers with a cause of action under the DTPA, she in her complaint and motion that Extra Cash used the
has shown that she is entitled to summary judgment for name “Check Fraud Investigations” when attempting
her claims against Extra Cash under the DTPA. Thus, to collect the debt. 5 Summary judgement is thus not
her motion for summary judgment on her DTPA claim is appropriate on this record. Ranzy's motion for partial
GRANTED. summary judgment on her FDCPA claims is therefore
DENIED.
6. FDCPA Violations
Ranzy claims that Extra Cash attempted to collect charges 7. Tijerina's Individual Liability
not authorized by the CSO agreement or permitted by *11 Ranzy argues that Tijerina is liable individually
law and that she is therefore entitled to judgement as a for unauthorized renewal fees charged between May 30,
matter of law under the section 1692f(1) of the FDCPA. 2008, and December 2, 2009, a timeframe during which
Dkt. 103. “The FDCPA was enacted in part ‘to eliminate Extra Cash's corporate charter/certificate of registration
abusive debt collection practices by collectors.’ “ Hamilton was forfeited because Tijerina failed to pay its franchise
v. United Healthcare of La., Inc., 310 F.3d 385, 388 tax. Dkt. 103 & Exh. CC (forfeiture notice dated May 30,
(5th Cir.2002) (quoting 15 U.S.C. § 1692(e) (1997)). 2008), Exh. DD (application for reinstatement received
“The FDCPA prohibits debt collectors from, inter alia, by the Secretary of State on December 2, 2009). The
using any false, deceptive, or misleading representation Texas Tax Code states “[i]f the corporate privileges of a
or means in connections with the collection of a debt.” corporation are forfeited for the failure to file a report
Taylor v. Perrin, Landry, deLaunay & Durand, 103 F.3d or pay a tax or penalty, each director or officer of the
1232, 1234 (5th Cir.1997). Section 1692f(1) prohibits debt corporation is liable for each debt of the corporation
collectors from collecting “any amount (including any that is created or incurred in this state after the date on
interest, fee, charge, or expense incidental to the principal which the report, tax, or penalty is due and before the
obligation) unless such amount is expressly authorized by corporate privileges are revived ....“ Tex. Tax Code Ann.
the agreement creating the debt or permitted by law.” § § 171 .255(a). Officers are only liable for debts incurred
1692f(1). The term “debt collector” means “any person while the corporation's privileges have been forfeited for
who uses any instrumentality of interstate commerce or failure to pay the franchise tax. Williams v. Adams, 74
the mails in any business the principal purpose of which S.W.3d 437, 441 (Tex.App.-Corpus Christi 2002, pet.
is the collection of any debts, or who regularly collects denied). The Texas Supreme Court has noted that the
or attempts to collect, directly or indirectly, debts owed purpose of section 171.255 is “to prevent wrongful acts of
or due or asserted to be due another.” 15 U .S.C. § culpable officers of a corporation,” and that the statute
1692a(6). “The term does not ordinarily include creditors is meant to protect the “public and particularly those
who, directly or indirectly, try to collect debts owed them.” dealing with the corporation.” Schwab v. Schlumberger
Taylor, 103 F.3d at 1234. However, the term “does include Well Surveying Corp., 145 Tex. 379, 198 S.W.2d 79, 81–
any creditor who, in the process of collecting his own 82 (1946).
debts, uses any name other than his own which would
indicate that a third person is collecting or attempting to Tijerina can only be held individually liable to Ranzy for
collect such debts.” Id. (citing 15 U.S.C. § 1692a(6)). unauthorized renewal fees if the liability for these fees is
a “debt” that was “created or incurred” during the time protected from individual liability by the corporate form.
Extra Cash's corporate charter was forfeited. In Schwab However, some Texas courts hold that debts that are
v. Schlumberger Well Surveying Corp., the Texas Supreme “brought into existence, caused by, resulted from, or arose
Court considered whether it was appropriate to impose out of the performance or implementation” of a contract
liability on the officers and directors of a corporation for “relate back to and are authorized at the time of execution
funds payable by the company from a promissory note of the contract.” Curry Auto Leasing, Inc. v. Byrd, 683
dated January 1, 1941, that was evidenced by a note that S.W.2d 109, 112 (Tex.App.-Dallas 1984, no writ) (holding
originated in 1938 as an open account and then consisted that debts relating to the breach of a car lease agreement
of six renewal notes, only one of which was sued upon. 198 related back to the time of the promise to pay made in
S.W.2d at 79–80. The corporation's right to do business the rental contract for purposes of liability under section
in Texas was forfeited in 1940 because it did not pay its 171.255); see also Jonnet v. State, 877 S.W.2d 520, 523–
franchise tax. Id. at 79. The trial court and initial appellate 24 (Tex.App.-Austin 1994, writ denied) (collecting cases
court held that the directors and officers were personally in which the courts held that damages from breach related
liable under a predecessor statute to section 171.255. Id. at back to the date of the contract but holding that claims
80. The court noted that the relating to a failure to follow a Texas administrative
rule did not relate back to the date of said failure).
words ‘created’ and ‘incurred,’ as used in the statute, Other Texas courts hold that the term “debt” should be
have a clear and well defined meaning. The word strictly construed, and a corporate officer should be held
‘create’ means ‘To bring into existence something which individually liable under section 171.255 only if the debts
did not exist.’ 10 Words and Phrases, Perm. Ed., p. were liquidated at the time of forfeiture. See Cain v. State,
331, Roth v. State, 158 Ind. 242, 63 N.E. 460, 469. The 882 S.W.2d 515, 517, 519 (Tex.App.-Austin 1994, no writ)
word ‘incur’ is defined in Ashe v. Youngst, 68 Tex. 123, (noting that “it is difficult to see how such a meaning,” i.e.
125, 3 S.W. 454, 455, as ‘Brought on,’ ‘occasioned,’ or “unliquidated debt”, “could be assigned to the word if it is
‘caused.’ required to be construed strictly, that is to say, narrowly,
literally, and technically”).
Id. The court determined that no debt had been created or
incurred by the renewal of the note because the obligation
In Jonnet v. State, the Austin Court of Appeals indicated
existed before the renewals. Id. The obligation, in fact,
that the relate-back doctrine may be appropriate in some
existed before the forfeiture of the right to do business. Id.
cases, but held that penalties imposed for a company's
failure to plug abandoned oil wells in violation of Texas
*12 Here, the contract and renewal fees occurred
Statewide Rule 14 did not relate back to the time when the
while Extra Cash's right to do business was forfeited,
company failed to plug the wells for purposes of assessing
but Extra Cash's right to do business has now been
liability under the Texas Tax Code. The court reasoned
restored. Under the statute, Tijerina may be held liable
that the debt was not incurred or created before the
for “debts” “created or incurred” between May 30, 2008,
penalty was assessed, even though there was an obligation
and December 2, 2009. The original CSO agreement is
to plug the wells before this date, because the statute
dated December 10, 2008. Dkt. 103, Exh. GG. Extra Cash
authorizing the assessment of damages for the failure to
charged Ranzy additional fees several times in 2008 and
plug the wells indicated that the Railroad Commission
2009. If these additional fees are “debts” and they were
of Texas “may or may not assess penalties for violations
“incurred or created” by Extra Cash at the time they were
of its rules.” Jonnet, 877 S.W.2d 520, 523 (Tex.App.-
charged to Ranzy, then Tijerina may be held individually
Austin 1994,) (discussing Tex. Natural Resources Code
liable.
Ann. § 81.0531). The court thus held that the debt was not
created or incurred until the Commission actually made
Under the normal understanding of the term “debts,” it
the decision to assess penalties. Id. at 523–24; see also
would appear that the fees only become Extra Cash's debts
Wilburn v. State, 877 S.W.2d 755 (Tex.App.-Austin 1992,
through a judgment from this court finding that Extra
no writ).
Cash must return the fees because they were unlawful.
Since Extra Cash is now up-to-date on its taxes, as far
*13 At this point, the only claims that are resolved are
as the court has been informed, this judgment would be
the DTPA claims and the claim under section 393.201 of
incurred or created at a time when Tijerina would be
Footnotes
1 Extra Cash contends that Ranzy owes $375.00 plus accrued interest, as well as attorneys' fees incurred due to Ranzy's
default. Dkt. 33.
2 Ranzy also moved for partial summary judgment on usury claims against Z Cash of Texas and St. Croix Financial Group,
provided that this court granted her request for class certification. Because the class was not certified, this order only
addresses Ranzy's usury claims against Extra Cash and Amigo Financial.
3 Much of Texas' usury law, especially in the context of credit service organizations, has been superceded by the CSOA.
Id. at 442, 198 S.W.2d 79. However, the “statutory action for usury did not repeal the common-law action.” Duggan v.
Marshall, 7 S.W.3d 888, 892 (Tex.App.-Houston [1 st Dist.] 1999, no pet.).
4 Although the original agreement covers both the original fee and renewals because it specifically refers to being charged
additional fees if new CSO services are needed, the original agreement does not sufficiently set forth the payment terms
of renewals. It does not state how much these additional fees will be or how often they will be assessed. See Dkt. 103,
Exh. GG. Extra Cash violated section 201 by continuing to charge Ranzy $125 CSO fees without properly informing her
in advance, in writing, as required by the CSOA.
5 The summary judgment evidence does not include an affidavit attesting to Extra Cash's alleged use of the name “Check
Fraud Investigations,” and the debt collection letter submitted by Ranzy is from “Extra Cash.” See Dkt. 103, Exh. LL.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[3] Trial
240 S.W. 348 Issues and Theories of Case in General
Court of Civil Appeals of Texas, Fort Worth.
A phrase in an instruction in a malicious
REED prosecution suit that it was immaterial
v. whether plaintiff was guilty or innocent of
the charge was erroneous and misleading, and
LINDLEY.
the prejudice was not materially lessened by
No. 9775. another instruction that the burden was upon
| the plaintiff to prove that he was not guilty.
March 11, 1922.
Cases that cite this headnote
Appeal from District Court, Montague County; C. R.
Pearman, Judge. [4] Malicious Prosecution
Malice
Action by Tom Lindley against W. L. Reed. Judgment for
In malicious prosecution, an instruction that
plaintiff, and defendant appeals. Reversed and remanded.
“malice, as used in the law and in this charge,
does not mean personal spite or ill will, and
the allegations that an act was maliciously
West Headnotes (14) done does not mean that it was done for that
reason or in such spirit, but it does mean
an unlawful act,” etc., was misleading, and
[1] Malicious Prosecution
liable to give the jury the impression that
Instructions
personal spite or ill will was to be wholly
In action for malicious prosecution and disregarded in considering whether defendant
slander, held, that the court erred, under had been actuated by malice in instituting the
the evidence, in refusing to give a special prosecution.
instruction to the effect that, if the jury
believed that the plaintiff sought to be 2 Cases that cite this headnote
prosecuted in order to have a pretext for a
damage suit, and that in furtherance thereof [5] Malicious Prosecution
he wrote threatening letters and made threats Nature and Elements
against the defendant, and did other things
Spite or ill will, if the motive for a prosecution,
thereby intending to engender in defendant's
coupled with a want of probable cause, is
mind the belief that he had burned the
malice, warranting recovery of damages; but
defendant's house and barn, then they should
malice also may be inferred from a wrongful
find for defendant.
act done in reckless disregard of the rights of
Cases that cite this headnote another, and in a spirit of indifference as to
whether such other party is injured or not,
even though there be no personal spite or ill
[2] Malicious Prosecution
will.
Presumptions and Burden of Proof
A plaintiff in a suit for malicious prosecution 5 Cases that cite this headnote
must show that he is not guilty of the charge
made against him. [6] Malicious Prosecution
Malice
Cases that cite this headnote
In a malicious prosecution suit, malice is a fact
for the jury.
During the night of April 21, 1920, a residence and On April 14, 1920, Lindley, at Foard City, Foard
barn owned by the appellant, Reed, were destroyed by county, wrote and mailed the following letter addressed to
fire. On the next day, April 22, 1920, appellant filed a “Master J. B. Lindley, Star Route, Montague, Texas, %
complaint before Henry M. Burns, justice of the peace for Reed”:
precinct No. 7 of Montague county, charging appellee, “Foard City, Texas, 4--14--20.
Tom Lindley, with the burning. A warrant was issued
upon the complaint, under which Lindley was arrested in “Little J. B. Lindley--Dear, Dear Little Fellow: Papa is
Foard county and brought to Montague county, and at an now fixing to take a hike some place across the other side.
examining trial had upon said charge on April 27, 1920, I hope you will some day grow to be a man. Always live
Lindley was discharged, and has not since been indicted. single. Papa has studied over the way your mother has
Lindley brought this suit against W. L. Reed in the district gone until he is almost crazy. Now, son, my dear little boy,
court of Montague county for malicious prosecution and papa hates to leave you to battle in the world, though papa
slander, seeking to recover actual and exemplary damages. is a man of virtue. Papa loved mama until she went wrong.
At a trial had on the 3d day of February, 1921, Lindley Papa still loves you, and papa will die that way. Now, son,
recovered judgment for $800 actual damages, and this papa in a few days will take this hike, and then papa will
appeal is from that judgment. cross over the river. Papa has just got back from Wichita.
Grandma don't know what I am here for and never will.
The evidence, briefly stated, in substance furnishes but
Papa will have revenge if it takes half of Montague and
little, if any, reason to doubt that the fire was incendiary
Belcher. Papa is fixed now for a big Bear for the edges of
in its origin. It further appears that on the 17th day of
hell. Good-bye, son. Papa.
March preceding the fire Lindley, who had theretofore
married Gertrude Reed, daughter of appellant, W. L.
“Papa hears about you every day or so.”
Reed, deserted her and their two children without cause.
Prior to 1920 Lindley and family lived on farms belonging
to Mr. Reed, but at the time he abandoned his wife and The testimony indicates that the appellant was unable
children he was living on a rented place in Montague to read writing, and that the letter was delivered to him
county not belonging to Reed. Will Benson, one of the and thereafter read to him by Mrs. Reed, his wife. The
witnesses for the defendant, testified that Lindley said little boy to whom the letter was addressed was unable to
that the reason for his moving down there was that the read or write. The letter caused much uneasiness in the
“old man” (Reed) had promised them a place, and he mind of Mr. Reed, and he went to the county attorney
had moved to the rented place for “aggravation.” After and tried to have Lindley put under a peace bond, but he
said abandonment, and prior to the fire, appellee's wife, was informed this could not be done. While on the stand
Gertrude, procured a divorce from appellee on the ground Lindley admitted that he wrote and mailed the above
of having been falsely accused by her husband of a want letter, and directed it to Reed because he did not know
of marital fidelity, and she testified on the trial that where little J. B. was; that he did not know whether little
before appellee had abandoned his family he frequently J. B. could read or write. He denied that in writing the
expressed animosity against her father, and made threats letter he desired to scare old man Reed, testifying that he
of serious injury against him, and that these threats had did not have in mind Reed when he said he would have
been communicated to her father after the abandonment, revenge if it took half of Montague and Belcher, but that
but before the fire. Mrs. Lindley testified that at the time he was going to have revenge on another party, but he did
appellee abandoned her and their two infant children, not name such other party; that he did not remember what
aged two and three years, respectively, he carried with him river he was going to cross, but it was not Red river; that
his clothes, including two pair of work shoes; that the right he had not been to Wichita Falls and did not know why
heel of his work shoe was run down, and would show in he put that in the letter.
his tracks.
the subject agree to the proposition that a plaintiff in a or ill will, if any, when proven, is relevant to that issue,
suit for malicious prosecution must show that he is not and proper for the consideration of a jury in determining
guilty of the charge made against him. It was not true, whether or not malice existed. If it did exist, and was
therefore, as the court in effect charged in said paragraph the motive for the prosecution, and is found to have
8 that it was immaterial whether the plaintiff was guilty been coupled with a want of probable cause for the
of the charge of arson. It is true that in a previous part prosecution, it is sufficient. Malice also may be inferred
of the charge, as we have already shown, the jury was from a wrongful act done in reckless disregard of the
instructed that before the plaintiff could recover he must rights of another, and in a spirit of indifference as to
show by a preponderance of the evidence that the charge whether such other party is injured or not, even though
of arson made against him “was not true.” But the two there be no personal spite or ill will, in either case it
read together presented a conflict that, to say the least, being for the determination of the jury whether malice
was confusing to the jury. It cannot be said with certainty in fact existed. See 18 R. C. L. p. 28, § 16 et seq. The
that the latter expression in the court's charge, to the effect
defendant's uncomplimentary expressions to the officer
that plaintiff's guilt of the charge made against him was before whom he made the complaint and to others relating
immaterial, did not in the minds of the jury neutralize to the plaintiff was therefore relevant to and admissible
or materially lessen the force and effect of the former upon the issue of malice, to be considered by the jury for
instruction that the burden was upon the plaintiff to prove the purpose of determining whether they were the natural
that he was not guilty. See Ry. Co. v. Sage, 98 Tex. 438, results of a feeling of outrage or whether they indicated
84 S. W. 814; Peden v. Jaimes (Tex. Com. App.) 208 S. W. that spirit of malevolence and evil purpose contemplated
898; Weisner v. M., K. & T. Ry. Co. (Tex. Com. App.) 207 by the term malice as used in the legal definition of that
S. W. 904; H. E. & W. T. Ry. Co. v. De Walt, 96 Tex. 121, term.
70 S. W. 531, 97 Am. St. Rep. 877. [8] In view of another trial, and in view of the defendant's
demurrers, we will also add that a number of authorities
*351 [4] [5] [6] [7] In view of another trial, we willseem to support the proposition that, when a malicious
also briefly notice an error in the court's definition of prosecution, slander, or libel all arise out of the same
malice. He defined malice thus: transaction, they may all be considered by the jury, and
“Malice as used in law and in this recompensed by a single verdict. See Williams v. Planten
charge does not mean personal spite Ins. Co., 57 Miss. 759, 34 Am. Rep. 494; Neil v. Thorn,
or ill will, and the allegations that 88 N. Y. 270; Boeger v. Langenberg, 97 Mo. 390, 11 S. W.
an act was maliciously done does 223, 10 Am. St. Rep. 322; Jarnigan v. Fleming, 43 Miss.
not mean that it was done for that 710, 5 Am. Rep. 514; Sheldan v. Carpenter, 4 N. Y. 575,
reason, or in such spirit, but it does 51 Am. Dec. 301.
mean an unlawful act, done in reckless
disregard of the rights of another and [9] [10] The majority, composed of the writer and Mr.
in a spirit of indifference as to whether Justice DUNKLIN, are of the further opinion that under
such other party is injured or not; when the circumstances of this case the verdict and judgment
an act is done in that spirit and with is not supported on the issue of probable cause. To
such malice it is said in law to be done support an action for malicious criminal prosecution, the
maliciously, or upon legal malice.” plaintiff must prove the fact of the prosecution, and that
the defendant was the prosecutor or that he instigated
its commencement, and that it finally terminated in the
plaintiff's acquittal. He must also prove that the charge
As worded, we think the charge misleading. What the preferred against him was unfounded, and that it was
able judge had in mind doubtless was that malice did not made without probable cause, and that defendant in
necessarily mean spite or ill will, but, as worded, the jury making or instigating it was actuated by malice. Proof
were liable to receive the impression that personal spite or of these several facts is indispensable to support the
ill will was to be wholly disregarded in considering whether declaration, and clearly the burden of proof in the first
the defendant had been actuated by malice in instituting instance is upon the plaintiff to make out his case, and,
the prosecution. This view is erroneous. Personal spite if he fails to do so in any one of these particulars, the
defendant has no occasion to offer any evidence in his [12] The author of the note cites a great number of
defense. Hurlbut v. Boaz, 4 Tex. Civ. App. 371, 23 S. W. cases from the English reports, the United States court
446; Ramsey v. Arrott, 64 Tex. 320; and numerous other decisions, and from nearly if not all of the states of the
authorities that might be cited. Union, *352 including Texas; the Texas cases cited being
Landa v. Obert, 45 Tex. 539; Ramsey v. Arrott, 64 Tex.
[11] The reason for such strictness in proof is indicated 320; G., C. & S. F. Ry. Co. v. James, 73 Tex. 12, 10 S. W.
by the following quotation from 18 R. C. L. p. 11, § 2: 744, 15 Am. St. Rep. 743. In reading the authorities we
“The action for malicious prosecution sometimes meet with the expression that the existence vel
is not favored in law, and hence non of probable cause is a question for the determination
has been hedged about by limitations of the jury, but the authorities cited clearly establish the
more stringent than those in the rule, as we think, that, while it is the function of the jury to
case of almost any other act causing determine what the facts are, it is for the court to declare
damage to another and the courts the legal effect of the facts found. In this case the evidence
have allowed recovery only when the relating to the issue of plaintiff's guilt of the crime of arson,
requirements limiting it have been of which the defendant charged him, may be said to be
fully complied with. The disfavor with conflicting.
which the action is looked upon is
especially marked in cases where the [13] [14] The plaintiff while a witness denied in effect
suit is being brought for the institution that he wore run-down shoes; he denied that he had made
of criminal proceedings against the threats against the defendant; he denied that he was in the
plaintiff, as public policy favors the town of Nocona, as testified to by the daughter-in-law of
exposure of crime, which a recovery the defendant; and therefore these issues in the evidence
against a prosecutor obviously tends to were for the jury. But the evidence is undisputed that at
discourage.” and prior to the time the defendant made the complaint
the defendant's daughter informed him of threats of
personal injury. It is undisputed that the defendant's
daughter-in-law had informed him that she had seen the
Numerous authorities are cited in a note to the quotation plaintiff, Lindley, in the town of Nocona, but some six
made, and we think the soundness of the observations miles away. It is undisputed that the plaintiff wrote the
made in the quotation will be accepted without further letter to his little son that we have already quoted, and
discussion. It is to be noted that by all of the authorities there is no proof in the record that prior to the burning
a want of probable cause for the institution of the the defendant and plaintiff had ever had any difficulty, or
prosecution must be proven, and the court in this case that the defendant at any time prior to the time of making
clearly so charged the jury. See numerous Texas cases cited the complaint gave expression to any ill will or hostility
in 12 Encyclopedic Digest of Texas Reports, p. 59, col. 2. toward the plaintiff, nor is there proof that the defendant
in making the complaint was actuated by any other motive
In a note to the case of Michael v. Matson, 81 Kan. 360, than that of originating a prosecution against one whom
105 Pac. 537, as published in L. R. A. 1915D, p. 5, it is said: he undoubtedly believed to be guilty of a serious crime;
“The general rule of the common and it is common knowledge that, in the search for an
law, sustained by the overwhelming unknown criminal, a motive therefor is diligently sought.
weight of authority, both in England As the facts, about which there is no conflict must have
and America, is that what facts, and appeared to the defendant, the plaintiff, and the plaintiff,
whether particular facts, constitute only, so far as the record shows, had a motive, purpose,
probable cause, is always a question of or desire to burn the defendant's property. The plaintiff's
law, which the judge must decide upon letter to his little boy, directed in the care of the defendant,
the facts found to exist in the particular with the apparent purpose of having its contents come to
case, and which it is error for him to his knowledge, would, as it seems to the majority, plainly
submit to the decision of the jury.” justify a reasonably prudent man in believing that some
serious injury was threatened, and such letter, coupled
with threats that had been communicated to him by his For the reasons stated, we conclude that the judgment
daughter, and with the information that had also been should be reversed, and the cause remanded.
communicated to him by his daughter-in-law that the
plaintiff Lindley had been seen but a few days before the
fire in the vicinity, and, in the entire absence, as we must BUCK, J.
infer, of evidence of any other person having a motive
I concur in the reversal and remanding of this cause,
or desire to so injure the defendant, seems sufficient as a
without concurring in certain of the statements contained
matter of law to the majority to amount to probable cause.
in the opinion.
For an exhaustive discussion of the subject, with abundant
citations of authorities, see the case of Michael v. Matson, All Citations
and notes thereto, cited above.
240 S.W. 348
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
and had waited 19 months after being Richmont Holdings, Inc., through an affiliate, bought the
sued to move to compel arbitration based assets of Superior Recharge Systems, L.L.C. The parties'
on implausible explanation that, despite Asset Purchase Agreement contained an arbitration
having drafted the agreement containing provision. Superior Recharge's part-owner, Jon Blake,
the arbitration clause, it did not recognize agreed to continue as general manager of the business for
that the clause potentially applied to former two years. The employment contract contained a covenant
employee's claims. not to compete but not an arbitration clause. After six
months, Blake's employment was terminated, allegedly for
4 Cases that cite this headnote cause.
recognize the arbitration agreement while it drafted the Asset Purchase Agreement and knew
full well of the arbitration clause, it was very slow in
here is contrary to our precedent,
recognizing that the clause could apply to Blake's claims.
which mandates enforcement of
We think this explanation implausible; certainly, it does
such an agreement absent proof of a
not justify the delay. But mere delay in moving to compel
defense.
arbitration is not enough for waiver. In re Fleetwood
392 S.W.3d 633, 635 (Tex. 2013) (per curiam). On remand, Homes of Tex., L.P., 257 S.W.3d 692, 694 (Tex. 2008)
the court of appeals held that Richmont had waived (per curiam) (eight-month delay); In re Vesta Ins. Group,
arbitration by suing Blake in Dallas County, moving Inc., 192 S.W.3d 759, 763 (Tex. 2006) (per curiam) (two-
to transfer venue of the Denton County suit, failing to year delay); see also Prudential Sec. Inc. v. Marshall, 909
respond to discovery requests, and delaying in moving to S.W.2d 896, 898–99 (Tex. 1995) (per curiam) (“A party
compel arbitration. ––– S.W.3d ––––, –––– (Tex.App.– does not waive a right to arbitration merely by delay;
Fort Worth 2013). instead, the party urging waiver must establish that any
delay resulted in prejudice.”). The circumstances here,
[2] [3] [4] [5] Merely filing suit does not waiveconsidered as a whole, do not approach a substantial
arbitration, even when the movant, as in this case, files invocation of the judicial process.
a second, separate suit in another county based in part
on a contract at issue in the first action. See In re D. Having reached this conclusion, we need not consider
Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006). whether Blake was prejudiced by the delay. Accordingly,
Nor, we think, does moving to transfer venue. The we grant the petition for review and, without hearing
motion does not address the merits of the case. Moreover, oral argument, reverse the court of appeals' judgment and
objections to improper venue must be made at the outset remand the case to the trial court. TEX. R. APP. P. 59.1.
of the case. TEX. R. CIV. P. 86. Richmont engaged in
only minimal discovery. For the most part, it refused to
All Citations
respond to Blake's discovery requests. Richmont argues
that it delayed in moving to compel arbitration because, 455 S.W.3d 573, 58 Tex. Sup. Ct. J. 179
Footnotes
1 See Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542, 544–45 (Tex. 2014) (per curiam) (law firm did not waive
right to arbitrate a fee dispute with former clients by litigating with a former associate); In re Fleetwood Homes of Tex.,
L.P., 257 S.W.3d 692, 694 (Tex. 2008) (per curiam) (defendant did not waive by “failing to pursue its arbitration demand
for eight months while discussing a trial setting and allowing limited discovery”); In re Citigroup Global Mkts., Inc., 258
S.W.3d 623, 625–26 (Tex. 2008) (per curiam) (defendant did not waive arbitration by removing case to federal court
and acceding to remand seven months later before demanding arbitration); In re Bank One, N.A., 216 S.W.3d 825, 827
(Tex. 2007) (per curiam) (defendant did not waive arbitration by moving to set aside a default judgment, requesting a
new trial, and waiting eight months to move to compel arbitration); In re D. Wilson Constr. Co., 196 S.W.3d 774, 783
(Tex. 2006) (contractors did not waive arbitration by suing to preserve evidence and cross-claiming for indemnity in a
separate suit, absent a showing that their actions detrimentally affected the defendant); In re Vesta Ins. Group, Inc., 192
S.W.3d 759, 763 (Tex. 2006) (per curiam) (defendants did not waive arbitration by litigating for two years, especially
when the plaintiff initiated more discovery requests than he received); In re Serv. Corp. Int'l, 85 S.W.3d 171, 174–75 (Tex.
2002) (per curiam) (defendants did not waive arbitration by supporting plaintiffs' inclusion in a federal class action whose
members were not subject to arbitration, and moving, inter alia, to dismiss in that action); In re Bruce Terminix Co., 988
S.W.2d 702, 704 (Tex. 1998) (per curiam) (defendant did not waive arbitration by its delay and discovery requests, when
the responses were insufficient to show prejudice); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89–90 (Tex. 1996) (per
curiam) (in the absence of a showing of prejudice, defendants did not waive arbitration by, e.g., requesting discovery
and waiting ten months to ask for arbitration); Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898–99 (Tex. 1995) (per
curiam) (defendants did not waive arbitration by moving to strike an intervention, seeking and resisting discovery, and
failing to timely seek mandamus review).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Contracts
Language of Contract *344 Carl D. Rosenblum, John D. White, Jones Walker
Waechter Poitevent Carrere & Denegre, The Woodlands,
The court's primary concern when
Alida C. Hainkel, Jones Walker Waechter Poitevent
interpreting a contract is to ascertain and give
Carrere & Denegre, New Orleans, LA, J.D. Page, Doyle
effect to the intent of the parties as that intent
Restrepo Harwin & Robbins, Houston, for respondent.
is expressed in the contract; to discern this
intent, the court examines and considers the Opinion
entire writing in an effort to harmonize and
gives effect to all the provisions of the contract Justice MEDINA delivered the opinion of the Court.
so that none will be rendered meaningless.
[1] In this case we must determine whether the sale
156 Cases that cite this headnote of an oil and gas working interest, which was subject
to an operating agreement, 1 released the seller from
[7] Contracts any further obligations to the operator. The court of
Construction as a Whole appeals concluded that it did, reversing the trial court's
judgment in favor of the operator. 135 S.W.3d 122. We
No single contract provision taken alone will
conclude that, despite selling its working interest, the
be given controlling effect; rather, all the
seller remains liable under the operating agreement, unless
provisions must be considered with reference
released by the operator or the terms of the agreement.
to the whole instrument.
Because neither the operating agreement nor the operator
71 Cases that cite this headnote expressly released the seller from its obligations under that
agreement, we reverse the court of appeals' judgment and
render judgment for the operator.
[8] Assignments
On Contract Assigned Seagull Energy E & P, Inc. is a lessee and operator of two
Generally speaking, a party cannot escape offshore oil and gas leases in the Gulf of Mexico near the
its obligations under a contract merely by Texas coast—Blocks 828 and 831, Mustang Island Area.
assigning the contract to a third party. In 1994, Eland Energy, Inc. purchased an interest in both
leases, acquiring a 1.09375% interest in Block 828 from
10 Cases that cite this headnote
General Atlantic Resources, Inc. and a 9.41719% interest
in Block 831 from UMC Petroleum Corporation. As the
[9] Assignments new owner, Eland expressly assumed certain rights and
On Contract Assigned responsibilities under two offshore operating agreements,
As a general rule, a party who assigns its each applicable to its respective block. Both agreements
contractual rights and duties to a third party designated Seagull as the operator and were essentially
remains liable unless expressly or impliedly the same. They provided that Eland and the other lessees
released by the other party to the contract. were to share the cost of operations in proportion to their
Restatement (Second) of Contracts § 318(3). respective interests, and that Seagull, as operator, was to
exploit the minerals and collect the operating costs from
12 Cases that cite this headnote the other lessees.
Seagull then sued Eland and Nor–Tex for breach of the have found this operating agreement ambiguous, and we
operating agreement. Both Seagull and Eland moved for likewise agree that it is not. Its meaning is therefore a
summary judgment. The trial court denied Eland's motion question of law. Coker v. Coker, 650 S.W.2d 391, 394
but granted a partial summary judgment in Seagull's (Tex.1983).
favor. In its summary judgment, the court concluded that
Nor–Tex had breached the operating agreement by failing [6] [7] Our primary concern when interpreting a
to pay its share of the operating expenses and that Eland contract is to ascertain and give effect to the intent of the
also remained liable for these expenses which it incurred parties as that intent is expressed in the contract. Gulf Ins.
under the operating agreement. Damages were tried to Co. v. Burns Motors, Inc. 22 S.W.3d 417, 423 (Tex.2000);
the court which found Eland and Nor–Tex jointly and Ideal Lease Serv., Inc. v. Amoco Prod. Co., 662 S.W.2d
severally liable to Seagull in the amount of $268,418.90, 951, 953 (Tex.1983). To discern this intent, we “examine
plus interest and attorney's fees. Eland appealed. and consider the entire writing in an effort to harmonize
and give effect to all the provisions of the contract so that
The court of appeals reversed the trial court's judgment to none will be rendered meaningless. No single provision
the extent it awarded damages against Eland. The court taken alone will be given controlling effect; rather, all
concluded that Eland had no continuing liability under the provisions must be considered with reference to the
the operating agreements after *345 the assignment of its whole instrument.” Coker, 650 S.W.2d at 393 (emphasis
working interest because the agreements did not expressly in original) (citations omitted).
provide for such a continuing obligation. 135 S.W.3d at
127–28. Eland focuses on several provisions that connect its
obligation to reimburse the operator for costs and
Seagull argues, however, that Texas contract law generally expenses to its participating interest, which is in turn
provides that an assignor's contractual obligations based on its ownership in the lease. The pertinent
survive assignment unless the contract expressly provides provisions define participating interest and allocate costs
otherwise or the assignor obtains an express release. and expenses in proportion to these interests as follows:
Because the operating agreements here were silent on
the subject and they did not expressly release Eland, Article 2
Seagull submits that the court of appeals should have Definitions
applied this general rule. Eland responds that the court of
appeals was right to ignore this rule of continuing liability ***
because the express language of the operating agreements
2.10 Participating Interest. The respective percentage
indicated that the rule did not apply. Eland maintains
of participation of each Party electing to participate in
that its obligation to pay expenses under the operating
each of the operations conducted hereunder, including
agreement terminated on the date it sold its interests
the production of Oil and Gas, based on ownership in
because the agreement imposed liability for expenses only
the Lease.
upon current working interest owners.
***
[2] [3] [4] [5] This dispute thus turns on whether
the parties to the operating agreement expressly agreed Article 8
upon the consequences that should follow an assignment Expenditures
of one's interest to a third party. Although Seagull
and Eland construe their obligations under this contract 8.1 Basis of Charge to the Parties. Operator shall pay
quite differently, a contract is not ambiguous merely all costs and each Party shall reimburse Operator in
because the parties disagree on its meaning. Sun Oil Co. proportion to its Participating Interest.
(Delaware) v. Madeley, 626 S.W.2d 726, 727 (Tex.1981).
