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FILED

16-0854
4/20/2017 8:14:03 AM
tex-16556230
SUPREME COURT OF TEXAS
BLAKE A. HAWTHORNE, CLERK

NO. 16-0854

IN THE SUPREME COURT OF TEXAS

HIAWATHA HENRY, ADDIE HARRIS, MONTRAY NORRIS, and


ROOSEVELT COLEMAN, JR., on behalf of themselves and for all other similarly
situated
Petitioner

v.

CASH BIZ, LP, CASH ZONE, LLC D/B/A CASH BIZ and REDWOOD
FINANCIALS, LLC
Respondent

From the Court of Appeals for the Fourth District of Texas


Cause No. 04-15-00469-CV

RESPONDENTS’ BRIEF ON THE MERITS

COATS ROSE, P.C.


Edward S. Hubbard
State Bar No.: 10131700
ehubbard@coatsrose.com
Patrick E. Gaas
State Bar No.: 07562790
pgaas@coatsrose.com
9 Greenway Plaza, Ste. 1100
Houston, Texas 77046
(713) 651-0111
(713) 651-0220 facsimile
COUNSEL FOR RESPONDENTS

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I. IDENTITY OF PARTIES AND COUNSEL

In compliance with Rule 55.3(a) of the Texas Rules of Appellate Procedure,

Respondents agree with and will defer to the “Identity of Parties and Counsel”

contained in Petitioners’ Brief on the Merits.

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

attempt by Texas Appleseed to participate in an oral argument of this matter before

this Court, Respondents will treat Texas Appleseed as so closely aligned with

Petitioners as to require disclosure of the identity of it and its counsel.

Amicus Curaie: Texas Appleseed

Represented by: Ricardo G. Cedillo


State Bar No. 04043600
Davis, Cedillo & Mendoza, Inc.
755 E. Mulberry, Suite 500
San Antonio, Texas 78212
Telephone: (210) 822-6666
Facsimile: (210) 822-1151
rcedillo@lawdcm.com

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II. TABLE OF CONTENTS

PAGE
I. IDENTITY OF PARTIES AND COUNSEL .................................................. i
II. TABLE OF CONTENTS ............................................................................... ii

III. INDEX OF AUTHORITIES ......................................................................... iv

IV. STATEMENT OF THE CASE ................................................................... xiii

V. STATEMENT OF JURISDICTION ........................................................... xiv

VI. ISSUES PRESENTED FOR REVIEW .........................................................xv

VII. SUMMARY OF THE ARGUMENT ..............................................................1


VIII. STATEMENT OF FACTS ..............................................................................4

A. Contextual Background .........................................................................4


B. The Undisputed Facts ............................................................................9

C. The Evidentiary Record ......................................................................10


D. The Trial Court Hearing and Order .....................................................12

E. The Fourth Court’s Opinion and Disposition of the Case ..................13


IX. GOVERNING LAW, STANDARD OF REVIEW, AND BURDENS OF
PROOF...........................................................................................................15

A. The FAA under Texas Law .................................................................15

B. The Standard of Review ......................................................................18

C. The Burdens of Proof ..........................................................................21

X. ARGUMENT .................................................................................................23
A. Respondents met their burden of proof to enforce the arbitration
provision ..............................................................................................23

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1. A valid and enforceable arbitration agreement exists...............24

2. The dispute falls within the scope of the arbitration provision 25

B. The Petitioners failed to meet their burden to prove waiver and


prejudice ..............................................................................................32

C. The trial court erred by not enforcing the waiver-of-class-action


provision ..............................................................................................46

D. There is no split of authority justifying further review by this Court .47


E. The Vine Memorandum Opinion.........................................................47

F. The Harrison Opinion .........................................................................50


CONCLUSION ........................................................................................................51

XI. PRAYER........................................................................................................52
XII. CERTIFICATE OF COMPLIANCE ............................................................53

XIII. CERTIFICATE OF SERVICE ......................................................................54


XIV. APPENDIX......................................................................................................1

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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

AT&T Mobility v. Concepcion, 563 U.S. 333 (2011) ........................................18, 46

AT&T Technologies, Inc. v. Communications Workers of Am.,


475 U.S. 643 (1986) ..........................................................................20, 28, 41, 44

Bell v. State, 2006 WL 3628916 (Tex. App.—Houston [1st Dist.]


2006, no pet.) ................................................................................................34, 48
BG Group, PLC v. Republic of Argentina,
572 U.S. ____, 134 S. Ct. 1198 (2014)............................................................... 30

Bonded Builders Home Wty Ass’n of Texas, Inc. v. Smith,


2016 WL 1612916 (Tex. App.—Dallas 2016, no pet. h.) .................................. 20
Browning-Ferris Indus. v. Lieck,
881 S.W.2d 288 (Tex. 1994) ..................................................................30, 34, 35
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006) ........................... 25

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

Cash Biz, LP v. Henry,


2016 WL 4013794 (Tex. App.—San Antonio 2016, pet. filed) .............13, 32, 40

Coker v. Coker, 650 S.W.2d 391 (Tex. 1983) ......................................................... 27

iv
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Community Financial Services Assoc. of Am., Ltd. v. FDIC,
132 F.Supp.3d 98 (D.C. D. 2015) ......................................................................... 7

Consorcio Rive, S.A. De C.V. v. Briggs of Cancun, Inc.,


134 F.Supp.2d 789 (E.D. La. 2001) .................................................................... 37

Consumer Service Alliance of Texas, Inc. v. City of Dallas,


433 S.W.3d 796 (Tex. App.—Dallas 2014, no pet.) ............................................ 6

Cooper Indus., LLC v. Pepsi-Cola Metro. Bottling Co., Inc.,


475 S.W.3d 436 (Tex. App.—Houston [14th Dist.] 2015, no pet.)
............................................................................ 16, 17, 20, 22, 23, 30, 32, 36, 45

D Magazine Partners, L.P. v. Rosenthal,


___ S.W.3d ___, 2017 WL 1041234 (Tex., March 17, 2017)............................ 42
Diamond Shamrock Corp. v. Ortiz,
753 S.W.2d 238 (Tex.App.—Corpus Christi 1988, writ denied) ....................... 35
DirectTV, Inc. v. Imburgia, 577 U.S. ___, 136 S.Ct. 463 (2015) ......................18, 46
Doctor’s Assocs. Inc. v. Casarotto, 517 U.S. 681 (1996)........................................ 17

East Montgomery Cty. Mun. Utility Dist. No. 1 v. Roman Forest


Consol. Mun. Utility Dist.,
620 S.W.2d 110 (Tex. 1981) .............................................................................. 28
Ex parte Rains, 555 S.W.2d 478 (Tex. Crim. App. 1977)....................................... 39
First Options of Chi., Inc. v. Kaplan,
514 U.S. 938 (1995) ............................................................................................ 17

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

Frost Nat’l Bank v. L&F Distributors, Ltd.,


165 S.W.3d 310 (Tex. 2005) .............................................................................. 27

Garcia v. Huerta,
340 S.W.3d 864 (Tex. App.—San Antonio 2011, pet. denied) .......................... 20

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Gatlin v. P.O.A. Criscione Star #16195,
2008 WL 2745956 (N.D. Ill. 2008) ..............................................................31, 37

Greever v. Persky, 165 S.W.2d 709 (Tex. 1935) ....................................................... 4

Griffin v. Burlington Volkswagen, Inc.,


411 N.J.Super. 515, 988 A.2d 101 (NJ. App. Div. 2010) .................................. 37
G.T. Leach, Builders L.L.C. v. Sapphire VP, L.P.,
458 S.W.3d 502 (Tex. 2015) ............................. 19, 21, 22, 30, 36, 38, 42, 43, 45
Guyton v. Monteau,
332 S.W.3d 687 (Tex. App.—Houston [14th Dist.] 2011, no pet.) ................... 40

Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co.,


849 S.W.2d 380 (Tex. App.—Houston [14th Dist.] 1993, writ
denied)................................................................................................................. 20

Heritage Res. v. Nationsbank, 939 S.W.2d 118 (Tex. 1996) .................................. 27


Horizon Health Corp. v. Tyler-Holmes Memorial Hosp.,
284 F. Supp. 2d 439 (N.D. Miss. 2003)............................................20, 21, 41, 44

Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002) .................................. 30

In re AdvancePCS Health, L.P.,


172 S.W.3d 603 (Tex. 2005) (orig. proceeding) ....................................18, 21, 25
In re Amos, 397 S.W.3d 309 (Tex. App.—Dallas 2013, orig.
proceeding) ...................................................................................................34, 48
In re Bruce Terminix Co., 988 S.W.2d 702 (Tex.1998) ....................................14, 45

In re Christus Spohn Health System Corp.,


231 S.W.3d 475 (Tex. App.—Corpus Christi-Edinburg 2007, orig.
proceeding) .......................................................................................33, 38, 48, 49

In re Conseco Finance Servicing Corp.,


19 S.W.3d 562 (Tex. App.—Waco 2000, orig. proceeding) ............25, 28, 29, 36

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
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In re Fleetwood Homes, 257 S.W.3d 692 (Tex. 2008) ............................................ 19

In re Flores, 2016 WL 890969 (Tex. App.—Dallas 2016, orig.


proceeding) ...................................................................................................35, 48

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 Kellogg Brown & Root, Inc.,


166 S.W.3d 732 (Tex.2005)........................................................16, 17, 21, 22, 23

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 Olshan Foundation Repair Co., Inc.,


328 S.W.3d 883 (Tex. 2010) .............................................................................. 27

In re Online Travel Co. (OTC) Hotel Booking Antitrust Litigation,


953 F.Supp.2d 713 (N.D. Tex. 2013) ................................................................. 21
In re Rubiola, 334 S.W.3d 220 (Tex. 2011) ......................................................14, 21

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 Universal Underwriters of Texas Ins. Co.,


345 S.W.3d 404 (Tex. 2011) .............................................................................. 18

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

Kennedy Hodges, L.L.P. v. Gobellan,


433 S.W.3d 542 (Tex. 2014) ......................................................19, 22, 23, 32, 45

Kenny v. Portfolio Recovery Assocs., LLC,


464 S.W.3d 29 (Tex. App.—Houston [1st Dist.] 2015, no pet.) ........................ 40

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

Moses H. Cone Mem’l Hosp. v. Mecury Constr. Corp.,


460 U.S. 1 (1983) ....................................................................................16, 17, 45

Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp.,


804 F.2d 338 (5th Cir. 1986) ..................................................................20, 41, 44
Myers v. Rosenberg, 1986 WL 3329 (N.D.Ill.3/7/86) .................................35, 37, 38
NCP Finance Ltd. Partnership v. Escatiola,
350 S.W.3d 152 (Tex. App.—San Antonio, no pet.) ...... 6, 18, 24, 27, 46, 47, 50
Perry Homes v. Cull,
258 S.W.3d 580 (Tex. 2008) ........... 14, 15, 16, 17, 18, 19, 23, 32, 38, 42, 43, 45

Perry v. Thomas, 482 U.S. 483 (1987) .................................................................... 17


PHH Corp. v. CFPB,
839 F.3d 1 (D.C. Cir. 2016) (en banc review granted, op.
withdrawn, February 6, 2017) .............................................................................. 7

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

Porter & Clements, LLP v. Stone,


935 S.W.2d 217 (Tex. App.—Houston [1st Dist.] 1996, no writ) ..................... 24

Prescott-Follett & Assocs., Inc. v. Delasa/Prescott Folett & Assocs.,


2002 WL 31528463 (E.D. La. 2002) ......................................................35, 37, 38

Preston v. Ferrer, 552 U.S 346 (2008) .................................................................... 15


Primerica Life Ins. Co. v. Brown, 304 F.3d 469 (5th Cir. 2002) ...........20, 21, 41, 44

Principal Investments v. Harrison, 366 P.3d 688 (Nov. 2016) .........................33, 50

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

Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C.,


455 S.W.3d 573 (Tex. 2014) ............................................... 22, 23, 32, 36, 38, 45

Seagull Energy E & P, Inc. v. Eland Energy, Inc.,


207 S.W.3d 342 (Tex. 2006) .............................................................................. 27

Smith Barney Shearson, Inc. v. Boone,


838 F. Supp. 1156 (N.D. Tex. 1993) ......................................................20, 41, 44

Snap-On Tools Corp. v. Mason,


18 F.3d 1261 (5th Cir. 1994) ..................................................................20, 41, 44

Southland Corp. v. Keating, 465 U.S. 1 (1984) ....................................................... 15

Southwind Group, Inc. v. Landwehr,


188 S.W.3d 730 (Tex. App.—Eastland 2006, orig. proceeding) ....................... 42
Suarez v. City of Tex. City, 465 S.W.3d 623 (Tex. 2015).......................................xiv

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Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc.,
468 F.3d 523 (8th Cir. 2006) ........................................................................40, 41

Subway Equip. Leasing Corp. v. Forte,


169 F.3d 324 (5th Cir. 1999) ................................... 33, 34, 35, 36, 37, 38, 49, 50

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

Tuscan Builders, L.P. v. 1437 SH6 L.L.C.,


438 S.W.3d 717 (Tex. App.—Houston [1st Dist.] 2014, pet.
denied)................................................................................................................. 42

Valero Energy Corp. v. Teco Pipeline Co.,


2 S.W.3d 576 (Tex. App.—Houston [14th Dist.] 1999, no pet.) .................19, 45
Venture Cotton Co-op v. Freeman,
435 S.W.3d 222 (Tex. 2014) ........................................................................14, 21

Vine v. PLS Financial Services, Inc.,


___ F. Supp.3d ___, 2016 WL 8138800 (W.D. Tex. [El Paso
Division] June 6, 2016) .................................................. 7, 8, 9, 37, 38, 47, 48, 49
Vine v. PLS Financial Services, Inc., ___ F.Supp.3d ___, 2016 WL
8138799 (W.D.Tex. [El Paso Division] August 11, 2016) .............................. 7, 9

Wash. Mut. Fin. Group, LLC v. Bailey,


364 F.3d 260 (5th Cir. 2004) ..................................................................22, 42, 43

Williams Indus. v. Earth Dev. Sys. Corp.,


110 S.W.3d 131 (Tex. App.—Houston [1st Dist.] 2003, no pet.) ...................... 28

Willis v. Donnelly,
199 S.W.3d 262 (Tex. 2006) .............................................................................. 27

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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

12 USC § 5491(a) ...................................................................................................... 4

15 USC § 1692e (2006) ............................................................................................. 4


TEX. CIV. PRAC. & REM. CODE § 51.016.................................................................. 15

TEX. CIV. PRAC. & REM. CODE § 171.021(b) ...............................................16, 17, 41

TEX. CIV. PRAC. & REM. CODE §171.098(a)(1) ....................................................... 15


TEX. FIN. CODE § 341.001(6) ..................................................................................... 5
TEX. FIN. CODE § 393.001(3) ..................................................................................... 5

TEX. FIN. CODE § 393.105 .......................................................................................... 6


TEX. FIN. CODE § 393.201-223 .................................................................................. 6

TEX. FIN. CODE § 393.203 ........................................................................................ 31

TEX. FIN. CODE § 393.204 ..............................................................................6, 10, 11


TEX. FIN. CODE § 393.221(1) ..................................................................................... 5

TEX. FIN. CODE § 393.221(2) ..................................................................................... 5


TEX. FIN. CODE § 393.503 ..............................................................................6, 10, 11

TEX. FIN. CODE § 393.504 ..................................................................................26, 31

TEX. FIN. CODE §§ 393.601-628 ................................................................................ 5

TEX. GOV’T. CODE § 22.001(a)(1) ..........................................................................xiv


TEX. GOV’T. CODE § 22.225(c) ...............................................................................xiv

TEX. PENAL CODE § 1.03(c) ..................................................................................... 34

TEX. PENAL CODE § 9.06 .......................................................................................... 34

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Other Authorities
Federal Rules of Civil Procedure Rule 12(b).........................................40, 41, 43, 47

TEX. R. APP. P. 9(i) .................................................................................................. 54

TEX. R. APP. P. 55.2(d)(1) ...........................................................................................i

TEX. R. APP. P. 55.3(a) ........................................................................................... xiii


TEX. R. APP. P. 56.1(a)(1) .......................................................................................xiv

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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

by Rule of 55.2(d)(1) of the Texas Rules of Appellate Procedure.

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

Respondents used the criminal justice system as an improper means to collect

debts accrued on “pay-day” loans. Respondents seek individual arbitrations of

each of Petitioners’ claims through enforcement of broad-form arbitration and

class-action waiver provisions contained in the written contracts with each

Petitioner.

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V. STATEMENT OF JURISDICTION

Respondents recognize that the justices of the court of appeals disagree on a

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).

Respondents disagree with the other bases of jurisdiction asserted in

Petitioners’ Brief on the Merits. As will be shown in Respondents’ Brief, there is

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.

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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.

4. The Court of Appeals correctly determined that the written, broad-form


agreements contained enforceable class-action waiver provisions applicable
to Petitioners’ claims.

5. The Court of Appeals correctly determined that Petitioners failed to meet


their burden of proof on the defense of waiver to arbitrability, because:
a. Petitioners failed to submit relevant, and legally sufficient evidence of
waiver;

b. reliance solely on the allegations in the Petitioners’ pleading, and


unverified allegations from newspapers articles and online sources,
does not constitute legally sufficient evidence of waiver;
c. a private litigant cannot, as a matter of law, “substantially invoke” the
criminal justice system so as to waive its right to arbitrate civil
disputes; and

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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.

6. The relief sought by Petitioners would constitute an improper “punishment”


of Respondents, which is not supported by federal or state law, and would
require development of new rules, or exceptions to existing rules, governing
the defenses of waiver and prejudice.

7. The jurisprudential consequences of creating the relief sought by Petitioners


would adversely impact federal and Texas public policy.

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TO THE HONORABLE SUPREME COURT OF TEXAS:

VII. SUMMARY OF THE ARGUMENT

Did the Fourth Court of Appeals correctly construe and


apply the federal substantive law of arbitration in this
case?

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.”

The Fourth Court of Appeals correctly applied well-established law

governing arbitrability under the Federal Arbitration Act (“FAA”) in the context of

three overlapping circumstances:

 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

from applying the well-established rules governing waiver, as Petitioners seek.

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When all of Petitioners’ allegations and arguments are fully distilled, what

they actually seek from this Court is imposition of a preliminary procedural

“punishment” on Respondents by prohibiting the enforcement of broad-form

arbitration and class-action-waiver provisions contained in “pay-day” loan

agreements. In support of their pleading for “punishment,” Petitioners argue that

different rules or exceptions should apply to the analysis of their defenses to

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.

Petitioners provided no evidence of waiver. Instead, they filed petitions

containing conclusory allegations of wrongdoing, followed by a response to the

motion to compel that

 quoted interviews and papers from private organizations obtained from


various websites, which accused Respondents and other Credit Service
Organizations of improperly using the criminal justice system to collect
debts owed on “pay day” loans;

 provided copies of criminal court webpages listing Respondents as


“complainants” in certain criminal cases;

 asserted the merit of the factual allegations contained in their pleading; and

 offered conclusory and inferential arguments about what other evidence


would show in support of their malicious prosecution claim.

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This is not legally sufficient evidence of the elements of waiver. In lieu of

evidence, Petitioners argue that their substantive allegations of wrongdoing prove

“substantial invocation of the judicial process,” and that their substantive

allegations of damages prove prejudice. However, these arguments ignore the rule

that courts are prohibited from considering the underlying merits of the substantive

claims when determining arbitrability.

In essence, Petitioners and Amicus are reconfiguring their attack on

enforcement of the arbitration and class-action waiver provision into a de facto

unconscionability defense—that is, given all of the allegations they have made

against Respondents, it is somehow unconscionable to make Petitioners

individually arbitrate their claims. But, this argument fails, too, because courts

have uniformly held that unconscionability is not a defense to the enforcement of

the provision at issue.

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

United States Fifth Circuit Court of Appeals.

The Legality of Respondents’ Business

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

Under the Finance Code, a licensed broker who obtains, or assists in

obtaining, short-term loans for consumers is defined as a Credit Access Business

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

§§ 393.001(3), 393.221(1). Compliance with the Finance Code by CSOs,

including CABs, is regulated by the Finance Commission and the Office of

Consumer Credit Commissioner (“OCCC”). TEX. FIN. CODE §§ 393.601-628.

As reflected in the written contracts contained in the record, it is undisputed

that Respondents are licensed and regulated CAB/CSOs that engage in the business

of facilitating short-term loans to customers in Texas. (C.R. 80-130). The short-

term loans facilitated by Respondents include loans defined in the Finance Code as

“Deferred Presentment Transactions”:

a transaction in which: (A) a cash advance in whole or in part is made


in exchange for a personal check or authorization to debit a deposit
account; (B) the amount of the check or authorization debit equals the
amount of the advance plus a fee; and (C) the person making the
advance agrees that the check will not be cashed or deposited or the
authorized debit will not be made until a designated future date.

TEX. FIN. CODE §§ 341.001(6), 393.221(2).

Respondents are not the lender to the consumer. Instead, Respondents

arrange and assist with extensions of short-term credit for consumers through a

third-party lending institution, including the collection of payments to forward to

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

agreements (“CSO Agreements”) and credit services disclosures statements

5
010725.000005\4820-6817-9523.v1
(“Disclosure Statements”), certain terms of which are proscribed and regulated by

the Finance Code. TEX. FIN. CODE §§ 393.105, 393.201-223. The CSO

Agreements and Disclosure Statements, together with Loan Disclosures,

Promissory Note and Security Agreements (“Promissory Notes”), form the

documentation of the transaction between Respondents and their customers,

including Petitioners (hereinafter collectively referred to as “Loan Contracts”).2

A breach of contract by a CAB/CSO is deemed to be a violation of Chapter

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

WL 6719881, *4 (S.D. Tex. 2011).

As illustrated by the briefs submitted by Petitioners and Amicus, the

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

through zoning regulations, to federal regulatory efforts to foreclose 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
010725.000005\4820-6817-9523.v1
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

“Operation Choke Point”). Additionally (as discussed in Petitioners’ Brief), the

recently-created CFPB has considered prohibiting the inclusion of arbitration and

class-action-waiver provisions in the written contracts for these short-term credit

agreements. It is critical to note, however, that no such regulation has been

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).

As is clear from much of Petitioners’ (and Amicus’) arguments, this current

political climate engulfing the entire CAB/CSO industry provides a significant pre-

text for the Petition now before the Court.

The Current Litigation Effort Against the CAB/CSO Industry

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

6, 2016), opinion on reconsideration, ___ F. Supp.3d ___, 2016 WL 8138799

(W.D. Tex. [El Paso Division] August 11, 2016)3, are part of a concerted effort by

organizations, including Petitioners’ counsel and Amicus, to impose a prohibition

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
010725.000005\4820-6817-9523.v1
on the enforcement of arbitration and class-action-waiver provisions in the written

contracts for short-term Deferred Presentment Transactions, which neither the

State of Texas, nor the federal government, has imposed.

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

opposition to enforcement of arbitration and class-action-waiver provisions in CSO

Agreements. (See Appendix 4 to Respondents’ Brief on the Merits). In turn, the

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
010725.000005\4820-6817-9523.v1
in Vine ultimately issued a second opinion in which it disagreed with the Fourth

Court’s analysis in this case. Vine, 2016 WL 8138799, at *5 n.4. 5

B. The Undisputed Facts


Turning from the pretext presented by Petitioners, Respondents now present

the following uncontested facts, which are relevant to the issue of arbitrability

before this Court:

 Respondents are CAB/CSOs that are regulated pursuant to Chapter 393 of


the Finance Code (C.R. 131);

 Petitioners entered into transactions with Respondents memorialized by the


Loan Contracts, which contained a broad-form arbitration and waiver-of-
class-action provision (C.R. 132, 80-130);

 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);

 Respondents arranged extensions of credit to Petitioners by obtaining the


amount of funds described in each Loan Contract by and through a third-
party lender (C.R. 132, 80-130);

 Petitioners brought the present action alleging that Respondents’ submission


of information to prosecutors constituted an improper attempt to collect a
civil debt in violation of the Texas Finance Code and tort law, and that they
were damaged as result of such conduct (C.R. 1-11, 15-26, 147-48, 257-58);

 the damages sought by Petitioners include damages recoverable under the


Finance Code for a breach of contract (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));

 Respondents sought to enforce its contractual right to individual arbitrations


of Petitioners’ claims by moving to compel arbitration and enforce the
waiver-of-class action provision (C.R. 52-133, 248-55);

 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

 There is no allegation, evidence or finding that Respondents filed or initiated


any civil proceedings against any Petitioners, or sought any relief or benefit
in the underlying action before the motion to compel was heard by the trial
court. (C.R. 1-11, 15-26, 147-48, 257-58).

C. The Evidentiary Record


The record from the trial court consists of Petitioners’ pleadings; the motions

and responses filed by the parties pertaining to the enforcement of the contractual

10
010725.000005\4820-6817-9523.v1
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

order denying the motion to compel.

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).

In response, Respondents sought to enforce the contractual broad-form

arbitration and waiver-of-class-action provision by filing a motion to compel.

(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,

who, as an officer of Respondents, authenticated the Loan Contracts and

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
010725.000005\4820-6817-9523.v1
transactions, and swore to the limited involvement of Respondents in the process

of providing information to prosecutors. (C.R. 131-33; S.C.R. 10).

Petitioners provided no evidence controverting either the Loan Contracts or

the affidavits. Instead, they filed a response that quoted interviews and papers

from private organizations obtained from various websites, which accused

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

webpages listing Respondents as “complainants” in certain criminal cases; asserted

the merit of the factual allegations contained in their pleading; and offered

conclusory and inferential arguments about what other evidence would show in

support of their malicious prosecution claim. (C.R. 137-43; R.R. 13:20-14:9,

19:12-21:21, 22:7-10, 24:2-25:10, 29:16-23:10, 32:17-33:14).

D. The Trial Court Hearing and Order


No additional evidence was presented during the hearing in the trial court on

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

about the process used by certain prosecutors when handling bad-check

complaints. (R.R. 28:15-22, 30:22-24, 31:14-18). None of the statements made by

the trial court were based on any evidence submitted in support of, or in opposition

to, the motion to compel.

12
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At the end of the hearing, the trial judge denied the motion and received a

pre-prepared written order to sign from Petitioners’ counsel.7 (R.R. 33:16-19).

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-

47, 257-58). The order contained the following findings:

 Respondents “filed criminal charges against Plaintiffs, participated in


criminal trials, obtained criminal judgments, and attempted to collect from
Plaintiffs;”

 Petitioners’ claims arose from Respondents’ use of the “the criminal justice
system to enforce a civil debt;”

 the arbitration and class-action-waiver provision did not apply to such a


dispute; and

 Respondents waived their right to enforce the arbitration and class-action-


waiver provision by substantially invoking the judicial process when they
submitted information about criminal activity to prosecutors.

(C.R. 246-47, 257-58).

E. The Fourth Court’s Opinion and Disposition of the Case


The Fourth Court of Appeals, in a 2-1 opinion, reversed the trial court order,

and rendered judgment enforcing the broad-form arbitration and waiver-of-class

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
010725.000005\4820-6817-9523.v1
applied Texas case law interpreting and applying the FAA, including the following

opinions from this Court:

 In re Rubiola, 334 S.W.3d 220 (Tex. 2011);

 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (Tex. 2003);

 Venture Cotton Co-op v. Freeman, 435 S.W.3d 222 (Tex. 2014);

 In re Labatt Food Serv., L.P., 279 S.W.3d 640 (Tex. 2009);

 Prudential Securities, Inc. v. Marshall, 909 S.W.2d 896 (Tex. 1995);

 In re FirstMerit Bank, N.A., 52 S.W.3d 749 (Tex. 2001);

 Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008); and

 In re Bruce Terminix Co., 988 S.W.2d 702 (Tex.1998).

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

of either waiver or prejudice. Id., *3-8.

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

of Appeals. (See, Petition for Review, App. F).

14
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IX. GOVERNING LAW, STANDARD OF REVIEW, AND BURDENS OF
PROOF

A. The FAA under Texas Law

The FAA under Texas Law

The Loan Contracts specifically stated that the arbitration provision “is made

pursuant to a transaction involving interstate commerce and shall be governed by

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.

Capital Income Properties v. Blackmon, 843 S.W.2d 22, 23 (Tex. 1992).

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.

15
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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

endeavoring to keep its ruling as consistent as possible with federal law. In re

Kellogg Brown & Root, Inc., 166 S.W.3d at 739.

Maintaining consistency between federal and state law requires Texas trial

courts to harmonize and apply the procedural rules of Texas law and the

substantive federal law to determine whether the parties must arbitrate. In re

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,

no pet.).. Under Texas procedural law, a party seeking to compel arbitration is

entitled to a summary determination of its motion by the trial court, in a proceeding

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

16
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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

questions of law to be resolved summarily by comparing the arbitration provision

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

Indus., LLC, 475 S.W.3d at 441.

As for the substantive law of arbitration, application of the FAA generally

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

the “totality of circumstances” legal analysis developed by federal courts. Perry

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

1999, pet. dism’d. want of jurisdiction).

Public policy heavily favors enforcement of contractual terms that provide

private mechanisms for resolving disputes outside of the courthouse, including

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,

supra. (Tex. 2008) (contractual arbitration provision); NCP Finance Ltd.

Partnership, 350 S.W.3d at 155 (contractual arbitration and class-action waiver

provisions). Consistent with federal law and this shared public policy, Texas courts

applying the FAA are generally required to enforce broad-form arbitration and

class-action waiver provisions. See generally, DirectTV, Inc. v. Imburgia, 577

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.

B. The Standard of Review


Based on these principles, a trial court’s disposition of a motion to compel

arbitration involves a series of summary determinations and questions of law,

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

standard specifically applies to appellate review of questions of law and legal

conclusions, including the existence of a valid arbitration agreement, whether the

scope of the arbitration provision includes the dispute at issue, and whether the

defense of waiver applies to defeat enforcement of an otherwise valid and

applicable arbitration provision. In re Fleetwood Homes, 257 S.W.3d 692, 694

(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

(Tex. 2014). Moreover, where no factual dispute is raised as to an issue addressed

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

at 545; Perry Homes, 258 S.W.3d at 598.

To the extent any of the decisions of the trial court involve findings of fact,

those findings will be reviewed by an appellate court for an abuse of discretion

applying the legal sufficiency or “no evidence” standard of review. Valero Energy

19
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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

S.W.3d 864, 868 (Tex. App.—San Antonio 2011, pet. denied).

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).

20
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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:

1. Is there a valid arbitration agreement; and

2. If so, does the agreement encompass the claim.9

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.

The questions as to whether a valid arbitration agreement exists, and

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

reasonable presumption, and resolve all doubts, in favor of compelling arbitration.

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

supporting affidavits or discovery. J.M. Davidson, Inc., 128 S.W.3d at 227.

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

applicability or enforcement of the arbitration provision, including the defense of

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

based on a totality of circumstances that the party seeking to enforce arbitration

substantially invoked the judicial process to the non-movant’s detriment or

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;

Cooper Indus., LLC, 475 S.W.3d at 447-448.

X. ARGUMENT

A. Respondents met their burden of proof to enforce the arbitration


provision
Respondents had the initial burden to prove the two initial elements required

to compel arbitration. In re Kellogg Brown & Root, 166 S.W.3d at 737.

Respondents met this burden by proffering the Loan Contracts and the affidavits of

23
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David Flanagan, together with the motion to compel and reply.

1. A valid and enforceable arbitration agreement exists


Petitioners did not challenge the existence, validity, or enforceability of the

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

provision, Respondents will briefly address this element.

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

on an individual basis as indicated above. Each Petitioner enjoyed the benefits of

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);

NCP Finance Ltd. Partnership, 350 S.W.3d at 155.

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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

appear to be reconfiguring their attack on enforcement of the provision into a de

facto unconscionability defense—that is, given all of the allegations they have

made against Respondents, it is somehow unconscionable to make Petitioners

individually arbitrate their claims. Not only have Petitioners failed to properly

raise such a defense, but Texas and federal courts have been clear that

unconscionability is not a defense to judicial enforcement of an arbitration

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

608; In re Oakwood Mobile Homes, Inc., 987 S.W.2d at 573; In re Conseco

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

stage of the proceeding.

2. The dispute falls within the scope of the arbitration provision


As for the second element of Respondents’ burden, the order signed by the

trial court concluded that the arbitration and waiver-of-class-action provision was

inapplicable to the Petitioners’ allegations related to “use of the criminal justice

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

of material breach of the Loan Contracts, based on the allegation of Respondents’

improper “use of the criminal justice system to enforce a civil debt.” (CR, 6-9, 21-

23, 147-48). Petitioners sought to recover monetary damages caused by such

conduct, including statutory damages recoverable for breach of a CAB/CSO

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

the arbitration and class-action waiver provision.

Paragraph1of the arbitration provision states that the agreement requires

arbitration of all disputes between the parties to the Loan Contracts, including the

following:

… (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; … and/or (j) all claims arising
from or relating directly or indirectly to the disclosure by us … of any
non-public personal information about you.

26
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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

broad referral under Paragraph 1(g) of the provision.

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.

Davidson, Inc. 128 S.W.3d at 229. Unambiguous contracts are enforced as

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

ordinarily immaterial to the determination of the construction of an unambiguous

27
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contract. East Montgomery Cty. Mun. Utility Dist. No. 1 v. Roman Forest Consol.

Mun. Utility Dist., 620 S.W.2d 110, 112 (Tex. 1981).

Applying these rules of construction, courts must resolve any doubts about

an arbitration agreement’s scope in favor of arbitration. In re FirstMerit Bank,

N.A., 52 S.W.3d at 753. A broad-form arbitration clause, purporting to cover all

claims, disputes, and other matters arising out of or relating to the contract, creates

a presumption of arbitrability. AT&T Technologies, Inc., 475 U.S. at 650;

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,

137 (Tex. App.—Houston [1st Dist.] 2003, no pet.); In re Conseco Finance

Servicing Corp., 19 S.W.3d at 570. All of Petitioners’ claims are expressly

covered by the contractual provision at issue. Therefore, under the proper rules of

construction, including the presumption of arbitrability, Petitioners’ claims fall

within the scope of the provision as a matter of law.

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

as described in both the order and Petitioners’ pleadings—“use of the criminal

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-

28
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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

within the scope of the arbitration provision.

Even if the trial court could look beyond the express language of the

arbitration provision, as well as its application to disputes involving the “civil

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

29
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general obligations imposed by law. In re Vesta Ins. Group, Inc., 192 S.W.3d 759,

761 (Tex. 2006); Cooper Indus., LLC, 475 S.W.3d at 442.

In the present case, the malicious prosecution and fraud claims arise from

the allegations that Respondents chose an improper method of collecting the

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

would be no debt and there would be no issue of disclosure. Petitioners’ own

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

Petitioners constitutes a breach of the Loan Contracts, which, in turn, constitutes a

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

these elements to shift the burden to the Petitioners to prove waiver.

B. The Petitioners failed to meet their burden to prove waiver and


prejudice
Petitioners had the “high” burden of proof and persuasion on the issue of

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

at 589-90; In re Kaplan Higher Educ. Corp., 235 S.W.3d at 208–09; Cooper

Indus., LLC, 475 S.W.3d at 449. Because they failed to meet this burden, the trial

court erred as a matter of law by denying Respondents’ motion to compel. Forest

Oil Corp., 268 S.W.3d at 56, 61; Perry Homes, 258 S.W.3d at 598; Cooper Indus.,

LLC, 475 S.W.3d at 449.

1. Filing information or complaints with prosecutors does not waive


a contractual right to arbitrate civil claims
Petitioners argue that Respondents waived their right to arbitrate Petitioners

claims tort and statutory claims for damages when Respondents sought the support

and assistance of prosecutors pertaining to “bad checks” provided by Petitioners.

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.

proceeding) (courts “ordinarily would not consider actions in a separate cause to be

indicative of waiver.”); see also Principal Investments v. Harrison, 366 P.3d 688,

695 (Nov. 2016) (“Litigation-conduct waiver questions commonly arise out of

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

litigation conduct in a separate proceeding, is the Fifth Circuit’s opinion in Subway

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:

… We use the term to describe the act of implementing or enforcing


the judicial process, not the act of calling upon for support or
assistance, as say, one would invoke a spirit or the elements. Thus, to
invoke the judicial process, the waiving party must do more than call
upon unrelated litigation to delay an arbitration proceeding. The party
must, at the very least, engage in some overt act in court that evinces
a desire to resolve the arbitrable dispute through litigation rather
than arbitration.

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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

of the concept of “invoke” contains two elements: an “act of implementing or

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

within the sole discretion of the prosecuting attorney. Browning-Ferris Industries,

Inc., 881 S.W.2d at 293-294; Alvarez v. Anesthesiology Associates, 967 S.W.2d

871 (Tex. App.—Corpus Christi 1998, no writ); Taylor v. Gately, 870 S.W.2d 204,

204 (Tex. App.—Waco 1994, writ dism’d.). Additionally, a private party is

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

34
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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.

proceeding)); In re Flores, 2016 WL 890969, at *1 (Tex. App.—Dallas 2016, orig.

proceeding); In re Jeffory Blackard, 2016 WL 1756786 (Tex. App.—Dallas 2016,

orig. proceeding). Moreover, criminal law disputes are not arbitrable. See

Prescott-Follett & Assocs., Inc. v. Delasa/Prescott Folett & Assocs., 2002 WL

31528463, *4-5 (E.D. La. 2002); Myers v. Rosenberg, 1986 WL 3329, *2

(N.D.Ill.3/7/86).

Instead, consistent with the first element of “invoke” described in Subway,

all a private party can do is seek the “support or assistance” of prosecutors if it

feels a crime has been committed—a private party cannot, as a matter of law,

implement or enforce the criminal process. Therefore, Respondents, as a matter of

law, could not “substantially invoke the judicial process” by providing affidavits or

form complaints to law enforcement.12

As to the second element of Subway, Petitioners’ allegations cannot, as a

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

fails under both elements of the Subway standard for “invoke.”

Even assuming that submitting affidavits or form complaints to prosecutors

could be considered in the context of a waiver defense, the Respondents’ conduct

is more analogous to the filing of initial pleadings in a civil case. As the Fourth

Court of Appeals recognized in the Majority Opinion below, Texas courts

uniformly hold that the mere filing of pleadings in a civil case is not the type of

active participation in a court proceeding required to find “substantial invocation 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

F.Supp.2d 789, 795-97 (E.D. La. 2001).

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

2745956, at *3; Prescott-Follett & Assocs., Inc., 2002 WL 31528463, at *4-5;

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).

Moreover, courts do not typically find involvement in separate legal

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)

civil proceeding in which arbitration is sought to be compelled. Perry Homes, 258

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

be indicative of waiver.”). There is nothing in the recent decisions of the this

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

presenting information as a criminal complaint substantially invokes the judicial

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
010725.000005\4820-6817-9523.v1
erred as a matter of law by concluding that Respondents’ submission of

information as a criminal complainant against Petitioners substantially invoked the

litigation process so as to waive the contractual right to arbitrate the present civil

suit brought by Petitioners.

2. The Appellees failed to meet their burden on the issue of waiver


Petitioners produced no evidence to the trial court to prove waiver or

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:

Respondents submitted affidavits and complaints to law enforcement officials.

Despite this lack of evidence, the trial court signed the pre-written order

finding that Respondents “filed criminal charges against the Plaintiffs, participated

in criminal trial, obtained criminal judgments, and attempted to collect from

Plaintiffs.” Petitioners contend that the allegations recited in their pleadings,

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

prove waiver.15 In essence, they are relying on their substantive allegations of

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
010725.000005\4820-6817-9523.v1
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.

To avoid this conclusion, Petitioners argued in their motion for rehearing

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

motions to compel arbitration in federal court should be incorporated into the

federal substantive law under the FAA in order to show that they met their burden

of proof.

Petitioners note that federal courts procedurally treat a motion to compel

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
010725.000005\4820-6817-9523.v1
the relevant evidence and burden of proof on the defense of waiver and prejudice.

See, e.g., Id., at 525-27.

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
010725.000005\4820-6817-9523.v1
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

“totality of the circumstances” standard. G. Leach Builders, LLC, 458 S.W.3d at

512; Perry Homes, 258 S.W.3d 589-90. Because this portion of the proceeding

requires the presentation of “evidence,” the federal pleading rule is simply

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
010725.000005\4820-6817-9523.v1
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

apply as broadly as Petitioners argue so as to relieve them from producing

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

Respondents were complainants in several criminal cases—a point Respondents

concede. The other materials presented to the trial court by Petitioners—their

conclusory pleadings, the Texas Appleseed Report and online articles—contain

arguments, inferences, conclusions and unverified quotes from out-of-court

interviews that, at most, provide an indication of what Petitioners contend they

could proffer to support the alleged merit of their underlying claims; such materials

present no legally sufficient evidence relevant to the “totality of the circumstances”

standard applicable to the elements of waiver. G. Leach Builders, LLC, 458

S.W.3d at 512; Perry Homes, 258 S.W.3d 589-90.

Moreover, if the federal rule of pleading were to be engrafted into

substantive arbitration law and applied to the defense of waiver, Petitioners’

pleadings and supporting materials still do not provide legally sufficient evidence

of “substantial invocation” or prejudice. Such materials simply present the

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;

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.

Therefore, even if it is legally possible under Texas law to substantially

invoke the judicial process by submitting information to law enforcement as a

criminal complainant separate from seeking arbitration in a later civil dispute,

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

that Respondents “filed criminal charges”—only a prosecutor can file criminal

charges. There was no evidence in the record that Respondents “participated in

criminal trials.” There was no evidence in the record that Respondents “obtained

criminal judgments”—again, only prosecutors can obtain criminal judgments.

Finally, there is no evidence that Respondents “attempted to collect from

Plaintiffs”—they were not parties to the criminal actions and they had not filed any

civil collection action against any Petitioner.

44
010725.000005\4820-6817-9523.v1
The only evidence submitted to the trial court by either party showed that the

Respondents merely submitted information of possible criminal activity to

prosecutors, and that Respondents were referred to as the “complainant” on official

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
010725.000005\4820-6817-9523.v1
complainant in criminal proceedings pre-dating Petitioners’ current suit does not

constitute waiver of the contractual right to arbitrate Petitioners’ underlying civil

action. To have considered the arguments, inferences, conclusions and unverified

quotes from out-of-court interviews submitted by Petitioners as evidence of

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

federal law when resolving the issue of arbitrability.

Therefore, the Majority Opinion correctly applied the pleading rules to

review the trial court’s order, and this Petition for Review should be denied of the

Fourth Court of Appeals’ decision should be affirmed.

C. The trial court erred by not enforcing the waiver-of-class-action


provision
The trial court’s ruling on the enforcement of the waiver-of-class-action

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.

It is well-settled that Texas law enforces arbitration agreements and class-

action waivers of the type contained in the Loan Contracts. In fact, the San

Antonio Court of Appeals previously enforced an arbitration provision prohibiting

class actions in an almost identical suit brought by borrowers against a Credit

Service Organization, involving language remarkably similar to the arbitration

46
010725.000005\4820-6817-9523.v1
agreements at issue in this case. See NCP Finance Ltd. Partnership, 350 S.W.3d at

155.

D. There is no split of authority justifying further review by this


Court
Although Texas courts look to the decisions of federal courts and other

sister-state courts when construing and applying the FAA, they are not bound by

distinguishable decisions by those courts. Again, Petitioners want this Court to

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

non-movants’ underlying actions.

E. The Vine Memorandum Opinion


The federal district court’s memorandum opinion in Vine, which currently is

on appeal to the Fifth Circuit, is distinguishable for several reasons.18

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

elements of waiver simply based on the allegations contained in their pleading. By

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

pleading rule to relieve the non-movants of their burden to produce evidence of

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

underlying action as it made its determination, which federal law prohibits.

Second, the District Court in Vine relies too extensively on In re Christus

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

inexplicably allowed to intervene in a criminal case to pursue a contempt motion

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
010725.000005\4820-6817-9523.v1
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

relies on a misreading of Christus Spohn, it should not be given weight in this

Court’s determination of the present case.

Third, Vine misapplies the definition of “invoke” provided in Subway.

Although the opinion contains a correct quotation of the Subway definition, it

ignores Texas and federal law by assuming that a private party can implement or

enforce the criminal judicial process when it presents a complaint to a district

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

constitute a “substantial invocation of the judicial process.” Moreover, Vine

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

“substantial invocation of the judicial process” to waive arbitration of a later civil

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.

The arbitration provision had allowed the plaintiff to choose whether to

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

agreement. Therefore, Harrison is distinguishable, but not inconsistent with, the

Majority Opinion in this case.19

Neither of these cases support Petitioners’ arguments in this case, nor do

they conflict with the decision of the Fourth Court of Appeals.

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.

50
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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

by the appellate court.

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

in the trial court record.

In reality, what Petitioners and Amicus seek is a different rule of law, or a

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

trier of fact—the arbitrator—not for the court to decide in a summary proceeding

to determine arbitrability.

Any rule or exception that would deny enforcement of the arbitration and

class-action waiver provision in this case would necessarily turn on a consideration

of the merits of Petitioners’ and Amicus’ allegations, lower the “high hurdle” of

51
010725.000005\4820-6817-9523.v1
proof required to sustain the defense of waiver, treat submission of information to

prosecutors differently than filing pleadings in civil proceedings, and recognize a

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

should not acquiesce to change the law of arbitrability to punish Respondents as

Petitioners seek.

Therefore, this Petition for Review should be denied, or the judgment of the

Fourth Court of Appeals should be affirmed.

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

which they are justly entitled.

Respectfully submitted,

COATS ROSE, P.C.

By: /s/ Edward S. Hubbard


Edward S. Hubbard
State Bar No. 10131700
ehubbard@coatsrose.com
Patrick E. Gaas

52
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

ATTORNEYS FOR THE RESPONDENTS

XII. CERTIFICATE OF COMPLIANCE

Pursuant to Rule 9(i)(2)(B) and (i)(3) of the Texas Rules of Appellate

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

computer program used to prepare this Petition.

/s/ Edward S. Hubbard


Edward S. Hubbard

Attorney for Respondents

Dated: April 20, 2017

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

/s/ Edward S. Hubbard


Edward S. Hubbard

54
010725.000005\4820-6817-9523.v1
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

4 Vine pleadings: Plaintiffs’ Unopposed Motion for Leave to File Response to


Defendants’ Motions to Dismiss, and Compel Plaintiffs to Arbitration;
Plaintiff’s Response; and Exhibit C to Plaintiff’s Response

1
010725.000005\4820-6817-9523.v1
Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

4 Cases that cite this headnote


967 S.W.2d 871
Court of Appeals of Texas,
Corpus Christi. [2] Judgment
Tort Cases in General
Ramona ALVAREZ, et al., Appellants, Bad faith and malice elements of malicious
v. prosecution are not properly disposed of by
ANESTHESIOLOGY ASSOCIATES, et al., Appellees. summary judgment because they entail the
evaluation of intent.
No. 13–96–385–CV.
| Cases that cite this headnote
March 26, 1998.
|
[3] Judgment
Rehearing Overruled May 28, 1998.
Torts
Mother and her parents brought action against hospital Mother failed to create genuine issue of
and physicians for malicious prosecution, intentional material fact as to whether doctors were
infliction of emotional distress, civil conspiracy, and involved in reporting or investigating of child
negligence relating to treatment of child and filing of abuse, as would preclude summary judgment
report of abuse. The 117th District Court, Nueces County, in her malicious prosecution claim, where
Robert J. Blackmon, J., granted summary judgment in she did not contradict doctors' statements
favor of hospital and physicians. Mother appealed. The in affidavits that denied that they had any
Court of Appeals, Rodriguez, J., held that: (1) genuine communications with anyone from Child
issue of material fact existed as to whether one doctor Protective Services (CPS) or any other
acted in good faith when he made report of child abuse, department or investigating agency on which
precluding summary judgment on malicious prosecution mother's claims were based.
claim; (2) genuine issue of material fact remained on
claim of intentional infliction of emotional distress; (3) 3 Cases that cite this headnote
genuine issues of material fact existed on civil conspiracy
claim; and (4) genuine issues of material fact existed on [4] Malicious Prosecution
negligence claim. Personal Knowledge and Statements of
Others
Affirmed in part, reversed and remanded in part.
Doctor, who was not accused of malpractice,
had reasonable suspicion of child abuse
justifying report of mother to Child Protective
West Headnotes (22) Services (CPS), precluding mother's malicious
prosecution claim, where doctor was faced
with an infant who had suddenly lapsed into
[1] Malicious Prosecution a life-threatening coma and concluded the
Nature and Elements of Malicious child's lungs appeared healthy and would
Prosecution in General not explain respiratory failure, she was told
In order to maintain a malicious prosecution by other doctors that, in their opinion,
action, a plaintiff must prove: (1) the the circumstances of the child's illness were
commencement of a criminal prosecution suspicious, she was told that another doctor
against the plaintiff, (2) initiated or procured had contacted CPS based on his suspicions,
by the defendant, (3) which terminated in the and she observed child's medical records
plaintiff's favor, (4) the plaintiff was innocent, which suggested mother was not forthcoming
(5) there was no probable cause for the with information, had disregarded prior
proceedings, (6) malice, and (7) damages.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


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

[5] Malicious Prosecution


Necessity [9] Malicious Prosecution
To prevail on a defense to malicious Belief in Guilt of Accused
prosecution, a defendant must show that Doctors should be given deference in
probable cause justified the initiation of reporting child abuse, and claim for malicious
criminal proceedings. prosecution should not stand where doctor
sets out objectively reasonable basis for his
1 Cases that cite this headnote belief.

Cases that cite this headnote


[6] Malicious Prosecution
Belief in Guilt of Accused
In the context of malicious prosecution, [10] Judgment
probable cause is the existence of such facts Tort Cases in General
and circumstances as would excite belief in Genuine issue of material fact existed as to
the mind of a reasonable person, acting on whether doctor acted in good faith when
facts within his knowledge, that the person he told Child Protective Services (CPS) that
charged was guilty of the crime for which he mother had attempted to suffocate her child,
was prosecuted; question to be answered is or whether he reported mother to cover his
not what the facts actually were, but rather own acts of negligence, precluding summary
what the defendant honestly and reasonably judgment on claim of malicious prosecution.
believed the facts to be.
Cases that cite this headnote
1 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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

intentional infliction of emotional distress, on Torts


motion for summary judgment. In a medical malpractice suit, because the
trier of fact must be guided by the opinion
1 Cases that cite this headnote
testimony of experts, a defendant physician
can obtain summary judgment based on his
[13] Judgment uncontroverted testimonial evidence if he
Matters of Fact or Conclusions establishes, as a matter of law, that no genuine
Conclusory statements made by an expert issue of material fact exists as to one or more
witness are insufficient to support summary elements of the plaintiff's cause of action.
judgment. Vernon's Ann.Texas Rules Civ.Proc., Rule
166a(c).
Cases that cite this headnote
3 Cases that cite this headnote

[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

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Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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.

[21] Appeal and Error


For Newly Discovered Evidence Standard of Review
Denials of motions for new trial based on
newly discovered evidence are reviewed under The standards of review for a summary judgment are well-
an abuse of discretion standard. established. The movant must show there is no genuine
issue concerning a material fact which would entitle
1 Cases that cite this headnote the movant to judgment as a matter of law. TEX.R.
CIV. P. 166a(c); Cathey v. Booth, 900 S.W.2d 339, 341
(Tex.1995). A defendant who conclusively negates at
[22] New Trial
least one essential element of a plaintiff's claim or who
Power and Duty of Court in General
conclusively establishes all the elements of an affirmative
In order to obtain a new trial based on
defense is entitled to summary judgment. Wornick Co.
newly discovered evidence, a plaintiff must
v. Casas, 856 S.W.2d 732, 733 (Tex.1993). However, in
show that: (1) the evidence has come to
reviewing a summary judgment, all evidence is to be
their attention since the trial; (2) it was not
construed in favor of the nonmovant, to whom every
discovered earlier due to the lack of diligence;
reasonable inference is allowed and on whose behalf all
(3) the evidence is not cumulative; and (4) it is
doubts are resolved. El Chico v. Poole, 732 S.W.2d 306
so material that it would produce a different
(Tex.1987); Nixon v. Mr. Property Mgt. Co., 690 S.W.2d
result if a new trial were granted.
546, 548–49 (Tex.1985); Dickson v. State Farm Lloyds,
1 Cases that cite this headnote 944 S.W.2d 666, 667 (Tex.App.—Corpus Christi 1997,
no writ). It is not the purpose of summary judgment to
deprive a litigant of his right to a full hearing on the
merits of any real issue of fact, but to eliminate patently
unmeritorious claims and untenable defenses. City of
Attorneys and Law Firms
Garland v. Booth, 895 S.W.2d 766, 768 (Tex.App.—Dallas
*873 Craig S. Smith, Donald B. Edwards, Smith & 1995, writ denied).
Edwards, Corpus Christi, for Appellants.

Linda C. Breck, Thomas F. Nye, Brin & Brin, Carlos


Facts
Villarreal, Hunt, Hermansen, McKibben & Barger,
Corpus Christi, for Appellees. Viewing the evidence in the light most favorable to
appellants shows that Michael Harwood was the infant
Before DORSEY, YANEZ and RODRIGUEZ, JJ.
son of Roxanne Alvarez and Clifford Harwood. Since
his birth, the baby was regularly treated at Driscoll
Children's Hospital (“Driscoll”) for asthma, pneumonia,
OPINION and gastrointestinal or gastroesophegeal reflux. He had
a history of sleep apnea—periods when he would stop
RODRIGUEZ, Justice.
breathing while sleeping. On several occasions in late
This is an appeal from a summary judgment granted 1992 and early 1993, Alvarez brought Michael to see Dr.
in favor of appellees Anesthesiology Associates and Steve Oshman concerning his various medical problems.
Mary Dale Peterson, M.D. (collectively referred to Michael was prescribed a heart monitor for the apnea and
herein as “Peterson”); Edgar Cortes, M.D. (“Cortes”); the drug Reglan to control the reflux.
Tom McNeil, M.D. (“McNeil”); and William Dirksen,
M.D. (“Dirksen”) for claims of malicious prosecution,

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Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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.

Michael had an asthma attack on April 10, 1993, and


again Alvarez took him to Driscoll, where McNeil treated
him. He was then transferred out of the emergency Analysis
room and placed under the care of Dirksen. He was
Because appellants alleged the same four causes of action
not prescribed a heart monitor, and his Reglan was
against each of the appellees, for ease of reference we will
discontinued. On April 12th, at approximately 3:30
first set out the elements of each cause of action and then
a.m., Michael was found not breathing by Norma
address the merits of each appellee's motion for summary
Gonzalez, the respiratory therapist. She turned Michael
judgment in the context of these elements.
onto his back and applied CPR. The resuscitation effort
restored Michael's breathing, but he did not regain
consciousness. 1 Michael was transferred to pediatric ICU
I. Malicious Prosecution
and placed under the care of Peterson and Cortes.
[1] In order to maintain a malicious prosecution action,
After Michael was in ICU for approximately thirty-six a plaintiff must prove: 1) the commencement of a criminal
hours, red marks appeared on the back of his neck and prosecution against the plaintiff; 2) initiated or procured
head. Cortes called Children's Protective Services (“CPS”) by the defendant; 3) which terminated in the plaintiff's
to report suspected child abuse. The risk management favor; 4) the plaintiff was innocent; 5) there was no
department at Driscoll was also notified. probable cause for the proceedings; 6) malice; and 7)
damages. Browning–Ferris Indus., Inc. v. Zavaleta, 827
On April 15th, Alvarez and Harwood were informed of S.W.2d 336, 338 (Tex.App.—Corpus Christi 1991, writ
Michael's vegetative condition. Harwood demanded to denied).
know the reason for CPS involvement and suggested the
doctors and the hospital had engaged in a cover-up of their InBrowning–Ferris Indus., Inc. v. Lieck, 881 S.W.2d 288
negligence. Also on April 15th, the police were summoned (Tex.1994), the supreme court modified the causation
to Driscoll. Alvarez was interviewed and Michael was element of a malicious prosecution case. The court
photographed. expressly rejected the concept that the prosecution could
be brought about merely through a defendant's aid
In addition to initially reporting to CPS, Cortes wrote or cooperation. Instead, the court held that malicious
to CPS on April 24, 1993, and stated Alvarez had prosecution occurs only when a defendant “initiates”
not informed the hospital of Michael's previous medical
or “procures” the prosecution. Lieck, 881 S.W.2d
history; that the apnea attacks occurred only in Alvarez's at 293. “Initiation” occurs when a defendant is the
presence; and that Alvarez seemed more concerned with entity that actually files the charges. The court defined
getting Harwood out of prison than in Michael's health. “procurement” as follows:

*875 On April 29th Peterson gave a statement to A person procures a criminal


CPS concurring with Cortes. She also concluded the prosecution if his actions were
bruises found on Michael's neck could not be caused by enough to cause the prosecution,
resuscitation efforts, but only by being held face down. and but for his actions the
Cortes contacted CPS for a third time on May 6, 1993 and prosecution would not have
opined that Alvarez deliberately attempted to suffocate occurred. A person does not procure
Michael by forcing his head into the mattress. a criminal prosecution when the
decision whether to prosecute is

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Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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.