“An ambiguity exists only if the contract language is ***
susceptible to two or more reasonable interpretations.”
*346 Article 14
Am. Mfrs. Mut. Ins. Co. v. Schaefer, 124 S.W.3d 154,
Abandonment and Salvage
157 (Tex.2003). Neither the parties nor the lower courts
apparent why Eland would not have been able to fulfill its judgment and render judgment for Seagull as the trial
court did.
obligations under the operating agreement even after the
transfer of its interest in the underlying lease. See id. cmt.
c, illus. 1.
Justice O'NEILL and Justice BRISTER did not
Because the operating agreement did not expressly participate in the decision.
provide that Eland's obligations under the operating
agreement should terminate upon assignment and Seagull All Citations
did not expressly release Eland following the assignment
207 S.W.3d 342, 168 Collier Bankr.Cas.2d 655, 36 Envtl.
of its working interest, we reverse the court of appeals'
L. Rep. 20,115, 49 Tex. Sup. Ct. J. 744
Footnotes
1 An operating agreement is a contract typical to the oil and gas industry whose function is to designate an “operator,
describe the scope of the operator's authority, provide for the allocation of costs and production among the parties to the
agreement, and provide for recourse among the parties if one or more default in their obligations.” 3 ERNEST E. SMITH
& JACQUELINE L. WEAVER, TEXAS LAW OF OIL AND GAS § 17.3 at 17–7 (2d ed. 2006).
2 15.1 Withdrawal. A Party may withdraw from this Agreement as to a Lease by assigning, to the other Parties who do
not desire to withdraw, all its interest in such Lease and the wells, platforms and Facilities used in operations on such
Lease.... Providing all such expenses, including any deficiency hereunder, due from the withdrawing Party have been
paid within thirty (30) days after the rendering of such final payment, the assignment shall be effective the first day of
the month following its receipt, and, the withdrawing Party shall thereafter be relieved from all further obligations and
liabilities with respect to such Lease.
3 14.3 Assignment of Interest. Each Participating Party desiring to abandon a well pursuant to Section 14.2 shall assign
effective as of the last applicable election date, to the non-abandoning Parties, in proportion to their Participating Interests,
its interest in such well and the equipment therein and its ownership in the production from such well. Any Party so
assigning shall be relieved from any further liability with respect to said well.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Performance, breach, enforcement, and on the basis of their motions, affidavits and a stipulation
contest of agreement of facts. SBS and Boone's dispute solely concerns
Although last disputed investment purchase interpreting American Stock Exchange arbitration rule
took place more than six years before 605 (AMEX R. 605) to determine its effect on Boone's
investor filed arbitration claim, American pending arbitration claims against SBS.
Stock Exchange (AMEX) arbitration rule
requiring claims to be filed within six years Because of the nature of this dispute, the Court
from event giving rise to claim was procedural believes that further evidentiary hearings are unnecessary
limitation on arbitrability of investor's claims, to resolve this matter. See, Fed.R.Civ.P. 43(e) (court
and thus timeliness of claims was for arbitral, may determine matter entirely on the filings) and
not judicial, determination; moreover, it could Fed.R.Civ.P. 78 (court may determine matter without oral
not be said with confidence that claims were argument). Therefore, the Court sua sponte consolidates
time barred without forbidden judicial inquiry its ruling on SBS' Motion for Preliminary Injunction
into underlying merits of claims. with determination of SBS' Complaint for Declaratory
Judgment.
Cases that cite this headnote
I. BACKGROUND FACTS
Boone opened several stock accounts with SBS 1 in both
Attorneys and Law Firms his name and in the name of the Watercol Profit Sharing
Plan, a retirement plan for his McDonald's franchises.
*1156 Charles Watts Flynn, Susan L. Karamanian, Boone used these accounts to invest in several limited
Bradley W. Foster, Locke Purnell Rain Harrell, Dallas, partnerships that ultimately proved unprofitable and are
TX, for plaintiff. the subject of this litigation. Boone made these purchases
from May 4, 1984 to February 18, 1986. Boone filed his
Tracy Pride Stoneman, Godwin & Carlton, Dallas, TX,
arbitration claim on July 13, 1993, over seven and a half
for defendant.
years after the last transaction.
[1] It is a settled matter of law that submission to It is clear from Boone's Customer agreement that the
arbitration is a matter bound by the parties' contract—a claims he is making are of the type Boone and SBS agreed
party cannot be forced to arbitrate what it has not agreed to arbitrate. The Agreement requires that “any disputes
to arbitrate. AT & T Technologies v. Communications relating to [Boone's] investments shall be settled by
Workers of America, 475 U.S. 643, 648, 106 S.Ct. 1415, arbitration in accordance with the rules” of the arbitration
1418, 89 L.Ed.2d 648 (1986), citing, Steelworkers v. organization of Boone's choice. SBS' Original Compl.,
Warrior & Gulf, 363 U.S. 574, 582, 80 S.Ct. 1347, 1352, Application for T.R.O. and Mot. for Prelim. Inj., Ex. C.
4 L.Ed.2d 1409 (1960) and Steelworkers v. American SBS concurs—“there is no dispute that this controversy is
Manufacturing Co., 363 U.S. 564, 570–71, 80 S.Ct. 1363, subject to arbitration ... under the Customer Agreement
1364, 4 L.Ed.2d 1432 (1960). which Boone signed.” Pl.'s Resp. to Def.'s Mot. to Dismiss
and Mot. to Compel Arbitration at 3. Accordingly, the question. At issue in Local 4–447 was a provision in
Court finds that Boone's substantive claims arise out of Chevron's arbitration agreement with the union that
his investments with SBS and are substantively arbitrable “[o]nly grievances ... which are processed ... within the
under the provisions of the Customer Agreement. time limits herein provided shall be subject to arbitration.”
Local 4–447, 815 F.2d at 341. In addressing Chevron's
Boone elected, under the terms of the contract, to have an arguments that this timing clause should act as a
arbitration panel of the American Stock Exchange hear substantive limit on the union's claims (because Chevron
this dispute, and any arbitration that occurs will be bound had not agreed to arbitrate untimely claims), the court,
by AMEX's rules, including AMEX R. 605. following John Wiley, 376 U.S. at 557–58, 84 S.Ct. at 918,
stated that, while normally a court should not address
procedural questions, in rare instances a court “could
*1159 2. Is AMEX R. 605 a Procedural or Substantive deny arbitration [ ] if it could confidently be said, not
Bar? only that a claim was strictly ‘procedural’, ... but also
Now the Court turns to the stickier question of whether that it should operate to bar arbitration altogether.” Local
AMEX Rule 605 is a procedural or substantive limitation 4–447 815 F.2d at 341. The court held that because an
on the arbitrability of Boone's claim. arbitrator could find that Chevron had waived its rights to
object to late service by its conduct, the district court had
SBS cites many well reasoned and thorough opinions properly ordered Chevron to arbitration because the trial
from outside the Fifth Circuit in support of its claim judge could not confidently say that the procedural claim
that AMEX 605 is a substantive limitation on Boone's would bar arbitration altogether. Id. at 342 (emphasis in
agreement to arbitrate. 3 SBS includes Shearson Lehman original).
Brothers v. Glazer Scott Investments, CA 3–92–0600–
T, (N.D.Tex.1992) which held, in an order temporarily [5] [6] In light of these decisions, current Fifth Circuit
restraining arbitration of Glazer Scott's claims, that law appears to be that timeliness questions are procedural
New York Stock Exchange Rule 603 4 (NYSE R. 603) issues for arbitral, not judicial, determination. Austin Co.,
is a substantive limitation on arbitration contracts. In 784 F.2d at 1264. The only exception to this rule is that
reaching this decision, the Glazer Scott court recognized a court may decide procedural arbitrability questions if,
that “non-binding authority to the contrary exists,” and only if, the court can confidently say the claim would
referring to, inter alia, Commerce Park at DFW Freeport be barred. Local 4–447 815 F.2d at 340–41, relying on
v. Mardian Construction Co., 729 F.2d 334, 339 n. 5 (5th John Wiley & Sons, 376 U.S. at 557–58, 84 S.Ct. at 918.
Cir.1984) where, according to the Glazer Scott court, the The court may not, however, consider the merits of the
Fifth Circuit had stated, “in dicta, that whether a request underlying dispute in deciding whether the claims are
for arbitration was timely or not is a procedural matter barred. AT & T Technologies, 475 U.S. at 649, 106 S.Ct.
to be resolved by the arbitrator.” Glazer Scott Investments at 1418.
slip op. at 3 n. 1.
[7] The situation in Local 4–447 is analogous to the one
The Glazer Scott court does not appear to have considered before the Court. If proven before the AMEX arbitrators,
post-Commerce Park cases that solidified its rule when Boone's allegations that SBS fraudulently concealed its
it dismissed Commerce Park as dicta. See Local 4–447, wrongdoing could act to waive any objection SBS has
815 F.2d at 341, citing, Local No. 406, Int'l Union of to Boone filing his arbitration claims late, but the Fifth
Operating Engineers, AFL–CIO v. Austin Co., 784 F.2d Circuit has made it clear that this is a question for the
1262, 1264 (5th Cir.1986) (timeliness issues are procedural arbitrators. Additionally, because the Court may not
questions to be answered by the arbitrator, not judicially consider the merits of Boone's claims, the Court *1160
determinable limitations on the substantive scope of cannot confidently determine whether or not Boone's
arbitration). SBS' reliance on Glazer Scott is, therefore, fraudulent concealment claims are valid, i.e. would toll or
poorly placed. waive AMEX R. 605's six year limitation.
A closer examination of Local 4–447 sheds additional Therefore, because the Fifth Circuit considers timeliness
light on the procedural versus substantive limitation questions to be procedural, not substantive, issues and
because this Court cannot confidently say that SBS' This action came on for consideration by the Court,
Honorable David O. Belew, Jr., District Judge, presiding,
procedural timeliness claim clearly bars Boone from
and the issues having been duly heard and considered
proceeding, SBS' Complaint for Declaratory Relief is
and a decision having been rendered by Memorandum
hereby DENIED.
Opinion and Order entered this same day,
As discussed supra SBS' Motion for Preliminary
It is hereby ORDERED and ADJUDGED that Plaintiff
Injunction is also DENIED.
Smith Barney Shearson's Complaint for Declaratory
Judgment is DENIED. This action is hereby terminated
These rulings are made without reference or comment on
and the Clerk of the Court is directed to close this case.
the merits of the underlying dispute between Boone and
SBS. The parties are free to pursue arbitration according
Each party shall pay their own costs of court.
to the Customer Agreement.
IT IS SO ORDERED.
IT IS SO ORDERED.
All Citations
JUDGMENT ON DECISION BY THE COURT
838 F.Supp. 1156
Footnotes
1 For the sake of clarity, the Court will refer to all transactions as if made with Smith Barney Shearson, regardless if made
with SBS or one of its predecessors.
2 AMEX Rule 605 reads:
No dispute, claim or controversy shall be eligible for submission to arbitration in any instance where six (6) years
shall have elapsed from the occurrence or event giving rise to the act or the dispute, claim or controversy. This
section shall not extend applicable statutes of limitations, nor shall it apply to any case which is directed to arbitration
by a court of competent jurisdiction.
2 Am.Stock Ex.Guide (CCH) ¶ 9544 (1989).
3 E.g., PaineWebber, Inc. v. Hofmann, 984 F.2d 1372 (3d Cir.1993); Roney & Co. v. Kassab, 981 F.2d 894 (6th Cir.1992);
and Edward D. Jones & Co. v. Sorrells, 957 F.2d 509 (7th Cir.1992).
4 NYSE R. 603 is identical to AMEX R. 605.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
that they will suffer increased costs if the federal court result in the hospital being forced to resolve its dispute
asserts jurisdiction over this case because the state court against the architect in a different forum than its dispute
is closer to their home. They provide no other evidence of against the contractor,
inconvenience; both the federal suit and any arbitration
will likely occur in Texas, where the Masons reside. “That misfortune ... is not the
More specifically, at least some increased cost appears result of any choice between the
to have arisen from the Masons' resistance to arbitration federal and state courts; it occurs
and their litigating in two court systems, in a manner because the relevant federal *1266
hardly in accord with the Supreme Court's approach that, law requires piecemeal resolution
“[c]ontracts to arbitrate are not to be avoided by allowing when necessary to give effect to
one party to ignore the contract and resort to the courts. an arbitration agreement. Under
Such a course could lead to prolonged litigation, one of the Arbitration Act, an arbitration
the very risks the parties, by contracting for arbitration, agreement must be enforced
sought to eliminate.” Southland Corp. v. Keating, 465 U.S. notwithstanding the presence of
1, 7, 104 S.Ct. 852, 856, 79 L.Ed.2d 1 (1984). other persons who are parties to the
underlying dispute but not to the
The Masons rely most heavily on the third factor, the arbitration agreement.”
avoidance of piecemeal litigation. They contend that
460 U.S. at 20, 103 S.Ct. at 939.
the tort claims alleged in their state court suit are not
arbitrable under the contract and therefore will have to
With regard to the fourth factor, concerning which forum
be litigated in a separate forum. Further, they assert that
first acquired jurisdiction over the action, the Masons
some of the parties will not participate in the arbitration,
assert that because the state court suit was filed first, that
namely Sandra Mason and the individual co-defendants,
court should retain jurisdiction. The district court also
none of whom were parties to the arbitration agreement,
relied on the priority in filing in its reasoning. However,
again resulting in some claims being litigated in another
the Supreme Court in Moses H. Cone characterized
forum.
as “mechanical” a similar argument in that case and
noted that in the arbitration context, such an argument
The terms of the arbitration agreement suggest that,
“disregards the obvious reason for the ... priority in filing.
practically speaking, piecemeal litigation may well not
An indispensable element of [the contractor's] cause of
result. The arbitration agreement mandates arbitration
action under § 4 for an arbitration order is the Hospital's
of claims for breach of the Dealer Agreement as well
refusal to arbitrate.... That refusal did not occur until less
as for claims “arising out of or relating to” the Dealer
than a day before the Hospital filed its state suit.” Id. at
Agreement. Because the tort claims all arise out of
21, 103 S.Ct. at 939. See also Municipal Energy Agency v.
the business relationship between the opposing parties,
Big Rivers Elec. Corp., 804 F.2d 338, 344 (5th Cir.1986).
it appears that they are arbitrable under the terms of
the agreement. The arbitration agreement also provides
In this case, Snap-on had no notice that the Masons would
that Barney Mason must arbitrate not only claims
repudiate their apparent duty to arbitrate until the state
against Snap-on, but also claims against any “employee,
court suit was filed, and therefore, there is no reason why
officer or director” of Snap-on. Thus Barney Mason's
Snap-on should be expected to have filed the within suit
claims against the Snap-on employees may be subject to
before that date. That the state of Texas may have some
arbitration, even though those defendants are not parties
interest in maintaining jurisdiction over this litigation has
to the agreement. Further, according to Snap-on, the
no bearing in a case such as this one, where the federal
individual co-defendants may be willing to participate in
policy favoring arbitration prevails “notwithstanding any
the arbitration proceeding.
state substantive or procedural policies to the contrary.”
Moses H. Cone, 460 U.S. at 24, 103 S.Ct. at 941.
However, even if some piecemeal litigation does result,
Moreover, we note that when the district court chose to
that sometimes is the inevitable result of a congressional
abstain, the state court had not substantially proceeded
policy strongly favoring arbitration. The Supreme Court
towards disposition of the case. In Moses H. Cone, Justice
in Moses H. Cone noted that although arbitration could
Brennan commented that “the federal suit was running
well ahead of the state suit at the very time that the District to request arbitration within six weeks of the Masons'
Court decided to refuse to adjudicate the case.” 460 U.S. written notice to Snap-on that Snap-on had violated the
at 22, 103 S.Ct. at 940. contract. The Masons assert that they provided written
notice to Snap-on on January 23, 1992, that Snap-on was
As to the fifth Moses H. Cone factor, whether federal law in breach of the contract. Although the district court did
controls the case, the Masons contend that because state not consider this argument, and we therefore have no
law governs the underlying dispute, their claims against factual record with regard to this matter, even if we assume
Snap-on should be heard in state court. However, in this arguendo that the Masons' factual assertion is correct,
federal case—concerning only whether the case should be their waiver claim lacks merit.
submitted to arbitration under § 4 of the FAA—federal
law provides the rule of decision on the merits. Id. at 24, “[F]ifth Circuit precedent places a ‘heavy burden’ on
103 S.Ct. at 941. The basic issue presented in this suit, a party claiming waiver of arbitration rights.” Storey
as in Moses H. Cone, is “the arbitrability of the dispute” v. Shearson–American Express, 928 F.2d 159, 163 (5th
between the opposing parties, and federal law governs that Cir.1991) (quoting Frye v. Paine, Webber, Jackson
issue whether it is raised in federal or state court. Id. at 24, & Curtis, Inc., 877 F.2d 396, 398 (5th Cir.1989)).
103 S.Ct. at 941. “Accordingly, we indulge a presumption against finding
waiver.” Walker v. J.C. Bradford & Co., 938 F.2d 575, 577
Despite the obvious applicability of Moses H. Cone (5th Cir.1991). Herein, the Masons' waiver contention is
to the facts of the instant case, the Masons present based upon the arbitration clause of the agreement which
several additional arguments with which they attempt in pertinent part provides: “Any request for arbitration
to distinguish this case from Moses H. Cone. In shall be filed in writing within six (6) months following
that context, they contend that the individual state the alleged breach; otherwise, the right to any remedy
defendants are indispensable parties to the within case shall be deemed forever waived and lost.” From Snap-
under Fed.R.Civ.P. 19 and that the presence of all of on's perspective, there was no possible breach of the dealer
them destroys diversity jurisdiction. 5 Without diversity agreement to arbitrate until the Masons sought to avoid
jurisdiction, the federal courts would have no subject arbitration and filed their suit in state court. Under the
agreement, a party who alleges a breach must request
matter jurisdiction over this case. 6 According *1267 to
arbitration within six months. The plain language of the
the Masons, the co-defendants are indispensable because
agreement, as well as common sense, reveals that the
“any resolution by arbitration does not adjudicate all
agreement does not require an arbitration request to be
issues of law and fact between the Masons and all potential
made upon notice of an alleged breach, only upon an
defendants.”
actual breach. By filing its request for arbitration within
one month of the Masons' state court filing, Snap-on
Under Rule 19(a)(1), joinder is required if “in the person's
absence complete relief cannot be accorded among those complied with the dealer agreement. 7 The fact that the
already parties.” This is essentially what the Masons are breach alleged by the Masons may have occurred more
contending. However, such a contention merely re-states than six months before Snap-on requested arbitration
the “piecemeal litigation” argument which the Supreme cannot under any commonsense interpretation of the
Court rejected in Moses H. Cone. In Moses H. Cone, arbitration clause bar Snap-on of the right to arbitrate
the existence of the state suit against the architect did since Snap-on had no way of knowing what the Masons
not make the architect “indispensable” to the federal would do until they did it.
court suit. While the Supreme Court recognized that
any suit against the architect would necessarily take Finally, the Masons argue that they were fraudulently
place in another forum if the architect did not consent induced to enter the dealership agreement and they
to arbitration, nonetheless, that result did not warrant proffer certain facts concerning such alleged inducement.
abstention. Id. at 19–21, 103 S.Ct. at 938–940. However, the merits of the underlying dispute are for the
arbitrator to consider, not for this Court or the district
In a further attempt to demonstrate “exceptional court. Under § 4 of the FAA, the federal district court
circumstances” warranting abstention, the Masons claim ascertains only whether the arbitration clause covers the
that Snap-on waived its right to arbitration by failing allegations at issue. “If the dispute is within the scope of
the arbitration clause, the court may not delve further into inducement of the contract generally.” Prima Paint, 388
U.S. at 404, 87 S.Ct. at 1806. As in Prima Paint and Mesa
the merits of the dispute.” *1268 Municipal Energy, 804
Operating, the defendants in this case have “not argued
F.2d at 342 (citing City of Meridian v. Algernon Blair, Inc.,
that the agreement to arbitrate is invalid separately from
721 F.2d 525, 528 (5th Cir.1983)).
the entire contract. Thus the arbitration provision remains
separate and enforceable....” Mesa Operating, 797 F.2d at
The fact that the Masons make general allegations
244.
of fraud does not alter this analysis. In Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395,
In sum, the Masons have not demonstrated “exceptional
87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), the Supreme
circumstances” which support abstention; rather, Moses
Court “held that, under section 4 of the FAA, the
H. Cone makes clear that in this case, as in most cases, a
‘making’ of an agreement to arbitrate was not called into
“liberal federal policy favoring arbitration” prevails, and
question by the allegation that the entire contract was
abstention is unwarranted. 460 U.S. at 24, 103 S.Ct. at
fraudulently induced. Therefore, the Court concluded, the
941. In the light of the foregoing discussion, we reverse the
fraudulent inducement question was properly resolved by
district court and remand with direction to that court to
an arbitrator rather than a court.” Mesa Operating Ltd.
enter an appropriate order compelling arbitration.
Partnership v. Louisiana Intrastate Gas Corp., 797 F.2d
238, 244 (5th Cir.1986) (citing Prima Paint, 388 U.S. at
REVERSED AND REMANDED.
403–04, 87 S.Ct. at 1805–1806); see also Municipal Energy,
804 F.2d at 342. Only if the allegation of fraud goes
specifically to the making of the agreement to arbitrate All Citations
must a district court address the merits of the fraud claim.
The district court does not address “claims of fraud in the 18 F.3d 1261
Footnotes
* District Judge of the District of Maryland, sitting by designation.
1 The Masons have not responded in the state court to Snap-on's motion to stay the state court proceedings. As of the
date of the district court's dismissal, the state court had taken no action with regard to either the complaint or the motion
to stay. Shortly before arguments were heard in this appeal, the state court granted Snap-on's motion for a stay pursuant
to § 3 of the FAA and sua sponte ordered Barney Mason to arbitrate.
9 U.S.C. § 3 provides:
If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration
under an agreement in writing for such arbitration, the court in which such suit is pending, upon being satisfied
that the issue involved in such suit or proceeding is referable to arbitration under such an agreement, shall on
application of one of the parties stay the trial of the action until such arbitration has been had in accordance with
the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.
2 Section 4 provides in pertinent part:
A party aggrieved by the alleged failure, neglect, or refusal of another to arbitrate under a written agreement for
arbitration may petition any United States district court which, save for such agreement, would have jurisdiction under
Title 28, in a civil action ... of the subject matter of a suit arising out of the controversy between the parties, for an
order directing that such arbitration proceed in the manner provided for in such agreement.
9 U.S.C. § 4.
3 On April 8, 1993, at a Scheduling Conference, the district court directed Snap-on to file a formal motion to compel
arbitration by April 30, 1993, and to file an opposition to the motion to dismiss by May 14, 1993. Snap-on filed its motion
to compel arbitration on April 30, 1993, the same day the district court issued its Order granting the Masons' motion to
dismiss. In its Order, the district court expressly forbade the parties from filing anything further in this case in the district
court.
4 The district court's decision cannot be sustained on the basis that determining whether Snap-on is entitled to arbitrate
would require a “full-fledged trial,” since in FAA suits, the federal courts conduct “an expeditious and summary hearing,
with only restricted inquiry into factual issues” bearing on the making of the arbitration agreement. Moses, 460 U.S. at
22, 103 S.Ct. at 940.
Further, the district court's position that Snap-on may have been trying to get into federal court after failing timely to
remove is not valid. Snap-on could not remove the state court case to federal court in any event because the presence
of the co-defendants destroys diversity. 28 U.S.C. §§ 1332, 1441.
Finally, the district court's assumption that Snap-on could have brought its suit in state court may or may not be soundly
based. This is because the Supreme Court has expressed reticence on this issue, by noting that although states courts
must grant stays pursuant to § 3 of the FAA, “[i]t is less clear ... whether the same is true of an order to compel arbitration
under § 4 of the Act.” Moses H. Cone, 460 U.S. at 26, 103 S.Ct. at 942 (noting the “probable inadequacy of the state-
court proceeding to protect [the] rights” of the party seeking arbitration).
5 Under Rule 19, joinder is required if:
(1) in the person's absence complete relief cannot be accorded among those already parties, or (2) the person claims
an interest relating to the subject of the action and is so situated that the disposition of the action in the person's
absence may (i) as a practical matter impair or impede the person's ability to protect that interest or (ii) leave any
of the persons already parties subject to a substantial risk of incurring double, multiple, or otherwise inconsistent
obligations by reason of the claimed interest.
“When joinder of someone described in Rule 19(a) is not feasible [because it will deprive the court of subject matter
jurisdiction], the court must examine ... Rule 19(b) to determine whether the action may go forward in his absence or
must be dismissed....” 7 Charles A. Wright, Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1604,
at 41 (1986). Because in this case joinder is not required under 19(a), see infra, it is unnecessary for this court, in this
appeal, to go on to address the 19(b) standards.
6 Although the Arbitration Act creates a body of substantive federal law governing arbitration agreements, it does not
provide a basis for federal question jurisdiction. “[T]here must be diversity of citizenship or some other independent basis
for federal jurisdiction before [an order compelling arbitration] can issue.” Moses, 460 U.S. at 25 n. 32, 103 S.Ct. at 942
n. 32.
7 We acknowledge that questions of waiver go to the substantive merits of the petition to compel arbitration, i.e., whether
the claim is arbitrable. Because the district court abstained from addressing the merits, we could remand this case to
the district court to reconsider the petition in the light of this Court's guidance. However, where abstention is clearly
unwarranted, as it appears to be in this case, the appellate court should consider the merits itself and move this litigation
along. See Burns v. Watler, 931 F.2d 140, 147 (1st Cir.1991).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Individual actions and class action by convenience store 47 Cases that cite this headnote
franchisees were brought against franchisor alleging,
among other things, fraud, breach of contract and
violation of disclosure requirements of the California [2] Alternative Dispute Resolution
Franchise Investment Law. The Superior Court, Alameda As ousting jurisdiction of or precluding
County, Robert H. Kroninger, J., ordered arbitration of resort to courts
all claims except those based on the statute. The California Contracts to arbitrate are not to be avoided by
Court of Appeal, 109 Cal.App.3d 784, 167 Cal.Rptr. 481, allowing one party to ignore the contract and
reversed as regards the statutory claim. The California resort to the courts. 9 U.S.C.A. § 2.
Supreme Court, 31 Cal.3d 584, 183 Cal.Rptr. 360, 645
186 Cases that cite this headnote
P.2d 1192, held that statutory claims were not arbitrable,
and appeal was taken. The Supreme Court, Chief Justice
Burger, held that: (1) the court had jurisdiction to [3] Federal Courts
decide whether federal arbitration act preempted state law Validity of state constitution or statutes
voiding arbitration clause; (2) since it did not affirmatively Federal Courts
appear that request for class certification was drawn in Review of state courts
question on federal grounds the court lacked appellate
Where it was not contended in California
jurisdiction to resolve that question as a matter of federal
courts and those courts did not decide
law; and (3) provision of state law requiring judicial
whether state law imposition of class
consideration of claims brought under that law directly
actions procedures for arbitration under
conflicts with the Federal Arbitration Act and violates the
franchise agreement was preempted by
supremacy clause.
Federal Arbitration Act, the class action
arbitration issue was not directly appealable
Appeal dismissed in part and judgment reversed in part.
to the United States Supreme Court under
statute providing for appeal from state court
Justice Stevens, filed an opinion concurring in part and
when validity of challenged state statute is
dissenting in part.
sustained as not in conflict with federal law,
notwithstanding appealability of ruling that
Justice O'Connor filed a dissenting opinion, in which
provision of state franchise act precluding
Justice Rehnquist joined.
arbitration did not violate the federal act.
West's Ann.Cal.Corp.Code §§ 31000 et seq.,
31512; 9 U.S.C.A. § 2; 28 U.S.C.A. § 1257(2).
granted the motion as to all claims except those based (a) In enacting § 2 of the federal Act, Congress declared
on the Franchise Investment Law, and did not pass on a national policy favoring arbitration and withdrew the
appellees' request for class certification. The California power of the states to require a judicial forum for the
Court of Appeal reversed the trial court's refusal to resolution of claims that the contracting parties agreed
compel arbitration of the claims under the Franchise to resolve by arbitration. That Act, resting on Congress'
Investment Law, construing the arbitration clause to authority under the Commerce Clause, creates a body of
require arbitration of such claims and holding that the federal substantive law that is applicable in both state
Franchise Investment Law did not invalidate arbitration and federal courts. Moses H. Cone Memorial Hospital v.
agreements and that if it rendered such agreements Mercury Construction Corp., 460 U.S. 1, 103 S.Ct. 927,
involving commerce unenforceable, it would conflict with 74 L.Ed.2d 765 (1983). To confine the Act's scope to
§ 2 of the United States Arbitration Act, which provides arbitrations sought to be enforced in federal courts would
that “a contract evidencing a transaction involving frustrate what Congress intended to be a broad enactment.
commerce to settle by arbitration a controversy ... Pp. 858 – 860.
arising out of such contract or transaction ... shall be
valid, irrevocable, and enforceable, *2 save upon such (b) If Congress, in enacting the Arbitration Act, had
grounds as exist at law or in equity for the revocation intended to create a procedural rule applicable only in
of any contract.” The court also directed the trial federal courts it would not have limited the Act to
court to conduct class certification proceedings. The contracts “involving commerce.” Section 2's “involving
California Supreme Court reversed the **854 ruling commerce” requirement is not to be viewed as an
that claims asserted under the Franchise Investment Law inexplicable limitation on the power of the federal courts
are arbitrable, interpreting § 31512 of that Law—which but as a necessary qualification on a statute intended to
renders void any provision purporting to bind a franchisee apply in state as well as federal courts. P. 860.
to waive compliance with any provision of that Law—to
require judicial consideration of claims brought under that (c) The California Supreme Court's interpretation of §
statute and holding that the statute did not contravene 31512 would encourage and reward forum shopping. This
the federal Act. The court remanded the case to the Court will not attribute to *3 Congress the intent to
trial court for consideration of appellees' request for class create a right to enforce an arbitration contract and yet
certification. make that right dependent on the particular forum in
which it is asserted. Since the overwhelming proportion
Held: of civil litigation in this country is in the state courts,
Congress could not have intended to limit the Arbitration
1. This Court has jurisdiction under 28 U.S.C. § 1257(2) Act to disputes subject only to federal -court jurisdiction.
to decide whether the United States Arbitration Act pre- In creating a substantive rule applicable in state as well
empts § 31512 of the California statute. Cox Broadcasting as federal courts, Congress intended to foreclose state
Corp. v. Cohn, 420 U.S. 469, 95 S.Ct. 1029, 43 L.Ed.2d 328 legislative attempts to undercut the enforceability of
(1975). To delay review of a state judicial decision denying arbitration agreements. Pp. 860 – 861.
enforcement of an arbitration contract until the state
litigation has run its course would defeat the core purpose Appeal dismissed in part; 31 Cal.3d 584, 183 Cal.Rptr.
of the contract. On the other hand, since it does not 360, 645 P.2d 1192, reversed in part and remanded.
affirmatively appear that the request for class certification
was “drawn in question” on federal grounds, this Court is
without jurisdiction to resolve this question as a matter of Attorneys and Law Firms
federal law under § 1257(2). Pp. 856 – 858.
Mark J. Spooner argued the case for appellants. With him
on the briefs were Peter K. Bleakley and Martin H. Kresse.
2. Section 31512 of the California statute directly conflicts
with § 2 of the United States Arbitration Act and hence John F. Wells argued the cause for appellees. With him on
violates the Supremacy Clause. Pp. 858 – 861. the brief were Lise A. Pearlman and Fonda Karelitz.*
* A brief of amici curiae was filed by Simon H. Trevas for Appellees are 7-Eleven franchisees. Between September
the Securities Division of the State of Washington et al. 1975 and January 1977, several appellees filed individual
actions against Southland in California Superior
Mark J. Spooner argued the case for appellants. With him
Court alleging, among other things, fraud, oral
on the briefs were Peter K. Bleakley and Martin H. Kresse.
misrepresentation, breach of contract, breach of fiduciary
John F. Wells argued the cause for appellees. With him on duty, and violation of the disclosure requirements of the
the brief were Lise A. Pearlman and Fonda Karelitz.* California Franchise Investment Law, Cal.Corp.Code §
31000 et seq. (West 1977). Southland's answer, in all but
* A brief of amici curiae was filed by Simon H. Trevas for one of the individual actions, included the affirmative
the Securities Division of the State of Washington et al. defense of failure to arbitrate.
Jurisdiction of this Court is asserted under 28 U.S.C. Contracts to arbitrate are not to be avoided by allowing
§ 1257(2) which provides for an appeal from a final one party to ignore the contract and resort to the courts.
judgment of the highest court of a state when the validity Such a course could lead to prolonged litigation, one of
of a challenged state statute is sustained as not in the very risks the parties, by contracting for arbitration,
conflict with federal law. Here Southland challenged the sought to eliminate. In The Bremen v. Zapata Off-Shore
California Franchise Investment Law as it was applied to Co., 407 U.S. 1, 12, 92 S.Ct. 1907, 1914, 32 L.Ed.2d
invalidate a contract for arbitration made pursuant to the 513 (1972), we noted that the contract fixing a particular
Federal Arbitration Act. Appellee argues that the action forum for resolution of all disputes
of the California Supreme Court with respect to this claim
is not a “final judgment or decree” within the meaning of “was made in an arm's-length
§ 1257(2). negotiation by experienced and
sophisticated businessmen, and
Under Cox Broadcasting Corp. v. Cohn, 420 U.S. 469, 482– absent some compelling and
483, 95 S.Ct. 1029, 1039–1040, 43 L.Ed.2d 328 (1975), countervailing reason it should be
judgments of state courts that finally decide a federal honored by the parties and enforced
issue are immediately appealable when “the party seeking by the courts.”
review here might prevail [in the state court] on the merits
on nonfederal grounds, thus rendering unnecessary review The Zapata court also noted that
of the federal issue by this Court, and where reversal of
“the forum clause was a vital part of the agreement, and
the state court on the federal issue would be preclusive of
it would be unrealistic to think that the parties did not
any further litigation on the relevant cause of action....”
conduct their negotiations, including fixing the **857
In these circumstances, we have resolved the federal issue
monetary terms, with the consequences of the forum
“if a refusal immediately to review the state-court decision
clause figuring prominently in their calculations.” Id.,
might seriously erode federal policy.” Id., at 483, 95 S.Ct.,
at 14, 92 S.Ct., at 1915.
at 1040.
For us to delay review of a state judicial decision denying jurisdiction to resolve this question as a matter of federal
enforcement of the contract to arbitrate until the state law under 28 U.S.C. § 1257(2). See Bailey v. Anderson, 326
court litigation has run its course would defeat the core U.S. 203, 207, 66 S.Ct. 66, 68, 90 L.Ed. 3 (1945).
purpose of *8 a contract to arbitrate. We hold that
the Court has jurisdiction to decide whether the Federal
Arbitration Act preempts § 31512 of the California
*10 III
Franchise Investment Law.
[4] The California Franchise Investment Law provides:
In the California Supreme Court, Southland argued that “A written provision in any maritime transaction or a
California law applied but that neither the contract to contract evidencing a transaction involving commerce
arbitrate nor State law authorized class action procedures to settle by arbitration a controversy thereafter arising
to govern arbitrations. Southland also contended that out of such contract or transaction, or the refusal
the Federal Rules were inapplicable in State proceedings. to perform the whole or any part thereof, or an
Southland pointed out that although California law agreement in writing to submit to arbitration an existing
provided a basis for class action procedures, the Judicial controversy arising out of such a contract, transaction,
Council of California acknowledged “the incompatibility or refusal, shall be valid, irrevocable, and enforceable,
of class actions and arbitration.” Petition for Hearing save upon such grounds as exist at law or in equity for
at 23. It does not appear that Southland opposed class the revocation of any contract.” 9 U.S.C. § 2 (1976).
procedures on federal grounds in the *9 California
Congress has thus mandated the enforcement of
Supreme Court. 3 Nor does the record show that the
arbitration agreements.
California Supreme Court passed upon the question
whether superimposing class action procedures on a
We discern only two limitations on the enforceability
contract arbitration was contrary to the federal Act. 4 of arbitration provisions governed by the Federal
Arbitration *11 Act: they must be part of a written
**858 Since it does not affirmatively appear that the maritime contract or a contract “evidencing a transaction
validity of the State statute was “drawn in question”
involving commerce” 5 and such clauses may be revoked
on federal grounds by Southland, this Court is without
upon “grounds as exist at law or in equity for the
revocation of any contract.” We see nothing in the Act applicable in state and federal court. Moses H. Cone
indicating that the broad principle of enforceability is began with a petition for an order to compel arbitration.
subject to any additional limitations under State law. The District Court stayed the action pending resolution
of a concurrent state court suit. In holding that the
[6] The Federal Arbitration Act rests on the authority of District Court had abused its discretion, we found no
Congress to enact substantive rules under the Commerce showing of exceptional circumstances justifying the stay
Clause. In Prima Paint Corp. v. Flood & Conklin and recognized “the presence of federal-law issues” under
Manufacturing Corp., 388 U.S. 395, 87 S.Ct. 1801, 18 the federal Act as “a major consideration weighing against
L.Ed.2d 1270 (1967), the Court examined the legislative surrender [of federal jurisdiction].” Id., at ––––, 103 S.Ct.,
history of the Act and concluded that the statute “is based at 942. We thus read the underlying issue of arbitrability
upon ... the incontestable federal foundations of ‘control to be a question of substantive federal law: “Federal law
over interstate commerce and over admiralty.’ ” Id., at in the terms of the Arbitration Act governs that issue in
405, 87 S.Ct., at 1806 (quoting H.R.Rep. No. 96, 68th either state or federal court.” Id., at ––––, 103 S.Ct., at 941.
Cong., 1st Sess. 1 (1924)). The contract in Prima Paint,
as here, contained an arbitration clause. One party in that Although the legislative history is not without
case alleged that the other had committed fraud in the ambiguities, there are strong indications that Congress
inducement of the contract, although not of arbitration had in mind something more than making arbitration
clause in particular, and sought to have the claim of agreements enforceable only in the federal courts. The
fraud adjudicated in federal court. The Court held that, House Report plainly suggests the more comprehensive
notwithstanding a contrary state rule, consideration of a objectives:
claim of fraud in the inducement of a contract “is for the
arbitrators and not for the courts,” id., at 400, 87 S.Ct., at “The purpose of this bill is to make valid and
1804. The Court relied for this holding on Congress' broad enforcible agreements for arbitration contained in
power to fashion substantive rules under the Commerce contracts involving *13 interstate commerce or within
the jurisdiction or admiralty, or which may be the
Clause. 6
subject of litigation in the Federal courts.” H.R.Rep.
No. 96, 68th Cong., 1st Sess. 1 (1924) (Emphasis added.)
**859 At least since 1824 Congress' authority under
the Commerce Clause has been held plenary. Gibbons
This broader purpose can also be inferred from the reality
v. Ogden, 22 U.S. 1, 196, 9 Wheat. 1, 196, 6 L.Ed. 23
that Congress would be less likely to address a problem
(1824). In the words of Chief Justice Marshall, *12 the
whose impact was confined to federal courts than a
authority of Congress is “the power to regulate; that is, to
problem of large significance in the field of commerce. The
prescribe the rule by which commerce is to be governed.”
Arbitration Act sought to “overcome the rule of equity,
Ibid. The statements of the Court in Prima Paint that
that equity will not specifically enforce any arbitration
the Arbitration Act was an exercise of the Commerce
agreement.” Hearing on S. 4214 Before a Subcomm. of the
Clause power clearly implied that the substantive rules of
Senate Comm. on the Judiciary, 67th Cong., 4th Sess. 6
the Act were to apply in state as well as federal courts.
(1923) ( “Senate Hearing”) (remarks of Sen. Walsh). The
As Justice Black observed in his dissent, when Congress
House Report accompanying the bill stated:
exercises its authority to enact substantive federal law
under the Commerce Clause, it normally creates rules “[t]he need for the law arises from ... the jealousy of
that are enforceable in state as well as federal courts. the English courts for their own jurisdiction.... This
Prima Paint, 388 U.S., at 420, 87 S.Ct., at 1814 (Black, J., jealousy survived for so lon[g] a period that the principle
dissenting). became firmly embedded in the English common law
and was adopted with it by the American courts. The
In Moses H. Cone Memorial Hospital v. Mercury courts have felt that the precedent was too strongly
Construction Corp., ––– U.S., at ––––, –––– n. 32, 103 fixed to be overturned without legislative enactment....”
S.Ct., at 942 n. 32, we reaffirmed our view that the H.R.Rep. No. 96, supra, 1–2 (1924).
Arbitration Act “creates a body of federal substantive
law” and expressly stated what was implicit in Prima Surely this makes clear that the House Report
Paint, i.e., the substantive law the Act created was contemplated a broad reach of the Act, unencumbered
by state law constraints. As was stated in Metro courts, but as a necessary *15 qualification on a statute
Industrial Painting Corp. v. Terminal Construction Corp., intended to apply in state and federal courts.
287 F.2d 382, 387 (CA2 1961) (Lumbard, Chief Judge,
concurring), “the purpose of the act was to assure those Under the interpretation of the Arbitration Act urged by
who desired arbitration and whose contracts related to Justice O'CONNOR, claims brought under the California
interstate commerce that their expectations would not Franchise Investment Law are not arbitrable when they
be undermined by federal judges, or ... by state courts are raised in state court. Yet it is clear beyond question
or legislatures.” Congress also showed its awareness that if this suit had been brought as a diversity action in
of the widespread unwillingness of **860 state courts a federal district court, the arbitration clause would have
to enforce arbitration agreements, e.g., Senate Hearing, been enforceable. 7 Prima Paint, supra. The interpretation
supra, at 8, and that *14 such courts were bound by state given to the Arbitration Act by the California Supreme
laws inadequately providing for Court would therefore encourage and reward forum
shopping. We are unwilling to attribute to Congress
“technical arbitration by which, if you agree to arbitrate
the intent, in drawing on the comprehensive powers of
under the method provided by the statute, you have an
the Commerce Clause, to create a right to enforce an
arbitration by statute[;] but [the statutes] ha[d] nothing
arbitration contract and yet make the right dependent
to do with validating the contract to arbitrate.” Ibid.
for its enforcement on the particular forum in which it is
The problems Congress faced were therefore twofold: asserted. And since the overwhelming proportion of all
the old common law hostility toward arbitration, and civil litigation in this country is in the state courts, 8 we
the failure of state arbitration statutes to mandate cannot believe Congress intended to limit the Arbitration
enforcement of arbitration agreements. To confine the Act to disputes subject only to federal **861 court
scope of the Act to arbitrations sought to be enforced in jurisdiction. 9 Such an interpretation would frustrate
federal courts would frustrate what we believe Congress Congressional *16 intent to place “[a]n arbitration
intended to be a broad enactment appropriate in scope to agreement ... upon the same footing as other contracts,
meet the large problems Congress was addressing. where it belongs.” H.R.Rep. No. 96, supra, 1.
[7] Justice O'CONNOR argues that Congress viewed [8] [9] In creating a substantive rule applicable in state
the Arbitration Act “as a procedural statute, applicable
as well as federal courts, 10 Congress intended to foreclose
only in federal courts.” Post, at 865. If it is correct that
state legislative attempts to undercut the enforceability
Congress sought only to create a procedural remedy in the
federal courts, there can be no explanation for the express of arbitration agreements. 11 We hold that § 31512 of
limitation in the Arbitration Act to contracts “involving the California Franchise Investment Law violates the
commerce.” 9 U.S.C. § 2. For example, when Congress has Supremacy Clause.
authorized this Court to prescribe the rules of procedure
in the federal Courts of Appeals, District Courts, and
bankruptcy courts, it has not limited the power of the *17 IV
Court to prescribe rules applicable only to causes of action
involving commerce. See, e.g., 28 U.S.C. §§ 2072, 2075, The judgment of the California Supreme Court denying
2076 (1976). We would expect that if Congress, in enacting enforcement of the arbitration agreement is reversed;
the Arbitration Act, was creating what it thought to be a as to the question whether the Federal Arbitration Act
procedural rule applicable only in federal courts, it would precludes a class action arbitration and any other issues
not so limit the Act to transactions involving commerce. not raised in the California courts, no decision by this
On the other hand, Congress would need to call on the Court would be appropriate at this time. As to the latter
Commerce Clause if it intended the Act to apply in state issues, the case is remanded for further proceedings not
courts. Yet at the same time, its reach would be limited to inconsistent with this opinion.
transactions involving interstate commerce. We therefore
view the “involving commerce” requirement in § 2, not It is so ordered.
as an inexplicable limitation on the power of the federal
2529, 2539–2540, 61 L.Ed.2d 153 (1979); United States that all such agreements are valid *21 irrespective of
v. Kimbell Foods, Inc., 440 U.S. 715, 99 S.Ct. 1448, 59 their purpose or effect. See generally, Paramount Famous
L.Ed.2d 711 (1979); Clearfield Trust Co. v. United States, Lasky Corp. v. United States, 282 U.S. 30, 51 S.Ct. 42, 75
318 U.S. 363, 63 S.Ct. 573, 87 L.Ed. 838 (1943). Indeed, L.Ed. 145 (1930) (holding arbitration agreement void as a
the lower courts generally look to State law regarding restraint of trade).
questions of formation of the arbitration agreement under
§ 2, see, e.g., Comprehensive Merchandising Cat. *20 Inc. We should not refuse to exercise independent judgment
v. Madison Sales Corp., 521 F.2d 1210 (CA7 1975), which concerning the conditions under which an arbitration
is entirely appropriate so long as the state rule does not agreement, generally enforceable under the Act, can be
conflict with the policy of § 2. held invalid as contrary to public policy simply because
the source of the substantive law to which the arbitration
A contract which is deemed void is surely revocable agreement attaches is a State rather than the Federal
at law or in equity, and the California legislature has Government. I find no evidence that Congress intended
declared all conditions purporting to waive compliance such a double standard to apply, and I would not lightly
with the protections of the Franchise Disclosure Act, impute such an intent to the 1925 Congress which enacted
including but not limited to arbitration provisions, void the Arbitration Act.
as a matter of public policy. Given the importance to the
State of franchise relationships, the relative disparity in A state policy excluding wage claims from arbitration,
the bargaining positions between the franchisor and the cf. Merrill Lynch, Pierce, Fenner & Smith v. Ware, 414
franchisee, and the remedial purposes of the California U.S. 117, 94 S.Ct. 383, 38 L.Ed.2d 348 (1973), or a state
Act, I believe this declaration of State policy is entitled to policy of providing special protection for franchisees, such
respect. as that expressed in California's Franchise Investment
Law, **864 can be recognized without impairing the
Congress itself struck a similar balance in § 14 of the basic purposes of the federal statute. Like the majority of
Securities Act of 1933, 15 U.S.C. § 77n, and did not the California Supreme Court, I am not persuaded that
find it necessary to amend the Federal Arbitration Act. Congress intended the pre-emptive effect of this statute
Rather, this Court held that the Securities Act provision to be “so unyielding as to require enforcement of an
invalidating arbitration agreements in certain contexts agreement to arbitrate a dispute over the application of a
could be reconciled with the general policy favoring regulatory statute which a state legislature, in conformity
enforcement of arbitration agreements. Wilko v. Swan, with analogous federal policy, has decided should be left
346 U.S. 427, 74 S.Ct. 182, 98 L.Ed. 168 (1953). Repeals to judicial enforcement.” App. to Juris. Statement 18a.
by implication are of course not favored, and we did
not suggest that Congress had intended to repeal or Thus, although I agree with most of the Court's
modify the substantive scope of the Arbitration Act reasoning and specifically with its jurisdictional holdings,
in passing the Securities Act. Instead, we exercised I respectfully dissent from its conclusion concerning the
judgment, scrutinizing the policies of the Arbitration enforceability of the arbitration agreement. On that issue,
Act and their applicability in the special context of the I would affirm the judgment of the California Supreme
remedial legislation at issue, and found the Arbitration Court.
Act inapplicable. We have exercised such judgment in
other cases concerning the scope of the Arbitration Act,
and have focused not on sterile generalization, but rather
Justice O'CONNOR with whom Justice REHNQUIST
on the substance of the transaction at issue, the nature
joins, dissenting.
of the relationship between the parties to the agreement,
Section 2 of the Federal Arbitration Act (FAA), 9 U.S.C.
and the purpose of the regulatory scheme. See, e.g., Scherk
§ 2, provides that a written arbitration agreement “shall be
v. Alberto-Culver Co., 417 U.S. 506, 94 S.Ct. 2449, 41
valid, irrevocable, *22 and enforceable, save upon such
L.Ed.2d 270 (1974), rev'g, 484 F.2d 611 (CA7 1973); see
grounds as exist at law or in equity for the revocation of
also, id., 484 F.2d, at 615–620 (Stevens, Circuit Judge,
dissenting). Surely the general language of the Arbitration any contract.” 1 § 2 does not, on its face, identify which
Act that arbitration agreements are valid does not mean judicial forums are bound by its requirements or what
procedures govern its enforcement. The FAA deals with to arbitrate a contract dispute is outcome-determinative
these matters in §§ 3 and 4. § 3 provides: —i.e. “substantive”—and therefore a matter normally
governed by state law in federal diversity cases.
“If any suit or proceeding be brought in any of the **865 Bernhardt gave rise to concern that the FAA
courts of the United States upon any issue referable to could thereafter constitutionally be applied only in federal
arbitration ... the court ... shall on application of one court cases arising under federal law, not in diversity
of the parties stay the trial of the action until such
cases. 4 In Prima Paint v. Flood & Conklin, 388 U.S.
arbitration has been had in accordance with the terms
395, 404–405, 87 S.Ct. 1801, 1806–1807, 18 L.Ed.2d 1270
of the agreement....” 2 (1967), we addressed that concern, and held that the
§ 4 specifies that a party aggrieved by another's refusal to FAA may constitutionally be applied to proceedings in a
arbitrate
federal diversity court. 5 The FAA covers only contracts
“may petition any United States district court which, involving interstate commerce or maritime affairs, and
save for such agreement, would have jurisdiction under Congress “plainly has the power to legislate” in that area.
Title 28, in a civil action or in admiralty of the 388 U.S., at 405, 87 S.Ct., at 1807.
subject matter ... for an order directing that such
arbitration proceed in the manner provided for in such *24 Nevertheless, the Prima Paint decision “carefully
avoided any explicit endorsement of the view that the
agreement....” 3
Arbitration Act embodied substantive policies that were
to be applied to all contracts within its scope, whether
Today, the Court takes the facial silence of § 2 as a
sued on in state or federal courts.” P. Bator, P. Mishkin,
license to declare that state as well as federal courts
D. Shapiro, & H. Wechsler, Hart and Wechsler's The
must apply § 2. In addition, though this is not spelled
Federal Courts and the Federal System 731–732 (2d ed.
out in the opinion, the Court holds that in enforcing
this newly-discovered federal right state courts must 1973). 6 Today's case is the first in which this Court has
follow procedures specified in § 3. The Court's decision had occasion to determine whether the FAA applies to
is impelled by an understandable desire to encourage the state court proceedings. One statement on the subject did
use of arbitration, but it utterly fails to recognize *23 the appear in Moses H. Cone Memorial Hospital v. Mercury
clear congressional intent underlying the FAA. Congress Construction Corp., 460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d
intended to require federal, not state, courts to respect 765 (1983), but that case involved a federal, not a state,
arbitration agreements. court proceeding; its dictum concerning the law applicable
in state courts was wholly unnecessary to its holding.
I
II
The FAA (originally the “United States Arbitration Act”)
was enacted in 1925. As demonstrated below, infra, at The majority opinion decides three issues. First, it holds
865 – 868, Congress thought it was exercising its power that § 2 creates federal substantive rights that must be
to dictate either procedure or “general federal law” in enforced by the state courts. Second, though the issue
federal courts. The issue presented here is the result of is not raised in this case, the Court states, ante, at 861,
three subsequent decisions of this Court. n. 9, that § 2 substantive rights may not be the basis
for invoking federal court jurisdiction under 28 U.S.C. §
In 1938 this Court decided Erie Railroad Co. v. Tompkins, 1331. Third, the Court reads § 2 to require state courts
304 U.S. 64, 58 S.Ct. 817, 82 L.Ed. 1188. Erie denied the to enforce § 2 rights using procedures that mimic those
federal government the power to create substantive law specified for federal courts by FAA §§ 3 and 4. The first
solely by virtue of the Article III power to control federal of these conclusions is unquestionably wrong as a matter
court jurisdiction. Eighteen years later the Court decided of statutory construction; the second appears to be an
Bernhardt v. Polygraphic Co., 350 U.S. 198, 76 S.Ct. attempt to limit the damage done by the first; the third is
273, 100 L.Ed. 199 (1956). Bernhardt held that the duty unnecessary and unwise.
In 1925 Congress emphatically believed arbitration to “Nor can it be said that the Congress of the United
be a matter of “procedure.” At hearings on the Act States, directing its own courts ..., would infringe upon
congressional subcommittees were told: “The theory on *27 the provinces or prerogatives of the States....
which you do this is that you have the right to tell the [T]he question of the enforcement relates to the law
of remedies and not to substantive law. The rule must
Federal courts how to proceed.” 7 **866 The House
be changed for the jurisdiction in which the agreement
Report on the FAA stated: “Whether an agreement for
is sought to be enforced.... There is no disposition
arbitration shall be enforced or not is a question of
therefore by means of the Federal bludgeon to force
procedure....” 8 On the floor of the House Congressman an individual State into an unwilling submission to
Graham assured his fellow members that the FAA
arbitration enforcement.” 12
“does not involve any new principle of law except The House Report on the FAA unambiguously stated:
to provide a simple method ... in order to give “Before [arbitration] contracts could be enforced in the
enforcement.... It creates no new legislation, grants no Federal courts ... this law is essential. The bill declares that
new rights, except a remedy to enforce an agreement in such agreements shall be recognized **867 and enforced
commercial contracts and in admiralty contracts.” 9 by the courts of the United States.” 13
*26 A month after the Act was signed into law the
American Bar Association Committee that had drafted Yet another indication that Congress did not intend
and pressed for passage of the federal legislation wrote: the FAA to govern state court proceedings is found
in the powers *28 Congress relied on in passing the
“The statute establishes a procedure in the Federal Act. The FAA might have been grounded on Congress's
courts for the enforcement of arbitration agreements.... powers to regulate interstate and maritime affairs, since
A Federal statute providing for the enforcement of the Act extends only to contracts in those areas. There
arbitration agreements does relate solely to procedure are, indeed, references in the legislative history to the
in the Federal courts.... [W]hether or not an arbitration corresponding federal powers. More numerous, however,
agreement is to be enforced is a question of the law are the references to Congress's pre-Erie power to
of procedure and is determined by the law of the prescribe “general law” applicable in all federal courts. 14
jurisdiction wherein the remedy is sought. That the At the congressional hearings, for example: “Congress
enforcement of arbitration contracts is within the law of rests solely upon its power to prescribe the jurisdiction and
procedure as distinguished from substantive law is well
duties of the Federal courts.” 15 And in the House Report:
settled by the decisions of our courts.” 10
Since Bernhardt, a right to arbitration has been “The matter is properly the subject of Federal action.
characterized as “substantive,” and that holding is not Whether an agreement for arbitration shall be enforced
challenged here. But Congress in 1925 did not characterize or not is a question of procedure to be determined by
the FAA as this Court did in 1956. Congress believed the law court in which the proceeding is brought and
that the FAA established nothing more than a rule of
*31 III
B
Section 2, like the rest of the FAA, should have no
The structure of the FAA itself runs directly contrary to application whatsoever in state courts. Assuming, to the
the reading the Court today gives to § 2. §§ 3 and 4 are contrary, that § 2 does create a federal right that the state
the implementing provisions of the Act, and they expressly courts must enforce, state courts should nonetheless be
apply only to federal courts. § 4 refers to the “United States allowed, at least in the first instance, to fashion their own
district court[s],” and provides that it can be invoked only procedures for enforcing the right. Unfortunately, the
in a court that has jurisdiction **868 under Title 28 of Court seems to direct that the arbitration clause at issue
the United States Code. As originally enacted, § 3 referred, here must be specifically enforced; apparently no other
in the same terms as § 4, to “courts [or court] of the United means of enforcement is permissible. 20
States.” 17 There has since been a minor amendment in §
4's phrasing, but no substantive change in either section's **869 It is settled that a state court must honor
federally created rights and that it may not unreasonably
limitation to federal courts. 18
undermine them by invoking contrary local procedure.
“[T]he assertion of Federal rights, when plainly and
*30 None of this Court's prior decisions has
reasonably made, is not to be defeated under the name of
authoritatively construed the Act otherwise. It bears
local practice.” Brown v. Western R., 338 U.S. 294, 299,
repeating that both Prima Paint and Moses H. Cone
70 S.Ct. 105, 108, 94 L.Ed. 100 (1949). But absent specific
involved federal court litigation. The applicability of the
direction from Congress the state courts have always been
FAA to state court proceedings was simply not before
permitted to apply their own reasonable procedures when
the Court in either case. Justice Black would surely be
enforcing federal rights. Before we undertake to read a
surprised to find either the majority opinion or his dissent
set of complex and mandatory procedures into § 2's brief
in Prima Paint cited by the Court today, as both are, ante,
and general language, we should at a minimum allow
at 858, 859. His dissent took pains to point out:
state courts and legislatures a chance to develop their
“The Court here does not hold ... that the body of own methods for enforcing the new federal rights. Some
federal substantive law created by federal judges under might choose to award compensatory or punitive damages
the Arbitration Act is required to be applied by state for the violation of an arbitration agreement; some
courts. A holding to that effect—which the Court seems might award litigation costs to the party who remained
to leave up in the air—would flout the intention of the willing to arbitrate; some might affirm the “validity and
framers of the Act.” 388 U.S., at 424, 87 S.Ct., at 1816 enforceability” *32 of arbitration agreements in other
(Black, J., dissenting) (footnotes omitted). ways. Any of these approaches could vindicate § 2 rights
in a manner fully consonant with the language and
background of that provision. 21
Arbitration was, accordingly, identical to that in § 2 of the FAA in a federal court proceeding as a valid exercise
of Congress's Commerce Clause and Admiralty powers.
FAA. 29
Today the Court discovers a federal right in FAA § 2
that the state courts must enforce. Apparently confident
**871 In summary, forum shopping concerns in
that state courts are not competent to devise their own
connection with the FAA are a distraction that do
procedures for protecting the newly discovered federal
not withstand scrutiny. The Court ignores the drafters'
right, the Court summarily prescribes a specific procedure,
carefully devised plan for dealing with those problems.
found nowhere in § 2 or its common law origins, that the
state courts are to follow.
Footnotes
* The syllabus constitutes no part of the opinion of the Court but has been prepared by the Reporter of Decisions for the
convenience of the reader. See United States v. Detroit Lumber Co., 200 U.S. 321, 337, 26 S.Ct. 282, 287, 50 L.Ed. 499.
1 Cal.Corp.Code § 31512 provides: “Any condition, stipulation or provision purporting to bind any person acquiring any
franchise to waive compliance with any provision of this law or any rule or order hereunder is void.”
2 Supplemental Memorandum of Points and Authorities in Opposition to Petition for Writs of Mandate or Prohibition at
19–25.
3 The question Southland presented to the state Supreme Court was “[w]hether a court may enter an order compelling a
private commercial arbitration governed by the Federal Arbitration Act ... to proceed as a class action even though the
terms of the parties' arbitration agreement do not provide for such a procedure.” Southland argued that (1) the decision
of the Court of Appeal “is in conflict with the decisions of other Courts of Appeal in this State,” Petition for Hearing at 3; (2)
class actions would delay and complicate arbitration, increase its cost, and require judicial supervision, “considerations
[which] strongly militate against the creation of class action arbitration procedures,” id., at 22; and (3) there was no basis
in law for class actions. According to appellants, the Federal Rules of Civil Procedure did not apply in California courts.
Id., at 23. Southland thus relied, not on federal law, but on California law in opposing class action procedures.
4 The California Supreme Court cited “[a]nalogous authority” supporting consolidation of arbitration proceedings by federal
courts. E.g., Compania Espanola de Petroleos, S.A. v. Nereus Shipping, S.A., 527 F.2d 966, 975 (CA2 1975), cert. denied,
426 U.S. 936, 96 S.Ct. 2650, 49 L.Ed.2d 387 (1976); In re Czarnikow-Rionda Co., 512 F.Supp. 1308, 1309 (SDNY 1981).
This, along with support by other state courts and the California legislature for consolidation of arbitration proceedings
permitted the court to conclude that class action proceedings were authorized: “It is unlikely that the state Legislature in
adopting the amendment to the Arbitration Act authorizing consolidation of arbitration proceedings, intended to preclude
a court from ordering classwide arbitration in an appropriate case. We conclude that a court is not without authority to do
so.” 31 Cal.3d, at 613, 183 Cal.Rptr., at 377, 645 P.2d, at 1209. The California Supreme Court thus ruled that imposing
a class action structure on the arbitration process was permissible as a matter of state law.
5 We note that in defining “commerce” Congress declared that “nothing herein contained shall apply to contracts of
employment of seamen, railroad employees, or any other class or workers engaged in foreign or interstate commerce.”
9 U.S.C. § 1 (1976).
6 The procedures to be used in an arbitration are not prescribed by the federal Act. We note, however, that Prima Paint,
supra, considered the question of what issues are for the courts and what issues are for the arbitrator.
7 Appellees contend that the arbitration clause, which provides for the arbitration of “any controversy or claim arising out of
or relating to this Agreement or the breach hereof,” does not cover their claims under the California Franchise Investment
Law. We find the language quoted above broad enough to cover such claims. Cf. Prima Paint, supra, 388 U.S., at 403–
404, 406, 87 S.Ct., at 1805–1806, 1807 (finding nearly identical language to cover a claim that a contract was induced
by fraud).
8 It is estimated that 2% of all civil litigation in this country is in the federal courts. Administrative Office of the United
States Court, Annual Report of the Director 3 (1982) (206,000 filings in federal district court in twelve months ending June
30, 1982, excluding bankruptcy filings); Flango, Advance Report—The Latest State Court Caseload Data, State Court
Journal, p. 18 (Winter 1983) (approximately 13,600,000 civil filings during comparable period, excluding traffic filings).
9 While the Federal Arbitration Act creates federal substantive law requiring the parties to honor arbitration agreements,
it does not create any independent federal-question jurisdiction under 28 U.S.C. § 1331 (1976) or otherwise. Moses H.
Cone, 460 U.S., at –––– n. 32, 103 S.Ct., at 942 n. 32. This seems implicit in the provisions in § 3 for a stay by a “court in
which such suit is pending” and in § 4 that enforcement may be ordered by “any United States district court which, save for
such agreement, would have jurisdiction under Title 28, in a civil action or in admiralty of the subject matter of a suit arising
out of the controversy between the parties.” Ibid.; Prima Paint, supra, 388 U.S., at 420 and n. 24, 87 S.Ct., at 1814 (Black,
J., dissenting); Krauss Bros. Lumber Co. v. Louis Bossert & Sons, Inc., 62 F.2d 1004, 1006 (CA2 1933) (L. Hand, J.)
10 The contention is made that the Court's interpretation of § 2 of the Act renders §§ 3 and 4 “largely superfluous.” Post, at
869, n. 20. This misreads our holding and the Act. In holding that the Arbitration Act preempts a state law that withdraws
the power to enforce arbitration agreements, we do not hold that §§ 3 and 4 of the Arbitration Act apply to proceedings in
state courts. Section 4, for example, provides that the Federal Rules of Civil Procedure apply in proceedings to compel
arbitration. The Federal Rules do not apply in such state court proceedings.
11 The California Supreme Court justified its holding by reference to our conclusion in Wilko v. Swan, 346 U.S. 427, 74 S.Ct.
182, 98 L.Ed. 168 (1953), that arbitration agreements are nonbinding as to claims arising under the federal Securities
Act of 1933. 31 Cal.3d at 602, 183 Cal.Rptr. at 370, 645 P.2d at 1202–1203. The analogy is unpersuasive. The question
in Wilko was not whether a state legislature could create an exception to § 2 of the Arbitration Act, but rather whether
Congress, in subsequently enacting the Securities Act, had in fact created such an exception.
Justice STEVENS dissents in part on the ground that § 2 of the Arbitration Act permits a party to nullify an agreement
to arbitrate on “such grounds as exist at law or in equity for the revocation of any contract.” We agree, of course, that
a party may assert general contract defenses such as fraud to avoid enforcement of an arbitration agreement. We
conclude, however, that the defense to arbitration found in the California Franchise Investment Law is not a ground
that exists at law or in equity “for the revocation of any contract” but merely a ground that exists for the revocation of
arbitration provisions in contracts subject to the California Franchise Investment Law. Moreover, under this dissenting
view, “a state policy of providing special protection for franchisees ... can be recognized without impairing the basic
purposes of the federal statute.” Post, at 866. If we accepted this analysis, states could wholly eviscerate Congressional
intent to place arbitration agreements “upon the same footing as other contracts,” H.R.Rep. No. 96, supra, 1, simply by
passing statutes such as the Franchise Investment Law. We have rejected this analysis because it is in conflict with the
Arbitration Act and would permit states to override the declared policy requiring enforcement of arbitration agreements.
1 9 U.S.C. § 2.
2 9 U.S.C. § 3 (emphasis added).
3 9 U.S.C. § 4 (emphasis added). § 9, which addresses the enforcement of arbitration awards, is also relevant. “If no court
is specified in the agreement of the parties, then such application may be made to the United States court in and for the
district within which such award was made....” 9 U.S.C. § 9 (emphasis added).
4 Justice Frankfurter made precisely this suggestion in Bernhardt. 350 U.S., at 208, 76 S.Ct., at 279 (Frankfurter, J.,
concurring).
5 Two circuits had previously addressed the problem. Robert Lawrence Co. v. Devonshire Fabrics, Inc., 271 F.2d 402
(CA2 1959), cert. granted 362 U.S. 909, 80 S.Ct. 682, 4 L.Ed.2d 618, dismissed pursuant to stipulation of counsel, 364
U.S. 801, 81 S.Ct. 27, 5 L.Ed.2d 37 (1960); American Airlines, Inc. v. Louisville & Jefferson County Air Bd., 269 F.2d
811 (CA6 1959).
6 In Robert Lawrence, supra, the Second Circuit had flatly announced—in dictum, of course—that the FAA was “a
declaration of national law equally applicable in state or federal courts.” 271 F.2d, at 407. One Justice in Prima Paint
was prepared to adopt wholesale the Second Circuit's more broadly written opinion. 388 U.S., at 407, 87 S.Ct., at 1807
(Harlan, J., concurring). But the Prima Paint majority opinion did not do so. In these circumstances, the majority opinion
speaks loudly by its complete silence regarding the Act's applicability to state courts.
7 Arbitration of Interstate Commercial Disputes, Hearing on H.R. 646 and S. 1005 before the Joint Committee of
Subcommittees on the Judiciary, 68th Cong., 1st Sess. 17 (1924) (hereinafter Joint Hearing) (statement of Mr. Cohen,
American Bar Association). See also, Sales and Contracts to Sell in Interstate and Foreign Commerce, and Federal
Commercial Arbitration, Hearing Before a Subcommittee of the Senate Committee on the Judiciary, 67th Cong., 4th Sess.
2 (1923) (hereinafter Senate Hearing).
8 H.R.Rep. No. 96, 68th Cong., 1st Sess. 1 (1924). To similar effect, the Senate Report noted that the New York statute,
after which the FAA was patterned, had been upheld against constitutional attack the previous year in Red Cross Line
v. Atlantic Fruit Co., 264 U.S. 109, 44 S.Ct. 274, 68 L.Ed. 582 (1924). S.Rep. No. 536, 68th Cong., 1st Sess. 3 (1924).
In Red Cross Justice Brandeis based the Court's approval of the New York statute on the fact that the statute effected
no change in the substantive law.
9 65 Cong.Rec. 1931 (1924).
10 Committee on Commerce, Trade and Commercial Law, The United States Arbitration Law and its Application, 11 A.B.A.J.
153, 156 (1925). See also Cohen & Dayton, The New Federal Arbitration Law, 12 Va.L.Rev. 265, 275–276 (1926).
11 That Congress chose to apply the FAA only to proceedings related to commercial and maritime contracts does not
suggest that the Act is “substantive.” Cf. Fed.Rule Civ.Proc. 81; Fed.Rule Evid. 1101; Fed.Rule Crim.Proc. 54.
12 Joint Hearing 39–40 (emphasis added). “The primary purpose of the statute is to make enforcible in the Federal courts
such agreements for arbitration....” Id., at 38 (statement of Mr. Cohen). See also Senate Hearing 2 (“The bill follows the
lines of the New York arbitration law applying it to fields wherein there is Federal jurisdiction”).