TEX. FAM.CODE ANN. § 34.03 (Vernon 1989) (Act of B. Peterson


June 14, 1989, 71st Leg., R.S., ch. 371, § 8, 1989 Tex.

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Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

[4] [5] [6] To prevail on a defense to malicious


prosecution, a defendant must show that probable cause [7] There is an initial presumption in malicious
justified the initiation of criminal proceedings. Ellis prosecution cases that the defendant acted in good
County State Bank v. Keever, 888 S.W.2d 790, 793–94 faith and had probable cause to initiate or procure the
(Tex.1994) (opinion on reh'g); Akin v. Dahl, 661 S.W.2d prosecution. Richey, 952 S.W.2d at 517. That presumption
917, 920 (Tex.1983), cert. denied, 466 U.S. 938, 104 S.Ct. disappears once a plaintiff produces evidence that the
1911, 80 L.Ed.2d 460 (1984); Zavaleta, 827 S.W.2d at 338. motives, grounds, beliefs, and other evidence upon which
In the context of malicious prosecution, probable cause is the defendant acted did not constitute probable cause. Id.
“the existence of such facts and circumstances as would at 518.
excite belief in the mind of a reasonable person, acting on
facts within his knowledge, that the person charged was Appellants' response questioned whether Peterson had
guilty of the crime for which he was prosecuted.” Richey v. probable cause and whether she reasonably believed
Brookshire Grocery Co., 952 S.W.2d 515, 517 (Tex.1997) Alvarez had attempted to suffocate Michael. Their
(citing Akin, 661 S.W.2d at 921); Metzger v. Sebek, 892 summary judgment proof included the following:
S.W.2d 20, 42 (Tex.App.—Houston [1st Dist.] 1994, writ
denied) (quoting Compton v. Calabria, 811 S.W.2d 945, 1. Michael's hospital records from the admission in
949 (Tex.App.—Dallas 1991, no writ)). The question to question, as well as his previous admissions. These
be answered is not what the facts actually were, but rather records showed Michael was born with “Mongolian
what the defendant honestly and reasonably believed the spots”; he had been admitted to Driscoll for asthma and
facts to be. Metzger, 892 S.W.2d at 42; Compton, 811 bronchitis; his condition required a breathing monitor;
S.W.2d at 950. and he was on medication to control gastroesophageal
reflux, a condition which can cause vomiting and
Peterson delineated her probable cause as follows: aspiration of the vomitus.

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

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Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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

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Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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.

4. Dr. Joseph Anzaldua's deposition in which he stated,


“it just seems to me that everything starts coming into
play after the lawsuit or after all these incidents and all II. Intentional Infliction of Emotional Distress
of a sudden these physicians kind of decide, through
[11] [12] A plaintiff establishes intentional infliction
whatever inspiration they have, that this mother is a
of emotional distress if he can show: (1) the defendant
bad mother doing all these bad things to this poor
acted intentionally or recklessly; (2) the conduct was
child. It just doesn't fit. And the medical records,
extreme and outrageous; (3) defendant's conduct caused
as I stated before, do not substantiate any of their
the plaintiff emotional distress; and (4) the emotional
theories or scenarios or possibilities that they seem to be
distress was severe. Twyman v. Twyman, 855 S.W.2d 619,
postulating, as we say, in the records that I've reviewed.”
621 (Tex.1993).
When asked whether the red marks observed on
Michael were bruises as alleged by the doctors, In their motions for summary judgment, both McNeil
Anzaldua stated, “Specifically in this case of everything and Dirksen stated only that appellants “have no proof
I know about this case, I would not feel comfortable of three of the four requisite elements in this case.”
agreeing to that. I mean, the very people that are making Cortes stated appellants “have no proof of two of the
four requisite elements in this case.” While appellants

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Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

would ultimately have the burden of proof at trial to


present sufficient evidence to prove each of the elements Appellants' sixth, seventh and eighth points of error are
of this cause of action, they were not required to do so sustained.
before that time. 4 Neither Cortes, McNeil, nor Dirksen
delineated what appellants' lack of proof was, nor did they
provide any evidence to negate the elements of intentional III. Conspiracy
infliction *880 of emotional distress. Their sole evidence
consisted of the following: [14] [15] To prove civil conspiracy, the plaintiff must
show the following elements: (1) two or more persons;
(2) an object to be accomplished; (3) a meeting of
Affidavit of McNeil and Dirksen the minds on the object to be accomplished; (4) one
or more unlawful, overt acts; and (5) damages as the
I have been informed what the elements of a claim
proximate result. Triplex Communications, Inc. d/b/a
for Intentional Infliction of Emotional Distress ... are.
Radio Station KZZB–95 FM v. Riley, 900 S.W.2d 716,
I have reviewed Plaintiffs' Third Amended Original
719 (Tex.1995); Massey v. Armco Steel Co., 652 S.W.2d
Petition with respect to their claims of Intentional
932, 934 (Tex.1983); Bernstein v. Portland Sav. & Loan
Infliction of Emotional Distress.... I specifically deny
Ass'n., 850 S.W.2d 694, 706 (Tex.App.—Corpus Christi
each and every one of the claims in each of the
1993, writ denied).
aforementioned causes of action with respect to any
care and treatment rendered by me in this case.
In their motions for summary judgment, McNeil and
McNeil and Dirksen also denied having any
Dirksen provided the affidavits set out above. While
conversations with anyone from CPS or with any other
the affidavits are sufficient to establish that neither
investigating agency.
McNeil nor Dirksen communicated with CPS, neither
Affidavit of Cortes appellee stated he did not discuss the case with any of
the other appellees. On this basis alone, we find this
I have been informed what the elements of a claim for affidavit evidence insufficient as a matter of law to negate
intentional infliction of emotional distress are. With appellants' claim of conspiracy.
respect to Plaintiffs' claims for intentional infliction of
emotional distress, I specifically deny each and every Moreover, appellants' summary judgment proof included
one of those claims. I deny that I acted intentionally or excerpts from McNeil's deposition in which he stated he
recklessly to cause harm to the Plaintiffs. I deny that had several conversations with Cortes regarding Michael's
my contact by merely exercising my duty was in anyway bruising and Michael's “unexplained” apneic episodes.
[sic] extreme or outrageous. I further deny that Plaintiffs McNeil stated Michael's apnea was caused by abuse, an
were caused emotional distress or that said distress was opinion substantiated by viewing the child in ICU and
severe as a result of any actions that were taken by me. the bruises to the back of his head. McNeil conceded,
[13] In Anderson v. Snider, the supreme court held however, that he did not go to look at Michael in ICU
that testimony comprised only of legal conclusions is until requested to do so by Cortes. He also conceded he
insufficient to support summary judgment as a matter saw no signs of abuse when Michael was admitted in the
of law. 808 S.W.2d 54, 55 (Tex.1991); see also Mercer emergency room and he made no notation in Michael's
v. Daoran Corp., 676 S.W.2d 580, 583 (Tex.1984); emergency room record that he suspected any abuse.
Hidalgo v. Surety Savings & Loan Ass'n, 487 S.W.2d
702, 703 (Tex.1972) (per curiam). Likewise, conclusory Dirksen stated in his deposition that he went to see
statements made by an expert witness are insufficient to Michael in ICU even though at that time Michael was no
support summary judgment. Anderson, 808 S.W.2d at longer his patient, but was Cortes's patient. He observed
55; Vinklarek v. Cane, 691 S.W.2d 108, 111 (Tex.App.— bruising on the back of Michael's neck. He consulted with
Austin 1985, writ ref'd n.r.e.). These doctors' affidavits are Cortes and Peterson about it. When asked if he considered
wholly insufficient to negate appellants' cause of action for whether the bruising could have occurred when Norma
intentional infliction of emotional distress as a matter of Gonzales attempted to resuscitate Michael after he had
law; they are merely sworn denials of appellants' claims. vomited and aspirated milk, *881 Dirksen stated he was

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 10


Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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).

Cortes's sole summary judgment evidence consisted of his


affidavit. He stated:
IV. Negligence
I am familiar with the definition of gross negligence,
A. Peterson
that being explained to me as meaning more than
In point of error thirteen, appellants complain the trial
momentary thoughtlessness, inadvertence, or error of
court erred in granting summary judgment in favor
judgment. *882 It means such an entire want of care
of Peterson on their claims of negligence and gross
as to establish that the act or omission in question

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 11


Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


Alvarez v. Anesthesiology Associates, 967 S.W.2d 871 (1998)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 13


Amalgamated Local No. 55, United Auto., Aerospace and..., 396 F.Supp. 667 (1975)
89 L.R.R.M. (BNA) 2922, 77 Lab.Cas. P 11,051

Cases that cite this headnote


396 F.Supp. 667
United States District Court, W.D. New York.
[2] Labor and Employment
AMALGAMATED LOCAL NO. 55, UNITED Pensions and Other Benefits
AUTOMOBILE, AEROSPACE & AGRICULTURAL Arbitration clause in collective bargaining
IMPLEMENT WORKERS OF AMERICA, Plaintiff, agreement requiring arbitration of all issues
v. regarding interpretation or application of any
METAL AND ALLOY DIVISION OF SILVER term of the agreement applied to dispute
CREEK PRECISION CORPORATION, Defendant. as to whether there were arrearages of
employer's contributions to union welfare
No. Civ-74-397. fund required by the contract. Labor
| Management Relations Act, 1947, § 301, 29
June 19, 1975. U.S.C.A. § 185.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Amalgamated Local No. 55, United Auto., Aerospace and..., 396 F.Supp. 667 (1975)
89 L.R.R.M. (BNA) 2922, 77 Lab.Cas. P 11,051

arbitrate the grievance.’ United Steelworkers of America


This is an action brought by Amalgamated Local No. 55 v. Warrior & Gulf Navigation Co., 363 U.S. 574, 582, 80
pursuant to § 301 of the Labor Management Relations S.Ct. 1347, 1353, 4 L.Ed.2d 1409 (1960). Furthermore,
Act, 29 U.S.C. § 185, to compel arbitration under a
collective bargaining agreement. The agreement, which
was executed in 1968 and amended on September 1, 1972, an order to arbitrate the particular grievance should not
*668 contains an arbitration clause requiring all issues be denied unless it may be said with positive assurance
regarding interpretation or application of any term of that the arbitration clause is not susceptible of an
the agreement upon which the parties cannot agree to be interpretation that covers the asserted dispute. Doubts
submitted to the office of the New York State Board of should be resolved in favor of coverage. Id. at 582-83, 80
Mediation for a panel of nine names, from which the name S.Ct. at 1353.
of an arbitrator could be chosen to arbitrate the dispute. 1
In another case, United Steelworkers of America v.
The issue the plaintiff seeks to submit to arbitration
American Mfg. Co., 363 U.S. 564, 567-68, 80 S.Ct. 1343,
stems from defendant's alleged failure to contribute to an
1346, 4 L.Ed.2d 1403 (1960), decided on the same day as
employee welfare fund, as required by Article XI, Section
the above cited case, the role of the court was similarly
5 of the amended agreement. 2 The case is now before delineated:
the court on plaintiff's motion for summary judgment
brought pursuant to Rule 56 of the Federal Rules of Civil The function of the court is very limited when the
Procedure. parties have agreed to submit all questions of contract
interpretation to the arbitrator. It is confined to
The facts in this case are not in dispute. Defendant ascertaining whether the party seeking arbitration is
corporation terminated its manufacturing operations on making a claim which on its face is governed by the
or about August 13, 1973, at which time employees contract. Whether the moving party is right or wrong is
represented by plaintiff were laid off. 3 On September 14, a question of contract interpretation for the arbitrator.
1973, plaintiff union informed defendant that an arrearage In these circumstances the moving party should not be
in its contributions payable to the Local 55 UAW Welfare deprived of the arbitrator's judgment, when it was his
Fund, pursuant to Article XI, Section 5 of their collective judgment and all that it connotes that was bargained for.
bargaining agreement, had developed. Plaintiff received
no response and, therefore, again notified defendant Under the standards set forth above, and reiterated in
of the arrearage on February 27, 1974. At that time other Supreme Court cases, 4 this court must therefore
plaintiff also stated that if the amount was not paid initially make a determination whether the company
within ten days, the plaintiff would submit the dispute contractually bound itself to arbitrate. John Wiley & Sons,
to arbitration. Further letters followed in March and Inc. v. Livingston, 376 U.S. 543, 547, 84 S.Ct. 909, 11
April 1974, reiterating plaintiff's intention to arbitrate the L.Ed.2d 898 (1964); Atkinson v. Sinclair Refining Co.,
dispute. Thereafter plaintiff contacted the New York State 370 U.S. 238, 241, 82 S.Ct. 1318, 8 L.Ed.2d 462 (1962);
Mediation Board on March 26, 1974 and requested that Necchi v. Necchi Sewing Machine Sales Corp., 348 F.2d
a panel of nine names be submitted to the parties from 693 (2d Cir. 1965), cert. denied, 383 U.S. 909, 86 S.Ct. 892,
which an arbitrator could be selected pursuant to their 15 L.Ed.2d 664 (1966). After this primary determination
agreement. On April 11, 1974, plaintiff was informed by has been made, the decision of whether or not arbitration
both the Mediation Board and defendant's attorney that should be compelled can be made.
defendant refused to arbitrate the dispute. This action was [2] Plaintiff has submitted both the text of the arbitration
then begun on August 16, 1974. clause, Article VI, Section 4, and the insurance provision,
[1] The precise question raised by the plaintiff's summary Article XI, Section 5, contained in the September 1, 1972
judgment motion is whether the defendant's alleged failure contract, as amended. 5 Defendant has acknowledged
to pay into the union's welfare fund is an arbitrable dispute both the existence of this contract and the provisions
subject to the arbitration clause. In deciding this *669 in question. An issue has clearly arisen regarding
question, the role of the court under § 301 of the Labor
contributions to the welfare fund. 6 The arbitration
Management Relations Act has been narrowly limited to a
clause, in concise, unambiguous language, requires that all
consideration of ‘whether the reluctant party did agree to
disputes regarding any such term of the agreement must

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Amalgamated Local No. 55, United Auto., Aerospace and..., 396 F.Supp. 667 (1975)
89 L.R.R.M. (BNA) 2922, 77 Lab.Cas. P 11,051

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:

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Amalgamated Local No. 55, United Auto., Aerospace and..., 396 F.Supp. 667 (1975)
89 L.R.R.M. (BNA) 2922, 77 Lab.Cas. P 11,051

(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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
131 S.Ct. 1740, 179 L.Ed.2d 742, 79 USLW 4279, 161 Lab.Cas. P 10,368...

KeyCite Yellow Flag - Negative Treatment West Headnotes (13)


Disagreement Recognized by Wallace v. Red Bull Distributing Co., 
N.D.Ohio, July 23, 2013
131 S.Ct. 1740 [1] Alternative Dispute Resolution
Supreme Court of the United States Constitutional and statutory provisions
and rules of court
AT&T MOBILITY LLC, Petitioner, The provision of the Federal Arbitration Act
v. (FAA) stating that arbitration agreements in
Vincent CONCEPCION et ux. maritime transactions or contracts evidencing
transactions involving commerce are valid,
No. 09–893. irrevocable, and enforceable, save upon such
| grounds as exist at law or in equity for the
Argued Nov. 9, 2010. revocation of any contract, reflects both a
| liberal federal policy favoring arbitration and
Decided April 27, 2011. the fundamental principle that arbitration is a
matter of contract. 9 U.S.C.A. § 2.
Synopsis
Background: Customers brought putative class action 756 Cases that cite this headnote
against telephone company, alleging that company's offer
of a free phone to anyone who signed up for its cellphone
service was fraudulent to the extent that the company [2] Alternative Dispute Resolution
charged the customer sales tax on the retail value of Constitutional and statutory provisions
the free phone. The United States District Court for the and rules of court
Southern District of California, Dana M. Sabraw, J., In light of the liberal federal policy
2008 WL 5216255, denied company's motion to compel favoring arbitration and the fundamental
arbitration. Company appealed. The United States Court principle that arbitration is a matter
of Appeals for the Ninth Circuit, Carlos T. Bea, Circuit of contract, which are reflected in the
Judge, 584 F.3d 849, affirmed. Certiorari was granted. provision of the Federal Arbitration Act
(FAA) stating that arbitration agreements in
maritime transactions or contracts evidencing
transactions involving commerce are valid,
[Holding:] The Supreme Court, Justice Scalia, held that
irrevocable, and enforceable, save upon such
the Federal Arbitration Act preempts California's judicial
grounds as exist at law or in equity for
rule regarding the unconscionability of class arbitration
the revocation of any contract, courts must
waivers in consumer contracts, abrogating Discover Bank
place arbitration agreements on an equal
v. Superior Court, 36 Cal.4th 148, 30 Cal.Rptr.3d 76, 113
footing with other contracts, and enforce
P.3d 1100.
them according to their terms. 9 U.S.C.A. § 2.

1002 Cases that cite this headnote


Reversed and remanded.

Justice Thomas filed a concurring opinion. [3] Alternative Dispute Resolution


Preemption
Justice Breyer filed a dissenting opinion, in which Justices States
Ginsburg, Sotomayor, and Kagan, joined. Particular cases, preemption or
supersession
The Federal Arbitration Act (FAA) preempts
California's judicial rule stating that a
class arbitration waiver is unconscionable

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
131 S.Ct. 1740, 179 L.Ed.2d 742, 79 USLW 4279, 161 Lab.Cas. P 10,368...

under California law if it is found in a Substantive unconscionability


consumer contract of adhesion in a setting Under California law, a finding that
in which disputes between the contracting a contract is unconscionable requires a
parties predictably involve small amounts of procedural and a substantive element, the
damages, and if it is alleged that the party with former focusing on oppression or surprise
superior bargaining power has carried out a due to unequal bargaining power, the latter
scheme to deliberately cheat large numbers of on overly harsh or one-sided results. West's
consumers out of individually small sums of Ann.Cal.Civ.Code §§ 1668, 1670.5(a).
money, because that rule stands as an obstacle
to the accomplishment and execution of the 55 Cases that cite this headnote
full purposes and objectives of Congress in
enacting the FAA, which include ensuring
[6] Alternative Dispute Resolution
the enforcement of arbitration agreements
Preemption
according to their terms so as to facilitate
States
streamlined proceedings; abrogating Discover
Particular cases, preemption or
Bank v. Superior Court, 36 Cal.4th 148, 30
supersession
Cal.Rptr.3d 76, 113 P.3d 1100. 9 U.S.C.A. § 2;
West's Ann.Cal.Civ.Code §§ 1668, 1670.5(a). When state law prohibits outright the
arbitration of a particular type of claim,
154 Cases that cite this headnote the conflicting state rule is displaced by the
Federal Arbitration Act (FAA). 9 U.S.C.A. §
[4] Alternative Dispute Resolution 2.
Validity
141 Cases that cite this headnote
Alternative Dispute Resolution
Validity of assent
[7] Alternative Dispute Resolution
Alternative Dispute Resolution
Preemption
Unconscionability
States
Under the saving clause in the provision
Particular cases, preemption or
of the Federal Arbitration Act (FAA)
supersession
stating that arbitration agreements in
In light of the preemptive effect of the Federal
maritime transactions or contracts evidencing
Arbitration Act (FAA), a court may not
transactions involving commerce are valid,
rely on the uniqueness of an agreement to
irrevocable, and enforceable, save upon such
arbitrate as a basis for a state-law holding
grounds as exist at law or in equity for
that enforcement would be unconscionable,
the revocation of any contract, arbitration
for this would enable the court to effect what
agreements may be invalidated by generally
the state legislature cannot. 9 U.S.C.A. § 2.
applicable contract defenses, such as fraud,
duress, or unconscionability, but not by 181 Cases that cite this headnote
defenses that apply only to arbitration or that
derive their meaning from the fact that an
agreement to arbitrate is at issue. 9 U.S.C.A. [8] Alternative Dispute Resolution
§ 2. Constitutional and statutory provisions
and rules of court
979 Cases that cite this headnote While the saving clause, in the provision
of the Federal Arbitration Act (FAA)
[5] Contracts stating that arbitration agreements in
Procedural unconscionability maritime transactions or contracts evidencing
transactions involving commerce are valid,
Contracts

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AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
131 S.Ct. 1740, 179 L.Ed.2d 742, 79 USLW 4279, 161 Lab.Cas. P 10,368...

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

297 Cases that cite this headnote


[13] Alternative Dispute Resolution
Contractual or consensual basis
[9] States Alternative Dispute Resolution
Congressional intent Constitutional and statutory provisions
A federal statute's preemption saving clause and rules of court
cannot in reason be construed as allowing a Arbitration is a matter of contract, and
common law right, the continued existence of the Federal Arbitration Act (FAA) requires
which would be absolutely inconsistent with courts to honor parties' expectations. 9
the provisions of the act; in other words, the U.S.C.A. § 1 et seq.
act cannot be held to destroy itself.
143 Cases that cite this headnote
5 Cases that cite this headnote

[10] Alternative Dispute Resolution


Constitutional and statutory provisions West Codenotes
and rules of court
Limited on Preemption Grounds
The principal purpose of the Federal
West's Ann.Cal.Civ.Code §§ 1668, 1670.5(a).
Arbitration Act (FAA) is to ensure that
private arbitration agreements are enforced
according to their terms. 9 U.S.C.A. §§ 2–4. **1742 *333 Syllabus *

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

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AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
131 S.Ct. 1740, 179 L.Ed.2d 742, 79 USLW 4279, 161 Lab.Cas. P 10,368...

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

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AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
131 S.Ct. 1740, 179 L.Ed.2d 742, 79 USLW 4279, 161 Lab.Cas. P 10,368...

seek reimbursement of its attorney's fees, and, in the event


Opinion that a customer receives an arbitration award greater than
AT & T's last written settlement offer, requires AT & T to
**1744 Justice SCALIA delivered the opinion of the
pay a $7,500 minimum recovery and twice the amount of
Court.
the claimant's attorney's fees. 3
*336 Section 2 of the Federal Arbitration Act (FAA)
makes agreements to arbitrate “valid, irrevocable, and The Concepcions purchased AT & T service, which was
enforceable, save upon such grounds as exist at law or advertised as including the provision of free phones; they
in equity for the revocation of any contract.” 9 U.S.C. were not charged for the phones, but they were charged
§ 2. We consider whether the FAA prohibits States $30.22 in sales tax based on the phones' retail value. In
from conditioning the enforceability of certain arbitration March 2006, the Concepcions filed a complaint against
agreements on the availability of classwide arbitration AT & T in the United States District Court for the
procedures. Southern District of California. The complaint was later
consolidated with a putative class action alleging, among
other things, that AT & T had engaged in false advertising
and fraud by charging sales tax on phones it advertised as
I
free.
In February 2002, Vincent and Liza Concepcion entered
into an agreement for the sale and servicing of cellular In March 2008, AT & T moved to compel
arbitration under the terms of its contract **1745
telephones with AT & T Mobility LCC (AT & T). 1 The
with the Concepcions. The Concepcions opposed the
contract provided for arbitration of all disputes between
motion, contending that the arbitration agreement was
the parties, but required that claims be brought in the
unconscionable and unlawfully exculpatory *338 under
parties' “individual capacity, and not as a plaintiff or
California law because it disallowed classwide procedures.
class member in any purported class or representative
The District Court denied AT & T's motion. It described
proceeding.” App. to Pet. for Cert. 61a. 2 The agreement
AT & T's arbitration agreement favorably, noting, for
authorized AT & T to make unilateral amendments, which
example, that the informal dispute-resolution process was
it did to the arbitration provision on several occasions.
“quick, easy to use” and likely to “promp[t] full or ...
The version at issue in this case reflects revisions made in
even excess payment to the customer without the need to
December 2006, which the parties agree are controlling.
arbitrate or litigate”; that the $7,500 premium functioned
as “a substantial inducement for the consumer to pursue
The revised agreement provides that customers may
the claim in arbitration” if a dispute was not resolved
initiate dispute proceedings by completing a one-page
informally; and that consumers who were members of a
Notice of Dispute form available on AT & T's Web site.
class would likely be worse off. Laster v. T–Mobile USA,
AT & T may *337 then offer to settle the claim; if it
Inc., 2008 WL 5216255, *11–*12 (S.D.Cal., Aug.11, 2008).
does not, or if the dispute is not resolved within 30 days,
Nevertheless, relying on the California Supreme Court's
the customer may invoke arbitration by filing a separate
decision in Discover Bank v. Superior Court, 36 Cal.4th
Demand for Arbitration, also available on AT & T's Web
148, 30 Cal.Rptr.3d 76, 113 P.3d 1100 (2005), the court
site. In the event the parties proceed to arbitration, the
found that the arbitration provision was unconscionable
agreement specifies that AT & T must pay all costs for
because AT & T had not shown that bilateral arbitration
nonfrivolous claims; that arbitration must take place in
adequately substituted for the deterrent effects of class
the county in which the customer is billed; that, for claims
actions. Laster, 2008 WL 5216255, *14.
of $10,000 or less, the customer may choose whether the
arbitration proceeds in person, by telephone, or based
The Ninth Circuit affirmed, also finding the provision
only on submissions; that either party may bring a claim
unconscionable under California law as announced in
in small claims court in lieu of arbitration; and that
Discover Bank. Laster v. AT & T Mobility LLC, 584
the arbitrator may award any form of individual relief,
F.3d 849, 855 (2009). It also held that the Discover
including injunctions and presumably punitive damages.
Bank rule was not preempted by the FAA because that
The agreement, moreover, denies AT & T any ability to
rule was simply “a refinement of the unconscionability

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AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
131 S.Ct. 1740, 179 L.Ed.2d 742, 79 USLW 4279, 161 Lab.Cas. P 10,368...

analysis applicable to contracts generally in California.”


584 F.3d, at 857. In response to AT & T's argument [3] [4] The final phrase of § 2, however, permits
that the Concepcions' interpretation of California law arbitration agreements to be declared unenforceable
discriminated against arbitration, the Ninth Circuit “upon such grounds as exist at law or in equity for the
rejected the contention that “ ‘class proceedings will revocation of any contract.” This saving clause permits
reduce the efficiency and expeditiousness of arbitration’ agreements to arbitrate to be invalidated by “generally
” and noted that “ ‘Discover Bank placed arbitration applicable contract defenses, such as fraud, duress, or
agreements with class action waivers on the exact same unconscionability,” but not by defenses that apply only to
footing as contracts that bar class action litigation outside arbitration or that derive their meaning from the fact that
the context of arbitration.’ ” Id., at 858 (quoting Shroyer an agreement to arbitrate is at issue. Doctor's Associates,
v. New Cingular Wireless Services, Inc., 498 F.3d 976, 990 Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134
(C.A.9 2007)). L.Ed.2d 902 (1996); see also Perry v. Thomas, 482 U.S.
483, 492–493, n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987).
We granted certiorari, 560 U.S. 923, 130 S.Ct. 3322, 176 *340 The question in this case is whether § 2 preempts
L.Ed.2d 1218 (2010). California's rule classifying most collective-arbitration
waivers in consumer contracts as unconscionable. We
refer to this rule as the Discover Bank rule.

*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).

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AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
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An obvious illustration of this point would be a case


California courts have frequently applied this rule to finding unconscionable or unenforceable as against public
find arbitration agreements unconscionable. See, e.g., policy *342 consumer arbitration agreements that
Cohen v. DirecTV, Inc., 142 Cal.App.4th 1442, 1451–1453, fail to provide for judicially monitored discovery. The
48 Cal.Rptr.3d 813, 819–821 (2006); Klussman v. Cross rationalizations for such a holding are neither difficult to
Country *341 Bank, 134 Cal.App.4th 1283, 1297, 36 imagine nor different in kind from those articulated in
Cal.Rptr.3d 728, 738–739 (2005); Aral v. EarthLink, Inc., Discover Bank. A court might reason that no consumer
134 Cal.App.4th 544, 556–557, 36 Cal.Rptr.3d 229, 237– would knowingly waive his right to full discovery, as
239 (2005). this would enable companies to hide their wrongdoing.
Or the court might simply say that such agreements are
exculpatory—restricting discovery would be of greater
III benefit to the company than the consumer, since the
former is more likely to be sued than to sue. See Discover
Bank, supra, at 161, 30 Cal.Rptr.3d 76, 113 P.3d, at 1109
A (arguing that class waivers are similarly one-sided). And,
the reasoning would continue, because such a rule applies
The Concepcions argue that the Discover Bank rule,
the general principle of unconscionability or public-policy
given its origins in California's unconscionability doctrine
disapproval of exculpatory agreements, it is applicable
and California's policy against exculpation, is a ground
to “any” contract and thus preserved by § 2 of the
that “exist[s] at law or in equity for the revocation of
FAA. In practice, of course, the rule would have a
any contract” under FAA § 2. Moreover, they argue
disproportionate impact on arbitration agreements; but
that even if we construe the Discover Bank rule as
it would presumably apply to contracts purporting to
a prohibition on collective-action waivers rather than
restrict discovery in litigation as well.
simply an application of unconscionability, the rule would
still be applicable to all dispute-resolution contracts,
Other examples are easy to imagine. The same argument
since California prohibits waivers of class litigation as
might apply to a rule classifying as unconscionable
well. See America Online, Inc. v. Superior **1747 Ct.,
arbitration agreements that fail to abide by the Federal
90 Cal.App.4th 1, 17–18, 108 Cal.Rptr.2d 699, 711–713
Rules of Evidence, or that disallow an ultimate disposition
(2001).
by a jury (perhaps termed “a panel of twelve lay
[6] [7] When state law prohibits outright the arbitrators” to help avoid preemption). Such examples
are not fanciful, since the judicial hostility towards
arbitration of a particular type of claim, the analysis is
arbitration that prompted the FAA had manifested itself
straightforward: The conflicting rule is displaced by the
in “a great variety” of “devices and formulas” declaring
FAA. Preston v. Ferrer, 552 U.S. 346, 353, 128 S.Ct.
arbitration against public policy. Robert Lawrence Co.
978, 169 L.Ed.2d 917 (2008). But the inquiry becomes
v. Devonshire Fabrics, Inc., 271 F.2d 402, 406 (C.A.2
more complex when a doctrine normally thought to be
1959). And although these statistics are not definitive, it
generally applicable, such as duress or, as relevant here,
is worth noting that California's courts have been more
unconscionability, is alleged to have been applied in a
likely to hold contracts to arbitrate unconscionable than
fashion that disfavors arbitration. In Perry v. Thomas,
other contracts. Broome, An Unconscionable Applicable
482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987), for
of the Unconscionability Doctrine: How the California
example, we noted that the FAA's preemptive effect might
Courts are Circumventing the Federal Arbitration Act,
extend even to grounds traditionally thought to exist “
3 Hastings Bus. L.J. 39, 54, 66 (2006); Randall,
‘at law or in equity for the revocation of any contract.’
*343 Judicial Attitudes Toward Arbitration and the
” Id., at 492, n. 9, 107 S.Ct. 2520 (emphasis deleted). We
Resurgence of Unconscionability, 52 Buffalo L.Rev. 185,
said that a court may not “rely on the uniqueness of an
186–187 (2004).
agreement to arbitrate as a basis for a state-law holding
that enforcement would be unconscionable, for this would
The Concepcions suggest that all this is just a parade
enable the court to effect what ... the state legislature
of horribles, and no genuine worry. “Rules aimed
cannot.” Id., at 493, n. 9, 107 S.Ct. 2520.
at destroying arbitration” or “demanding procedures

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AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011)
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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

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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

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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

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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.

[13] The Concepcions contend that because parties may It is so ordered.


and sometimes do agree to aggregation, class procedures
are not necessarily incompatible with arbitration. But the
same could be said about procedures that the Concepcions Justice THOMAS, concurring.
admit States may not superimpose on arbitration: Parties Section 2 of the Federal Arbitration Act (FAA) provides
could agree to arbitrate pursuant to the Federal Rules that an arbitration provision “shall be valid, irrevocable,
of Civil Procedure, or pursuant to a discovery process and enforceable, save upon such grounds as exist at law or
rivaling that in litigation. Arbitration is a matter of in equity for the revocation of any contract.” 9 U.S.C. §
contract, and the FAA requires courts to honor parties' 2. The question here is whether California's Discover Bank
expectations. Rent–A– **1753 Center, West, 561 U.S., rule, see Discover Bank v. Superior Ct., 36 Cal.4th 148, 30
at ––––, 130 S.Ct. 2772, 2774. But what the parties in Cal.Rptr.3d 76, 113 P.3d 1100 (2005), is a “groun[d] ... for
the aforementioned examples would have agreed to is not the revocation of any contract.”
arbitration as envisioned by the FAA, lacks its benefits,
and therefore may not be required by state law. It would be absurd to suggest that § 2 requires only
that a defense apply to “any contract.” If § 2 means
The dissent claims that class proceedings are necessary anything, it *353 is that courts cannot refuse to enforce
to prosecute small-dollar claims that might otherwise slip arbitration agreements because of a state public policy
through the legal system. See post, at 9. But States cannot against arbitration, even if the policy nominally applies
require a procedure that is inconsistent with the FAA, to “any contract.” There must be some additional limit
even if it is desirable for unrelated reasons. Moreover, the on the contract defenses permitted by § 2. Cf. ante, at
claim here was most unlikely to go unresolved. As noted 17 (opinion of the Court) (state law may not require
earlier, the arbitration agreement provides that AT & T procedures that are “not arbitration as envisioned by the
will *352 pay claimants a minimum of $7,500 and twice FAA” and “lac[k] its benefits”); post, at 5 (BREYER, J.,
their attorney's fees if they obtain an arbitration award dissenting) (state law may require only procedures that are
greater than AT & T's last settlement offer. The District “consistent with the use of arbitration”).
Court found this scheme sufficient to provide incentive for
the individual prosecution of meritorious claims that are I write separately to explain how I would find that limit
not immediately settled, and the Ninth Circuit admitted in the FAA's text. As I would read it, the FAA requires
that aggrieved customers who filed claims would be that an agreement to arbitrate be enforced unless a party
“essentially guarantee[d]” to be made whole, 584 F.3d, successfully challenges the formation of the arbitration
at 856, n. 9. Indeed, the District Court concluded that agreement, such as by proving fraud or duress. 9 U.S.C.
the Concepcions were better off under their arbitration §§ 2, 4. Under this reading, I would reverse the Court of
agreement with AT & T than they would have been as Appeals because a district court cannot follow both the
participants in a class action, which “ could take months, FAA and the Discover Bank rule, which does not relate to
if not years, and which may merely yield an opportunity defects in the making of an agreement.
to submit a claim for recovery of a small percentage of a
few dollars.” Laster, 2008 WL 5216255, at *12. **1754 This reading of the text, however, has not been
fully developed by any party, cf. Brief for Petitioner 41,
n. 12, and could benefit from briefing and argument in
*** an appropriate case. Moreover, I think that the Court's
test will often lead to the same outcome as my textual
Because it “stands as an obstacle to the accomplishment interpretation and that, when possible, it is important in
and execution of the full purposes and objectives of interpreting statutes to give lower courts guidance from
Congress,” Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. a majority of the Court. See US Airways, Inc. v. Barnett,
399, 85 L.Ed. 581 (1941), California's Discover Bank rule 535 U.S. 391, 411, 122 S.Ct. 1516, 152 L.Ed.2d 589 (2002)
is preempted by the FAA. The judgment of the Ninth (O'Connor, J., concurring). Therefore, although I adhere

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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).

Examining the broader statutory scheme, § 4 can be read


to clarify the scope of § 2's exception to the enforcement
I
of *355 arbitration agreements. When a party seeks to
The FAA generally requires courts to enforce arbitration enforce an arbitration agreement in federal court, § 4
agreements as written. Section 2 provides that “[a] written requires that “upon being satisfied that the making of
provision in ... a contract ... to settle by arbitration a the agreement for arbitration or the failure to comply
controversy thereafter arising out of such contract ... therewith is not in issue,” the court must order arbitration
shall *354 be valid, irrevocable, and enforceable, save “in accordance with the terms of the agreement.”
upon such grounds as exist at law or in equity for the
revocation of any contract.” Significantly, the statute Reading §§ 2 and 4 harmoniously, the “grounds ... for
does not parallel the words “valid, irrevocable, and the revocation” preserved in § 2 would mean grounds
enforceable” by referencing the grounds as exist for related to the **1755 making of the agreement. This
the “ invalidation, revocation, or nonenforcement” of would require enforcement of an agreement to arbitrate
any contract. Nor does the statute use a different unless a party successfully asserts a defense concerning the
word or phrase entirely that might arguably encompass formation of the agreement to arbitrate, such as fraud,
validity, revocability, and enforce-ability. The use of duress, or mutual mistake. See Prima Paint Corp. v. Flood
only “revocation” and the conspicuous omission of & Conklin Mfg. Co., 388 U.S. 395, 403–404, 87 S.Ct. 1801,
“invalidation” and “nonenforcement” suggest that the 18 L.Ed.2d 1270 (1967) (interpreting § 4 to permit federal
exception does not include all defenses applicable to any courts to adjudicate claims of “fraud in the inducement
contract but rather some subset of those defenses. See of the arbitration clause itself” because such claims “g[o]
Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, to the ‘making’ of the agreement to arbitrate”). Contract
150 L.Ed.2d 251 (2001) (“It is our duty to give effect, if defenses unrelated to the making of the agreement—such
possible, to every clause and word of a statute” (internal as public policy—could not be the basis for declining to
quotation marks omitted)). enforce an arbitration clause. *

Concededly, the difference between revocability, on the


one hand, and validity and enforceability, on the other,
*356 II
is not obvious. The statute does not define the terms,
and their ordinary meanings arguably overlap. Indeed, Under this reading, the question here would be whether
this Court and others have referred to the concepts of California's Discover Bank rule relates to the making of an
revocability, validity, and enforceability interchangeably. agreement. I think it does not.
But this ambiguity alone cannot justify ignoring Congress'
clear decision in § 2 to repeat only one of the three In Discover Bank, 36 Cal.4th 148, 30 Cal.Rptr.3d 76,
concepts. 113 P.3d 1100, the California Supreme Court held that
“class action waivers are, under certain circumstances,
To clarify the meaning of § 2, it would be natural to look unconscionable as unlawfully exculpatory.” Id., at 65, 30
to other portions of the FAA. Statutory interpretation Cal.Rptr.3d 76, 113 P.3d, at 1112; see also id., at 161,
focuses on “the language itself, the specific context in 30 Cal.Rptr.3d 76, 113 P.3d, at 1108 (“[C]lass action
which that language is used, and the broader context of waivers [may be] substantively unconscionable inasmuch
the statute as a whole.” Robinson v. Shell Oil Co., 519 as they may operate effectively as exculpatory contract
U.S. 337, 341, 117 S.Ct. 843, 136 L.Ed.2d 808 (1997). clauses that are contrary to public policy”). The court
“A provision that may seem ambiguous in isolation is concluded that where a class-action waiver is found in
often clarified by the remainder of the statutory scheme ... an arbitration agreement in certain consumer contracts
because only one of the permissible meanings produces of adhesion, such waivers “should not be enforced.” Id.,

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at 163, 30 Cal.Rptr.3d 76, 113 P.3d, at 1110. In practice,


the court explained, such agreements “operate to insulate
I
a party from liability that otherwise would be imposed
under California law.” Id., at 161, 30 Cal.Rptr.3d 76, 113 The California law in question consists of an authoritative
P.3d, at 1108, 1109. The court did not conclude that a state-court interpretation of two provisions of the
customer would sign such an agreement only if under California Civil Code. The first provision makes unlawful
**1756 the influence of fraud, duress, or delusion. all contracts “which have for their object, directly or in-
directly, to exempt anyone from responsibility for his
The court's analysis and conclusion that the arbitration own ... violation of law.” *358 Cal. Civ.Code Ann. § 1668
agreement was exculpatory reveals that the Discover Bank (West 1985). The second provision authorizes courts to
rule does not concern the making of the arbitration “limit the application of any unconscionable clause” in
agreement. Exculpatory contracts are a paradigmatic a contract so “as to avoid any unconscionable result.” §
example of contracts that will not be enforced because of 1670.5(a).
public policy. *357 15 G. Giesel, Corbin on Contracts
§§ 85.1, 85.17, 85.18 (rev. ed.2003). Indeed, the court The specific rule of state law in question consists of
explained that it would not enforce the agreements the California Supreme Court's application of these
because they are “ ‘against the policy of the law.’ ” 36 principles to hold that “some” (but not “all”) “class action
Cal.4th, at 161, 30 Cal.Rptr.3d 76, 113 P.3d, at 1108 waivers” in consumer contracts are exculpatory and
(quoting Cal. Civ.Code Ann. § 1668); see also 36 Cal.4th, unconscionable under California “law.” Discover Bank v.
at 166, 30 Cal.Rptr.3d 76, 113 P.3d, at 1112 (“Agreements Superior Ct., 36 Cal.4th 148, 160, 162, 30 Cal.Rptr.3d 76,
to arbitrate may not be used to harbor terms, conditions 113 P.3d 1100, 1108, 1110 (2005). In particular, in Discover
and practices that undermine public policy” (internal Bank the California Supreme Court stated that, when a
quotation marks omitted)). Refusal to enforce a contract class-action waiver
for public-policy reasons does not concern whether the
contract was properly made. “is found in a consumer contract of adhesion in
a setting in which disputes between the contracting
Accordingly, the Discover Bank rule is not a “groun[d] ... parties predictably involve small amounts of damages,
for the revocation of any contract” as I would read § 2 and when it is alleged that the party with the
of the FAA in light of § 4. Under this reading, the FAA superior bargaining power has carried out a scheme to
dictates that the arbitration agreement here be enforced deliberately cheat large numbers of consumers out of
and the Discover Bank rule is pre-empted. individually small sums of money, then ... the waiver
becomes in practice the exemption of the party ‘from
responsibility for [its] own fraud, or willful injury
**1757 to the person or property of another.’ ” Id., at
Justice BREYER, with whom Justice GINSBURG,
162–163, 30 Cal.Rptr.3d 76, 113 P.3d, at 1110.
Justice SOTOMAYOR, and Justice KAGAN join,
dissenting. In such a circumstance, the “waivers are unconscionable
The Federal Arbitration Act says that an arbitration under California law and should not be enforced.” Id., at
agreement “shall be valid, irrevocable, and enforceable, 163, 30 Cal.Rptr.3d 76, 113 P.3d, at 1110.
save upon such grounds as exist at law or in equity for the
revocation of any contract.” 9 U.S.C. § 2 (emphasis added). The Discover Bank rule does not create a “blanket policy
California law sets forth certain circumstances in which in California against class action waivers in the consumer
“class action waivers” in any contract are unenforceable. context.” Provencher v. Dell, Inc., 409 F.Supp.2d
In my view, this rule of state law is consistent with the 1196, 1201 (C.D.Cal.2006). Instead, it represents the
federal Act's language and primary objective. It does not “application of a more general [unconscionability]
“stan[d] as an obstacle” to the Act's “accomplishment and principle.” Gentry v. Superior Ct., 42 Cal.4th 443,
execution.” Hines v. Davidowitz, 312 U.S. 52, 67, 61 S.Ct. 457, 64 Cal.Rptr.3d 773, 165 P.3d 556, 564 (2007).
399, 85 L.Ed. 581 (1941). And the Court is wrong to hold Courts applying California law have enforced class-action
that the federal Act pre-empts the rule of state law. waivers where they satisfy general unconscionability
standards. See, e.g., *359 Walnut Producers of Cal.

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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

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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

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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

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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

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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

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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)).

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AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

[2] Alternative Dispute Resolution


KeyCite Yellow Flag - Negative Treatment Existence and Validity of Agreement
Not Followed on State Law Grounds Local No. 1119, American 
Unless parties clearly and unmistakably
Federation State, County, and Mun. Employees, AFL-CIO v. Mesabi
provide otherwise, question of whether parties
Regional Medical Center, Minn.App., November 20, 1990
agreed to arbitrate is to be decided by court,
106 S.Ct. 1415
not arbitrator.
Supreme Court of the United States
2570 Cases that cite this headnote
AT & T TECHNOLOGIES, INC., Petitioner
v.
COMMUNICATIONS [3] Alternative Dispute Resolution
WORKERS OF AMERICA et al. Merits of Controversy
In deciding whether parties have agreed to
No. 84-1913. submit particular grievance to arbitration,
| court is not to rule on potential merits of
Argued Jan. 22, 1986. underlying claims.
|
Decided April 7, 1986. 2309 Cases that cite this headnote

Union sought intervention of court to compel arbitration


of dispute concerning company's layoff of employees. The [4] Alternative Dispute Resolution
United States District Court for the Northern District Construction in Favor of Arbitration
of Illinois, John F. Grady, J., ordered arbitration of Order to arbitrate particular grievance should
arbitrability issue, and employer appealed. The Court not be denied unless it may be said with
of Appeals, 751 F.2d 203, affirmed, and certiorari positive assurance that arbitration clause is
was granted. The Supreme Court, Justice White, held not susceptible of interpretation that covers
that it was for court, not arbitrator, to decide in asserted dispute; doubts should be resolved in
first instance whether parties to collective bargaining favor of coverage.
agreement intended to arbitrate grievances concerning
1365 Cases that cite this headnote
layoffs predicated on “lack of work” determination by
company.
[5] Labor and Employment
Vacated and remanded. Discharge and Layoff
It was for court, not arbitrator, to decide
Justice Brennan filed concurring opinion in which Chief in first instance whether parties to collective
Justice Burger and Justice Marshall joined. bargaining agreement intended to arbitrate
grievances concerning layoffs predicated on
“lack of work” determination by company.
West Headnotes (5)
908 Cases that cite this headnote

[1] Alternative Dispute Resolution


Contractual or Consensual Basis
Arbitration is matter of contract and party
cannot be required to submit to arbitration **1415 *643 Syllabus *
any dispute which he has not agreed so to
Petitioner employer and respondent Union are parties
submit.
to a collective-bargaining agreement covering telephone
1651 Cases that cite this headnote equipment installation workers. Article 8 of the agreement

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AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

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

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AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

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).

The Court expressly reaffirmed this principle in John


Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 84 S.Ct.
II
909, 11 L.Ed.2d 898 (1964). The “threshold question”
The principles necessary to decide this case are not new. there was whether the court or an arbitrator **1419
They were set out by this Court over 25 years ago in a series should decide if arbitration provisions in a collective-
of cases known as the Steelworkers Trilogy: Steelworkers bargaining contract survived a corporate merger so as to
v. American Mfg. Co., supra; Steelworkers v. Warrior & bind the surviving corporation. Id., at 546, 84 S.Ct., at
Gulf Navigation Co., supra; and Steelworkers v. Enterprise 912. The Court answered that there was “no doubt” that
Wheel & Car Corp., 363 U.S. 593, 80 S.Ct. 1358, 4 L.Ed.2d this question was for the courts. “ ‘Under our decisions,
1424 (1960). These precepts have served the industrial whether or not the company was bound to arbitrate, as
relations community well, and have led to continued well as what issues it must arbitrate, is a matter to be
reliance on arbitration, rather than strikes or lockouts, as determined by the Court on the basis of the contract
the preferred method of resolving disputes arising during entered into by the parties.’ ... The duty to arbitrate
the term of a collective-bargaining agreement. We see no being of contractual origin, a compulsory submission to
reason either to question their continuing validity, or to arbitration cannot precede judicial determination that the
eviscerate their meaning by creating an exception to their collective bargaining agreement does in fact create such
general applicability. a duty.” Id., at 546-547, 84 S.Ct., at 912-913 (citations
omitted).
[1] The first principle gleaned from the Trilogy is that
“arbitration is a matter of contract and a party cannot [3] The third principle derived from our prior cases is
be required to submit to arbitration any dispute which that, in deciding whether the parties have agreed to submit
he has not agreed so to submit.” Warrior & Gulf, supra, a particular grievance to arbitration, a court is not to rule
363 U.S., at 582, 80 S.Ct., at 1353; American Mfg. on the potential merits of the underlying claims. Whether
Co., supra, 363 U.S., at 570-571, 80 S.Ct., at 1364-1365 “arguable” or not, indeed even if it appears to the court
(BRENNAN, J., concurring). This axiom recognizes the to be *650 frivolous, the union's claim that the employer
fact that arbitrators derive their authority to resolve has violated the collective-bargaining agreement is to be
disputes only because the parties have agreed in advance decided, not by the court asked to order arbitration,
to submit such grievances to *649 arbitration. Gateway but as the parties have agreed, by the arbitrator. “The
Coal Co. v. Mine Workers, 414 U.S. 368, 374, 94 S.Ct. 629, courts, therefore, have no business weighing the merits
635, 38 L.Ed.2d 583 (1974). of the grievance, considering whether there is equity
in a particular claim, or determining whether there
[2] The second rule, which follows inexorably from is particular language in the written instrument which
the first, is that the question of arbitrability-whether a will support the claim. The agreement is to submit all
collective-bargaining agreement creates a duty for the grievances to arbitration, not merely those which the court
parties to arbitrate the particular grievance-is undeniably will deem meritorious.” American Mfg. Co., 363 U.S., at
an issue for judicial determination. Unless the parties 568, 80 S.Ct., at 1346 (footnote omitted).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

[5] With these principles in mind, it is evident that


[4] Finally, it has been established that where the contract the Seventh Circuit erred in ordering the parties to
contains an arbitration clause, there is a presumption arbitrate the arbitrability question. It is the court's duty
of arbitrability in the sense that “[a]n order to arbitrate to interpret the agreement and to determine whether the
the particular grievance should not be denied unless it parties intended to arbitrate grievances concerning layoffs
may be said with positive assurance that the arbitration predicated on a “lack of work” determination by the
clause is not susceptible of an interpretation that covers Company. If the court determines that the agreement so
the asserted dispute. Doubts should be resolved in favor provides, then it is for the arbitrator to determine the
of coverage.” Warrior & Gulf, 363 U.S., at 582-583, relative merits of the parties' substantive interpretations of
80 S.Ct., at 1352-1353. See also Gateway Coal Co. v. the agreement. It was for the court, not the arbitrator, to
Mine Workers, supra, 414 U.S., at 377-378, 94 S.Ct., at decide in the first instance whether the dispute was to be
636-637. Such a presumption is particularly applicable resolved through arbitration.
where the clause is as broad as the one employed in this
case, which provides for arbitration of “any differences The Union does not contest the application of these
arising with respect to the interpretation of this contract or principles to the present case. Instead, it urges the Court to
the performance of any obligation hereunder....” In such examine the specific provisions of the agreement for itself
cases, “[i]n the absence of any express provision excluding and to affirm the Court of Appeals on the ground that the
a particular grievance from arbitration, we think only the parties had agreed to arbitrate the dispute over the layoffs
most forceful evidence of a purpose to exclude the claim at issue here. But it is usually not our function in the
from arbitration can prevail.” Warrior & Gulf, supra, 363 first instance to construe collective-bargaining contracts
U.S., at 584-585, 80 S.Ct., at 1353-1354. and arbitration clauses, or to consider any other evidence
that might unmistakably demonstrate that a particular
This presumption of arbitrability for labor disputes grievance was not to *652 be subject to arbitration. The
recognizes the greater institutional competence issue in the case is whether, because of express exclusion or
of arbitrators in interpreting collective-bargaining other forceful evidence, the dispute over the interpretation
agreements, “furthers the national labor policy of peaceful of Article 20 of the contract, the layoff provision, is not
resolution of labor disputes and thus best accords with subject to the arbitration clause. That issue should have
the parties' presumed objectives in pursuing collective been decided by the District Court and reviewed by the
bargaining.” Schneider Moving & Storage Co. v. Robbins, Court of Appeals; it should not have been referred to the
466 U.S. 364, 371-372, 104 S.Ct. 1844, 1849-1850, arbitrator.
80 L.Ed.2d 366 (1984) (citation *651 omitted). See
Gateway Coal Co., supra, 414 U.S., at 378-379, 94 The judgment of the Court of Appeals is vacated, and the
S.Ct., at 637-638. The willingness of parties to enter case is remanded for proceedings in conformity with this
into agreements that provide for arbitration of specified opinion.
disputes would be “drastically reduced,” however, if
a labor arbitrator had the “power to determine his It is so ordered.
own jurisdiction ....” Cox, Reflections Upon Labor
Arbitration, 72 Harv.L.Rev. 1482, 1509 (1959). Were this
the applicable rule, an arbitrator would not be constrained
Justice BRENNAN, with whom THE CHIEF JUSTICE
to resolve only those disputes that the parties have agreed
and Justice MARSHALL join, concurring.
in advance to settle by arbitration, but, instead, would be
I join the Court's opinion and write separately only to
empowered “to impose obligations outside the contract
supplement what has been said in order to avoid any
limited only by his understanding and conscience.” Ibid.
misunderstanding on remand and in future cases.
This result undercuts the longstanding federal policy
of promoting industrial harmony through the use of
The Seventh Circuit's erroneous conclusion that the
collective-bargaining agreements, and is antithetical to the
arbitrator should decide whether this dispute is arbitrable
function of a collective- **1420 bargaining agreement as
resulted from that court's confusion respecting the
setting out the rights and duties of the parties.
“arbitrability” determination that we have held must be
judicially made. Despite recognizing that Article 8 of the

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AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

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.”

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AT & T Technologies, Inc. v. Communications Workers of America, 475 U.S. 643 (1986)
106 S.Ct. 1415, 121 L.R.R.M. (BNA) 3329, 89 L.Ed.2d 648, 54 USLW 4339...

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Bell v. State, Not Reported in S.W.3d (2006)
2006 WL 3628916

when the State failed to incorporate into the indictment


the necessary language and adoption by reference of the
2006 WL 3628916
document the State alleges was the corpus delicti of the
Only the Westlaw citation is currently available.
offense itself”; and (4) the trial court should have “referred
SEE TX R RAP RULE 47.2 FOR a ‘motion to recuse’ filed by a purported ‘public interest
DESIGNATION AND SIGNING OF OPINIONS. group’ before proceeding to trial.”

MEMORANDUM OPINION We affirm.


Court of Appeals of Texas,
Houston (1st Dist.).

Betty Brock BELL, Appellant Factual and Procedural Background


v.
James Devore, Chief Deputy for the Harris County Tax
The STATE of Texas, Appellee.
Assessor Collector's office, testified that his office provides
disabled parking placards to qualified persons, persons
No. 01-05-01180-CR.
who desire such placards are required by law to complete
|
an application, the application is a governmental record,
Dec. 14, 2006.
and the application contains a warning stating that the
On Appeal from the 232nd District Court, Harris County, falsification of any required statement on the application
Texas, Trial Court Cause No. 1020229. is a crime. Devore received a complaint that appellant
made a false statement on an application for a disabled
Attorneys and Law Firms parking placard, and he referred the matter to the Harris
County District Attorney's office.
Jeffrey Gelb, for Betty Brock Bell.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Bell v. State, Not Reported in S.W.3d (2006)
2006 WL 3628916

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Bell v. State, Not Reported in S.W.3d (2006)
2006 WL 3628916

appellant sought to renew were for appellant's mother,


and appellant told Mitchem that the application was for
Legal Sufficiency
her mother. The application, which was introduced into
In regard to her legal sufficiency complaint, made within evidence, showed that appellant identified her mother
her first issue, appellant asserts that the State failed to as the applicant, signed the application on her mother's
prove that she acted with the intent to defraud another behalf, and wrote her initials next to her mother's
person and an “intent to harm anyone, much less a specific name. Mitchem processed the application and gave
other person” and that there was no evidence appellant appellant the placards. However, after remembering
“used, profited from, or allowed another to use the permit that appellant's mother was deceased, Mitchem notified
in question.” Gistand. Mitchem stated that appellant deceived her, and
both Gistand and Mitchem testified that they would not
We review the legal sufficiency of the evidence by viewing have provided appellant with the placards had they known
the evidence in the light most favorable to the verdict she was obtaining them for her deceased mother. Britt
to determine whether any rational trier of fact could testified that during the course of his investigation, he
have found the essential elements of the offense beyond interviewed appellant, and appellant initially told Britt
a reasonable doubt. Vodochodsky v. State, 158 S.W.3d that the placards were for her and then stated that they
502, 509 (Tex.Crim.App.2005). We note that the trier were for her 82-year-old aunt.
of fact is the sole judge of the weight and credibility
of the evidence. Margraves v. State, 34 S.W.3d 912, *4 The State presented sufficient evidence that appellant
919 (Tex.Crim.App.2000). Thus, when performing a legal acted with the intent to defraud both Mitchem and
sufficiency review, we may not re-evaluate the weight and Gistand in renewing her deceased mother's disabled
credibility of the evidence and substitute our judgment parking placards. Furthermore, the State was not required
for that of the fact finder. Dewberry v. State, 4 S.W.3d to prove that appellant “used, profited from, or allowed
735, 740 (Tex.Crim.App.1999). We must resolve any another to use the permit in question.” Viewing all the
inconsistencies in the evidence in favor of the verdict. evidence in the light most favorable to the jury's verdict,
Curry v. State, 30 S.W.3d 394, 406 (Tex.Crim.App.2000). we conclude that a rational trier of fact could have found
the essential elements of the offense beyond a reasonable
A person commits the offense of tampering with a doubt. Accordingly, we hold that the evidence is legally
governmental record if she “knowingly makes a false entry sufficient to support appellant's conviction.
in, or false alteration of, a governmental record.” TEX.
PEN.CODE ANN. § 37.10(a) (Vernon Supp.2006). An We overrule appellant's first issue.
offense under this section is a state jail felony if the actor's
intent is to defraud or harm another. Id. § 37.10(c)(1).
Motion to Quash Indictment
Here, Devore testified that persons who desire disabled
parking placards are required by law to complete In her second issue, appellant argues that the trial
an application, which qualifies as a governmental court “abuse[d] its discretion in failing to quash the
record. Gistand testified that when appellant handed indictment ... based on a statutory ‘confusion.’ “ In
her a disabled parking placard, along with some other her motion to quash, appellant asserted that she should
paperwork, she told Gistand that she needed “to do have been charged under section 502.410 of the Texas
her renewal” and appellant confirmed, in response to Transportation Code. See TEX. TRANSP. CODE ANN.
Gistand's question, that the paperwork was for her. § 502.410 (Vernon Supp.2006). In her brief, appellant
The following morning, Gistand noticed that appellant's argues that section 502.410 “amply covers the alleged
mother, who was deceased, was identified as the applicant conduct” and that she should have been charged under
for the parking placards. this more specific statute in accordance with the statutory
rule of construction of in pari materia. 5
Mitchem testified that she provided appellant with the
application for the disabled parking placards. Mitchem Here, appellant completed and submitted the application
discovered in the computer records that the placards for the disabled parking placards in accordance with

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Bell v. State, Not Reported in S.W.3d (2006)
2006 WL 3628916

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.

However, because appellant did not assert this objection


Exhibit Attached to Indictment in the trial court, we hold that appellant has waived this
complaint for our review. TEX.CODE CRIM. PROC.
In her third issue, appellant argues that the “indictment as ANN. art 1.14(b) (Vernon 2005) (“If the defendant does
a matter of law fail[ed] to charge an offense when the State not object to a defect, error, or irregularity of form or
failed to incorporate into the indictment the necessary substance in an indictment or information before the date
language and adoption by reference of the document the on which the trial on the merits commences, he waives
State alleges was the corpus delicti of the offense itself.” and forfeits the right to object to the defect, error, or
irregularity and he may not raise the objection on appeal
Although appellant does not discuss this issue in the or in any other postconviction proceeding.”).
argument section of her brief, appellant, in her statement
of facts, explains that “[a]t no time was Exhibit A [the We overrule appellant's third issue.
application] adopted and incorporated by reference into
the indictment, but was in fact, left as a stand-alone
document which was a renewal of information that was
already on file in the Tax Assessor's Office, which was true, Motion to Recuse
and to which the State did not allege a falsity.”
In her fourth issue, appellant argues that the trial court
should have “referred a ‘motion to recuse’ filed by a
*5 Here, the indictment stated that appellant
purported ‘public interest group’ before proceeding to
.... [U]nlawfully and knowingly trial.”
[made] a false entry, namely,
the applicant name of Mary The motion to recuse that appellant asserts should have
Lou Brock, in a governmental been “referred” was captioned “Emergency Motion to
record, namely, APPLICATION Intervene; Motion for Judge Mary Lou Keel's Recusal;
FOR DISABLED PERSON Motion to Vacate Motion for Criminal Contempt of
IDENTIFICATION PLACARD Court.” The motion was filed by the “African-American
AND/OR DISABLED PERSON Legal Defense Group,” a self-described “public interest
LICENSE PLATE, attached hereto organization that investigates and prosecutes government

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Bell v. State, Not Reported in S.W.3d (2006)
2006 WL 3628916

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.

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Bell v. State, Not Reported in S.W.3d (2006)
2006 WL 3628916

(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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

[4] arbitrators' decision, in concluding that foreign


KeyCite Yellow Flag - Negative Treatment investor in Argentinian entity was excused from having
Declined to Extend by Crystallex International Corporation v. 
to comply with local court litigation requirement, did not
Bolivarian Republic of Venezuela, D.D.C., March 25, 2017
stray from interpretation and application of arbitration
134 S.Ct. 1198
provisions in treaty, and could not be disturbed by court.
Supreme Court of the United States

BG GROUP PLC, Petitioner


Reversed.
v.
REPUBLIC OF ARGENTINA. Justice Sotomayor filed opinion concurring in part.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

[4] Alternative Dispute Resolution [7] Treaties


Evidence Construction and operation in general
Courts presume that parties to contract Normally, interpretation of treaty, like
intend for arbitrators, not courts, to decide interpretation of contract, is matter of
disputes about meaning and application of determining parties' intent.
particular procedural preconditions for the
use of arbitration, including claims of waiver, 5 Cases that cite this headnote
delay, or a like defense to arbitrability, or
disputes as to satisfaction of such prerequisites [8] Alternative Dispute Resolution
as time limits, notice, laches, estoppel, and Presumptions
other conditions precedent to obligation to
Treaties
arbitrate.
Construction and operation of particular
41 Cases that cite this headnote provisions
When federal court is asked to interpret
intent of parties to treaty, pursuant to motion
[5] Alternative Dispute Resolution
to vacate or confirm an arbitration award
Proceedings
made in the United States under the Federal
Treaties Arbitration Act, it should normally apply
Construction and operation of particular the presumptions supplied by American law,
provisions such as the presumption that parties intend
Local court litigation requirement in procedural preconditions to arbitration to be
arbitration provisions of investment treaty resolved primarily by arbitrators. 9 U.S.C.A.
between United Kingdom and Argentina, § 1 et seq.
which required 18 months to elapse from
time that dispute was submitted to local 4 Cases that cite this headnote
tribunal, without a final decision by that
tribunal, before dispute could be submitted [9] Alternative Dispute Resolution
for international arbitration, was procedural Matters to Be Determined by Court
condition precedent to arbitration, which
Treaties
determined when the contractual duty to
Construction and operation of particular
arbitrate arose and not whether there was
provisions
contractual duty to arbitrate at all, such that
In absence of explicit language in treaty
this requirement, if it appeared in ordinary
demonstrating that the parties thereto
contract rather than in treaty, would be
intended a different delegation of authority,
presumptively for arbitrators, and not courts,
the ordinary interpretive framework, which is
to interpret and apply. Agreement for the
utilized by courts in deciding who is primarily
Promotion and Protection of Investments,
responsible for deciding threshold questions
Art. 8(2), 1765 U.N.T.S. 33.
about arbitration, applies when arbitration
16 Cases that cite this headnote provision appears not in ordinary contract but
in treaty.

[6] Treaties Cases that cite this headnote


Nature and grounds of obligation
As general matter, treaty is contract, though
[10] Alternative Dispute Resolution
it is between nations.
Proceedings
6 Cases that cite this headnote Treaties

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BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

Construction and operation of particular Construction and operation of particular


provisions provisions
Primary responsibility for interpretation Arbitrators' decision, in concluding that
and application of local court litigation foreign investor in Argentinian entity was
requirement in arbitration provisions of excused from having to comply with local
investment treaty between United Kingdom court litigation requirement in arbitration
and Argentina, which required 18 months to provisions of investment treaty between
elapse from time that dispute was submitted United Kingdom and Argentina, by first
to local tribunal, without a final decision filing suit in Argentine court and waiting for
by that tribunal, before dispute could be 18 months prior to submitting matter for
submitted for international arbitration, lay international arbitration, as result of conduct
with arbitrators rather than with courts, so by the Argentine government which interfered
that court, on competing motions to confirm with this judicial remedy by suspending
and vacate arbitration award, had to grant Argentine courts' ability to enter final
appropriate deference to arbitrators' decision judgments and by refusing to allow parties
that foreign nation's own conduct had excused engaged in litigation with the Argentine
other party from having to comply with this government to utilize contract renegotiation
purely procedural requirement regarding the process, did not stray from interpretation
timing of arbitration and could not review and application of arbitration provisions in
matter de novo; treaty did not indicate that treaty, and could not be disturbed by court.
local litigation requirement was condition Agreement for the Promotion and Protection
of foreign nations' consent to arbitration, of Investments, Art. 8(2), 1765 U.N.T.S. 33.
and there was nothing else in treaty to
rebut presumption that interpretation and 3 Cases that cite this headnote
application of such procedural provisions was
for arbitrators. Agreement for the Promotion
and Protection of Investments, Art. 8(2), 1765
U.N.T.S. 33.
*1201 Syllabus *
4 Cases that cite this headnote
An investment treaty (Treaty) between the United
Kingdom and Argentina authorizes a party to submit
[11] Alternative Dispute Resolution
a dispute “to the decision of the competent tribunal of
Matters to Be Determined by Court
the Contracting Party in whose territory the investment
When provision in arbitration agreement was made,” i.e., a local court, Art. 8(1); and permits
resembles a claims-processing requirement arbitration, as relevant here, “where, after a period of
and is not a requirement that affects the eighteen months has elapsed from the moment when
arbitration contract's validity or scope, court the dispute was submitted to [that] tribunal ..., the said
presumes that the parties, even if they are tribunal has not given its final decision,” Art. 8(2)(a)(i).
sovereigns, intended to give authority to
decide disputes regarding that provision to the Petitioner BG Group PLC, a British firm, belonged to
arbitrators. a consortium with a majority interest in MetroGAS,
an Argentine entity awarded an exclusive license to
1 Cases that cite this headnote
distribute natural gas in Buenos Aires. At the time of
BG Group's investment, Argentine law provided that
[12] Alternative Dispute Resolution gas “tariffs” would be calculated in U.S. dollars and
Proceedings would be set at levels sufficient to assure gas distribution
Treaties firms a reasonable return. But Argentina later amended
the law, changing (among other things) the calculation

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BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

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

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BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

different delegation of authority, the ordinary interpretive


framework applies. Pp. 1208 – 1210. Alexander A. Yanos, Elliot Friedman, Julia A. Lisztwan,
Freshfields Bruckhaus, Deringer US LLP, New York,
(c) The Treaty contains no evidence showing that NY, Thomas C. Goldstein, Counsel of Record, Kevin
the parties had an intent contrary to the ordinary K. Russell, Tejinder Singh, Goldstein & Russell, P.C.,
presumptions about who should decide threshold Washington, DC, for Petitioner.
arbitration issues. The text and structure of Article
Jonathan I. Blackman, Counsel of Record, Carmen
8's litigation requirement make clear that it is a
Amalia Corrales, Carmine D. Boccuzzi, Jr., Cleary
procedural condition precedent to arbitration. Because
Gottlieb Steen & Hamilton LLP, New York, NY,
the ordinary presumption applies and is not overcome,
Matthew D. Slater, Teale Toweill, M. Veronica Yepez,
the interpretation and application of the provision are
Caroline Stanton, Cleary Gottlieb Steen & Hamilton
primarily for the arbitrators, and courts must review their
LLP, Washington, DC, for Respondent.
decision with considerable deference. Pp. 1209 – 1212.
Opinion
2. While Argentina is entitled to court review (under
a properly deferential standard) of the arbitrators' Justice BREYER delivered the opinion of the Court.
decision to excuse BG Group's noncompliance with the
Article 8 of an investment treaty between the United
*1203 litigation requirement, that review shows that the
Kingdom and Argentina contains a dispute-resolution
arbitrators' determinations were lawful. Their conclusion
provision, applicable to disputes between one of those
that the litigation provision cannot be construed as an
nations and an investor from the other. See Agreement for
absolute impediment to arbitration, in all cases, lies
the Promotion and Protection of Investments, Art. 8(2),
well within their interpretative authority. Their factual
Dec. 11, 1990, 1765 U.N.T.S. 38 (hereinafter Treaty). The
findings that Argentina passed laws hindering recourse
provision authorizes either party to submit a dispute “to
to the local judiciary by firms similar to BG Group are
the decision of the competent tribunal of the Contracting
undisputed by Argentina and are accepted as valid. And
Party in whose territory the investment was made,” i.e., a
their conclusion that Argentina's actions made it “absurd
local court. Art. 8(1). And it provides for arbitration
and unreasonable” to read Article 8 to require an investor
in BG Group's position to bring its grievance in a domestic “(i) where, after a period of eighteen months has elapsed
court, before arbitrating, is not barred by the Treaty. Pp. from the moment when the dispute was submitted to the
1212 – 1213. competent tribunal ..., the said tribunal has not given its
final decision; [or]
665 F.3d 1363, reversed.
“(ii) where the final decision of the aforementioned
BREYER, J., delivered the opinion of the Court, in tribunal has been made but the Parties are still in
which SCALIA, THOMAS, GINSBURG, ALITO, and dispute.” Art. 8(2)(a).
KAGAN, JJ., joined, and in which SOTOMAYOR, J.,
joined except for Part IV–A–1. SOTOMAYOR, J., filed The Treaty also entitles the parties to agree to proceed
an opinion concurring in part. ROBERTS, C.J., filed a directly to arbitration. Art. 8(2)(b).
dissenting opinion, in which KENNEDY, J., joined.
This case concerns the Treaty's arbitration clause, and
specifically the local court litigation requirement set forth
Attorneys and Law Firms in Article 8(2)(a). The question before us is whether a
court of the United States, in reviewing an arbitration
Thomas Goldstein, Washington, DC, for Petitioner. award made under the Treaty, *1204 should interpret
and apply the local litigation requirement de novo, or
Ginger D. Anders, for the United States as amicus curiae,
with the deference that courts ordinarily owe arbitration
by special leave of the Court, supporting vacatur and
decisions. That is to say, who—court or arbitrator—bears
remand.
primary responsibility for interpreting and applying the
Jonathan I. Blackman, New York, NY, for Respondent. local litigation requirement to an underlying controversy?

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BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

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

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BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
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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,

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preconditions for the use of arbitration. See Howsam,


supra, at 86, 123 S.Ct. 588 (courts assume parties
III
“normally expect a forum-based decisionmaker to decide
[1] [2] Where ordinary contracts are at issue, it is up forum-specific procedural gateway matters” (emphasis
to the parties to determine whether a particular matter is added)). These procedural matters include claims of
primarily for arbitrators or for courts to decide. See, e.g., “waiver, delay, or a like defense to arbitrability.” Moses
Steelworkers v. Warrior & Gulf Nav. Co., 363 U.S. 574, H. Cone Memorial Hospital v. Mercury Constr. Corp., 460
582, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960) (“[A]rbitration U.S. 1, 25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). And
is a matter of contract and a party cannot be required to they include the satisfaction of “ ‘prerequisites such as
submit to arbitration any dispute which he has not agreed time limits, notice, laches, estoppel, and other conditions
so to submit”). If the contract is silent on the matter of precedent to an obligation to arbitrate.’ ” Howsam,
who primarily is to decide “threshold” questions about supra, at 85, 123 S.Ct. 588 (quoting the Revised Uniform
arbitration, courts determine the parties' intent with the Arbitration Act of 2000 § 6, Comment 2, 7 U.L.A.
help of presumptions. 13 (Supp.2002); emphasis deleted). See also § 6(c) (“An
arbitrator shall decide whether a condition precedent
[3] On the one hand, courts presume that the parties to arbitrability has been fulfilled”); § 6, Comment 2
intend courts, not arbitrators, to decide what we have (explaining that this rule reflects “the holdings of the vast
called disputes about “arbitrability.” These include majority of state courts” and collecting cases).
questions such as “whether the parties are bound by
a given arbitration clause,” or “whether an arbitration [5] The provision before us is of the latter, procedural,
clause in a concededly binding contract applies to a variety. The text and structure of the provision make
particular type of controversy.” Howsam v. Dean Witter clear that it operates as a procedural condition precedent
Reynolds, Inc., 537 U.S. 79, 84, 123 S.Ct. 588, 154 L.Ed.2d to arbitration. It says that a dispute “shall be submitted
491 (2002); accord, Granite Rock Co. v. Teamsters, to international arbitration” if “one of the Parties so
561 U.S. 287, 299–300, 130 S.Ct. 2847, 177 L.Ed.2d requests,” as long as “a period of eighteen months
567 (2010) (disputes over “formation of the parties' has elapsed” since the dispute was “submitted” to a
arbitration agreement” *1207 and “its enforceability or local tribunal and the tribunal “has not given its final
applicability to the dispute” at issue are “matters ... the decision.” Art. 8(2). It determines when the contractual
court must resolve” (internal quotation marks omitted)). duty to arbitrate arises, not whether there is a contractual
See First Options, supra, at 941, 943–947, 115 S.Ct. duty to arbitrate at all. Cf. 13 R. Lord, Williston on
1920 (court should decide whether an arbitration clause Contracts § 38:7, pp. 435, 437; § 38:4, p. 422 (4th ed.
applied to a party who “had not personally signed” the 2013) (a “condition precedent” determines what must
document containing it); AT & T Technologies, Inc. v. happen before “a contractual duty arises” but does
Communications Workers, 475 U.S. 643, 651, 106 S.Ct. not “make the validity of the contract depend on its
1415, 89 L.Ed.2d 648 (1986) (court should decide whether happening” (emphasis added)). Neither does this language
a particular labor-management layoff dispute fell within or other language in Article 8 give substantive weight
the arbitration clause of a collective-bargaining contract); to the local court's determinations on the matters at
John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, issue between the parties. To the contrary, Article 8
546–548, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964) (court provides that only the “arbitration decision shall be
should decide whether an arbitration provision survived final and binding on both Parties.” Art. 8(4). The
a corporate merger). See generally AT & T Technologies, litigation provision is consequently a purely procedural
supra, at 649, 106 S.Ct. 1415 (“Unless the parties clearly requirement—a claims-processing rule that governs when
and unmistakably provide otherwise, the question of the arbitration may begin, but not whether it may occur
whether the parties agreed to arbitrate is to be decided by or what its substantive outcome will be on the issues in
the court, not the arbitrator”). dispute.

[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,

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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

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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

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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).

To the contrary, the bulk of international authority


supports our view that the provision functions as a

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purely procedural precondition to arbitrate. See 1 G.


Born, International Commercial Arbitration 842 (2009) The arbitration panel made three relevant determinations:
(“A substantial body of arbitral authority from investor-
state disputes concludes that compliance with procedural (1) “As a matter of treaty interpretation,” the local
mechanisms in an arbitration agreement (or bilateral litigation provision “cannot be construed as an absolute
investment treaty) is not ordinarily a jurisdictional impediment to arbitration,” App. to Pet. for Cert. 165a;
prerequisite”); Brief for Professors and Practitioners of
Arbitration Law as Amici Curiae 12–16 (to assume the (2) Argentina enacted laws that “hindered” “recourse
parties intended de novo review of the provision by a to the domestic judiciary” by those “whose rights
court “is likely *1212 to set United States courts on a were allegedly affected by the emergency measures,”
collision course with the international regime embodied id., at 165a–166a; that sought “to prevent any judicial
in thousands of [bilateral investment treaties]”). See also interference with the emergency legislation,” id., at 169a;
Schreuer, Consent to Arbitration, supra, at 846–848 and that “excluded from the renegotiation process” for
(“clauses of this kind ... creat[e] a considerable burden public service contracts “any licensee seeking judicial
to the party seeking arbitration with little chance of redress,” ibid.;
advancing the settlement of the dispute,” and “the most
likely effect of a clause of this kind is delay and additional (3) under these circumstances, it would be “absurd and
cost”). unreasonable” to read Article 8 as requiring an investor to
bring its grievance to a domestic court before arbitrating.
[11] In sum, we agree with the dissent that a sovereign's Id., at 166a.
consent to arbitration is important. We also agree that
sovereigns can condition their consent to arbitrate by The first determination lies well within the arbitrators'
writing various terms into their bilateral investment interpretive authority. Construing the local litigation
treaties. Post, at 1207 – 1208. But that is not the issue. provision as an “absolute” requirement would mean
The question is whether the parties intended to give courts Argentina could avoid arbitration by, say, passing a
or arbitrators primary authority to interpret and apply a law that closed down its court system indefinitely or
threshold provision in an arbitration contract—when the that prohibited investors from using its courts. Such
contract is silent as to the delegation of authority. We have an interpretation runs contrary to a basic objective of
already explained why we believe that where, as here, the the investment treaty. Nor does Argentina argue for an
provision resembles a claims-processing requirement and absolute interpretation.
is not a requirement that affects the arbitration contract's
validity or scope, we presume that the parties (even if As to the second determination, Argentina does not argue
they are sovereigns) intended to give that authority to the that the facts set forth by the arbitrators are incorrect.
arbitrators. See Parts III, IV–A and IV–B, supra. Thus, we accept them as valid.

The third determination is more controversial. Argentina


argues that neither the 180–day suspension of courts'
V
issuances of final judgments nor its refusal to allow
[12] Argentina correctly argues that it is nonetheless litigants (and those in arbitration) to *1213 use
entitled to court review of the arbitrators' decision to its contract renegotiation process, taken separately
excuse BG Group's noncompliance with the litigation or together, warrants suspending or waiving the
requirement, and to take jurisdiction over the dispute. It local litigation requirement. We would not necessarily
asks us to provide that review, and it argues that even characterize these actions as rendering a domestic court-
if the proper standard is “a [h]ighly [d]eferential” one, exhaustion requirement “absurd and unreasonable,” but
it should still prevail. Brief for Respondent 50. Having at the same time we cannot say that the arbitrators'
the relevant materials before us, we shall provide that conclusions are barred by the Treaty. The arbitrators did
review. But we cannot agree with Argentina that the not “ ‘stra[y] from interpretation and application of the
arbitrators “ ‘exceeded their powers' ” in concluding they agreement’ ” or otherwise “ ‘effectively “dispens[e]” ’ ”
had jurisdiction. Ibid. (quoting 9 U.S.C. § 10(a)(4)). their “ ‘own brand of ... justice.’ ” Stolt–Nielsen S.A. v.

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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.,

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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.

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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),

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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

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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

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—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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 18


BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 19


BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

665 F.3d 1363, 1371–1373 (C.A.D.C.2012). At the same


time, however, the court seems to have simply taken it for
Nor has the majority pointed to evidence that would rebut
granted that, because BG Group did not submit its dispute
this presumption by showing that Argentina “ ‘clearly and
to the local courts, the arbitral award in BG Group's favor
*1223 unmistakably’ ” intended to have an arbitrator
was invalid. Indeed, the court addressed the issue in a
enforce the litigation requirement. Howsam, supra, at 83,
perfunctory paragraph at the end of its opinion and saw
123 S.Ct. 588 (quoting AT & T Technologies, Inc. v.
“ ‘only one possible outcome’ ”: “that BG Group was
Communications Workers, 475 U.S. 643, 649, 106 S.Ct.
required to commence a lawsuit in Argentina's courts and
1415, 89 L.Ed.2d 648 (1986)). As the majority notes, ante,
wait eighteen months before filing for arbitration.” Id., at
at 1210, the Treaty incorporates certain arbitration rules
1373 (quoting Stolt–Nielsen S.A. v. AnimalFeeds *1224
that, in turn, authorize arbitrators to determine their own
Int'l Corp., 559 U.S. 662, 677, 130 S.Ct. 1758, 176 L.Ed.2d
jurisdiction over a dispute. See Art. 8(3). But those rules
605 (2010)).
do not operate until a dispute is properly before an arbitral
tribunal, and of course the whole question in this case is
That conclusion is not obvious. A leading treatise has
whether the dispute between BG Group and Argentina
indicated that “[i]t is a necessary implication from [a
was before the arbitrators, given BG Group's failure to
unilateral] offer that the offeror, in addition, makes a
comply with the 18–month local litigation requirement.
subsidiary offer by which he or she promises to accept
As a leading treatise has explained, “[i]f the parties have
a tender of performance.” 1 Lord § 5:14, at 1005. On
not validly agreed to any arbitration agreement at all,
this understanding, an offeree's failure to comply with an
then they also have necessarily not agreed to institutional
essential condition of the unilateral offer “will not bar an
arbitration rules.” 1 Born 870. “In these circumstances,
action, if failure to comply with the condition is due to the
provisions in institutional rules cannot confer any [such]
offeror's own fault.” Id., at 1005–1006.
authority upon an arbitral tribunal.” Ibid.

It would be open to BG Group to argue before the


I also see no reason to think that arbitrators enjoy
Court of Appeals that this principle was incorporated
comparative expertise in construing the local litigation
into Article 8(2)(a) as an implicit aspect of Argentina's
requirement. Ante, at 1210. It would be one thing if
unilateral offer to arbitrate. Such an argument would find
that provision involved the application of the arbitrators'
some support in the background principle of customary
own rules, cf. Howsam, supra, at 85, 123 S.Ct. 588, or if
international law that a foreign individual injured by a
it were “intertwined” with the merits of the underlying
host country must ordinarily exhaust local remedies—
dispute, John Wiley & Sons, 376 U.S., at 557, 84 S.Ct.
unless doing so would be “futile.” See Dugan 347–357. In
909. Neither is true of the litigation requirement. A court
any event, the issue would be analyzed as one of contract
can assess compliance with the requirement at least as
formation, and therefore would be for the court to decide.
well as an arbitrator can. Given the structure of Article 8
I would accordingly vacate the decision of the Court of
and the important interests that the litigation requirement
Appeals and remand the case for such an inquiry.
protects, it seems clear that the United Kingdom and
Argentina thought the same. 2
I respectfully dissent.

III All Citations

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 20


BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198 (2014)
188 L.Ed.2d 220, 82 USLW 4166, 14 Cal. Daily Op. Serv. 2337...

* 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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 21


Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

Practices Act under statutes that entitled prevailing party


to recover reasonable attorney fees; and
488 S.W.3d 468
Court of Appeals of Texas,
[7] invalid attorney fees clause of arbitration agreement
Dallas.
was severable from remainder of otherwise valid
Bonded Builders Home Warranty agreement.
Association of Texas, Inc. d/b/a Bonded
Builders Warranty Group, Appellant
Reversed and remanded.
v.
James B. Smith and Michelle Eyrich, Appellees

No. 05–15–00964–CV West Headnotes (26)


|
Opinion Filed April 21, 2016.
[1] Alternative Dispute Resolution
Synopsis Validity
Background: Purchasers of new home filed suit against Alternative Dispute Resolution
builder arising out of construction defects, and against Disputes and Matters Arbitrable Under
corporation that issued warranty based on claims of Agreement
breach of warranty and violations of Texas Deceptive In general, a party seeking to compel
Trade Practices Act (DTPA). Corporation filed motion arbitration under the Federal Arbitration Act
to compel arbitration. The 95th Judicial District Court, (FAA) must establish (1) the existence of a
Dallas County, denied motion to compel, and corporation valid, enforceable arbitration agreement and
appealed. (2) that the claims at issue fall within that
agreement's scope. 9 U.S.C.A. § 1 et seq.

3 Cases that cite this headnote


Holdings: The Court of Appeals, Lang, J., held that:

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

When determining whether an agreement a transaction so one-sided, with so gross a


to arbitrate is valid, state law, whether of disparity in the values exchanged, that no
legislative or judicial origin, is applicable if rational contracting party would have entered
that law arose to govern issues concerning the contract.
the validity, revocability, and enforceability of
contracts generally. Cases that cite this headnote

Cases that cite this headnote


[10] Alternative Dispute Resolution
Unconscionability
[5] Contracts In applying the unconscionability standard to
Unconscionable Contracts an arbitration agreement, the crucial inquiry
Texas law renders unconscionable contracts is whether the arbitral forum in a particular
unenforceable. case is an adequate and accessible substitute
to litigation, a forum where the litigant can
Cases that cite this headnote effectively vindicate his or her rights, and this
inquiry is not satisfied by speculation but by
[6] Alternative Dispute Resolution specific proof in the particular case of the
Unconscionability arbitral forum's inadequacy.
Arbitration agreements may be either Cases that cite this headnote
substantively or procedurally unconscionable,
or both.
[11] Alternative Dispute Resolution
Cases that cite this headnote Contractual or consensual basis
An arbitration agreement need not be in any
[7] Alternative Dispute Resolution particular form, but no party is under a duty
Unconscionability to arbitrate unless by clear language he has
so agreed, and it must clearly appear that the
“Substantive unconscionability” of an
intention of the parties was to submit their
arbitration agreement refers to the fairness
dispute to the arbitrators and to be bound by
of the arbitration provision itself, whereas
that decision.
“procedural unconscionability” refers to the
circumstances surrounding adoption of the Cases that cite this headnote
arbitration provision.

Cases that cite this headnote [12] Alternative Dispute Resolution


Nature, purpose, and right to arbitration
in general
[8] Alternative Dispute Resolution
Evidence The essence of arbitration is the submission of
the controversy to a third party. 9 U.S.C.A. §
A party seeking to avoid arbitration on
2.
unconscionability grounds bears the burden
of proof. Cases that cite this headnote
Cases that cite this headnote
[13] Alternative Dispute Resolution
In general; formation of agreement
[9] Contracts
Unconscionable Contracts Identity of arbitrator and rules and costs
of arbitration were not essential terms of
The theory behind unconscionability in
arbitration agreement in warranty issued
contract law is that courts should not enforce
to purchasers of new home, and therefore,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

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

[14] Alternative Dispute Resolution [17] Alternative Dispute Resolution


In general; formation of agreement Unconscionability
Arbitration agreement in warranty issued Arbitration agreement in warranty issued to
to purchasers of new home was not purchasers of new home, which provided that,
impermissibly vague, based on purchasers' when arbitration was requested, warranty
allegation that it failed to identify any corporation would provide to purchasers list
arbitrator, arbitration body, or arbitral rules; of approved arbitrators for purchasers to
agreement provided method for selecting select from, and that arbitration would be
an arbitration company, which company's governed by rules of selected arbitrator, was
rules would apply, and agreement did not not unconscionable, based on purchasers'
designate particular rules that were known to assertions that corporation controlled pool
be nonexistent. of potential arbitrators and therefore, dispute
would not be resolved by neutral party, that
Cases that cite this headnote corporation intended to control every aspect
of arbitration process, and that purchasers
[15] Alternative Dispute Resolution could face fees “north of $100,00” by
Validity conclusion of arbitration; because purchasers
had not requested arbitration before filing suit
Arbitration agreement in warranty issued to
against corporation for breach of warranty,
purchasers of new home was not invalid
no list of approved arbitrators was provided
based on purchasers' unsupported assertion
to them, and therefore, purchasers' assertions
that it gave warranty corporation exclusive
about partiality of potential arbitrators
authority to select arbitrators; rather,
amounted to nothing more than pure
under arbitration agreement, once claim
speculation, and “risk” of possible costs
was submitted under warranty, corporation
of arbitration, without any documentary
provided purchasers with list of approved
evidence as to actual costs that purchasers
arbitration companies for purchasers to select
could incur, was insufficient to prove that
from.
arbitration fees that purchasers would incur
Cases that cite this headnote were excessive.

Cases that cite this headnote


[16] Alternative Dispute Resolution
Unconscionability
[18] Alternative Dispute Resolution
To extent that trial court determined that
Unconscionability
arbitration agreement in warranty issued to
Excessive costs imposed by an arbitration
purchasers of new home was procedurally
agreement render a contract unconscionable
unconscionable due to “gross disparity”
if the costs prevent a litigant from effectively
between parties, such determination was
vindicating his or her rights in the arbitral
abuse of discretion, given that purchasers
forum; however, evidence of the risk of
did not raise “procedural unconscionability”
possible costs of arbitration is insufficient
argument before trial court on warranty
evidence of the prohibitive cost of the
corporation's motion to compel arbitration
arbitration forum.
of purchasers' claim for breach of warranty,

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Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

for the purposes of severability of the


Cases that cite this headnote invalid provision, depends upon whether
the remaining provisions are independent or
[19] Alternative Dispute Resolution mutually dependent promises, which courts
Evidence determine by looking to the language of
the contract itself; the relevant inquiry is
The party opposing arbitration based on an
whether or not parties would have entered
assertion that agreement is unconscionable
into the agreement absent the unenforceable
because the costs of arbitration are prohibitive
provisions.
must show the likelihood of incurring such
costs in his particular case. Cases that cite this headnote
Cases that cite this headnote
[23] Alternative Dispute Resolution
Existence and validity of agreement
[20] Alternative Dispute Resolution
Evidence Alternative Dispute Resolution
Evidence
While claimants are not required to actually
incur the cost of arbitration before they When the parties have contracted for
can show its excessiveness, as a basis for arbitration of their disputes, a trial court
determining that the arbitration agreement may consider only issues relating to the
is unconscionable, the claimant must at making and performance of the agreement to
least provide evidence of the likely cost of arbitrate, and when authority over the matter
their particular arbitration, through invoices, is unclear, a strong federal presumption favors
expert testimony, reliable cost estimates, or arbitration.
other comparable evidence; evidence that
Cases that cite this headnote
merely speculates about the risk of possible
cost is insufficient.
[24] Alternative Dispute Resolution
Cases that cite this headnote Matters to Be Determined by Court
To extent that purchasers complained of
[21] Alternative Dispute Resolution “General Conditions” of warranty that issued
Validity on purchase of new home, such matters were
Alternative Dispute Resolution for arbitrator to address in first instance, and
Severability were not for trial court to resolve on warranty
corporation's motion to compel arbitration
An arbitration agreement covering statutory
of purchasers' claim for breach of warranty,
claims is generally invalid if it waives
where warranty's “General Conditions” was
substantive rights and remedies the statute
not within or specifically referenced by
affords; however, an illegal or unconscionable
arbitration clause, and therefore, complaints
provision of a contract may generally be
as to “General Conditions” was not challenge
severed so long as it does not constitute the
to arbitration clause itself.
essential purpose of the agreement.
Cases that cite this headnote
Cases that cite this headnote

[25] Alternative Dispute Resolution


[22] Contracts
Statutory rights and obligations
Partial Illegality
Provisions of arbitration agreement in
Whether or not the invalidity of a particular
warranty issued to purchasers of new home,
provision affects the rest of the contract,
stating that each party would pay their own

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

attorney fees and expenses, and that arbitrator


had discretion to reallocate arbitration fees *472 On Appeal from the 95th Judicial District Court,
and expenses, save and except attorney fees, Dallas County, Texas, Trial Court Cause No. DC–15–
in interests of justice, were unenforceable 04117, Ken Molberg, Judge.
against purchasers; purchasers' claims against
Attorneys and Law Firms
warranty corporation included breach of
warranty and violations of Texas Deceptive William David Toney II, Adam Massey, Houston, TX, for
Trade Practices Act (DPTA) under statutes appellants.
that provided for recovery of attorney fees by
prevailing parties, and there was no evidence Cynthia C. Hollingsworth, Rachel E. Khirallah, William
that purchasers waived their statutory rights L. Wolf, Dallas, TX, for appellees.
to recover attorney fees. Tex. Civ. Prac. &
Before Justices Lang, Evans, and Whitehill
Rem. Code Ann. § 38.001; Tex. Bus. & C.
Code § 17.50.

Cases that cite this headnote OPINION

Opinion by Justice Lang


[26] Alternative Dispute Resolution
Statutory rights and obligations **1 In this interlocutory appeal, appellant Bonded
Clause of arbitration agreement in warranty Builders Home Warranty Association of Texas, Inc. d/b/a
issued to purchasers of new home stating Bonded Builders Warranty Group (“BBWG”) challenges
that each party would bear their own the trial court's denial of its motion to compel arbitration
attorney fees and expenses, and that arbitrator in a lawsuit filed by James B. Smith and Michelle Eyrich
had discretion to reallocate arbitration fees (“appellees” or “plaintiffs”) based on alleged defects in a
and expenses, save and except attorney home purchased by them.
fees, which clause was invalid with respect
to purchasers' claims against warranty We decide in favor of BBWG on its sole issue. We
corporation for breach of warranty and reverse the portion of the trial *473 court's order denying
violations of Texas Deceptive Trade Practices BBWG's motion to compel arbitration, order the severing
Act (DPTA) under statutes that provided of a portion of the arbitration provision in question and
for recovery of attorney fees by prevailing the granting of BBWG's motion to compel arbitration,
parties, was severable from remainder of and remand this case to the trial court for further
otherwise valid and enforceable arbitration proceedings consistent with this opinion.
agreement; arbitration agreement's essential
purpose was to provide for expedient and
efficient resolution of dispute arising out of I. FACTUAL AND PROCEDURAL BACKGROUND
warranty without resorting to legal action,
and effect of attorney fee clause on purchasers' In April 2013, appellees purchased a home from a builder,
statutory rights and remedies was nothing Regent Custom Homes (“Regent”). In connection with
more than peripheral concern to that essential that purchase, appellees obtained an “express limited
purpose. Tex. Civ. Prac. & Rem. Code Ann. § warranty” (the “Warranty”) issued by BBWG. The
38.001; Tex. Bus. & C. Code § 17.50. Warranty documentation set forth “general warranty
provisions” applicable here. 1
1 Cases that cite this headnote

**2 On April 10, 2015, appellees filed this lawsuit


against Regent 2 and BBWG. In their last-filed petition
at the time of the order complained of, appellees
contended in part that several months after purchase,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

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

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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,

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save upon such grounds as exist at law or in equity for


the revocation of any contract.” 9 U.S.C. § 2; *477
C. Application of Law to Facts
In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883,
891 (Tex.2010) (orig.proceeding). Such agreements are In its sole issue on appeal, BBWG asserts the trial
enforceable only if they meet the requirements of the court abused its discretion by denying BBWG's motion
general contract law of the applicable state. Olshan, 328 to compel arbitration because (1) “BBWG conclusively
S.W.3d at 891. When determining whether an agreement established that Plaintiffs' claims fall squarely within the
to arbitrate is valid, state law, whether of legislative scope of a valid, enforceable arbitration agreement” and
or judicial origin, is applicable if that law arose to (2) “Plaintiffs failed to meet their burden of establishing
govern issues concerning the validity, revocability, and that the arbitration agreement is unconscionable.”
enforceability of contracts generally. Id. at 891–92. Texas
law renders unconscionable contracts unenforceable. Id. Appellees contend on appeal that BBWG did not prove
at 892. the existence of a valid agreement to arbitrate because
(1) the alleged agreement in question “lacks essential
[6] [7] [8] Arbitration agreements may be either terms rendering it impermissibly vague and invalid”;
substantively or procedurally unconscionable, or both. (2) BBWG's “exclusive right to choose the pool of
Royston, Rayzor, Vickery, & Williams, LLP v. Lopez, arbitrators” renders the alleged agreement invalid; and
467 S.W.3d 494, 499 (Tex.2015) (citing In re Halliburton (3) “BBWG's system utterly fails to provide a neutral
Co., 80 S.W.3d 566, 572 (Tex.2002) (orig.proceeding) forum.” Additionally, appellees assert that even if this
(“[C]ourts may consider both procedural and substantive Court concludes there is an agreement to arbitrate,
unconscionability of an arbitration clause in evaluating the arbitration provision in question is unconscionable
the validity of an arbitration provision.”)). “Substantive because (1) it “permits [BBWG] to unilaterally select the
unconscionability refers to the fairness of the arbitration arbitrator”; (2) it “attempts to limit the statutory rights”
provision itself, whereas procedural unconscionability of appellees; and (3) there is a “gross disparity” between
refers to the circumstances surrounding adoption of appellees and BBWG.
the arbitration provision.” Id. (citing In re Palm
Harbor Homes, Inc., 195 S.W.3d 672, 677 (Tex.2006)
(orig.proceeding)). A party seeking to avoid arbitration on
1. Existence of Valid Agreement to Arbitrate
unconscionability grounds bears the burden of proof. See
In re Halliburton, 80 S.W.3d at 572. **5 [11] [12] We begin by considering whether the
record shows BBWG conclusively *478 established
[9] [10] The supreme court has stated that courts
the existence of a valid agreement to arbitrate. 6 See
“should be wary of setting the bar for holding arbitration
Pilot Travel Ctrs., 416 S.W.3d at 177. “The arbitration
clauses unconscionable too low.” Olshan, 328 S.W.3d at
agreement need not be in any particular form, but no
892. “[T]he theory behind unconscionability in contract
party is under a duty to arbitrate unless by clear language
law is that courts should not enforce a transaction so one-
he has so agreed, and it must clearly appear that the
sided, with so gross a disparity in the values exchanged,
intention of the parties was to submit their dispute to
that no rational contracting party would have entered
the arbitrators and to be bound by that decision.” Manes
the contract.” Id. “In applying the unconscionability
v. Dallas Baptist Coll., 638 S.W.2d 143, 145 (Tex.App.–
standard, the crucial inquiry is whether the arbitral forum
Dallas 1982, writ ref'd n.r.e.); accord In re Bates, 177
in a particular case is an adequate and accessible substitute
S.W.3d 419, 422 (Tex.App.–Houston [1st Dist.] 2005, orig.
to litigation, a forum where the litigant can effectively
proceeding) (“Although an arbitration agreement does
vindicate his or her rights.” Id. at 894. “That inquiry
not have to assume any particular form, the language
is not satisfied by speculation but by specific proof in
of the agreement must clearly indicate the intent to
the particular case of the arbitral forum's inadequacy.”
arbitrate.”). “The essence of arbitration is the submission
Venture Cotton Coop. v. Freeman, 435 S.W.3d 222, 232
of the controversy to a third party.” Manes, 638 S.W.2d
(Tex.2014) (citing Olshan, 328 S.W.3d at 896).
at 145; see also 9 U.S.C. § 2.

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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.’

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Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
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” 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

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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

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**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.”

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 13


Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

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....
....

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Bonded Builders Home Warranty Association of Texas, Inc...., 488 S.W.3d 468 (2016)
2016 WL 1612916

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 15


Browning-Ferris Industries, Inc. v. Lieck, 881 S.W.2d 288 (1994)

as required to establish tort of malicious


prosecution, unless person's acts were both
KeyCite Yellow Flag - Negative Treatment necessary and sufficient cause of prosecution,
Disagreed With by Pahle v. Colebrookdale Tp., E.D.Pa., March 26, 2002 
i.e., person's actions in course of things
881 S.W.2d 288
brought about prosecution and, but for his
Supreme Court of Texas.
actions, prosecution would not have occurred;
abrogating -Flowers, 314 S.W.2d 373.
BROWNING–FERRIS INDUSTRIES,
INC. and James Meszaros, Petitioners, 96 Cases that cite this headnote
v.
Kenneth LIECK and Nydia
[2] Marriage and Cohabitation
Hinojosa Lieck, Respondents.
Nature of underlying claim or injury
No. D–3616. Damages for loss of consortium cannot be
| awarded for harm to spouse that involves no
Argued Oct. 13, 1993. physical injury.
|
29 Cases that cite this headnote
Decided June 2, 1994.
|
Rehearing Overruled Sept. 8, 1994.

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,

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Browning-Ferris Industries, Inc. v. Lieck, 881 S.W.2d 288 (1994)

appeals, 845 S.W.2d 926, en banc, affirmed with some


modifications. 845 S.W.2d at 950. We reverse and remand At the request of various other law enforcement officials,
the case for further proceedings. Meszaros and an attorney for BFI provided additional
statements and affidavits. Two City Commissioners also
told officials that Lieck had given Torres confidential
information. Meszaros, by his own admission at trial,
I
never told officials that the terms of BFI's contract
A detailed account of the evidence in this case has been had been made public during the City Commission's
made by the court of appeals in assessing the sufficiency consideration of the bids, even though he knew that was
of the evidence to support the judgment. As we have not true, nor did he tell officials that he believed Lieck had not
been asked to review the method or standard used in that committed a crime, even though that was his belief. From
assessment, we need not recapitulate the entire record. We these admissions it may thus be fairly said that Meszaros
focus instead on the circumstances directly relevant to the withheld from law enforcement officials information
legal issues raised here. which they might well have considered important in
deciding whether to prosecute Lieck.
When James Meszaros, an employee of Browning–
Ferris Industries, Inc., heard that the Texas Rangers An assistant district attorney reviewed the matter and
were investigating the purchasing practices of the City presented it to the grand jury, which indicted Lieck
of Brownsville, he became concerned that they might for giving Torres confidential information, specifically,
question his attempt to make a financial contribution to the contract BFI had submitted to the Brownsville City
the reelection campaign of one of the members of the City Commission. The indictment alleged a misdemeanor,
Commission at a time when BFI was bidding on the City's although it did not state what statute had been violated.
garbage collection business. Meszaros asked another BFI The indictment was dismissed about two months later
employee and former Ranger, Dan North, to contact because the grand jury had been improperly constituted.
his friends among the Rangers and try to determine the A second grand jury refused to indict Lieck, and the
scope of the investigation. North did so, and arranged prosecution was then terminated.
for Meszaros to meet with two officials involved in the
investigation. Lieck and his wife Nydia sued BFI and Meszaros
for malicious prosecution. The jury rendered a verdict
At that meeting, Meszaros brought up the subject of the favorable to the Liecks on all issues and found actual
bidding on the City's garbage collection business. BFI had damages of $706,500 for Lieck 1 and $250,000 for his wife
submitted its bid on its standard form contract, which for loss of consortium, and punitive damages against BFI
was similar to the ones it, and its competitors, used with of $1,500,000. The trial court rendered judgment awarding
other Texas cities. Garbage Management Services also Lieck his actual damages against BFI and Meszaros,
bid on the City's business. The terms of the bids were jointly and severally, and his punitive damages against
summarized by Brownsville's City Manager, Kenneth BFI, but rendered judgment non obstante veredicto
Lieck, distributed to members of the City Commission and that Nydia Lieck take nothing. The court of appeals
to the press, and discussed at several City Commission reversed in part, awarding Nydia the consortium damages
meetings *290 which were open to the public. After found by the jury, then modified the punitive damages,
the Commission voted to award the business to GMS, apportioning them between Nydia and Kenneth, and
Lieck gave GMS' representative, Robert Torres, a slightly otherwise affirmed the judgment. 845 S.W.2d 926.
modified form of the contract BFI had submitted, and
that proposed contract became the basis of the final
negotiations between the City and GMS. Meszaros
II
complained to the investigators that the contract Lieck
had given Torres was confidential information. North Before we turn to petitioners' complaints, it is necessary
showed the two investigators a statute from which they to recognize the important societal interests in tension in
concluded, after reading it, that Lieck had violated the the tort of malicious criminal prosecution. A century ago
law. this Court wrote:

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Browning-Ferris Industries, Inc. v. Lieck, 881 S.W.2d 288 (1994)

S.W.2d 496, 499 (Tex.Civ.App.—Dallas 1971, no writ);


It is important that every Montgomery Ward & Co. v. Kirkland, 225 S.W.2d 906,
citizen should be protected against 909 (Tex.Civ.App.—San Antonio 1949, writ ref'd n.r.e.);
malicious prosecutions, and it Deaton v. Montgomery Ward & Co., 159 S.W.2d 969,
is equally important that crimes 972 (Tex.Civ.App.—Beaumont 1942, writ ref'd w.o.m.);
should be punished, in order that the Reed v. Lindley, 240 S.W. 348, 351 (Tex.Civ.App.—Ft.
law-abiding citizen may be secure in Worth 1922, no writ); 54 C.J.S. Malicious Prosecution § 4,
life, liberty, and property. To make at 524–25 (1987); 52 AM.JUR.2D Malicious Prosecution
the citizen liable to be mulcted in § 5, at 188 (1970). This aphorism is far too vague to
damages for an honest discharge serve as an analytical tool. As with any other cause
of duty is to give immunity to of action, if the elements of malicious prosecution are
crime, and to weaken the restraining proved, liability is established. What is distinctive about
power of the criminal law, thereby malicious prosecution is that there is little room for error
endangering the security of law- in applying the law. Even a small departure from the
abiding people. exact prerequisites for liability may threaten the delicate
balance between protecting against wrongful prosecution
Sebastian v. Cheney, 86 Tex. 497, 25 S.W. 691, 694
and encouraging reporting of criminal conduct. It is in this
(1894). The Restatement (Second) of Torts describes these
context that we consider the issues raised.
competing interests similarly:

The first is the interest of society


in the efficient enforcement of the III
criminal law, which requires that
private persons who aid in the
enforcement of the law should A
be given an effective protection
Petitioners complain that the trial court erred in refusing
against the prejudice that is likely
to require the jury to find whether Meszaros' actions
to arise from the termination of
actually caused the indictment of Lieck. The trial court
the prosecution in favor of the
asked instead:
accused. The second is the interest
that the individual citizen has in Did James R. Meszaros, acting
being protected against unjustifiable without probable cause and with
and oppressive litigation of criminal malice, cause, or aid or cooperate in
charges, which not only involve causing, a criminal prosecution to
pecuniary loss but also distress and be commenced against Kenneth J.
loss of reputation. Lieck?

*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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Browning-Ferris Industries, Inc. v. Lieck, 881 S.W.2d 288 (1994)

of this statement. In Davis v. City of San Antonio, 752


S.W.2d 518 (Tex.1988), this Court held that there was The RESTATEMENT formulates the causation element
evidence to support a finding that defendant caused, aided as “initiates or procures”. RESTATEMENT § 653. 2 A
or contributed to a criminal prosecution, but did not person initiates a criminal prosecution if he makes a
consider—because it was not questioned by the parties formal charge to law enforcement authorities. Id. cmt. c.
—whether such a finding was sufficient for liability. In A person procures a criminal prosecution if his actions are
Bass v. Metzger, 569 S.W.2d 917, 924 (Tex.Civ.App.— enough to cause the prosecution, and but for his actions
Corpus Christi 1978, writ ref'd n.r.e.), and Ellis v. Sinton the prosecution would not have occurred. Id. cmts. d, f–
Sav. Ass'n, 455 S.W.2d 834, 836 (Tex.Civ.App.—Corpus h. In other words, procurement requires that a person's
Christi 1970, writ ref'd n.r.e.), the court listed the elements actions be both a necessary and a sufficient cause of
of a malicious prosecution action as including that the criminal prosecution. Thus, a person cannot procure
defendant have caused, or aided or cooperated in causing, a criminal prosecution when the decision whether to
plaintiff's prosecution. Neither of these cases considered prosecute is left to the discretion of another person, a law
the causation element specifically; each merely listed enforcement official or the grand jury. Id. An exception,
the element among the other requirements to establish which we discuss below, occurs when a person provides
liability. See also Yianitsas v. Mercantile Nat'l Bank, 410 information which he knows is false to another to cause a
S.W.2d 848, 850 (Tex.Civ.App.—Dallas 1967, no writ). criminal prosecution. Id. cmt. g.
Finally, Thomas v. Cisneros, 596 S.W.2d 313, 316–17
(Tex.Civ.App.—Austin 1980, writ ref'd n.r.e.), also lists The concept of procurement in the RESTATEMENT
the same elements but later refers to a requirement that is essentially the same as the cause-in-fact element of
defendant's actions have proximately caused plaintiff's proximate cause. Cause in fact is ordinarily defined as
prosecution. Thus, none of the cases cited by the court “that cause which, in a natural and continuous sequence,
of appeals, or by respondents, specifically considers the produces an event, and without which cause such event
element of causation. would not have occurred”. 1 STATE BAR OF TEXAS,
TEXAS PATTERN JURY CHARGES PJC 2.04 (1987).
The statement of the element as “cause, or aid or A person procures a criminal prosecution if his actions
cooperate in causing”, appears to have originated in in the course of things bring it about, and if, but for
Flowers v. Central Power & Light Co., 314 S.W.2d his actions, the prosecution would not have occurred.
373, 375 (Tex.Civ.App.—Waco 1958, writ ref'd n.r.e.). Just as there may be more than one proximate cause
That case cites no authority for so broad an element of an event, a single prosecution may be procured by
*292 of causation. Prior decisions included among more than one person. The RESTATEMENT idea of
the required elements a stricter showing that defendant procurement does not, however, include the foreseeability
actually caused the prosecution. See Davidson v. First component of proximate cause, which requires that “the
State Bank, 310 S.W.2d 678, 680 (Tex.Civ.App.—El act or omission complained of must be such that a person
Paso 1958, no writ); Kirkland, 225 S.W.2d at 907–08; using ordinary care would have foreseen that the event, or
Meyer v. Viereck, 286 S.W. 894, 897 (Tex.Civ.App.— some similar event, might reasonably result therefrom.”
Galveston 1926, writ dism'd w.o.j.); Reed, 240 S.W. at Id. Foreseeability is not an appropriate requirement
351. Although as noted above several courts of appeals for procurement. An ordinary person simply cannot be
have recited the Flowers version of the elements of expected to foresee that his communication with law
malicious prosecution, several others have referred to enforcement officials either will or will not lead to a
the pre-Flowers version of the causation element. See criminal prosecution. There are too many participants in
McHenry v. Tom Thumb Page Drug Stores, 696 S.W.2d the process to foresee what the outcome of one person's
664, 665 (Tex.App.—Dallas 1985, writ dism'd); Blanton role in the investigatory process is likely to be.
v. Morgan, 681 S.W.2d 876, 878 (Tex.App.—El Paso
1984, writ ref'd n.r.e.); Fisher v. Beach, 671 S.W.2d 63, 66 The RESTATEMENT rule does not subject a person
(Tex.App.—Dallas 1984, no writ); Martin v. Trevino, 578 to liability for merely aiding or cooperating in causing
S.W.2d 763, 766 (Tex.Civ.App.—Corpus Christi 1978, a criminal prosecution. We agree that liability should
writ ref'd n.r.e.); Lloyd v. Almeda State Bank, 346 S.W.2d be thus restricted. Were it otherwise, persons only
947, 951 (Tex.Civ.App.—Waco 1961, writ ref'd n.r.e.). incidentally involved in a criminal investigation might find

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Browning-Ferris Industries, Inc. v. Lieck, 881 S.W.2d 288 (1994)

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–

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Browning-Ferris Industries, Inc. v. Lieck, 881 S.W.2d 288 (1994)

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.

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Browning-Ferris Industries, Inc. v. Lieck, 881 S.W.2d 288 (1994)

******
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.

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Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
126 S.Ct. 1204, 163 L.Ed.2d 1038, 74 USLW 4119, 06 Cal. Daily Op. Serv. 1491...

KeyCite Yellow Flag - Negative Treatment West Headnotes (5)


Declined to Extend by Jackson v. Rent-A-Center West, Inc., 9th Cir. 
(Nev.), September 9, 2009
126 S.Ct. 1204 [1] Alternative Dispute Resolution
Supreme Court of the United States Validity
Alternative Dispute Resolution
BUCKEYE CHECK CASHING, INC., Petitioner, Validity of assent
v. Challenges to the validity of arbitration
John CARDEGNA et al. agreements that are made “upon such
grounds as exist at law or in equity for
No. 04–1264.
the revocation of any contract,” within
|
meaning of Federal Arbitration Act provision
Argued Nov. 29, 2005.
stating that arbitration provisions are valid,
|
irrevocable, and enforceable “save upon such
Decided Feb. 21, 2006.
grounds as exist at law or in equity for
Synopsis the revocation of any contract,” include
Background: Borrowers brought putative class action specific challenges to the validity of the
lawsuit against lender, alleging that lender made illegal agreement to arbitrate and challenges to the
usurious loans disguised as check cashing transactions in contract as a whole, either on a ground that
violation of various state statutes. Lender filed motion to directly affects the entire agreement, such as
compel arbitration and to stay proceedings pursuant to fraudulent inducement, or on the ground that
provisions for arbitration contained in deferred deposit the illegality of one of the contract's provisions
and disclosure agreement signed by borrowers. The renders the whole contract invalid. 9 U.S.C.A.
Circuit Court, 15th Judicial Circuit, Palm Beach County, § 2.
Thomas H. Barkdull, III, J., denied motion, but the
671 Cases that cite this headnote
District Court of Appeal, 824 So.2d 228, reversed and
remanded. Borrowers petitioned for review. The Florida
Supreme Court, 894 So.2d 860, quashed and remanded, [2] Alternative Dispute Resolution
ruling that borrowers' claim that underlying contract was What law governs
illegal and void ab initio had to be resolved by trial court Alternative Dispute Resolution
before arbitration of other disputes could be compelled. Severability
Certiorari was granted. Federal Courts
Alternative dispute resolution
As a matter of substantive federal arbitration
[Holding:] The Supreme Court, Justice Scalia, held that law, an arbitration provision is severable from
claim that purportedly usurious contract containing an the remainder of the contract, and such law
arbitration provision was void for illegality was to be applies in either state or federal courts.
determined by arbitrator, not court.
201 Cases that cite this headnote

Reversed and remanded.