13 H.R.Rep. No. 96, supra, at 1. Commentators writing immediately after passage of the Act uniformly reached the same
conclusion. The A.B.A. Committee that drafted the legislation wrote: “So far as the present law declares simply the policy
of recognizing and enforcing arbitration agreements in the Federal courts it does not encroach upon the province of
the individual states.” Committee on Commerce, Trade and Commercial Law, supra, at 155. See also Cohen & Dayton,
supra, at 276–277; Baum & Pressman, The Enforcement of Commercial Arbitration Agreements in the Federal Courts,
8 N.Y.U.L.Quart.Rev. 428, 459 (1931). Williston wrote: “Inasmuch as arbitration acts are deemed procedural, the United
States Act applies only to the federal courts....” 6 S. Williston & G. Thompson, A Treatise on the Law of Contracts 5368
(Rev. ed. 1938).
More recent students of the FAA uniformly and emphatically reach the same conclusion. Prima Paint, supra, 388 U.S.,
at 424, 87 S.Ct., at 1816 (Black, J., dissenting); Note, 73 Harv.L.Rev. 1382 (1960); Note, Erie, Bernhardt, and § 2 of the
United States Arbitration Act: A Farrago of Rights, Remedies, and a Right to a Remedy, 69 Yale L.J. 847, 863 (1960);
Note, Scope of the United States Arbitration Act in Commercial Arbitration: Problems in Federalism, 58 Nw.U.L.Rev.
468, 492 (1963).
14 For my present purpose it is enough to recognize that Congress relied at least in part on its Article III power over the
jurisdiction of the federal courts. See Prima Paint, 388 U.S., at 405, and n. 13, 87 S.Ct., at 1807, n. 13 (majority opinion);
id., at 416–420, 87 S.Ct., at 1812–1814 (Black, J., dissenting).
15 Joint Hearing 38. See also id., at 17, 37–38.
16 H.R.Rep. No. 96, supra, at 1. Immediately after the FAA's enactment the A.B.A. drafters of the Act wrote:
“[The FAA] rests upon the constitutional provision by which Congress is authorized to establish
and control inferior Federal courts. So far as congressional acts relate to procedure in the Federal
courts, they are clearly within the congressional power.”
Committee on Commerce, Trade and Commercial Law, supra, at 156. Numerous other commentators writing shortly
after the FAA's passage, as well as more recently, have made similar statements. See, e.g., Cohen & Dayton, supra,
at 275; Baum & Pressman, supra, at 430–431; Note, 73 Harv.L.Rev., at 1383; Note, 58 Nw.U.L.Rev., at 481.
17 The use of identical language in both sections was natural: § 3 applies when the party resisting arbitration initiates the
federal court action; § 4 applies to actions initiated by the party seeking to enforce an arbitration provision. Phrasing the
two sections differently would have made no sense.
18 In 1954, as a purely clerical change, Congress inserted “United States district court” in § 4 as a substitute for “court of the
United States.” Both House and Senate Reports explained: “ ‘United States district court’ was substituted for ‘court of the
United States' because, among Federal courts, such a proceeding would be brought only in a district court.” H.R.Rep.
No. 1981, 83d Cong., 2d Sess. 8 (1954); S.Rep. No. 2498, 83d Cong., 2d Sess. 9 (1954).
Even without this history, § 3's “courts of the United States” is a term of art whose meaning is unmistakable. State
courts are “in” but not “of” the United States. Other designations of federal courts as the courts “of” the United States
are found, for example, in 28 U.S.C. § 2201 (declaratory judgments); Fed.Rule Evid. 501; and the Norris LaGuardia
Act, 29 U.S.C. § 104, see Boys Markets, Inc. v. Retail Clerks Union, 398 U.S. 235, 247, 90 S.Ct. 1583, 1590, 26 L.Ed.2d
199 (1970) (Brennan, J.). References to state and federal courts together as courts “in” or “within” the United States
are found in the Supremacy Clause (“Judges in every state”); 11 U.S.C. § 306; 22 U.S.C. § 2370(e)(2); and 28 U.S.C.
§ 1738. See also W. Sturges, Commercial Arbitration and Awards § 480, p. 937 (1930).
19 The Court suggests, ante, at 859, that it is unlikely that Congress would have created a federal substantive right that
the state courts were not required to enforce. But it is equally rare to find a federal substantive right that cannot be
enforced in federal court under the jurisdictional grant of 28 U.S.C. § 1331. Yet the Court states, ante, at 861, n. 9, that
the FAA must be so construed. The simple answer to this puzzle is that in 1925 Congress did not believe it was creating
a substantive right at all.
20 If my understanding of the Court's opinion is correct, the Court has made § 3 of the FAA binding on the state courts.
But as we have noted, supra, at 8–9, § 3 by its own terms governs only federal court proceedings. Moreover, if § 2,
standing alone, creates a federal right to specific enforcement of arbitration agreements §§ 3 and 4 are, of course, largely
superfluous. And if § 2 implicitly incorporates §§ 3 and 4 procedures for making arbitration agreements enforceable
before arbitration begins, why not also § 9 procedures concerning venue, personal jurisdiction, and notice for enforcing
an arbitrator's award after arbitration ends? One set of procedures is of little use without the other.
21 See Note, 69 Yale L.J., at 864–865; Note, 73 Harv.L.Rev., at 1385; Note, 58 Nw.U.L.Rev., at 493.
22 See J. Cohen, Commercial Arbitration and the Law 53–252 (1918); W. Sturges, supra, at §§ 15–17 (discussing
“revocability”); id., § 22 (treating as equivalent different courts' declarations that arbitration agreements were “contrary to
public policy,” “invalid,” “not binding upon the parties,” “unenforceable,” or “void”). See also Note, 73 Harv.L.Rev., at 1384.
23 See W. Sturges, supra, at §§ 22–24.
24 Hart, The Relations Between State and Federal Law, 54 Colum.L.Rev. 489, 508 (1954). See generally P. Bator, P.
Mishkin, D. Shapiro, & H. Wechsler, supra, at 567–573.
25 See Joint Hearing 16 (statement of Mr. Cohen, A.B.A.); Senate Hearing 2. See also Cohen & Dayton, supra, at 275–
276; Sturges & Murphy, Some Confusing Matters Relating to Arbitration under the United States Arbitration Act, 17 L.
& Contemp.Prob. 580, 590 (1952).
26 See, e.g., Atlantic Fruit Co. v. Red Cross Line, 276 Fed. 319 (SDNY 1921), aff'd, 5 F.2d 218 (CA2 1924); Lappe v. Wilcox,
14 F.2d 861 (NDNY 1926).
27 Joint Hearing 35.
28 See S.Rep. No. 536, supra, at 3.
29 The Uniform Act tracked the “valid, irrevocable, and enforceable” language of § 2. See 47 A.B.A.Reps. 318 (1922). It was
also hoped that other states might pattern their arbitration statutes directly after the federal Act. See, e.g., Joint Hearing
28. By 1953 it was reported that arbitration statutes “quite similar” to the FAA had been enacted in twelve other states.
Kochery, The Enforcement of Arbitration Agreements in the Federal Courts: Erie v. Tompkins, 39 Corn.L.Q. 74, 76, n.
7 (1953). See also Ludwig Mowinckels Rederi v. Dow Chemical Co., 25 N.Y.2d 576, 584–585, 307 N.Y.S.2d 660, 666,
255 N.E.2d 774, 778 (1970).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Synopsis
[2] Mandamus
Background: Employer sued former employee and his
Civil Proceedings Other Than Actions
wife, seeking to recover $32,000 that it allegedly had
loaned to defendants in connection with their purchase If the Federal Arbitration Act (FAA) applies,
of home in Texas, and seeking a resulting trust on a party must seek relief, from a trial court's
the home. Defendants counterclaimed for breach of order denying a motion to compel arbitration,
employment agreement. The 104th District Court, Taylor through a mandamus proceeding. 9 U.S.C.A.
County, Lee Hamilton, J., denied employer's motion § 1 et seq.
to compel arbitration of the counterclaims. Employer
Cases that cite this headnote
brought interlocutory appeal and petitioned for writ of
mandamus.
[3] Alternative Dispute Resolution
Constitutional and Statutory Provisions
and Rules of Court
Holdings: The Court of Appeals, Terry McCall, J., held
that: Commerce
Arbitration
[1] arbitration clause of employment agreement was The Federal Arbitration Act (FAA) extends
governed by Texas Arbitration Act rather than Federal to any contract affecting interstate commerce
Arbitration Act, and thus, interlocutory appeal rather as far as the Commerce Clause of the United
than mandamus was appropriate method for employer to States Constitution will reach. U.S.C.A.
seek relief from trial court's order; Const. Art. 1, § 8, cl. 3; 9 U.S.C.A. § 1 et seq.
[2] employer did not substantially invoke the judicial 1 Cases that cite this headnote
process, as element for waiver of right to arbitration; and
[4] Alternative Dispute Resolution
[3] even assuming employer substantially invoked the Constitutional and Statutory Provisions
judicial process, employee was not prejudiced. and Rules of Court
Commerce
Arbitration
Reversed and remanded with instructions; petition denied.
The Federal Arbitration Act (FAA) does
not require a substantial effect on interstate
commerce; it requires only that commerce be
Cases that cite this headnote Cases that cite this headnote
Cases that cite this headnote 3 Cases that cite this headnote
Any doubts regarding waiver of the right process with respect to employee's arbitrable
to arbitration are resolved in favor of counterclaim for breach of employment
arbitration. agreement, and thus, employer did not
waive its contractual right to arbitration of
Cases that cite this headnote counterclaim.
process, as element for waiver of right movant's actions or movant's delay in seeking
to arbitration, with respect to employee's to compel arbitration.
arbitrable counterclaim for breach of
employment agreement. 3 Cases that cite this headnote
plus any commissions earned. The employment agreement in seeking arbitration and by substantially invoking the
contained the following arbitration provision: judicial process. After a hearing, the trial court denied
Southwind's motion to compel arbitration.
9.04. Arbitration Provisions. Any
claim or controversy that arises out
of or relates to this Agreement,
or the breach of this Agreement, Which Act Applies?
shall be settled by arbitration in
[1] [2] The employment agreement does not provide
accordance with the rules of the
whether the TAA or the FAA applies. If the TAA applies,
American Arbitration Association.
a party must seek relief from a trial court's order denying
Judgment upon the award rendered
a motion to compel arbitration through an interlocutory
may *734 be entered in any court
appeal. If the FAA applies, a party must seek relief from
of competent jurisdiction.
the trial court's order through a mandamus proceeding.
In re Educ. Mgmt. Corp., 14 S.W.3d 418, 425 (Tex.App.-
The Landwehrs moved from Arkansas to Texas in Houston [14th Dist.] 2000, orig. proceeding); Russ Berrie
connection with Jesstin's employment with Southwind. In and Co. v. Gantt, 998 S.W.2d 713, 714–15 (Tex.App.-
2002, Jesstin left his employment with Southwind, and the El Paso 1999, no pet.). Southwind argues that the TAA
Landwehrs moved back to Arkansas. applies, but it has filed a petition for writ of mandamus in
the event the FAA applies. The Landwehrs do not assert
On July 17, 2002, Southwind filed suit against the that the FAA applies.
Landwehrs seeking to recover $32,000 that it allegedly
had loaned to the Landwehrs in connection with their [3] [4] [5] The FAA extends to any contract affecting
purchase of a home in Abilene, Texas. Southwind also interstate commerce as far as the Commerce Clause
sought to establish a resulting trust on the Landwehrs'
of the United States Constitution 3 will reach. In re
home. On November 13, 2002, the Landwehrs filed
FirstMerit Bank, N.A., 52 S.W.3d 749, 754 (Tex.2001);
their original counterclaim alleging that Southwind had
In re L & L Kempwood Assocs., L.P., 9 S.W.3d 125,
breached its employment agreement with Jesstin. The
127 (Tex.1999). The FAA does not require a substantial
Landwehrs sought to recover not only Jesstin's annual
effect on interstate commerce; it requires only that
salary of $50,000 plus benefits for the remaining term of
commerce be involved or affected. In re Merrill Lynch
the agreement, but also additional damages.
Trust Co., 123 S.W.3d 549, 553 (Tex.App.-San Antonio
2003, orig. proceeding). In this case, Jesstin performed
The record demonstrates that the parties exchanged
his employment responsibilities for Southwind in Abilene,
written discovery and took depositions. The case also
Texas. The record does not show that the employment
received a number of trial settings. The record also shows
agreement, Jesstin's employment with Southwind, or
that the Landwehrs moved for summary judgment on
Southwind's business operations in any way involved or
Southwind's claims against them, Southwind responded to
affected interstate commerce. *735 Because the record
their motion, and the trial court denied the motion.
does not show that the employment agreement involved or
affected interstate commerce, we conclude that the TAA
On June 1, 2005, Southwind filed its motion to stay and
applies. We deny Southwind's request for mandamus relief
compel arbitration of the Landwehrs' claims pursuant to
pursuant to the FAA.
the TAA. Southwind did not seek to compel arbitration
of its claims against the Landwehrs. Southwind asserted
that the Landwehrs' claims fell within the scope of
the arbitration provision in the employment agreement. Southwind's Right to Arbitrate the Landwehrs' Claims
The Landwehrs filed a response to Southwind's motion
to compel arbitration. The Landwehrs did not argue [6] [7] A party seeking to compel arbitration must
that their claims did not fall within the scope of first prove that an arbitration agreement exists and
the arbitration provision. Instead, they argued that that the claims asserted fall within the scope of the
Southwind had waived its right to arbitration by its delay agreement. In re Oakwood Mobile Homes, Inc., 987
S.W.2d 571, 573 (Tex.1999)(orig.proceeding). The law
presumes the existence of an arbitration agreement, by delay; instead, the party urging waiver must establish
and any doubts regarding the existence or scope of an that any delay resulted in prejudice. Prudential Secs., Inc.
agreement are resolved in favor of arbitration. In re v. Marshall, 909 S.W.2d 896, 898 (Tex.1995). Waiver will
FirstMerit Bank, N.A., 52 S.W.3d at 753. Section 9.04 be found only when (1) the party seeking arbitration has
of the employment agreement provided that any claims substantially invoked the judicial process and (2) the party
arising out of a breach of the agreement would be settled opposing arbitration suffers actual prejudice as a result. In
by arbitration. In their counterclaim, the Landwehrs re Bruce Terminix Co., 988 S.W.2d at 704; Williams Indus.,
alleged that Southwind had breached the employment Inc., 110 S.W.3d at 135.
agreement. The Landwehrs' claims fall within the scope
of the arbitration agreement. Southwind met its burden
of establishing that an arbitration agreement exists and Substantially Invoking the Judicial Process
that the Landwehrs's claims fall within the scope of the [17] [18] [19] [20] The Landwehrs argue that
agreement. Southwind substantially invoked the judicial *736
process by conducting discovery, by seeking a continuance
of the trial setting, and by asking the trial court to
reset the case for trial. Courts will not find that a
Waiver Defense to Arbitration party has waived its right to enforce an arbitration
clause by merely taking part in litigation unless it has
[8] If a party seeking arbitration carries its initial
substantially invoked the judicial process to its opponent's
burden, the burden shifts to the party resisting arbitration
detriment. In re Bruce Terminix Co., 988 S.W.2d at
to present evidence on its defenses to the arbitration
704. Substantially invoking the judicial process may
agreement. Williams Indus., Inc. v. Earth Dev. Sys. Corp.,
occur when the party seeking arbitration actively tried,
110 S.W.3d 131, 134 (Tex.App.-Houston [1st Dist.] 2003,
but failed, to achieve a satisfactory result in litigation
no pet.). The Landwehrs' sole defense to arbitration is that
before turning to arbitration. Williams Indus., Inc., 110
Southwind waived its right to arbitrate their claims.
S.W.3d at 135. Examples include moving for summary
judgment or otherwise seeking a final judicial resolution
[9] [10] [11] [12] The standard for determining waiver
of the dispute but failing to receive a satisfactory result.
of the right to arbitration is the same under both the
In re Bruce Terminix Co., 988 S.W.2d at 704; In re
TAA and the FAA. Brown v. Anderson, 102 S.W.3d 245,
Winter Park Constr., Inc., 30 S.W.3d 576, 579 (Tex.App.-
250 (Tex.App.-Beaumont 2003, pet. denied); Sedillo v.
Texarkana 2000, orig. proceeding). Substantially invoking
Campbell, 5 S.W.3d 824, 826 (Tex.App.-Houston [14th
the judicial process has also been defined as taking specific
Dist.] 1999, no pet.). Whether a party has waived its
and deliberate actions after a suit has been filed that are
right to arbitrate presents a question of law that we
inconsistent with the right to arbitrate. Sedillo, 5 S.W.3d
review de novo. In re Oakwood Mobile Homes, Inc., 987
at 827. The Sedillo court held that a party substantially
S.W.2d at 574; Williams Indus., Inc., 110 S.W.3d at 136.
invoked the judicial process by seeking a discharge of
Because public policy favors arbitration, there is a strong
claims in the bankruptcy court before seeking arbitration
presumption against finding that a party has waived its
of the claims. Sedillo, 5 S.W.3d at 827.
right to arbitration; the burden to prove waiver is thus
a heavy one. In re Bruce Terminix Co., 988 S.W.2d 702,
[21] In this case, Southwind filed suit against the
704–05 (Tex.1998)(orig.proceeding); EZ Pawn Corp. v.
Landwehrs seeking to recover $32,000 that it allegedly
Mancias, 934 S.W.2d 87, 89 (Tex.1996)(orig.proceeding).
had loaned to the Landwehrs in connection with
Any doubts regarding waiver are resolved in favor of
their purchase of a home. Neither Southwind nor the
arbitration. In re Bruce Terminix Co., 988 S.W.2d at 705.
Landwehrs contend that Southwind's affirmative claims
for relief fall within the scope of the arbitration provision.
[13] [14] [15] [16] Waiver may be express or implied,
Southwind did not substantially invoke the judicial
but it must be intentional. EZ Pawn Corp., 934 S.W.2d
process by filing suit on its nonarbitrable claims.
at 89; Williams Indus., Inc., 110 S.W.3d at 135. Whether
waiver occurs depends on the individual facts and
The Landwehrs filed their counterclaim for breach of
circumstances of each case. Williams Indus., Inc., 110
the employment agreement. Southwind did not move
S.W.3d at 135. A party does not waive arbitration merely
for summary judgment or otherwise seek a final judicial
Footnotes
1 TEX. CIV. PRAC. & REM.CODE ANN. §§ 171.001–.098 (Vernon 2005).
2 9 U.S.C. §§ 1–16.
3 U.S. CONST. art. I, § 8, cl. 3.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
immunity under Texas Tort Claims Act. Tex. and to be swept out to rougher, deeper water,
Civ. Prac. & Rem. Code Ann. §§ 41.001(11), and therefore, that city's failure to warn
75.002, 101.021. visitors at risk rose to level of gross negligence,
as required to waive city's immunity from
Cases that cite this headnote suit for drowning deaths of children and
their father while trying to same them, under
[17] Municipal Corporations recreational use statute's limitation on waiver
Actions for injuries of governmental immunity under Texas Tort
Claims Act; rather, mayor's testimony related
Evidence that other individuals had drowned
to risks and conditions that would ordinarily
in water off man-made beach did not
be anticipated by reasonable recreational
demonstrate that city had actual knowledge
users interacting with coastal waters. Tex.
of unusual, concealed danger relating to
Civ. Prac. & Rem. Code Ann. §§ 41.001(11),
submerged beach which, when combined with
75.002, 101.021.
rough current, caused nine-year-old children
wading in knee-deep water along beach to Cases that cite this headnote
lose footing and to be swept out to rougher,
deeper water, and therefore, that city's failure
to warn beach patrons about dangers rose
to level of gross negligence, as required
*626 ON PETITION FOR REVIEW FROM THE
to waive city's immunity from suit arising
COURT OF APPEALS FOR THE FIRST DISTRICT
out of drowning deaths of children and
OF TEXAS
their father while trying to save children,
under recreational use statute's limitation on Attorneys and Law Firms
waiver of immunity under Texas Tort Claims
Act, absent any evidence describing nature, Alton C. Todd, The Law Firm of Alton C. Todd, 312 S.
location, frequency, or circumstances of any Friendswood Drive, Friendswood TX 77546, Iain Gordon
previous drownings over 50-year period that Simpson, Simpson, P.C., 1333 Heights Blvd., Suite 102,
area had been open to public for recreational Houston TX 77008, for Petitioner.
purposes, or any evidence that any previous
drownings occurred under conditions similar, George W. Vie III, Mills Shirley LLP, One City Centre,
in any respect, to conditions attributable to 1021 Main Street, Suite 1950, Houston TX 77002, for
drowning deaths. Tex. Civ. Prac. & Rem. Respondent.
Code Ann. §§ 41.001(11), 75.002, 101.021.
Opinion
Cases that cite this headnote
JUSTICE GUZMAN delivered the opinion of the Court.
negligent and grossly negligent in (1) creating a beach, (2) by Texas City after Hurricane Ike and installed at two boat
allowing swimming in the area, (3) failing to provide signs ramps were substantively identical to the monument signs
warning of perilous conditions that were not obvious to damaged in the hurricane. The photos also show that a
swimmers, and (4) failing to conduct studies to determine sign at a third boat ramp bore no warnings either before
the existence of any such perils. Suarez asserted that, in or after Hurricane Ike.
doing so, Texas City failed to use the ordinary care a
reasonable and prudent person would have employed to In response to Texas City's jurisdictional plea and motion
reduce, eliminate, or warn about the risk and, accordingly, for summary judgment, Suarez offered the following
breached its duty to warn or make the premises reasonably evidence: (1) deposition testimony from both the current
safe. In the alternative, Suarez claimed Texas City created mayor of Texas City, Matthew T. Doyle, and the Director
an attractive nuisance, enticing the public to swim near an of Public Works, Tom Kessler; (2) an affidavit from
area that looked like a beach, knowing there were hidden one of the would-be rescuers recounting the events
dangers in the form of deadly undertows, currents, and leading up to the drownings; (3) Texas City's responses
deep holes in the beach water. In bringing suit against to Suarez's request for admissions; and (4) an affidavit
Texas City, Suarez averred that governmental immunity from Worsham, the coastal engineering expert, in which
was waived under the Wrongful Death Act and, in the he “characterize[d] natural and man-made forces that
alternative, the Tort Claims Act and the recreational use were potentially involved” *631 and “describe[d] in a
statute. physical sense how this incident occurred.” In his affidavit,
Worsham observed that “[t]he directional orientation of
Texas City answered with a plea to the jurisdiction, [the] recreational beach with respect to wind-generated
general denial, and several affirmative defenses. The City's waves, tidal currents, and ship-generated hydrodynamic
plea, as supplemented, asserted that Suarez's pleadings effects is unique in the upper Texas coastal region, and
and evidence were insufficient to support jurisdiction. does not exist naturally anywhere in Texas” and that,
Texas City denied that it owed a duty under the on the day of the incident, “[t]he manmade structure
circumstances or that there was any evidence it acted (Texas City Dike) and beach interacted with the [natural]
with the culpability required to invoke a statutory waves and tidal currents to cause energetic breaking waves
waiver of immunity. More specifically, the City asserted and stronger currents, each of which was highly variable
it owes recreational users only the degree of care in strength and direction.” He opined that “[t]he water
afforded to a trespasser, which does not include warning motion in the form of wave action and currents initially
or protecting against beach conditions and associated caused the loss of footing of these two young victims and
risks that are open and obvious, ordinary and natural resulted in the relatively rapid movement of the young
features of submerged land, and inherent in open- victims from knee deep water into deeper rough water.”
water swimming. The City further alleged that evidence
of conscious indifference was lacking and argued that After a hearing, the trial court denied Texas City's plea
the use of some warning signs affirmatively negated to the jurisdiction and motion for summary judgment.
conscious indifference. In addition to other arguments, Texas City filed an interlocutory appeal from the denial
the City denied the existence of a defect, special of its jurisdictional plea. See TEX. CIV. PRAC. & REM.
or otherwise; asserted that its discretionary decisions CODE § 51.014(a)(8). The court of appeals reversed
regarding placement of warning signs is not actionable the trial court's order and rendered judgment dismissing
under the Tort Claims Act; and argued that the Wrongful Suarez's claims for lack of jurisdiction. In addition to
Death Act does not waive immunity for municipalities. other holdings that are not at issue on appeal, the court
See TEX. CIV. PRAC. & REM. CODE § 101.056. of appeals held that the record contained “no evidence
[creating] a factual dispute with regard to whether [Texas
Texas City also moved for summary judgment on identical City] had actual knowledge or awareness of the alleged
grounds and further challenged causation as a matter unique and dangerous property condition existing at the
of law. In support of both the plea and the motion for beach at the time of the drowning deaths of Suarez's
summary judgment, Texas City offered the affidavit of family.” 2013 WL 867428, at *12. Accordingly, the court
Tom Kessler, the City's Director of Public Works, and concluded that Suarez failed to bring a valid gross-
attached photographs showing that warning signs erected
negligence claim under the recreational use statute and, as or use of ... real property if the governmental unit would,
a result, Texas City retained immunity from suit. Id. were it a private person, be liable to the claimant according
to Texas law.” Id. § 101.021; see State v. Shumake, 199
Suarez moved for panel and en banc reconsideration. S.W.3d 279, 283 (Tex.2006). In premises-defect cases, the
Although the court of appeals denied both motions, governmental unit owes “only the duty [of care] that a
Justice Keyes, a non-panel member, dissented in an private person owes to a licensee on private property.” 4
opinion challenging the court's jurisdictional analysis. Id. § 101.022(a). When property is open to the public
Justice Keyes stated that the court had improperly relied for “recreation,” however, the recreational use statute
on precedent pertaining only to natural conditions and further limits the governmental unit's duty by classifying
incorrectly applied the standard of review by crediting recreational users as trespassers and limiting liability for
inferences in support of Texas City rather than in favor of premises defects to claims involving gross negligence,
Suarez. ––– S.W.3d ––––, –––– – ––––, No. 01–1200848– malicious intent, or bad faith. Id. at § 75.002. In doing
CV, 2013 WL 5913185, at *10–13 (Keyes, J., dissenting so, the statute elevates the burden of proof necessary
on reh'g). Because Justice Keyes's dissent addressed the to invoke the Tort Claims Act's statutory waiver. Id. §§
merits of the panel's decision and expressly disagreed 75.003(d)-(g) (the recreational use statute neither creates
with a question of law material to the decision, we have liability nor waives sovereign immunity, but “limits the
jurisdiction over this interlocutory appeal. See Am. Type liability of a governmental unit under circumstances in
Culture Collection, Inc. v. Coleman, 83 S.W.3d 801, 805 which the governmental unit would be liable under [the
(Tex.2002) (citingTEX. GOV'T CODE § 22.225(b)(4)). Tort Claims Act]”); 101.058 (the recreational use statute
controls to the extent it limits a governmental unit's
The issues on appeal to this Court are limited to the liability under the Tort Claims Act). As used in the
existence of evidence to support Texas City's liability recreational use statute, the term “recreation” includes
under the recreational use statute as it pertains to the a non-exclusive list of activities, including “swimming”
Texas Tort Claims Act's waiver of immunity. The specific and “picnicking.” Id. § 75.001(3). Suarez does not dispute
matters presented for our consideration are (1) the that her family was engaged in these activities and that
existence and parameters of any duty to warn or protect the recreational use statute therefore applies. See City of
recreational users from the conditions at the man-made Bellmead v. Torres, 89 S.W.3d 611, 614 (Tex.2002).
beach and (2) whether there is some evidence that Texas
City was grossly negligent in discharging any such duty. Furthermore, Suarez does not allege that Texas City
acted with malicious intent or in bad faith; accordingly,
Texas City “may be liable for gross negligence only to
II. Discussion the extent that it owed ... a legal duty.” See Kirwan, 298
S.W.3d at 623. Considering the interplay between the
Texas Tort Claims Act and the recreational use statute,
A. Governmental Immunity Texas City retains immunity from suit absent evidence
of circumstances giving rise to a duty to warn or protect
[2] Absent a valid statutory or constitutional waiver,
coupled with the requisite mental state. Suarez contends
trial courts lack subject-matter jurisdiction to adjudicate
that immunity is waived because (1) Texas City had a
lawsuits against municipalities. City of Watauga v.
duty to warn about or protect against the extreme and
Gordon, 434 S.W.3d 586, 589 (Tex.2014); Tex. Dep't.
unusual dangers created by the interaction of natural
of Parks & Wildlife v. Miranda, 133 S.W.3d 217, 224
forces with the manmade dike and (2) there is some
(Tex.2004); *632 Tex. Dep't of Transp. v. Jones, 8 S.W.3d
evidence Texas City acted with gross negligence by failing
636, 638 (Tex.1999). The Texas Tort Claims Act waives
to warn or protect the decedents from those conditions.
immunity from suit but only “to the extent of liability
See Shumake, 199 S.W.3d at 287–88.
created by [the Act].” See TEX. CIV. PRAC. & REM.
CODE § 101.025(a). The immunity waiver is therefore
intertwined with the merits of a claim under the Act.
B. Standard of Review
Under the Tort Claims Act, a governmental unit is liable
for “personal injury and death so caused by a condition
[3] [4] [5] [6] [7] Whether subject-matter jurisdiction conditions that are naturally occurring but concealed and
exists is a question of law that can be challenged, as it unexpected, we have said we could “envision” such a duty
was here, by a plea to the jurisdiction. Bland Indep. Sch.
Dist. v. Blue, 34 S.W.3d 547, 554 (Tex.2000). We review where a landowner knows of
de novo the disposition of Texas City's jurisdictional plea. a hidden and dangerous natural
Miranda, 133 S.W.3d at 226. Because we address a plea condition that is located in an area
to the jurisdiction in which disputed evidence implicates frequented by recreational users,
both the court's subject-matter jurisdiction and the merits where the landowner is aware of
of the case, we consider relevant evidence submitted by deaths or injuries related to that
the parties to determine if a fact *633 issue exists. particular condition, and where the
Id. at 227. We take as true all evidence favorable to danger is such that a reasonable
the nonmovant, indulge every reasonable inference, and recreational user would not expect
resolve any doubts in the nonmovant's favor. Id. at 228. If to encounter it on the property.
the evidence creates a fact question regarding jurisdiction,
Id. at 626.
the plea must be denied pending resolution of the fact
issue by the fact finder. Id. at 227–28. If the evidence
Here, we need not consider whether Texas City had a duty
fails to raise a question of fact, however, the plea to the
to warn or protect under the circumstances alleged to exist
jurisdiction must be granted as a matter of law. Id. at 228.
at the Dike because, even assuming the existence of such
a duty, there is no evidence that Texas City was grossly
negligent.
C. Analysis
[9] [10] As used in the recreational use statute, gross
[8] We have been called upon on several occasions to negligence has both objective and subjective components:
examine when circumstances existing in a recreational
setting give rise to a duty to warn or protect. We have (1) viewed objectively from the standpoint of the actor
found such a duty when an artificial condition created a at the time of its occurrence, the act or omission involves
risk of harm that was latent and not so inherent in the an extreme degree of risk, considering the probability
recreational use that it could reasonably be anticipated. and magnitude of the potential harm to others; and
See Shumake, 199 S.W.3d at 281–82, 288 (recognizing
a duty to warn or protect when a man-made structure (2) the actor has actual, subjective awareness of the
—an underground culvert—interacted with the natural risk involved, but nevertheless proceeds with conscious
perils associated with river tubing to create a powerful indifference to the rights, safety, or welfare of others.
undertow that sucked a nine-year-old girl under water and
Flynn, 228 S.W.3d at 660 (citing TEX. CIV. PRAC.
trapped her in the culvert). On the other hand, we have
& REM. CODE § 41.001(11)); Louisiana–Pac. Corp.
declined to impose a duty for premises conditions that are
v. Andrade, 19 S.W.3d 245, 246 (Tex.1999). To raise
open and obvious, regardless of whether such conditions
a fact issue regarding gross negligence, there must be
are artificial or naturally occurring. See Kirwan, 298
legally sufficient evidence that Texas City had actual,
S.W.3d at 623, 626 (concluding that landowner had
subjective awareness that conditions at the beach involved
no duty to warn about risk of falling associated with
an extreme *634 degree of harm but nevertheless was
sitting on cliff's edge even though the particular risk—
consciously indifferent to the rights, safety, or welfare
the collapse of the cliff—was unexpected); Flynn, 228
of others. Flynn, 228 S.W.3d at 660. “[I]n other words,
S.W.3d at 655, 659–60 (finding no duty to warn or protect
the plaintiff must show that the defendant knew about
cyclist from visible oscillating sprinkler that knocked the
the peril, but his acts or omissions demonstrate that he
plaintiff off her bike as she rode along a public trail).
did not care.” Louisiana–Pac. Corp., 19 S.W.3d at 246–
For naturally occurring conditions, our jurisprudence
47. We assume for purposes of our analysis that there is
suggests that obvious conditions include dangers that are
some evidence of an extreme risk considering both the
not necessarily visible but are inherent in the recreational
probability and magnitude of the harm. But Suarez's claim
use. Kirwan, 298 S.W.3d at 626. Although we have not
fails nonetheless because there is no evidence that Texas
directly addressed whether a duty arises with respect to
City was subjectively aware of perils at the beach that
were beyond the ken of a reasonable recreational user. See than create a mere surmise or suspicion of its existence,
Bellmead, 89 S.W.3d at 614 (in premises-defect cases, the the evidence is no more than a scintilla and, in legal
risk or condition alleged must be the cause of the resulting effect, is no evidence.” Browning–Ferris, Inc. v. Reyna,
injury). 865 S.W.2d 925, 927 & n.3 (Tex.1993) (quoting Kindred
v. Con/Chem, Inc., 650 S.W.2d 61, 63 (Tex.1983)). An
[11] To satisfy the subjective-knowledge component of inference is not reasonable if it is susceptible to multiple,
the gross negligence standard, the governmental entity equally probable inferences, requiring the factfinder to
must have “knowledge that the dangerous condition guess in order to reach a conclusion. See Ford Motor Co. v.
existed at the time of the accident.” City of Corsicana Ridgway, 135 S.W.3d 598, 601 (Tex.2004) (citing Lozano
v. Stewart, 249 S.W.3d 412, 414–15 (Tex.2008). Suarez's v. Lozano, 52 S.W.3d 141, 148 (Tex.2001)); see also *635
allegation that Texas City had knowledge of latent perils City of Keller, 168 S.W.3d at 814. Reviewing the record
at the man-made Dike rests on circumstantial evidence in the light most favorable to Suarez, we conclude there is
and inferences alleged to arise from evidence that, prior to no evidence Texas City knew perilous conditions existed
Hurricane Ike, Texas City (1) had posted warning signs— along the Dike that exceeded those inherently associated
including signs that said: “Beware. Undertow and wake, with aquatic activities in open water or beyond what
rip currents, and sink holes,” “No lifeguard on duty. Swim would reasonably be expected to exist.
at your own risk,” and “Swim in designated area only”—
but failed to replace the signs after the hurricane; (2) [15] Suarez first relies on undisputed evidence that before
had previously provided a “designated swimming area” Hurricane Ike, Texas City had erected signs on the Dike
somewhere at the beach but had not established such an warning visitors about undertows, wakes, rip currents,
area after Hurricane Ike; and (3) knew an unspecified and sink holes and cautioning them not to swim or to swim
number of drowning deaths had previously occurred at at their own risk. Although the admonitions on those signs
unknown locations along the Dike over the course of certainly imply an understanding of the perils associated
an unspecified time period. To the extent this evidence with entering the waters surrounding the Dike, they refer
raises any inference that the City knew uniquely perilous to common marine hazards that a reasonable recreational
conditions existed at the beach (or the Dike generally), user would know or expect to exist, especially in areas
the evidence is equally consistent with mere knowledge where boaters and swimmers regularly interact. They do
of risks inherently associated with open-water swimming. not, perforce, give rise to an inference that Texas City had
As such, it is no evidence of subjective awareness of and actual knowledge of any conditions or risks beyond those
conscious indifference to the enhanced marine hazards open and inherent in open-water recreational use. Indeed,
alleged to have caused or contributed to the drowning the signs do not even hint that conditions at the beach were
deaths of Hector Suarez and his daughters. See City of of such magnitude as to sweep away even non-swimmers
Keller v. Wilson, 168 S.W.3d 802, 814 (Tex.2005) (“When wading in shallow water. As we acknowledged in Kirwan,
the circumstances are equally consistent with either of two
landowners may err on the side of safety by warning
facts, neither fact may be inferred.” (quoting Lozano v. visitors of dangerous natural conditions whether or not
Lozano, 52 S.W.3d 141, 167 (Tex.2001))). the landowner has any duty to provide such warnings. 298
S.W.3d at 625–26. Other than guesswork and conjecture,
[12] [13] [14] Circumstantial evidence can establish the language used on the pre-Hurricane Ike warning signs
actual knowledge but such evidence must “either directly gives no purchase to Suarez's allegation that Texas City
or by reasonable inference” support that conclusion. was aware of an unusual, extreme, and concealed risk of
Stewart, 249 S.W.3d at 415 (quoting State v. Gonzalez, harm at the Dike.