[3] Alternative Dispute Resolution
Existence and validity of agreement
Justice Thomas filed dissenting opinion.
In either state or federal courts, unless
Justice Alito did not participate. a challenge involving a contract with
an arbitration clause is to the contract's
arbitration clause itself, the issue of the

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
126 S.Ct. 1204, 163 L.Ed.2d 1038, 74 USLW 4119, 06 Cal. Daily Op. Serv. 1491...

contract's validity is considered by the arbitration agreement in a contract challenged as unlawful


arbitrator in the first instance. would violate state public policy and contract law.

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.

894 So.2d 860, reversed and remanded.

SCALIA, J., delivered the opinion of the Court, in


**1205 *440 Syllabus * which ROBERTS, C. J., and STEVENS, KENNEDY,
SOUTER, GINSBURG, and BREYER, JJ., joined.
For each deferred-payment transaction respondents
THOMAS, J., filed a dissenting opinion, post, p. 1211.
entered into with Buckeye **1206 Check Cashing, they
ALITO, J., took no part in the consideration or decision
signed an Agreement containing provisions that required
of the case.
binding arbitration to resolve disputes arising out of
the Agreement. Respondents sued in Florida state court,
alleging that Buckeye charged usurious interest rates Attorneys and Law Firms
and that the Agreement violated various Florida laws,
rendering it criminal on its face. The trial court denied Amy L. Brown, Pierre H. Bergeron, Squire, Sanders &
Buckeye's motion to compel arbitration, holding that a Dempsey LLP, Washington, DC, Christopher Landau,
court rather than an arbitrator should resolve a claim Counsel of Record, Michael Shumsky, Kirkland & Ellis
that a contract is illegal and void ab initio. A state LLP, Washington, DC, for petitioner.
appellate court reversed, but was in turn reversed by the
Florida Supreme Court, which reasoned that enforcing an

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Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
126 S.Ct. 1204, 163 L.Ed.2d 1038, 74 USLW 4119, 06 Cal. Daily Op. Serv. 1491...

of limitations and shall honor claims of privilege


E. Clayton Yates, Yates & Mancini, LLC, Fort recognized by law ... .” App. 36, 38, 40, 42.
Pierce, Florida, Christopher C. Casper, James, Hoyer,
Newcomer, & Smiljanich, P.A., Tampa, Florida, Richard Respondents brought this putative class action in Florida
A. Fisher, Richard Fisher Law Office, Cleveland, state court, alleging that Buckeye charged usurious
Tennessee, F. Paul Bland, Jr., Counsel of Record, interest rates and that the Agreement violated various
Michael J. Quirk, Trial Lawyers for Public Justice, Florida lending and consumer-protection laws, rendering
P.C., Washington, DC, Arthur H. Bryant, Leslie A. it criminal on its face. Buckeye moved to compel
Bailey, Trial Lawyers for Public Justice, P.C., Oakland, arbitration. The trial court denied the motion, holding
California, for Respondents. that a court rather than an arbitrator should resolve
a claim that a contract is illegal and void ab initio.
Opinion
The District Court of Appeal of Florida for the Fourth
Justice SCALIA delivered the opinion of the Court. District reversed, holding that because respondents did
not challenge the arbitration provision itself, but instead
*442 We decide whether a court or an arbitrator claimed that the entire contract was void, the agreement
should consider the claim that a contract containing an to arbitrate was enforceable, and the question of the
arbitration provision is void for illegality. contract's legality should go to the arbitrator.

Respondents appealed, and the Florida Supreme Court


reversed, reasoning that to enforce an agreement to
I
arbitrate in a contract challenged as unlawful “ ‘could
Respondents John Cardegna and Donna Reuter breathe life into a contract that not only violates state law,
entered into various deferred-payment transactions with but also is criminal in nature ... .’ ” 894 So.2d 860, 862
petitioner Buckeye Check Cashing (Buckeye), in which (2005) (quoting Party Yards, Inc. v. Templeton, 751 So.2d
they received cash in exchange for a personal check in 121, 123 (Fla.App.2000)). We granted certiorari. 545 U.S.
the amount of the cash plus a finance charge. For each 1127, 125 S.Ct. 2937, 162 L.Ed.2d 864 (2005).
separate transaction they signed a “Deferred Deposit and
Disclosure Agreement” (Agreement), which included the
following arbitration provisions: II
“1. Arbitration Disclosure By signing this Agreement,
you agree that i[f] a dispute of any kind arises out of A
this Agreement or your application therefore or any
instrument relating thereto, th[e]n either you or we or [1] To overcome judicial resistance to arbitration,
third-parties involved can choose to have that dispute Congress enacted the Federal Arbitration Act (FAA), 9
resolved by binding arbitration as set forth in Paragraph U.S.C. §§ 1–16. Section 2 embodies the national policy
2 below .... favoring arbitration and places arbitration agreements on
equal footing with all other contracts:
“2. Arbitration Provisions Any claim, dispute, or
controversy ... arising from or relating to this **1208 “A written provision in ...
Agreement ... or the validity, enforceability, or scope a contract ... to settle by arbitration
of this Arbitration Provision or the entire Agreement a controversy thereafter arising out
(collectively ‘Claim’), shall be resolved, upon the of such *444 contract ... or an
election of you or us or said third-parties, by agreement in writing to submit to
binding arbitration .... This arbitration Agreement is arbitration an existing controversy
made pursuant to a transaction involving interstate arising out of such a contract ...
commerce, and shall be governed *443 by the Federal shall be valid, irrevocable, and
Arbitration Act (‘FAA’), 9 U.S.C. Sections 1–16. enforceable, save upon such grounds
The arbitrator shall apply applicable substantive law as exist at law or in equity for the
constraint [sic] with the FAA and applicable statu[t]es revocation of any contract.”

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
126 S.Ct. 1204, 163 L.Ed.2d 1038, 74 USLW 4119, 06 Cal. Daily Op. Serv. 1491...

Challenges to the validity of arbitration agreements “upon


such grounds as exist at law or in equity for the revocation
of any contract” can be divided into two types. One type B
challenges specifically the validity of the agreement to
[2] [3] [4] Prima Paint and Southland answer
arbitrate. See, e.g., Southland Corp. v. Keating, 465 U.S.
the question presented here by establishing three
1, 4–5, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984) (challenging
propositions. First, as a matter of substantive federal
the agreement to arbitrate as void under California law
arbitration law, an arbitration provision is severable from
insofar as it purported to cover claims brought under the
the remainder of the contract. Second, unless the challenge
state Franchise Investment Law). The other challenges the
is to the arbitration clause itself, *446 the issue of the
contract as a whole, either on a ground that directly affects
contract's validity is considered by the arbitrator in the
the entire agreement (e.g., the agreement was fraudulently
first instance. Third, this arbitration law applies in state as
induced), or on the ground that the illegality of one of the
well as federal courts. The parties have not requested, and
contract's provisions renders the whole contract invalid. 1 we do not undertake, reconsideration of those holdings.
Respondents' claim is of this second type. The crux of the Applying them to this case, we conclude that because
complaint is that the contract as a whole (including its respondents challenge the Agreement, but not specifically
arbitration provision) is rendered invalid by the usurious its arbitration provisions, those provisions are enforceable
finance charge. apart from the remainder of the contract. The challenge
should therefore be considered by an arbitrator, not a
In Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 court.
U.S. 395, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967), we
addressed the question of who—court or arbitrator— In declining to apply Prima Paint's rule of severability, the
decides these two types of challenges. The issue in the case Florida Supreme Court relied on the distinction between
was “whether a claim of fraud in the inducement of the void and voidable contracts. “Florida public policy and
entire contract is to be resolved by the federal *445 court, contract law,” it concluded, permit “no severable, or
or whether the matter is to be referred to the arbitrators.” salvageable, parts of a contract found illegal and void
Id., at 402, 87 S.Ct. 1801. Guided by § 4 of the FAA, 2 under Florida law.” 894 So.2d, at 864. Prima Paint makes
we held that “if the claim is fraud in the inducement of this conclusion irrelevant. That case rejected application
the arbitration clause itself—an issue which goes to the of state severability rules to the arbitration agreement
making of the agreement to arbitrate—the federal court without discussing whether the challenge at issue would
may proceed to adjudicate it. But the statutory language have rendered the contract void or voidable. See 388 U.S.,
does not permit the federal court to consider claims of at 400–404, 87 S.Ct. 1801. Indeed, the opinion expressly
fraud in the inducement of the contract generally.” Id., disclaimed any need to decide what state-law remedy
at 403–404, 87 S.Ct. 1801 (internal quotation marks and was available, id., at 400, n. 3, 87 S.Ct. 1801 (though
footnote omitted). We rejected the view that the question Justice Black's dissent asserted that state law rendered
of “severability” was one of state law, so that if state the contract void, id., at 407, 87 S.Ct. 1801). Likewise
law held the arbitration provision not to be severable a in Southland, which arose in state court, we did not
challenge to the contract as a whole would be decided by ask whether the several challenges made there—fraud,
the court. See id., at 400, 402–403, 87 S.Ct. 1801. misrepresentation, breach of contract, breach of fiduciary
duty, and violation of the California Franchise Investment
Subsequently, in Southland Corp., we held that the FAA Law—would render the contract void or voidable. We
“create[d] a body of **1209 federal substantive law,” simply rejected the proposition that the enforceability of
which was “applicable in state and federal courts.” 465 the arbitration agreement turned on the state legislature's
U.S., at 12, 104 S.Ct. 852 (internal quotation marks judgment concerning the forum for enforcement of the
omitted). We rejected the view that state law could bar state-law cause of action. See 465 U.S., at 10, 104 S.Ct.
enforcement of § 2, even in the context of state-law claims 852. So also here, we cannot accept the Florida Supreme
brought in state court. See id., at 10–14, 104 S.Ct. 852; see Court's conclusion that enforceability of the arbitration
also Allied–Bruce Terminix Cos. v. Dobson, 513 U.S. 265, agreement should turn on “Florida public policy and
270–273, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995). contract law,” 894 So.2d, at 864.

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Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
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provision “upon such grounds as exist at law or in equity


for the revocation of any contract.” (Emphasis added.)
There can be no doubt that “contract” as used this last
*447 C
time must include contracts that later prove to be void.
Respondents assert that Prima Paint's rule of severability Otherwise, the grounds for revocation would be limited
does not apply in state court. They argue that Prima Paint to those that rendered a contract voidable—which would
interpreted only §§ 3 and 4—two of the FAA's procedural mean (implausibly) that an arbitration agreement could
provisions, which appear to apply by their terms only be challenged as voidable but not as void. Because the
in federal court—but not § 2, the only provision that sentence's final use of “contract” so obviously includes
we have applied in state court. This does not accurately putative contracts, we will not read the same word earlier
describe Prima Paint. Although § 4, in particular, had in the same sentence to have a more narrow meaning. 3 We
much to do with Prima Paint's understanding of the rule note that neither Prima Paint nor Southland lends support
of severability, see 388 U.S., at 403–404, 87 S.Ct. 1801, to respondents' reading; as we have discussed, neither case
this rule ultimately arises out of § 2, the FAA's substantive turned on whether the challenge at issue would render the
command that arbitration agreements be treated like all contract voidable or void.
other contracts. The rule of severability establishes how
this equal-footing guarantee for “a written [arbitration]
provision” is to be implemented. Respondents' **1210
***
reading of Prima Paint as establishing nothing more
than a federal-court rule of procedure also runs contrary It is true, as respondents assert, that the Prima Paint
to Southland's understanding of that case. One of the rule permits a court to enforce an arbitration agreement
bases for Southland's application of § 2 in state court in a contract that the arbitrator later finds to be void.
was precisely Prima Paint's “reli[ance] for [its] holding on But it is equally true that respondents' approach permits
Congress' broad power to fashion substantive rules under a court to deny effect to an arbitration provision in a
the Commerce Clause.” 465 U.S., at 11, 104 S.Ct. 852; see contract that *449 the court later finds to be perfectly
also Prima Paint, supra, at 407, 87 S.Ct. 1801 (Black, J., enforceable. Prima Paint resolved this conundrum—and
dissenting) (“[t]he Court here holds that the [FAA], as a resolved it in favor of the separate enforceability of
matter of federal substantive law ...” (emphasis added)). arbitration provisions. We reaffirm today that, regardless
Southland itself refused to “believe Congress intended of whether the challenge is brought in federal or state
to limit the Arbitration Act to disputes subject only to court, a challenge to the validity of the contract as a whole,
federal-court jurisdiction.” 465 U.S., at 15, 104 S.Ct. 852. and not specifically to the arbitration clause, must go to
the arbitrator.
[5] Respondents point to the language of § 2, which
renders “valid, irrevocable, and enforceable” “a written **1211 The judgment of the Florida Supreme Court is
provision in” or “an agreement in writing to submit reversed, and the case is remanded for further proceedings
to arbitration an existing controversy arising out of” a not inconsistent with this opinion.
“contract.” Since, respondents argue, the only arbitration
agreements to which § 2 applies are those involving It is so ordered.
a “contract,” and since an agreement void ab initio
under state law is not a “contract,” there is no “written Justice ALITO took no part in the consideration or
provision” in or “controversy arising out of” a “contract,” decision of this case.
to which § 2 can apply. This argument echoes *448
Justice Black's dissent in Prima Paint: “Sections 2 and
3 of the Act assume the existence of a valid contract.
They merely provide for enforcement where such a valid Justice THOMAS, dissenting.
contract exists.” 388 U.S., at 412–413, 87 S.Ct. 1801. I remain of the view that the Federal Arbitration Act
We do not read “contract” so narrowly. The word (FAA), 9 U.S.C. § 1 et seq., does not apply to proceedings
appears four times in § 2. Its last appearance is in the in state courts. See Allied–Bruce Terminix Cos. v. Dobson,
final clause, which allows a challenge to an arbitration 513 U.S. 265, 285–297, 115 S.Ct. 834, 130 L.Ed.2d

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006)
126 S.Ct. 1204, 163 L.Ed.2d 1038, 74 USLW 4119, 06 Cal. Daily Op. Serv. 1491...

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Cantella & Co., Inc. v. Goodwin, 924 S.W.2d 943 (1996)
39 Tex. Sup. Ct. J. 856

Courts must resolve any doubts about


agreement to arbitrate in favor of arbitration.
KeyCite Yellow Flag - Negative Treatment 9 U.S.C.A. § 1 et seq.
Distinguished by Morella v. Andonov, Tex.App.-Hous. (1 Dist.), 
December 20, 2001 34 Cases that cite this headnote
924 S.W.2d 943
Supreme Court of Texas.
[4] Alternative Dispute Resolution
CANTELLA & CO., INC., Relator, Evidence
v. Party opposing arbitration agreement bears
The Honorable Gerald A. burden of defeating it. 9 U.S.C.A. § 1 et seq.
GOODWIN, Judge, Respondent.
16 Cases that cite this headnote
No. 95–0819.
| [5] Alternative Dispute Resolution
June 28, 1996. Elements
Securities broker filed petition for writ of mandamus, Alternative Dispute Resolution
seeking relief from trial court's order denying arbitration Discretion
of city's suit against broker arising from securities Alternative Dispute Resolution
transaction. The Supreme Court held that: (1) Remedies and Proceedings for
arbitration provision was sufficiently conspicuous, and (2) Enforcement in General
noncompliance with National Association of Securities Once party seeking to compel arbitration
Dealers (NASD) rules did not render arbitration establishes that agreement exists under
agreement void. Federal Arbitration Act (FAA), and that
claims raised are within agreement's scope,
Writ conditionally granted. trial court has no discretion but to compel
arbitration and stay its proceedings pending
arbitration. 9 U.S.C.A. § 1 et seq.
West Headnotes (8)
43 Cases that cite this headnote

[1] Alternative Dispute Resolution [6] Alternative Dispute Resolution


Arbitration favored; public policy Agreements to arbitrate
Federal and state law strongly favor Arbitration provision in client's agreement
arbitration. 9 U.S.C.A. § 1 et seq. between city and securities broker was
sufficiently conspicuous; provision was
33 Cases that cite this headnote
separately numbered and captioned in bold
print, and entire arbitration provision, unlike
[2] Alternative Dispute Resolution other provisions in the agreement, was typed
Evidence in all capital letters.
Presumption exists in favor of agreements
6 Cases that cite this headnote
to arbitrate under Federal Arbitration Act
(FAA). 9 U.S.C.A. § 1 et seq.
[7] Alternative Dispute Resolution
67 Cases that cite this headnote Agreements to arbitrate
Even though disclosure warning of arbitration
[3] Alternative Dispute Resolution was located at bottom of client's agreement,
Construction in favor of arbitration instead of immediately above signature line as

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Cantella & Co., Inc. v. Goodwin, 924 S.W.2d 943 (1996)
39 Tex. Sup. Ct. J. 856

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Cantella & Co., Inc. v. Goodwin, 924 S.W.2d 943 (1996)
39 Tex. Sup. Ct. J. 856

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,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Cantella & Co., Inc. v. Goodwin, 924 S.W.2d 943 (1996)
39 Tex. Sup. Ct. J. 856

All Citations

924 S.W.2d 943, 39 Tex. Sup. Ct. J. 856

Footnotes
1 See 9 U.S.C. § 1 et seq.

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Capital Income Properties-LXXX v. Blackmon, 843 S.W.2d 22 (1992)

KeyCite Yellow Flag - Negative Treatment Attorneys and Law Firms


Distinguished by Loy v. Harter, Tex.App.-Texarkana, February 10, 2004 
843 S.W.2d 22 *22 Kelly M. Crawford and C. Kent Adams, Dallas,
Supreme Court of Texas. Scott G. Campbell, New York City, for relators.

CAPITAL INCOME PROPERTIES–LXXX; Cary N. Goldberg, Chicago, IL, Thomas L. Busby,


CRI, Inc.; William B. Dockser; Martin C. Corpus Christi, Ronald A. Schy, Chicago, IL, Kathryn
F. Green, Corpus Christi, Bruce W. Collins, Dallas, for
Schwartzberg; H. William Willoughby;
respondent.
C.R.C.C. of Corpus Christi, Ltd.; CRICO–
Texas Growth Partners Limited Partnership Opinion
and Crico Securities Corporation, Relators,
v. PER CURIAM.
The Honorable Robert M. Capital Income Properties–LXXX and seven other
BLACKMON, Judge, Respondent. defendants (collectively CIP) have filed a motion for leave
to file a petition for writ of mandamus, requesting that
No. D–2848.
we direct the trial court to compel arbitration of the
|
claims raised by thirty plaintiffs in the underlying suit.
Dec. 16, 1992.
Concluding that CIP has established that the trial court
Limited partnership petitioned for writ of mandamus abused its discretion in refusing to order arbitration and
to compel arbitration of limited partners' claims against that CIP does not have an adequate remedy by appeal, we
limited partnership. The Supreme Court held that conditionally grant the relief requested. 1
arbitration was required.
Plaintiffs, residents of fourteen different states, purchased
Petition granted. shares in CIP, a District *23 of Columbia limited
partnership formed to develop and operate a Corpus
Christi hotel. Article 12.01 of the limited partnership
agreement provided that “any dispute, controversy or
West Headnotes (1)
claim arising out of or in connection with or relating to
this Agreement ... shall, upon the request of any party
[1] Alternative Dispute Resolution involved, be submitted to and settled by arbitration....”
Disputes and Matters Arbitrable Under Plaintiffs filed suit in 1991, seeking return of their
Agreement initial investments plus damages based on fraud, breach
Limited partners' claims that limited of fiduciary duty, negligent misrepresentation, and
partnership breached fiduciary duty in violation of the Deceptive Trade Practices Act. Urging
operating and managing partnership, the application of the Texas General Arbitration Act,
repeatedly misrepresenting financial health TEX.REV.CIV.STAT.ANN. art. 224—238–6 (the Texas
of operation, and fraudulently inducing Act), and the Federal Arbitration Act, 9 U.S.C. § 1–16 (the
investments arose out of and related to Federal Act), CIP requested that the trial court compel
limited partnership agreement, and, thus, arbitration.
arbitration was required under provision
of agreement requiring arbitration of any At the conclusion of a hearing on the motion to compel
dispute, controversy, or claim arising out of or arbitration, the trial court determined that the agreement
in connection with or relating to agreement. to arbitrate was binding and enforceable but that the
claims raised were not within the scope of the arbitration
42 Cases that cite this headnote clause. CIP's request for mandamus relief from the
Thirteenth Court of Appeals was denied.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Capital Income Properties-LXXX v. Blackmon, 843 S.W.2d 22 (1992)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


CASH BIZ, LP v. HENRY, Not Reported in S.W.3d (2016)
2016 WL 4013794

borrowing parties' alleged causes of action fall within


the scope of the arbitration provision contained within
KeyCite Yellow Flag - Negative Treatment the loan documents, and if so, (2) whether Cash Biz
Declined to Follow by Vine v. Pls Financial Services, Inc., W.D.Tex., 
waived the right to enforce the arbitration provision
August 11, 2016
because it substantially invoked the judicial process by
2016 WL 4013794
filing criminal complaints against the borrowing parties.
Only the Westlaw citation is currently available.
Dependent upon whether the arbitration provision
SEE TX R RAP RULE 47.2 FOR applies, the parties also dispute whether the Plaintiff
DESIGNATION AND SIGNING OF OPINIONS. borrowing parties waived the ability to proceed through a
class action.
Court of Appeals of Texas,
San Antonio. We conclude the Plaintiff borrowing parties' causes of
action fall within the scope of the parties' arbitration
CASH BIZ, LP, Redwood Financial, LLC, agreement, and Cash Biz's filing of a criminal complaint
Cash Zone, LLC dba Cash Biz, Appellants was not an act that substantially invoked the judicial
v. process to constitute waiver of this agreement. We
Hiawatha HENRY, Addie Harris, Montray Norris, conclude the Plaintiff borrowing parties waived the right
and Roosevelt Coleman Jr., et al., Appellees to bring a class action. Accordingly, we reverse the
trial court's order denying Cash Biz's motion to compel
No. 04-15-00469-CV arbitration and denying Cash Biz's motion to enforce the
| class action waiver provision. We render an order granting
Delivered and Filed: July 27, 2016 Cash Biz's motion. We remand for arbitration.

From the 166th Judicial District Court, Bexar County,


Texas, Trial Court No. 2015-CI-01545, Honorable Laura
Salinas, Judge Presiding. FACTUAL BACKGROUND

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.

Also as part of the process of obtaining the loan,


borrowers signed written credit service agreements
MEMORANDUM OPINION
along with disclosure statements, promissory notes, and
Opinion by: Jason Pulliam, Justice security agreements (collectively, “Loan Contracts”).
Each written credit service agreement contained
a provision entitled “Waiver of Jury Trial and
INTRODUCTION
Arbitration Provision” (hereinafter referred to as
*1 This appeal arises from the trial court's denial of “arbitration provision”). This arbitration provision
a motion to compel arbitration and to enforce a class requires arbitration of any of the following “disputes”:
action waiver provision contained within loan documents
between the Cash Biz appellants and its customers.
The issues on appeal are: (1) whether the Plaintiff

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


CASH BIZ, LP v. HENRY, Not Reported in S.W.3d (2016)
2016 WL 4013794

OF CLAIMANTS IN ANY LAWSUIT FILED


the words “dispute and “disputes” are given the AGAINST US ....
broadest possible meaning and include, without
limitation Finally, the arbitration provision contains a waiver of
class action in arbitration provision, which states,
• (a) claims, disputes, or controversies arising from or
relating directly or indirectly to the signing of this all disputes ... shall be
Arbitration Provision, the validity and scope of this resolved by binding arbitration
Arbitration Provision and any claim or attempt to set only on an individual
aside this Arbitration Provision; basis with you. THEREFORE,
THE ARBITRATOR SHALL
• (b) all federal or state law claims ... arising from or NOT CONDUCT CLASS
relating directly or indirectly to this Agreement ..., ARBITRATION ....
any past and/or future claims or disputes between you Notwithstanding any other
and us and/or any Lender who provides you with a provision herein to the contrary,
loan as a result of our services; ... the validity, effect, enforceability of
this waiver of class action lawsuit
*2 • (d) all common law claims, based upon contract,
and class-wide arbitration shall be
tort, fraud, or other intentional torts;
determined solely by a court of
• (e) all claims based upon a violation of any state or competent jurisdiction and not by
federal constitution, statute, or regulation; the arbitrator.

• (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.

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brought by the Borrowing Parties. In addition, the trial


court concluded Cash Biz waived its right to arbitration
by substantially invoking the judicial process when it
PROCEDURAL BACKGROUND
“filed criminal charges against Plaintiffs, participated
On January 30, 2015, the Borrowing Parties filed a in criminal trials, obtained criminal judgments, and
class action petition on behalf of themselves and all attempted to collect from Plaintiffs.” Cash Biz perfected
this interlocutory appeal pursuant to Texas Civil Practice
others similarly situated in Texas, 1 alleging Cash Biz: (1)
and Remedies Code Sections 51.016 and 171.098.
illegally and wrongfully used the criminal justice system
to collect payday loans through the wrongful filing of
criminal charges; (2) illegally and wrongfully threatened
its customers with criminal prosecution for failure to ANALYSIS
repay payday loans in violation of the Texas Finance
Code, Texas Penal Code, and Texas Constitution; and
Burden of Proof to Compel Arbitration
(3) illegally and wrongfully classified post-dated checks
as bad checks and pursued criminal charges against its A party seeking to compel arbitration bears the burden to
customers in violation of the Finance Code and Penal establish (1) the existence of a valid agreement to arbitrate;
Code. The Borrowing Parties alleged Cash Biz engaged in and (2) the claims in dispute fall within the scope of the
the described conduct knowing it was in violation of the arbitration agreement. In re Rubiola, 334 S.W.3d 220,
law. 2 223 (Tex. 2011); J.M. Davidson v. Webster, 128 S.W.3d
223, 227 (Tex. 2003). If the party seeking arbitration
*3 Based upon these allegations, the Borrowing Parties meets its two-pronged burden to establish the agreement's
pled specific causes of action of malicious prosecution, validity and scope, the burden shifts to the party opposing
fraud, violation of the DTPA, and violation of Finance arbitration to raise an affirmative defense to enforcement
Code Section 393.301. Cash Biz filed a motion to compel of the arbitration agreement, such as, in this case, waiver
arbitration under the Loan Contracts and to enforce of arbitration. Venture Cotton Co-op. v. Freeman, 435
the class action waiver provision within the arbitration S.W.3d 222, 227 (Tex. 2014); J.M. Davidson, 128 S.W.3d
provision. Cash Biz requested that the trial court compel at 227.
individual arbitration with each Plaintiff and stay the
action pending completion of the individual arbitrations.
Standard of Review
At the conclusion of the hearing on the motion, the trial
court denied Cash Biz's motion to compel and enforce the An appellate court will review a trial court's order denying
arbitration and class action waiver provisions and signed a motion to compel arbitration for an abuse of discretion,
a written order finding: deferring to the trial court's factual determinations if
they are supported by the record and reviewing legal
(1) the plaintiffs' claims “relate solely to Cash Biz's
determinations de novo. In re Labatt Food Serv., L.P.,
illegal use of the criminal justice system to enforce a
279 S.W.3d 640, 643 (Tex. 2009) (orig. proceeding);
civil debt”;
Bonded Builders Home Wty Ass'n of Texas, Inc. v. Smith,
(2) the challenged conduct occurred after the expiration 05-15-00964-CV, 2016 WL 1612916, at *3 (Tex. App.—
of any contracts entered into by the Borrowing Dallas Apr. 21, 2016, no. pet. h.); Garcia v. Huerta, 340
Parties; and S.W.3d 864, 868 (Tex. App.—San Antonio 2011, pet.
denied). A trial court's determination whether a valid
(3) all of the damages are “solely related to criminal arbitration agreement exists and whether the claims in
fines, jail time, and loss of reputation related to dispute fall within the scope of an arbitration agreement
plaintiffs' criminal convictions.” are legal determinations subject to de novo review. In
re Labatt, 279 S.W.3d at 643; J.M. Davidson, Inc., 128
Based on these findings, the trial court concluded the S.W.3d at 227. If the moving party satisfies its burden of
arbitration provision and class action waiver within the proof, the trial court has no discretion but to grant the
Loan Contracts are “not applicable” to the type of action

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motion to compel arbitration unless the opposing party


satisfies its burden to prove an affirmative defense. Henry
v. Gonzalez, 18 S.W.3d 684, 688-89 (Tex. App.—San
Applicable Law
Antonio 2000, pet. dism'd by agrm't); Dallas Cardiology
Assoc., P.A. v. Mallick, 978 S.W.2d 209, 212 (Tex. App.— When determining whether a particular claim falls within
Texarkana 1998, writ denied). the scope of an arbitration agreement, courts employ a
strong presumption in favor of arbitration. In re Rubiola,
*4 In this case, the only affirmative defense at issue is 334 S.W.3d at 225; Prudential Sec. Inc. v. Marshall, 909
waiver of the right to arbitrate. Determination whether S.W.2d 896, 899 (Tex. 1995). Any doubt as to whether
a party waived its right to arbitrate presents a question a claim falls within the scope of a valid arbitration
of law subject to de novo review. Sedillo v. Campbell, 5 agreement must be resolved in favor of arbitration. In
S.W.3d 824, 826 (Tex. App.—Houston [14th Dist.] 1999). re Rubiola, 334 S.W.3d at 225; Prudential Sec. Inc., 909
If the opposing party satisfies its burden, the trial court S.W.2d at 899.
must deny the motion to compel arbitration. See Henry,
18 S.W.3d at 688-89; see also In re FirstMerit Bank, N.A., Under a broad arbitration clause, arbitration can
52 S.W.3d 749, 753 (Tex. 2001) (orig. proceeding); In re be compelled even though a particular dispute that
Washington Mut. Fin., L.P., 173 S.W.3d 189, 192 (Tex. arises between the parties does not specifically pertain
App.—Corpus Christi 2005, no pet.). to formation of, or obligations created by, the
originating contract. See In re Conseco Fin. Servicing
Corp., 19 S.W.3d 562, 570 (Tex. App.—Waco 2000,
Issue One: Enforcement of the Arbitration Provision
orig. proceeding) (holding broad arbitration provision
On appeal, Cash Biz challenges the trial court's denial of
encompassed statutory and tort claims not based on
its motion to compel arbitration contending it satisfied its
the formation, negotiation, terms, or performance of
burden of proof to compel arbitration, and the Borrowing
contract); AutoNation USA Corp. v. Leroy, 105 S.W.3d
Parties failed to establish waiver. The parties do not
190, 197 (Tex. App.—Houston [14th Dist.] 2003, no pet.);
contest the first element of Cash Biz's burden of proof:
Hou-Scape, Inc. v. Lloyd, 945 S.W.2d 202, 205-06 (Tex.
whether a valid arbitration agreement exists. Instead,
App.—Houston [1st Dist.] 1997, no writ). To determine
Cash Biz's appellate argument focuses on the second
whether a claim falls within the scope of the agreement,
prong: whether the claims in dispute fall within the scope
courts must focus on the factual allegations outlined in the
of the parties' arbitration provision.
petition, rather than the legal causes of action asserted.
Prudential Sec. Inc., 909 S.W.2d at 899; Hou-Scape, Inc. v.
1. Cash Biz's Burden of Proof to Compel Arbitration: Lloyd, 945 S.W.2d at 205.
Whether the Borrowing Parties' asserted claims fall
within the scope of the arbitration provision *5 If the facts alleged in support of a cause of action
On appeal, Cash Biz argues it proved the Borrowing have a “significant relationship” to or are “factually
Parties' claims fall within the scope of the arbitration intertwined” with an underlying contract that contains
provision because the supporting factual allegations, the arbitration agreement, then the asserted cause of
contending Cash Biz used the criminal justice system to action is within the scope of the arbitration agreement.
enforce a civil debt arise out of the Loan Contract which See Pennzoil Co. v. Arnold Oil Co., 30 S.W.3d 494, 498
created the civil debt and which contains the arbitration (Tex. App.—San Antonio 2000, orig. proceeding); Hou-
provision. Cash Biz contends these factual allegations and Scape, Inc. v. Lloyd, 945 S.W.2d at 205-06. If the facts
basis of the action are encompassed within the broad alleged stand alone and are completely independent of
definition of “dispute” in the arbitration provision. the contract, the asserted cause of action is not subject to
arbitration. Pennzoil, 30 S.W.3d at 498.
The Borrowing Parties assert their claims are not based
on the parties' legal relationship created by the Loan
Contract, but arise independently based upon Cash Biz's Application
ancillary action of illegally initiating criminal prosecutions
against them.

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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

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CASH BIZ, LP v. HENRY, Not Reported in S.W.3d (2016)
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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,

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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,

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though the impetus for initiation of criminal process, is


insufficient to be construed as substantial invocation of a Here, the Borrowing Parties do not contest the validity of
judicial process. the class action waiver provision. Absent any argument or
basis to hold the class action waiver provision internally
invalid, this court must conclude it applies, and the trial
court erred by denying Cash Biz's motion to enforce the
Conclusion
class action waiver provision.
As in precedential and persuasive cases involving similar
or greater participation in litigation than occurred here, Cash Biz's second issue is sustained.
we decline to find waiver under these circumstances.
Consequently, the Borrowing Parties failed to satisfy their
burden of proof to establish Cash Biz waived its right CONCLUSION
to arbitration as a matter of law. Because the Borrowing
Parties failed to satisfy the first prong of their burden of For these reasons, the trial court's order denying Cash
proof, we do not address the remaining prong: whether the Biz's motion to compel arbitration and motion to enforce
Borrowing Parties were prejudiced by Cash Biz's actions. the class action waiver is reversed and order is rendered
granting this motion. The cause is remanded and stayed
Cash Biz's first issue is sustained. pending completion of individual arbitration.

Issue Two: Enforcement of the Class-Action Waiver


Provision Rebeca C. Martinez, Justice, dissenting
The class-action waiver provision is not an independent While I agree that the Borrowing Parties' claims against
agreement or provision, but is included within the Cash Biz in the underlying suit are factually intertwined
arbitration provision in the Loan Contracts. Therefore with the Loan Contracts, and thus fall within the broad
applicability of the class action waiver provision is scope of the Loan Contracts' arbitration agreement, I
dependent upon the validity and applicability of the disagree with the majority's conclusion that Cash Biz
arbitration provision. did not “substantially invoke the judicial process” and
thus did not waive its right to enforce the arbitration
Cash Biz contends the trial court erred by denying agreement. In my view, the Borrowing Parties met their
its motion to enforce the class action waiver provision burden to prove that Cash Biz waived its right to enforce
based upon the plain language of the provision, itself. arbitration by showing that Cash Biz filed criminal “bad
The Borrowing Parties argue generally that the class check” complaints against the Borrowing Parties in an
action waiver does not apply under these facts for the effort to collect restitution on the debts created by
same reasons and based upon the same arguments as the Loan Contracts, thereby substantially invoking the
that presented to dispel application of the arbitration judicial process to obtain a satisfactory result and causing
provision. the Borrowing Parties actual prejudice. 1 See Perry Homes
v. Cull, 258 S.W.3d 580, 584 (Tex. 2008) (stating the two-
*9 We have already concluded the Borrowing Parties' prong test for waiver). I therefore dissent to the portion of
asserted causes of action fall within the scope of the the majority opinion holding that the Borrowing Parties
arbitration provision, and therefore, the provision applies, failed to prove that Cash Biz waived its right to enforce
and further concluded Cash Biz did not waive its the arbitration agreement by substantially invoking the
right to arbitration. This conclusion necessarily compels judicial process.
application of the class action waiver contained therein.
Therefore, the class-action waiver contained within the As the majority notes, the relevant issue presented on
arbitration provision must also apply, unless shown to appeal is whether Cash Biz's action in filing criminal
be independently invalid. See NCP Fin. Ltd. P'ship v. bad check complaints against the Borrowing Parties
Escatiola, 350 S.W.3d 152, 155 (Tex. App.—San Antonio was sufficient to constitute substantial invocation of the
2011, no pet.). judicial process, waiving its contractual right to arbitrate

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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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


CASH BIZ, LP v. HENRY, Not Reported in S.W.3d (2016)
2016 WL 4013794

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

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CASH BIZ, LP v. HENRY, Not Reported in S.W.3d (2016)
2016 WL 4013794

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 11


CASH BIZ, LP v. HENRY, Not Reported in S.W.3d (2016)
2016 WL 4013794

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


Coker v. Coker, 650 S.W.2d 391 (1983)

755 Cases that cite this headnote


KeyCite Yellow Flag - Negative Treatment
Distinguished by Castro v. Castro, Tex.App.-Hous. (14 Dist.), May 9, 
2013
[2] Contracts
650 S.W.2d 391 Construing whole contract together
Supreme Court of Texas. No single contractual provision taken alone
will be given controlling effect; rather, all
Mac L. COKER, Jr., Petitioner, provisions must be considered with reference
v. to the whole instrument.
Frances Kincaid COKER, Respondent.
277 Cases that cite this headnote
No. C–1728.
|
[3] Contracts
May 4, 1983.
Conflicting clauses in general
|
In harmonizing contractual provisions, terms
Rehearing Denied June 8, 1983.
stated earlier in an agreement must be favored
Divorced wife brought action against former husband to over subsequent terms.
recover under the terms of property settlement agreement
38 Cases that cite this headnote
incorporated into their divorce decree. The District Court,
Court No. 134, Dallas County, Burnett, J., entered
summary judgment in favor of divorced wife, and husband [4] Contracts
appealed. The Dallas Court of Appeals, Fifth Supreme Existence of ambiguity
Judicial District, Akin, J., affirmed, and appeal was taken. Contracts
The Supreme Court, Barrow, J., held that substantial fact Ambiguity in general
issue existed as to whether former husband agreed to pay
If written instrument is so worded that it can
wife a specified amount of money or whether wife was
be given a certain or definite legal meaning or
merely assigned all of husband's interest in real estate
interpretation, then it is not ambiguous and
commissions, precluding summary judgment.
court will construe the contract as a matter of
law.
Reversed and remanded.
1053 Cases that cite this headnote
Spears, J., dissented and filed opinion in which Pope, C.J.,
and Ray and Robertson, JJ., joined.
[5] Contracts
Existence of ambiguity
A contract is ambiguous when its meaning
West Headnotes (11) is uncertain and doubtful or it is reasonably
susceptible to more than one meaning.
[1] Contracts
295 Cases that cite this headnote
Construing whole contract together
In construing a written contract, primary
concern of court is to ascertain the true [6] Contracts
intentions of parties as expressed in the Ambiguity in general
instrument, and to achieve that objective, Whether a contract is ambiguous is a question
courts should examine and consider the entire of law for court to decide by looking at
writing in an effort to harmonize and give contract as a whole in light of circumstances
effect to all provisions of the contract so that present when the contract was entered.
none will be rendered meaningless.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Coker v. Coker, 650 S.W.2d 391 (1983)

or whether wife was merely assigned all of


266 Cases that cite this headnote husband's interest in real estate commissions,
precluding summary judgment.
[7] Judgment
6 Cases that cite this headnote
Contract cases in general
When contract contains an ambiguity, the
granting of a motion for summary judgment
is improper because the interpretation of the
Attorneys and Law Firms
instrument becomes a fact issue.
*392 Akin, Gump, Strauss, Hauer & Feld, Emil Lippe,
142 Cases that cite this headnote
Jr. and Ruth Abboud Cross, Dallas, for petitioner.

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Coker v. Coker, 650 S.W.2d 391 (1983)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Coker v. Coker, 650 S.W.2d 391 (1983)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Coker v. Coker, 650 S.W.2d 391 (1983)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Coker v. Coker, 650 S.W.2d 391 (1983)

“up to the guaranteed sum of $25,000.” No draftsman


could have made it any plainer. The finding of an
ambiguity in this language, which is neither negated nor POPE, C.J., and RAY and ROBERTSON, JJ., join in this
qualified elsewhere in the contract, expressly or impliedly, dissent.
is without justification.
All Citations
I would, therefore, affirm the judgment of the court of
650 S.W.2d 391
appeals, and hold that Mac agreed to pay Frances the
$25,000, and that she is entitled to recover the balance of
$10,682.84 from him.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

accounts and their chosen line of business, so as to state a


claim for violation of procedural due process.
132 F.Supp.3d 98
United States District Court,
District of Columbia. Motions to dismiss granted in part and denied in part, and
motion to amend granted.
Community Financial Services Association
of America, Ltd., et al., Plaintiffs,
v.
Federal Deposit Insurance West Headnotes (53)
Corporation, et al., Defendants.
[1] Consumer Credit
Case No. 14–CV–953 (GK)
Regulations in general
|
Signed September 25, 2015 Consumer Financial Protection Bureau
(CFPB) has authority to supervise payday
Synopsis lenders and promulgate regulations pertaining
Background: National trade association representing to payday lending. 12 U.S.C.A. § 5491(a).
payday lenders, together with payday lender, brought
action against Federal Deposit Insurance Corporation Cases that cite this headnote
(FDIC), Board of Governors of Federal Reserve System,
and Office of Comptroller of Currency (OCC), seeking [2] Banks and Banking
declaratory and injunctive relief to set aside certain In general; nature and status
informal guidance documents and other actions by
Banks and Banking
defendants as part of their alleged participation in United
Powers, functions and dealings in general
States Department of Justice (DOJ)-initiated campaign
to force banks to terminate their business relationships Federal Deposit Insurance Corporation
with payday lenders. Defendants filed motions to dismiss. (FDIC) is an independent agency that acts
Plaintiffs filed motion for leave to file second amended as the primary federal regulator for certain
complaint. state-chartered banks, in which capacity
it prescribes standards to promote banks'
safety and soundness, either by regulation or
guideline; the agency also examines banks,
Holdings: The District Court, Gladys Kessler, J., held that: prepares examination reports, and brings
enforcement actions.
[1] plaintiffs had standing to bring this action;
Cases that cite this headnote
[2] plaintiffs' claims were not moot, notwithstanding
FDIC's issuance of two new guidance documents;
[3] Banks and Banking
Regulation and supervision in general
[3] the agency actions in question were neither final agency
actions nor binding norms and, thus, were not subject to Building and Loan Associations
judicial review under the Administrative Procedure Act Regulation in general
(APA); Office of the Comptroller of the Currency
(OCC) is an independent bureau within the
[4] plaintiffs sufficiently stated a claim for which due United States Department of the Treasury
process protections applied; and that functions as the primary supervisor
of federally chartered “national” banks and
[5] plaintiffs sufficiently alleged that their liberty interests savings and loan associations; the OCC
were implicated by defendants' alleged actions and that administers statutory provisions governing
alleged stigma deprived them of their rights to bank most aspects of the federal banking system

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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

[4] Banks and Banking


Federal Reserve Board [9] Federal Courts
Board of Governors of the Federal Reserve Case or Controversy Requirement
System is a federal agency authorized to No principle is more fundamental to the
regulate and examine bank holding companies judiciary's proper role in this nation's
and state-chartered banks that are members of system of government than the constitutional
the Federal Reserve System. limitation of federal-court jurisdiction to
actual cases or controversies. U.S. Const. art.
Cases that cite this headnote 3, § 2, cl. 1.

Cases that cite this headnote


[5] Federal Courts
Limited jurisdiction; jurisdiction as
dependent on constitution or statutes [10] Federal Civil Procedure
As courts of limited jurisdiction, federal In general; injury or interest
courts possess only those powers specifically Federal Courts
granted to them by Congress or directly by the Injury, harm, causation, and redress
United States Constitution. One element of the case-or-controversy
requirement is that plaintiffs must establish
Cases that cite this headnote
that they have standing to sue. U.S. Const. art.
3, § 2, cl. 1.
[6] Federal Courts
Weight and sufficiency Cases that cite this headnote

Plaintiff bears the burden of establishing by a


preponderance of the evidence that the court [11] Federal Civil Procedure
has subject matter jurisdiction to hear the In general; injury or interest
case. Fed. R. Civ. P. 12(b)(1). Federal Civil Procedure
Causation; redressability
Cases that cite this headnote
Irreducible constitutional minimum of
standing contains three elements: (1) plaintiff
[7] Federal Courts must have suffered an injury in fact which is
Presumptions and burden of proof (a) concrete and particularized, and (b) actual
In deciding whether to grant a motion to or imminent, not conjectural or hypothetical,
dismiss for lack of jurisdiction, the court must (2) there must be a causal connection between
accept all of the factual allegations in the the injury and the conduct complained of, and
complaint as true. Fed. R. Civ. P. 12(b)(1). (3) it must be likely, as opposed to merely
speculative, that the injury will be redressed by
Cases that cite this headnote a favorable decision.

Cases that cite this headnote


[8] Federal Courts
Evidence; Affidavits
In deciding whether to grant a motion to [12] Federal Civil Procedure
dismiss for lack of jurisdiction, the court may In general; injury or interest

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

Federal Civil Procedure


Pleading Cases that cite this headnote

Plaintiff's burden to demonstrate standing


grows heavier at each stage of the litigation; at [16] Declaratory Judgment
the pleading stage, general factual allegations Subjects of relief in general
of injury resulting from the defendant's Plaintiffs, a payday lender and a national
conduct may suffice, for on a motion to trade association representing such lenders,
dismiss courts presume that the general had standing to bring action for declaratory
allegations embrace those specific facts which and injunctive relief against Federal Deposit
are necessary to support the claim. Insurance Corporation (FDIC) and other
government entities to set aside informal
Cases that cite this headnote
guidance documents and other actions as
part of defendants' alleged participation
[13] Federal Civil Procedure in Department of Justice (DOJ)-initiated
Matters deemed admitted; acceptance as campaign to force banks to terminate their
true of allegations in complaint business relationships with payday lenders; at
Courts must accept as true all material pleading stage it was undisputed that plaintiffs
allegations of the complaint at the pleadings suffered injury in fact, as association's
stage. members had lost beneficial banking
relationships, plaintiffs alleged sufficient facts
Cases that cite this headnote that, if proven true, could have shown
that defendants' conduct was substantial
factor motivating decisions of third parties,
[14] Federal Civil Procedure
namely, banks, that were direct source of
In general; injury or interest
plaintiffs' injuries, and injunctive relief and/or
Federal Civil Procedure
invalidation of agency documents providing
Causation; redressability
guidance on risk management would result in
When plaintiff's asserted injury arises from the substantial likelihood of redressability.
government's regulation of a third party that is
not before the court, it becomes “substantially Cases that cite this headnote
more difficult” to establish standing; where
standing has been found on the basis of [17] Federal Civil Procedure
third-party conduct, the record presented Causation; redressability
substantial evidence of a causal relationship
In order to establish standing on the basis
between the government policy and the third-
of third-party conduct, to show causation,
party conduct, leaving little doubt as to
plaintiffs must show that defendants' actions
causation and the likelihood of redress.
were a substantial factor motivating the
Cases that cite this headnote decisions of the third parties that were the
direct source of plaintiffs' injuries.

[15] Federal Civil Procedure Cases that cite this headnote


In general; injury or interest
While the court accepts as true all material [18] Federal Civil Procedure
allegations made by plaintiffs, plaintiffs bear Causation; redressability
a greater burden of what they must allege in
Redressability component of standing
order to show standing on the basis of third-
requires that plaintiffs demonstrate a
party conduct.
substantial likelihood that the requested relief
will remedy the alleged injury in fact.

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

grant any injunctive relief whatsoever. 12


Cases that cite this headnote U.S.C.A. § 1818(i)(1).

Cases that cite this headnote


[19] Federal Civil Procedure
Causation; redressability
“Substantial likelihood” that requested relief [23] Constitutional Law
will remedy the alleged injury in fact, as Advisory Opinions
required to establish standing, requires more Federal Courts
than a remote possibility that plaintiffs' Rights and interests at stake
situation might improve were the court to Doctrine of mootness is premised upon the
afford relief, but is not so demanding as to notion that a federal court is constitutionally
require plaintiffs to show to a certainty that a forbidden to render advisory opinions or to
favorable decision will redress their injury. decide questions that cannot affect the rights
of litigants in the case before them.
Cases that cite this headnote
Cases that cite this headnote
[20] Federal Civil Procedure
Causation; redressability [24] Federal Courts
Plaintiffs cannot establish standing by Weight and sufficiency
requesting relief that the court lacks the Burden to establish that a case is moot is a
authority to grant. heavy one.

Cases that cite this headnote Cases that cite this headnote

[21] Federal Civil Procedure [25] Federal Courts


Causation; redressability Trade, Business, and Finance
To establish the redressability component of Claims of payday lender and national trade
standing, plaintiffs are not required to show association representing such lenders, in their
to a certainty that a favorable decision will action against the Federal Deposit Insurance
redress their injury. Corporation (FDIC) and other government
entities to set aside informal guidance
Cases that cite this headnote
documents and other actions claimed to
be part of defendants' alleged participation
[22] Banks and Banking in Department of Justice (DOJ)-initiated
Actions campaign to force banks to terminate
Injunction their business relationships with payday
Financial institutions, transactions, and lenders, were not moot, notwithstanding
services FDIC's issuance of two new guidance
documents clarifying that banks' termination
While the section of the Federal Deposit
of relationships with payday lenders was
Insurance Act divesting federal courts of
not required; while the subject documents
jurisdiction to “affect by injunction or
may have addressed a portion of plaintiffs'
otherwise” or “modify” cease-and-desist
allegations, they did not resolve the entirety
orders issued by certain federal banking
of plaintiffs' claims, as invalidation of agency
agencies precludes the court's jurisdiction to
documents was only one facet of the relief
issue an injunction that interferes with an
sought.
enforcement action or other specified orders,
that does not preclude the court's ability to

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

facts consistent with the allegations in the


Cases that cite this headnote complaint. Fed. R. Civ. P. 12(b)(6).

Cases that cite this headnote


[26] Action
Persons entitled to sue
Federal Civil Procedure [30] Federal Civil Procedure
In general; injury or interest Pleading, Defects In, in General
Principle of “prudential standing” denies a Federal Civil Procedure
right of review if the plaintiff's interests are Determination
so marginally related to or inconsistent with Court deciding a motion to dismiss must not
the purposes implicit in the statute that it make any judgment about the probability of
cannot reasonably be assumed that Congress the plaintiffs' success, must assume all the
intended to permit the suit. allegations in the complaint are true, even if
doubtful in fact, and must give the plaintiff
Cases that cite this headnote the benefit of all reasonable inferences derived
from the facts alleged. Fed. R. Civ. P. 12(b)(6).
[27] Action
Cases that cite this headnote
Persons entitled to sue
Federal Civil Procedure
In general; injury or interest [31] Federal Civil Procedure
Matters deemed admitted; acceptance as
Zone of interests test no longer falls under the
true of allegations in complaint
prudential standing umbrella, nor is the zone
of interests test a jurisdictional requirement; Court deciding a motion to dismiss does not
instead, the zone of interests test is now accept as true legal conclusions or inferences
considered a merits issue, in which the court that are unsupported by the facts alleged. Fed.
asks whether the plaintiff has a cause of action R. Civ. P. 12(b)(6).
under the statute in question.
Cases that cite this headnote
Cases that cite this headnote
[32] Federal Civil Procedure
[28] Federal Civil Procedure Claim for relief in general
Insufficiency in general Complaint which tenders naked assertions
To survive a motion to dismiss for failure to devoid of further factual enhancement will not
state a claim upon which relief can be granted, suffice. Fed. R. Civ. P. 12(b)(6).
plaintiff need only plead enough facts to state
Cases that cite this headnote
a claim to relief that is plausible on its face and
to nudge his or her claims across the line from
conceivable to plausible. Fed. R. Civ. P. 12(b) [33] Administrative Law and Procedure
(6). Finality; ripeness
In context of the final agency action
Cases that cite this headnote
requirement for judicial review under the
Administrative Procedure Act (APA), one
[29] Federal Civil Procedure way of viewing the final agency action
Claim for relief in general question is whether the action constitutes a
Once a claim has been stated adequately, it de facto rule or binding norm that could
may be supported by showing any set of not properly be promulgated absent the
requirements of the APA; by demonstrating

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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.

Cases that cite this headnote


[34] Administrative Law and Procedure
Finality; ripeness
Supreme Court's two-part Bennett test is used [38] Administrative Law and Procedure
to determine when agency action is reviewable Finality; ripeness
as “final” under the Administrative Procedure Agency's expressed intentions may be
Act (APA): (1) the action under review evaluated in determining whether legal
must mark the consummation of the agency's consequences flow from agency action, such
decisionmaking process, that is, it must not be that it is reviewable as “final” under the
of a merely tentative or interlocutory nature, Administrative Procedure Act (APA); this
and (2) the action must be one by which entails a consideration of three factors: (1) the
rights or obligations have been determined, agency's own characterization of the action,
or from which legal consequences will flow. 5 (2) whether the action was published in the
U.S.C.A. § 704. Federal Register or the Code of Federal
Regulations, and (3) whether the action has
Cases that cite this headnote binding effects on private parties or on the
agency. 5 U.S.C.A. § 704.
[35] Administrative Law and Procedure
Cases that cite this headnote
Finality; ripeness
Final agency action under the Administrative
Procedure Act (APA) may be comprised of a [39] Banks and Banking
series of agency pronouncements rather than Regulation and supervision in general
a single edict. 5 U.S.C.A. § 704. Banks and Banking
Federal Reserve Board
Cases that cite this headnote
Banks and Banking
Powers, functions and dealings in general
[36] Administrative Law and Procedure Alleged actions of Federal Deposit Insurance
Finality; ripeness Corporation (FDIC), Board of Governors
In evaluating whether legal consequences flow of Federal Reserve System, and Office
from agency action, such that it is reviewable of Comptroller of Currency (OCC) in
as “final” under the Administrative Procedure promulgating certain informal guidance
Act (APA), courts may consider the effects documents for banks, engaging in coercive
of the agency's action, inquiring whether back-room communications, and creating
the agency has: (1) imposed any rights de facto rule against providing financial
and obligations, or (2) genuinely left the services to payday lenders were neither final
agency and its decisionmakers free to exercise agency actions nor binding norms and,
discretion. 5 U.S.C.A. § 704. thus, were not subject to judicial review
under the Administrative Procedure Act
Cases that cite this headnote (APA); although, given their publication and
wide distribution, it was reasonable to view
[37] Administrative Law and Procedure documents as consummation of agencies'
Finality; ripeness decision-making processes rather than as

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

tentative or interlocutory steps, the same Finality; ripeness


could not be said for the amorphous de While an enforcement action may be sufficient
facto rule, documents did not create legal to show legal consequences, it is not per se
obligations, but were advisory, providing indicative of final agency action, for purposes
guidance on agencies' views regarding risk of determining availability of judicial review
management, and documents did not commit under the Administrative Procedure Act
agencies to particular course of action. 5 (APA); the enforcement action must still be
U.S.C.A. § 704. evaluated within the Bennett rubric of “rights
or obligations” or “legal consequences.” 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

[41] Administrative Law and Procedure [45] Constitutional Law


Finality; ripeness Procedural due process in general
Guidance documents must establish a For a plaintiff to establish a procedural
new substantive rule before they can be due process claim, it must show that:
characterized as “final” action under the (1) it has a protected interest, (2) the
Administrative Procedure Act (APA) subject government deprived it of this interest, and
to judicial review. 5 U.S.C.A. § 704. (3) the deprivation occurred without proper
procedural protections. U.S. Const. Amend.
Cases that cite this headnote
5.

[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

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

have more than an abstract need or desire;


Cases that cite this headnote the party must have a legitimate claim of
entitlement to it. U.S. Const. Amend. 5.
[47] Banks and Banking
Cases that cite this headnote
Regulation and supervision in general
Banks and Banking
Federal Reserve Board [50] Constitutional Law
Rights, Interests, Benefits, or Privileges
Banks and Banking
Involved in General
Powers, functions and dealings in general
Interests afforded due process protection are
Constitutional Law
not created by the Constitution, but are
Financial institutions, transactions, and
defined by existing rules or understandings
services
that secure certain benefits and that support
Allegations of payday lender and national claims of entitlement to these benefits. U.S.
trade association representing payday lenders, Const. Amend. 5.
that Federal Deposit Insurance Corporation
(FDIC) and other government entities Cases that cite this headnote
promulgated risk-management guidelines for
banks, that they engaged in coercive back-
[51] Constitutional Law
room communications aimed at payday
Reputation; defamation
lenders and targeting specific payday lenders,
and that they took these actions for the While a company may have a liberty interest
direct purpose of putting payday lenders in avoiding the damage to its reputation and
out of business, stated a claim for which business caused by stigma, stigma alone is
due process protections applied; defendants' insufficient to implicate due process interests.
alleged actions were not legislative in nature, U.S. Const. Amend. 5.
but were more analogous to an adjudication
Cases that cite this headnote
of payday lenders' right to do business, and
the effects of defendants' actions were neither
indirect nor incidental. U.S. Const. Amend. 5. [52] Constitutional Law
Reputation; defamation
Cases that cite this headnote
Constitutional Law
Public contracts
[48] Constitutional Law In addition to stigma or reputational harm,
Rights, Interests, Benefits, or Privileges plaintiff asserting a due process claim must
Involved in General be able to show that: (1) the government
First inquiry in every due process challenge is has deprived plaintiff of some benefit to
whether the plaintiff has been deprived of a which it had a legal right, for example,
protected interest in “property” or “liberty.” the right to be considered for government
U.S. Const. Amend. 5. contracts in common with all others, or (2) the
government-imposed stigma is so severe that
Cases that cite this headnote it broadly precludes plaintiff from pursuing a
chosen trade or business. U.S. Const. Amend.
[49] Constitutional Law 5.
Rights, Interests, Benefits, or Privileges
Cases that cite this headnote
Involved in General
In order to have a life, liberty, or property
interest protected by due process, a party must [53] Banks and Banking

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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.

Attorneys and Law Firms I. Background

*105 David Henry Thompson, Harold Smith Reeves,


A. Factual Overview 2
Howard C. Nielson, Jr., Charles John Cooper, Cooper &
[1] Plaintiff CFSA is a national trade organization that
Kirk, PLLC, Washington, DC, for Plaintiffs.
represents payday lenders and Plaintiff Advance America
Duncan Norman Stevens, Erik Bond, Federal Deposit is a payday lender and member of CFSA. SAC ¶¶ 14–16.
Insurance Corporation, Arlington, VA, Yvonne F. Payday lenders are by and large licensed and regulated
Mizusawa, Federal Reserve Board, Peter Chadwell Koch, by the states, as well as some federal consumer protection
Office of the Comptroller of the Currency, Washington, laws. Board Mot. at 3. The Dodd–Frank Act gave
DC, for Defendants. the Consumer Financial Protection Bureau (“CFPB”)
authority to supervise payday lenders and promulgate
*106 regulations pertaining to payday lending. See SAC
¶¶ 39–41; Dodd–Frank Act Wall Street Reform and
MEMORANDUM OPINION
Consumer Protection Act, 12 U.S.C. § 5491(a). CFPB is
Gladys Kessler, United States District Judge not a party in this case.

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

[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.'

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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

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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,

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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

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(D.C.Cir.2015) (quoting Vermont Agency of Natural Res.


v. U.S. ex rel. Stevens, 529 U.S. 765, 771, 120 S.Ct.
i. Invalidation of Agency Documents
1858, 146 L.Ed.2d 836 (2000)). A “substantial likelihood”
requires “more than a remote possibility ... that [Plaintiffs'] Defendants argue that, even if the Court were to invalidate
situation might ... improve were the court to afford the Agency Documents that allegedly redefine reputation
relief,” Warth v. Seldin, 422 U.S. 490, 491, 95 S.Ct. 2197, risk and enjoin Defendants' actions, it does not necessarily
45 L.Ed.2d 343 (1975), but is not so demanding as to follow that the banks will re-establish relationships with
require Plaintiffs to “show to a certainty that a favorable the Plaintiffs. See FDIC Mot. at 16–20; OCC Mot. at 13–
decision will redress [their] injury.” Teton, 785 F.3d at 726 14; Board Mot. at 14.
(quoting Nat'l Wildlife Fed'n v. Hodel, 839 F.2d 694, 705
(D.C.Cir.1988)). Defendants explain that the Agency Documents do not
require banks to sever relationships with any third parties,
Plaintiffs' prayer for relief includes: (1) declaring various but only provide guidance on risk management. For that
Agency Documents to be unlawful, (2) declaring that reason, Defendants argue that the documents could not
Defendants significantly changed the definition of have been the impetus for the termination of the bank
reputation risk without notice and comment rulemaking; relationships, and invalidation of them will not necessarily
(3) declaring that Defendants deprived Plaintiffs of liberty be the catalyst for reinstatement of the bank relationships.
without due process of law; (4) enjoining Defendants, See FDIC Mot. at 17; OCC Mot. at 14–15. The Board
“as well as those acting in concert with them,” from argues that this is particularly true for it, because Plaintiffs
implementing the aforementioned Agency Documents, are not even seeking to invalidate any Board documents.
from relying on the revised definition of “reputation See Board Mot. at 14.
risk,” and from applying informal pressure to banks to
encourage them to terminate relationships with payday Defendants argue further that invalidation of the Agency
lenders; (5) enjoining Defendants, “as well as those acting Documents would not provide prospective relief to
in concert with them,” from harming the reputations of Plaintiffs. Banks would still be required to abide by safety
Plaintiffs and from seeking to deprive them of access to and soundness standards, and independently determine
financial services; and (6) other such relief as the Court whether they can adequately manage risks. See OCC Mot.
deems just and proper. SAC ¶ 205. at 14–15; Board Mot. at 14.

[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

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“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,

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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

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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.

[23] [24] The doctrine of mootness is premised upon the


E. Prudential Standing
notion that “[a] federal court is constitutionally forbidden
[26] Defendant FDIC argues that, even if Plaintiffs have
to render advisory opinions or ‘to decide questions that
Article III standing, Plaintiffs fail to meet prudential
cannot affect the rights of litigants in the case before
standing requirements because they are not within the
them.’ ” Better Gov't Assoc. v. Dep't of State, 780 F.2d
zone of interests protected by the relevant statutes. FDIC
86, 90–91 (D.C.Cir.1986) (quoting North Carolina v. Rice,
Mot. at 20. The principle of prudential standing “denies a
404 U.S. 244, 246, 92 S.Ct. 402, 30 L.Ed.2d 413 (1971)).
right of review if the plaintiff's interests are so marginally
Plaintiffs state that under the two-pronged test established
related to or inconsistent with the purposes implicit in
by the Supreme Court, Defendants bear the burden of
the statute that it cannot reasonably be assumed that
showing that “(1) there is no reasonable expectation that
Congress intended to permit the suit.” Clarke v. Sec. Indus.
the alleged violation will recur and (2) interim relief or
Ass'n, 479 U.S. 388, 399, 107 S.Ct. 750, 93 L.Ed.2d 757
events have completely and irrevocably eradicated the
(1987).
effects of the alleged violation.” Pls.' Opp'n. at 22 (quoting
Reeve Aleutian Airways, Inc. v. United States, 889 F.2d
The FDIC states that the statutes giving it the authority
1139, 1142–43 (D.C.Cir.1989)); see alsoCounty of Los
to promulgate guidelines, as well as the FDIC Agency
Angeles v. Davis, 440 U.S. 625, 631, 99 S.Ct. 1379, 59
Documents, are focused on promoting the safety and
L.Ed.2d 642 (1979). This burden “is a heavy one.” Reeve
soundness of banks, and that those interests are not
Aleutian Airways, 889 F.2d at 1143).
implicated by Plaintiffs' claims. FDIC Mot. at 21.

[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'

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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

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Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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.

Plaintiffs have alleged a similar deprivation here—“the All Citations


previously held right to ... hold bank accounts. NCRI, 251
F.3d at 204. “Many people ... would consider [this] right[ ] 132 F.Supp.3d 98

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 23


Community Financial Services Association of America, Ltd...., 132 F.Supp.3d 98 (2015)

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.

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

[3] Alternative Dispute Resolution


134 F.Supp.2d 789 Suing or participating in suit
United States District Court,
In order to substantially invoke judicial
E.D. Louisiana.
process, for purposes of determining waiver
CONSORCIO RIVE, S.A. DE C.V. of right to arbitrate, party must have actively
v. participated in lawsuit or some other type of
act inconsistent with desire to arbitrate.
BRIGGS OF CANCUN, INC., et al
2 Cases that cite this headnote
No. Civ.A. 99–2204.
|
March 14, 2001. [4] Alternative Dispute Resolution
Suing or participating in suit
Mexican lessor brought action under Convention on
Merely initiating litigation, without more,
the Recognition and Enforcement of Foreign Arbitral
does not effect waiver of right to arbitrate
Awards to enforce arbitration award entered in Mexico
because no actual prejudice results from that
against American lessee. After bench trial, the District
isolated action.
Court, Barbier, J., held that: (1) lessor did not waive its
right to arbitrate dispute by filing criminal complaint in Cases that cite this headnote
Mexico against lessee's president, and (2) lessee was not
“unable to present its case.”
[5] Alternative Dispute Resolution
Award enforced. Proceedings
Mexican lessor did not waive its right
under Convention on the Recognition and
Enforcement of Foreign Arbitral Awards to
West Headnotes (7) arbitrate dispute with American lessee by
filing criminal complaint in Mexico against
[1] Alternative Dispute Resolution lessee's president; criminal complaint did
Enforcement and recognition of awards not amount to substantial invocation of
judicial process, was not inconsistent with
Waiver of right to arbitrate is not defense
lessor's intention to arbitrate, and did not
to enforcement of foreign arbitral award
prejudice lessee with respect to ongoing
under Convention on the Recognition
arbitration. Convention on the Recognition
and Enforcement of Foreign Arbitral
and Enforcement of Foreign Arbitral Awards,
Awards. Convention on the Recognition and
Art. I et seq., 9 U.S.C.A. § 201 note.
Enforcement of Foreign Arbitral Awards,
Art. I et seq., 9 U.S.C.A. § 201 note. 1 Cases that cite this headnote
Cases that cite this headnote
[6] Alternative Dispute Resolution
Proceedings
[2] Alternative Dispute Resolution
Suing or participating in suit American lessee was not “unable to present
its case,” for purposes of Convention on
Waiver or right to arbitrate requires both
the Recognition and Enforcement of Foreign
substantial invocation of judicial process and
Arbitral Awards, as result of Mexican lessor's
either detriment or prejudice to other party.
filing of criminal complaint against lessee's
2 Cases that cite this headnote president; lessee could have participated
by means other than president's physical
presence at arbitration, and lessee did

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

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.

*790 Randall A. Smith, Andrew Lewis Kramer, Smith,


Jones & Fawer, New Orleans, LA, for Plaintiff.
I. FINDINGS OF FACT
Robert A. Kutcher, Nicole S. Tygier, Vicki A. Turko,
Choplin, Wagner, Cole, Richard, Reboul & Kutcher, 1. Rive is a corporation organized and existing under the
LLP, Metairie, LA, for Defendants. laws of the Country of Mexico, with its principal place of
business in Mexico City, Mexico.
Opinion
2. Briggs of Cancun is a corporation organized and
BARBIER, District Judge. existing under the laws of the State of Louisiana, with its
principal place of business in Metairie, Louisiana.
This matter came on for trial before the Court, sitting
without a jury, on February 5 and 6, 2001. At the
3. On October 1, 1991, Rive, represented by Eugenio
conclusion of the trial, and upon consideration of all of
Riquelme Valdez, and Briggs of Cancun, represented
the evidence and arguments of counsel, the Court dictated
by David A. Briggs, Jr. (“David Briggs”) entered into
oral findings of fact and conclusions of law on the issue
an “Agreement” by which Rive provided property and
of whether Briggs of Cancun, Inc., and David Briggs
permits for Briggs of Cancun *791 to open a restaurant
Enterprises, Inc. should be considered a single business
and bar called Fat Tuesdays in Cancun, Mexico.
enterprise for purposes of the instant dispute. In summary,
the Court found that these two entities do not comprise
4. As memorialized in clause 35 of the Agreement, both
a single business enterprise, and thus that any arbitration
parties specifically agreed as follows:
award confirmed in this proceeding may only be enforced
against Briggs of Cancun, Inc. THIRTY FIFTH.—Any
controversy or claim arising out
At that time, the Court also allowed the parties until of, or related to, this agreement,
February 14, 2001 to file post-trial memoranda on the or the making, performance,
remaining issues, after which it took the matter under or interpretation thereof, shall
submission. be finally settled by arbitration
pursuant to the then-prevailing

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

rules of the INTERAMERICAN 6. As a result of a dispute relating to payments due under


COMMERCIAL ARBITRATION the Agreement, Rive initiated an arbitration proceeding
COMMISSION and the arbitrators against Briggs of Cancun in January of 1996 in Mexico.
shall be appointed in accordance
with such rules. All arbitration 7. On or about February 14, 1996, David Briggs,
proceedings shall take place Jr. responded to the Inter–American Commercial
in Monterrey, N.L., Mexico, Arbitration Commission, designating an arbitrator.
and the laws applicable to
the arbitration procedure shall 8. On or about March 26, 1996, Rive submitted its formal
be the laws of Mexico. The arbitration demand.
award of the arbitrator shall be
the sole and exclusive remedy 9. On or about August 14, 1996, Rive attorney Jose
between the parties regarding any Manuel Gomez Mont Ureta filed a criminal Statement
claims, counterclaims, issues, or of Facts requesting that the Attorney General for the
accountings presented or pled to State of Quintana Roo, Mexico initiate an investigation of
the arbitrator; shall be made and Adalberto de Luna Zuniga, Javier Ramirez Meza, David
shall promptly be payable free of A. Briggs, Jr., and Raul Torres Rivera, alleging a criminal
any tax, deduction, or offset; and conspiracy by them to prevent Rive “from exercising its
any costs, fees, or taxes incident full rights in its capacity as lessor regarding the property
to enforcing the award shall, to in question.” Exh. 174, 4.
the maximum extent permitted
by law, be charged against the 10. David Briggs testified that following the filing of the
party resisting such enforcement. criminal Statement of Facts, he did not enter Mexico for
Judgment upon the award of the fear of being detained until after the criminal matter was
arbitrator may be entered in the cleared up in 1998.
court having jurisdiction thereof,
or application may be made to 11. On or about November 26, 1996, Briggs of Cancun
such court for a judicial acceptance answered the allegations of Rive in the arbitration matter
of the award or an order of by filing a brief and attaching relevant exhibits.
enforcement. The prevailing party in
any such arbitration shall be entitled 12. Thereafter, the arbitration continued and the parties
to recovery of all administration fees were given the opportunity to offer further evidence,
and arbitration fees paid. All other which was only presented by Rive, because Briggs of
costs expenses and fees incurred by Cancun refused to participate in the arbitration due to
either party in connection with such alleged criminal proceedings in Cancun.
arbitration (including attorneys' fees
incurred) shall be borne by the party *792 13. On or about August 22, 1997, David Briggs,
so incyurring [sic] such fees. and Danny Drago, Chief Financial Officer of David
Briggs Enterprises, Inc., 2 received a letter from the
5. On November 2, 1991, Rive and Briggs of Cancun United Mexican States Solicitor of the General Republic,
also entered into an “Management Agreement” and requesting their appearance on October 5, 1997. The letter
a “Commodatum Agreement” for the operation of stated that failure to appear would result in a “remand
the Fat Tuesdays restaurant in Cancun. Like the [of] the current investigation to the Federal Penal Court
original Agreement, the Management and Commodatum so that the corresponding arrest warrant may be issued.”
Agreements also provided for controversies or claims to Exh. 181.
be resolved by arbitration.
14. David Briggs testified that he voluntarily chose not to
comply with the request to appear on October 5, 1997.

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

15. There was conflicting testimony at trial as to whether


an arrest warrant was actually issued for David Briggs. 23. In April 1999, Rive made formal demand on Briggs
While a document was introduced which appears to of Cancun at the address set forth in the Agreement for
reference a pending arrest warrant against David Briggs the *793 arbitration award and costs, but received no
(Rec.Doc. 178), as well as a document denominated an response.
“amparo” which purports to suspend a warrant (Rec.Doc.
176), no actual arrest warrant for David Briggs was 24. To date, Briggs of Cancun has not paid Rive any
introduced at trial. amount in satisfaction of the arbitration award.

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.

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

for recognition and enforcement shall, at the time of


An arbitration agreement or arbitral the application, supply:
award arising out of a legal
relationship, whether contractual (a) The duly authenticated original award or a duly
or not, which is considered as certified copy thereof;
commercial, including a transaction,
contract, or agreement described in (b) The original agreement referred to in article II or
section 2 of this title, falls under the a duly certified copy thereof.
Convention. An agreement or award
arising out of such a relationship 10. Article II of the Convention requires that there be an
which is entirely between citizens of “agreement in writing” under which the parties agree to
the United States shall be deemed submit to arbitration all or any differences which have
not to fall under the Convention arisen or may arise between them in respect of a defined
unless that relationship involves legal relationship, whether contractual or not, concerning
property located abroad, envisages a subject matter capable of settlement by arbitration. The
performance or enforcement term “agreement in writing” includes an arbitral clause
abroad, or has some other in a contract or an arbitration agreement, signed by the
reasonable relation with one or parties or contained in an exchange of letters of telegrams.
more foreign states. For the purpose
of this section a corporation is a 11. There is no dispute in this matter that the arbitral
citizen of the United States if it award and the relevant agreements between Rive and
is incorporated or has its principal Briggs of Cancun have been supplied to the Court.
place of business in the United
States. 12. Thus, under the terms of the Convention and the
enabling federal statute, this Court has the authority to
recognize and enforce the arbitral award at issue in this
6. Under Article III of the Convention, “[e]ach
matter.
Contracting State shall recognize arbitral awards as
binding and enforce them in accordance with the rules
13. Numerous federal courts have recognized that “[T]he
of procedure of the territory where the award is relied
1958 Convention clearly shifted the burden of proof to
upon ...” 9 U.S.C. § 201 note.
the party defending against enforcement and limited his
defenses to seven set forth in Article V.” Parsons &
6. The Fifth Circuit has stated that awards of foreign
Whittemore Overseas Co. v. Societe Generale de L'Industrie
arbitrators that fall under the Convention are to be
du Papier, 508 F.2d 969, 973 (2d Cir.1974).
enforced by U.S. courts “just as easily as domestic arbitral
awards.” Schlumberger Technology Corp. v. United States,
14. Under Article V(1), recognition and enforcement may
195 F.3d 216, 217 (5th Cir.1999).
be refused if the party resisting the award furnished
to the competent authority where the recognition and
8. The Convention requires a U.S. court to treat a foreign
enforcement is sought, proves that:
arbitral award as it would a domestic award, subject to
limited defenses, including incapacity of a party, illegality (a) the parties to the agreement were under some
of the agreement, lack of due process, an award outside incapacity, or the agreement is not valid under the law
the scope of arbitration, an improper arbitration panel, to which the parties have subjected it or, failing any
or when the arbitration award has been vacated or is not indication thereon, under the law of the country where
final. Id., citing Convention, arts. III & V. the award was made; or

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

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

“[w]aiver will be found when the party seeking arbitration


(c) the award deals with a difference not contemplated substantially invokes the judicial process to the detriment
by or not falling within the terms of the submission to or prejudice of the other party.” Miller Brewing Co. v.
arbitration, or it contains decisions on matters beyond Fort Worth Dist. Co., 781 F.2d 494, 497 (5th Cir.1986).
the scope of the submission to arbitration; however, if Thus, waiver (if permissible at all in the context presented)
the decisions on matters submitted to arbitration can be requires both a substantial invocation of the judicial
separated from those not so submitted, that part of the process and either detriment or prejudice to the other
award which contains decisions on matters submitted to party.
arbitration may be recognized and enforced; or
19. Further, in evaluating whether a waiver occurred
(d) the composition of the arbitral authority or the
under applicable law, it must be borne in mind that
arbitral procedure was not in accordance with the
“[w]aiver of arbitration is not a favored finding, and there
agreement of the parties, or, failing such agreement, was
is a presumption against it.” Id. at 496.
not in accordance with the law of the country where the
arbitration took place; or
20. In the same vein, the United States Supreme Court has
(e) the award has not yet become binding on the parties, stated that “any doubts concerning the scope of arbitrable
or has been set aside or suspended by a competent issues should be resolved in favor of arbitration, whether
authority of the country in which, or under the law of the problem at hand is the construction of the contract
which, that award was made. itself or an allegation of waiver, delay, or a like defense to
arbitrability.” Moses H. Cone Memorial Hosp. v. Mercury
9 U.S.C. § 201 note. Construction Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 941,
74 L.Ed.2d 765 (1983).
15. Additionally, Article V(2) provides that recognition
and enforcement may be refused if the competent [3] 21. In considering what amounts to a substantial
authority finds that: invocation of the judicial process, federal courts have
required active participation in a lawsuit or some other
(a) the subject matter of the difference is not capable type of act inconsistent with the desire to arbitrate. For
of settlement by arbitration under the law of that [the example, in Parcel Tankers, Inc. v. Formosa Plastics Corp.,
forum] country; or 569 F.Supp. 1459, 1467 (S.D.Tex.1983), the district court
found that “[a]ctions constituting waiver may include,
*795 (b) the recognition or enforcement of the award
inter alia, some combination of filing an answer, setting
would be contrary to the public policy of that [the
up a counterclaim, pursuing discovery, and moving
forum] country.
for a continuance prior to moving for a stay pending
9 U.S.C. § 201 note. arbitration.”

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).

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

construed. Parsons & Whittemore Overseas Co. v. Societe


[5] 24. The Court finds that Rive's filing of a Statement of Generale de L'Industrie du Papier, 508 F.2d 969, 975 (2d
Facts with the Attorney General in Quintana Roo did not Cir.1974).
amount to substantial invocation of the judicial process,
and was not inconsistent *796 with Rive's intention [6] 29. In the instant case, the Court finds that Briggs
to arbitrate, especially given the fact that the Statement of Cancun was not “unable to present its case,” because
of Facts was filed eight months after arbitration was Briggs of Cancun could have participated by means other
requested. Further, Rive's actions in filing the Statement than David Briggs's physical presence at the arbitration.
of Facts did not prejudice Briggs of Cancun with respect to For instance, Briggs of Cancun could have sent a company
the ongoing arbitration. Accordingly, Rive did not waive representative to attend; could have sent its attorney to
its right to arbitration in this matter. attend; or David Briggs could have attended by telephone.

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

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Consorcio Rive, S.A. de C.V. v. Briggs Of Cancun, Inc., 134 F.Supp.2d 789 (2001)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

[4] Declaratory Judgment Act (DJA) did not furnish an


independent source of subject matter jurisdiction for the
433 S.W.3d 796
trial court.
Court of Appeals of Texas,
Dallas.
Affirmed.
CONSUMER SERVICE ALLIANCE OF
TEXAS, INC., Titlemax of Texas, Inc.,
and Ace Cash Express, Inc., Appellants
v. West Headnotes (24)
CITY OF DALLAS, Texas, Appellee.
[1] Courts
No. 05–13–00255–CV.
Presumptions and Burden of Proof as to
|
Jurisdiction
May 23, 2014.
The plaintiff has the burden to affirmatively
Synopsis demonstrate the trial court has subject matter
Background: Trade association of credit access businesses jurisdiction.
brought action, requesting a declaration that city
ordinance regulating credit access businesses with physical Cases that cite this headnote
locations within the city was preempted by provisions of
state finance code, and seeking injunctive relief to prevent [2] Pleading
enforcement of contested city ordinance. Two credit Plea to the Jurisdiction
access businesses that were members of trade association
A “plea to the jurisdiction” is a dilatory plea
and that had physical locations in the city intervened. The
that challenges the trial court's subject matter
14th Judicial District Court, Dallas County, Eric Moye, J.,
jurisdiction, and it is used to defeat a cause of
granted city's plea to the jurisdiction. Plaintiffs appealed.
action without regard to whether the claims
asserted have merit.

Holdings: The Court of Appeals, Fillmore, J., held that: 1 Cases that cite this headnote

[1] contested city ordinance regulating credit access [3] Pleading


businesses to reduce predatory lending practices was penal Plea to the Jurisdiction
in nature;
A plea to the jurisdiction can challenge the
sufficiency of the plaintiff's pleadings or the
[2] civil court lacked subject matter jurisdiction to rule
existence of necessary jurisdictional facts.
on meaning or constitutionality of city's penal ordinance
or to enjoin its enforcement, since plaintiffs failed to Cases that cite this headnote
demonstrate that enforcement of the ordinance would
result in irreparable harm to plaintiffs' vested property
[4] Pleading
interests;
Plea to the Jurisdiction
[3] plaintiffs had adequate remedy at law by which to Pleading
challenge penal ordinance, in that plaintiffs could assert Petition, complaint, declaration or other
the unconstitutionality of the ordinance as a defense to pleadings
any criminal prosecution instituted against them under the When a plea to the jurisdiction challenges
ordinance; and the plaintiff's pleadings, the court determines
whether the plaintiff has pleaded facts that
affirmatively demonstrate the trial court's
jurisdiction, construing the pleadings liberally

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

construe a criminal statute or ordinance in a


narrow set of circumstances. Cases that cite this headnote

Cases that cite this headnote


[15] Injunction
On ground of invalidity
[11] Injunction Plaintiffs, a trade association of credit access
Prosecution of Criminal Laws businesses and two member credit access
As a rule, a party cannot seek to construe businesses with physical locations inside
or enjoin enforcement of a criminal statute city boundaries, failed to demonstrate that
in a civil proceeding without a showing enforcement of city's penal ordinance which
of irreparable injury to the party's vested regulated credit access businesses within
property rights. the city in order to reduce abusive and
predatory lending practices would result
Cases that cite this headnote in irreparable harm to plaintiffs' vested
property interests, and thus, civil court lacked
[12] Injunction subject matter jurisdiction to rule on penal
On ground of invalidity ordinance's meaning or constitutionality or
to enjoin its enforcement; despite plaintiffs'
When a penal statute or ordinance is being
contention that enforcement of city ordinance
enforced and, although the party has not
would affect their existing customer lists,
been prosecuted, prosecution is imminent,
loan portfolios, and business methods,
an equity court will not interfere with
enforcement of ordinance would not preclude
the ordinary enforcement of the statute or
plaintiffs from engaging in the lending
ordinance unless the statute or ordinance
business or otherwise shut down plaintiffs'
is unconstitutional and its enforcement will
lawful business, such that it would not result
result in irreparable injury to vested property
in irreparable harm to their vested property
rights; if the party fails to satisfy both prongs
interests.
of the test, an equity court lacks jurisdiction
over the claim. Cases that cite this headnote
Cases that cite this headnote
[16] Constitutional Law
Property Rights and Interests
[13] Equity
Crimes Constitutional Law
Source of right or interest
When questions as to the meaning and validity
of a penal statute or ordinance can be resolved Property rights protected by due process
in any criminal proceeding that may be are created and defined by state law, and
instituted, and vested property rights are not a person's property interests include actual
in jeopardy, there is no occasion for the owner of real estate, chattels, and money.
intervention of equity. U.S.C.A. Const.Amend. 14.

Cases that cite this headnote 1 Cases that cite this headnote

[14] Habeas Corpus [17] Constitutional Law


Validity of statute or ordinance Property Rights and Interests
A person may continue his activities until he For due process purposes, term “property
is arrested and then procure his release by right” refers to any type of right to
showing that the law is void. specific property, including tangible, personal
property. U.S.C.A. Const.Amend. 14.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

Cases that cite this headnote [21] Injunction


On ground of invalidity

[18] Constitutional Law The ability to assert the unconstitutionality of


Property Rights and Interests a penal provision as a defense to a criminal
prosecution is an adequate remedy at law.
A property right protected by due process is
“vested” when it has some definitive, rather Cases that cite this headnote
than merely potential existence. U.S.C.A.
Const.Amend. 14.
[22] Declaratory Judgment
1 Cases that cite this headnote Jurisdiction not enlarged
The Declaratory Judgment Act (DJA) is
[19] Constitutional Law not an independent source of subject matter
Property in General jurisdiction, but instead is available only
when a court already has jurisdiction over
Property owners do not have a
the underlying controversy. V.T.C.A., Civil
constitutionally protected, vested right to use
Practice & Remedies Code § 37.001 et seq.
property in any certain way; however, a seller
does have a vested property right in the lawful 1 Cases that cite this headnote
possession of physical items of inventory that
it owns. U.S.C.A. Const.Amend. 14.
[23] Declaratory Judgment
Cases that cite this headnote Criminal laws
For the same reasons that a court exercising
[20] Injunction civil jurisdiction does not have equity
On ground of invalidity jurisdiction to enjoin the enforcement of penal
statutes, it does not have equity jurisdiction
Plaintiffs, a trade association of credit access
to render a declaratory judgment regarding
businesses and two credit member access
the constitutionality of a criminal statute or
businesses with physical locations inside city
ordinance.
boundaries, had an adequate remedy at law
by which to challenge constitutionality of Cases that cite this headnote
city's penal ordinance which regulated credit
access businesses within the city in order
to reduce abusive and predatory lending [24] Declaratory Judgment
practices, in that plaintiffs could assert Criminal laws
the unconstitutionality of the city's penal A court exercising civil jurisdiction simply has
ordinance as a defense to any criminal no jurisdiction to render naked declarations
prosecution instituted against them under of rights, status, or other legal relationships
the ordinance, and thus, plaintiffs were not arising under a penal statute.
exempt from general jurisdictional rule that
civil court had subject matter jurisdiction 1 Cases that cite this headnote
to hear claim challenging validity of a
penal ordinance and seeking to enjoin its
enforcement only if the ordinance was
unconstitutional and its enforcement would Attorneys and Law Firms
result in irreparable harm to a party's vested
*799 Carol Payne, Anthony Patrick Miller, Tracey
property rights.
Dawn Estes, Michael Paige Lynn, Kent Krabill, Richard
1 Cases that cite this headnote A. Smith, Dallas, for Appellants.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

or in part, by the Act, and injunctive relief to prevent


Barbara E. Rosenberg, Thomas P. Perkins Jr., Jennifer enforcement of the Ordinance. The City filed a plea to the
Wang, Peter B. Haskel, James B. Pinson, Dallas, for jurisdiction and special exceptions to CSAT's pleading. In
Appellee. response, CSAT filed an amended petition, and TitleMax
and Ace intervened in the lawsuit.
Before Justices FITZGERALD, FILLMORE, and
EVANS.
The City filed a second plea to the jurisdiction and special
exceptions to CSAT's amended petition and TitleMax
and Ace's plea in intervention. After the trial court
OPINION granted some of the City's special exceptions, CSAT,
TitleMax, and Ace filed a combined pleading consisting of
Opinion by Justice FILLMORE.
CSAT's second amended petition and TitleMax and Ace's
Consumer Service Alliance of Texas, Inc. (CSAT), amended petition in intervention. The City filed special
TitleMax of Texas, Inc. (TitleMax), and Ace Cash exceptions to the combined pleading asserting appellants
Express, Inc. (Ace) (collectively appellants) appeal the had failed to plead a waiver of governmental immunity
trial court's order granting the City of Dallas, Texas's (the from suit or facts demonstrating a valid cause of action
City) plea to the jurisdiction. We affirm the trial court's exists that falls within a constitutional or legislative waiver
order. of governmental immunity from suit. Appellants agreed
to amend their pleading and filed a second combined
pleading consisting of CSAT's third amended petition
and TitleMax and Ace's second amended petition in
Background
intervention.
Chapter 393 of the finance code regulates *800 credit
In the second combined pleading, appellants alleged the
services organizations (CSOs). 1 See TEX. FIN.CODE
Act “regulates the field of business in which CAB's [sic]
ANN. §§ 393.001–.628 (West 2006 & Supp.2013) (the
operate in Texas,” and the Ordinance conflicted with
Act). During the 2011 Legislative Session, the Texas
the Act by placing restrictions on consumer credit that
Legislature amended the Act, as relevant here, to
CABs could obtain for consumers, or assist consumers
provide for the licensing and regulation of credit
in obtaining, that were not contained in the Act.
access businesses (CABs), a type of CSO. 2 See id. §§ Appellants specifically complained about the restrictions
393.201(c), .221–.224, .601–.628 (West Supp.2013). The
in section 50–151.3 of the Ordinance. 3 Appellants sought
statutory amendments were effective January 1, 2012. See
a declaration *801 that the Ordinance was preempted
Act of May 23, 2011, 82d Leg., ch. 1301, § 3, 2011 Tex.
and unenforceable because it conflicts with the Act.
Gen. Laws 3717, 3718; Act of May 23, 2011, 82d Leg., ch.
Alternatively, appellants sought a declaration that the
1302, § 10, 2011 Tex. Gen. Laws 3719, 3726.
credit restrictions in the Ordinance were preempted
and unenforceable because the restrictions conflict with
On June 22, 2011, the Dallas City Council adopted
section 393.602(b) of the finance code by prohibiting
Ordinance No. 28287 (the Ordinance) regulating CABs
CSAT's members from acting in a way expressly
with physical locations within the City. The Ordinance
was codified in chapter 50, article XI of the Revised Code authorized by the Act. 4 TitleMax sought a declaration
of Civil and Criminal Ordinances of the City of Dallas, that the Ordinance and the credit restrictions in the
Texas. See Dallas, Tex., Code §§ 50–144–50–151. Like the Ordinance are preempted and unenforceable because
amendments to the Act, the Ordinance became effective “they amount to a virtual prohibition against TitleMax's
on January 1, 2012. Id. § 50–144. TitleMax and Ace are business operations in the city of Dallas.” Appellants also
CABs with physical locations in the City and are members sought injunctive relief to prevent the City from enforcing
of CSAT, a trade association comprised of CABs. the Ordinance. Appellants alleged the City's immunity
from suit was waived because they sought a declaration
On July 15, 2011, CSAT filed this lawsuit requesting a that the Ordinance was invalid.
declaration that the Ordinance was preempted, in whole

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

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.

[16] [17] [18] [19] Property rights are created and


defined by state law. Bd. of Regents of State Colls. v.
Application
Roth, 408 U.S. 564, 577, 92 S.Ct. 2701, 33 L.Ed.2d 548
In order for the trial court to have equity jurisdiction over (1972); Reese v. City of Hunter's Creek Vill., 95 S.W.3d
their claims, appellants were first required to establish 389, 391 (Tex.App.-Houston [1st Dist.] 2002, pet. denied).
that the Ordinance is unconstitutional. See Morales, 869 A person's property interests include actual ownership of
S.W.2d at 945; Woodfield, 305 S.W.3d at 417. In its plea to real estate, chattels, and money. Reese, 95 S.W.3d at 391.
the jurisdiction, the City contended the trial court did not The term “ ‘property right’ refers to any type of right to
have subject matter jurisdiction because appellants had specific property, including tangible, personal property.”
not asserted, and could not assert, a valid field or conflict City of Corpus Christi v. Maldonado, 398 S.W.3d 266,
preemption claim to establish waiver of governmental 270 (Tex.App.-Corpus Christi 2011, no pet.). A right
immunity from suit. The trial court did not state the is “vested” when it “has some definitive, rather than
ground on which it granted the plea to the jurisdiction, merely potential existence.” City of Houston v. Guthrie,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

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

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Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

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

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Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

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:

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Consumer Service Alliance of Texas, Inc. v. City of Dallas, 433 S.W.3d 796 (2014)

(1) three percent of the consumer's gross annual income; or


(2) 70 percent of the retail value of the motor vehicle.
(c) A credit access business shall use a paycheck or other documentation establishing income to determine a
consumer's income.
(d) An extension of consumer credit that a credit access business obtains for a consumer or assists a consumer
in obtaining and that provides for repayment in installments may not be payable in more than four installments.
Proceeds from each installment must be used to repay at least 25 percent of the principal amount of the extension of
consumer credit. An extension of consumer credit that provides for repayment in installments may not be refinanced
or renewed.
(e) An extension of consumer credit that a credit access business obtains for a consumer or assists a consumer in
obtaining and that provides for a single lump sum repayment may not be refinanced or renewed more than three
times. Proceeds from each refinancing or renewal must be used to repay at least 25 percent of the principal amount
of the original extension of consumer credit.
(f) For purposes of this section, an extension of consumer credit that is made to a consumer within seven days after
a previous extension of consumer credit has been paid by the consumer will constitute a refinancing or renewal.
Dallas, Tex., Code § 50–151.3.
4 Section 393.602 of the finance code provides:
(a) This subchapter applies only to a credit services organization that obtains for a consumer or assists a consumer
in obtaining an extension of consumer credit in the form of:
(1) a deferred presentment transaction; or
(2) a motor vehicle title loan.
(b) A credit access business may assess fees for its services as agreed to between the parties. A credit access
business fee may be calculated daily, biweekly, monthly, or on another periodic basis. A credit access business is
permitted to charge amounts allowed by other laws, as applicable. A fee may not be charged unless it is disclosed.
(c) A person may not use a device, subterfuge, or pretense to evade the application of this subchapter. A lawful
transaction governed under another statute, including Title 1, Business & Commerce Code, does not violate this
subsection and may not be considered a device, subterfuge, or pretense to evade the application of this subchapter.
TEX. FIN.CODE ANN. § 303.602.
5 TEX. CIV. PRAC. & REM.CODE ANN. §§ 37.001–.011 (West 2008).
6 In City of Austin, the supreme court used the following hypothetical:
Suppose a city, not having the power under its charter to do so, should pass an ordinance prohibiting the sale of
butchers' meat in a certain locality, and suppose it should also prohibit any one from selling meat to be there sold,
or from buying in the prohibited place. The ordinance would be void; but could any one say that the business of a
market man in the locality might not be effectually destroyed by it? Under such circumstances, we are of opinion that
he should have the right to proceed against the corporation to enjoin its enforcement. If a penalty was denounced
against no one but the market man who should sell, it would seem that his remedy would be proceed with his
business, and defeat any prosecution that should be brought against him for the infraction of the void ordinance.
28 S.W. at 530. Under the Ordinance, a CAB in the City clearly fits within the second scenario and, like the market
man, can proceed with its business and contest the Ordinance in any prosecution brought against it. This challenge
could be made in a prosecution for a single violation of the Ordinance in which the CAB faced a minimal fine.

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

475 S.W.3d 436 West Headnotes (26)


Court of Appeals of Texas,
Houston (14th Dist.).
[1] Alternative Dispute Resolution
Cooper Industries, LLC, Cooper What law governs
Industries, Ltd., Cooper US, Inc., and When the Federal Arbitration Act (FAA)
Cooper Industries, PLC, Appellants governs an arbitration clause, a Texas trial
v. court conducts a summary proceeding under
Pepsi–Cola Metropolitan Bottling Co., Inc., and Texas procedural rules to make the gateway
Whitman Insurance Company Ltd., Appellees determination of arbitrability, and it applies
Texas substantive law regarding whether a
NO. 14–14–00562–CV litigant must arbitrate. 9 U.S.C.A. § 1 et seq.
|
Opinion filed August 25, 2015 Cases that cite this headnote

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.

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

a contract with an arbitration clause from


Cases that cite this headnote refusing arbitration in some circumstances, is
a question of law, not a matter committed to
[6] Alternative Dispute Resolution the trial court's discretion.
Existence and validity of agreement
Cases that cite this headnote
Whether a non-signatory can compel
arbitration questions the existence of a valid
arbitration agreement between the parties and [10] Torts
therefore is a gateway matter for the court to Contracts
decide. Torts
Tortfeasor as stranger to contract or
Cases that cite this headnote relationship, in general
The obligation not to interfere with existing
[7] Alternative Dispute Resolution contracts is a general obligation imposed by
Persons entitled to enforce law, but it is not imposed on the parties to
Under direct-benefits estoppel doctrine, that contract because a party cannot interfere
guarantor of indemnity could enforce tortiously with its own contract.
arbitration clause of stock purchase contract
Cases that cite this headnote
executed between indemnitee and indemnitor
even though guarantor was not a signatory to
contract, in indemnitee's tortious interference [11] Torts
and conspiracy action against guarantor, Tortfeasor as stranger to contract or
which alleged that guarantor tortiously relationship, in general
caused indemnitor to breach indemnity A person must be a stranger to a contract to
obligation; if indemnitor did not breach stock interfere tortiously with it.
purchase agreement, then there would be no
claim for tortious interference or conspiracy, Cases that cite this headnote
and damages sought by indemnitee could
not be calculated without reference to terms
[12] Alternative Dispute Resolution
of indemnity obligation in stock purchase
Persons affected or bound
contract.
A signatory to a contract with an arbitration
Cases that cite this headnote clause generally is not required to arbitrate a
tortious interference claim against a complete
stranger to his contract and its arbitration
[8] Alternative Dispute Resolution
clause, but if the signatory plaintiff's right
Waiver or Estoppel
to recover and its damages depend on the
A signatory plaintiff who seeks to derive existence of the contract containing the
a direct benefit from a contract with an arbitration clause, or if the non-signatory
arbitration clause may be equitably estopped defendant is an agent or affiliate of a
from refusing arbitration. signatory, then the plaintiff can be compelled
to arbitrate its claim.
Cases that cite this headnote
2 Cases that cite this headnote
[9] Alternative Dispute Resolution
Trial or hearing [13] Alternative Dispute Resolution
When the facts are not disputed, the Persons entitled to enforce
application of estoppel, including direct
benefit estoppel precluding a signatory to

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

Termination of mutual guaranty agreement breach indemnity obligation, where guarantor


between guarantor and indemnitor did never opposed arbitration before filing its
not abrogate guarantor's ability to compel motion to compel.
arbitration, pursuant to direct-benefits
estoppel doctrine, of indemnitee's claims Cases that cite this headnote
under that agreement, in indemnitee's
action against guarantor asserting tortious [17] Alternative Dispute Resolution
interference and conspiracy claims alleging Waiver or Estoppel
that guarantor tortiously caused indemnitor
A party can waive a contractual right to
to breach indemnity obligation; indemnitee
arbitrate either expressly or by implication.
was not party to termination agreement, and
indemnitee's claims against guarantor hinged Cases that cite this headnote
on existence of guaranty.

Cases that cite this headnote [18] Alternative Dispute Resolution


Scope and standards of review
Whether waiver of a contractual right to
[14] Alternative Dispute Resolution
arbitrate has occurred is a question of law that
Modification or termination
the appellate court reviews de novo.
In general, an arbitration agreement
contained within a contract survives the Cases that cite this headnote
termination or repudiation of the contract as
a whole.
[19] Alternative Dispute Resolution
Cases that cite this headnote Evidence
Because public policy favors arbitration, there
is a strong presumption against waiver of the
[15] Alternative Dispute Resolution
right to arbitrate.
Remedies and Proceedings for
Enforcement in General Cases that cite this headnote
Once the arbitration movant establishes a
valid arbitration agreement that encompasses
[20] Alternative Dispute Resolution
the claims at issue, a trial court has no
Waiver or Estoppel
discretion to deny the motion to compel
arbitration unless the opposing party proves a Express waiver of a contractual right to
defense to arbitration such as waiver. arbitration arises when a party affirmatively
indicates that it wishes to resolve the case in
Cases that cite this headnote the judicial forum rather than in arbitration.

Cases that cite this headnote


[16] Alternative Dispute Resolution
Suing or participating in suit
[21] Alternative Dispute Resolution
Guarantor did not expressly waive its
Suing or participating in suit
right to arbitrate indemnitee's claims against
guarantor by moving to dismiss the case in Guarantor did not substantially invoke
favor of adjudication in a different state based judicial process and thus did not impliedly
on principles of exclusive jurisdiction, comity, waive its right to arbitrate indemnitee's
and forum non conveniens, in indemnitee's claims against guarantor, in indemnitee's
tortious interference and conspiracy action tortious interference and conspiracy action
against guarantor, which alleged that against guarantor, which alleged that
guarantor tortiously caused indemnitor to guarantor tortiously caused indemnitor

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

to breach indemnity obligation, despite in terms of delay, expense, or damage to a


delay of 28 months between filing of party's legal position that occurs when the
action against guarantor and guarantor's party's opponent forces it to litigate an issue
motion to compel arbitration and fact that and later seeks to arbitrate that same issue.
guarantor moved for continuance, sought
admissions from indemnitee, and agreed Cases that cite this headnote
to extension of discovery, where guarantor
never opposed arbitration, case was not [26] Alternative Dispute Resolution
on eve of trial, parties were involved in Suing or participating in suit
settlement negotiations, guarantor did not file
Venue and jurisdictional motions do not
counterclaims, and guarantor never sought
constitute substantial invocation of the
disposition on merits.
judicial process, as could waive contractual
Cases that cite this headnote right to arbitration, because those motions do
not relate to the merits of the case.

[22] Alternative Dispute Resolution 1 Cases that cite this headnote


Waiver or Estoppel
Waiver of a contractual right to arbitration
must be decided on a case-by-case basis,
and court looks to the totality of the *439 On Appeal from the 80th District Court, Harris
circumstances. County, Texas, Trial Court Cause No.2011–77606. Larry
Weiman, Judge.
Cases that cite this headnote
Attorneys and Law Firms

[23] Alternative Dispute Resolution J. Christopher Reynolds, Solace Kirkland Southwick,


Waiver or Estoppel Houston, TX, for appellant.
For a court to find waiver of a contractual
right to arbitration, the party's conduct must Winstol D. Carter, Jr., David J. Levy, John M. Deck,
be unequivocally inconsistent with claiming a Houston, TX, Allyson Newton Ho, Dallas, TX, for
known right to arbitration. appellee.

1 Cases that cite this headnote Panel consists of Justices Jamison, Busby, and Brown.

[24] Alternative Dispute Resolution


OPINION
Waiver or Estoppel
Delay to the litigation process, alone, J. Brett Busby, Justice
generally does not establish waiver of a
contractual right to arbitration. This is an interlocutory appeal from an order denying
a motion to compel arbitration. Appellee Pepsi–Cola
Cases that cite this headnote Metropolitan Bottling Co. (“Metro”) sued appellants
Cooper Industries, LLC, Cooper Industries, Ltd., Cooper
US, Inc., and Cooper Industries, PLC (collectively,
[25] Alternative Dispute Resolution
“Cooper”), seeking to enforce two agreements. Appellee
Suing or participating in suit
Whitman Insurance Company Ltd. later joined the suit as
Even substantially invoking the judicial a plaintiff. Cooper filed a motion to compel arbitration
process does not waive a party's arbitration pursuant to the agreements. The trial court denied the
rights unless the opposing party proves that it motion after a hearing without making findings of fact or
suffered prejudice as a result; in this context, conclusions of law.
“prejudice” relates to the inherent unfairness

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

for any obligations Pneumo Abex owed to Metro and


On appeal, Cooper argues the trial court erred because Whitman. Like the SPA, the APA contains an arbitration
the agreements require arbitration and appellees did not provision. In section 13.2(c), the APA provides that any
show that Cooper waived its right to arbitrate. We agree dispute arising in connection with the agreement and not
that the trial court erred in denying Cooper's motion to settled by the parties within sixty days after notice is given
compel arbitration. We therefore reverse the trial court's “shall be finally settled by arbitration....” The provision
order, render judgment ordering arbitration of appellees' states that “[a]ny party may request a court to provide
claims against the Cooper defendants who are parties to interim relief without waiving the agreement to arbitrate.”
this appeal, 1 and remand this case to the trial court for
further proceedings consistent with this opinion, including Wagner's then-parent company, Cooper Industries, LLC,
the grant of an appropriate stay. guaranteed Wagner's indemnification of Pneumo Abex
under a Mutual Guaranty agreement signed in 1994.
Section 6 of the Mutual Guaranty provides that any claim
or dispute “arising in connection with” this agreement
*440 BACKGROUND shall be resolved in accordance with sections 13.2(b)
and (c) of the APA, thus explicitly incorporating the
This case concerns indemnification obligations regarding
arbitration provision of the APA.
asbestos claims. Appellees' second amended petition
and Cooper's motion to compel arbitration provide the
Pneumo Abex filed a lawsuit in New York against various
pertinent background of the parties' dispute. 2 We begin Cooper defendants, contending that Cooper Industries,
by discussing the various transactions that resulted in the LLC was mismanaging its assets and thus endangering
current alignment of the parties because they are relevant the Mutual Guaranty. Metro and Whitman were not
to our disposition of the case. parties to that suit. In 2011, the Cooper defendants and
Pneumo Abex reached a settlement agreement, which the
IC Industries—Metro's predecessor—acquired Abex judge in the New York lawsuit approved. Under the
Corporation and Pneumo Corporation, two companies settlement agreement, PCT International Holdings, Inc.—
that manufactured products containing asbestos. IC then-owner of Pneumo Abex—transferred its ownership
Industries sold its stock in both companies to PA Holdings interest to a trust. Cooper Industries' indemnities were
under a Stock Purchase Agreement (“SPA”). Under the released and, in exchange, the trust received a cash
SPA, IC Industries agreed to indemnify PA Holdings payment and notes to be paid over five years.
against certain claims filed between August 29, 1988 and
August 29, 1998, and PA Holdings agreed to indemnify In response to the 2011 settlement agreement, Metro
IC Industries and its affiliates against claims filed after filed this lawsuit alleging *441 various causes of
August 29, 1998. As explained below, a Cooper entity action, among them tortious interference with contractual
later guaranteed an indemnity of PA Holdings' successor. relations, conspiracy to commit tortious interference,
The SPA provides that if any controversy or claim arising fraudulent transfers, and conspiracy to commit fraudulent
out of or relating to the agreement has not been resolved
transfers. 3 The suit named several defendants, including
within twenty-one days after notice is given, either party
may initiate arbitration to resolve the dispute. the Cooper appellants. 4 Whitman later joined the suit as
a plaintiff, claiming that as successor to an affiliate of IC
PA Holdings subsequently became Pneumo Abex, LLC. Industries, it is entitled to indemnification from Pneumo
IC Industries became appellee Metro through a merger Abex under the SPA. Metro and Whitman alleged that
and name change. Whitman's predecessor was a captive the settlement agreement was the end result of collusive
insurance carrier affiliated with IC Industries, and efforts by the defendants that left Pneumo Abex and the
Whitman is now a subsidiary of Metro. trust with a finite amount of assets. In particular, Metro
and Whitman alleged that the defendants “conspired to
Pneumo Abex eventually sold one of its product lines buy their way out of uncapped guaranty obligations”
to Wagner Electronic Corporation through an Asset and made Pneumo Abex's performance of its indemnity
Purchase Agreement (“APA”). Under the APA, Wagner obligations to Metro and Whitman more “burdensome,
agreed to indemnify and hold Pneumo Abex harmless difficult, and expensive, if not impossible.”

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

valid arbitration agreement exists. In re Koch Indus., Inc.,


Citing the Federal Arbitration Act, Cooper filed a motion 49 S.W.3d 439, 444 (Tex.App.–San Antonio 2001, orig.
to compel arbitration under various agreements, including proceeding). If there is an agreement to arbitrate, the party
the SPA and the Mutual Guaranty. After an unreported must also establish that the claims asserted fall within the
hearing, the court denied the motion. This interlocutory scope of the agreement. In re Kellogg Brown & Root, Inc.,
appeal followed. See 9 U.S.C. § 16(a)(1)(B) (West 2009); 166 S.W.3d 732, 737 (Tex.2005).
Tex. Civ. Prac. & Rem.Code Ann. § 51.016 (West 2015).

A. Cooper may compel arbitration against Metro under


the SPA.
ANALYSIS [6] [7] Cooper argues that Metro's claims are subject
to arbitration under the SPA, which contains a broad
On appeal, Cooper argues that the trial court erred in
clause requiring arbitration of any controversy or claim
denying the motion to compel arbitration because (1)
arising out of or relating to the agreement. The parties
Metro's and Whitman's claims are subject to arbitration
to the SPA are Pneumo Abex and a company that later
under the SPA and the Mutual Guaranty, and (2) Cooper
became known as Metro. Metro is thus a signatory to
has not waived the right to arbitrate as to either Metro or
the agreement, but Cooper is not. Appellees Metro and
Whitman. We address each issue in turn.
Whitman respond that Cooper cannot compel arbitration
as a non-signatory. Whether a non-signatory can compel
[1] [2] [3] When the Federal Arbitration Act governs an
arbitration questions the existence of a valid arbitration
arbitration clause, a Texas trial court conducts a summary
agreement between the parties and therefore is a gateway
proceeding under Texas procedural rules to make the
matter for the court to decide. See In re Weekley Homes,
gateway determination of arbitrability, and it applies
L.P., 180 S.W.3d 127, 130 (Tex.2005).
Texas substantive law regarding whether a litigant must
arbitrate. 5 See In re Weekley Homes, L.P., 180 S.W.3d [8] [9] The supreme court has recognized that “[a] person
127, 130 (Tex.2005) (orig. proceeding). Because the trial who has agreed to arbitrate disputes with one party may
court did not sign written findings or conclusions, we in some cases be required to arbitrate related disputes
may uphold the court's order on any theory supported with others.” Meyer v. WMCO–GP, LLC, 211 S.W.3d
by the evidence, and we imply all factual findings *442 302, 304 (Tex.2006). In particular, a signatory plaintiff
supported by the record that are necessary to the order. who seeks to derive a “direct benefit” from a contract
In re W.E.R., 669 S.W.2d 716, 717 (Tex.1984) (per with an arbitration clause may be equitably estopped from
curiam); Rush v. Barrios, 56 S.W.3d 88, 96 (Tex.App.– refusing arbitration. Id. at 305; see also In re Kellogg, 166
Houston [14th Dist.] 2001, pet. denied). We defer to the S.W.3d at 739 (discussing direct-benefits estoppel of non-
trial court's factual determinations that are supported by signatories). Although the boundaries of direct-benefits
sufficient evidence, but we review the trial court's legal estoppel are not always clear, the signatory generally must
determinations de novo. In re Labatt Food Serv., L.P., 279 arbitrate claims if liability arises from a contract with an
S.W.3d 640, 643 (Tex.2009). arbitration clause, but not if liability arises from general
obligations imposed by law. In re Vesta Ins. Group, Inc.,
192 S.W.3d 759, 761 (Tex.2006) (per curiam). When the
I. Cooper established that appellees' claims fall within
facts are not disputed, the application of estoppel is a
the scope of valid arbitration agreements that Cooper can
question of law, not a matter committed to the trial court's
invoke.
discretion. See Meyer, 211 S.W.3d at 308.
[4] [5] Cooper's first issue asks whether the trial
court erred in refusing to compel arbitration because
[10] [11] [12] Tortious interference claims do not fall
appellees' claims are founded on two contracts that
comfortably within either category. In re Vesta, 192
contain mandatory arbitration provisions. Arbitration
S.W.3d at 761. The obligation not to interfere with existing
cannot be ordered in the absence of an agreement to
contracts is a general obligation imposed by law, but it
arbitrate. Freis v. Canales, 877 S.W.2d 283, 284 (Tex.1994)
is not imposed on the parties to that contract because a
(orig.proceeding) (per curiam). The party moving for
party cannot interfere tortiously with its own contract.
arbitration has the initial burden to present evidence that a
Id. (citing Holloway v. Skinner, 898 S.W.2d 793, 796

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

(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—

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

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.