82 S.W.3d 322, 330 (Tex.2002)). An inference is not
reasonable, however, if it is premised on mere suspicion [16] Suarez next points to the establishment and
—“some suspicion linked to other suspicion produces subsequent elimination of a “designated swimming area”
only more suspicion, which is not the same as some as evidence that Texas City had knowledge of dangerous
evidence.” Marathon Corp. v. Pitzner, 106 S.W.3d 724, conditions in the water. In her brief, Suarez contends
727–28 (Tex.2003) (citing Johnson v. Brewer & Pritchard, that (1) Texas City specifically designated “safe areas
P.C., 73 S.W.3d 193, 210 (Tex.2002)). “When the evidence for swimming” before Hurricane Ike, (2) no designated
offered to prove a vital fact is so weak as to do no more swimming area was reestablished after the hurricane,
and (3) her husband and daughters drowned in an area [occurred] before October 3, 2010,” the record in this case
previously designated for swimming. The inference Suarez is not comparable to other cases in which courts have
suggests is not clear. She implies both that designating a found sufficient evidence of knowledge based on evidence
swimming area at the beach supports an inference that of prior incidents.
swimming was recommended as being safe there and that
the designated swimming area was discontinued because In Shumake, the city knew about the dangers associated
it was not safe to swim at that location. with a man-made culvert because only days before the
incident, both a Parks Department employee and the
For some period of time, Texas City had erected a warning Austin Parks Department were informed that three park
sign on the Dike that read “No lifeguard on duty. Swim patrons nearly drowned in the same area from the same
in designated area only.” The sign may have been placed undertow that killed the Shumakes' daughter. 199 S.W.3d
at the beach, but the record is unclear on that point. at 281, 288. Similarly, in City of Houston v. Cavazos, a
The location of the designated swimming area is also child drowned while attempting to cross a river over a
speculative, but may have been at the beach and possibly concrete slab partially covered in water. 811 S.W.2d 231,
in the area where the drownings occurred. But even 231 (Tex.App.–Houston [14th Dist.] 1991, writ dism'd).
assuming the facts are as Suarez alleges, what inference do The slab appeared to be covered with about a foot of
these facts generate? One could equally infer any of the murky water but the water concealed a fifteen-foot drop-
following: (1) Texas City's knowledge that swimming at off at the concrete slab's edge. Id. The child slipped, fell,
any location at the Dike was abnormally dangerous; (2) and was carried into deeper water where he drowned.
Texas City knew that, whatever conditions existed at the Id. In Cavazos, the court found evidence of knowledge
Dike, they were no different in the designated location; based in part on testimony from two law-enforcement
or (3) establishing a segregated swimming area was futile officers that the dangers at the location were well known to
when people can and do enter the water all along the 10– the city. Id. at 234–35. Both officers stated unequivocally
mile shoreline. that the area was dangerous and that warnings were
imperative. Id. One of the officers testified that he had
Tom Kessler, Director of Public Works, testified that the personally posted warning signs five years before the child
swim area “wasn't there very long”; “you're swimming died, the signs were not up at the time of the incident
at your own risk in that area, too”; “[t]here was nothing because the city had removed them, and the city must
special about it. It was just set aside”; “[t]he hazards have known about the dangers because as many as three
were essentially the same [because] [i]t's the same bottom, drownings had occurred every year at the same location
the same currents, same everything, other than it had over a seven-year period. Id. at 235; see also City of El
some [pylons] around it”; and swimming occurred outside Paso v. Zarate, 917 S.W.2d 326, 332–33 (Tex.App.–El
as well as inside the designated swimming area when it Paso 1996, no writ) (finding evidence of knowledge where
existed. *636 The only evidence in the record regarding a child nearly drowned in the same location four years
the purpose of the designated swimming area is that earlier).
it had been intended to reduce the interaction between
recreational boaters and swimmers. Mayor Doyle testified Here, the record is devoid of similar evidence. Suarez
that “[t]he pylon area was there to separate the boats, the presented no evidence describing the number, nature,
catamarans ... from the swimmers.... It may have been a location, frequency, or circumstances of any previous
designated swimming [area] but it certainly wasn't the only drownings over the fifty-year period the Dike has been
swimming area” because people “swim all over the dike.” open to the public for recreational purposes. No evidence
Nothing more insidious could reasonably be inferred from exists that any previous drownings occurred under
the absence of a specially designated swimming area after conditions similar, in any respect, to those conditions
Hurricane Ike. Suarez's expert attributed to the deaths of Hector Suarez
and his daughters. In fact, nothing in the record suggests
[17] Suarez next contends that Texas City knew that any drownings or near drownings occurred with
dangerous conditions existed because people had such frequency or under such conditions that it would be
previously drowned at the beach. Although Kessler reasonable to infer actual knowledge of risks in excess of
affirmed that “other drowning deaths on the dike those normally associated with coastal-water recreation.
Footnotes
1 There is a suggestion in the record that at least some of these signs were posted at the behest of a former Texas City
mayor, Chuck Doyle, in response to his son's diving accident, the circumstances of which are not elucidated. Texas City's
current mayor, Matthew T. Doyle, is the former mayor's son and was the victim of the referenced diving accident. He
testified that he did not know about a particular impetus for erecting warning signs at the Dike and stated that his accident
had nothing to do with swimming skill or ability but resulted from a mistake.
2 A monument sign without a warning was replaced with another, similar sign at a third boat ramp.
3 Because Edith and Hector Suarez share a surname, we refer to Hector by his first name to avoid confusion.
4 Exceptions amplifying the government's duty exist and were alleged to apply in this case. See TEX. CIV. PRAC. & REM.
CODE § 101.022(a), (b). However, the court of appeals determined those matters adversely to Suarez, and they are not
at issue on appeal to this Court.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[Holding:] The Court of Appeals, Shepherd, Circuit Judge, [5] Alternative Dispute Resolution
held that dispute regarding franchise agreement was not Construction
subject to arbitration clause contained in subsequent e- Under Virginia law, oral franchise agreement
commerce agreement between the parties. was independent of, collateral to, and not
inconsistent with subsequent e-commerce
agreement between franchisor and franchisee,
Affirmed. and thus, pursuant to the “collateral contract
doctrine,” the e-commerce agreement's
arbitration clause was not attributable
West Headnotes (8) to the oral franchise agreement through
the e-commerce agreement's merger clause;
e-commerce agreement, which required
[1] Alternative Dispute Resolution franchisee to install and service franchisor's
Scope and Standards of Review products sold from franchisor's website, did
The Court of Appeals reviews de novo the not address franchisee's ability to promote or
district court's denial of a motion to compel sell franchisor's products, the subject of the
arbitration based on contract interpretation. prior oral franchise agreement.
11 Cases that cite this headnote 1 Cases that cite this headnote
I.
[8] Evidence
Prior and Contemporaneous Collateral For the purpose of ruling on AMF's motion to dismiss
Agreements or in the alternative to compel arbitration, the district
court assumed the truth of the allegations in Suburban's
Under Virginia law, the parol evidence rule
complaint. With the limited purpose of reviewing the
does not exclude parol proof of a prior
district court's ruling, we, too, view Suburban's allegations
or contemporaneous oral agreement that
as true. See Palcko v. Airborne Express, Inc., 372
is independent of, collateral to and not
F.3d 588, 597 (3d Cir.2004) (stating that a motion to
inconsistent with the written contract, and
compel arbitration is generally treated as a motion to
which would not ordinarily be expected
dismiss for failure to state a claim upon which relief
to be embodied in the writing, and thus
can be granted); cf. Manion v. Nagin, 394 F.3d 1062,
a merger clause gives rise to no more
1065 (8th Cir.2005) (viewing factual allegations as true
than a presumption that all the parties'
for purposes of motion to dismiss). Accordingly, the
prior agreements merged into the written
following facts are undisputed for purposes of this appeal.
agreement.
Suburban distributes indoor and outdoor lawn and leisure
Cases that cite this headnote equipment, and AMF manufactures pool tables and pool
table accessories. The parties entered into an oral franchise
agreement, whereby they agreed that Suburban would
have the right use the AMF trade name, trademark, or
Attorneys and Law Firms service mark in order to sell AMF's line of pool tables
and related accessories from Suburban's stores located in
*524 Vincint Keady, argued, St. Louis, MO, for the St. Louis, Missouri region. Subsequently, the parties
appellant. executed a written E-Commerce Dealer Agreement (“e-
commerce agreement”), in which Suburban agreed to
Matthew S. McBride, argued, St. Louis, MO, for appellee. provide delivery and installation of AMF's products sold
by AMF via its website to customers in Suburban's
Before MELLOY, BENTON and SHEPHERD, Circuit
specified areas.
Judges.
With regard to the e-commerce agreement, Section 14 of this appeal is also governed by the FAA, 9 U.S.C. §
provides that “[t]he determination of any dispute or claim 1 et seq., because the e-commerce agreement “involved
arising under the Agreement or any invoice or agreement interstate commerce.” Amchem Prods., Inc. v. Newport
executed pursuant to this Agreement will be settled by News Circuit Court Asbestos Cases, 264 Va. 89, 563 S.E.2d
binding arbitration in Richmond, Virginia.” Further, 739, 743 (2002).
Section 15 states that the e-commerce “[a]greement
constitutes the entire agreement between the parties and [2] [3] [4] Pursuant to the FAA, we construe the
supercedes all prior agreement[s], oral and written.” arbitration clause resolving any doubts in favor of
Finally, Section 15 goes on to state that the e-commerce arbitration. Am. Recovery Corp. v. Computerized Thermal
agreement “will be construed in accordance with the Imaging, Inc., 96 F.3d 88, 92 (4th Cir.1996) (citing Moses
laws of Virginia without regard to their conflict of laws H. Cone Mem'l Hosp. v. Mercury Constr. Co., 460 U.S. 1,
provisions.” 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983)). “Thus, we
may not deny a party's request to arbitrate an issue ‘unless
On August 25, 2005, AMF sent a termination letter it may be said with positive assurance that the arbitration
stating that Suburban would be “required to cease clause is not susceptible of an interpretation that covers
promoting” AMF's line of pool tables and accessories the asserted dispute.’ ” Id. (quoting United Steelworkers
within sixty days. The letter made no mention of the of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574,
e-commerce agreement. Suburban filed suit in Missouri 582-83, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960)). However,
state court alleging that it was entitled to damages from a “party cannot be required to submit to arbitration
the cancellation of the oral franchise agreement without any dispute which he has not agreed so to submit.”
the requisite notice pursuant to Missouri Revised Statute Amchem Prods., Inc., 563 S.E.2d at 743 (quoting United
section 407.405 as well as recoupment for improvements Steelworkers of Am., 363 U.S. at 582, 80 S.Ct. 1347).
it had made to its stores in reliance on the oral franchise When determining whether a contractual dispute exists
agreement. See Mo. Ann. Stat. § 407.405 (West 2001). that is subject to arbitration, Virginia courts examine
Pursuant to 28 U.S.C. § 1441, AMF removed the matter the contract's language and apply the commonwealth's
to federal court. Upon removal, AMF filed a motion substantive contract law. Id.
to dismiss or in the alternative to compel arbitration
and stay proceedings pursuant to the FAA, 9 U.S.C. § [5] On appeal, AMF contends that the e-commerce
3. Because the district court found that the e-commerce agreement's merger clause incorporates and subsumes
agreement did not address Suburban's ability to promote the oral franchise agreement such that the e-commerce
or sell AMF's products, it concluded that Suburban's agreement is the sole agreement between the parties
underlying claims did not arise under the e-commerce necessitating arbitration of the present dispute. “[A]
agreement. Accordingly, the district court denied AMF's ‘merger clause’ (sometimes an ‘integration’ or ‘entire
motion to compel arbitration of the dispute. AMF appeals agreement’ clause) ... ‘merges' prior negotiations into the
the district court's order. writing. A typical clause includes a recital that the writing
‘contains the entire agreement of the parties.’ ” 2 E. Allan
Farnsworth, Farnsworth on Contracts § 7.3 (3d ed.2004);
see, e.g., Prospect Dev. Co., Inc. v. Bershader, 258 Va.
II.
75, 515 S.E.2d 291, 296 (1999) (observing that a contract
[1] We review de novo the district court's denial of contained an “integration clause” stating “that in the
a motion to compel arbitration based on contract absence of an amendment in writing, the contract contains
interpretation. *526 Nitro Distrib., Inc. v. Alticor, Inc., the final and entire agreement between the parties”);
453 F.3d 995, 998 (8th Cir.2006). As both Missouri Spotsylvania County Sch. Bd. v. Seaboard Surety Co.,
and Virginia recognize the validity of the choice of laws 243 Va. 202, 415 S.E.2d 120, 126 (1992) (noting that “a
provision contained in the e-commerce agreement, we merger clause in the contract stated that the document
apply the law of Virginia to resolve this appeal. See Paul ‘represent[ed] the entire and integrated agreement between
Bus. Sys., Inc. v. Canon U.S.A., Inc., 240 Va. 337, 397 the parties' ”).
S.E.2d 804, 807 (1990); Kagan v. Master Home Prods.
Ltd., 193 S.W.3d 401, 407 (Mo.Ct.App.2006). Resolution
[6] [7] Merger clauses “purport to contractually require discussed Shevel's and stated that its “focus then was
on whether parol evidence was admissible in the face of
application of the parol evidence rule to the parties'
a [contract] silent on the subject matter of an alleged
agreement.” 11 Richard A. Lord, Williston on Contracts
separate agreement yet stating that it was the complete
§ 33:21 (4th ed.1999). In Virginia, “parol evidence ... is
agreement of the parties. We said such evidence was
inadmissible to vary, contradict, add to, or explain the
admissible.” J.E. Robert Co. v. J. Robert Co., Inc. of
terms of a complete, unambiguous, unconditional written
Virginia, 231 Va. 338, 343 S.E.2d 350, 353 (1986).
instrument.” (Shevel's Inc.-Chesterfield v. Se. Assocs., Inc.,
228 Va. 175, 320 S.E.2d 339, 343 (1984)). However, a
This case involves two distinct agreements between
merger “clause does not prohibit the admission of parol
Suburban and AMF. Suburban and AMF initially
evidence which does not contradict or vary the terms of
entered into the oral franchise agreement providing for
the ... contract....” Prospect Dev. Co., Inc., 515 S.E.2d
Suburban's promotion and sale of AMF products from
at 296. In this case, as the district court found, the e-
Suburban's stores. Subsequently, the parties executed the
commerce agreement does not address Suburban's ability
written e-commerce agreement, which required Suburban
to promote or sell AMF's products, which is the subject
to install and service AMF products sold by AMF through
of the prior oral franchise agreement. Accordingly, the
its website to its customers. Therefore, the oral franchise
prior oral agreement necessarily does not seek *527
agreement addresses a contractual relationship between
to contradict or supplement the subsequent e-commerce
the parties that is not covered in any manner by the
agreement that addresses a different subject, AMF's
e-commerce agreement. As a result, the oral franchise
selling its own product from the AMF website. Thus, these
agreement is “independent of, collateral to, and not
facts do not implicate the parol evidence rule.
inconsistent with” the e-commerce agreement within the
meaning of Shevel's. See Shevel's, 320 S.E.2d at 343. Thus,
[8] Further, the e-commerce agreement does not
the parties did not intend for the e-commerce agreement
extinguish the prior oral franchise agreement because
to be their sole agreement such that the merger clause does
it constitutes an independent agreement under the
not subsume the prior oral franchise agreement pursuant
“collateral contract doctrine.” Because “the parol
to Virginia's “collateral contract doctrine.” Because the
evidence rule does not exclude parol proof of a prior
agreements are independent of each other, the e-commerce
or contemporaneous oral agreement that is independent
agreement's arbitration language cannot be attributed
of, collateral to and not inconsistent with the written
to the oral franchise agreement, even construing the
contract, and which would not ordinarily be expected to
language in favor of arbitration. Accordingly, Suburban
be embodied in the writing,” a merger clause gives rise
has not agreed to arbitrate its claims in the underlying suit.
to no more than a presumption that all the parties' prior
agreements merged into the written agreement. Shevel's,
320 S.E.2d at 343 (quoting Pierce v. Plogger, 223 Va.
116, 286 S.E.2d 207, 209 (1982)). The Virginia Supreme III.
Court refers to this exception to the parol evidence rule as
the “collateral contract doctrine.” Id. The Shevel's Court We conclude that the district court did not err in denying
determined that this doctrine required the admission of a AMF's motion to dismiss or in the alternative to compel
prior oral agreement into evidence, despite a merger clause arbitration and stay proceedings, and affirm.
in the parties' subsequent written agreement, because the
prior oral agreement was a “different agreement” that
All Citations
did not seek “to vary or explain” the subsequent written
agreement. Id. In a later case, the Virginia Supreme Court 468 F.3d 523
Footnotes
1 The Honorable Donald J. Stohr, United States District Judge for the Eastern District of Missouri.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[6] Alternative Dispute Resolution *325 Edward Wood Dunham, Wiggins & Dana,
Suing or participating in suit New Haven, CT, for Plaintiffs–Appellants and Counter
Sandwich shop franchisor did not invoke Defendants–Appellants.
a judicial process to the prejudice of its
franchisees, so as to waive arbitration of James C. Ferguson, Ferguson & Associates, Baton Rouge,
franchisees' claims under franchise agreement, LA, David Maxwell Duree, Reinert & Duree, St. Louis,
by allegedly encouraging its affiliates to MO, for Plaintiffs–Appellees and Defendants–Counter
file involuntary bankruptcy petitions against Claimants–Appellees.
franchisees to delay arbitration, where
Appeals from the United States District Court for the
franchisees never challenged arbitrator's
Eastern District of Louisiana.
decision to hold arbitration in abeyance
pending bankruptcy proceeding, and there Before JOLLY, DUHÉ and EMILIO M. GARZA,
was no showing that franchisor desired Circuit Judges.
to resolve the arbitrable dispute through
litigation. Opinion
I
[8] Alternative Dispute Resolution
Particular cases This case involves a franchisor-franchisee relationship
Federal Arbitration Act (FAA) required stay gone sour. Subway, the chain sandwich shop, sells
pending arbitration of franchisees' claims franchises through DAI. Earl and Dorothy Sims and
against sandwich shop franchisor to extend various other partners (“the franchisees”), ran four
to franchisees' claims against franchisor's Subway franchises in the 1980's. Earl Sims was also
affiliates, although affiliates were not parties a Subway Development Agent (“D.A.”) for the Baton
to arbitration agreement, where franchisees' Rouge area and, on a temporary basis, for the New
claims were based entirely on their rights Orleans area. The franchisees' agreements with DAI,
under franchise agreement, which contained contained broad arbitration clauses. Earl Sims's D.A.
arbitration clause. 9 U.S.C.A. § 3. contract with DAI contained a similar arbitration clause.
28 Cases that cite this headnote The franchisees subletted real estate and leased equipment
from DAI's affiliated companies, Subway Restaurants,
Inc. (“SRI”) and Subway Sandwich Shops (“SSS”), both In the interim, the franchisees had filed two lawsuits of
of which leased real estate, and Subway Equipment their own. In July 1989, they filed a suit in the District
Leasing (“SEL”), which leased store equipment. The Court for East Baton Rouge Parish for damages against
franchisees' real estate subleases and the equipment leases DAI, DeLuca, and SSS. That case was stayed while
did not contain arbitration clauses. the bankruptcy case was pending and, after discharge,
the state granted DAI's motion to stay the matter
In March 1988, Earl Sims, much to his displeasure, was pending arbitration. In February of 1990, Sims sued
replaced by another D.A. in the New Orleans area. In May DAI and DeLuca in the Orleans Parish District Court.
of 1988, he filed an arbitration demand with the American DAI removed the suit to federal court, where it was
Arbitration Association (“AAA”), claiming that DAI consolidated with the 1988 federal case.
had breached the D.A. agreement. Subsequently, the
franchisees defaulted on their real estate and equipment The consolidated case was stayed pursuant to the
leases. Shortly thereafter, the litigation began in earnest. bankruptcy proceedings. At approximately the same time,
pursuant to a letter sent by counsel for DAI, the AAA
In November 1988, SEL and SRI sued the franchisees in decided to hold Earl Sims's arbitration in abeyance
United States District Court for the Eastern District of until the bankruptcy proceedings were resolved. Sims
Louisiana to recover amounts due under the equipment apparently did not object to the arbitration proceeding
and real estate contracts for one of the franchises being held in abeyance. When the bankruptcy proceedings
(“the 1988 federal case”). The claims made by SEL concluded in 1996, the franchisees moved to restore their
and SRI were under their respective contracts with the actions in the consolidated case to the active docket. After
franchisees, for which there were no arbitration clauses. the district court reopened the franchisees' actions, DAI
The franchisees responded by filing what they styled as a filed a demand for arbitration with the AAA and moved to
counterclaim against DAI and Frederick DeLuca, one of stay the litigation pending arbitration. The district court
DAI's principals. Although neither DAI nor DeLuca were denied the motion, reasoning that DAI waived its right to
parties to the lawsuit, the franchisees claimed that they compel arbitration. DAI has filed a timely appeal.
should be joined as SEL and SRI were merely extensions
of DAI. The district court apparently permitted this On appeal, DAI makes two arguments. First, DAI
1
joinder. The counterclaim *326 alleged similar claims contends that the district court erred when it held that
to those made by Sims in his arbitration demand. DAI had waived its right to arbitrate claims related to the
D.A. agreement. Second, DAI argues that, provided it is
A day before the franchisees filed their counterclaim in the correct that the district court should stay the franchisees'
1988 federal case, SEL filed an involuntary bankruptcy claims against DAI pending arbitration, then the district
petition against the franchisees. By 1990, SEL, SRI and court should also stay the claims against SEL, SRI, and
SSS had all filed separate, amended involuntary petitions SSS as well. We address each argument in turn.
against the franchisees in bankruptcy court. None of
the bankruptcy petitions involved arbitrable claims. In
December of 1990, the bankruptcy court entered orders II
for relief, granting the involuntary petition in each
proceeding. The district court reversed the bankruptcy [1] [2] We review the issue of whether a party's conduct
court, holding that SEL, SRI, and SSS were not separate amounts to a waiver of arbitration de novo. Walker v.
entities for purposes of 11 U.S.C. § 303(b)(1). On appeal, J.C. Bradford & Co., 938 F.2d 575, 577 (5th Cir.1991).
we reversed the holding that SEL, SRI, and SSS were The factual findings underlying a district court's waiver
separate entities. Matter of Sims, 994 F.2d 210 (5th determination are reviewed for clear error. See id. at 576.
Cir.1993). The franchisees then appealed to the Supreme “Waiver will be found when the party seeking arbitration
Court, which denied certiorari in 1994. Sims v. Subway substantially invokes the judicial process to the detriment
Equipment Leasing Corporation, 510 U.S. 1049, 114 S.Ct. or prejudice of the other party.” Miller Brewing Co. v. Fort
702, 126 L.Ed.2d 669 (1994). The bankruptcy proceedings Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir.1986).
were finally resolved in 1996.
[3] There is a strong presumption against waiver of and later seeks to arbitrate that same issue.” Doctor's
arbitration. See, e.g., Lawrence v. Comprehensive Business Associates v. Distajo, 107 F.3d 126, 134 (2d Cir.1997),
Services Co., 833 F.2d 1159, 1164 (5th Cir.1987) (“Waiver cert. denied, 522 U.S. 948, 118 S.Ct. 365, 139 L.Ed.2d
of arbitration is not a favored finding and there is a 284 (1997) (“Distajo II ”). However, in Distajo II, the
presumption against it.”); Moses H. Cone Mem'l Hosp. court held that, even where DAI directed its affiliates to
v. Mercury Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. sue pursuant to cross-default clauses based on franchise
927, 74 L.Ed.2d 765 (1983) (“[A]s a matter of law, any agreement breaches, there was no waiver of DAI's right to
doubts concerning the scope of arbitrable issues should be arbitrate the franchisees' claims. Id. at 132.
resolved in favor of arbitration.”). Accordingly, a party
alleging waiver of arbitration must carry a heavy burden.
Associated Builders v. Ratcliff Constr. Co., 823 F.2d 904,
III
905 (5th Cir.1987).
In this case, the arbitration clause in the D.A. agreement
Walker provides an example of this court's “hesitat[ion] covers “[a]ny controversy or claim arising out of or
to find that a party has waived its contractual right to relating to this contract or the breach thereof.” This
arbitration.” 938 F.2d at 577. In Walker, the plaintiffs language clearly covers the franchisees' claims against
sued in state court, alleging state securities law violations. DAI. Absent waiver, the FAA would require the district
*327 Instead of immediately demanding arbitration, court to stay the litigation pending arbitration. See In re
the defendant answered the complaint and participated Complaint of Hornbeck Offshore Corp., 981 F.2d 752, 754
in discovery. Thirteen months later, after the plaintiffs (5th Cir.1993).
moved to transfer the case, the defendant sought to
enforce its contractual right to arbitration. Despite the The district court provided the following explanation for
defendant's delay and participation in the lawsuit, this concluding that DAI waived its right to arbitrate:
court held that the defendant had not waived arbitration
because the plaintiffs failed to show that they were [The] disputes in these actions were
“materially prejudiced” by the delay. Id. at 578. not arbitrated at their inception
because of the actions of the
Before proceeding to the arguments in this case, we should Subway entities. Movants invoked
note that the Second Circuit has addressed the waiver issue the judicial process, in this court
in great detail with respect to litigation involving one of and in bankruptcy court, creating
the parties before this court, DAI. In Doctor's Associates, an eight year delay which has
Inc. v. Distajo, the Second Circuit considered and rejected prejudiced the opposing parties.
challenges to the arbitration clause in a Subway franchise Movants, the Subway entities,
agreement. 66 F.3d 438 (2d Cir.1995) (“Distajo I ”), cert. waived their right to arbitration.
denied, 517 U.S. 1120, 116 S.Ct. 1352, 134 L.Ed.2d 520
DAI argues that the district court erred when it concluded
(1996). The court held that “[i]f the alleged violations of
that DAI invoked the judicial process.
the subleases were premised on violations of the franchise
agreement (which DAI was contractually bound to resolve
DAI argues that it has not engaged in any litigation on
through arbitration) then DAI did litigate substantial
the merits of the claims it is seeking to arbitrate. None
issues going to the merits, and the only remaining question
of the actions brought by a DAI affiliate involved claims
will be whether the franchisees suffered prejudice from the
arising out of a contract containing an arbitration clause.
eviction proceedings.” Id. at 457.
SEL and SRI brought the 1988 federal action for breach
of their respective contracts, neither of which contained
In a subsequent appeal of Distajo I, the Second Circuit
arbitration clauses. The only other action initiated by
further delved into the meaning of prejudice for purposes
a DAI affiliate is the bankruptcy proceeding, which
of a waiver of an arbitration agreement: “prejudice ...
again did not involve arbitrable claims. In contrast, the
refers to the inherent unfairness—in terms of delay,
franchisees have, on three separate occasions, sought to
expense, or damage to a party's legal position—that occurs
litigate arbitrable claims related to the D.A. agreement:
when the party's opponent forces it to litigate an issue
(1) in their counterclaim in the 1988 federal case; (2) in
their petition filed in Baton Rouge Parish; and (3) in their agent, or precursor to DAI. Even if the affiliates and DAI
petition filed in Orleans Parish. On its face, at least, it were one and the same, DAI still would not have invoked
would appear that it is the franchisees, not DAI, that have the judicial process.
invoked the judicial process.
[6] The franchisees further argue that DAI encouraged its
The franchisees make two arguments to support their affiliates to file actions against the franchisees so that DAI
claim that DAI has invoked the judicial process to their could postpone the arbitration proceeding. This argument
detriment. First, they argue that DAI and its affiliates is a relatively novel one. The franchisees essentially
are so related, and the claims brought by the affiliates contend that by using the bankruptcy proceeding as an
so inextricably intertwined, that DAI *328 invoked the excuse to delay the Simses' arbitration, DAI invoked
judicial process when its affiliates brought the 1988 federal a judicial process (the bankruptcy proceeding) to the
action and the bankruptcy action. The franchisees second prejudice of the franchisees (who were subjected to an
argument is that DAI's affiliates acted as an agents for eight-year delay). Even if we accepted the reasoning of
DAI in filing the bankruptcy proceeding so that DAI this argument, which we do not, the franchisees' argument
could stay Sims's arbitration proceeding. would still fail on the record before us. DAI did request
that Sims's arbitration be held in abeyance pending the
[4] The franchisees contend that the district court bankruptcy proceeding and all of the parties now agree
correctly concluded that DAI invoked the judicial process that there was no legally binding reason for the arbitrator
through its affiliates, insisting that the affiliates were to do so. The franchisees, however, never challenged the
DAI's alter egos or at least its agents. 2 This argument arbitrator's decision. We will not construe a decision to
brings up an issue we addressed in Lawrence, and which delay arbitration as prejudicial to the franchisees, when
the Second Circuit has addressed in greater detail since the franchisees never objected to that delay.
—whether a party can invoke the judicial process if it
litigates a non-arbitrable claim against a party with whom [7] More importantly, the reasoning used by the
it has arbitrable claims. Lawrence, 833 F.2d at 1165 franchisees is ultimately specious. As we make clear today,
(holding that franchisor who sued franchisees had not in order to invoke the *329 judicial process, a party must
invoked the judicial process for purposes of a subsequent have litigated the claim that the party now proposes to
dispute); Distajo II, 107 F.3d at 132–33 (“only prior arbitrate. Here, the franchisees argue that, by asserting
litigation of the same legal and factual issues as those unrelated litigation—the bankruptcy proceeding—as a
the party now wants to arbitrate results in waiver of basis for delaying the arbitration proceeding, DAI has
the right to arbitrate”); see also Gingiss Int'l, Inc. v. “invoked the judicial process” and therefore waived its
Bormet, 58 F.3d 328, 330(holding that a franchisor “did right to arbitrate. This argument, however, confuses our
not waive ... [his arbitrable] claims by prosecuting the use of the term “invoke” in past cases. We use the
unlawful detainer action in California state court because term to describe the act of implementing or enforcing
that action involved different issues”). We hold today that the judicial process, not the act of calling upon for
a party only invokes the judicial process to the extent it support or assistance, as say, one would invoke a spirit
litigates a specific claim it subsequently seeks to arbitrate. or the elements. 3 Thus, to invoke the judicial process,
the waiving party must do more than call upon unrelated
[5] The franchisees argue, however, that the dispute over litigation to delay an arbitration proceeding. The party
the D.A. agreement is so inextricably intertwined with must, at the very least, engage in some overt act in court
the actions brought by DAI's affiliates that they amount that evinces a desire to resolve the arbitrable dispute
to the same action. We cannot agree. DAI's affiliates through litigation rather than arbitration. There is no
sought to recover for obligations under their respective evidence that DAI's actions or, assuming arguendo that
contracts. These contracts, all related to obligations for DAI's associates' actions can be imputed to DAI, the
leasing equipment and real estate, in no instance involved actions of SEL, SRI, or SSS amount to this threshold
the D.A. agreement between Sims and DAI. Because the showing of an attempt to invoke the judicial process.
actions brought by the DAI affiliates involved claims that
are different from the one DAI now seeks to arbitrate, it We therefore find no basis for concluding that DAI should
does not matter whether DAI's affiliates were the alter ego, be denied an opportunity to arbitrate this claim. DAI
did not invoke the judicial process with respect to the have no right to arbitration, the claim brought by the
franchisees is based entirely on the franchisees' rights
arbitrable claim at issue here. Even if the franchisees could
under the D.A. contract. We therefore fail to see how
show that DAI intentionally brought the bankruptcy
litigation could proceed on the franchisees' claims without
proceeding to delay arbitration, the franchisees have not
adversely affecting DAI's right to arbitration. See, e.g.,
shown that they were prejudiced as a result of that stay.
Kroll v. Doctor's Associates, Inc., 3 F.3d 1167, 1171 (7th
We therefore hold that the district court erred when it
Cir.1993) (stating that a decision about whether to grant
denied DAI's motion for a stay pending arbitration.
a stay should be motivated by the court's “concern that
litigation against a party not bound by an arbitration
provision may impair an arbitrator's consideration of
IV claims against a party that is compelled to arbitrate.”).