B. Cooper may compel arbitration against Whitman ...


and Metro under the Mutual Guaranty despite its
termination. Each Party hereby irrevocably consents and agrees that
[13] Cooper also argues that both Whitman's and Metro's any dispute regarding this Agreement shall be brought
claims are independently subject to arbitration under only to the exclusive jurisdiction of the federal or state
the 1994 Mutual Guaranty agreement, which broadly courts located in New York County, New York....
requires arbitration of any dispute arising in connection
with the agreement. The parties to the Mutual Guaranty We disagree with appellees that this language cuts off
are Pneumo Abex and Cooper Industries, LLC. Thus, the estoppel effect of the Mutual Guaranty's arbitration
appellees Whitman and Metro are not parties to the clause.
Mutual Guaranty. Nevertheless, direct-benefits estoppel
can also require non-signatory plaintiffs to arbitrate if [14] In general, as our sister court has held, an
they seek to derive a direct benefit from a contract “arbitration agreement contained within a contract
containing an arbitration clause. See In re Kellogg, survives the termination or repudiation of the contract
166 S.W.3d at 739–741 (considering whether plaintiffs as a whole.” Cleveland Constr. Inc. v. Levco Constr. Inc.,
claims seek to enforce contract or stand independently of 359 S.W.3d 843, 854 (Tex.App.–Houston [1st Dist.] 2012,
contract). pet. dism'd)) (citing Henry v. Gonzalez, 18 S.W.3d 684,
690 (Tex.App.–San Antonio 2000, pet. dism'd)). 11 Our
In their second amended petition, appellees seek to facts illustrate the sensible result of applying this rule
enforce Cooper's obligations under the Mutual Guaranty. here. Appellees' position is that the Mutual Guaranty
They allege that Cooper's acts of tortious interference in was tortiously and fraudulently terminated by Cooper

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

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

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[17] [18] [19] A party can waive a contractual right


to arbitrate either expressly or by implication. Sedillo v. The supreme court held that the motion should have been
Campbell, 5 S.W.3d 824, 826 (Tex.App.–Houston [14th granted because Richmont had not waived arbitration.
Dist.] 1999, no pet.). Whether waiver has occurred is a Id. The court explained that “[m]erely filing suit does not
question of law for the court that we review de novo. waive arbitration, even when the movant, as in this case,
Perry Homes v. Cull, 258 S.W.3d 580, 598 (Tex.2008). files a second, separate suit in another county based in
Because public policy favors arbitration, there is a strong part on a contract at issue in the first action. Nor, we
presumption against waiver of the right to arbitrate. *448 think, does moving to transfer venue. The motion does not
In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex.1998) address the merits of the case.” Id. (citations omitted).
(orig.proceeding).
Thus, Richmont went far beyond asserting—as Cooper
[20] Express waiver arises when a party affirmatively did here—that another forum was the only correct place
indicates that it wishes to resolve the case in the judicial to decide the parties' disputes. Richmont actually filed
forum rather than in arbitration. See Okorafor v. Uncle a second suit in the other forum, yet the supreme
Sam & Assocs., Inc., 295 S.W.3d 27, 39 (Tex.App.– court held that act did not waive Richmont's ability to
Houston [1st Dist.] 2009, pet. struck). Appellees contend compel arbitration in the original suit. Richmont therefore
that Cooper expressly waived the right to arbitrate by first supports the conclusion that Cooper did not waive its right
moving to dismiss the case in favor of adjudication in to arbitration.
New York based on principles of exclusive jurisdiction,
comity, and forum non conveniens. In its motion, Cooper Similarly, in In re Citigroup Global Markets, the supreme
argued that the New York court that approved the court held that Citigroup did not waive arbitration despite
2011 settlement had exclusive jurisdiction over questions its previous attempts to transfer the case to a *449 federal
regarding that settlement. multidistrict litigation court in New York. 258 S.W.3d
at 626. The court held that despite statements in various
Moving to dismiss in favor of exclusive jurisdiction in transfer pleadings about the case's similarity to others
another court is equivalent, for present purposes, to already transferred, the potential savings in consolidated
moving to transfer venue or filing a notice of removal to discovery, and the potential convenience of parties and
another court. The Supreme Court of Texas and many witnesses in consolidated proceedings, Citigroup did not
other courts have held that such actions do not waive a expressly waive its right to arbitrate. Id. As the court
right to arbitrate. E.g., Richmont Holdings, Inc. v. Superior explained, “we disagree ... that transfer to an MDL court
Recharge Sys., L.L.C., 455 S.W.3d 573, 576 (Tex.2015) is necessarily inconsistent with seeking arbitration.” Id.
(per curiam); In re Citigroup Global Markets, Inc., 258
S.W.3d 623, 626 (Tex.2008). 13 Appellees urge that Citigroup is distinguishable because in
that case, the party seeking to compel arbitration expressly
In Richmont Holdings, Superior and Richmont signed reserved the right to request arbitration early on. See
an asset purchase agreement with an arbitration clause, id. But the court in Citigroup did not hold that a party
and Superior's part-owner, Blake, signed a related must expressly reserve its right to arbitrate before seeking
employment agreement with Richmont that contained to transfer a case. Rather, Citigroup simply noted that
a Dallas County forum selection clause. 455 S.W.3d the party “never opposed arbitration.” Id. The same is
at 575. Superior and Blake later sued Richmont in true here: Cooper never opposed arbitration before filing
Denton County on various causes of action and sought its motion to compel. Accordingly, we hold the trial
a declaration that a covenant not to compete in court erred to the extent it denied the motion to compel
the employment agreement was unenforceable. Id. In arbitration on the ground that Cooper expressly waived
response, Richmont moved to transfer venue to Dallas its right to arbitrate.
County and also filed a separate suit against Blake in
Dallas County to enforce the covenant not to compete. Id.
III. Cooper did not waive its right to arbitrate by
Richmont later filed a motion to compel arbitration in the
implication.
Denton County suit, but the trial court denied the motion.
[21] A party waives an arbitration clause by implication
Id. at 576.
when it substantially invokes the judicial process to the

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other party's detriment or prejudice. Perry Homes, 258


S.W.3d at 589–90. The hurdle of proving implied waiver Baty v. Bowen, Miclette & Britt, Inc., 423 S.W.3d 427, 433
is a high bar. Kennedy Hodges, L.L.P. v. Gobellan, 433 (Tex.App.–Houston [14th Dist.] 2013, pet. denied) (citing
S.W.3d 542, 545 (Tex.2014) (per curiam). In close cases, Perry Homes, 258 S.W.3d at 591–92).
the “strong presumption against waiver” should govern.
Perry Homes, 258 S.W.3d at 593. [24] The quantum of litigation conduct that constitutes
“substantial” invocation of the litigation process depends
[22] [23] Waiver must be decided on a case-by-case basis, on the context. See Perry Homes, 258 S.W.3d at 593. A
and we look to the totality of the circumstances. Id. at 592. party who enjoys substantial direct benefits by gaining
The party's conduct must be unequivocally inconsistent an advantage in the pretrial litigation process should be
with claiming a known right to arbitration. See Van Indep. barred from turning around and seeking arbitration with
the spoils. Id. Delay alone generally does not establish
Sch. Dist. v. McCarty, 165 S.W.3d 351, 353 (Tex.2005). 14
waiver. See In re Serv. Corp. Int'l, 85 S.W.3d 171, 174
We consider a wide variety of factors in deciding whether a
(Tex.2002) (orig. proceeding).
party substantially invoked the litigation process, such as:

• 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 filed


To support their position that Cooper substantially
affirmative claims or dispositive motions;
invoked the judicial process, appellees assert that Cooper
• how much discovery has been conducted and who “inexplicably delayed” moving to compel arbitration
initiated the discovery; until May 2014, twenty-eight months after it was sued.
Appellees further contend that Cooper participated in
• whether the discovery sought would be useful in extensive discovery related to the merits. They point out
arbitration; that Cooper sought admissions that Metro is “seeking to
void and/or avoid the transfers incident to the creations of
• what discovery would be unavailable in arbitration; the [trust]” and that Pneumo Abex did “not owe a duty
to [Metro] to ensure that it obtained consideration that
*450 • whether activity in court would be duplicated
was at least equal to the value” of Cooper's obligations.
in arbitration;
Appellees argue that those requests relate directly to their
• when the case was to be tried; and claims of fraudulent transfer and tortious interference.

• 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

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

“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

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

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.

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

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

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Cooper Industries, LLC v. Pepsi-Cola Metropolitan Bottling..., 475 S.W.3d 436 (2015)

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.

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D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

granted it as to the other claims asserted, and denied the


magazine's request for attorney's fees. The court of appeals
2017 WL 1041234
affirmed, holding that the plaintiff was entitled to proceed
NOTICE: THIS OPINION HAS NOT BEEN on her defamation claim. The court also concluded that
RELEASED FOR PUBLICATION IN THE it lacked jurisdiction over the appeal of the trial court's
PERMANENT LAW REPORTS. UNTIL RELEASED, denial of attorney's fees.
IT IS SUBJECT TO REVISION OR WITHDRAWAL.
Supreme Court of Texas. The magazine presents two primary issues here. First,
it asserts that the court of appeals improperly relied on
D MAGAZINE PARTNERS, L.P. d/b/ Wikipedia as authority in its opinion. Second, it argues
a D Magazine, Magazine Limited Partners, that the plaintiff failed to establish a prima facie case of
L.P., and Allison Media, Inc., Petitioners, defamation sufficient to defeat the magazine's dismissal
v. motion. We agree with the magazine that the court of
Janay Bender ROSENTHAL, Respondent appeals' reliance on Wikipedia led to an unduly narrow
interpretation of the article's title that, in turn, impacted
No. 15-0790 the court's analysis of the plaintiff's defamation claim. As
| to the second point, we hold that a reasonable person
Argued October 4, 2016 could construe the article as a whole to accuse the plaintiff
| of fraudulently obtaining public benefits and that the
OPINION DELIVERED: March 17, 2017 plaintiff presented sufficient evidence in support of the
defamation elements to survive the magazine's motion for
ON PETITION FOR REVIEW FROM THE COURT early dismissal. Finally, on the ancillary issue of attorney's
OF APPEALS FOR THE FIFTH DISTRICT OF fees, we disagree with the court of appeals' conclusion that
TEXAS it lacked jurisdiction to consider the magazine's appeal of
the trial court's denial of its request for attorney's fees in
Opinion
connection with the partially granted motion to dismiss,
Justice Lehrmann delivered the opinion of the Court. and we conclude that the trial court erred in awarding no
fees. We affirm the court of appeals' judgment in part,
*1 A free press is essential to a healthy democracy. reverse it in part, and remand the case to the trial court for
Through conscientious and diligent reporting, the press further proceedings.
holds public officials accountable and helps citizens stay
informed on matters of public concern. Accordingly, both
the U.S. Constitution and the Texas Constitution robustly
I. Background
protect freedom of speech. But, these safeguards are not
unlimited and do not categorically deprive individuals In March 2013, D Magazine published an article under
of legal recourse when they are injured by false and the heading “CRIME” titled “THE PARK CITIES
defamatory speech. The line between the rights of the press WELFARE QUEEN.” In the subheading, the article
and the rights of defamed individuals is not easily drawn. identifies Janay Rosenthal as a “University Park mom”
This elusive boundary underlies today's dispute about the who “has figured out how to get food stamps while living
propriety of a defamation lawsuit's early dismissal under in the lap of luxury.” Rosenthal's mug shot from a prior,
the Texas Citizens Participation Act (TCPA). unrelated arrest features prominently next to the title. The
body of the article, discussed in more detail below, goes
In this case, the plaintiff—a private citizen who was the on to describe how Rosenthal “pulls it off” despite the
subject of a magazine article about her receipt of food assumption that someone in her situation would “never
stamps—sued the magazine, asserting defamation and qualify.” D Magazine printed the article, attributed to an
other claims stemming from allegations that the article “ANONYMOUS PARK CITIES PARENT,” and also
falsely accused her of committing welfare fraud. When the published it online.
magazine moved to dismiss the suit under the TCPA, the
trial court denied the motion as to the defamation claim,

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D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

*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).

*3 However, while freedom of the press is critically


A divided court of appeals affirmed, holding that
important to the functioning of our democratic society,
Rosenthal established a prima facie case for each element
members of the press are also “responsible for the abuse
of the defamation claim by clear and specific evidence.

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D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

of that privilege.” TEX. CONST. art. I, § 8. In turn, states


maintain a legitimate interest in “the compensation of
individuals for the harm inflicted on them by defamatory
B. Defamation Framework
falsehood.” Gertz v. Robert Welch, Inc., 418 U.S. 323, 341
(1974); see alsoKinney v. Barnes, 443 S.W.3d 87, 91 (Tex. In this case, the parties do not dispute that the TCPA
2014) (noting that courts have long recognized “a cause applies to Rosenthal's defamation claim and that she
of action for damages to a person's reputation inflicted by had the burden to establish a prima facie case of each
the publication of false and defamatory statements”). element of defamation to avoid dismissal of the claim.
These elements include: (1) the defendant published a
The tension between the “need for a vigorous and false statement; (2) that defamed the plaintiff; (3) with
uninhibited press” and “the legitimate interest in the requisite degree of fault regarding the truth of
redressing wrongful injury” necessarily comes into play the statement (negligence if the plaintiff is a private
in cases addressing First Amendment limitations on individual); and (4) damages (unless the statement
defamation liability. Gertz, 418 U.S. at 342. And in constitutes defamation per se). Lipsky, 460 S.W.3d at
today's world, we must be especially mindful of this 593; WFAA-TV, Inc. v. McLemore, 978 S.W.2d 568, 571
longstanding yet delicate balance, as modern technology (Tex. 1998). Because of the importance of cultivating
allows information to be easily and widely disseminated and protecting freedom of expression, the plaintiff bears
without necessarily being subjected to the sort of rigorous the burden of proving falsity if the alleged defamatory
verification processes that conventional media sources are statements were made by a media defendant over a matter
expected to employ. Maintaining that balance of allowing of public concern. KBMT Operating Co. v. Toledo, 492
the press the freedom to perform its critical societal S.W.3d 710, 713–14 (Tex. 2016); Neely v. Wilson, 418
function while protecting the rights of individuals harmed S.W.3d 52, 62 (Tex. 2013).
by false or misleading reporting remains an essential task,
and courts continue to struggle “to define the proper *4 In making the initial determination of whether a
accommodation between these competing concerns.” Id. publication is capable of a defamatory meaning, we
examine its “gist.” Neely, 418 S.W.3d at 63. That is,
The TCPA is also designed to balance these policies. On we construe the publication “as a whole in light of the
the one hand, the statute shields “citizens who petition surrounding circumstances based upon how a person of
or speak on matters of public concern from retaliatory ordinary intelligence would perceive it.” Turner v. KTRK
lawsuits that seek to intimidate or silence them.” In re Television, Inc., 38 S.W.3d 103, 114 (Tex. 2000); see
Lipsky, 460 S.W.3d 579, 584 (Tex. 2015). On the other alsoBentley v. Bunton, 94 S.W.3d 561, 579 (Tex. 2002)
hand, the statute “protect[s] the rights of a person to file (“It is well settled that ‘the meaning of a publication
meritorious lawsuits for demonstrable injury.” TEX. CIV. and thus whether it is false and defamatory, depends
PRAC. & REM. CODE § 27.002. Under the TCPA, a on a reasonable person's perception of the entirety of
defendant may file a motion to dismiss a legal action that a publication and not merely on individual statements.’
“is based on, relates to, or is in response to a party's ” (quoting Turner, 38 S.W.3d at 115)). Consistent with
exercise of the right of free speech.” Id. § 27.003(a). To this approach, under the “substantial truth doctrine” a
avoid dismissal, the plaintiff must establish a prima facie publication's truth or falsity depends on whether the
case for each element of the asserted claims by clear publication “taken as a whole is more damaging to the
and specific evidence. Id. § 27.005(c). Clear and specific plaintiff's reputation than a truthful [publication] would
evidence means that the plaintiff “must provide enough have been.” KBMT Operating Co., 492 S.W.3d at 714
detail to show the factual basis for its claim.” Lipksy, 460 (quoting Neely, 418 S.W.3d at 63).
S.W.3d at 591. If the plaintiff satisfies this burden, the
defendant may still obtain dismissal by “establish[ing] by In Neely, we reaffirmed the importance of assessing a
a preponderance of the evidence each essential element publication's gist in evaluating a defamation claim. 418
of a valid defense” to the claim. TEX. CIV. PRAC. & S.W.3d at 63–64. We explained that a publication “with
REM. CODE § 27.005(d). When considering the motion specific statements that err in the details but that correctly
to dismiss, the court considers both the pleadings and any convey the gist of a story is substantially true.” Id. (citing
supporting and opposing affidavits. Id. § 27.006(a). Turner, 38 S.W.3d at 115). Conversely, even if all the

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D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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.

Wikipedia is a self-described “online open-


III. Analysis of Defamation Elements content collaborative encyclopedia.” Wikipedia:
General Disclaimer, https://en.wikipedia.org/wiki/
Wikipedia:General_disclaimer (last visited Mar. 13,
A. The Article's Gist 2017). This means that, except in certain cases to prevent
disruption or vandalism, anyone can write and make
The primary dispute between D Magazine and Rosenthal
changes to Wikipedia pages. Wikipedia: About, https://
is over the gist of the article. D Magazine contends the
en.wikipedia.org/wiki/Wikipedia:About (last visited Mar.
article is about the Commission's decision to give SNAP
13, 2017). Volunteer editors can submit content as
benefits to a person living in an expensive home in a
registered members or anonymously. Id. Each time an
wealthy school district despite a criminal history of theft.
editor modifies content, the editor's identity or IP address
Rosenthal disputes this characterization and argues the
and a summary of the modification, including a time
article's gist is that she defrauded the Commission to
stamp, become available on the article's “history” tab.
obtain benefits.
Jason C. Miller & Hannah B. Murray, Wikipedia in Court:
When and How Citing Wikipedia and Other Consensus
As noted, the court of appeals agreed with Rosenthal
Websites Is Appropriate, 84 ST. JOHN'S L. REV. 633, 637
that the article accuses her of committing welfare fraud.
(2010). Wikipedia is one of the largest reference websites in
In reaching its conclusion, the court of appeals cited
the world, with over “70,000 active contributors working
Wikipedia to define one of the terms in the article's title,
on more than 41,000,000 articles in 294 languages.”
and this definition played an important role in the court's
Wikipedia: About, supra.
gist analysis. Because that analysis is crucial to this case,
we first examine the propriety of the court's reliance on
*5 References to Wikipedia in judicial opinions began
Wikipedia as authority in its opinion.
in 2004 and have increased each year, although such
references are still included in only a small percentage
of opinions. Jodi L. Wilson, Proceed with Extreme
1. Wikipedia Caution: Citation to Wikipedia in Light of Contributor
Demographics and Content Policies, 16 VAND. J.
The court of appeals began its gist analysis with a
ENT. & TECH. L. 857, 868 (2014). These cites often
discussion of the article's title, “THE PARK CITIES
relate to nondispositive matters or are included in
WELFARE QUEEN.” 475 S.W.3d at 482. Citing
string citations. But, some courts “have taken judicial
Wikipedia, along with additional sources cited in the
notice of Wikipedia content, based their reasoning on
Wikipedia article, the court stated:
Wikipedia entries, and decided dispositive motions on
The term “Welfare Queen” has two meanings; it can the basis of Wikipedia content.” Lee F. Peoples, The
mean either (1) a woman who has defrauded the welfare Citation of Wikipedia in Judicial Opinions, 12 YALE
system by using false information to obtain benefits to J. L. & TECH. 1, 3 (2009–2010). While there has
which she is not legally entitled, and it can also mean been extensive research on Wikipedia's accuracy, “the
(2) a woman who has exploited the welfare system by results are mixed—some studies show it is just as
having children out of wedlock and avoiding marital good as the experts, [while] others show Wikipedia
relationships for the purpose of continuing to qualify is not accurate at all.” Michael Blanding, Wikipedia
legally for government benefits. or Encyclopædia Britannica: Which Has More Bias?,
FORBES (Jan. 20, 2015), http://www.forbes.com/sites/
Id. The court explained that the second definition does hbsworkingknowledge/2015/01/20/wikipedia-or-
not apply to Rosenthal and that the article's title therefore encyclopaedia-britannica-which-has-more-bias/
necessarily references a woman “who is committing fraud #5c254ac51ccf.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

it unlikely Wikipedia could suffice as the sole source of


Any court reliance on Wikipedia may understandably authority on an issue of any significance to a case. That
raise concerns because of “the impermanence of said, Wikipedia can often be useful as a starting point for
Wikipedia content, which can be edited by anyone at research purposes. See Peoples, supra at 28 (“Selectively
any time, and the dubious quality of the information using Wikipedia for ... minor points in an opinion is an
found on Wikipedia.” 4 Peoples, supra at 3. Cass economical use of judges' and law clerks' time.”). In this
Sunstein, legal scholar and professor at Harvard Law case, for example, the cited Wikipedia page itself cited past
School, also warns that judges' use of Wikipedia newspaper and magazine articles that had used the term
“might introduce opportunistic editing.” Noam Cohen, “welfare queen” in various contexts and could help shed
Courts Turn to Wikipedia, but Selectively, N.Y. TIMES light on how a reasonable person could construe the term.
(Jan. 29, 2007), http://www.nytimes.com/2007/01/29/
technology/29wikipedia.html. The Fifth Circuit has *6 However, the court of appeals utilized Wikipedia as
similarly warned against using Wikipedia in judicial its primary source to ascribe a specific, narrow definition
opinions, agreeing “with those courts that have found to a single term that the court found significantly
Wikipedia to be an unreliable source of information” and influenced the article's gist. Essentially, the court used
advising “against any improper reliance on it or similarly the Wikipedia definition as the lynchpin of its analysis
unreliable internet sources in the future.” Bing Shun Li v. on a critical issue. As a result, the court narrowly
Holder, 400 Fed.Appx. 854, 857 (5th Cir. 2010); accord read the term “welfare queen” to necessarily implicate
Badasa v. Mukasey, 540 F.3d 909, 910–11 (8th Cir. 2008). fraudulent or illegal conduct, while other sources
connote a broader common meaning. See, e.g., Oxford
For others in the legal community, however, Wikipedia Living Dictionaries, https://en.oxforddictionaries.com/
is a valuable resource. Judge Richard Posner has said definition/welfare_queen (last visited Mar. 13, 2017)
that “Wikipedia is a terrific resource ... because it [is] (broadly defining “welfare queen” as a “woman perceived
so convenient, it often has been updated recently and to be living in luxury on benefits obtained by exploiting or
is very accurate.” Cohen, supra. However, Judge Posner defrauding the welfare system”); YourDictionary, http://
also noted that it “wouldn't be right to use it in a critical www.yourdictionary.com/welfare-queen (last visited
issue.” Id. Other scholars agree that Wikipedia is most Mar. 13, 2017) (broadly defining “welfare queen” as
appropriate for “soft facts,” when courts want to provide a “woman collecting welfare, seen as doing so out
context to help make their opinions more readable. Id. of laziness, rather than genuine need”). In addition,
Moreover, because Wikipedia is constantly updated, some and independent of the Wikipedia concerns, the court
argue that it can be “a good source for definitions of of appeals' overwhelming emphasis on a single term
new slang terms, for popular culture references, and in determining the article's gist departed from our
for jargon and lingo including computer and technology jurisprudential mandate to evaluate the publication as a
terms.” Peoples, supra at 31. They also argue that open- whole rather than focus on individual statements.
source tools like Wikipedia may be useful when courts
are trying to determine public perception or community Our own analysis of the article's gist is governed by
norms. Id. at 32. This usefulness is lessened, however, this important principle. Accordingly, we will consider
by the recognition that Wikipedia contributors do not the article as a whole in order to determine whether a
necessarily represent a cross-section of society, as research reasonable person could view it as accusing Rosenthal of
has shown that they are overwhelmingly male, under forty defrauding the Commission to obtain SNAP benefits.
years old, and living outside of the United States. Wilson,
supra at 885–89.
2. Gist Analysis
Given the arguments both for and against reliance on
Wikipedia, as well as the variety of ways in which the We begin our gist analysis with a discussion of the article's
source may be utilized, a bright-line rule is untenable. Of contents. As noted, the article is published under the
the many concerns expressed about Wikipedia use, lack heading “CRIME” and is accompanied by Rosenthal's
of reliability is paramount and may often preclude its use mug shot from a prior unrelated charge. 5 The article
as a source of authority in opinions. At the least, we find states under the aforementioned “Welfare Queen” title

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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.

Wikipedia has many strengths and benefits, 5 but


reliance on unverified, crowd-generated information
IV. Conclusion to support judicial rulings is unwise. Mass-edited
collaborative resources, like Wikipedia, are malleable by
Texas and federal law recognize the importance of
design, 6 raising serious concerns about the accuracy
protecting free speech, particularly on matters of public
and completeness of the information, the expertise and
concern. Still, publications can and do cross the line from
credentials of the contributors, and the potential for
protected free speech to actionable defamation. Here,
manipulation and bias. In an age when news about
Rosenthal presented clear and specific evidence sufficient
“fake news” has become commonplace, long-standing
to support a prima facie case of defamation. We therefore
concerns about the validity of information obtained from
agree with the trial court and the court of appeals that
“consensus websites” like Wikipedia are not merely the
dismissal of the claim under the TCPA is not warranted
at this stage of the proceedings. However, the trial court antiquated musings of luddites. 7 To the contrary, as
erred in failing to award D Magazine attorney's fees in current events punctuate with clarity, courts must remain
light of its dismissal of other claims. Accordingly, we vigilant in guarding against undue reliance on sources of
affirm the court of appeals' judgment in part, reverse it dubious reliability. A collaborative encyclopedia that may
in part, and remand the case to the trial court for further be anonymously and continuously edited undoubtedly fits
proceedings. the bill. 8

*11 Legal commentators may debate whether and


to what extent courts could properly rely on online
Justice Guzman filed a concurring opinion.
sources like Wikipedia, but the most damning indictment
of Wikipedia's authoritative force comes directly from
Justice Guzman, concurring. Wikipedia:

• “WIKIPEDIA MAKES NO GUARANTEE OF


VALIDITY”

• “Please be advised that nothing found here has


necessarily been reviewed by people with the expertise
required to provide you with complete, accurate or
[Editor's Note: The preceding image contains the reference reliable information.”

for footnote 1 ] • “Wikipedia cannot guarantee the validity of the


information found here.”
The Court holds that Janay Bender Rosenthal may
proceed with her defamation lawsuit against D Magazine • “Wikipedia is not uniformly peer reviewed.”
because the gist of “The Park Cities Welfare Queen”
article, considered under the appropriate legal standard, • “[A]ll information read here is without any
implied warranty of fitness for any purpose or use
is false and defamatory. 2 I agree with the Court's analysis
whatsoever.”
and join the Court's opinion and judgment. I write
separately, however, to emphasize the perils of relying on • “Even articles that have been vetted by informal peer
Wikipedia: The Free Encyclopedia 3 as an authoritative review or featured article processes may later have
source for any controverted, decisive, or critical issue.

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D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
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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

meaning of a term that may be central to a legal inquiry. 17


In truth, Wikipedia's own policies 18 disclaim the notion: All Citations
“Wikipedia is not a dictionary, phrasebook, or a slang,
--- S.W.3d ----, 2017 WL 1041234

Footnotes

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D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 11


D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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”).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


D Magazine Partners, L.P. v. Rosenthal, --- S.W.3d ---- (2017)
2017 WL 1041234

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 13


Diamond Shamrock Corp. v. Ortiz, 753 S.W.2d 238 (1988)

4 Cases that cite this headnote


753 S.W.2d 238
Court of Appeals of Texas,
Corpus Christi. [2] Appeal and Error
Interrogatories and Special Verdicts
DIAMOND SHAMROCK CORPORATION Appeal and Error
and Industrial Lubricants, Inc., Appellants, Extent of Review
v. Appeal and Error
Reynaldo E. ORTIZ, Appellee. Total Failure of Proof
In deciding no evidence point, appellate
No. 13–87–328–CV.
court considers only evidence and inferences
|
which support jury finding and disregards all
June 16, 1988.
evidence and inferences to contrary; however,
|
point must be sustained if there is complete
Rehearing Denied June 30, 1988.
absence of, or no more than scintilla of
Employee brought action against former employer evidence which supports verdict.
for malicious prosecution. The 107th District Court,
Cameron County, Gilberto Hinojosa, J., entered Cases that cite this headnote
judgment in favor of employee, and employer appealed.
The Court of Appeals, Kennedy, J., held that: (1) burden [3] Malicious Prosecution
of proving that no probable cause exists for instituting Preliminary Investigations by Prosecutor
criminal proceedings in malicious prosecution case is Where business or organization discovers
initially upon plaintiff, and there inferably is initial what it believes to be criminal behavior during
presumption that defendant acted reasonably and in good internal investigation, public policy requires
faith and therefore had probable cause, and (2) evidence that there be wide latitude in reporting facts to
was insufficient to disprove employer's probable cause to prosecuting authorities in order that exposure
believe employee had stolen merchandise, and to release of crime not be discouraged.
incriminating statements to police.
8 Cases that cite this headnote
Reversed and rendered.

[4] Malicious Prosecution


Presumptions and Burden of Proof
West Headnotes (6) Burden of proving that no probable cause
existed for instituting criminal proceedings
in malicious prosecution case is initially
[1] Malicious Prosecution
upon plaintiff, and there inferably is initial
Nature and Elements of Malicious
presumption that defendant acted reasonably
Prosecution in General
and in good faith and therefore had
Elements of malicious prosecution are probable cause; presumption disappears,
commencement of criminal prosecution however, when plaintiff produces evidence
against plaintiff; which has been caused by that motives, grounds, beliefs and other
defendant or through defendant's aid or evidence upon which defendant acted were
cooperation; which terminated in favor of not probable cause to commence proceedings
plaintiff; that plaintiff was innocent; that there which defendant instituted.
was no probable cause for such proceedings;
that it was done with malice; and resulted in 7 Cases that cite this headnote
damage to plaintiff.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Diamond Shamrock Corp. v. Ortiz, 753 S.W.2d 238 (1988)

judgment interest, and a point on excessive damages. We


[5] Malicious Prosecution reverse the judgment of the trial court.
Instigation of or Participation in
Prosecution In 1981, appellee was hired by Richard Johnson, a district
Malicious Prosecution manager for Shamrock, to work in a La Feria warehouse
Motive of Prosecution for Industrial Lubricants, Inc. Appellee first worked
Party reporting crime to police generally has installing racks and cleaning the warehouse, then worked
duty to make full and fair disclosure of as a truck driver delivering oil and lubricants stored
all evidence and failure to make material there, and finally moved back in the warehouse preparing
exculpatory information known to police orders for shipment. In 1983, appellee, Alex Jimenez
could be evidence of hostile motive or and Chuck Danek worked together preparing orders
insufficient grounds for purposes of malicious for shipment under the supervision of Dan Savarino.
prosecution action. Savarino worked in an office adjoining the bay area, along
with his secretaries, Rosi Trevino and Estella Elizonda.
8 Cases that cite this headnote Johnson worked in Corpus Christi and visited the La Feria
warehouse once a month to supervise an inventory of the
[6] Malicious Prosecution stock. Appellee's cousin, Arnold Ortiz, worked as a truck
Probable Cause and Malice driver for the warehouse.

Evidence was insufficient to disprove


It was Savarino's policy to sell damaged warehouse
employers' probable cause to believe that
merchandise to the employees at a discount. Appellee
employee had stolen merchandise and to
purchased merchandise by check every two or three weeks
release incriminating statements to police
and either took it home in his car or let his cousin Arnold
and cooperate in prosecution of employee;
transport it for him on Arnold's truck.
thus, employee could not prevail in malicious
prosecution action against employer.
Sometime in 1983, Trevino found an invoice in her
1 Cases that cite this headnote files that had originally indicated the sale of an oil
drum, but had been altered to reflect the sale of a less
expensive item. She called Johnson, who came down to
investigate the discrepancy. Savarino, who had actually
been responsible for altering the invoice, managed to
Attorneys and Law Firms
convince Johnson that Elizonda, who had recently been
*239 Charles Sweetman, Dana Allison Lester, Law terminated, was responsible, and the investigation was
Offices of Allison, Chavez and Sweetman, Brownsville, for temporarily suspended. Savarino, however, resigned from
appellants. the company. Johnson then instructed Trevino to look
for other altered invoices. When Trevino discovered ten
James A. Herrmann, Harlingen, for appellee. such invoices, reflecting close to $1,000 unaccounted
for, Johnson resumed his investigation of the La Feria
Before NYE, C.J., and KENNEDY and SEERDEN, JJ. warehouse.

This time Johnson and Joseph O'Connell, an investigator


OPINION employed by Shamrock, visited the La Feria warehouse on
a Tuesday and began to question the employees one by one
KENNEDY, Justice.
in the office. When appellee was questioned, Johnson got
Diamond Shamrock Corporation [Shamrock] and angry, accused him of stealing and cussed him. Johnson
Industrial Lubricants, Inc., a subsidiary thereof, appeal and O'Connell questioned several other employees who
from a judgment rendered against them for $50,000, for gave them statements implicating the appellee and Jiminez
the malicious prosecution of Reynaldo Ortiz. Appellants in theft. Arnold Ortiz gave a statement that:
bring five no evidence points of error, a point on pre-

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Diamond Shamrock Corp. v. Ortiz, 753 S.W.2d 238 (1988)

Ray Ortiz, a warehouseman and one other individual


I know that Ray Ortiz and Alex who help load the trucks are involved. This person is
Jiminez put extra merchandise on Alex Jimenez who is also a warehouseman.
my truck. I take the merchandise
which is company property to my
house and I then sell it off to my The merchandise is taken by these men from the shelfs
friends and neighbors. I keep half in the warehouse and put on the pallets after the
of the money and I give the other manifest is written and after the manager has checked
half to Ray and Alex. This has off the merchandise. After the stolen merchandise is
been going on for about one and loaded on the truck it would be dropped off at various
one half *240 years, (1½) or since locations. One spot I know of was Shorty's Diamond
Alex Jiminez came to work for the Shamrock station in Pharr. I also know that Ray Ortiz
company. stole a two wheel truck from the warehouse that he sold
to drivers that frequent Shorty's. I also know these men
In addition, three other truck drivers for the warehouse would throw spark plugs they stole over the warehouse
gave the following statements to Johnson and O'Connell: fence and pick them up later.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Diamond Shamrock Corp. v. Ortiz, 753 S.W.2d 238 (1988)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Diamond Shamrock Corp. v. Ortiz, 753 S.W.2d 238 (1988)

*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

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DIRECTV, Inc. v. Imburgia, 136 S.Ct. 463 (2015)
193 L.Ed.2d 365, 84 USLW 4018, 166 Lab.Cas. P 61,659...

KeyCite Yellow Flag - Negative Treatment West Headnotes (9)


Declined to Extend by 24th Senatorial Dist. Republican Committee v. 
Alcorn, 4th Cir.(Va.), April 19, 2016
136 S.Ct. 463 [1] Courts
Supreme Court of the United States Decisions of United States Courts as
Authority in State Courts
DIRECTV, INC., Petitioner States
v. Federal Supremacy; Preemption
Amy IMBURGIA et al. Lower court judges are free to note their
disagreement with a decision of the Supreme
No. 14–462.
Court, but the Supremacy Clause forbids state
|
courts to dissociate themselves from federal
Argued Oct. 6, 2015.
law because of disagreement with its content
|
or a refusal to recognize the superior authority
Decided Dec. 14, 2015.
of its source. U.S.C.A. Const. Art. 6, cl. 2.
Synopsis
3 Cases that cite this headnote
Background: Consumer brought action against satellite
television service provider, seeking damages for early
termination fees that allegedly violated California law. [2] Alternative Dispute Resolution
The Superior Court, Los Angeles County, No. BC398295, Preemption
John Shepard Wiley, Jr., J., denied provider's motion States
to compel arbitration, and provider appealed. The Particular cases, preemption or
California Court of Appeal, Rothschild, Acting P.J., 225 supersession
Cal.App.4th 338, 170 Cal.Rptr.3d 190, affirmed, and Federal Arbitration Act is a law of the United
certiorari was granted. States; consequently, the judges of every State
must follow it. U.S.C.A. Const. Art. 6, cl. 2; 9
U.S.C.A. § 1 et seq.
[Holding:] The Supreme Court, Justice Breyer, held that
5 Cases that cite this headnote
under arbitration clause in parties' contract, providing
that it was invalid if “law of your state” made its class
arbitration waiver unenforceable, “law of your state” did [3] Alternative Dispute Resolution
not include California law invalidating class arbitration Validity
waivers that was valid at time the contract was entered Alternative Dispute Resolution
into, but was later ruled preempted by the Federal Choice of law
Arbitration Act.
The Federal Arbitration Act allows parties to
an arbitration contract considerable latitude
Reversed and remanded. to choose what law governs some or all of
its provisions, including the law governing
Justice Thomas filed a dissenting opinion. enforceability of a class-arbitration waiver. 9
U.S.C.A. § 1 et seq.
Justice Ginsburg filed a dissenting opinion in which
23 Cases that cite this headnote
Justice Sotomayor joined.

[4] Federal Courts


Review of State Courts

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Interpretation of a contract is ordinarily a Judicial construction; role, authority,


matter of state law to which the Supreme and duty of courts
Court defers. Judicial construction of a statute ordinarily
applies retroactively.
4 Cases that cite this headnote
Cases that cite this headnote
[5] Courts
Decisions of United States Courts as [9] Contracts
Authority in State Courts Construction against party using words
California courts are the ultimate authority on The reach of the canon construing contract
California law. language against the drafter must have limits,
no matter who the drafter was.
1 Cases that cite this headnote
Cases that cite this headnote
[6] Alternative Dispute Resolution
Preemption
States
Particular cases, preemption or West Codenotes
supersession
Recognized as Preempted
Under arbitration clause in contract between West's Ann.Cal.Civ.Code §§ 1751, 1781(a)
consumer and satellite television service
provider, providing that it was invalid if
“law of your state” made its class arbitration *464 Syllabus *
waiver unenforceable, “law of your state” did
not include California law invalidating class Petitioner DIRECTV, Inc., and its customers entered
arbitration waivers that was valid at time into a service agreement that included a binding
the contract was entered into, but was later arbitration provision with a class-arbitration waiver.
ruled preempted by the Federal Arbitration It specified that the entire arbitration provision was
Act; interpreting the provision as applying unenforceable if the “law of your state” made class-
to invalid state law did not place arbitration arbitration waivers unenforceable. The agreement also
contracts on equal footing with all other declared that the arbitration clause was governed by the
contracts or give due regard to federal policy Federal Arbitration Act. At the time that respondents,
favoring arbitration. 9 U.S.C.A. § 2. California residents, entered into that agreement with
DIRECTV, California law made class-arbitration waivers
31 Cases that cite this headnote unenforceable, see Discover Bank v. Superior Court, 36
Cal.4th 148, 30 Cal.Rptr.3d 76, 113 P.3d 1100. This Court
subsequently held in AT & T Mobility LLC v. Concepcion,
[7] Contracts
563 U.S. 333, 131 S.Ct. 1740, 179 L.Ed.2d 742, however,
Existing law as part of contract
that California's Discover Bank rule was pre-empted by the
Under general California contract principles, Federal Arbitration Act, 9 U.S.C. § 2.
references in a contract to California law
incorporate the California Legislature's power When respondents sued petitioner, the trial court denied
to change the law retroactively. DIRECTV's request to order the matter to arbitration,
and the California Court of Appeal affirmed. The court
1 Cases that cite this headnote
thought that California law would render class-arbitration
waivers unenforceable, so it held the entire arbitration
[8] Statutes provision was unenforceable under the agreement. The
fact that the Federal Arbitration Act pre-empted that
California law did not change the result, the court said,

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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

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“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

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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.

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Indeed, neither the parties nor the dissent refer us to any


contract case from California or from any other State
that interprets similar language to refer to state laws
III
authoritatively held to be invalid. While we recognize that
[5] [6] Although we may doubt that the Court of Appeal the dissent believes this phrase to be “ambiguous,” post,
has correctly interpreted California law, we recognize at 474 – 475, 475 – 476, or “anomalous,” post, at 476, we
that California courts are the ultimate authority on that cannot agree with that characterization.
law. While recognizing this, we must decide whether
the decision of the California court places arbitration [7] [8] Second, California case law itself clarifies any
contracts “on equal footing with all other contracts.” doubt about how to interpret the language. The California
Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, Supreme Court has held that under “general contract
443, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006). And in principles,” references to California law incorporate
doing so, we must examine whether the Court of Appeal's the California Legislature's power to change the law
decision in fact rests upon “grounds as exist at law or in retroactively. See Doe v. Harris, 57 Cal.4th 64, 69–70, 158
equity for the revocation of any contract.” 9 U.S.C. § 2. Cal.Rptr.3d 290, 302 P.3d 598, 601–602 (2013) (holding
That is to say, we look not to grounds that the California that plea agreements, which are governed by general
court might have offered but rather to those it did in fact contract principles, are “ ‘ “deemed to incorporate and
offer. Neither this approach nor our result “steps beyond contemplate not only the existing law but the reserve
Concepcion ” or any other aspect of federal arbitration power of the state to amend the law or enact additional
law. See post, at 475 – 476 (GINSBURG, J., dissenting) laws” ’ ” (quoting People v. Gipson, 117 Cal.App.4th
(hereinafter the dissent). 1065, 1070, 12 Cal.Rptr.3d 478, 481 (2004))). And judicial
construction of a statute ordinarily applies retroactively.
We recognize, as the dissent points out, post, at 473, that Rivers v. Roadway Express, Inc., 511 U.S. 298, 312–313,
when DIRECTV drafted the contract, the parties likely 114 S.Ct. 1510, 128 L.Ed.2d 274 (1994). As far as we
believed *469 that the words “law of your state” included are aware, the principle of California law announced in
California law that then made class-arbitration waivers Harris, not the Court of Appeal's decision here, would
unenforceable. But that does not answer the legal question ordinarily govern the scope of phrases such as “law of your
before us. That is because this Court subsequently held in state.”
Concepcion that the Discover Bank rule was invalid. Thus
the underlying question of contract law at the time the Third, nothing in the Court of Appeal's reasoning
Court of Appeal made its decision was whether the “law of suggests that a California court would reach the same
your state” included invalid California law. We must now interpretation of “law of your state” in any context other
decide whether answering that question in the affirmative than arbitration. The Court of Appeal did not explain
is consistent with the Federal Arbitration Act. After why parties might generally intend the words “law of
examining the grounds upon which the Court of Appeal your state” to encompass “invalid law of your state.”
rested its decision, we conclude that California courts To the contrary, the contract refers to “state law” that
would not interpret contracts other than arbitration makes the waiver of class arbitration “unenforceable,”
contracts the same way. Rather, several considerations while an invalid state law would not make a contractual
lead us to conclude that the court's interpretation of this provision unenforceable. Assuming—as we must—that
arbitration contract is unique, restricted to that field. the court's reasoning is a correct statement as to the
meaning of “law of your state” in this arbitration
First, we do not believe that the relevant contract language provision, we can find nothing in that opinion (nor
is ambiguous. The contract says that “[i]f ... the law in any other California case) suggesting that California
of your state would find this agreement to dispense would generally interpret words such as “law of your
with class arbitration procedures unenforceable, then this state” to include state laws held invalid because they
entire Section 9 [the arbitration section] is unenforceable.” conflict with, say, federal labor statutes, federal pension
App. 129. Absent any indication in the contract that statutes, federal antidiscrimination *470 laws, the Equal
this language is meant to refer to invalid state law, it Protection Clause, or the like. Even given our assumption
presumably takes its ordinary meaning: valid state law. that the Court of Appeal's conclusion is correct, its

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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

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DIRECTV's *472 service agreement applicable in this


case (the 2007 version) requires consumers to arbitrate all
Justice THOMAS, dissenting.
disputes and to forgo class arbitration. Id., at 128–129.
I remain of the view that the Federal Arbitration Act
If the relevant provision stopped there, the Court's recent
(FAA), 9 U.S.C. § 1 et seq., does not apply to proceedings
precedent, see American Express Co. v. Italian Colors
in state courts. See Allied–Bruce Terminix Cos. v. Dobson,
Restaurant, 570 U.S. ––––, 133 S.Ct. 2304, 186 L.Ed.2d
513 U.S. 265, 285–297, 115 S.Ct. 834, 130 L.Ed.2d 753
417 (2013); AT & T Mobility LLC v. Concepcion, 563
(1995) (dissenting opinion); see also Preston v. Ferrer, 552
U.S. 333, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011), would
U.S. 346, 363, 128 S.Ct. 978, 169 L.Ed.2d 917 (2008)
control, and DIRECTV could have resisted the lawsuit.
(same); Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.
But DIRECTV's form contract continued: The entire
440, 449, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006) (same);
arbitration clause is unenforceable “[i]f ... the law of your
Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 460,
state would find” unenforceable the agreement's class-
123 S.Ct. 2402, 156 L.Ed.2d 414 (2003) (same); Doctor's
arbitration prohibition. App. 129. At the time plaintiff-
Associates, Inc. v. Casarotto, 517 U.S. 681, 689, 116 S.Ct.
respondents Imburgia and Greiner commenced their court
1652, 134 L.Ed.2d 902 (1996) (same). Thus, the FAA does
action, class-arbitration bars like the one in DIRECTV's
not require state courts to order arbitration. Accordingly,
agreement were per se unenforceable as unconscionable
I would affirm the judgment of the California Court of
under the law of California. See Discover Bank v. Superior
Appeal.
Court, 36 Cal.4th 148, 162–163, 30 Cal.Rptr.3d 76, 113
P.3d 1100, 1110 (2005).
Justice GINSBURG, with whom Justice SOTOMAYOR
joins, dissenting. Nearly three years into the litigation, this Court held
It has become routine, in a large part due to this Court's in Concepcion, 563 U.S., at 338–351, 131 S.Ct. 1740,
decisions, for powerful economic enterprises to write into that the Federal Arbitration Act (FAA), 9 U.S.C. § 1
their form contracts with consumers and employees no- et seq., preempts state rules that render class-arbitration
class-action arbitration clauses. The form contract in this bans unenforceable. DIRECTV then moved to halt the
case contains a Delphic provision stating that “if the long-pending lawsuit and compel bilateral arbitration.
law of your state” does not permit agreements barring App. to Pet. for Cert. 4a. The California Superior Court
class arbitration, then the entire agreement to arbitrate denied DIRECTV's motion, No. BC398295 (Super. Ct.
becomes unenforceable, freeing the aggrieved customer to Los Angeles Cty., Cal., Jan. 26, 2012), App. to Pet.
commence class-based litigation in court. This Court reads for Cert. 17a–20a, and the California Court of Appeal
that provision in a manner most protective of the drafting affirmed. The Court of Appeal first observed that, under
enterprise. I would read it, as the California court did, to the California law DIRECTV confronted when it drafted
give the customer, not the drafter, the benefit of the doubt. the clause in question, provisions relinquishing the right
Acknowledging the precedent so far set by the Court, I to proceed under the CLRA on behalf of a class would not
would take no further step to disarm consumers, leaving be enforced. 225 Cal.App.4th 338, 342, 170 Cal.Rptr.3d
them without effective access to justice. 190, 194 (2014). The question dispositive of DIRECTV's
motion, the California court explained, trains on the
meaning of the atypical contractual phrase “the law of
your state”: “does it mean ‘the law of your state to the
I extent it is not preempted by the FAA,’ or ‘the law of your
state without considering the preemptive effect, if any, of
This case began as a putative class action in state
the FAA’?” Id., at 344, 170 Cal.Rptr.3d, at 195.
court claiming that DIRECTV, by imposing hefty early-
termination fees, violated California consumer-protective
In resolving this question, the California court emphasized
legislation, including the Consumers Legal Remedies
that DIRECTV drafted the service agreement, giving its
Act (CLRA), Cal. Civ.Code Ann. § 1750 et seq. (West
customers no say in the matter, and reserving to itself the
2015). App. 58. DIRECTV did not initially seek to
right to modify the agreement unilaterally at any time.
stop the lawsuit and compel bilateral arbitration. See
Id., at 345, 170 Cal.Rptr.3d, at 196. See also Brief for
id., at 52–53. The reason for DIRECTV's failure to
Respondents 1–2. DIRECTV used the same take-it-or-
oppose the litigation is no mystery. The version of

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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

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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

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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

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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

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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.

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Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996)
116 S.Ct. 1652, 134 L.Ed.2d 902, 64 USLW 4370, 96 Cal. Daily Op. Serv. 3502...

Particular cases, preemption or


supersession
KeyCite Yellow Flag - Negative Treatment
Although generally applicable contract
Not Followed on State Law Grounds In re Conseco Finance Servicing 
Corp., Tex.App.-Waco, June 7, 2000 defenses, such as fraud, duress or
116 S.Ct. 1652 unconscionability, may be applied to
Supreme Court of the United States invalidate arbitration agreements without
contravening Federal Arbitration Act (FAA),
DOCTOR'S ASSOCIATES, INC. courts may not, however, invalidate
and Nick Lombardi, Petitioners, arbitration agreements under state laws
v. applicable only to arbitration provisions. 9
Paul CASAROTTO et ux. U.S.C.A. § 2.

No. 95-559. 1258 Cases that cite this headnote


|
Argued April 16, 1996. [2] Alternative Dispute Resolution
| Preemption
Decided May 20, 1996. States
Particular cases, preemption or
Franchisees brought action in state court against
supersession
franchisor and its agent regarding dispute under standard
form franchise agreement. The District Court, Eighth Montana statute which conditioned
Judicial District, Cascade County, John M. McCarvel, J., enforceability of arbitration agreements on
stayed proceedings pending arbitration, and franchisees compliance with special notice requirement
appealed. The Montana Supreme Court, 268 Mont. 369, that was not applicable to contracts generally
886 P.2d 931, reversed on finding that arbitration clause was preempted by Federal Arbitration Act
was unenforceable under state statute. The Supreme (FAA) with respect to arbitration agreements
Court, 115 S.Ct. 2552, vacated and remanded. On remand, covered by FAA; state statute required that
the Montana Supreme Court, Trieweiler, J., 274 Mont. arbitration clause be printed on first page
3, 901 P.2d 596, reaffirmed prior opinion on finding that in underlined capital letters. 9 U.S.C.A. § 2;
state statute was not preempted by Federal Arbitration MCA 27-5-114(4).
Act (FAA), and franchisors sought review. Certiorari
1180 Cases that cite this headnote
was granted. The Supreme Court, Justice Ginsburg, held
that FAA preempted Montana statute which conditioned
enforceability of arbitration clause on compliance with
special notice requirements.
West Codenotes
Reversed.
Preempted
MCA 27-5-114(4).
Justice Thomas dissented for reasons given in his dissent
in Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115
S.Ct. 834, 130 L.Ed.2d 753 (1995). **1653 *681 Syllabus *

When a dispute arose between parties to a standard


form franchise agreement for the operation of a Subway
West Headnotes (2) sandwich shop in Montana, respondent franchisee sued
petitioners, franchisor Doctor's Associates, Inc. (DAI),
[1] Alternative Dispute Resolution and its agent, Lombardi, in a Montana state court. The
Preemption court stayed the lawsuit pending arbitration pursuant
to the arbitration clause set out in ordinary type on
States

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996)
116 S.Ct. 1652, 134 L.Ed.2d 902, 64 USLW 4370, 96 Cal. Daily Op. Serv. 3502...

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996)
116 S.Ct. 1652, 134 L.Ed.2d 902, 64 USLW 4370, 96 Cal. Daily Op. Serv. 3502...

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996)
116 S.Ct. 1652, 134 L.Ed.2d 902, 64 USLW 4370, 96 Cal. Daily Op. Serv. 3502...

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996)
116 S.Ct. 1652, 134 L.Ed.2d 902, 64 USLW 4370, 96 Cal. Daily Op. Serv. 3502...

DAI and Casarotto; instead, Montana's first-page notice


It is so ordered.
requirement would invalidate the clause. The “goals and
policies” of the FAA, this Court's precedent indicates, are
antithetical to threshold limitations placed specifically and
solely on arbitration provisions. Section 2 “mandate[s] Justice THOMAS, dissenting.
the enforcement of arbitration agreements,” Southland, For the reasons given in my dissent last Term in Allied-
465 U.S., at 10, 104 S.Ct., at 858, “save upon such Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 115 S.Ct.
grounds as exist at law or in equity for the revocation 834, 130 L.Ed.2d 753 (1995), I remain of the view that
of any contract,” 9 U.S.C. § 2. Section 27-5-114(4) of § 2 of the Federal Arbitration Act, 9 U.S.C. § 2, does
Montana's law places arbitration agreements in a class not apply to proceedings in state courts. Accordingly, I
apart from “any contract,” and singularly limits their respectfully dissent.
validity. The State's prescription is thus inconsonant with,
and is therefore preempted by, the federal law.
All Citations
*689 * * *
517 U.S. 681, 116 S.Ct. 1652, 134 L.Ed.2d 902, 64 USLW
4370, 96 Cal. Daily Op. Serv. 3502, 96 Daily Journal
For the reasons stated, the judgment of the Supreme Court
D.A.R. 5705
of Montana is reversed, and the case is remanded for
further proceedings not inconsistent with this opinion.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


East Montgomery County Municipal Utility Dist. No. 1 v...., 620 S.W.2d 110 (1981)

[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.

Application granted, judgment of Court of Civil Appeals


reversed, and judgment of trial court affirmed.
Attorneys and Law Firms

*111 Ernest Coker, Jr., Conroe, for petitioner.


West Headnotes (4) Danny R. Edwards, Houston, for respondent.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


East Montgomery County Municipal Utility Dist. No. 1 v...., 620 S.W.2d 110 (1981)

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

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© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Ex parte Rains, 555 S.W.2d 478 (1977)

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.

Cases that cite this headnote

West Headnotes (9)


[6] Criminal Law
Conduct of Trial in General
[1] Habeas Corpus
Presuming waiver of right to counsel from
Questions of Law and Fact
silent record is impermissible; record must
Court of Criminal Appeals is not
show, or there must be allegation and evidence
bound by findings of trial court in
which show, that accused was offered counsel
postconviction habeas corpus proceeding.
but intelligently and understandingly rejected
Vernon's Ann.C.C.P. art. 11.07.
offer.
8 Cases that cite this headnote
Cases that cite this headnote

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Ex parte Rains, 555 S.W.2d 478 (1977)

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.

At the habeas corpus hearing held on February 18, 1977,


[9] Habeas Corpus
Lillie Mae Dansby, petitioner's mother, testified he was
Counsel
born on June 13, 1942 and that at the time of his 1961
Petitioner for writ of habeas corpus, who
trial he was 19 years old. She related that in 1961 she was
alleged that at time of his formal sentencing
a widow and after posting bond for the petitioner and
following conviction he was indigent and
retaining counsel for trial she had exhausted her funds;
without counsel and as result was denied
that while he had counsel for the trial, no attorney was
appellate review of his conviction, sustained
present at the time of the sentencing on June 23, 1961.
burden of proof by preponderance of evidence
that he was at time of sentencing indigent, had Petitioner Rains testified that prior to the murder offense
no counsel, and did not affirmatively waive he had no encounter with law enforcement, that he did
right to counsel. Vernon's Ann.C.C.P. art. not know any law. He stated that counsel retained by
11.07. his mother because he was indigent, a Mr. Duke, was
not present at the time of formal sentencing; that he did
15 Cases that cite this headnote
not waive his right to counsel. He admitted he did not
tell the sentencing judge, Judge J. Frank Wilson, that
he was indigent and did not request counsel. He stated
his counsel had never discussed appeal with him, that he
Attorneys and Law Firms did not know he had a right of appeal and no one at
the sentencing explained that right to him. He related he
*479 Robert T. Baskett, Dallas, court appointed, for
would have appealed his conviction if he had known of
appellant.
his right to do so. It was further shown by his testimony
Jim D. Vollers, State's Atty., David S. McAngus, Asst. that he was sent to prison on July 5, 1961 and that he was
State's Atty., Austin, for the State. released on parole in March, 1975. He admitted that he
had since been convicted of burglary of a vehicle and that
the Board of Pardons and Paroles was seeking to revoke
his parole on the basis of the subsequent conviction. He
OPINION
acknowledged he had not previously filed an application
ONION, Presiding Judge. for habeas corpus, but stated he had only learned of his
right to have counsel present at sentencing when he was
This is a post-conviction habeas corpus proceeding brought into another district court.
brought under the provisions of Article 11.07, Vernon's
Ann.C.C.P. Upon petitioner's request, the trial court took judicial
notice of the court records of the 1961 conviction. The
The petitioner was convicted of murder in 1961 and a docket sheet and the formal sentence are silent as to
sentence of forty (40) years' imprisonment was imposed. counsel at the time of the sentencing. No other evidence
Petitioner contends that at the time of formal sentencing indicates counsel was present. It was stipulated that the

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Ex parte Rains, 555 S.W.2d 478 (1977)

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.