Footnotes
1 This point is not entirely clear. Normally, such a joinder would raise an issue regarding whether DAI and DeLuca were
properly joined under Fed.R.Civ.P. 14(a). Because the 1988 case was subsequently consolidated with the 1990 case,
in which DAI and DeLuca were named defendants, and because this issue was not argued on appeal, we assume that
DAI and DeLuca are proper parties in this appeal.
2 The franchisees concede that, in Matter of Sims, 994 F.2d 210, 217–20 (5th Cir.1993), we held that the bankruptcy court's
finding that DAI's affiliates were not its alter egos was not clearly erroneous. Even so, the appellees note that several
post-Sims cases have found an alter ego relationship between DAI and its affiliates. See Jannotta v. Subway Sandwich
Shops, Inc., 125 F.3d 503, 510 (7th Cir.1997) (noting that DAI did not appeal the jury finding that SSS was DAI's alter
ego); Doctor's Associates, Inc. v. Distajo, 944 F.Supp. 1010, 1014 (D.Conn.1996) (stating that “DAI has conceded that
the leasing companies were its alter egos”); Pine Tree Associates v. Doctors' Associates, Inc., 654 So.2d 735, 739–40
(La.App.1995) (finding sufficient evidence to warrant a trial on the issue of whether DAI's affiliates were its alter egos).
The franchisees also contend that DAI is responsible for SEL's conduct in initiating the involuntary bankruptcy
proceeding because SEL merged into DAI on December 31, 1996. The franchisees claim that, as a Florida corporation,
DAI is “liable and responsible” for SEL's pre-merger conduct pursuant to Fla. Stat. Ann. § 607.1106(1)(c).
Because we need not make a determination of the exact relationship between DAI and its affiliates to resolve the
matter before us, we will not do so.
3 See Webster's Third International Dictionary 1191 (1993). Both uses of “invoke” are accepted definitions. In this context,
however, we cannot see a plausible reading of the term “invoke” that would lead to our treating the “judicial process”
as if it were a specter, ghost, or deity. In this context, we regard the judicial process as a mechanism: to invoke it is
to implement it.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
West Headnotes (1) In October, 1984, after requesting the return of certain
information and records to Norris and Hirshberg,
appellee Burttram swore out warrants charging Taft
[1] Alternative Dispute Resolution and Kilroy with theft by taking. He contended that
Performance, Breach, Enforcement, and they had stolen client lists, confirmation slips, and other
Contest of Agreement information regarding Norris and Hirshberg's clients
Officers of securities exchange brokerage when they left Norris and Hirshberg to join the other
corporation, by swearing out criminal business. Taft and Kilroy were arrested on November 2,
warrants against former account executives 1984.
rather than arbitrating dispute as required by
employment contract, waived right to compel On November 6, a Fulton County Magistrate dismissed
arbitration. the charges for lack of probable cause. He stated that
the controversy was best suited for civil court. The
2 Cases that cite this headnote **586 appellees subsequently requested Taft and Kilroy
to submit the dispute to arbitration. Taft and Kilroy filed
the complaints initiating these lawsuits five days later, on
December 12, 1984.
1. Taft and Kilroy contend that the trial court erred in Manhattan Industries, 754 F.2d 457, 461 (2d Cir.1985), as
the dispute involved in the criminal case and this case, and
staying their lawsuits pending arbitration.
the parties involved in both cases for all practical purposes
Under the agreement that the appellants signed prior are identical. 2 The appellees, in choosing the forum of
to their employment with Norris and Hirshberg, they criminal law rather than arbitration in their first attempt
“[agreed] to arbitrate any dispute, claim, or controversy” to sort out their dispute with Taft and Kilroy, waived their
that the National Association of Securities Dealers right to compel arbitration. To put it simply, appellees
[NASD] requires to be arbitrated. The NASD requires its cannot run with the hare and the hounds. Accordingly
members to arbitrate “any dispute, claim, or controversy we find that the trial court should have denied appellees'
arising out of or in connection with the business of any motions for stay of these lawsuits pending arbitration.
member of the Association ...” (Emphasis supplied.) As
the appellees note, this procedure broadly encourages the 2. Following the holding in Division 1, we need not reach
members to arbitrate their disputes. appellants' remaining enumerations of error.
Footnotes
1 Here, the party who initiated legal proceedings subsequently seeks arbitration, and the party who defended that action
claims waiver by inconsistency. This distinguishes this case from waiver cases in which the party defending the initial
action seeks arbitration belatedly and the party initiating the action claims waiver. See, e.g., Sweater Bee, infra.
2 Compare Amalgamated Local No. 55, etc. v. Metal and Alloy Division, 396 F.Supp. 667 (W.D.N.Y.1975).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Inmate appealed from order of the 52nd District Court, Attorneys and Law Firms
Coryell County, Phillip Zeigler, J., which denied petition
for mandamus. The Court of Appeals, Vance, J., held that *204 Frenando Ray Taylor, pro se.
mandamus was not available to require district attorney
Sandy S. Gately, Dist. Atty., Gatesville, for appellee.
to initiate criminal prosecution for assault and battery and
violation of inmate's civil rights. Before THOMAS, C.J., and CUMMINGS and VANCE,
JJ.
Affirmed.
OPINION
West Headnotes (3)
VANCE, Justice.
Procedure. TEX.CODE CRIM.PROC.ANN. art. 2.01. ministerial, as opposed to discretionary. Walker v. Packer,
827 S.W.2d 833, 839 (Tex.1992). Taylor has failed to meet
The interpretative commentary to section twenty-one
the second prong of the test. Discretion is a necessary
attributes the importance of the office to the “fact
ingredient in the determination of whether the requisites
that upon the prosecuting attorneys rests the power
*205 for accepting and filing a criminal complaint have
of determining whether prosecution in any given case
been met. See id.
shall be inaugurated, or if inaugurated, pushed to a
successful conclusion.” TEX. CONST. art. 5, § 21 interp.
We overrule the point of error and affirm the judgment.
commentary (Vernon 1993).
[2] [3] A writ of mandamus will not issue unless the All Citations
petitioner establishes that he has no adequate remedy at
law and that the act sought to be compelled is purely 870 S.W.2d 204
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
prosecution that followed, but if defendant and determine whether certain employee of
stated facts fully and fairly to district attorney State Board of Insurance had been joking,
and such officer determined that such facts whether he knew that another employee of
constituted crime and proceeded to formulate State Board of Insurance was not on grand
necessary papers to set prosecution in motion, jury investigating State Board of Insurance,
defendant is not liable in action for malicious and any other circumstances material to mens
prosecution, since if there is any fault, it is not rea required by statute governing crime of
defendant's. “retaliation.” V.T.C.A., Penal Code § 36.06.
6 Cases that cite this headnote 3 Cases that cite this headnote
Appellant, J. C. Thomas, plaintiff in the court below, The next day the District Attorney filed a complaint,
filed suit against appellee, Kathy Cisneros, for malicious which he personally signed as a complainant, charging
prosecution. The trial court granted appellee's motion for appellant with “retaliation” as defined in Tex.Penal Code
summary judgment that appellant take nothing. It is from Ann. s 36.06 (1974). Subsequently, on March 7, 1978,
this take nothing judgment that appellant has perfected the charges against Thomas were dismissed on motion of
this appeal. the District Attorney after Thomas passed a polygraph
examination.
The controlling facts are undisputed. Appellant was an
attorney employed by the State Board of Insurance as On June 19, 1978, appellant filed suit against appellee for
a hearing examiner. Appellee was also employed by the damages arising out of this alleged malicious prosecution.
State Board of Insurance as a secretary in the Company
License Division, performing a function which was in *316 Initially, appellant complains that “. . . Appellee's
conjunction with appellant's work but not in a directly Motion for Summary Judgment completely failed to state
subordinate capacity or position. The parties did have its grounds with specificity sufficient either to define the
official contact of some frequency. issues for summary judgment purposes or to provide
Appellant with adequate information for opposing the
In addition to her work at the State Board of Insurance, motion.”
appellee was, at the time of the incident complained of,
a member of the April, 1977, term of the Travis County Rule 166-A(c), Texas Rules of Civil Procedure
Grand Jury. During this same period of time, the Travis (Supp.1980), provides that a “. . . motion for summary
County Grand Jury for the January term of 1977, which judgment shall state the specific grounds therefor . . . .
had extended its term to complete an investigation which Issues not expressly presented to the trial court by written
concerned the State Board of Insurance, was also in motion, answer or other response shall not be considered
session. on appeal as grounds for reversal.”
It is undisputed that between 11:00 and 11:30 A.M. on [1] In judging the specificity requirement, we are to be
June 21, 1977, appellant walked up to appellee's desk at guided by the sufficiency requirements as made applicable
the Board of Insurance and engaged her in conversation. to pleadings by Rules 45(b) and 47(a), Texas Rules of
The fact that appellee had been out of the office and was Civil Procedure (1979). Westchester Fire Insurance Co. v.
working on a grand jury came up and appellant made Alvarez, 576 S.W.2d 771, 772-3 (Tex.1978). Thus, grounds
a comment to the effect that, “. . . well, I hope you for summary judgment are sufficiently specific if they
are not after the chairman, you might not be here the consist of a concise statement sufficient to give fair notice
next day.” This comment was obviously in reference to of the claim involved to the non-moving party.
an investigation by a Travis County grand jury of Great
Commonwealth Insurance Company and its regulation by Appellee's motion for summary judgment provided, in
the Board of Insurance. The conversation ended and later pertinent part:
in the day appellee related the incident to the foreman of
the Grand Jury of which she was a member, withholding “II. . . . The undisputed summary judgment proof
the identity of appellant. conclusively demonstrates that Defendant did not
swear to any complaint against Plaintiff and that the
On June 23, 1977, at a meeting of the same Grand complaint was signed and filed by the District Attorney.
Jury, the District Attorney approached appellee and Any decision to institute criminal proceedings against
questioned her about the incident. She was very reluctant Plaintiff was made by the District Attorney's Office,
to disclose any details and refused to divulge appellant's and as a matter of law, without the existence of any
identity. Subsequently, after repeated urging by the fact question, Defendant did not institute a criminal
District Attorney, appellee did furnish appellant's name prosecution against Plaintiff, and Plaintiff's cause of
but refused to file a complaint against him. action must fail.
that Defendant's action was false, malicious and issue. This element of malicious prosecution requires that
without probable cause. Plaintiff's cause of action the criminal prosecution be caused by the defendant
must fail as a matter of law because an action for or through the defendant's aid or cooperation. *317
malicious prosecution cannot be based upon a criminal Ellis v. Sinton Savings Association, supra; Flowers v.
prosecution when Defendant in good faith simply Central Power & Light Co., supra. It is not necessary for
makes a full and fair statement of the facts to the the defendant to have signed the complaint or to have
prosecuting authority and the prosecuting authority communicated the subject matter to the person who did
makes a determination that a criminal prosecution can if the making of the statement proximately caused the
be sustained. . . .” prosecution that followed. Meyer v. Viereck, 286 S.W.
894, 897 (Tex.Civ.App. Galveston 1926, writ dism'd).
[2] The elements of malicious prosecution are: However, it is a corollary to this rule that “. . . if the
defendant stated the facts fully and fairly to the District
(1) the commencement of a criminal prosecution against Attorney . . . and such officer determines that such facts
plaintiff; constitute a crime and proceeds to formulate the necessary
papers to set the prosecution in motion, the . . . defendant
(2) which has been caused by the defendant or through
is not liable in an action for malicious prosecution,
defendant's aid or cooperation;
since if there is any fault, it is not the defendants'.”
(3) which terminated in favor of the plaintiff; Ada Oil Company v. Dillaberry, 440 S.W.2d 902, 912
(Tex.Civ.App. Houston (14th Dist.) 1969, writ dism'd);
(4) that plaintiff was innocent; Meyer v. Viereck, supra; Sebastian v. Cheney, 86 Tex. 497,
25 S.W. 691 (1894); 36 A.L.R.2d 786, 812 (1954).
(5) that there was no probable cause for such
proceedings; [6] Public policy requires that there be wide latitude in
reporting facts to prosecuting authorities in order that the
(6) that it was done with malice; and
exposure of crime not be discouraged. Reed v. Lindley,
(7) resulted in damage to plaintiff. 240 S.W. 348 (Tex.Civ.App. Fort Worth 1922, no writ).
Ellis v. Sinton Savings Association, 455 S.W.2d 834, 836 The reasoning behind this corollary is succinctly stated in
(Tex.Civ.App. Corpus Christi 1970, writ ref'd n. r. e.); Restatement (Second) of Torts, s 653, Comment g (1977):
Flowers v. Central Power & Light Co., 314 S.W.2d 373,
375 (Tex.Civ.App. Waco 1958, writ ref'd n. r. e.). “INFLUENCING A PUBLIC PROSECUTOR. A
private person who gives to a public official information
[3] The above-quoted grounds for summary judgment of another's supposed criminal misconduct, of which
gave fair notice of appellee's claims and were sufficiently the official is ignorant, obviously causes the institution
specific to raise the grounds of lack of causation, probable of such subsequent proceedings as the official may begin
cause, and malice. on his own initiative, but giving the information or even
making an accusation of criminal misconduct does not
“A defendant who seeks a summary judgment on the constitute a procurement of the proceedings initiated by
theory that the plaintiff's suit is without merit has the the officer if it is left entirely to his discretion to initiate
burden of establishing as a matter of law that there is no the proceedings or not. When a private person gives to
genuine issue of fact as to at least one essential element of a prosecuting officer information that he believes to be
plaintiff's cause of action.” Sanchez v. Garza, 581 S.W.2d true, and the officer in the exercise of his uncontrolled
258, 259 (Tex.Civ.App. Corpus Christi 1979, no writ); discretion initiates criminal proceedings based upon
Gibbs v. General Motors Corporation, 450 S.W.2d 827 that information, the informer is not liable . . . even
(Tex.1970); Citizens First National Bank of Tyler v. Cinco though the information proves to be false and his belief
Exploration Company, 540 S.W.2d 292 (Tex.1976). was one that a reasonable man would not entertain. The
exercise of the officer's discretion makes the initiation
[4] [5] Because we deem the element of causation to of the prosecution his own and protects from liability
be determinative of this case, we will discuss only this the person whose information or accusation has led the
officer to initiate the proceedings.
“If, however, the information is known by the giver to It should be pointed out that appellee was under court
be false, an intelligent exercise of the officer's discretion order to reveal any communication concerning the Grand
becomes impossible, and a prosecution based upon it Jury to the foreman.
is procured by the person giving the false information.
In order to charge a private person with responsibility By written order signed by the district judge who
for the initiation of proceedings by a public official, empanelled the Grand Jury of which appellee was a
it must therefore appear that his desire to have the member, the Grand Jury was instructed as follows:
proceedings initiated, expressed by direction, request
or pressure of any kind, was the determining factor “. . . all unofficial communications to the Grand
in the official's decision to commence the prosecution, Jury are improper. Any such communications received
or that the information furnished by him upon which by a member of the Grand Jury should be at
the official acted was known to be false.” (Emphasis once handed to the foreman; and every grand juror
added). should keep constantly in mind that he must not
discuss matters pending before the Grand Jury with
[7] The parties are in substantial agreement as to the any person whomsoever outside the Grand Jury
occurrence of the conversation between appellant and Room. . . .” (Emphasis added).
appellee, its factual content, and that both were fully
disclosed to the District Attorney. However, appellant Under these instructions from the court, appellee's acts in
asserts that a “full and fair disclosure” also required reporting the conversation with appellant to the Grand
appellee to disclose his reputation as a jokester and his Jury were required as a part of her duty as a grand juror.
knowledge that she was not serving on the Grand Jury
investigating the Insurance Commission. After appellee made the report to the Grand Jury, the
District Attorney was informed of these facts by some
Appellee was only required to state the objective facts unidentified member of the Grand Jury. He confronted
as they were known to her. Any statements by her as to appellee with the incident, but she refused to reveal any
appellant's reputation around the Insurance Commission information. Finally, she agreed to be a witness if someone
or the knowledge of others as to her grand jury assignment could be found to corroborate her story. This was the
would have been objectionable at trial as hearsay. Box extent of her involvement in the prosecution.
v. Bates, 162 Tex. 184, 346 S.W.2d 317 (1961). These
were not the kind of objective facts that a “full and fair [9] Presumably, the District Attorney investigated the
disclosure” would require. allegations and determined that a complaint should be
filed. The complaint that was filed was signed by the
[8] Furthermore, appellee had no duty to investigate District Attorney personally as the complaining witness.
appellant's motives or state *318 of mind. It is Neither party advocates the position that appellee's desire
undisputed that the facts that were given to the District to have the proceedings initiated was the determining
Attorney were true. Having received this information factor in the institution of the proceedings. On the
revealing a possible crime, it was the duty of the District contrary, the record shows it was not. The summary
Attorney to investigate and determine whether appellant judgment proof established that the criminal charges were
had been joking, whether he knew that appellee was not on filed by the District Attorney as a unilateral exercise of his
the grand jury investigating the Insurance Commission, discretion. This made the prosecution the sole endeavor
and any other circumstances material to the mens rea of the District Attorney and completely insulated appellee
required by Section 36.06 of the Penal Code. Carswell from any liability for malicious prosecution. Ada Oil Co.
v. Southwestern Bell Telephone Co., 449 S.W.2d 805, v. Dillaberry, supra; Green v. Meadows, 517 S.W.2d 799,
817 (Tex.Civ.App. Houston (1st Dist.) 1969, no writ); 808 (Tex.Civ.App. Houston (1st Dist.)), rev'd on other
Missouri, K. & T. Ry. Co. v. Groseclose, 110 S.W. grounds, 524 S.W.2d 509, on remand, 527 S.W.2d 496
477, 479-80 (Tex.Civ.App.1908, no writ). Since appellee (1975).
was not required to relate appellant's knowledge and
motives, it is then undisputed that she made a full and fair As appellee negated, as a matter of law, appellant's
disclosure of the material facts to the District Attorney. essential causation element, the trial court properly
Accordingly, the judgment of the trial court that appellant 596 S.W.2d 313
take nothing is hereby affirmed.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
Estoppel
Implied waiver and conduct constituting [6] Alternative Dispute Resolution
waiver Suing or participating in suit
“Waiver ” is the intentional relinquishment For waiver of arbitration agreement to have
of known right or intentional conduct occurred, appellant must, at the very least,
inconsistent with claiming that right. have engaged in some overt act in court
that evinced a desire to resolve the same
arbitrable dispute through litigation rather and physically inspected building, with the
than arbitration. trial setting less than a month away.
1 Cases that cite this headnote 1 Cases that cite this headnote
presented in each case. See In re Citigroup Global Mkts., Contract, other documents listed in the Agreement and
Inc., 258 S.W.3d 623, 625 (Tex.2008); Okorafor, 295 Modifications issued after execution of the Contract.” It
S.W.3d at 38; Interconex, Inc., 224 S.W.3d at 533. further provides that “[t]he Contract Documents shall be
signed by Owner and Contractor.” Tuscan, however, did
not provide a signed copy of the form with its motion, nor
The Perry Homes Factors did it deny Sweetwater's assertion that it had no actual
[9] Tuscan began as a defendant in the suit. Early in knowledge or notice of the form's contents until it received
the litigation, however, Tuscan also became a third-party Tuscan's motion to compel.
plaintiff by suing its subcontractors. Although a party
invokes the judicial process when it sues in court, the If Tuscan's failure to attach the industry form to the
filing of a third-party action, standing alone, may not be construction contract did not render the arbitration
enough to constitute waiver of an agreement to arbitrate. provision invalid, the record, at a minimum, demonstrates
In D.R. Horton–Tex., Ltd. v. Drogseth, for example, the that Tuscan understood the reference to its own industry
Fort Worth Court of Appeals held that the defendant form and was aware that it contained an arbitration
did not waive its right to arbitrate by filing a third-party provision, yet did not enlighten Sweetwater that its claims
action because the defendant concurrently had moved in were subject to arbitration until Tuscan moved to compel
the trial court to abate the case and submit it to binding arbitration more than a year after filing third party actions
arbitration. No. 02–12–00435–CV, 2013 WL 3377121, at and proceeding with discovery.
*5–6 (Tex.App.-Fort Worth July 3, 2013, no pet.) (mem.
op.). In its motion to compel arbitration filed six weeks Sweetwater's contract with Mirador expressly excludes
later, the defendant explained that it had filed the third- any obligation to arbitrate and requires litigation in
party petition before the hearing on its motion to compel Harris County district court. As a result, Tuscan's belated
to preserve its claims against the third-party defendants invocation of the arbitration clause to conduct arbitration
and did not intend a waiver of *722 right to arbitration. would delay the resolution of the dispute between
Id. at *5. In contrast to the movant in D.R. Horton, Tuscan Tuscan and Mirador, and would make for an inefficient,
did not accompany its answer or its third-party claims piecemeal adjudication, to the expense of Sweetwater, who
with any notice of an intent to pursue arbitration, nor did has prepared its case against the defendants in a single
Tuscan seek an abatement of the case pending resolution forum. Had Tuscan promptly moved for arbitration,
of its claim to arbitration. Sweetwater and the other defendants would have been
entitled to a stay of proceedings pending arbitration;
[10] Based on the record, the trial court reasonably instead, the parties engaged in considerable time and
could have found that Tuscan knew of the arbitration expense on the road to a court trial. These circumstances
clause before it answered Sweetwater's suit, but that make the timing of Tuscan's motion to compel more
it did not reveal the existence of the arbitration consistent with a late-game tactical decision than an intent
agreement to Sweetwater until after Tuscan had to preserve the right to arbitrate.
sued third parties and the parties had conducted a
property inspection and completed written discovery, Tuscan joined in motions that prolonged the discovery
including expert designations. 2 The owner-contractor period and postponed the trial date and mediation
agreement, prepared by Tuscan for Sweetwater's deadline to allow the parties to pursue additional
execution, incorporates a construction industry form that discovery on the merits. By the time Tuscan moved to
incorporates by reference another clause, contained in the compel arbitration—more than a year after Sweetwater
General Conditions form, that allows for arbitration. filed suit—the parties had completed written discovery,
designated *723 their experts for trial, and physically
The “General Conditions” form containing the inspected the building, and the trial setting was less than
arbitration clause declares that, “The Contract a month away. The need for further merits discovery
Documents consist of the Agreement between Owner served as the basis for the parties' successful requests
and Contractor ..., Conditions of the Contract (General, for both the trial continuance and the extension of the
Supplementary, and other Conditions), Drawings, mediation deadline. In opposing Tuscan's motion to
Specifications, Addenda issued prior to execution of the compel arbitration, Sweetwater pointed out that Tuscan
would not have been likely to obtain a building inspection disposition of the disputed matter. See Porter & Clements,
L.L.P. v. Stone, 935 S.W.2d 217, 221 (Tex.App.-Houston
in an arbitral forum.
[1st Dist.] 1996, no pet.). Tuscan's year-long delay in
invoking or even mentioning the arbitration clause gave
Tuscan responds that its own discovery activities were
Tuscan litigation advantages it would not have had in
limited to written discovery. Tuscan's litigation strategy,
an arbitration proceeding. We hold that the trial court
however, enhanced its discovery efforts. By suing its
properly denied Tuscan's motion to compel arbitration
subcontractor-indemnitors, Tuscan benefited from the
because Tuscan had substantially invoked the judicial
discovery sought by these additional parties, who are
process, to Sweetwater's prejudice.
aligned with it against Sweetwater. For example, Tuscan
availed itself of the opportunity, made possible by the
subcontractors' discovery request, to inspect the building.
By bringing the subcontractors into the suit, Tuscan Conclusion
accomplished indirectly what it did not do directly. The
record supports the trial court's conclusion that these We hold that the trial court did not err in denying Tuscan's
tactics, taken together, were inconsistent with any intent motion to compel arbitration. We therefore affirm the
to arbitrate these claims, and caused some prejudice to trial court's order and remand the cause for further
Sweetwater. proceedings.
Footnotes
1 Tuscan also contends on appeal that it established the validity of the arbitration agreement. The trial court raised questions
concerning the validity during the evidentiary hearing, but it but did not base its ruling on any specific ground. For purposes
of this appeal, we assume that a valid arbitration agreement exists between Tuscan and Sweetwater.
2 On rehearing, Tuscan contends that we should disregard counsel's statements concerning the status of discovery in
the proceedings because they are not evidence, only argument. Tuscan, however, waived any complaint about their
evidentiary value by failing to object in the trial court. See Banda v. Garcia, 955 S.W.2d 270, 272 (Tex.1997).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
repurchase the pipeline as set forth in the Ownership On April 24, 1996, Teco filed the underlying suit,
Agreement. asserting causes of action for breach of fiduciary duty,
fraud, tortious interference, and professional malpractice.
In addition to filing suit in federal court, Valero Valero counterclaimed for breach of contract of the
also had lodged a complaint with the Federal Trade Operating Agreement, breach of fiduciary duty, and
Commission (“FTC”) regarding the proposed InterNorth/ fraud. Asserting that Teco's claims are based on the
HNG merger. The FTC, finding antitrust implications, Operating Agreement, Valero moved to stay the litigation
drew up a Consent Decree, which provided that in order and compel arbitration pursuant to the Texas General
for the merger to proceed, InterNorth had to divest itself Arbitration Act (“TGAA”), Chapter 171 of the Texas
of its interest in the TransTexas Pipeline. Civil Practice & Remedies Code, and the arbitration
clause found in the Operating Agreement:
In 1987, in an effort to reorganize and refinance its internal
operations, Valero assigned its interest in the TransTexas 3.01 General. Any dispute arising
Pipeline to a related entity. Enron threatened to block the with respect to any matter within the
assignment by exercising its right of first refusal under the scope of the Operating Agreement
Ownership Agreement. On March 24, 1987, the parties shall be resolved by arbitration
executed the TransTexas Settlement Agreement, which pursuant to this Article C, which
eliminated Valero's veto rights over any pipeline purchaser is intended to provide the exclusive
tendered by NorTex, but allowed Valero to continue with means for resolving all such
its reorganization. disputes....
On July 15 1987, Enron and Teco entered into an Teco moved to stay arbitration on several grounds: (1)
agreement for the sale of NorTex, which included its the TGAA applies only to disputes between nonprofit
interest in the TransTexas Pipeline. Valero opposed entities, (2) its claims arise out of a partnership separate
the sale to Teco and, exercising its right of first and independent of the joint venture established in
refusal, proposed to purchase the NorTex stock, thereby the Operating Agreement, (3) the arbitration clause
obtaining complete ownership of the pipeline. Enron has been revoked, (4) the Operating Agreement
submitted both proposed sales to the FTC for approval. specifically excludes from arbitration claims regarding the
The FTC approved the sale to Teco and disapproved the transporting of third party natural gas, (5) the scope of
sale to Valero. the arbitration clause is too narrow to include its claims,
(6) the Valero defendants, who are not signatories to the
Believing that the FTC did not have the authority to Operating Agreement, may not enforce the arbitration
disapprove of the sale to Valero in view of its right of clause, (7) Valero has waived its right to enforce the
first refusal, Valero sued Enron, NorTex, and Teco in arbitration clause by its previous litigation, and (8)
state court, for breach of contract. Valero also sought and Valero has failed to satisfy any conditions precedent to
received a temporary injunction blocking the conveyance arbitration. After a hearing, the trial court denied Valero's
of the pipeline to Teco. The case was removed to *581 the motion to stay litigation and compel arbitration and
United States District Court. After a trial on the merits, granted Teco's motion to stay arbitration.
judgment was entered in favor of Enron, NorTex, and
Teco and the temporary injunction was dissolved. The
United States Fifth Circuit Court of Appeals affirmed Standard of Review
the judgment. See West Tex. Transmission, L.P. v. Enron
Corp., 907 F.2d 1554 (5 th Cir.1990). On December [1] [2] In determining whether to compel arbitration,
12, 1988, Enron closed on the sale to Teco. Purchasing the court must decide two issues: (1) whether a valid,
NorTex's interest in the pipeline, Teco became a successor enforceable arbitration agreement exists, and (2) if so,
in interest to NorTex's partnership rights and succeeded whether the claims asserted fall within the scope of
to all of the contractual agreements between NorTex and the agreement. See Dallas Cardiology Assocs., P.A. v.
Valero. Mallick, 978 S.W.2d 209, 212 (Tex.App.-Texarkana 1998,
pet. denied); Nationwide of Bryan, Inc. v. Dyer, 969
S.W.2d 518, 520 (Tex.App.-Austin 1998, no pet.). The when the Texas Legislature amended the TGAA in 1995,
court has no discretion but to compel arbitration if it limited the entire Act to disputes between nonprofit
the answer to both questions is affirmative. See Dallas entities. In support of this argument, Teco cites section
Cardiology Assocs., P.A., 978 S.W.2d at 212; Merrill 171.022 of the Texas Civil Practice & Remedies Code,
Lynch, Pierce, Fenner & Smith v. Eddings, 838 S.W.2d 874, which states:
878 (Tex.App.-Waco 1992, writ denied).
The provisions of this chapter
[3] Whether the parties have agreed to arbitrate is a apply only to the arbitration of
question of fact to be summarily determined by the trial controversies between members of
court. See TEX. CIV. PRAC. & REM.CODE ANN. associations or corporations which
§ 171.021(b) (Vernon Supp.1999); see also Weber v. are exempt from the payment
Hall, 929 S.W.2d 138, 141 (Tex.App.-Houston [14 th of federal income taxes pursuant
Dist.] 1996, orig. proceeding). Appellate courts use a “no to Section 501(c) of the U.S.
evidence” standard for review of factual questions. See Internal Revenue Code or which
Fridl v. Cook, 908 S.W.2d 507, 511 (Tex.App.-El Paso are incorporated pursuant to the
1995, writ dism'd w.o.j.). In a no evidence point, we Texas Non–Profit Corporation Act
consider only the evidence that supports the finding, while (Article 1396–1.01 et seq., Vernon's
disregarding the evidence to the contrary. See Hearthshire Texas Civil Statutes).
Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849
TEX. CIV. PRAC. & REM.CODE ANN. § 171.022.
S.W.2d 380, 384 (Tex.App.-Houston [14 th Dist.] 1993,
writ denied). If there is any evidence of probative force to
Reading § 171.022 out of context from the preceding
support the finding, the point must be overruled and the
sections appears to support the argument that the TGAA
finding upheld. See id.
is limited to disputes involving members of nonprofit
entities. See D. Wilson Constr. Co. v. Cris Equip. Co.,
*582 [4] Legal conclusions, on the other hand, are
988 S.W.2d 388, 394 (Tex.App.-Corpus Christi 1999, no
subject to de novo review. See Fridl, 908 S.W.2d at 511; see
pet. h.); Holk v. Biard, 920 S.W.2d 803, 807 (Tex.App.-
also Certain Underwriters at Lloyd's of London v. Celebrity,
Texarkana 1996, orig. proceeding [leave denied] ). Prior to
Inc., 950 S.W.2d 375, 377 (Tex.App.-Tyler 1996), writ
its codification in 1995, § 171.022 was found in § 3 of article
dism'd w.o.j., 988 S.W.2d 731 (Tex.1998) (per curiam). De
238–20 of the Texas Revised Civil Statutes. Article 238–
novo review is appropriate when the legal interpretation
20 had four sections, which expressly applied to specific
of the arbitration clause, and no fact issue, is before the
enforcement of executory agreements to arbitrate future
court. See Nationwide of Bryan, Inc., 969 S.W.2d at 520;
disputes. See Holk, 920 S.W.2d at 807–08. When the
Certain Underwriters at Lloyd's of London, 950 S.W.2d at
TGAA was redesignated as Chapter 171 of the Texas
377; Texas Private Employment Ass'n v. Lyn–Jay Int'l, Inc.,
Civil Practice and Remedies Code, former § 3 of article
888 S.W.2d 529, 531 (Tex.App.-Houston [1 st Dist.] 1994,
238–20 was carried forward into Chapter 171. See id.
no writ).
at 808. Through error, however, § 3 was separated from
the remaining three sections of former article 238–20,
which were moved to § 171.021. See id. Rather than being
Scope of the TGAA designated as subsection (d) of § 171.021, § 3 was placed
alone as § 171.022. See id. This made § 171.022 appear to
[5] As a preliminary matter, Teco argues the TGAA limit the entire act, rather than applying only to specific
applies only to nonprofit entities. Until 1995, when it was performance of executory arbitration agreements in the
codified and moved to Chapter 171 of the Texas Civil bylaws of nonprofit corporations. See id.; see also D.
Practice and Remedies Code, the TGAA was found in Wilson Constr. Co., 988 S.W.2d at 394.
articles 224 through 238–20 of the Texas Revised Civil
Statutes. See Act of June 18, 1965, 59 th Leg., R.S., ch. The Holk court's reasoning is further strengthened by the
689, § 1, 1965 Tex. Gen. Laws 1593–1601, redesignated and fact that since Teco filed the underlying suit in 1996, the
amended by Act of June 14, 1995, 74 th Leg., R.S., ch. Texas Legislature has corrected the error by renumbering
588, § 1, 1995 Tex. Gen. Laws 3402–09. Teco contends that the TGAA. Section 171.022 is now designated § 173.002
of the Texas Civil Practice & Remedies Code. See Act of procedural arbitrability, i.e., issues such as compliance
June 14, 1995, 74 th
Leg., R.S., ch. 588, § 1, 1995 Tex. Gen. with a condition precedent to arbitrate. See City of
Lubbock, 940 S.W.2d at 126 (citing John Wiley & Sons,
Laws 3409, added by Act of May 21, 1997, 75 th Leg., R.S.,
Inc., 376 U.S. at 556–58, 84 S.Ct. 909). This reasoning has
ch. 165, § 5.03, 1997 Tex. Gen. Laws 349. Chapter 173
been followed in construing the Federal Arbitration Act.
of the Texas Civil Practice & Remedies Code specifically
and expressly applies to controversies between certain See Smith Barney Shearson, Inc., 838 F.Supp. at 1158. 4
nonprofit entities. See T EX. CIV. PRAC. & REM. The Amarillo Court of Appeals found the TGAA, like
CODE ANN. §§ 173.001–173.003 (Vernon Supp.1999). the Federal act, distinguishes substantive from procedural
Accordingly, we hold the TGAA, Chapter 171 of the arbitrability. See City of Lubbock, 940 S.W.2d at 127. 5
Civil Practice & *583 Remedies Code, is not limited to Therefore, because *584 the TGAA does not require
disputes between nonprofit entities. or authorize the trial court to address questions of
procedural arbitrability, the trial court need only decide
two issues: (1) whether there is an agreement to arbitrate,
and (2) whether the dispute comes within the scope of the
Conditions Precedent
arbitration agreement. See id.