[3] [4] The burden of proof in a habeas corpus


“2. The judge, court reporter, Petitioner's attorney and
proceeding is upon the petitioner. It was incumbent upon
some of the associates of Petitioner's attorney are all dead.
the petitioner here by a preponderance of the evidence to
The State's attorney is unknown.
show that he was indigent, had no counsel and did not
affirmatively waive the right to counsel. Ex parte Auten,
“3. Petitioner was paroled in this case. The Parole Board
458 S.W.2d 466 (Tex.Cr.App.1970); Ex parte Morgan, 412
is seeking to revoke Petitioner's parole due in part
S.W.2d 657 (Tex.Cr.App.1967).
to Petitioner's subsequent conviction for burglary of a
vehicle.
In determining whether the petitioner met his burden of
“4. Neither Petitioner nor his mother are credible proof, we find that Kitchens v. Smith, 401 U.S. 847, 91
witnesses. S.Ct. 1089, 28 L.Ed.2d 519 (1971), is instructive. There,
the petitioner pleaded guilty to robbery in a Georgia state
“5. Based on this court's personal knowledge of the parties court in 1944. He escaped while serving his sentence and
associated with this case as well as other factors, the court did not return to Georgia until 1969 to serve the remainder
finds that the allegation is untrue. of his sentence. He then brought state habeas corpus
proceedings to declare his conviction void under Gideon
“The Court finds that the Petitioner has not been denied v. Wainwright, 372 U.S. 335, 83 S.Ct. 792, 9 L.Ed.2d
any rights guaranteed to him by the Constitution of the 799 (1963), since he was not represented by counsel at
United States or the Constitution of Texas. the time of his trial. The trial court denied relief because
Gideon was “recent law and under the law at the time
“The Court finds that the Petitioner is lawfully restrained of his sentence, the sentence met the requirements of the
and confined by Respondent. . . .” law at that time.” The United States Supreme Court noted
that this was error as Gideon is fully retroactive, citing
[1] It is here observed that this court is not bound Linkletter v. Walker, 381 U.S. 618, 639, 85 S.Ct. 1731,
by the findings of the trial court in a post-conviction 14 L.Ed.2d 601 (1965); Desist v. United States, 394 U.S.
habeas corpus proceeding. Ex parte Garcia, 548 S.W.2d 244, 250, n. 15, 89 S.Ct. 1030, 22 L.Ed.2d 248 (1969);
405 (Tex.Cr.App.1977); Ex parte Bagley, 509 S.W.2d 332 McConnell v. Rhay, 393 U.S. 2, 3, 89 S.Ct. 32, 21 L.Ed.2d
(Tex.Cr.App.1974). 2 (1968); Stovall v. Denno, 388 U.S. 293, 297-298, 87 S.Ct.
1967, 18 L.Ed.2d 1199 (1967).

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Ex parte Rains, 555 S.W.2d 478 (1977)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Ex parte Rains, 555 S.W.2d 478 (1977)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW 4459, Fed. Sec. L. Rep. P 98,728

any other matter that parties have agreed


to arbitrate, giving considerable leeway to
KeyCite Yellow Flag - Negative Treatment arbitrator and setting aside his or her decision
Declined to Extend by Abram Landau Real Estate v. Bevona, 2nd Cir. 
only in certain narrow circumstances. 9
(N.Y.), August 15, 1997
U.S.C.A. § 10.
115 S.Ct. 1920
Supreme Court of the United States 1253 Cases that cite this headnote

FIRST OPTIONS OF CHICAGO, INC., Petitioner,


v. [2] Alternative Dispute Resolution
Manuel KAPLAN, et ux. and MK Investments, Inc. Scope of inquiry in general
If parties to arbitration agreement did not
No. 94-560. agree to submit arbitrability question itself
| to arbitration, then reviewing court should
Argued March 22, 1995. decide arbitrability as it would decide any
| other question parties had not submitted
Decided May 22, 1995. to arbitration, namely independently. 9
U.S.C.A. § 10.
Options market maker, its principal, and his wife
filed petitions to vacate arbitration award in favor of 861 Cases that cite this headnote
clearing firm, and clearing firm filed cross-petitions for
confirmation. The United States District Court for the
Eastern District of Pennsylvania, Jay C. Waldman, J., [3] Alternative Dispute Resolution
confirmed award and petitioners appealed. The Court of Disputes and Matters Arbitrable Under
Appeals for the Third Circuit, 19 F.3d 1503, affirmed Agreement
in part, and reversed and remanded with instructions in When deciding whether parties agreed
part. Certiorari was granted. The Supreme Court, Justice to arbitrate a certain matter (including
Breyer, held that: (1) question whether arbitrators or arbitrability), courts generally should apply
courts have primary power to decide if parties agreed to ordinary state-law principles governing
arbitrate merits of dispute depends on whether parties formation of contracts. 9 U.S.C.A. § 10.
agreed to submit question to arbitration; (2) there was no
375 Cases that cite this headnote
evidence that aggrieved parties had agreed to arbitrate;
and (3) Court of Appeals should accept district court's
findings of fact regarding agreement to submit issue to [4] Alternative Dispute Resolution
arbitration if not “clearly erroneous” but decide questions Arbitrability of dispute
of law de novo, regardless of whether district court has Under Illinois law, determination of who
confirmed or denied confirmation of arbitration award. was to decide question of arbitrability would
require court to see whether parties objectively
Affirmed. revealed an intent to submit arbitrability issue
to arbitration. 9 U.S.C.A. § 10.

481 Cases that cite this headnote


West Headnotes (8)

[5] Alternative Dispute Resolution


[1] Alternative Dispute Resolution Evidence
Scope and Standards of Review
In determining whether parties have agreed
If parties to arbitration have agreed to submit to submit issue of arbitrability of matter to
arbitrability question itself to arbitration, arbitration, courts are not to assume that
court's standard for reviewing arbitrator's parties agreed to arbitrate arbitrability unless
decision as to arbitrability is same as reviewing

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW 4459, Fed. Sec. L. Rep. P 98,728

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW 4459, Fed. Sec. L. Rep. P 98,728

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.

*939 b) The Kaplans did not agree to arbitrate


arbitrability. Courts generally should apply ordinary Attorneys and Law Firms
state-law principles governing contract formation in
James D. Holzhauer, Chicago, IL, for petitioner.
deciding whether such an agreement exists. However,
courts should not assume that the parties agreed John G. Roberts, Jr., Washington, DC, for respondents.
to arbitrate arbitrability unless there is “clea[r] and
unmistakabl[e]” evidence that they did so. See, e.g., AT Opinion
& T Technologies, Inc. v. Communications Workers, 475
*940 Justice BREYER delivered the opinion of the
U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648. First
Court.
Options cannot show a clear agreement on the part of
the Kaplans. The Kaplans' objections to the arbitrators' In this case we consider two questions about how
jurisdiction indicate that they did not want the arbitrators courts should review certain matters under the federal
to have binding authority over them. This conclusion Arbitration Act, 9 U.S.C. § 1 et seq. (1988 Ed. and Supp.
is supported by (1) an obvious explanation for their V): (1) how a district court should review an arbitrator's
presence before the arbitrators (i.e., Mr. Kaplan's wholly decision that the parties agreed to arbitrate a dispute, and
owned firm was arbitrating workout agreement matters); (2) how a court of appeals should review a district court's
and (2) Third Circuit law, which suggested that they decision confirming, or refusing to vacate, an arbitration
might argue arbitrability to the arbitrators without losing award.
their right to independent court review. First Options'
counterarguments are unpersuasive. Pp. 1924-1926.

**1922 2. Courts of appeals should apply ordinary I


standards when reviewing district court decisions
The case concerns several related disputes between, on
upholding arbitration awards, i.e., accepting findings
one side, First Options of Chicago, Inc., a firm that
of fact that are not “clearly erroneous” but deciding
clears stock trades on the Philadelphia Stock Exchange,
questions of law de novo; they should not, in those
and, on the other side, three parties: Manuel Kaplan; his
circumstances, apply a special “abuse of discretion”
wife, Carol Kaplan; and his wholly owned investment
standard. It is undesirable to make the law more
company, MK Investments, Inc. (MKI), whose trading
complicated by proliferating special review standards
account First Options cleared. The disputes center on
without good reason. More importantly, a court of
a “workout” agreement, embodied in four separate
appeals' reviewing attitude toward a district court
documents, which governs the “working out” of debts to
decision should depend upon the respective institutional
First Options that MKI and the Kaplans incurred as a
advantages of trial and appellate courts, not upon
result of the October 1987 stock market crash. In 1989,
what standard of review will more likely produce a
after entering into the agreement, MKI lost an additional
particular substantive result. Nothing in the Arbitration
$1.5 million. First Options then took control of, and
Act supports First Options' claim that a court of appeals
liquidated, certain MKI assets; demanded immediate
should use a different standard when conducting review of
payment of the entire MKI debt; and insisted that the
certain district court decisions. P. 1926.
Kaplans personally pay any deficiency. When its demands

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW 4459, Fed. Sec. L. Rep. P 98,728

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW 4459, Fed. Sec. L. Rep. P 98,728

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

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First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW 4459, Fed. Sec. L. Rep. P 98,728

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

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First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938 (1995)
115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW 4459, Fed. Sec. L. Rep. P 98,728

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.

We conclude that the Court of Appeals used the proper


We believe, however, that the majority of Circuits is
standards for reviewing the District Court's arbitrability
right in saying that courts of appeals should apply
determinations.
ordinary, not special, standards when reviewing district
court decisions upholding arbitration awards. For one
thing, it is undesirable to make the law more complicated
by proliferating review standards without good reasons. IV
More importantly, the reviewing attitude that a court
of appeals takes toward a district court decision should Finally, First Options argues that, even if we rule against
depend upon “the respective institutional advantages of it on the standard-of-review questions, we nonetheless
trial and appellate courts,” not upon what standard of should hold that the Court of Appeals erred in its
review will more likely produce a particular substantive ultimate conclusion that the merits of the Kaplan/First
result. Salve Regina College v. Russell, 499 U.S. 225, Options dispute were not arbitrable. This factbound issue
231-233, 111 S.Ct. 1217, 1221-1222, 113 L.Ed.2d 190 is beyond the scope of the questions we agreed to review.
(1991). The law, for example, tells all courts (trial and
appellate) to give administrative agencies a degree of legal The judgment of the Court of Appeals is affirmed.
leeway when they review certain interpretations of the
law that those agencies have made. See, e.g., Chevron It is so ordered.
U.S.A. Inc. v. Natural Resources Defense Council, Inc.,
467 U.S. 837, 843-844, 104 S.Ct. 2778, 2781-2782, 81
All Citations
L.Ed.2d 694 (1984). But no one, to our knowledge, has
suggested that this policy of giving leeway to agencies 514 U.S. 938, 115 S.Ct. 1920, 131 L.Ed.2d 985, 63 USLW
means that a court of appeals should give extra leeway 4459, Fed. Sec. L. Rep. P 98,728

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

KeyCite Yellow Flag - Negative Treatment West Headnotes (10)


Declined to Extend by In re Primera Energy, LLC, Bankr.W.D.Tex., 
September 29, 2016
268 S.W.3d 51 [1] Alternative Dispute Resolution
Supreme Court of Texas. Scope and standards of review
When an appeal from a denial of a motion
FOREST OIL CORPORATION and to compel arbitration turns on a legal
Daniel B. Worden, Petitioners, determination, the appellate court applies a de
v. novo standard of review.
James Argyle McALLEN, El Rucio Land and Cattle
10 Cases that cite this headnote
Company, Inc., San Juanito Land Partnership,
and McAllen Trust Partnership, Respondents.
[2] Alternative Dispute Resolution
No. 06–0178. Arbitration favored; public policy
| Federal law and Texas law strongly favor
Argued Oct. 16, 2007. arbitration. 9 U.S.C.A. § 1 et seq.; V.T.C.A.,
| Civil Practice & Remedies Code § 171.001 et
Decided Aug. 29, 2008. seq.
|
Rehearing Denied Nov. 14, 2008. 4 Cases that cite this headnote

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

[5] Alternative Dispute Resolution


Reversed and remanded.
Discretion
If a trial court finds that the claim falls within
Wallace B. Jefferson, C.J., filed a dissenting opinion, in
the scope of a valid arbitration agreement,
which Medina, J., joined.
the court has no discretion but to compel
arbitration and stay its own proceedings.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

30 Cases that cite this headnote 5 Cases that cite this headnote

[6] Release [9] Alternative Dispute Resolution


Fraud and Misrepresentation Disputes and Matters Arbitrable Under
A disclaimer of reliance on representations, Agreement
in a release, negates a fraudulent inducement Generally, after finding an arbitration
claim, where the parties' intent to waive agreement is valid, the court considers the
fraudulent inducement claims is clear and agreement's terms, to determine which issues
specific. are arbitrable.

47 Cases that cite this headnote 11 Cases that cite this headnote

[7] Alternative Dispute Resolution [10] Alternative Dispute Resolution


Validity of assent Matters to Be Determined by Court
Waiver-of-reliance provision in mediated Provision of arbitration agreement, taking
settlement agreement, which agreement away court's traditional role of deciding the
released claims relating to oil and gas scope of an arbitration agreement once the
royalties and mineral underdevelopment court finds the agreement is valid, and instead
but specifically excluded from the placing with the arbitration panel the role
release claims for environmental liability of deciding the scope of issues subject to
and personal injury and provided for arbitration, would be enforced, in absence of a
arbitration of such unreleased claims, challenge of such provision on legal or public
precluded fraudulent inducement claim with policy grounds.
respect to arbitration clause; waiver-of-
reliance provision constituted all-embracing 11 Cases that cite this headnote
disclaimer of any and all representations
and thereby clearly and specifically expressed
parties' intent to waive fraudulent inducement
claims with respect to arbitration clause, Attorneys and Law Firms
terms of settlement agreement, including
arbitration clause, were negotiated rather *52 Geoffrey L. Harrison, Johnny W. Carter, Richard
than boilerplate, during negotiations the Wolf Hess, Susman Godfrey LLP, Houston, TX, Mitchell
C. Chaney, Aaron Pena Jr., Rodriguez Colvin Chaney
parties specifically discussed arbitration of
& Saenz, L.L.P., Brownsville, TX, Neil E. Norquest,
environmental and personal injury claims,
Rodriguez, Colvin, Chaney & Saenz, L.L.P., Edinburg,
party asserting fraudulent inducement had
TX, for Petitioners.
been represented by counsel, parties had dealt
with each other in arm's length transaction, Jon Christian Amberson, Larissa Janee Hood, Jon
and parties were knowledgeable in business Christian Amberson, P.C., John F. Carroll, San Antonio,
matters. TX, Rolando Cantu, Rolando Cantu & Associates,
P.L.L.C., McAllen, TX, Craig T. Enoch, David Scott
60 Cases that cite this headnote
Morris, Winstead Sechrest & Minick P.C., Austin, TX, for
Respondents.
[8] Compromise and Settlement
Nature and Requisites Joseph R. Knight, Baker & Botts, L.L.P., Austin, TX, for
Settlement agreement are highly favored by Amicus Curiae.
the law.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

the releases contained in the agreement. 4 The parties also


Opinion
acknowledged they were “fully advised” by legal counsel
Justice WILLETT delivered the opinion of the Court, as to both the contents and consequences of the release.
in which Justice HECHT, Justice O'NEILL, Justice
WAINWRIGHT, Justice BRISTER, Justice GREEN, In 2004, McAllen sued Forest Oil to recover for
and Justice JOHNSON joined. environmental damage caused when Forest Oil allegedly
“used its access under the leases to the surface estate to
This commercial contract case asks whether an bury highly toxic mercury-contaminated” material on the
unambiguous waiver-of-reliance provision precludes a McAllen Ranch. McAllen also alleged environmental and
fraudulent-inducement claim as a matter of law. Here, personal injuries caused when Forest Oil moved oilfield
sophisticated parties represented by counsel in an arm's- drilling pipe contaminated with radioactive material from
length transaction negotiated a settlement agreement that the McAllen Ranch to a nearby property, the Santillana
included clear and broad waiver-of-reliance and release- Ranch, which housed a sanctuary for endangered
of-claims language. Because that agreement conclusively rhinoceroses. 5
negates reliance on representations made by either side,
any *53 fraudulent-inducement claim, lodged here to Forest Oil sought to compel arbitration under the
avoid an arbitration provision, is contractually barred. settlement agreement, but *55 McAllen argued the
We enforce the parties' contract as written. Thus, we arbitration provision was induced by fraud and thus
reverse the court of appeals' judgment and remand to the unenforceable. McAllen recounts assurances during the
trial court to compel arbitration in accordance with our 1999 settlement negotiations that no environmental
opinion. pollutants or contaminants existed on the property.
McAllen claims an unidentified lawyer for one of the
four defendants “assured [McAllen] that there was no
1. Factual and Procedural Background problem, no issue at all that [he] would be concerned
about,” and McAllen says he signed the agreement based
In 1999, Forest Oil Corporation settled a long-running on that specific representation. McAllen claims that when
lawsuit over oil and gas royalties and leasehold this assurance of “no environmental issues” was given,
development with James McAllen and others with Forest Oil knew all about the radioactive-contaminated
interests in the McAllen Ranch. 1 The settlement pipe and the mercury-contaminated material.
agreement resulted from a week-long mediation and
released Forest Oil from “any and all” claims “of any After an evidentiary hearing on Forest Oil's motion to
type or character known or unknown” that are “in any compel arbitration, the trial court denied the motion,
manner relating to” the McAllen Ranch Leases and the and the court of appeals affirmed, applying a no-
covered lands, whether the claims sound in contract, evidence standard of review because the case was “an
interlocutory appeal from an order denying a motion to
tort, trespass or any other theory. 2 While this sweeping
compel arbitration that involves the defense of fraudulent
release resolved the royalty and nondevelopment disputes,
the parties reserved the right to arbitrate under the inducement.” 6 After examining the testimony of McAllen
Texas General Arbitration Act (TAA) claims “for and a former Forest Oil employee, the court of appeals
environmental liability, surface damages, personal *54 concluded there was some evidence to support the trial
injury, or wrongful death occurring at any time and court's determination that the arbitration provision was
relating to the McAllen Ranch Leases.” The parties induced by fraud. 7
also incorporated into the settlement agreement a
separate surface agreement that detailed ongoing care and
[1] This interlocutory appeal followed. 8 Although the
3
remediation of the surface estate. court of appeals treated Forest Oil's argument as an
evidentiary challenge, this case fundamentally poses
Importantly, the settlement agreement specifically a legal question, not a factual one: does McAllen's
disclaimed reliance “upon any statement or any disclaimer of reliance on Forest Oil's representations
representation of any agent of the parties” in executing

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Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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

proceedings.” 14 of this Release.... 18


After learning that Schlumberger later sold the interest
Forest Oil challenges the trial court's refusal to compel to DeBeers for about $4 million, the Swansons sued,
arbitration on three grounds: (1) the waiver-of-reliance claiming Schlumberger had fraudulently induced them
provision in the contract precludes as a matter of to accept the low-price buyout. 19 They maintained that
law McAllen's ability to show the reliance element of when Schlumberger entered into the settlement, it knew
fraudulent inducement; (2) McAllen cannot establish that the Swansons' interest had a far higher value. 20
justifiable reliance on oral representations that directly
contradict the terms of a signed contract; and (3) McAllen Our decision in Schlumberger assumed that (1)
cannot establish justifiable reliance on statements made by the company knew during negotiations that it was
an adversary. Because Forest Oil's first argument defeats misrepresenting the value of the interest, and (2) the
McAllen's claim, we do not reach the other two. misrepresentations were made with the intent of inducing
the Swansons to settle. 21 Despite these assumptions, we
held as a matter of law that the Swansons could not show
3. Schlumberger Controls this Relevantly Similar Case: fraudulent inducement. 22
The Parties' Broad Disclaimer of Reliance is Dispositive
[7] McAllen argues that Schlumberger is not controlling
Forest Oil contends the waiver-of-reliance provision in
because we restricted that holding to the record,
the settlement agreement conclusively defeats McAllen's
and today's case involves “notable distinctions” and
fraudulent inducement claim. We agree.
“material fact differences.” McAllen's chief argument to
distinguish Schlumberger is that Schlumberger “focuses
[6] We considered today's question in Schlumberger
on representations that were made regarding the
Technology Corp. v. Swanson, holding that a disclaimer
underlying agreement's core subject matter.” The dispute
of reliance on representations, “where the parties' intent
in Schlumberger concerned the value of the Swansons'
is clear and specific, should be effective to negate a
interest in the sea-diamond project, and the alleged
fraudulent inducement claim.” 15 In that case—decided misrepresentation, as described by McAllen, “pertained
eighteen months before the settlement in the instant case to the very thing disputed, which was resolved ‘once
and construing virtually identical disclaimer language—
and for all’ in the settlement.” 23 This case is different,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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

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Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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.

Third, McAllen argues that fraudulent inducement “is


[8] Refusing to honor a settlement agreement—an
essentially a meeting-of-the-minds argument,” and there
was no such meeting here regarding the arbitration agreement highly favored by the law 33 —under these
agreement because Forest Oil knew all along of the facts would invite unfortunate consequences for everyday
potential for environmental claims while simultaneously business transactions and the efficient settlement of
assuring McAllen “there [were] no issues having to do disputes. After-the-fact protests of misrepresentation are
with the surface.” The parties thus had no common easily lodged, and parties who contractually promise
understanding of the facts underlying the contract, not to rely on extra-contractual statements—more than
according to McAllen. But the settlement agreement itself that, promise that they have in fact not relied upon such
belies this argument. The parties agreed that they might statements—should be held to their word. Parties should
disagree and decided to arbitrate any environmental or not sign contracts while crossing their fingers behind their
personal-injury disputes that might later arise. If they were backs. McAllen accuses Forest Oil of deceit, but Forest
certain such disagreements would never arise, there would Oil could make the same allegation against McAllen—
have been no need to reserve future claims for arbitration. who by his own admission and in writing is claiming the
The act of specifically carving out this discrete category of opposite now of what he expressly disclaimed then. It
contamination claims shows that McAllen in fact placed is not asking too much that parties not rely on extra-
little trust in Forest Oil's assurances that there were “no contractual statements that they contract not to rely on
issues having to do with the surface” and that both parties (or else set forth the relied-upon representations in the
recognized the possibility that McAllen might pursue contract or except them from the disclaimer). *61 If
future claims. Moreover, there is an arbitration provision disclaimers of reliance cannot ensure finality and preclude
in the environment-focused surface agreement itself, not post-deal claims for fraudulent inducement, then freedom
only in the broader settlement agreement. According to of contract, even among the most knowledgeable parties
the surface agreement, *60 “[s]urface issues which arise in

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Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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

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Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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.

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Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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

McAllen's Fraudulent Inducement Claim Forest Oil's Remaining Issues

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?

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Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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?

A. I believe he's the majority stockholder of Forest Oil IV


Company.

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]

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Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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.

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168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


Forest Oil Corp. v. McAllen, 268 S.W.3d 51 (2008)
168 Oil & Gas Rep. 450, 51 Tex. Sup. Ct. J. 1309

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 13


Fridl v. Cook, 908 S.W.2d 507 (1995)

Arbitration Act. Vernon's Ann.Texas Civ.St.


art. 238–2.
KeyCite Yellow Flag - Negative Treatment
Disagreed With by Pony Exp. Courier Corp. v. Morris, Tex.App.-San  2 Cases that cite this headnote
Antonio, April 17, 1996
908 S.W.2d 507
Court of Appeals of Texas, [2] Appeal and Error
El Paso. Interlocutory and Intermediate Decisions
Generally, Court of Appeals has no
James FRIDL, Individually and d/ jurisdiction to review interlocutory appeals,
b/a Cross Marketing, Inc., and Cross unless such appeal is permitted by rule or
Marketing of Texas, Inc., Appellant, statute.
v.
Cases that cite this headnote
Thomas W. COOK, Appellee.

No. 08–94–00392–CV. [3] Alternative Dispute Resolution


| Scope and standards of review
Aug. 31, 1995.
In reviewing factual question concerning
|
order denying arbitration, appellate court uses
Rehearing Overruled Oct. 4, 1995.
“no evidence” standard.
Sales agent sued marketing company's president for
13 Cases that cite this headnote
breach of contract, tortious interference, and fraud. The
142nd District Court, Midland County, George Gilles,
J., denied president's motions to stay litigation and [4] Appeal and Error
compel arbitration, and quash discovery, and ordered Cases Triable in Appellate Court
that all arbitration be stayed. President and marketing Appellate court reviews legal conclusions de
company appealed. The Court of Appeals, Larsen, J., novo.
held that: (1) district court had discretion to determine
alter ego issue before compelling arbitration; (2) fraud 7 Cases that cite this headnote
claim was not arbitrable; (3) tortious interference with
contracts claim was not arbitrable; (4) sales agent could [5] Alternative Dispute Resolution
not avoid arbitration clause in agency contract by suing Arbitration favored; public policy
president's alleged alter ego; (5) district court could not
Arbitration, as means of settling disputes
stay arbitration; and (6) marketing company waived
between parties, is favored.
objections to personal jurisdiction by making general
appearance. Cases that cite this headnote

Affirmed in part, reversed in part.


[6] Alternative Dispute Resolution
Evidence
Party opposing arbitration bears burden of
West Headnotes (27) proving no valid arbitration agreement as to
matters in controversy.
[1] Alternative Dispute Resolution
5 Cases that cite this headnote
Decisions reviewable; finality
Court of Appeals had jurisdiction over appeal
from interlocutory order denying motion to [7] Alternative Dispute Resolution
compel arbitration and order staying all Construction in favor of arbitration
arbitration proceedings under Texas General

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Fridl v. Cook, 908 S.W.2d 507 (1995)

Courts must indulge every reasonable


presumption in favor of arbitration, and all 1 Cases that cite this headnote
doubts as to arbitrability of issue must be
decided in favor of arbitration. [11] Alternative Dispute Resolution
Employment disputes
2 Cases that cite this headnote
Sales agent's claim against marketing
company's president for allegedly tortiously
[8] Alternative Dispute Resolution interfering with agency agreement with
Disputes and Matters Arbitrable Under company was not subject to arbitration under
Agreement agreement, as arbitrable breach of contract
Test to determine whether tort claim is subject claim could be superfluous to tortious
to arbitration is whether particular tort claim interference claim even as to damages.
is so interwoven with contract that it could
not stand alone or, on the other hand, is tort Cases that cite this headnote
completely independent of contract and could
it be maintained without reference to contract. [12] Torts
Tortfeasor as stranger to contract or
15 Cases that cite this headnote
relationship, in general
Party cannot tortiously interfere with its own
[9] Alternative Dispute Resolution contract.
Stay of Arbitration
Jury 2 Cases that cite this headnote
Civil Proceedings Other Than Actions;
Special Proceedings [13] Torts
While sales agent's breach of contract claim Contracts
against marketing company's president was Elements of tortious interference claim are
subject to arbitration under agency agreement existence of contract subject to interference,
with marketing company, agent was entitled act of interference that was wilful and
to jury trial on issue of whether president intentional, proximately causing plaintiff's
was marketing company's alter ego, pending damages, with actual damage or loss to
which determination arbitration would be plaintiff.
held in abeyance.
2 Cases that cite this headnote
Cases that cite this headnote

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Fridl v. Cook, 908 S.W.2d 507 (1995)

contracts with prospective clients was not


subject to arbitration under agency agreement Cases that cite this headnote
with marketing company, as claim did not
relate to agreement, but rather related to [20] Alternative Dispute Resolution
potential contracts that might have arisen, Matters to Be Determined by Court
absent interference, between sales agent and
Trial court was proper forum for
his clients.
determination of whether president was alter
Cases that cite this headnote ego of marketing company, which controlled
sales agent's breach of contract and tortious
interference with contract claims against
[16] Alternative Dispute Resolution president, despite arbitrability of breach of
Persons affected or bound contract claim under agent's agreement with
Suing marketing company's president, who marketing company.
was not party to contract containing
arbitration clause between sales agent 2 Cases that cite this headnote
and marketing company, on grounds that
president was alter ego of company did not [21] Alternative Dispute Resolution
relieve agent of his obligation to arbitrate. Proceedings

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

3 Cases that cite this headnote Appearance


Waiver of Objections
Marketing company that was neither named
[19] Contracts
as independent defendant nor served with
Effect in general; enforcement in general
citation in sales agent's suit against company's
Party is not entitled to enforce those portions president made “general appearance” in
of contract which it likes, while avoiding those suit, waiving any challenges to personal
which it does not.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Fridl v. Cook, 908 S.W.2d 507 (1995)

jurisdiction, by moving trial court to compel


arbitration and to stay litigation.

3 Cases that cite this headnote Attorneys and Law Firms

*509 Hector De Leon, Austin, for appellant.


[24] Courts
Jurisdiction of the Person in General James P. Boldrick, Dick R. Holland, Boldrick, Clifton,
Nelson & Holland, Midland, for appellee.
Trial court possesses jurisdiction over parties
properly before it. Before BARAJAS, C.J., and LARSEN and McCLURE,
JJ.
Cases that cite this headnote

[25] Appearance OPINION


Waiver of Objections
Party generally appearing in case waives any LARSEN, Justice.
complaints as to personal jurisdiction.
This is an appeal from the trial court's order denying
2 Cases that cite this headnote defendant's motions to compel arbitration, stay litigation,
and quash discovery requests. In addition to denying
defendant's motions, the trial court ordered that all
[26] Appearance arbitration be stayed “pending the determination ... of all
General or Special Appearance matters in controversy between the parties.” We affirm in
Appearance part and reverse in part.
Waiver of Objections
“General appearance” occurs, waiving any
objection to personal jurisdiction, when party FACTS
invokes judgment of court in any way on
any question other than of court's jurisdiction, In 1990, Thomas W. Cook entered into a written
without being compelled to do so by previous agreement with Cross Marketing, Inc., under which Cook
ruling of court seeking jurisdiction. would sell and service insurance policies, annuities, and
investments for CMI throughout West Texas and New
1 Cases that cite this headnote Mexico. In return, Cook would receive *510 50 percent
commission and other compensation for the sales. CMI's
[27] Appearance president, James Fridl, signed the contract as CMI's
General or Special Appearance representative. The contract contains an arbitration
Appearance clause, which states:
Waiver of Objections Any and all controversies, disputes
In determining whether voluntary appearance or claims arising out of or
is “general appearance,” waiving any relating to this Agreement or a
objection to personal jurisdiction, emphasis breach hereof, except as otherwise
is on affirmative action which impliedly provided herein, shall be resolved
recognized court's jurisdiction over parties; by arbitration to be held in
mere presence of party or his attorney in Houston, Texas, in accordance with
courtroom at time of hearing or trial, where the rules then observed by the
neither participates in prosecution or defense American Arbitration Association,
of action, is not appearance. and judgement upon any award
rendered may be entered by any
2 Cases that cite this headnote
court of competent jurisdiction. The

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Fridl v. Cook, 908 S.W.2d 507 (1995)

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).

Sec. B. The appeal shall be taken in the manner and


to the same extent as from orders or judgments in

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Fridl v. Cook, 908 S.W.2d 507 (1995)

or, on the other hand, is a


tort completely independent of the
ENFORCEABILITY OF ARBITRATION CLAUSE
contract and could be maintained
Appellant Fridl brings three points of error, the first without reference to the contract.
urging that the trial court erred in denying the motion Valero Energy Corp. v. Wagner
to compel arbitration and stay litigation, as he did not & Brown, 777 S.W.2d 564, 566
determine whether the parties had agreed to arbitrate, (Tex.App.—El Paso 1989, writ
and if so, the scope of such agreement. Fridl urges denied).
that whatever obligations he might have toward Cook
Cook's first amended petition makes claims against Fridl
are necessarily based on the 1990 contract. All claims,
for breach of contract, fraud in inducing Cook to
he argues, whether framed in contract or tort, whether
perform services through Fridl's other corporation, rather
against the corporate entity or Fridl as alter ego, rise and
than under the contract, and tortious interference with
fall with the contract containing the arbitration clause.
contract. The specific allegations Cook makes are:

Plaintiff Cook, on the other hand, successfully persuaded


the trial court that this lawsuit is not a dispute or claim I. First Claim
arising out of or relating to the contract. His argument is
based on two premises. First, Cook asserts that his claims [9] On February 6, 1990, COOK entered into a
against Fridl sound generally in tort, and therefore the contractual agreement with Defendant for the sale and
trial court properly declined to compel arbitration under service of insurance, annuities and investment products
the contract. Second, he argues that because the lawsuit is *512 to be marketed in the States of Texas and New
against James Fridl, who was not a party to the contract, Mexico....
and only parties to the contract can compel arbitration, .....
Fridl cannot compel arbitration. 2
FRIDL has breached the contract by refusing to pay
COOK the commission specified within the contract,
[5] [6] [7] We begin our analysis by noting that
and without valid reason, has refused to account to
arbitration, as a means of settling disputes between
Cook for the commissions owing.
parties, is favored by Texas courts. Brazoria County v.
Knutson, 142 Tex. 172, 176 S.W.2d 740, 743 (1943). The This is a simple breach of contract claim, and is
party opposing arbitration bears the burden of proving clearly subject to the arbitration clause within the
no valid arbitration agreement exists as to the matters contract. TEX.REV.CIV.STAT.ANN. art. 224 (Vernon
in controversy. Prudential Securities, Inc. v. Banales, 860 Supp.1995); Valero, 777 S.W.2d at 566. It is contingent,
S.W.2d 594 (Tex.App.—Corpus Christi 1993, no writ). however, on a finding that Fridl is CMI's alter ego. Alter
The courts must indulge every reasonable presumption in ego is a factual issue, and Cook has asked for a jury trial
favor of arbitration, and all doubts as to the arbitrability on all factual issues. It might enhance judicial economy to
of an issue must be decided in favor of arbitration. submit the breach of contract claim to arbitration first, as
D. Wilson Construction Co., Inc. v. McAllen I.S.D., 848 an alter ego finding matters little if the contract was not
S.W.2d 226 (Tex.App.—Corpus Christi 1992, writ dism'd
breached, or if Cook was not damaged. 3 Nevertheless, we
w.o.j.).
cannot say the trial court abused its discretion here. Cook
must prevail on both allegations, breach of contract and
alter ego, before he can succeed on this claim. Although his
ARBITRATION OF PLAINTIFF'S CLAIMS breach of contract claim must be arbitrated, he is entitled
to a jury trial on the issue of alter ego. The trial court may
[8] The test we employ in determining whether a tort properly hold arbitration in abeyance while determining
claim is subject to arbitration is: alter ego. Indeed, this seems the best way to insure Fridl's
participation in the arbitration if he is adjudicated CMI's
[W]hether the particular tort claim
alter ego and held ultimately responsible for CMI's breach
is so interwoven with the contract
that it could not stand alone of contract, if any. 4 On this claim, although we emphasize

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Fridl v. Cook, 908 S.W.2d 507 (1995)

that the parties' rights under the contract must be decided


by arbitration, nevertheless the trial court has not, thus This is a fraud claim. As we understand it, Cook claims
far, erred. that Fridl had several alter ego corporations, and that
he induced Cook into funneling business through Cross
Marketing of Texas, Inc. instead of through CMI. This,
II. Second Claim Cook claims, enabled Fridl to retain all the profits
[10] In his second claim, Cook alleges: generated by Cook while claiming that CMI had not
shown a profit, and thus that no money was owed under
FRIDL knowingly made the following representations the contract.
and/or knowingly concealed the following information:
We do not see that this is a claim “arising out of or relating
1. FRIDL individually and representing CMI
to” the contract. Fridl and CMI may have honored their
represented that CMI had existing contracts with
contractual obligations in every respect, and yet be liable
various insurance companies providing for the
for fraudulently inducing Cook to obtain business outside
marketing and sale of insurance, annuities and other
the contract so as to avoid full payment of commissions.
investment related products when in fact CMI did not.
We believe this claim is distinguishable from the fraud
2. That the above referenced contracts provide that claim which this Court found subject to arbitration in
CMI can employ agents in such marketing and Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Wilson, 805
promotion when in fact no contract existed. S.W.2d 38, 40 (Tex.App.—El Paso 1991, no writ). There,
Merrill Lynch could not be liable for fraud unless it had
3. That CMI was licensed to sell annuity and insurance breached its obligations under the brokerage contract with
products in the State of Texas at the time the contract Wilson, its client. Here, the fraud claim may be pursued
was entered into when in fact CMI was not licensed to even if no breach of the Cook–CMI contract occurred.
sell insurance products. We find the trial court did not err in refusing to compel
arbitration on this claim.
4. That CMI had existing contracts with various
insurance companies (which CMI did not) FRIDL
would perform this contract in the name of CMI when, III. Third Claim
in truth and in fact, FRIDL formed a company called
Cross Marketing of Texas, Inc. as his alter ego to reap [11] [12] [13] [14] FRIDL as sole shareholder a
the benefits of the marketing program sold under the controller of CMIT [Cross Marketing of Texas, Inc.],
terms and conditions of the contract between COOK caused CMIT to interfere with the contract between
and FRIDL. CMI and COOK.
This is a claim of tortious interference with contract.
5. FRIDL's scheme to defraud consisted of inducing It is well settled that a party cannot tortiously interfere
COOK to perform under the contract and to set up with its own contract. LA & N Interests, Inc. v. Fish, 864
CMIT to solicit business under the terms of the contract S.W.2d 745, 748–49 (Tex.App.—Houston [14th Dist.]
to the exclusion of COOK, to hide behind his other 1993, no writ); Barker v. Brown, 772 S.W.2d 507, 510
corporate identities, direct Cook to do business in these (Tex.App.—Beaumont 1989, no writ). The elements
other entity names and then claim CMI has not made of a tortious interference claim are: the existence of a
any money under the Contract and, therefore, not pay contract subject to interference, an act of interference
commissions earned. that was wilful and intentional, proximately causing
plaintiff's damages, with actual damage or loss to
..... plaintiff. Murray v. Crest Construction, Inc., 900 S.W.2d
342 (Tex.1995). Although breach of the interfered-
By reason of COOK's reliance upon FRIDL's with contract is probably the most common measure
representations and fraudulent *513 concealments of damage, tortious interference does not limit the
of material facts described above, COOK has been damage for the tort to that alone. The record does
damaged in an amount far in excess of the minimum not reveal whether Cook depends upon breach of the
jurisdictional limits of the Court.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Fridl v. Cook, 908 S.W.2d 507 (1995)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Fridl v. Cook, 908 S.W.2d 507 (1995)

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.

[22] Second, as we discussed earlier in this opinion, the


trial court does not have jurisdiction to determine all CONCLUSION
matters in controversy here. The breach of contract issues
must be decided by arbitration, as the parties originally We conclude in this case that Cook's breach of contract
agreed. Although we believe the trial court has discretion claims are subject to arbitration, and that the trial court
to decide in which order the breach of contract and may not decide them. We nevertheless hold that the issue
alter ego issues are to be resolved, staying arbitration of alter ego, essential to establishing Fridl's liability here,
until it determined all matters in controversy exceeded its is a fact question not subject to the arbitration clause in
authority. Point of Error Two is sustained. the parties' contract. Moreover, for Fridl to be bound by
the arbitration, he must either be adjudicated CMI's alter
ego, or otherwise actively participate in the arbitration
proceedings. To insure that all necessary parties are bound
REFUSAL TO QUASH DISCOVERY AGAINST CMI
by the arbitration, it is within the trial court's discretion to
[23] In Fridl's third point of error, he claims that the trial determine the alter ego issue before arbitration proceeds.
court erred in refusing to quash discovery requests against
CMI, as it has never been named as an independent We emphasize, however, that the trial court cannot
defendant nor been served with citation in this cause. We decide the breach of contract issue; that was clearly an

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


Fridl v. Cook, 908 S.W.2d 507 (1995)

area the parties agreed to arbitrate when they entered


their contract. We therefore reverse that portion of All Citations
the trial court's order staying arbitration “pending the
determination by this Court of all matters in controversy 908 S.W.2d 507
between the parties.” In all else, the trial court's order is
affirmed.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 10


Frost Nat. Bank v. L & F Distributors, Ltd., 165 S.W.3d 310 (2005)
48 Tex. Sup. Ct. J. 803

the provisions with reference to the whole


agreement.
165 S.W.3d 310
Supreme Court of Texas. 122 Cases that cite this headnote
FROST NATIONAL BANK, Petitioner,
v. [3] Contracts
L & F DISTRIBUTORS, LTD., Respondent. Subject, Object, or Purpose as Affecting
Construction
No. 04–0074. Contracts
| Reasonableness of Construction
May 27, 2005.
Courts construe contracts from a utilitarian
Synopsis standpoint bearing in mind the particular
Background: Assignee of motor vehicle lease brought business activity sought to be served and
declaratory judgment action against lessor after it refused will avoid, when possible and proper,
to sell vehicles to assignee before end of lease terms. The a construction which is unreasonable,
370th District Court, Hidalgo County, Noe Gonzalez, inequitable, and oppressive.
J., awarded final summary judgment to assignee. Lessor
137 Cases that cite this headnote
appealed. The Corpus Christi Court of Appeals, Dori
Contreras Garza, J., 122 S.W.3d 922, affirmed. Review
was granted. [4] Contracts
Existence of Ambiguity
Contracts
[Holding:] The Supreme Court held that assignee could Ambiguity in General
exercise the purchase option only at expiration of the If, after the pertinent rules of construction are
lease. applied, the contract can be given a definite or
certain legal meaning, it is unambiguous and
is construed as a matter of law.
Reversed and remanded.
72 Cases that cite this headnote

West Headnotes (6) [5] Contracts


Existence of Ambiguity
A contract is ambiguous if it is susceptible to
[1] Contracts
more than one reasonable interpretation.
Language of Contract
In construing a contract, courts must ascertain 43 Cases that cite this headnote
and give effect to the parties' intentions as
expressed in the document.
[6] Bailment
133 Cases that cite this headnote Termination, Rescission, and Option to
Purchase Property
Lease allowed lessee's assignee to purchase
[2] Contracts
the vehicles only at the end of the sixty-
Construction as a Whole
month lease term; although the terminal
Courts consider the entire writing and attempt rental adjustment clause entitled the lessee
to harmonize and give effect to all the to purchase the vehicles by giving written
provisions of the contract by analyzing notice at least ninety days before expiration,
it required payment of fair market value on

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Frost Nat. Bank v. L & F Distributors, Ltd., 165 S.W.3d 310 (2005)
48 Tex. Sup. Ct. J. 803

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Frost Nat. Bank v. L & F Distributors, Ltd., 165 S.W.3d 310 (2005)
48 Tex. Sup. Ct. J. 803

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.

.... Were we to consider the purchase option provision in


isolation, we might agree with the court of appeals'
Section 2. Terms; Rental; Unconditional Obligations;
reading. However, when both sentences of the provision
Security.
are properly considered in conjunction with each other
A. The lease of each item shall begin on the date of and the rest of the agreement, particularly the contractual
the related Schedule (the “Acceptance Date”) and end definition of *313 the term “Expiration,” the agreement
on the Expiration Date specified in the Schedule (the unambiguously allows L & F to purchase the vehicles only
“Expiration”) or on the date of any earlier or later at the end of the sixty-month lease term. 3
termination hereunder (the “Termination”).
The court of appeals ignored pertinent language in the
.... lease schedule when it held that, should L & F choose
to exercise the purchase option before the end of sixty
LEASE SCHEDULE TO MASTER
months, the lease would simply expire and payment
EQUIPMENT LEASE AGREEMENT
would be due at the time of purchase. Id. The agreement
.... specifically states that the lease ends on the “Expiration”
or “Expiration Date,” which occurs at sixty months. A
C. Term Expiration. (60) Sixty months (the different contractual term, “Termination,” describes the
“Expiration” or “Expiration Date”). agreement's being terminated on an earlier or later date.
By calling for payment “on the last day of such Expiration
....
[of] an amount in cash equal to the then Fair Market
Lease Schedule to Master Equipment Lease Agreement Value,” the agreement provides that, should L & F give
the requisite notice of its intent to exercise the purchase
Optional Provisions option, it will pay Frost at the end of the sixty-month lease
term the then-fair market value of the vehicles, which will
.... effectively come out to twenty percent of the invoice price.
To reach the court of appeals' conclusion requires either
Section 3. Purchase; Terminal Rental Adjustment
substituting the word “Termination” for “Expiration”
A. Provided no Event of default shall have occurred and in the purchase option provision or amending the
then be continuing, Lessee shall have, by giving not less

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Frost Nat. Bank v. L & F Distributors, Ltd., 165 S.W.3d 310 (2005)
48 Tex. Sup. Ct. J. 803

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Garcia v. Huerta, 340 S.W.3d 864 (2011)

[1] interlocutory order amending prior order compelling


arbitration of borrowers' claims against real estate agent
KeyCite Yellow Flag - Negative Treatment were subject to review for abuse of discretion, and
Distinguished by Hogg v. Lynch, Chappell & Alsup, P.C., Tex.App.-El 
Paso, November 10, 2015
[2] lender's waiver of right to enforce arbitration
340 S.W.3d 864
agreement could not be imputed to real estate agent.
Court of Appeals of Texas,
San Antonio.
Reversed and remanded.
Albert GARCIA, Appellant,
v.
Edward HUERTA and Margarita A.
Huerta, Individually and as Next Friends West Headnotes (12)
of Heather L. Huerta, Edward Timothy
Huerta and Danara L. Huerta, Appellees. [1] Alternative Dispute Resolution
Scope and standards of review
No. 04–10–00688–CV.
Interlocutory order that granted borrowers'
|
motion to amend order compelling arbitration
March 30, 2011.
by not requiring arbitration of claim
|
against lender's real estate agent that
Rehearing Overruled May 9, 2011.
evicted borrowers from home in process of
Synopsis foreclosure, and which permitted borrowers'
Background: Borrowers who defaulted on home equity litigation of claims against agent to proceed,
loan filed suit against secured lender, lender's real estate was subject to appellate review for abuse
agent that assisted lender in evicting borrowers from of discretion, pursuant to which appellate
property during foreclosure, and others, with claims court would defer to trial court's factual
against real estate agent for violations of Texas Debt determinations, and would review questions
Collection Act and for trespass, theft, burglary and of law de novo. V.T.C.A., Civil Practice &
conversion, and invasion of privacy. Defendants filed Remedies Code § 51.016.
motions to compel arbitration. The 229th Judicial District
Court, Duval County, Alex William Gabert, J., denied 2 Cases that cite this headnote
motions. Defendants filed petition for writ of mandamus
to compel District Court to vacate order and to compel [2] Alternative Dispute Resolution
arbitration. The Court of Appeals, 300 S.W.3d 818, Scope and standards of review
conditionally granted writ. The Judicial District Court On appeals of orders denying arbitration
ordered parties to submit to arbitration. Borrowers under the Texas Arbitration Act (TAA),
subsequently settled with lender and other defendants, the appellate court will apply a no-
and pursuant to agreement, lender waived arbitration and evidence standard to the trial court's factual
assigned its claims against real estate agent to borrowers. determinations and a de novo standard to
The District Court granted borrowers' motion to amend legal determinations. V.T.C.A., Civil Practice
arbitration order and ordered that litigation against agent & Remedies Code § 51.016.
could proceed. Real estate agent appealed.
4 Cases that cite this headnote

Holdings: The Court of Appeals, Phylis J. Speedlin, J., [3] Appeal and Error
held that: Cases Triable in Appellate Court
Appeal and Error

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Garcia v. Huerta, 340 S.W.3d 864 (2011)

Allowance of remedy and matters of enforcing arbitration. 9 U.S.C.A. § 1 et seq.;


procedure in general V.T.C.A., Civil Practice & Remedies Code §
When a matter involving both factual 171.001 et seq.
determinations and legal conclusions is
4 Cases that cite this headnote
decided by the trial court, the appellate
court will generally employ the abuse of
discretion standard, in which it defers to [8] Alternative Dispute Resolution
the trial court's factual determinations while Waiver or Estoppel
determining questions of law de novo. Secured lender's waiver of its right to compel
arbitration pursuant to arbitration agreement
4 Cases that cite this headnote
provision of home equity loan agreement
was not imputed to real estate agent
[4] Alternative Dispute Resolution that assisted lender in evicting borrowers
Scope and standards of review during foreclosure proceedings, and therefore,
Whether there is a valid and enforceable real estate agent did not waive right to
agreement to arbitrate is a legal question compel arbitration; agent never acted in any
subject to de novo review. way to indicate that he was repudiating
right to enforce arbitration agreement, or
7 Cases that cite this headnote otherwise acted inconsistently with intent
to rely on arbitration agreement, but in
fact consistently invoked right to enforce
[5] Alternative Dispute Resolution
arbitration agreement throughout course of
Evidence
borrower's litigation of tort claims against
There is a strong presumption favoring
agent.
arbitration, which arises only after the party
seeking to compel arbitration proves a valid 2 Cases that cite this headnote
arbitration agreement exists.

6 Cases that cite this headnote [9] Alternative Dispute Resolution


Scope and standards of review
Whether a party has waived his right to
[6] Alternative Dispute Resolution
arbitration is a question of law that the
Validity
appellate court reviews de novo, giving no
Under both the Federal Arbitration Act and
deference to the trial court's ruling.
the Texas Arbitration Act, the court will
apply ordinary state contract law principles 1 Cases that cite this headnote
in order to decide whether a valid arbitration
agreement exists. 9 U.S.C.A. § 1 et seq.;
[10] Estoppel
V.T.C.A., Civil Practice & Remedies Code §
Nature and elements of waiver
171.001 et seq.
Estoppel
2 Cases that cite this headnote Implied waiver and conduct constituting
waiver
[7] Alternative Dispute Resolution “Waiver” is an intentional relinquishment
Evidence of a known right or intentional conduct
inconsistent with claiming that right.
Once a valid agreement to arbitrate has been
established, a presumption attaches favoring 1 Cases that cite this headnote
arbitration and the burden shifts to the party
resisting arbitration to establish a defense to
[11] Estoppel

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Garcia v. Huerta, 340 S.W.3d 864 (2011)

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.

Subsequently, the Huertas defaulted on the home equity


loan; they eventually filed for bankruptcy and the loan was
OPINION discharged.
Opinion by: PHYLIS J. SPEEDLIN, Justice.
Thereafter, Wells Fargo, through its counsel Langley &
Albert Garcia challenges the trial court's rendition of an Banack, sought a non-judicial foreclosure of the home
amended order denying him arbitration. We reverse the equity loan. The property was purchased by Wells Fargo
judgment of the trial court, and remand the cause to the at the foreclosure sale. Wells Fargo and its wholly-
trial court for further proceedings. owned subsidiary, *867 Premier Asset Services, then
hired Garcia, a real estate agent, to evict the Huertas and
to remove their belongings from their home. Premiere
asked Garcia to use his best efforts to sell the property,
BACKGROUND
and specifically directed him to clean up and repair
The facts underlying this case are summarized in this the property. Following the eviction, the Huertas filed
court's earlier opinion in In re Wells Fargo Bank, N.A., 300 suit against Wells Fargo, America's Servicing Company,
S.W.3d 818, 821–23 (Tex.App.-San Antonio 2009, orig. Langley & Banack, Jones, Premiere, and Garcia. As to
proceeding), as follows. The underlying dispute involves Garcia, the Huertas asserted claims under the Texas Debt

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Garcia v. Huerta, 340 S.W.3d 864 (2011)

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.

17. Cooperation. The Parties agree to cooperate with


one another to execute and file or deliver such other
STANDARD OF REVIEW AND APPLICABLE LAW
documentation as may be necessary or appropriate to

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Garcia v. Huerta, 340 S.W.3d 864 (2011)

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Garcia v. Huerta, 340 S.W.3d 864 (2011)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Gatlin v. Criscione, Not Reported in F.Supp.2d (2008)
2008 WL 2745956

Before the court is the motion of Ogden Chrysler


Plymouth, Inc., the corporate name of Bill Kay, to stay
2008 WL 2745956
and compel arbitration of the claims against it pursuant
Only the Westlaw citation is currently available.
to an arbitration agreement between Gatlin and Bill Kay.
United States District Court,
For the reasons set forth below, the motion [# 12] will
N.D. Illinois,
be granted; however, the arbitration will be stayed until
Eastern Division.
Gatlin's nonarbitrable claims have been resovled by the
George GATLIN, Plaintiff, court. 1
v.
P.O. A. CRISCIONE, Star # 16195, P.O. S.
I. Background
Mulkerrin, Star # 17071, and Anthony Caputo,
On May 2, 2007, Gatlin signed an agreement to purchase a
Individually, and the City of Chicago, Illinois
used vehicle from Bill Kay (“the purchase agreement”). 2
Solution Group, and Bill Kay Chrysler, Defendants.
The purchase agreement provided that, while Gatlin was
No. 1:07-cv-7212. permitted to take the vehicle home that day, completion of
| the sale was contingent on Bill Kay's securing third party
July 11, 2008. financing for the sale. Gatlin was required to cooperate
in Bill Kay's efforts to secure financing, including filling
Attorneys and Law Firms out an accurate credit application as well as providing any
necessary documentation. The purchase agreement also
Edward M. Fox, Leslie C. Mccoy, Ed Fox & Associates,
stated that if Bill Kay was unable to secure financing,
Chicago, IL, for Plaintiff.
Gatlin would be required to return the vehicle within 24
Tiffany Yvette Harris, City of Chicago Law Department, hours. Should Gatlin fail to do so, he authorized Bill Kay
Stuart David Gordon, James Hjalmar Whalen, John to repossess the vehicle, “with or without legal process.”
C. Eggert, Gordon & Karr LLP, Chicago, IL, for
Defendants. Greater Suburban Acceptance Corporation (“GSAC”)
subsequently agreed to provide financing for Gatlin if it
was able to confirm the information provided in his credit
application. When GSAC was unable to confirm Gatlin's
MEMORANDUM OPINION AND ORDER
stated residence, employer, or income, it determined that it
JOAN HUMPHREY LEFKOW, District Judge. would not fund Gatlin's purchase. Bill Kay then requested
that Gatlin return the vehicle, and when he failed to do so,
*1 Plaintiff George Gatlin filed a seven count complaint Bill Kay hired ISG, a repossession company, to secure its
in this case. He alleges the following: (1) false arrest return. Anthony Caputo was ISG's employee.
under 42 U.S.C. § 1983 against Chicago Police Officer
defendants Criscione and Mulkerrin; (2) false arrest under At some time before 3:00 on the afternoon of June
42 U.S.C. § 1983 against defendant Anthony Caputo; 4, 2007, Caputo falsely informed officers Criscione and
(3) excessive force under 42 U.S.C. § 1983 against Mulkerrin that Gatlin was in possession of a weapon
defendants Criscione and Mulkerrin; (4) failure to provide while driving on Chicago Avenue near Pine Avenue in
medical care under 42 U.S.C. § 1983 against defendants Chicago. Caputo arranged with the officers that they be
Criscione and Mulkerrin; (5) false arrest under Illinois present “when Caputo caused Plaintiff's vehicle to be
law against defendants Criscione, Mulkerrin, Caputo, stopped.” When stopped, the officers searched Gatlin and
Illinois Solution Group (“ISG”), and Bill Kay Chrysler his vehicle without lawful cause, arrested him without
(“Bill Kay”); (6) an Illinois law claim of willful and probable cause, and used excessive force against him.
wanton conduct for failure to provide medical care against Also on June 4, Caputo on behalf of Bill Kay filed a
defendants Criscione, Mulkerrin, and the City of Chicago; police report alleging that Gatlin had submitted false
and (7) malicious prosecution under Illinois law against information in his credit application in violation of Illinois
defendants Caputo, ISG, and Bill Kay. law. Gatlin was criminally charged with defrauding a

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Gatlin v. Criscione, Not Reported in F.Supp.2d (2008)
2008 WL 2745956

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Gatlin v. Criscione, Not Reported in F.Supp.2d (2008)
2008 WL 2745956

has not responded to this argument in his response


A. Bill Kay Did Not Waive its Right to Arbitration brief. The arbitration agreement at issue clearly stipulates
Gatlin first contends that because Caputo, acting on that questions of arbitrability will be submitted to
behalf of Bill Kay, initiated criminal proceedings against arbitration. The court must therefore submit the question
Gatlin, Bill Kay waived its right to arbitration. Choosing of arbitrability to the arbitrator.
to submit issues which are arbitrable under a contract to
a court for decision is a presumptive waiver of the right
to arbitrate. Cabinetree of Wisconsin, Inc. v. Kraftmaid C. Arbitration will be Stayed Until the Conclusion of this
Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir.1995); Kennedy Case
v. Commercial Carriers, Inc., 630 N.E.2d 1059, 1062, 258 Gatlin's final contention is that his claims against those
Ill.App.3d 939, 943, 196 Ill.Dec. 894, 897 (Ill.App.Ct. defendants who were not signatories of the arbitration
1st Dist.1994). This is an unusual fact pattern. At least, agreement are intertwined with the claims against Bill Kay
neither party has cited any case authority specifically and it would therefore be prejudicial to pursue these claims
addressing the issue whether initiation of a criminal case separately. His argument overlooks the fact that “the
in court to resolve a contractual dispute amounts to Federal Arbitration Act ‘requires piecemeal resolution
submitting arbitrable issues to a court for decision. Here, when necessary to give effect to an arbitration agreement’
as the facts are presented, Bill Kay through its agent and mandates enforcement of an arbitration agreement
was not seeking resolution of a dispute contemplated ‘notwithstanding the presence of other persons who are
by the arbitration clause; it was attempting to effect parties to the underlying dispute but not to the arbitration
its contractual right to take possession of the vehicle. agreement.’ ” Board of Managers of the Courtyards at
Certainly, Bill Kay would not have had a justiciable claim the Woodlands Condominium Ass'n v. IKO Chicago, Inc.,
at that point. It follows that Bill Kay has not waived its 697 N.E.2d 727, 732, 183 Ill.2d 66, 75, 231 Ill.Dec. 942,
right to arbitration. 947 (1998) (citing Moses H. Cone Memorial Hospital, 460
U.S. at 20)). Immediate submission of Gatlin's claims
against Bill Kay, however, would undermine the court's
B. The Arbitrability of Gatlin's Claims against Bill Kay is jurisdiction over Gatlin's nonarbitrable claims against the
an Issue to be Determined by the Arbitrator other defendants in this case. Because Bill Kay's liability
Gatlin next contends that these claims do not fall within is premised on respondeat superior, it will depend on the
the scope of the arbitration agreement because false arrest liability of Caputo and Illinois Solutions Group and on
and malicious prosecution claims are too attenuated to findings of fact regarding their actions. The arbitrator
have been reasonably considered by the plaintiff at the could not determine Bill Kay's liability without deciding
time he signed the arbitration agreement. One of Bill whether Caputo and ISG are liable, and if it decides
Kay's points in support of its motion, however, is that those issues before the court could do so, its decision
the parties agreed to submit the question of arbitrability could potentially have a res judicata effect on the claims
itself to an arbitrator. As quoted above, the arbitration against those parties in this case. When a similar situation
agreement provides that “ ‘dispute’ includes any question arose in Dickinson v. Heinold Securities, Inc., 661 F.2d
regarding whether a matter is subject to arbitration under 638, 644 (7th Cir.1981), the Seventh Circuit said that the
this Arbitration Agreement.” district court did not have discretion to force the parties
to litigate otherwise arbitrable claims in order to preserve
*4 Under both federal and Illinois law, “courts have its jurisdiction over nonarbitrable claims, but noted that
recognized that parties are free to agree to submit the it did have discretion to stay the arbitration of those
question of arbitrability itself to arbitration.” Bahuriak claims until the nonarbitrable claims had been decided by
v. Bill Kay Chrysler Plymouth, Inc., 786 N.E.2d 1045, the court. Because that course of action would preserve
1050, 337 Ill.App.3d 714, 719, 272 Ill.Dec. 211 (2003) the court's jurisdiction over Gatlin's nonarbitrable claims
(citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. and would also promote efficiency, arbitration of Gatlin's
938, 943-45, 115 S.Ct. 1920, 1923-25, 131 L.Ed.2d 985, claims against Bill Kay will be stayed until the conclusion
992-94 (1995)); Int'l Bhd. of Elec. Workers, Local 21 of this case. If the arbitrator determines that those claims
v. Ill. Bell Tel. Co., 491 F.3d 685, 687 (7th Cir.2007) are not arbitrable, they will return to the court, and their
(Issues of arbitrability are to be decided by the court resolution will be likely to have been simplified by the
unless the parties have clearly provide otherwise). Gatlin proceedings in the interim.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Gatlin v. Criscione, Not Reported in F.Supp.2d (2008)
2008 WL 2745956

arbitration is stayed until Gatlin's nonarbitrable claims


have been resolved by the court.
IV. Conclusion and Order
*5 For the foregoing reasons, Bill Kay's motion to stay
and to compel arbitration [# 12] is granted; however, the All Citations

Not Reported in F.Supp.2d, 2008 WL 2745956

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Greever v. Persky, 140 Tex. 64 (1942)
165 S.W.2d 709

and such charge may not be made where the


party charging commission is merely lending
140 Tex. 64
his own money.
Supreme Court of Texas.
7 Cases that cite this headnote
GREEVER
v.
PERSKY. [3] Usury
Agent or Other Representative of Lender
No. 7943. Where party charging a commission to the
| borrower did not negotiate the loan to a third
Nov. 4, 1942. party but made it out of his own funds, the
| commission was required to be included as
Rehearing Denied Dec. 2, 1942. “interest” for the money lent in determining
usury.
Error to Court of Civil Appeals of Second Supreme
Judicial District. 9 Cases that cite this headnote

Action by Goldie Persky, as guardian of the estate of I.