[6] Teco asserts Valero has failed to comply with
contractual conditions precedent to enforce the agreement Similarly, this court has previously decided procedural
issues are for the arbitrator's determination. See Kline
to arbitrate. 3 Valero, on the other hand, maintains that
v. O'Quinn, 874 S.W.2d 776, 782 (Tex.App.-Houston
whether it has satisfied any condition precedent is a
[14 th Dist.] 1994, writ denied) (holding that while the
question for the arbitrator, not the court. In support
determination of the scope of an arbitration agreement is
of this contention, Valero cites several federal cases
for the court, the enforcement of pleading requirements
construing the Federal Arbitration Act. See, e.g., Del
before the arbitrator is a procedural matter for the
E. Webb Constr. v. Richardson Hosp. Auth., 823 F.2d
arbitrator). We conclude, therefore, that whether Valero
145, 149 (5 th Cir.1987); Smith Barney Shearson, Inc.
satisfied any conditions precedent to arbitration is for the
v. Boone, 838 F.Supp. 1156, 1158 (N.D.Tex.1993), aff'd,
arbitrator's determination. Hence, it is not necessary for
47 F.3d 750 (5 th Cir.1995). We note that in construing
this court to make that determination.
the TGAA, there is a conflict among Texas courts of
appeals on this issue. See, e.g., D. Wilson Constr. Co.,
988 S.W.2d at 395 (holding the trial court may determine
issue of condition precedent to enforcement of agreement Separate Partnership
to arbitrate); City of Lubbock v. Hancock, 940 S.W.2d
123, 127 (Tex.App.-Amarillo 1996, orig. proceeding) [7] Teco further argues its claims are not based on
(holding that under the TGAA, procedural questions, the Operating Agreement, which contains an arbitration
such as compliance with conditions precedent, are left to clause, but rather, arise out of a separate unwritten
arbitrator's determination). partnership agreement, which was created as a result of
the sale of the 50% undivided interest in the pipeline.
Addressing the question of whether a collective bargaining Therefore, according to Teco, because its claims are
agreement with an arbitration provision required an related to this separate partnership, they are not subject to
employer, who did not sign the agreement, to arbitrate, the arbitration clause of the Operating Agreement. 6
the United States Supreme Court stated, “Once it is
determined ... that the parties are obligated to submit [8] [9] “A partnership is an association of two or
to arbitration, ‘procedural’ questions which grow out more persons to carry on as co-owners of a business
of the dispute and bear on its final disposition should for profit.” TEX.REV.CIV. STAT. ANNN. art. 6132b
be left to the arbitrator.” John Wiley & Sons, Inc. § 6(1) (Vernon 1970). This association must be based
v. Livingston, 376 U.S. 543, 557, 84 S.Ct. 909, 11 on an express or implied agreement. See Grimmett v.
L.Ed.2d 898 (1964). In reaching this conclusion, the Court Higginbotham, 907 S.W.2d 1, 2 (Tex.App.-Tyler 1994, writ
distinguished substantive arbitrability, i.e., whether the denied). An express or implied partnership agreement has
dispute is encompassed by an agreement to arbitrate, and four essential elements: (1) a community of interest in the
Q. Okay. So now that we've said that, did you have Q. So you're saying — are you saying that that
any reason to believe that some type of partnership procedure was what you thought was to be used
existed separate and apart from that when you signed for accounting for the partnership revenues and
this letter on July the 15 th , 1987? profits?
signified by the merger clause contained in the Settlement Agreement. Should a dispute arise as
Agreement. 7 to such payment amount, such dispute
shall be submitted to arbitration as set
We disagree with Teco's contention. A review of forth in the Operating Agreement.
the 1985 Settlement Agreement reflects that it did
*588 [emphasis added]. Article V of the Operating
not revoke any clause to arbitrate. First, this clause
Agreement establishes how the revenues are to be shared
refers to “this Agreement.” The first page of the
between the joint venturers. A review of the Operating
1985 Settlement Agreement shortens its title to the
Agreement reveals no limitation on submitting any
“Agreement.” Therefore, this provision applies to disputes
dispute under Article V to arbitration. The June 12,
arising out of the 1985 Settlement Agreement, not the
1985 letter, which was entered into after the Settlement
previously executed Purchase, Operating, Ownership, and
Agreement, indicates that the arbitration clause is still in
Transportation Agreements.
full force and effect.
modification concerned § 3.03, which pertains to how the that agreement because of a mutual mistake. See Estes,
Management Committee is to conduct its meetings. A 462 S.W.2d at 275. Parol evidence is admissible to show
comparison of the original Operating Agreement and the mutual mistake. See id. Teco has failed to present any
1991 Amendment reveals a minor modification, otherwise evidence to satisfy its burden of establishing mutual
leaving the entire section, including the reference to mistake. Finding there is no evidence that the arbitration
arbitration, intact. It states, in part: “[m]atters which agreement was revoked or that it was later revived as a
cannot be resolved by the Management Committee as set result of fraudulent inducement or a mutual mistake, we
forth above shall be resolved by arbitration as provided conclude the arbitration clause remains in full force and
in Exhibit B, Article C.” The amendment reaffirms that effect.
the arbitration clause found in Exhibit B, Article C of
the Operating Agreement, which is at issue here, is still in
effect.
Scope of the Operating Agreement
[12] Valero argues that even if the arbitration clause [16] Teco further claims the Operating Agreement
had been previously revoked, it was revived by its excludes the subject matter of its claims. Teco states §
incorporation in the 1991 Amendment. Teco responds 2.11(D) of the Operating Agreement is the only provision
that any revival of the arbitration agreement was the covering third-party transportation transactions, which
result of fraudulent inducement or a mutual mistake. To are at issue in the underlying litigation. According to Teco,
establish fraud in the inducement in the formation of § 2.11(D) specifically precludes arbitration of its claims:
arbitration agreement, Teco must prove (1) a material
representation was made, and (2) it was false. See In 2.11 Transportation Fee.
re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574
(Tex.1999) (per curiam). Teco argues that had Valero
fulfilled its duty to inform it that the 1991 Amendment
***
would revive the arbitration clause, Teco would not have
signed the amendment. Teco has not cited to any evidence (D) All Other Volumes. For all volumes of gas
in the record in support of this assertion. transported through the System other than those
volumes set forth and described in Section 2.11(A)
[13] [14] [15] Teco also refers to the mention of and (B), the Joint Venture shall charge such
“arbitration as provided in Exhibit B, Article C” as a transportation fee as the Management Committee shall,
“casual reference at the bottom of a long paragraph.” within applicable regulatory constraints, determine
Teco contends the inclusion of this reference is a mutual to be appropriate. Notwithstanding any other
mistake because the parties never intended to revive the provisions of this Operating Agreement, the failure
arbitration clause. “The law presumes that a written of the Management Committee to agree upon a
agreement correctly embodies the parties' intentions, and transportation fee for any proposed transportation
is an accurate expression of the agreement the parties service involving volumes described in this Section
reached in prior oral negotiations.” Estes v. Republic 2.11(d) shall be deemed to be a final decision not
Nat'l Bank of Dallas, 462 S.W.2d 273, 275 (Tex.1970). A to perform such particular service and any dispute
mutual mistake occurs when both parties to a transaction with regard to such decision shall not be submitted to
have a belief *589 in the present existence of a thing, arbitration....
material to the transaction, that does not exist. See United Valero asserts this clause provides only that it is
Interests, Inc. v. Brewington, Inc., 729 S.W.2d 897, 903 the Management Committee's responsibility to set the
(Tex.App.-Houston [14 th Dist.] 1987, writ ref'd n.r.e.). transportation fee. If a party does not approve of the
An example is when the parties to the contract have a transportation fee or wants a reduction or an increase
common intention, but the written contract erroneously in a fee, then it must go to the Management Committee
reflects that intention because of a mistake by both and request a change in the transportation fee. If
parties in writing the agreement. See id. Teco, as the the Management Committee cannot agree upon the
party claiming relief, must show what the parties's true transportation fee, neither party can force the decision
agreement was and that the instrument incorrectly reflects to arbitration. Therefore, Valero contends it does not
provide an exception to arbitration for all disputes over contract and could be maintained
third party contracts. without reference to the contract.
We agree. Teco's claims revolve around Valero's alleged Id. Arbitration is favored by Texas courts. See Fridl,
diversion of business opportunities, the rerouting of gas 908 S.W.2d at 511; Hearthshire Braeswood Plaza Ltd.
to other pipelines owned by Valero, discounting services Partnership, 849 S.W.2d at 386. Therefore, any doubts
to customers in exchange for benefits to Valero, and regarding the scope of an arbitration agreement are to be
usurping opportunities for pipeline interconnects and resolved in favor of arbitration. See Emerald Texas, Inc. v.
facilities. Teco's claims do not involve the Management Peel, 920 S.W.2d 398, 403 (Tex.App.-Houston [1 st Dist.]
Committee's failure to agree on a certain transportation 1996, no writ); Fridl, 908 S.W.2d at 511.
fee. Therefore, we find Teco's claims are not excluded
from arbitration by the express terms of the Operating [23] In support of its claims, Teco makes the following
Agreement. factual allegations and charges Valero with: 1) diverting
business opportunities for the transportation of gas on
the TransTexas Pipeline; 2) disconnecting gas from the
TransTexas Pipeline and rerouting it to other Valero
Intertwining of Claims owned or controlled pipelines; 3) providing discounts to
customers of the TransTexas Pipeline in exchange for
[17] [18] [19] [20] Teco also asserts that even if
benefits to Valero; 4) providing discounts without proper
there is a valid arbitration agreement between the parties,
authorization; 5) discounting services on the TransTexas
its claims still do not come within the purview of the
Pipeline to obtain higher fees for services on other facilities
agreement. Once the existence of an arbitration agreement
owned by Valero; 6) usurping opportunities for pipeline
is shown, the party seeking to avoid the effects of the
interconnects and facilities; and 7) knowingly and willfully
arbitration agreement may do so by establishing that the
acting to destroy the TransTexas Partnership in order to
dispute is not within the terms of the agreement. See
secure its own pecuniary interests.
D. Wilson Constr. Co., 988 S.W.2d at 394. Whether the
parties' agreement imposes a duty to arbitrate is a matter
The Operating Agreement establishes a joint venture for
of *590 contract interpretation and a question of law
for the court. See Kline, 874 S.W.2d at 782. Therefore, the purpose of operating the pipeline. 8 Section 2.02
the language of the contract will be enforced according to further provides for joint management and control of the
its plain meaning unless such a reading would defeat the pipeline, and the appointment of the operator. 9 Section
intentions of the parties. See D. Wilson Constr. Co., 988 8.02 provides that Valero *591 and Teco each has the
S.W.2d at 394. Because this issue involves the trial court's right to use 50% of the pipeline to transport gas. Section
interpretation of the arbitration clause, de novo review is 2.11 provides that when a party transports gas on the
appropriate. See Nationwide, 969 S.W.2d at 520; Certain pipeline under its own contracts, it must account for the
Underwriters, 950 S.W.2d at 377. use by paying the Joint Venture a joint tariff of 11.9¢ for
the entire 337 miles or a proportionally reduced rate for
[21] [22] In determining whether a tort claim falls within shorter distances.
the scope of an agreement to arbitrate, the focus should be
on the factual allegations contained in the petition rather Section 5.01 of the Operating Agreement establishes that
than on the legal causes asserted. See Valero Energy Corp. revenues and costs are to be divided equally between the
v. Wagner & Brown, II, 777 S.W.2d 564, 566 (Tex.App.-El parties. With respect to the distribution of net revenues,
Paso 1989, writ denied). section 5.02 further provides the distribution of net
revenues is to be done in accordance with established
The test should be based on
accounting procedures. 10 To that end, Exhibit A to
a determination of whether the
the Operating Agreement establishes the accounting
particular tort claim is so interwoven
procedures to be used in calculating net revenues for
with the contract that it could not
distribution.
stand alone or, on the other hand, is
a tort completely independent of the
Teco's causes of action depend upon the factual [24] Teco argues that, even if its claims come within the
allegations that VTLP and Teco are joint venturers with terms of the Operating Agreement and the arbitration
respect to the pipeline, and that VTC is the operator. clause is still in full force and effect, only VTLP, as
Teco asserts the purpose of the joint venture was to joint owner in the pipeline, and VTC, as operator of the
maximize third party revenues to be generated by the pipeline, are entitled to arbitration. The remaining 25
use of the pipeline. Essentially, Teco's complaints allege Valero defendants are not parties to the Operating *592
improper discounting of third party transportation fees Agreement and, therefore, may not seek enforcement of
and diversion of partnership or joint venture business an arbitration agreement to which they are not parties.
opportunities. The Operating Agreement establishes (1)
the tariff charged for transporting gas on the pipeline, and In support of this contention, Teco relies on a case
(2) that each party has an equal right to use the pipeline. from the First Court of Appeals. See Pepe Int'l Dev.
We find that Teco's tort claims are so interwoven with the Co. v. Pub Brewing Co., 915 S.W.2d 925, 930 (Tex.App.-
Operating Agreement that they cannot stand independent Houston [1 st Dist.] 1996, no writ). In Pepe Int'l Dev.
of it. Co., PIDCO and Pub entered into two contracts under
which Pub would sell goods and provide services to
Teco further argues the arbitration clause is too narrow PIDCO related to the construction of breweries in the
in scope to include its tort claims. This assertion is based Republic of Kazakhstan. See id. at 928. The contracts
on the assumption that its tort claims are not related to contained arbitration clauses. See id. PIDCO canceled
the Operating Agreement. Teco contends that “within” is the contracts with Pub for material breach. See id. Pub
at least as narrow as the phrase “arising under,” which sued PIDCO, Moffett, secretary of PIDCO, Chappelle,
has been found to be too narrow to encompass unrelated president of PIDCO, and Pepe International, Inc. See id.
torts. See Mediterranean Enters., Inc. v. Ssangyong Corp., The defendants sought arbitration. See id.
708 F.2d 1458, 1464 (9 th Cir.1983) (finding “arising
hereunder” is intended to cover disputes relating to the Pub argued only PIDCO was a party to the contracts
interpretation and performance of the contract itself). and that any matter resolved through arbitration would
In any event, this argument, however, has been rejected not be enforceable as against Moffett, Chappelle, and
by the Valero Energy Corp. court. In developing the Pepe International. See id. at 930. The court found
test for intertwining tort claims, the court found any the breach of contract claim against PIDCO clearly fell
difference in an agreement to arbitrate any dispute “ within the scope of the arbitration clause. See id. at 931.
‘arising under this contract’ ” and “ ‘arising out of the The individual claims against Moffett, Chappelle, and
contract’ ” to be “unnecessarily sophisticated.” See Valero Pepe International, however, fell outside the scope of the
Energy Corp., 777 S.W.2d at 564; see also J.J. Ryan & arbitration clauses. See id. at 931. The court observed
Sons, Inc. v. Rhone Poulenc Textile, S.A., 863 F.2d 315, that Moffett, Chappelle, and Pepe International were not
321 (4 th Cir.1988) (concluding difference between “in signatories to the contract and, therefore, were not subject
connection with” and “may arise out of or in relation to” to the contracts' provisions. See id.
is largely semantic). Moreover, to the contrary, we find the
agreement to arbitrate “[a]ny dispute with respect to any Valero contends that because Teco has sued
matter within the Operating Agreement” is sufficiently nonsignatories to Operating Agreement, and the
broad to encompass related torts. See, e.g., Acevedo allegations against the nonsignatory Valero defendants
Maldonado v. PPG Indus., Inc., 514 F.2d 614, 616 (1 st are fundamentally grounded in obligations arising from
Cir.1975) (concluding “any claim or controversy arising the Operating Agreement, Teco is equitably estopped to
out or relating to this agreement” is broad enough to cover deny the enforceability of the arbitration clause by the
related torts); Griffin v. Semperit of Am., Inc., 414 F.Supp. nonsignatory Valero defendants. Valero cites a number
1384, 1387 (S.D.Tex.1976) (same). of cases in support of this argument. Teco maintains
that Valero's estoppel argument is not applicable here
because that theory has been decided under the Federal
Act, not the Texas Act. See, e.g., Sunkist Soft Drinks,
Nonparties to the Agreement to Arbitrate
Inc. v. Sunkist Growers, Inc., 10 F.3d 753, 757–58 (11 th
Cir.1993); McBro Planning & Dev. Co. v. Triangle Elec.
Constr. Co., 741 F.2d 342, 344 (11 th Cir.1984); Hughes the parent is not formally a party to the arbitration
Masonry Co. v. Greater Clark County Sch. Bldg. Corp., agreement)); Merrill Lynch v. Eddings, 838 S.W.2d 874,
659 F.2d 836, 841 n. 9 (7 th Cir.1981); Sam Reisfeld & 879 (Tex.App.-Waco 1992, writ denied) (holding that
Son Import Co. v. S.A. Eteco, 530 F.2d 679, 681 (5 th nonsignatory settlor and trust beneficiaries could be
Cir.1976). Teco also argues the estoppel theory is not compelled to arbitrate under account agreement between
applicable here because its claims are not fundamentally trustee and Merrill Lynch, which contained an arbitration
grounded or intertwined with any obligation arising from clause, because agreement was the underlying basis for all
the Operating Agreement, but instead, are related to its the claims of the beneficiaries and there would have been
and the joint venture's existing contracts and prospective no claims without the agreement)).
relationships with third parties.
In a discussion on the doctrine of equitable estoppel, the
This court, however, has previously considered the Carlin court observed that cases applying the doctrine
equitable estoppel theory. See Carlin v. 3V, Inc., 928 were decided on the same ultimate fact, i.e., that each
S.W.2d 291 (Tex.App.-Houston [14 th Dist.] 1996, no party must rely on the terms of the written agreement
writ). Francesco Carlin (“Carlin”) and SIGMA entered in asserting its claims. See id. at 296 (citing Sunkist Soft
into a contract (“1981 Italian agreement”). See id. at 292. Drinks, Inc., 10 F.3d at 757–58; J.J. Ryan & Sons, Inc.,
SIGMA and 3V are sister corporations and wholly owned 863 F.2d at 320–21; McBro Planning & Dev. Co., 741
subsidiaries of 3V Partecipazioni Industrial S.p.A. See F.2d at 344; Hughes Masonry Co., 659 F.2d at 841 n.
id. The parent and subsidiary corporations manufacture, 9). Moreover, the focus of the inquiry in each case was
sell, and distribute specialty chemical products. See id. a determination of the nature of the underlying claims
Under the 1981 Italian agreement, Carlin was to provide asserted by the party resisting arbitration, and whether
technical expertise with respect to the development of PVC these claims were within the scope of the arbitration clause
suspendants, “Polivic.” See id. Prior to the termination contained in the agreement. See id.
of the 1981 Italian agreement, SIGMA assigned to 3V
the rights to sell, manufacture, and distribute Polivic. See The Carlin court, finding that all of 3V's claims arose
id. After the 1981 Italian agreement expired, Carlin and out of and were directly related to the 1981 Italian
others developed other PVC suspendants. See id. agreement, concluded 3V was equitably estopped from
avoiding arbitration of its claims even though it was not a
3V sued Carlin and Compagnia Italiana Di Ricerca e signatory to the agreement. See id. at 297.
Sviluppo S.R.L. (“CIRS”) for breach of the 1981 Italian
agreement and related torts. See id. at 292–93. 3V argued Here, Teco has alleged the other Valero defendants
because it was not a party to the 1981 Italian agreement, are either subsidiary, parent, or sister corporations of
it was not bound by its terms, including the arbitration VTLP and VTC, or in the case of McLelland and
agreement. See id. at 294. This court disagreed, first noting Greehey, officers and directors of the various Valero
that 3V based its entire case on the rights it acquired in the defendants. Teco has brought the same claims against
*593 1981 Italian agreement and would have no case if the nonsignatory Valero defendants as against VTLP and
the agreement did not exist. See id. at 295. VTC. Specifically, Teco asserts that the Valero defendants
acted “in concert to thwart the legitimate purposes of
The Carlin court noted that other cases, finding that the the Partnership.” Having already found Teco's claims
claims of the nonsignatory party arise out of an agreement come within the scope of the Operating Agreement's
containing an arbitration clause, and the nonsignatory arbitration clause, we conclude Teco must rely on the
would have no claim in the absence of the underlying terms of the Operating Agreement in asserting its claims
agreement, the arbitration clause was enforceable against against the nonsignatories. Because Teco's claims against
the nonsignatory. See id. at 295–96 (citing J.J. Ryan & VTLP, VTC, and the other defendants are based on
Sons v. Rhone Poulenc Textile, S.A., 863 F.2d 315, 320– the same operative facts and are inherently inseparable,
21 (4 th Cir.1988) (stating that when the claims against we hold the nonsignatory Valero defendants may also
a parent company and its subsidiary are based on the compel arbitration of Teco's claims against them. See
same facts and are inherently inseparable, a court may Sam Reisfeld & Son Import Co. v. S.A. Eteco, 530
refer claims against the parent to arbitration even though F.2d 679, 681 (5 th Cir.1976) (explaining the claims
against nonsignatory defendants, including the parent Transwestern Pipeline Co. v. Horizon Oil & Gas Co.,
corporation of signatory defendant, were based on the 809 S.W.2d 589, 593 (Tex.App.-Dallas 1991, writ dism'd
same operative facts and were inherently inseparable from w.o.j.) (stating that appellee's argument that appellant had
the claims against the signatory defendant). 11 settled a previous dispute without compelling arbitration
is “of no import in the instant case”). “It has long been
the law in this state that even though a party may have
once waived a contract right in the past, it may enforce
*594 Waiver that right in the future by giving notice of its intention to
do so.” Transwestern Pipeline Co., 809 S.W.2d at 592.
[25] [26] [27] [28] [29] [30] Finally, Teco argues
Valero has waived enforcement of the arbitration clause
The United States Fifth Circuit Court of Appeals has
by its previous litigation. A party waives its right to
addressed facts similar to those at hand. In Lawrence v.
arbitration if it substantially invokes the judicial process
Comprehensive Bus. Servs. Co., Comprehensive had sued
to the detriment of the opposing party. See Turford v.
the Lawrences in Illinois small claims court for payment of
Underwood, 952 S.W.2d 641, 643 (Tex.App.-Beaumont
services it had provided under a franchise agreement, and
1997, orig. proceeding); Marble Slab Creamery, Inc. v.
obtained a judgment. 833 F.2d at 1161. The Lawrences,
Wesic, Inc., 823 S.W.2d 436, 438 (Tex.App.-Houston
in turn, sued Comprehensive in Texas state court seeking
[14 th Dist.] 1992, no writ). To establish waiver, Teco
a declaratory judgment that the agreement was illegal
bears the burden of showing Valero acted inconsistently
and unenforceable, therefore, freeing them of any further
with the arbitration agreement and that it was prejudiced
liability under it. See id. Comprehensive removed that
by such conduct. See In re Oakwood Mobile Homes,
cause of action to federal court and moved to stay
Inc., 987 S.W.2d at 574; Turford, 952 S.W.2d at 643.
the litigation and compel arbitration pursuant to the
There is a strong presumption against waiver, which must
arbitration clause in the franchise agreement. See id.
be intentional and may only be implied from a party's
actions if the facts demonstrate that the party seeking
The Lawrences argued Comprehensive had waived
to enforce arbitration intended to waive its arbitration
arbitration by its earlier action on the same agreement.
right. See Turford, 952 S.W.2d at 643. Therefore, any
See id. at 1164. The court found Comprehensive's previous
doubts regarding waiver should be resolved in favor of
suit in Illinois did not substantially invoke the judicial
arbitration. See In re Oakwood Mobile Homes, Inc., 987
process to the Lawrences' detriment in the present suit.
S.W.2d at 574. Whether a party waives arbitration is a
See id. at 1165. The court further observed the Lawrences
question of law. See id.; Nationwide of Bryan, Inc., 969
*595 had not suggested Comprehensive either delayed
S.W.2d at 521.
its demand for arbitration or shown the earlier suit
prejudiced their present claim. See id.
In 1985, Valero filed suit against InterNorth, NorTex and
HNG when InterNorth merged with HNG to form Enron.
Similarly, Teco has not claimed Valero either delayed its
Valero asserted the merger violated NorTex's fiduciary
demand for arbitration or explained how any previous
duties under the Ownership Agreement. In 1987, Valero
litigation prejudices arbitration of its present claims. We
sued Enron, NorTex and Teco in an attempt to block the
hold Valero has not waived its right to enforce arbitration.
sale to Teco. Teco argues that Valero's previous litigation
waives its right to enforce arbitration in the underlying
litigation. Teco, in particular, complains the Ownership
Agreement includes an arbitration clause similar to the Conclusion
one found in the Operating Agreement. Several courts
have rejected similar contentions. See, e.g., Lawrence We sustain both of Valero's points of error. Accordingly,
v. Comprehensive Bus. Servs. Co., 833 F.2d 1159 (5 th the judgment of the trial court is reversed and remanded
Cir.1987) (finding that a party who brings or participates for proceedings consistent with this opinion. Our opinion
in previous litigation does not forfeit the contractual right moots all pending motions which were taken with the case.
to compel arbitration as to all future disputes on the
same contract); Insurance Co. of N. Am. v. J.A. Jones
Constr. Co., 1995 WL 295280, at *4 (E.D.La.1995) (same);
All Citations
2 S.W.3d 576
Footnotes
1 The provision for interlocutory appeal of an order granting or denying arbitration was formerly found in § 171.017 of the
th
Texas Civil Practice & Remedies Code. Act of June 14, 1995, 74 Leg., R.S., ch. 588, § 1, 1995 Tex. Gen. Laws 3408,
th
amended by Act of May 21, 1997, 75 Leg., R.S., ch. 165, § 5.01, 1997 Tex. Gen. Laws 336.
2 The other Valero companies are Valero Management Company, VGMA Company, VNGC Holding Company, Valero
Natural Gas Company, Valero Eastex Pipeline Company, Valero Transmission Company, Valero Gas Marketing
Company, Valero Gas Storage Company, Valero Industrial Gas Company, Valero Hydrocarbons Company, VT
Company, Valero Marketing Company, Valero Natural Gas Partners, L.P., Valero Management Partnership, L.P., Valero
Transmission, L.P., Valero Hydrocarbons, L.P., Valero Marketing L.P., Valero Industrial Gas, L.P., Valero Gas Marketing,
L.P., VLDC, L.P., Reata Industrial Gas, L.P., Valero Nortex, L.P., Valero Northern Texas Company, and West Texas
Transmission Company.
3 The arbitration clause in the Operating Agreement contains a condition precedent, which provides:
... Any Party (or the Operator) wishing to submit a dispute or other matter for arbitration hereunder shall first, by notice
to the other Party and the Operator, call a meeting of the Management Committee to consider such dispute or other
matter, such meeting to be held when, where and as reasonably specified in said notice, but not less than ten days
nor more than twenty-five days after such notice is received. If such meeting is called and held as herein provided
and the dispute or other matter submitted for consideration at such meeting is not resolved to the satisfaction of both
Parties, ... then either Party may within ten days thereafter submit the matter to arbitration in accordance with the
following Sections 3.02 through 3.09.
4 Section 4 of the Federal Arbitration Act provides, in part:
The court shall hear the parties, and upon being satisfied that the making of the agreement for arbitration or the
failure to comply therewith is not in issue, the court shall make an order directing the parties to proceed to arbitration
in accordance with the terms of the agreement.
9 U.S.C.A. § 4 (1999).
5 Section 171.002(a) of the Texas Civil Practice & Remedies Code, as cited in City of Lubbock, states:
On application of a party showing an agreement described in Section 171.001, and the opposing party's refusal to
arbitrate, the court shall order the parties to proceed with arbitration; but if the opposing party denies the existence
of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised and shall
order arbitration if found for the moving party; otherwise, the application shall be denied.
th
Act of June 14, 1995, 74 Leg., R.S., ch. 588, § 1, 1995 Tex. Gen. Laws 3403, amended by Act of May 21, 1997, 75
th
Leg., R.S., ch. 165, § 5.01, 1997 Tex. Gen. Laws 330. The current version of this provision, without any substantive
changes, is found at TEX. CIV. PRAC. & REM.CODE ANN . § 171.021 (Vernon Supp.1999).
6 Although Teco raises this argument in its rejoinder brief to this court, a review of the reporter's record of the hearing on
the motion to compel arbitration reflects that Teco abandoned its contention that there was a separate partnership:
THE COURT: Well now, when you say the partnership there, let's make it clear exactly what you're talking about.
***
MR. MCFALL [Counsel for Teco]: Talking about the TransTexas Pipeline Partnership, Your Honor.
THE COURT: Okay. So we're talking about the written partnership and not the oral or the implied partnership as has
been alleged by the defendant, right? You're claiming — what I'm trying to get clear is — see, what I get out of this
is there's two things. Clearly, there is a joint venture that everybody agrees is in existence.
***
THE COURT: Then there is this other partnership theory that's out there; is that right?
MR. GLIDDEN [Counsel for Teco]: It's not really another partnership. What it is is the scope of the partnership. We
say that there are duties beyond what's contained in the written agreement, they say there cannot be and as a
result, they want to call what we're saying are the additional duties some separate independent partnership or some
contrived independent partnership and we aren't saying that. We're saying these guys are partners. The relationship
is defined in part by the agreement and in part by what they do and in part by the law. And -
***
THE COURT: Okay. Okay. So what we're looking at right here today then, just to be clear, make it clear is whether
or not these are stand alone causes of action, independent torts.
MR. GLIDDEN: That's right.
7 14.6 Entire Agreement; Amendments and Waivers. This Agreement, together with all exhibits and schedules attached
hereto, constitutes the entire agreement between the Parties hereto pertaining to the subject matter hereof and
supercedes all prior agreements, understandings, negotiations and discussions, whether oral or written, of the Parties,
and there are no warranties, representation or other agreements between the Parties in connection with the subject
matter hereof except as set forth specifically herein or contemplated hereby. No supplement, modification or waiver of
this Agreement shall be binding unless executed in writing by the Party to be bound thereby. No waiver of any of the
provisions of this Agreement shall be deemed or shall constitute a waiver of any other provision hereof (regardless of
whether similar), nor shall any such waiver constitute a continuing waiver unless otherwise expressly provided.
8 It states:
WHEREAS, the Parties desire to create a joint venture solely for the purpose of providing for the operation,
management and maintenance of the System and to appoint VTC as the Operator thereof; ...”
***
2.01 Creation of Joint Venture. VTC and NorTex hereby establish a joint venture having the exclusive right of
operating, managing and maintaining the System for the purpose of sharing the net revenues derived therefrom
as specified in Article V hereof. The joint venture shall be named the “TransTexas Pipeline” and shall be referred
to herein as the “Joint Venture”. The Joint Venture shall file appropriate corporate charter documents in the State
of Texas to permanently preserve “TransTexas Pipeline”. This Operating Agreement shall not govern each Party's
ownership interest in the assets of the System; the respective rights and obligations of each of the Parties as owners
are set forth and governed under the terms of the Ownership Agreement.
9 Section 2.02 states:
2.02 Establishment of a Management Committee and Appointment of an Operator. For purposes of management
of the System, the Parties hereby establish a Management Committee and assign the duties and responsibilities as
specified in Article III hereof. The sole responsibility for setting policies for operating, maintaining and managing the
System on behalf of the Joint Venture shall be vested in the Management Committee. No Party shall be empowered
to act on behalf of the Joint Venture except as specifically authorized by the Management Committee or otherwise
provided herein. VTC is hereby appointed as the Operator of the System and shall provide the Joint Venture with
all the services fully stated herein....
10 Section 5.02 states:
5.02 Distribution of Net Revenues. The distribution of net revenues shall be as set forth in the Accounting Procedure,
or as the Management Committee shall otherwise determine from time to time, for monies in excess of anticipated
working capital requirements after payment of all operating, maintenance, general and overhead expenses from
revenues received by the Joint Venture.
11 Moreover, several federal circuit decisions have found that nonsignatories to arbitration agreements may be bound by the
agreement under ordinary contract and agency principles. See Pritzker v. Merrill Lynch, Pierce, Fenner & Smith, 7 F.3d
1110, 1122 (3d Cir.1993) (claims against sister corporation fall within arbitration agreement based on agency principles);
Arnold v. Arnold Corp.-Printed Communications for Bus., 920 F.2d 1269, 1282 (6 th Cir.1990) (nonsignatory defendants
allegedly committed acts related to running of corporation in shareholder suit); Letizia v. Prudential Bache Secs., Inc., 802
F.2d 1185, 1187 (9 th Cir.1986) (individual defendants' allegedly wrongful acts related to handling of plaintiff's securities
account as agents of brokerage house). Teco alleges the Valero defendants acted as agents by entering into third party
transportation contracts on behalf of the joint venture.
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
rules did not comply with the statutory of contract was insufficient to invalidate
requirements for waiver of rights under the arbitration agreement as unconscionable,
the Consumer Protection-Deceptive Trade despite contention that it deprived growers of
Practices Act, including that the waiver be their statutory right to recover attorney fees
conspicuous and in bold-face type of at least on a breach of contract claim. V.T.C.A., Civil
10 points in size, and that it include language Practice & Remedies Code § 38.001.
substantially similar to the form provided by
the statute. V.T.C.A., Bus. & C. § 17.42(c)(1– 4 Cases that cite this headnote
3).
[14] Costs
Cases that cite this headnote
Contracts
Parties are generally free to contract for
[11] Alternative Dispute Resolution attorney's fees as they see fit; thus, a
Severability contract that expressly provides for one
Arbitration agreement's unenforceable party's attorney fees, but not another's, is not
limitation on cotton growers' right to unconscionable per se.
recover attorney fees on their claim
against cooperative marketing pool under Cases that cite this headnote
the Consumer Protection-Deceptive Trade
Practices Act was severable from the [15] Alternative Dispute Resolution
remainder of the arbitration agreement; Matters to Be Determined by Court
essential purpose of the arbitration agreement
Alternative Dispute Resolution
was to provide for speedy and efficient
Existence and validity of agreement
resolution of disputes to ensure timely
Alternative Dispute Resolution
performance under the contract, and
Waiver, laches, or estoppel
agreement's collateral effect on statutory
rights and remedies appeared to be a Questions of waiver, illegality, remedies, and
peripheral concern. attorney fees often relate to the broader,
container contract, rather than the separable
3 Cases that cite this headnote agreement to arbitrate, and, as such, are
matters entrusted to the arbitrators.
[12] Contracts
2 Cases that cite this headnote
Partial Illegality
In determining an agreement's essential
[16] Alternative Dispute Resolution
purpose, for purposes of severability of
Evidence
unenforceable provisions, the issue is whether
or not parties would have entered into When authority over the matters of waiver,
the agreement absent the unenforceable illegality, remedies, and attorney fees is
provisions. unclear, a strong federal presumption favors
arbitration. 9 U.S.C.A. § 1 et seq.
1 Cases that cite this headnote
2 Cases that cite this headnote
ultimately led to a lawsuit by Alan Freeman and Perry unconscionable and should not be enforced. The trial
Brewer, two prominent cotton farmers in Gaines County, court scheduled an evidentiary hearing.
Texas. 2
At this hearing, Freeman and Brewer testified about
In their lawsuit, Freeman and Brewer asserted claims for their decisions to join the pool. According to their
fraud, negligent misrepresentation, breach of fiduciary testimony, they had a question about “overages” a few
duty, mutual mistake, civil conspiracy and violations days after Venture's marketing presentation. “Overages”
of the Texas Consumer Protection—Deceptive Trade refers to cotton produced on designated land in excess
Practices Act, and the Texas Free Enterprise and Antitrust of the estimate given by a farmer at the time of land's
Act of 1983. Freeman and Brewer also sought declaratory commitment to the pool. Freeman and Brewer's question,
and injunctive relief and attorney's fees under Civil which they directed to Ocho, was whether overages
Practice and Remedies Code section 38.001. Shortly after were included in the pool under Venture's contracts. An
filing this suit, another group of farmers filed a second Ocho representative called Venture with this question and
suit against Venture and the other defendants in Gaines allegedly learned that the disposition of overages was at
the farmer's discretion, that is, the farmer could elect to
County, asserting similar claims. 3
sell overages under the agreement or not.
• The site of the arbitration shall be either Houston, Venture filed interlocutory appeals in both cases, and
Texas, or Memphis, Tennessee, as chosen by Venture, the court of appeals consolidated them for decision. See
unless otherwise directed by the arbitrator(s). TEX. CIV. PRAC. & REM.CODE § 51.016 (permitting
interlocutory *227 appeals of orders denying arbitration
• The cotton sold herein is purchased for shipment out
under the FAA). Agreeing that the arbitration agreements
of state of origin in interstate or foreign commerce.
were unconscionable, the court affirmed the trial court's
• Any court having or claiming jurisdiction, whether order denying Venture's motion to compel. 395 S.W.3d
state or federal, shall apply the substantive provisions at 275–76. The court reasoned that the agreements were
of the United States Arbitration Act.... unconscionable in two respects: (1) they forced the farmers
“to forego substantive rights and remedies afforded by
• In the event of a breach of this Agreement by Producer, statute,” id. at 275, and (2) they were one-sided because
Producer agrees to pay all arbitration and court costs, they allowed Venture to recover its attorney's fees, if
if any, and the reasonable attorney's fees and litigation the farmers breached the contract, but did not provide
and arbitration expenses of Venture. reciprocal rights to the farmers, id. at 276.
(1751); see also Saunders v. Guinn, 1 S.W.2d 363, 366 here is premised on our decision in In re Poly–America,
(Tex.Civ.App.–Eastland 1927, writ ref'd) (noting this L.P., 262 S.W.3d 337 (Tex.2008). There, we indicated
“definition”); Shumway v. Horizon Credit Corp., 801 that it would be unconscionable for an arbitration
S.W.2d 890, 896 (Tex.1991) (Mauzy, J. concurring and agreement to mandate arbitration of a statutory claim
quoting Janssen ). Modern uniform laws add context to and at the same time eliminate the rights and remedies
the defense but again do not attempt to define it. afforded by the statute. Id. at 349. The court of appeals
concludes that such a possibility exists here because the
The Uniform Commercial Code provides that a court arbitration agreement applies to “all disputes,” while the
should afford the parties a reasonable opportunity to ACSA Arbitration Rules, incorporated into the parties'
present evidence as to a contract's commercial setting, agreement, foreclose the farmers' statutory claims for
purpose and effect to aid the court in evaluating the attorney's fees and enhanced damages under the DTPA.
defense. TEX. BUS. & COMM.CODE § 2.302(b); see Specifically, section 8(k) of the ACSA rules limits the
also RESTATEMENT (SECOND) OF CONTRACTS § arbitral award “to the monetary damages arising out
208, cmt. a (stating that unconscionability determinations of the failure of either party to perform its obligations
are made in “light of [a contract's] setting, purpose, and pursuant to the contract as determined by the Arbitration
effect”). Under the UCC, an unconscionability defense Committee and shall not include attorney's fees unless
is a question of law that involves a highly fact-specific provided for in the contract.”
inquiry into the circumstances of the bargain, such as
the commercial atmosphere in which the agreement was [9] When parties agree to arbitrate a statutory claim,
made, the alternatives available to the parties at the time “a party does not forego the substantive rights afforded
and their ability to bargain, any illegality or public-policy by the statute; it only submits to their resolution in
concerns, and the agreement's oppressive or shocking an arbitral, rather than a judicial, forum.” Mitsubishi
nature. 49 TEXAS PRACTICE SERIES: CONTRACT Motors Corp. v. Soler Chrysler–Plymouth, Inc., 473
LAW § 3.11. U.S. 614, 628, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985).
Thus, in Poly–America, we observed that arbitration
In the court of appeals, the cotton farmers argued that agreements typically function simply as forum-selection
the arbitration agreement was unconscionable in several clauses rather than statutory waivers and generalized that
respects. They complained that the American Cotton “[a]n arbitration agreement covering statutory claims is
Shippers Association (ACSA) Arbitration Rules, adopted valid so long as ‘the arbitration agreement does not waive
by the agreement, were one-sided and designed to foster substantive rights and remedies of the statute and the
arbitrator bias and that the rules' summary procedures arbitration procedures are fair so that the employee may
further denied them adequate discovery and preparation effectively vindicate his statutory rights.’ ” Poly–America,
time. They also *229 contended that the arbitration was 262 S.W.3d at 352 (quoting In re Halliburton, 80 S.W.3d
too expensive and that its prospective cost would prevent at 572).
them from vindicating their rights in the arbitral forum.
Finally, they argued that the agreement and ACSA rules An asserted waiver of the anti-retaliation provisions of
violated the state's public policy by illegally eliminating the Workers' Compensation Act was at issue in Poly–
their statutory right to attorney's fees and other remedies America. The employee in that case sued his employer,
under the Texas Consumer Protection—Deceptive Trade seeking statutory remedies of reinstatement and punitive
Practices Act (DTPA). damages after being allegedly terminated for filing a
workers' compensation claim. Id. at 345. Because the
employee had agreed to arbitrate all disputes under the
FAA, the trial court granted the employer's motion to
B. Invalidity
compel arbitration. Id. at 344.
The court of appeals' decision focuses solely on this last
argument, concluding that the arbitration agreement is The employee sought mandamus relief from this
unconscionable because it forces the farmers “to forego order, arguing that the arbitration agreement was
substantive rights and remedies afforded by statute.” 395 unconscionable because it eliminated his rights and
S.W.3d at 275. The court's application of public policy remedies under the Workers Compensation Act. Id. at
352, 359. We agreed. Id. at 353, 360. After reviewing the ordinarily to deny effect to the unconscionable term.”
statutory remedies at issue, we held the anti-retaliation RESTATEMENT (SECOND) OF CONTRACTS § 208
provisions to be “a non-waivable legislative system” cmt. g.
necessary to the Act's function. Id. at 352. We further
concluded that their elimination under the arbitration The court of appeals concludes, however, that Venture
agreement undermined a key purpose of the Workers' waived its right to enforce the remainder of the arbitration
Compensation Act, was contrary to public policy, and clause by not asking the trial court to sever the offending
could not be enforced. Id. at 353. We did not, however, limitation of statutory remedies. 395 S.W.3d at 277. But
hold the arbitration agreement invalid. Instead, *230 this is an interlocutory appeal, and the case remains
we severed the offending limitation from the agreement pending in the trial court. We are therefore unsure about
and permitted the arbitration to proceed. See id. at 344 what Venture has waived. If the court merely means
(noting that severance was proper because the limitation to suggest that Venture waived the right to complain
of statutory remedies was “not integral to the parties' about severance in this interlocutory appeal, the waiver
overall intended purpose to arbitrate”). argument serves only to delay a decision in the case.
Conservation of time and resources recommend that we
[10] In contrast to Poly–America 's anti-retaliation consider the issue now because nothing prevents Venture
provision, the DTPA remedies at issue here can be from urging severance in the trial court and, if denied,
contractually waived. TEX. BUS. & COM.CODE § 17.42. from renewing its complaint in yet another interlocutory
The DTPA provides detailed instructions on how to appeal.
accomplish this. See id. (detailing requirements for a
valid waiver). Among other requirements, the waiver must [12] In Poly–America we noted that “[a]n illegal or
be “conspicuous and in bold-face type of at least 10 unconscionable provision of a contract may generally be
points in size,” identified by a specific heading indicating severed so long as it does not constitute the essential
the waiver, and include language substantially similar purpose of the agreement.” Poly–America, 262 S.W.3d
to the form the statute provides. Id. § 17.42(c)(1), (2) at 360. In determining an agreement's essential purpose,
and (3). The contracts here do not comply with the the issue is “whether or not parties would have entered
statutory requirements. We accordingly agree with the into the agreement absent the unenforceable provisions.”
court of appeals that any implied waiver under ACSA Id. Quite clearly, the arbitration agreement's essential
Rule 8(k), which likewise does not conform to the DTPA's purpose here was to provide for a speedy and efficient
requirements, is contrary to public policy and therefore resolution of disputes to ensure timely performance under
invalid. the contract. The agreement's collateral effect on statutory
rights and remedies appears to be a peripheral concern
to this essential purpose. We accordingly conclude that
the court of appeals erred in declining to sever *231 the
C. Severability
objectionable limitation on the farmers' statutory rights.
[11] Venture argues, however, that even if ACSA Rule
8(k) and the arbitration clause are deemed unconscionable
and incapable of limiting the farmers' statutory rights D. Attorney's Fees
under the DTPA, the court of appeals nevertheless
erred when it refused to sever the offending rule and In addition to the agreement's unconscionable limitation
require arbitration under the remainder of the agreement. on potential statutory rights, the court of appeals
Venture submits that the unconscionability defense, concludes that the arbitration agreement is also
which is codified in the Texas Business and Commerce unconscionably one-sided because it provides for only
Code and applicable to the cotton sales at issue here, Venture to recover attorney's fees. 395 S.W.3d at 276.
allows courts to consider severance whenever they are The court's opinion further indicates that this provision
confronted with an unconscionable contract term. TEX. together with an ACSA rule, limiting the award of
BUS. & COM.CODE § 2.302. Similarly, the Restatement attorney's fees to those expressed in the contract, violates
provides that “[w]here a term rather than the entire the farmers' statutory right to attorney's fees under Civil
contract is unconscionable, the appropriate remedy is Practice and Remedies Code section 38.001.
statutes, including RICO. Id. at 402, 123 S.Ct. 1531. farmers from pursuing statutory remedies. See 395
S.W.3d at 277 (concluding that the court did not need
Because the arbitration agreements prohibited awarding
to consider “remaining arguments attacking appellees'
punitive damages, the physicians argued that arbitration
other substantive unconscionability and procedural
would prevent them from obtaining “meaningful relief”
unconscionability defenses”).
under RICO's treble-damages provision. Id. at 403,
123 S.Ct. 1531. The lower courts agreed, holding the
[17] Texas courts usually analyze unconscionability
arbitration clauses to *233 be unenforceable with respect
issues “in light of a variety of factors, which aim to
to the RICO claims. Id.
prevent oppression and unfair surprise ...” Poly–America,
262 S.W.3d at 348. Unconscionability determinations
The Supreme Court reversed and remanded, concluding
are not isolated inquiries but rather are made in
that it was “premature” to conclude that the contractual
“light of [a contract's] setting, purpose, and effect.”
ban on punitive damages acted as a bar to statutory
RESTATEMENT (SECOND) OF CONTRACTS § 208,
damages and that the arbitrator should decide the issue
cmt. a.
as an initial matter. Id. at 404, 123 S.Ct. 1531. The Court
thus deferred consideration of whether public policy
Thus, in Olshan we observed that a court should consider
might taint the arbitration agreement's enforceability until
“the parties' general commercial background and the
the award-enforcement stage, but implicit in the Court's
commercial needs of the particular trade or case” when
analysis was the notion that the arbitration clause was
determining whether “the clause involved is so one-sided
prima facie enforceable, notwithstanding the contractual
that it is unconscionable under the circumstances existing
prohibition on punitive damages.
when the parties made the contract.” Olshan, 328 S.W.3d
at 892 (quoting FirstMerit Bank, 52 S.W.3d at 757).
In summary, we conclude that a contract that fails
to provide reciprocal rights to attorney's fees is not
In the court of appeals, Venture has argued the
unconscionable per se. We further disagree with the court
commercial reasonableness and necessity for the
of appeals' opinion to the extent it uses the contract's “one-
arbitration agreement, while the farmers have emphasized
sided” attorney's fees provision as an independent reason
potential abuses and unequal treatment under the arbitral
to hold the arbitration agreement unconscionable. See 395
process. In this Court, the parties have not briefed or
S.W.3d at 276.
argued these broader concerns. They have instead focused
solely on the court of appeals' rationale for affirming
the trial court's order. Because the court's public-policy
III. Unaddressed Arguments analysis is insufficient to defeat arbitration, the arguments
left unaddressed in the court of appeals should be
Although the court of appeals' refusal to compel
considered as they are “necessary to the final disposition
arbitration in this case rests solely on public-policy
of the appeal.” TEX.R.APP. P. 47.1.
grounds, unconscionability typically involves a broader
inquiry, and, indeed, the farmers presented a broader
***
case in the trial court. In addition to their complaint
about the agreement's limitation of remedies, the farmers
The court of appeals' judgment, affirming the trial court's
contended they could not effectively vindicate their rights
order denying arbitration, is reversed, and the case is
through arbitration because of arbitrator bias, the lack
remanded *234 to the court of appeals for consideration
of adequate discovery under the arbitration's summary
of the remaining arguments.
procedures, the exorbitant cost of the arbitration itself,
and other inequities in the arbitral process. The court
of appeals did not consider these additional concerns All Citations
once it determined the arbitration agreement to be
“substantively unconscionable” because it prevented the 435 S.W.3d 222, 57 Tex. Sup. Ct. J. 730
Footnotes
1 We have jurisdiction to hear an appeal from an interlocutory order denying arbitration when the court of appeals' decision
conflicts with prior precedent. See Forest Oil Corp. v. McAllen, 268 S.W.3d 51, 55 n. 8 (Tex.2008) (noting that our
jurisdiction over the interlocutory appeal depends on a dissent or decisional conflict); Certain Underwriters at Lloyd's of
London v. Celebrity, Inc., 988 S.W.2d 731, 733 (Tex.1998) (per curiam) (same).
2 The lawsuit was styled Alan and Christine Freeman d/b/a Alan Freeman Farms, J.V., and Perry and Kathy Brewer d/b/a
PDB Joint Venture v. Venture Cotton Cooperative, Noble Americas, Corp., Ocho Gin Co. and Ocho Management Corp.
3 The second lawsuit was styled Roger Neitsch, Gregory Upton, Wayne Upton, Anderson Upton, Jud Cheuvront d/b/a L
& ME, Inc. and JDC Farms, Max McGuire, Raymond McPherson, Abe Froese d/b/a BAC Farms, Gerardo Froese d/b/
a Gerardo Froese Farms, George P. Froese d/b/a George P. Froese Farms, Neil Enns, David Bergen, Bradley Peters,
Peter Neustaeter Jr., Wilhelm Friesen, Cornelius Banman, Gerard Neustaeter, Peter Friesen, Heinrich Friesen, Abe S.
Peters, Isaak T. Fehr, Jacob Peters, Abe Loewen, Isaak Wiebe, Ben Neudorf, and Rudolph Peters v. Venture Cotton
Cooperative, Noble Americas, Corp., Ocho Gin Co. and Ocho Management Corp.
4 The trial court's finding of fact stated: “The arbitration clause sought to be enforced is unconscionable.” Its conclusion of
law stated: “The arbitration clause sought to be enforced is unenforceable because it is unconscionable.”
5 Under FAA § 3, when a party moves to stay litigation pending arbitration, the court shall grant the motion “upon being
satisfied that the issue involved in such suit or proceeding is referable to arbitration under such an agreement.” 9 U.S.C. §
3. Section 4 requires a court to grant a motion to compel arbitration “upon being satisfied that the making of the agreement
for arbitration or the failure to comply therewith is not in issue.” Id. § 4.
6 Professor Rau explains:
Suppose that the issue—“whether the plaintiff can recover statutory damages or attorneys' fees”—is treated as one
more claim or dispute within the scope of the arbitration clause; suppose further that in pursuing this inquiry the
decisionmaker is presented with some more precise questions:
. For openers, is the contractual limitation of remedies properly interpreted as a “waiver” by the plaintiff of the recovery
otherwise made available by statute?
. If so, is the plaintiff able to waive this recovery? More precisely: Are, say, “sophisticated groups of doctors” who
contract with a managed care company the sort of plaintiffs who in these circumstances need the protection of
an unwaivable rule? For commercial parties in high-stakes cases, the appropriate trade-off between litigation and
informal justice may sometimes take the form of choosing a more intensive form of judicial review; an alternative
bargain might call for reducing the risk of excessive damage awards.
And in any event, is it sensible to address either of these concerns in the form of an interim decision preceding
the merits? Might they not instead be the focus of attention at a later point-once the predicate of liability has been
established, and an appropriate remedy needs to be crafted?
Framed in this way, all these questions begin very much to look as if they belonged to the realms of interpretation
and appreciation of context—that is, to the matters of substance that have been routinely entrusted to arbitrators.
Alan Scott Rau, Everything You Really Need to Know About “Separability” in Seventeen Simple Propositions, 14 AM.
REV. INT'L ARB. 1, 65–66 (2003) (emphasis in original) (footnotes omitted).
End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.
[14] Action
[10] Action
Stay of Proceedings
Stay of Proceedings
Administrative closure of a case by a court is
A stay of proceedings is not a matter of right;
the practical equivalent of a stay.
it is instead an exercise of judicial discretion,
and the propriety of its issue is dependent Cases that cite this headnote
upon the circumstances of the particular case.
to reconsider and reverse its decision for any reason it 597 (3d Cir. 2004) (noting the same)); see also Schnabel v.
deems sufficient, district courts consistently utilize the Trilegiant Corp., 697 F.3d 110, 113 (2d Cir. 2012) (when
standards of Federal Rule of Civil Procedure 59 to inform resolving a defendant's “motion to compel arbitration,
their analysis of a reconsideration request. Saqui v. Pride [the Court] accept[s] as true ... factual allegations in the
Cent Am., LLC, 595 F.3d 206, 210–11 (5th Cir. 2010) plaintiffs' complaint that relate to the underlying dispute
(citing Lavespere v. Niagara Mach. & Tool Works, Inc., between the parties”).
910 F.2d 167, 185 (5th Cir. 1990)); Vladmir Ltd. v. Pac.
Parts Supply Co., No. SA–08–CV–819XR, 2009 WL *3 In their Complaint, Plaintiffs allege that Defendants
4110288, at *2 (W.D. Tex. Nov. 20, 2009). To prevail on “illegally and wrongfully used the criminal justice system
a Rule 59 motion, the movant must show at least one of to collect payday loans through the wrongful filing of
the following: “(1) an intervening change in controlling criminal charges.” Compl. 3. Indeed, one of Plaintiffs'
law; (2) the availability of new evidence not previously causes of action, malicious prosecution, necessarily entails
available; or (3) the need to correct a clear error of that a criminal prosecution was filed. See Compl. 5;
law or prevent manifest injustice.” In re Benjamin Moore see also Shields v. Twiss, 389 F.3d 142, 152 (5th
& Co., 318 F.3d 626, 629 (5th Cir. 2002). Defendants' Cir. 2004) (emphasis added) (“Under Texas law, a
Motion appears to be premised on the argument that plaintiff alleging malicious prosecution must establish ...
reconsideration is necessary to correct an error of law or the commencement of a criminal prosecution against
fact, or to prevent manifest injustice. him ....” (citing Richey v. Brookshire Grocery Co., 952
S.W.2d 515, 517 (Tex. 1997))). Therefore, considering
both the Complaint's factual allegations and the malicious
III. DISCUSSION prosecution cause of action, the Court, at this stage
of the proceeding, correctly accepted Plaintiffs' facts as
A. Criminal Charges were Not Filed against Plaintiffs
true when it considered Defendants' motions to compel
[2] In its Order, which the Defendants ask the Court
arbitration.
to reconsider, the Court held that Defendants had
invoked the judicial process by “initiat[ing] a process
Next, the Court need not tackle Defendants' second
that invites Texas district attorneys' offices to address
argument that the statute of limitations has run its course.
issues that are at stake in the instant action.” Order
Defendants aver that the statute of limitations for filing
15. Defendants now contend that the Court erred in
criminal charges against Plaintiffs is two years from the
this conclusion for two reasons. First, they aver that
“date of the commission of the offense.” Mot. 3 (quoting
no criminal charges were filed against Plaintiffs. Mot.
3. Second, Defendants proffer that criminal charges can Tex. Code of Crim. Proc. § 12.02). 3 In turn, Plaintiffs
never “be filed against Plaintiffs based on the [worthless- respond that the statute of limitations was tolled when an
check] affidavits because the limitations period for filing “indictment, information, or complaint is filed in a court
criminal charges has passed.” Id. of competent jurisdiction.” See Resp. 4; see also Tex. Code
of Crim. Proc. § 12.05. In their Reply, Defendants reiterate
In their Response, Plaintiffs contend that Defendants did that the statute of limitations was not tolled because no
initiate the criminal law process by filing worthless-check criminal charges were ever filed. Reply 2.
affidavits. See Resp. Ex. A, at 5. In addition, Plaintiffs
argue that Defendants' worthless-check affidavits tolled Again, Defendants' statute-of-limitations argument
the statute of limitations. Resp. 5. hinges on a factual issue—whether criminal charges were
filed against Plaintiffs. To repeat, the Court will not make
Regarding Defendants' first argument, the Court accepted a factual determination regarding whether charges were
Plaintiffs' facts as true when it considered Defendants' filed against Plaintiffs because the Court accepts the facts
motions to compel arbitration. See Order 2 n.2 (citing See Plaintiffs allege in their Complaint as true. See Order 2 n.2.
Suburban Leisure Ctr., Inc. v. AMF Bowling Prods., Inc.,
468 F.3d 523, 525 (8th Cir. 2006) (stating that a motion Given that the Court must accept Plaintiffs' facts as
to compel arbitration is generally treated as a motion to true, the Court found—and still finds—that Defendants
dismiss for failure to state a claim upon which relief can be initiated a process that invited Texas district attorneys'
granted); Palcko v. Airborne Express, Inc., 372 F.3d 588, offices to consider filing criminal charges based upon
the Defendants' election to file worthless-check affidavits. the check's holder according to its terms at the time it was
Therefore, Defendants contention that no criminal issued” 1/2 Price Checks Cashed v. United Auto. Ins. Co.,
charges were filed against Plaintiffs is unavailing at this 344 S.W.3d 378, 380 (Tex. 2011) (citing Tex. Bus. & Com.
stage of the proceeding. Code § 3.414(b)) (recognizing that a holder can bring a suit
“asserting breach of contract on the basis of the obligation
owed by the drawer of a check under Texas Business
B. Criminal Matters are Non–Arbitrable and Commerce Code section 3.414”). Many other states
[3] The Court agrees with Defendants that criminal similarly provide a private right of action against the
statutes in a vacuum are non-arbitrable. Yet, the Supreme drawer. See, e.g., Cal. Civ. Code § 1719 (relief equal to
Court has recognized that civil statutes—that have treble the amount of the check, which shall not be less than
parrallel criminal laws—are arbitrable. See Shearson/Am. $100 nor more than $1,500); 810 Ill.Comp. Stat. Ann. 5/3–
Exp., Inc. v. McMahon, 482 U.S. 220, 240, 107 S.Ct. 806 (relief shall include the greater of $25 or all costs and
2332, 96 L.Ed.2d 185 (1987) (“We similarly find that the expenses, including reasonable attorney fees); La. Stat.
criminal provisions of [Racketeer Influenced and Corrupt Ann. § 9:2782 (relief of twice the amount so owing, but in
Organizations Act (“RICO”) ] do not preclude arbitration no case less than $100 plus attorney fees and court costs);
of bona fide civil actions brought under [RICO].”). To Miss. Code Ann. § 11–7–12 (relief of the face amount of
be sure, McMahon has recognized that private parties can the check, draft or order, and: (1) a service charge of $30
bring both civil RICO and antitrust claims “even though and reasonable attorney fees if the check is $25 or less; or
such conduct may also give rise to claims of criminal (2) a service charge of $40 and reasonable attorney fees
liability.” Id. Therefore, by analogy, the potential theft- if the check is over $25); N.Y. Gen. Oblig. Law § 11–104
by-check convictions “do not preclude arbitration of” (relief of liquidated damages no greater than twice the
parallel civil actions. See id. amount of the check or $400, whichever is less).
The central issue remains: whether the initiation of a theft- Ultimately, to invoke the judicial process, Defendants
by-check criminal complaint constitutes a substantial could only raise parallel civil claims that are similar to the
invocation of the judicial process. The Court previously potential theft-by-check criminal charges. As discussed
held that “[t]he specific claim in the instant action concerns previously, federal law affords aggrieved private parties
the issue of non-payment from which all Plaintiffs' causes the ability to pursue civil antitrust or RICO claims in
of actions derive.” Order 16. To this end, the Court will arbitration. See McMahon, 482 U.S. at 240, 107 S.Ct.
now utilize the McMahon holding as a framework in the 2332. Similarly, Texas law allows private parties to pursue
instant matter. claims in civil court based upon theft by check claims. See
1/2 Price Checks Cashed, 344 S.W.3d at 380 (citing Tex.
*4 As the Court previously noted, “[t]he Fifth Circuit Bus. & Com. Code § 3.414(b)).
precedent does not require that a defendant litigate
identical claims to invoke the judicial process, but rather ‘a Therefore, the Court concludes that Defendants' filing of
specific claim.’ ” Order 16 (emphasis in original) (quoting worthless-check affidavits amounts to “a specific claim
Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 328 [Defendants] subsequently want [ ] to arbitrate.” See
(5th Cir. 1999)); see also C.C.N. Managed Care, Inc. v. Subway Equip. Leasing Corp., 169 F.3d at 328 (emphasis
Shamieh, 374 Fed.Appx. 506, 509 (5th Cir. 2010) (per added).
curiam ) (noting that despite “[e]ach party ha[ving] a
different characterization of the state court litigation ... it
involved the same claims as those in the federal action”). C. Christus Spohn Decision is Different from the Instant
Given the McMahon framework, the Court must ascertain Action
whether Texas provides a comparable civil remedy for Defendants next argue that the Court's reliance on
those holders who are aggrieved by the crime of theft by Christus Spohn is misplaced because the facts are different
check. in the instant action. Mot. 6. Specifically, Defendants
did not (1) submit worthless-check affidavits while any
[4] With this in mind, Texas does afford holders civil civil proceedings were pending; (2) seek any advantage in
recourse. “[W]hen a bank dishonors a check, the drawer any civil proceeding; or (3) submit any worthless-check
of the check is obligated to pay the amount of the check to affidavits in any court. Id.
for the courts to adjudicate disputes about whether a because the plaintiff had not suffered “unfair prejudice.”
party, by earlier litigating in court, has waived the right Id. The Fifth Circuit found that the district court was
to arbitrate.”); JPD, Inc. v. Chronimed Holdings, Inc., “in the best decision possible” to determine the waiver
539 F.3d 388, 393 (6th Cir. 2008) (“[W]e join the First issue due to the “conduct of the parties before” that
and Third Circuits in holding that the court, not the same district court. Id. Unlike other circuit courts, the
arbitrator, presumptively evaluates whether a defendant Fifth Circuit did not conduct a thorough analysis of the
should be barred from seeking a referral to arbitration Howsam holding. Compare Tristar Fin. Ins. Agency, Inc.,
because it has acted inconsistently with reliance on an 97 Fed.Appx. at 464 with Marie, 402 F.3d at 12.
arbitration agreement.”); Perry Homes v. Cull, 258 S.W.3d
580, 588 (Tex. 2008) (“[F]ederal courts do not defer Without Fifth Circuit precedent to the contrary, the Court
to arbitrators when waiver is a question of litigation holds that it should decide the issue of waiver instead of an
conduct[.]”); Ehleiter, 482 F.3d at 221 (“[W]e hold that arbitrator for two reasons. First, courts should decide the
waiver of the right to arbitrate based on litigation conduct issue of waiver because they are equipped with “greater
remains presumptively an issue for the court to decide expertise in recognizing and controlling abusive forum-
in the wake of Howsam .... ”); Marie v. Allied Home shopping.” See Grigsby & Assocs., Inc., 664 F.3d at 1354.
Mortgage Corp., 402 F.3d 1, 14 (1st Cir. 2005) (“Howsam Second, having an arbitrator decide the issue of waiver is
... did not intend to disturb the traditional rule that an inefficient process. As the First Circuit articulated,
waiver by conduct, at least where due to litigation-related
activity, is presumptively an issue for the court.”); Tristar [S]ending waiver claims to the
Fin. Ins. Agency v. Equicredit Corp. of Am., 97 Fed.Appx. arbitrator would be exceptionally
462, 465 (5th Cir. 2004) (per curiam ); but see Nat'l Am. inefficient. A waiver defense is
Ins. Co. v. Transamerica Occidental Life Ins. Co., 328 F.3d raised by one party to a lawsuit in
462, 466 (8th Cir. 2003) (determining, without significant response to another party's motion
discussion, that the issue of waiver is one for the arbitrator to compel arbitration or stay judicial
to decide). proceedings on the basis of an
arbitration agreement signed by the
*7 The Court recognizes that these circuit cases that parties. If the arbitrator were to
questioned Howsam's reach were decided before the find that the defendant had waived
Supreme Court's holding in BG Group. Nevertheless, the its right to arbitrate, then the case
reasoning of these sister circuits remains persuasive even would inevitably end up back before
after BG Group. The Howsam and BG Group opinions the district court with the plaintiff
analyzed “waiver, delay, or a like defense to arbitrability” again pressing his claims. The case
within the context of “non-compliance with contractual would have bounced back and forth
conditions precedent to arbitration”—not waiver claims between tribunals without making
based on litigation activity. See Ehleiter, 482 F.3d at any progress.
219 (“Properly considered within the context of the
Marie, 402 F.3d at 13–14.
entire opinion, however, we believe it becomes clear
that the [Supreme] Court was referring only to waiver,
Therefore, the Court concludes that the issue of waiver
delay, or like defenses arising from non-compliance with
in the context presently before the Court should be
contractual conditions precedent to arbitration.”).
determined by the Court and not an arbitrator.
motion for stay pending appeal: “(1) whether the stay the Fifth Circuit's resolution of Defendants' interlocutory
applicant has made a strong showing that he is likely appeal. 7
to succeed on the merits; (2) whether the applicant
will be irreparably injured absent a stay; (3) whether
IV. CONCLUSION
issuance of the stay will substantially injure the other
Accordingly, IT IS ORDERED that Defendants PLS
parties interested in the proceeding; and (4) where the
Financial Services, Inc. and PLS Loan Store of Texas,
public interest lies.” Id. at 434, 129 S.Ct. 1749; see also
Inc.'s “Motion to Reconsider the Court's Order Denying
Weingarten Realty Inv'rs v. Miller, 661 F.3d 904, 910 (5th
Defendants' Motions To Compel Arbitration” (ECF No.
Cir. 2011) (employing the same test). Under this four
39) is DENIED.
factor test, the first two factors “are the most critical.”
Nken, 556 U.S. at 434, 129 S.Ct. 1749.
IT IS FURTHER ORDERED that Defendants PLS
Financial Services, Inc. and PLS Loan Store of Texas,
*8 [13] Yet, “where there is a serious legal question
Inc.'s “Motion to Stay Proceedings Pending Defendants'
involved and the balance of the equities heavily favors
Motion to Reconsider and Interlocutory Appeal” (ECF
a stay ... the movant only needs to present a substantial
No. 44) is GRANTED.
case on the merits.” Weingarten Realty Inv'rs, 661 F.3d
at 910. Therefore, the Court can forgo an analysis of the
IT IS FURTHER ORDERED that the CLERK of the
remaining three factors and institute a stay pending appeal
Court shall ADMINISTRATIVELY CLOSE this matter,
if the first factor weighs so heavily in favor of that stay. See
pending the United States Court of Appeals for the Fifth
In re Deepwater Horizon, 732 F.3d 326, 345 (5th Cir. 2013)
Circuit's resolution of Defendants PLS Financial Services,
(declining to analyze all four factors and instead granting
Inc. and PLS Loan Store of Texas, Inc.'s interlocutory
a stay based on analysis of the first factor).
appeal.
Here, the first factor weighs in favor of Defendants. The
IT IS FINALLY ORDERED that that CLERK of
issue of whether the filing of criminal charges results in
the Court TERMINATE Plaintiffs Lucinda Vine and
arbitration waiver is one of first impression before the
Kristy Pond's “Motion for Class Certification” (ECF
Fifth Circuit. Relatedly, Defendants' new argument of the
No. 30) and “Motion for Order Finding Allegations in
role between courts and arbitrators in deciding the issue
Plaintiffs' First Amended Class Action Complaint are
of waiver has not been addressed in any circuit post BG
Admitted” (ECF No. 31). Plaintiffs are granted leave to
Group. See supra Section III.E. In other words, the Fifth
refile these Motions after the Fifth Circuit's resolution of
Circuit has not addressed whether waiver claims based on
Defendants PLS Financial Services, Inc. and PLS Loan
litigation activity fall within the sphere of BG Group and
Store of Texas, Inc.'s interlocutory appeal.
Howsam. See Ehleiter, 482 F.3d at 219.
[14] The Court finds that “serious legal question[s]” are All Citations
“involved and the balance of the equities heavily favors a
stay.” See Weingarten Realty Inv'rs, 661 F.3d at 910. Thus, --- F.Supp.3d ----, 2016 WL 8138799
the Court will administratively close the case pending
Footnotes
1 Plaintiffs bring this suit on behalf of themselves and for all others similarly situated.
2 A holder is a “person in possession of a negotiable instrument that is payable either to bearer or to an identified person.”
Tex. Bus. & Com. Code § 1.201(b)(21)(A). A check's drawer is the one who signs or is otherwise identified as a person