B. Persky, against B. B. Greever. Judgment non obstante [4] Usury
veredicto for plaintiff was reversed and remanded by Loans or Sales of Credit
Court of Civil Appeals, 156 S.W.2d 566, and defendant Where one acts in good faith, he may sell
brings error. his credit to a borrower and to that end
may indorse instruments or become surety for
Judgment of Court of Civil Appeals affirmed, and payment of a loan made to the borrower by
judgment of district court reversed and cause remanded a third person at the highest lawful rate of
for new trial. interest without rendering the contract or the
loan usurious, but, for such transaction to be
legal, the sale of credit must be made to enable
the borrower to obtain money from a third
West Headnotes (14)
party or the transaction must be something
more than a mere loan of money.
[1] Usury
4 Cases that cite this headnote
Agent or Other Representative of Lender
An agent or a broker may charge a
commission for services in negotiating a loan [5] Usury
with a third party without being guilty of Loans or Sales of Credit
usury, where charge is in good faith and not That a lender has to pledge his credit with a
as a mere cloak to avoid the usury law. third party to obtain funds which he lends to
the borrower does not authorize him to charge
6 Cases that cite this headnote a commission in addition to the highest legal
rate of interest, but the hazard incurred by him
[2] Usury in securing money from a third party to make
Agent or Other Representative of Lender the loan is fully compensated for by payment
of the lawful rate of interest.
For commission charged by an agent for his
services in negotiating a loan with a third 15 Cases that cite this headnote
party to be valid, it must appear that the loan
was ultimately made with or passed on to
a third party and that the extra charge was [6] Usury
made in good faith for negotiating the loan,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Greever v. Persky, 140 Tex. 64 (1942)
165 S.W.2d 709

Contemporaneous Collateral Agreements


in General Cases that cite this headnote

A lender may, without violating the usury


law, make an extra charge for any distinctly [10] Usury
separate consideration other than the simple Grounds of Penalties
lending of money. To authorize recovery of the statutory penalty
for usury, there must have been a contract
7 Cases that cite this headnote
to pay the usurious interest so collected, and
voluntary acceptance of interest exceeding
[7] Usury the lawful rate is not sufficient. Vernon's
Questions for Jury Ann.Civ.St. arts. 5071, 5073.
Where there is a dispute as to whether
1 Cases that cite this headnote
there was separate consideration other than
a simple lending of money so as to justify
an extra charge by the lender against the [11] Usury
borrower, a question is raised for the jury. Verdict and Judgment
Where evidence did not conclusively establish
7 Cases that cite this headnote
a contract by borrower to pay lender 3
per cent. monthly commissions for loans of
[8] Usury money obtained by lender from a third party
Actions for Penalties after expiration of the first 90-day period
In suit by guardian to recover for alleged and borrower had continued to pay the
payment by ward of usurious interest, where commission after execution of renewal notes
lender did not render service to borrower to lender, recovery from lender of double
other than procuring the money from a third the commissions paid after expiration of the
person and lending it to borrower, there was period was not authorized where there was no
no question for jury as to whether the parties finding of a contract to pay such commissions.
intended that commission charged borrower Vernon's Ann.Civ.St. arts. 5071, 5073.
by lender should be charged as interest for use
1 Cases that cite this headnote
of the money or as compensation for lender's
services in procuring the money.
[12] Limitation of Actions
2 Cases that cite this headnote Nature of Action in General
Where omitted item of allegedly usurious
[9] Usury interest was included in total upon which
Grounds of Penalties recovery was sought in petition for recovery
Where one engaged in insurance business of such payments made within two years
at request of dealer in oil field equipment of filing suit and trial amendment gave the
borrowed money from bank in his own name date and amount of the omitted item, the
and upon collateral owned by him, deposited cause of action stated therein was part of the
such money in his general fund, and from original action and not barred by the two-
time to time made loans to dealer upon agreed year limitation statute, notwithstanding that
commission of 3 per cent. per month for the item had been paid more than two years
90 days, the commission was “usurious” and prior to filing of trial amendment. Vernon's
would form the basis for the statutory penalty. Ann.Civ.St. arts. 5071, 5073, 5539b.
Vernon's Ann.Civ.St. arts. 5071, 5073.
1 Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Greever v. Persky, 140 Tex. 64 (1942)
165 S.W.2d 709

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Greever v. Persky, 140 Tex. 64 (1942)
165 S.W.2d 709

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Greever v. Persky, 140 Tex. 64 (1942)
165 S.W.2d 709

[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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Greever v. Persky, 140 Tex. 64 (1942)
165 S.W.2d 709

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Griffin v. Burlington Volkswagen, Inc., 411 N.J.Super. 515 (2010)
988 A.2d 101

malicious prosecution against automobile


dealership and dealership employee arose
KeyCite Yellow Flag - Negative Treatment out of and related to his purchase of
Distinguished by Barr v. Bishop Rosen & Co., Inc., N.J.Super.A.D., 
automobile, and thus were subject to the
October 26, 2015
arbitration clause in the retail order form
411 N.J.Super. 515
signed by purchaser; purchaser's claims
Superior Court of New Jersey,
related to the actions dealership took after
Appellate Division.
purchaser retained possession of the car, even
Joseph GRIFFIN, Plaintiff-Appellant, though financing for the transaction was not
v. obtained, including its actions in attempting
to repossess the car by reporting to the police
BURLINGTON VOLKSWAGEN, INC., and
department that the car had been stolen.
Augustine Staino, Defendants-Respondents.
4 Cases that cite this headnote
Submitted Oct. 27, 2009.
|
Decided Feb. 8, 2010. [2] Alternative Dispute Resolution
Liberal or strict construction
Synopsis
Alternative Dispute Resolution
Background: Purchaser of automobile filed a complaint
Construction in favor of arbitration
alleging claims for false arrest, false imprisonment,
An agreement to arbitrate should be read
malicious prosecution, abuse of process, invasion of
liberally in favor of arbitration.
privacy, and intentional infliction of emotional distress
and a statutory claim under the New Jersey Civil Rights 22 Cases that cite this headnote
Act against car dealership and dealership employee
after defendants reported the vehicle dealership had sold
to purchaser as stolen, resulting in purchaser's arrest. [3] Alternative Dispute Resolution
Dealership filed a motion to compel arbitration. The Evidence
Superior Court, Law Division, Burlington County, No. Courts operate under a presumption of
L-2756-08, granted the motion, Purchaser appealed. arbitrability in the sense that an order to
arbitrate the particular grievance should not
be denied unless it may be said with positive
assurance that the arbitration clause is not
[Holding:] The Superior Court, Appellate Division,
susceptible of an interpretation that covers the
Skillman, P.J.A.D., held that purchaser's claims against
asserted dispute.
automobile dealership and dealership employee arose out
of and related to his purchase of automobile, and thus 6 Cases that cite this headnote
were subject to the arbitration clause in the retail order
form signed by purchaser.

Affirmed. Attorneys and Law Firms

**101 J. Craig Currie (J. Craig Currie & Associates),


attorney for appellant.
West Headnotes (3)
Wardell, Craig, Annin & Baxter, attorneys for
respondents (Jeffrey S. Craig and Domenic B. Sanginiti,
[1] Alternative Dispute Resolution Jr., Haddonfield, on the brief).
Sales contracts disputes
Before Judges SKILLMAN, GILROY and
Automobile purchaser's claims for false arrest,
SIMONELLI.
false imprisonment, abuse of process, and

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Griffin v. Burlington Volkswagen, Inc., 411 N.J.Super. 515 (2010)
988 A.2d 101

Griffin subsequently brought this damages action


Opinion against Burlington Volkswagen and Staino in the Law
The opinion of the court was delivered by Division, asserting common law claims for false arrest,
false imprisonment, malicious prosecution, abuse of
process, invasion of privacy, and intentional infliction of
SKILLMAN, P.J.A.D.
emotional distress and a statutory claim under the New
*516 In August 2006, plaintiff Joseph Griffin purchased Jersey Civil Rights Act of 2004, N.J.S.A. 10:6-1 to -2.
a car from defendant Burlington Volkswagen. This
purchase required Griffin to obtain financing. According Before filing an answer, Burlington Volkswagen moved
to Griffin, he was assured at the time of the sale by to dismiss Griffin's complaint on the ground that he
defendant Augustine Staino, an employee of Burlington was required to arbitrate his claims under an arbitration
Volkswagen, that he had already been approved **102 provision contained in the *518 retail order form. The
for such financing. After paying a $1,000 deposit and trial court granted this motion. Griffin appeals.
signing a retail order form, Griffin obtained possession
of the car and thereafter received what he described as a [1] The arbitration provision that the trial court
“certificate of ownership.” Griffin subsequently drove the concluded requires Griffin to arbitrate his claims against
car to Texas where he was enrolled in college. Burlington Volkswagen states in pertinent part:

The parties to this agreement agree


*517 Approximately a month after entering into
to arbitrate any claim, dispute, or
this transaction, Griffin was informed by Burlington
controversy, including all statutory
Volkswagen that the third-party lender it had expected
claims and any state or federal
to provide financing for Griffin's purchase of the car had
claims, that may arise out of or
changed its mind and was unwilling to provide financing.
relating to the purchase or lease
Moreover, Burlington Volkswagen declined to finance the
identified in this Motor Vehicle
purchase itself and instead undertook efforts to repossess
Retail Order and the financing
the car from Griffin. According to Griffin, these efforts
thereof. By agreeing to arbitration,
consisted of harassing telephone calls to Griffin and his
the parties understand and agree
employer at Griffin's place of employment and to Griffin
that they are waiving their rights to
and his girlfriend at their residence.
maintain other available resolution
processes, such as a court action
According to Griffin, Burlington Volkswagen also
or administrative proceeding, to
reported to the Burlington Police Department that Griffin
settle their disputes. New Jersey
had stolen the car by forcibly removing it from their
Consumer Fraud Act, Used Car
premises. As a result of this report, a warrant was
Lemon Law, and Truth-in-Lending
issued for Griffin's arrest. Based on this warrant, Griffin
claims are just three examples of the
was arrested while driving the car in Mississippi and
various types of claims subject to
incarcerated overnight. Griffin had to retain local counsel,
arbitration under this agreement....
post a bond, and remain in Mississippi until he provided
There are no limitations on the type
an explanation for his possession of the car sufficient
of claims that must be arbitrated,
for Mississippi law enforcement authorities to allow his
except for New Car Lemon Law
release. Griffin also alleges that the Mississippi police
and Magnuson-Moss Warranty Act
seized the car and that he has not seen the car since.
claims which are excluded from
arbitration under this agreement.
Thereafter, Griffin had to return to New Jersey to respond
to the criminal charges brought against him as a result of
Burlington Volkswagen's report of his theft of the car. On [2] [3] It is firmly established in this State that “[b]ecause
May 7, 2007, those charges were dismissed. of the favored status **103 afforded to arbitration, ‘[a]n
agreement to arbitrate should be read liberally in favor
of arbitration.’ ” Garfinkel v. Morristown Obstetrics &

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Griffin v. Burlington Volkswagen, Inc., 411 N.J.Super. 515 (2010)
988 A.2d 101

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Griffin v. Burlington Volkswagen, Inc., 411 N.J.Super. 515 (2010)
988 A.2d 101

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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

[3] question of whether a contractual deadline for


initiating arbitration operated to bar general contractor's
KeyCite Yellow Flag - Negative Treatment demand for arbitration was one for arbitrators to decide;
Declined to Extend by In Interest of C.C., Tex.App.-Amarillo, 
September 1, 2015
[4] brokers, subcontractors, and engineers did not have
458 S.W.3d 502
a legal right to enforce the arbitration provisions in the
Supreme Court of Texas.
general contract;
G.T. Leach Builders, LLC, et al., Petitioners,
v. [5] direct benefit estoppel did not apply to allow brokers,
subcontractors, and engineers to compel developer to
Sapphire V.P., LP, Respondent
arbitrate its claims against them pursuant to the general
NO. 13–0497 contract; and
|
Argued November 5, 2014 [6] contracts between general contractor and
| subcontractor did not require developer to arbitrate its
Opinion delivered: March 20, 2015. claims against subcontractors.

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).

1 Cases that cite this headnote

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

Suing or participating in suit


[2] Estoppel
A party asserting implied waiver as a defense
Nature and elements of waiver
to arbitration has the burden to prove
Estoppel that (1) the other party has “substantially
Implied waiver and conduct constituting invoked the judicial process,” which is
waiver conduct inconsistent with a claimed right to
“Waiver,” which is the intentional compel arbitration, and (2) the inconsistent
relinquishment of a known right, can occur conduct has caused it to suffer detriment
either expressly, through a clear repudiation or prejudice; because the law favors and
of the right, or impliedly, through conduct encourages arbitration, this hurdle is a high
inconsistent with a claim to the right. one.

5 Cases that cite this headnote 4 Cases that cite this headnote

[3] Alternative Dispute Resolution [7] Alternative Dispute Resolution


Trial or hearing Suing or participating in suit
When the relevant facts are undisputed, When a party asserts implied waiver as a
whether a party waived its right to arbitrate is defense to arbitration, which requires the
a question of law. party to prove, inter alia, that the other
party has substantially invoked the judicial
5 Cases that cite this headnote process, courts consider a wide variety of
factors in determining the invocation issue,
[4] Alternative Dispute Resolution including how long the party moving to
Suing or participating in suit compel arbitration waited to do so, the
General contractor's acts of requesting a reasons for the movant's delay, whether and
continuance and then agreeing to a new when the movant knew of the arbitration
trial date in an insurance-related dispute agreement during the period of delay, how
with property developer did not constitute much discovery the movant conducted before
an express waiver of general contractor's moving to compel arbitration and whether
arbitration rights as set forth in a contract that discovery related to the merits, whether
between the parties. the movant requested the court to dispose
of claims on the merits, whether the movant
Cases that cite this headnote asserted affirmative claims for relief in court,
the extent of the movant's engagement in
pretrial matters related to the merits as
[5] Alternative Dispute Resolution
opposed to matters related to arbitrability or
Suing or participating in suit
jurisdiction, the amount of time and expense
General contractor, in an insurance-related the parties have committed to the litigation,
dispute with property developer, did not whether the discovery conducted would be
impliedly waive its arbitration rights as set unavailable or useful in arbitration, whether
forth in a contract between the parties, absent activity in court would be duplicated in
proof by developer that general contractor arbitration, and when the case was to be tried.
substantially invoked the judicial process or
that developer was prejudiced by general 8 Cases that cite this headnote
contractor's litigation conduct.

Cases that cite this headnote [8] Alternative Dispute Resolution


Suing or participating in suit

[6] Alternative Dispute Resolution

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

General contractor did not substantially


invoke the litigation process in contravention [11] Alternative Dispute Resolution
of its arbitration rights as set forth in its Suing or participating in suit
contract with property developer, so as to Responding to discovery and simply being
support a conclusion that general contractor named in a lawsuit while discovery is ongoing
did not impliedly waive its arbitration rights do not amount to waiver of an arbitration
in an insurance-related dispute, even though right.
general contractor filed certain motions and
participated in pretrial discovery, and general Cases that cite this headnote
contractor could have been more prompt in
seeking arbitration; general contractor was in [12] Alternative Dispute Resolution
the lawsuit because it was sued by developer, Suing or participating in suit
general contractor's motions were defensive Property developer did not prove that it
in nature, general contractor's participation suffered unfair prejudice as a result of
in discovery was because developer engaged general contractor's litigation conduct in an
it in discovery, and a delay of two or insurance-related dispute, so as to support
three months between trial court's denial of a conclusion that general contractor did not
general contractor's motion to transfer venue impliedly waive its arbitration rights as set
and general contractor's motion to compel forth in a contract between the parties, even
arbitration was not a substantial delay relative though general contractor might have had
to the timeline of the case as a whole. access to more information as a result of the
litigation than if the dispute had originated in
Cases that cite this headnote
arbitration; developer, not general contractor,
chose to initiate proceedings in the courts
[9] Alternative Dispute Resolution rather than in arbitration, and general
Suing or participating in suit contractor did not serve any request for
Merely taking part in litigation is not production, interrogatory, or deposition
enough to show that a party substantially notice in the case.
invoked the judicial process, for the purpose
of determining whether the party impliedly Cases that cite this headnote
waived an arbitration right; rather, the
litigation conduct must demonstrate that the [13] Alternative Dispute Resolution
party has substantially invoked the judicial Suing or participating in suit
process to its opponent's detriment. Detriment or prejudice from a party's
litigation conduct, for the purpose of
6 Cases that cite this headnote
determining whether the party impliedly
waived an arbitration right, refers to an
[10] Alternative Dispute Resolution inherent unfairness caused by a party's
Suing or participating in suit attempt to have it both ways by switching
A party's litigation conduct aimed at between litigation and arbitration to its own
defending itself and minimizing its litigation advantage.
expenses, rather than at taking advantage
of the judicial forum, does not amount to 1 Cases that cite this headnote
substantial invocation of the judicial process,
for the purpose of determining whether the [14] Alternative Dispute Resolution
party impliedly waived an arbitration right. Suing or participating in suit
Prejudice may result when a party seeking
1 Cases that cite this headnote
arbitration first sought to use the judicial

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

process to gain access to information that arbitration regardless of whether general


would not have been available in arbitration, contractor waived any right to arbitration.
but propounding discovery will not, in and
of itself, result in waiver of a right to compel 1 Cases that cite this headnote
arbitration.
[18] Appeal and Error
6 Cases that cite this headnote
Necessity of presentation in general
Appeal and Error
[15] Alternative Dispute Resolution Incorporation of assignment of errors
Suing or participating in suit
An issue presented in a petition for review to
Although a delay may be a factor both in the Supreme Court must have been preserved
terms of whether a party moving to compel for appellate review in the trial court and
arbitration has substantially invoked the assigned as error in the court of appeals, but
judicial process and whether the nonmovant only if the matter complained of originated in
has suffered prejudice, mere delay is not the trial court. Tex. R. App. P. 53.2(f).
ordinarily enough to result in a waiver of
a right to compel arbitration, even if it is 1 Cases that cite this headnote
substantial.

3 Cases that cite this headnote [19] Appeal and Error


Nature of remedy by dismissal
Disposing of appeals for harmless procedural
[16] Alternative Dispute Resolution
defects is disfavored.
Waiver or Estoppel
Waiver of an arbitration right can be implied Cases that cite this headnote
from a party's unequivocal conduct, but not
by inaction.
[20] Appeal and Error
5 Cases that cite this headnote Defects, objections, and amendments
Appellate briefs are to be construed
reasonably, yet liberally, so that the right to
[17] Alternative Dispute Resolution
appellate review is not lost by waiver.
Presentation and reservation of grounds
for review Cases that cite this headnote
General contractor did not waive its argument
in the Supreme Court that arbitrators,
[21] Appeal and Error
not the courts, had to decide whether a
Scope of Inquiry in General
contractual deadline for initiating arbitration
When an error asserted in a petition for
of disputes with property developer barred
review in the Supreme Court first arose from
general contractor's demand for arbitration,
the judgment of the court of appeals, the
even though general contractor raised the
Supreme Court is not required to address and
argument for the first time in its petition
resolve the petitioner's related argument; in
for review in the Supreme Court; the alleged
the exercise of its discretionary jurisdiction,
error of which general contractor complained
the Supreme Court may elect to address the
did not originate in trial court but instead
issue, or not. Tex. R. App. P. 53.2(f).
first arose from the judgment of the court of
appeals, which, in response to an argument Cases that cite this headnote
raised for the first time by property developer
on appeal, held that the deadline precluded
[22] Appeal and Error

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

Scope of Inquiry in General agreement requires that they refer those


Supreme Court's decision on whether to disputes to arbitration. Tex. Civ. Prac. &
address and resolve an argument by a Rem. Code Ann. § 171.021(a).
petitioner for review related to an asserted
1 Cases that cite this headnote
error that first arose from the judgment
of the court of appeals involves important
prudential considerations, such as the need to [25] Alternative Dispute Resolution
conserve judicial resources, whether allowing Disputes and Matters Arbitrable Under
lower courts to first consider and rule on Agreement
the issue will further the goal of accuracy Whether disputing parties made a valid and
in judicial decision-making, and the Supreme presently enforceable agreement to arbitrate
Court's duty to promote fairness among and, if so, whether the present disputes
litigants. Tex. R. App. P. 53.2(f). fall within the scope of that agreement
are sometimes referred to as “questions of
Cases that cite this headnote
arbitrability.” Tex. Civ. Prac. & Rem. Code
Ann. § 171.021(b).
[23] Alternative Dispute Resolution
Arbitrability of dispute 7 Cases that cite this headnote

Alternative Dispute Resolution


Conditions precedent to arbitration; [26] Alternative Dispute Resolution
procedural arbitrability Construction
Question of whether a deadline in a contract In deciding questions of arbitrability, i.e.,
between property developer and general for whether disputing parties made a valid and
initiating arbitration operated to bar general presently enforceable agreement to arbitrate
contractor's demand for arbitration of an and, if so, whether the present disputes fall
insurance-related dispute with developer was within the scope of that agreement, courts
a question of procedural arbitrability for apply the common principles of general
arbitrators to decide, as opposed to a question contract law to determine the parties' intent.
of substantive arbitrability for the courts to Tex. Civ. Prac. & Rem. Code Ann. §
decide; the deadline did not determine the 171.021(b).
present existence, enforceability, or scope of
the agreement to arbitrate the parties' disputes 6 Cases that cite this headnote
but instead imposed a procedural limit on
the parties' rights under that agreement, [27] Alternative Dispute Resolution
given that developer conceded the existence Suing or participating in suit
of an enforceable arbitration agreement
Question of whether a party has waived its
that applied to its claims against general
right to arbitration by its conduct in litigation
contractor. Tex. Civ. Prac. & Rem. Code Ann. is another way of asking the first question of
§ 171.021(b). arbitrability, i.e., whether there is a presently
enforceable arbitration agreement; if a party's
6 Cases that cite this headnote
conduct in litigation equates to a waiver of
its rights under the arbitration agreement,
[24] Alternative Dispute Resolution there is no presently enforceable agreement to
Right to Enforcement and Defenses in arbitrate. Tex. Civ. Prac. & Rem. Code Ann.
General § 171.021(b).
When parties have contractually agreed to
arbitrate their future disputes, the courts' 12 Cases that cite this headnote
obligation to honor and enforce that

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

to allow nonparties, which were insurance


[28] Alternative Dispute Resolution brokers, subcontractors, and engineers, to
Persons affected or bound compel developer to arbitrate its claims
Nonparties may be bound to an arbitration against them pursuant to the general contract;
clause when the rules of law or equity would developer did not sue nonparties for breach
bind them to the contract generally. of obligations under the general contract but,
instead, alleged that they each breached duties
Cases that cite this headnote that each contractually agreed to perform
and failed to perform them as a reasonable
[29] Alternative Dispute Resolution professional would have performed them, the
Persons entitled to enforce allegations referred to other contracts, not the
Nonparties to a contract between property general contract, and even if developer's tort
developer and general contractor did not claims sounded in contract, they did not arise
have a legal right to enforce the contract's solely out of or otherwise seek direct benefits
arbitration provisions in an insurance- under the general contract.
related dispute with developer, even though
1 Cases that cite this headnote
nonparties, which were insurance brokers,
subcontractor, and engineers, pointed to the
contract's joinder provision and definition of [32] Alternative Dispute Resolution
“contractor”; the joinder provision permitted Waiver or Estoppel
the parties to the contract to consent to the Under principles of equitable estoppel, a
joinder of additional parties in the arbitration litigant who sues based on a contract with an
but did not require them to do so, and the arbitration provision cannot, on the one hand,
contract expressly provided that the contract seek to hold a nonsignatory liable pursuant
documents were not to be construed to create to duties imposed by the contract but, on the
a contractual relationship between any person other hand, deny arbitration's applicability
or entities other than developer and general because the defendant is a nonsignatory.
contractor. Tex. Civ. Prac. & Rem. Code Ann.
§ 171.021(a). 1 Cases that cite this headnote

Cases that cite this headnote


[33] Alternative Dispute Resolution
Waiver or Estoppel
[30] Alternative Dispute Resolution Equitable principle that a claimant cannot
Persons entitled to enforce both seek to hold a nonsignatory liable
As a general rule, an arbitration clause cannot pursuant to duties imposed by a contract
be invoked by a nonparty to the arbitration containing an arbitration provision and
contract. deny arbitration's applicability because the
defendant is a nonsignatory applies when
5 Cases that cite this headnote a claimant seeks direct benefits under the
contract.
[31] Alternative Dispute Resolution
Cases that cite this headnote
Waiver or Estoppel
Property developer's claims against
nonparties to a contract between developer [34] Alternative Dispute Resolution
and general contractor for negligence and Waiver or Estoppel
breach of contract did not seek a direct Whether a claim seeks a direct benefit from
benefit under the general contract, and a contract containing an arbitration clause
thus direct benefit estoppel did not apply turns on the substance of the claim, not

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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

[38] Alternative Dispute Resolution


[35] Alternative Dispute Resolution Waiver or Estoppel
Waiver or Estoppel When the substance of a claim arises from
For direct benefits estoppel to apply to general obligations imposed by state law,
bar a claimant from both seeking to including statutes, torts, and other common
hold a nonsignatory liable pursuant to law duties, or federal law, rather than from a
duties imposed by a contract containing contract containing an arbitration provision,
an arbitration provision and denying direct benefits estoppel does not apply, even if
arbitration's applicability because the the claim refers to or relates to the contract.
defendant is a nonsignatory, it is not enough
that a party's claim relates to the contract; 5 Cases that cite this headnote
instead, the party must seek to derive a “direct
benefit,” that is, a benefit that stems directly, [39] Alternative Dispute Resolution
from that contract. Operation and Effect

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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

or if they are equitably estopped *509 from denying


*508 ON PETITION FOR REVIEW FROM THE their assent to such an agreement, courts must honor
COURT OF APPEALS FOR THE THIRTEENTH the agreement by referring the disputes to arbitration
DISTRICT OF TEXAS unless the party demanding arbitration has waived that
right by substantially participating in the litigation. We
Attorneys and Law Firms
apply these principles in this case to determine whether
Calvin Burgess, John B. Wallace, Timothy Leo Nebel, a property developer must arbitrate its claims against
Hartline Dacus Barger Dreyer LLP, Houston, for several defendants involved in a construction project.
Petitioner ZCA Residential, LLC. The trial court denied all of the defendants' motions to
compel arbitration, and the court of appeals affirmed. We
Charles Clayton Conrad, Edward S. Hubbard, Coats, hold that (1) the developer agreed to arbitrate its claims
Rose, Yale, Ryman & Lee, PC, Gilberto Hinojosa, against the general contractor and the general contractor
Law Offices of Gilberto Hinojosa & Associates, P.C., did not waive its right to demand arbitration; (2) the
Brownsville, Lawrence J. West, Stephen Douglas Pritchett developer's argument that a contractual deadline bars
Jr., Johnson, Trent, West & Taylor, L.L.P., Houston, for the general contractor's demand for arbitration is itself a
Petitioner G.T. Leach Builders, L.L.C. claim that must be arbitrated; (3) the developer did not
agree in the general contract to arbitrate its claims against
Aaron Tilley, Cozen O'Connor, Dallas, Joseph the other defendants; (4) the developer is not equitably
A. Ziemianski, Stephen Bender Edmundson, Cozen
estopped from denying any such agreement; and (5) the
O'Connor, Houston, for Petitioner CHP and Associates, subcontracts do not contain an enforceable arbitration
Consulting Engineers, Inc. agreement. In short, we hold that the developer must
arbitrate its claims against the general contractor but not
Brian Christopher Lopez, Engvall & Lopez, L.L.P.,
its claims against the other defendants.
Jennifer Bruch Hogan, Richard P. Hogan Jr., Hogan &
Hogan, Houston, for Petitioner Comfort Systems USA–
South Central.
I.
Andrew T. McKinney IV, Daniel W. Burrows, Litchfield
Cavo, LLP, Houston, for Petitioner Power Design, Inc.
Background
Ethan Dennis Carlyle, James M. Cleary Jr., Martin
Disiere Jefferson & Wisdom LLP, Houston, for Petitioner In July 2008, Hurricane Dolly caused extensive damage
Adams Insurance Service, Inc. to a luxury condominium project that Sapphire V.P., L.P.
was in the process of developing on South Padre Island.
Jeremy J. Gaston, Walter J. Cicack, Hawash, Meade, Sapphire filed suit against Adams Insurance Services,
Gaston, Neese & Cicack LLP, Houston, for Petitioner Inc., Arthur J. Gallagher Risk Management, and Tracy
Arthur J. Gallagher Risk Management Services, Inc. Williams (collectively, the Insurance Brokers), asserting
claims for negligence and breach of contract. Sapphire
Frank Costilla, Law Offices of Frank Costilla, L.P., alleged that, eight days before the hurricane hit, the
Brownsville, Jonathan Daniel Simon, Simon Law Firm, Insurance Brokers allowed a builder's risk insurance
Richard D. Daly, Daly & Black, P.C., Houston, Melissa policy to expire and be replaced by a permanent insurance
Waden Wray, Daly & Black, P.C., Waco, for Respondent policy even though construction of the project was not yet
Sapphire VP, LP. complete. Sapphire sought to recover millions of dollars
for water damage, increased construction costs, delay
Opinion
costs, lost revenue, and other losses that the builder's risk
Justice Boyd delivered the opinion of the Court. policy allegedly covered or should have covered but the
permanent policy did not.
Texas law encourages parties to resolve disputes through
arbitration, 1 but it will not force them to arbitrate unless More than two-and-a-half years after the hurricane
they have agreed to that alternative. 2
If they have, struck, the Insurance Brokers designated several others
as responsible third parties: (1) the project's general

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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

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58 Tex. Sup. Ct. J. 532

trial setting” and discovery “cannot be completed prior


to the current trial setting.” When the parties agreed • how much discovery the movant conducted before
to postpone the trial setting, G.T. Leach then signed moving to compel arbitration, and whether that
a Rule 11 agreement in which all parties agreed to a discovery related to the merits;
scheduling order and a new trial date. We do not agree that
• whether the movant requested the court to dispose of
the statements contained in these documents expressly
claims on the merits;
relinquish and repudiate a right to arbitration. As we
explained when addressing nearly identical statements in • whether the movant asserted affirmative claims for
In re Fleetwood Homes of Texas, L.P., “[n]othing in [these relief in court;
statements] expressly waives arbitration or revokes [an]
arbitration demand.” 257 S.W.3d 692, 694 (Tex.2008); see • the extent of the movant's engagement in pretrial
also In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex.2007) matters related to the merits (as opposed to matters
(per curiam) (holding that filing of motion to set aside related to arbitrability or jurisdiction);
default judgment and set new trial date does not expressly
• the amount of time and expense the parties have
waive arbitration rights). Although the acts of requesting
committed to the litigation;
and then agreeing to a new trial date could be inconsistent
with an intent to exercise the right to arbitrate, they do not • whether the discovery conducted would be unavailable
constitute an express waiver of that right. or useful in arbitration;

• whether activity in court would be duplicated in


2. Implied Waiver arbitration;
[5] [6] A party asserting implied waiver as a defense
to arbitration has the burden *512 to prove that • when the case was to be tried.
(1) the other party has “substantially invoked the
judicial process,” which is conduct inconsistent with Perry Homes, 258 S.W.3d at 590–91.
a claimed right to compel arbitration, and (2) the
inconsistent conduct has caused it to suffer detriment [8] [9] Sapphire first initiated this lawsuit against the
or prejudice. Perry Homes, 258 S.W.3d at 593–94; see Insurance Brokers in 2009. In the summer of 2010, it
also Gobellan, 433 S.W.3d at 545. Because the law favors filed a separate lawsuit in Harris County, Texas, against
and encourages arbitration, “this hurdle is a high one.” the architects who designed the condominium project,
Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C., seeking to recover essentially the same damages arising
455 S.W.3d 573, 575 (Tex.2014) (per curiam) (quoting from Hurricane Dolly. Six months later, Sapphire added
Perry Homes, 258 S.W.3d at 589–90). We conclude that G.T. Leach to the Harris County lawsuit, and four
Sapphire has not cleared the hurdle in this case. months after that, Sapphire named G.T. Leach as a
defendant in this lawsuit. G.T. Leach moved to compel
arbitration the following November. Sapphire asserts that
G.T. Leach's actions in this case between May 2011
a. Litigation Conduct and November 2012 amount to waiver of any right it
has to arbitrate Sapphire's claims. Sapphire contends
[7] Whether a party has substantially invoked the judicial
that G.T. Leach waived its arbitration rights through its
process depends on the totality of the circumstances. Perry
actions between May 2011 and November 2012, primarily
Homes, 258 S.W.3d at 589–90. Courts consider a “wide
by filing counterclaims, filing motions for relief, and
variety” of factors, including:
participating in pretrial discovery. “Merely taking part
• how long the party moving to compel arbitration in litigation,” however, “is not enough.” In re D. Wilson
waited to do so; Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006) (citations
omitted). Rather, that conduct must demonstrate that the
• the reasons for the movant's delay; party “has substantially invoked the judicial process to
[its] opponent's detriment.” Id. (citing In re Vesta Ins. Grp.,
• whether and when the movant knew of the arbitration
Inc., 192 S.W.3d 759, 762 (Tex. 2006) (per curiam)).
agreement during the period of delay;

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In considering the relevant factors, we note first that G.T.


Leach did not elect to resolve its disputes with Sapphire [10] In addition to its venue challenge, G.T. Leach
in court; rather, it is in this lawsuit because Sapphire filed motions to designate responsible third parties, for
sued it. See Perry Homes, 258 S.W.3d at 591 (noting that continuance, and to quash depositions. These motions,
one factor is whether party seeking arbitration was *513 however, were defensive, rather than offensive, in nature.
plaintiff who chose to file suit or defendant responding A party's litigation conduct aimed at defending itself
to suit filed against it). Although G.T. Leach asserted a and minimizing its litigation expenses, rather than at
counterclaim against Sapphire in the Harris County suit, taking advantage of the judicial forum, does not amount
it did not assert counterclaims seeking affirmative relief in to substantial invocation of the judicial process. See
this lawsuit. The counterclaim G.T. Leach filed in Harris Richmont Holdings, ––– S.W.3d at ––––; see also Keytrade
County was defensive in nature, and our rules required USA, Inc. v. Ain Temouchent M/V, 404 F.3d 891, 897
G.T. Leach to file it or risk losing it altogether. See TEX. (5th Cir.2005) (declining to find waiver where movant
R. CIV. P. 97(a) (defining compulsory counterclaims). sought summary judgment “from a defensive posture”);
We have held that “[m]erely filing suit does not waive Rodriguez v. Transnave Inc., 8 F.3d 284, 288 (5th Cir.1993)
arbitration,” Richmont Holdings, 455 S.W.3d at 576, (declining to find waiver where movant voluntarily
and we have declined to find waiver of the right to appeared in suit and sought removal because it was
arbitrate when a movant filed cross-actions in litigation, “purely defensive action to preserve its right of removal
see D. Wilson Constr., 196 S.W.3d at 783. Moreover, and to avoid any possibility of a default judgment”).
G.T. Leach never sought disposition of its Harris County
counterclaim on the merits; instead it merely took the [11] Finally, G.T. Leach participated in pretrial
action necessary to preserve that claim once Sapphire discovery, but it did so because Sapphire engaged it in
initiated a lawsuit arising out of the same subject matter. discovery. Sapphire complains that because the parties
Nor did G.T. Leach ever seek summary judgment or agreed to conduct discovery jointly for both cases, all
dismissal of Sapphire's claims on the merits. See Richmont discovery propounded by any party was available to
Holdings, 455 S.W.3d at 575 (observing that whether all parties, such that G.T. Leach has received copies of
movant sought “disposition on the merits” is key factor in documents produced by other parties and transcripts of
deciding waiver); see also Perry Homes, 258 S.W.3d at 592 depositions taken by other *514 parties. Sapphire asserts
(observing that “whether the movant sought judgment on that G.T. Leach acted inconsistently with its right to
the merits” is a factor). arbitrate both when it responded to discovery requests
and when it resisted discovery by seeking to quash a
Instead, G.T. Leach first and primarily sought to transfer deposition notice. Responding to discovery and simply
venue of this case to Harris County, or alternatively to being named in the lawsuit while discovery is ongoing do
abate this case while the Harris County case was resolved. not amount to waiver. To the contrary, we have declined
Rather than driving up litigation costs—another factor to find waiver even when the movant itself propounded
courts consider for waiver—G.T. Leach endeavored to written discovery. See, e.g., Fleetwood Homes, 257 S.W.3d
create efficiency by defending Sapphire's claims in a at 694; In re Bruce Terminix, Co., 988 S.W.2d 702, 703–
single venue. Perry Homes, 258 S.W.3d at 591. We 04 (Tex.1998); EZ Pawn Corp. v. Mancias, 934 S.W.2d
have rejected arguments relying on venue challenges to 87, 88–89 (Tex.1996). Nor does G.T. Leach's motion to
establish waiver because such challenges do not relate quash, in which it objected to the time and place of a
to the merits of the case. See Richmont Holdings, 455 deposition notice served on it by Sapphire, amount to an
S.W.3d at 576 (also noting that under rules of procedure, affirmative invocation of the judicial forum.
“objections to improper venue must be made at the outset
of the case”); In re Serv. Corp. Int'l, 85 S.W.3d 171, The only discovery that G.T. Leach actually propounded
175 (Tex.2002) (holding that parties did not waive right was a form request for disclosure that G.T. Leach included
to arbitrate by seeking to move litigation from state to in its answer in the case. See TEX. R. CIV. P. 194.1
federal court); In re ADM Investor Servs., Inc., 304 S.W.3d (providing required form for requests for disclosure). Such
371, 374 (Tex.2010) (applying Perry Homes test in context requests seek basic information about a lawsuit: who are
of forum-selection clauses and holding that motion to the parties and witnesses, what are the theories, and how
transfer venue did not waive contractual right). much is at stake? A defendant needs this information to

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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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
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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

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our rules do not require petitioners to have made in the


court of appeals all arguments that are responsive to Here, when Sapphire argued for the first time in the court
arguments that a respondent raised for the first time in of appeals that the contractual deadline is an independent
that court. See Key Operating & Equip., Inc. v. Hegar, bar to G.T. Leach's arbitration demand, G.T. Leach
435 S.W.3d 794, 797 (Tex.2014) (“An issue raised in this neither conceded nor disputed that the court of appeals
Court must have been assigned as error in the court could decide that issue, and instead argued only that the
of appeals if it originated in the trial court.”) (emphasis bar did not apply. After the court of appeals held, for the
added). Instead, we have held that when the petitioner's first time in this case, that the bar applied and precluded
argument or complaint first arises “from the court of arbitration regardless of whether G.T. Leach waived any
appeals' judgment,” it “may be raised either in a motion right to arbitration, G.T. Leach asserted in its petition for
for rehearing in the court of appeals or in a petition for review in this Court both that the court could not decide
review in this Court.” Bunton v. Bentley, 153 S.W.3d 50, that issue and, if it could, the bar does not apply. Because
53 (Tex.2004) (holding that petitioner's *518 “complaint the error of which G.T. Leach complains did not originate
that the exemplary damages were unconstitutionally in the *519 trial court and first arose from the court of
excessive arose from the court of appeals' judgment and appeals' judgment, G.T. Leach did not waive its complaint
may therefore be raised in this Court for the first time”) by raising it for the first time in its petition for review in
(citing Larsen v. FDIC/Manager Fund, 835 S.W.2d 66, 74 this Court.
n.12 (Tex.1992)).
[21] [22] That is not to say that we must address and
Our decision in Gilbert Texas Construction, L.P. v. resolve an argument that the petitioner failed to raise
Underwriters at Lloyd's London illustrates this point. 327 in the court of appeals whenever the asserted error
S.W.3d 118, 125 (Tex.2010). In that case, Gilbert sued arose from that court's judgment. In the exercise of its
Underwriters for breach of contract after Underwriters discretionary jurisdiction, a court may elect to address
denied coverage of Gilbert's insurance claim. On cross- the issue, or not. See, e.g., United States v. Williams,
motions for summary judgment, the trial court agreed 504 U.S. 36, 41, 44–45, 112 S.Ct. 1735, 118 L.Ed.2d 352
with Gilbert, and having won on the issue of coverage, (1992) (finding it “a permissible exercise of our discretion”
Gilbert had no obligation to preserve any error in the trial to address an issue that was not “pressed or passed
court's judgment. Id. Underwriters appealed, however, upon” in the appellate court in the case presently before
and argued in the court of appeals that an exclusion the Court). The decision involves “[i]mportant prudential
to the policy's coverage applied. In that court, Gilbert considerations,” such as the need to conserve judicial
did not dispute that the exclusion applied, but instead resources, whether allowing lower courts to first consider
argued that an exception to the exclusion also applied, and rule on the issue will “further the goal of accuracy
thus resulting in coverage. The court of appeals reversed in judicial decision-making,” and our duty to “promote
and rendered judgment for Underwriters, finding that the fairness among litigants.” In re B.L.D., 113 S.W.3d at 350.
exclusion applied and the exception did not. Id. In its We conclude that G.T. Leach did not waive its right to
petition for review in this Court, Gilbert argued both that argue that the arbitrators, rather than the courts, must
the exclusion did not apply and, if it did, the exception to decide the effect of the contractual-deadline issues, and we
the exclusion applied as well. Pet. for Review at ix, Gilbert elect to exercise our discretionary jurisdiction to resolve
Tex. Constr., 327 S.W.3d 118, 2008 WL 2195918, at *6, that argument now.
*12. Underwriters then asserted that Gilbert had waived
its argument that the exclusion did not apply by failing to
raise it in the court of appeals, but we disagreed. Gilbert 2. Arbitrability of the Deadline
Tex. Constr., 327 S.W.3d at 125. “While ordinarily a party [23] [24] We now turn to the question of who should
waives a complaint not raised in the court of appeals,” we decide whether the contractual deadline bars G.T. Leach's
explained, “a complaint arising from the court of appeals' demand for arbitration in this case. Ultimately, this is a
judgment may be raised either in a motion for rehearing question of the parties' intent as expressed in their written
in that court or in a petition for review in this Court.” Id. agreement. When parties have contractually agreed to
(citing TEX. R. APP. P. 53.2(f); Bunton, 153 S.W.3d at arbitrate their future disputes, the courts' obligation to
honor and enforce that agreement requires that they
53). 13
refer those disputes to arbitration. The Texas Arbitration

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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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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).

Stated another way, the parties' dispute over the meaning


We applied these distinctions when we decided in Perry
and effect of the contractual deadline does not touch
Homes that waiver by litigation conduct presents a
upon the issue of whether an enforceable agreement to
question of substantive arbitrability that courts must
arbitrate Sapphire's claims exists. Neither party disputes
decide. 258 S.W.3d at 588–89. We held that, although
that such an agreement does exist. Instead, they dispute
Howsam referenced “waiver” and “delay” as “procedural
whether, in light of the contractual deadline, the existing,
matters” for arbitrators to decide, it did not mean that
enforceable agreement limits G.T. Leach's rights under the
the issue of waiver by litigation conduct was one for
agreement itself. Sapphire's contention that it does and
arbitrators, rather than courts. Id. Instead, we held that
G.T. Leach's contention that it does not are themselves
courts should defer to arbitrators to resolve the issue
“Claim[s] arising out of or related to the Contract,”
of waiver when “waiver concerns limitations periods or
waiver of particular claims or defenses,” but courts should which the parties expressly agreed to arbitrate. 17 See In
decide issues of waiver by litigation conduct. Id. at 588. re Wood, 140 S.W.3d 367, 369 (Tex.2004) (holding that
We stated that “parties generally intend arbitrators to dispute over whether contract prohibited class arbitration
decide matters that ‘grow out of the dispute and bear on its was a contract construction issue, which was a “dispute
final disposition,’ ” such as “waiver of a substantive claim arising out of” the contract that the parties had committed
or delay beyond a limitations deadline.” Id. at 589. Our to the arbitrator) (citing Green Tree Fin. Co. v. Bazzle,
explanation in Perry Homes is consistent with our prior 539 U.S. 444, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003),
recognition that, once the party seeking arbitration proves for the proposition that whether contract prohibited class
the existence of an enforceable agreement to arbitrate, arbitration was a “dispute about what the arbitration
Texas and federal law recognize a strong presumption contract [meant,]” which was “a dispute ‘relating to this
“in favor of arbitration such that myriad doubts— contract’ ” that the parties had agreed “an arbitrator, not
as to waiver, scope, and other issues not relating to a judge, would answer”).
enforceability—must be resolved in favor of arbitration.”
We do not hold that disputes over a contractual deadline
Poly–Am., 262 S.W.3d at 348. 16
in an arbitration agreement will always present questions
of procedural arbitrability that arbitrators must decide. If
In this case, the contractual deadline in the general
a party contends, for example, that a contractual deadline
contract falls squarely within the category of “matters that
renders the agreement to arbitrate unconscionable or that
‘grow out of the dispute and bear on [the arbitrators']
the deadline operates to limit the scope of the claims
final disposition’ ” of the claims. See Perry Homes,
the parties agreed to arbitrate, those contentions might
258 S.W.3d at 588. The deadline does not determine
raise issues of substantive arbitrability for the courts to
the present existence, enforceability, or scope of the
decide. Cf. Quilloin v. Tenet HealthSystem Phila., Inc.,
agreement to arbitrate the parties' disputes, but instead
673 F.3d 221, 234 (3d Cir.2012) (considering argument
imposes a procedural limit on the parties' rights under that
that time limit in arbitration agreement was substantively
agreement. It bears on the arbitrators' final disposition
unconscionable); but see Kristian v. Comcast Corp., 446
of Sapphire's claims—specifically, whether the arbitrators

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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.

In summary, with respect to Sapphire's claims against 1. No Agreement to Arbitrate


G.T. Leach, we hold that G.T. Leach did not expressly As we have explained, a party seeking to compel
or impliedly waive its right to arbitration, and the courts arbitration must establish that a valid arbitration
must defer to the arbitrators to decide whether and how agreement exists and that the claims at issue fall within
the contractual deadline affects that right. We therefore the scope of that agreement. TEX. CIV. PRAC. & REM.
reverse the court of appeals' judgment with respect to CODE § 171.021(a); FirstMerit Bank, 52 S.W.3d at 753.
the trial court's denial of G.T. Leach's motion to compel Sapphire concedes that the general contract contains a
arbitration. valid arbitration agreement, but contends that the Other
Defendants cannot enforce that agreement because they
are not signatories or parties to the general contract. See
III. In re Rubiola, 334 S.W.3d 220, 224 (Tex.2011) (holding
that, generally, “parties must sign arbitration agreements
before being bound by them”). We have recognized,
The Other Defendants however, that in some circumstances a non-signatory can
be bound to, or permitted to enforce, an arbitration
[28] We now turn to the arbitrability of Sapphire's claims
agreement. See, e.g., In re Kellogg Brown & Root, Inc.,
against the Other Defendants, which include (1) the
166 S.W.3d 732, 739 (Tex.2005) (listing “(1) incorporation
Insurance Brokers and Engineers, who each allegedly
by reference; (2) assumption; (3) agency; (4) alter ego; (5)
contracted directly with Sapphire in agreements that
equitable estoppel, and (6) third-party beneficiary”).
undisputedly did not include an enforceable arbitration
agreement, and (2) the Subcontractors, who contracted
[29] [30] With regard to the Other Defendants and the
directly with G.T. Leach in agreements that allegedly
general contract, the question in this case, as in Rubiola,
did include enforceable arbitration agreements. The
“is not whether a non-signatory may be compelled to
Other Defendants contend that Sapphire agreed to
arbitrate but rather whether a non-signatory may compel
arbitrate its claims against them in the general contract
arbitration.” 334 S.W.3d at 224. As a general rule, “an
and the subcontracts, and alternatively, that Sapphire
arbitration clause cannot be invoked by a non-party
is equitably estopped from denying its assent to the
to the arbitration contract.” Grigson v. Creative Artists
arbitration agreements in those contracts. Although the
Agency, L.L.C., 210 F.3d 524, 532 (5th Cir.2000). “[The]
Other Defendants did not sign the general contract
policy favoring arbitration is strong, but it alone cannot
and Sapphire did not sign the subcontracts, we have
authorize a non-party to invoke arbitration.” Id. Thus, the
recognized that “sometimes a person who is not a party
Other Defendants must establish that they have a valid
to the agreement can compel arbitration with one who is,
legal right to enforce the general contract's arbitration
and vice versa.” Meyer v. WMCO–GP, LLC, 211 S.W.3d
agreement even though they are not parties to that
302, 305 (Tex.2006). More specifically, “nonparties may
contract. The Other Defendants contend that Sapphire
be bound to an arbitration clause when the rules of law
agreed in the general contract that the Other Defendants

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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

The Other Defendants contend that the joinder provision


itself constitutes Sapphire's agreement that they could
a. The “Scope” of Arbitration
enforce the general contract's arbitration agreement.
First, the Other Defendants contend that Sapphire's Specifically, they contend that, through the joinder
claims against them fall *525 within the scope of provision, Sapphire agreed to allow non-parties to
the general contract's arbitration agreement because the “require” arbitration if their presence is “required” for
scope includes “[a]ny Claim arising out of or related to complete relief to be afforded in the arbitration. The
the Contract,” and Sapphire expressly agreed that the Subcontractors, in particular, note that Sapphire and G.T.
arbitration could include parties other than G.T. Leach. Leach specifically revised the AIA form to add a reference
Specifically, the Other Defendants rely on a provision to “a Subcontractor” as a party whose presence would
of the general contract in which Sapphire and G.T. be expected in the arbitration. Because Sapphire seeks to
Leach agreed that “[a]ny arbitration may include, by recover the same damages from each of the defendants and
consolidation or joinder or any other manner, parties to hold all of the defendants jointly and severally liable
other than the Owner, Contractor, a Subcontractor, a for those damages, they assert, the arbitration can only
separate contractor ... and other persons substantially provide “complete relief” if all of them are parties to it.
involved in a common question of fact or law whose We do not agree.
presence is required if complete relief is to be accorded in
arbitration.” To begin with, the joinder provision states that an
arbitration “may include” other parties, and we find no
The Other Defendants argue that, through this “joinder basis on which to conclude that the parties intended the
provision,” Sapphire agreed that the scope of the word “may” to be mandatory rather than permissive in
arbitration would include Sapphire's claims against this context. Cf. Iliff v. Iliff, 339 S.W.3d 74, 81 (Tex.2011)
the Other Defendants because those claims “arise out (stating that the word “may” is “permissive” and “imports
of or relate to” the general contract, those claims the exercise of discretion”); Dall. Cnty. Cmty. Coll. Dist.
and Sapphire's claims against G.T. Leach involve v. Bolton, 185 S.W.3d 868, 874 (Tex.2005) (“The words
common questions of law or fact, and the Other ‘may’ and ‘shall’ mean different things, and ... [t]he context
Defendants' presence is “required” for complete relief in this case does not require an interpretation of the

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
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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

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58 Tex. Sup. Ct. J. 532

to compel arbitration under contract between contractor


2. No Equitable Estoppel and owner).
[31] As an alternative to the argument that Sapphire
expressly agreed that they can enforce the general The Other Contractors contend that Sapphire's claims
contract's arbitration provisions, the Other Defendants against them seek a “direct benefit” under the general
argue that Sapphire is equitably estopped from denying its contract, even though they are not parties to that contract,
assent to such an agreement. We do not agree. because the claims “arise from and must be determined by
reference to” the general contract. More specifically, they
[32] [33] [34] We have recognized that, under principles assert that the work that they performed was necessary
of equitable estoppel, “a litigant who sues based on a only because of the general contract, and without the
contract subjects him or herself to the contract's terms ..., general contract they would have had no duties of their
including the Arbitration Addendum.” FirstMerit Bank, own to perform. Sapphire's claims thus “relate to and
52 S.W.3d at 755–56; see Meyer, 211 S.W.3d at 305 arise out of” the general contract, they contend, because
(listing cases so holding). This is because the claimant they are claims for work performed “pursuant to” the
cannot “have it both ways”; it cannot, “on the one hand, general contract. The Subcontractors also note that the
seek to hold the non-signatory liable pursuant to duties general contract required G.T. Leach to “include terms
imposed by the agreement, which contains an arbitration in the subcontracts ... binding its subcontractors ... to the
provision, but, on the other hand, deny arbitration's applicable terms of this agreement.”
applicability because the defendant is a non-signatory.”
Meyer, 211 S.W.3d at 306. This equitable principle applies Sapphire is not suing the Other Defendants, however, for
when a claimant seeks “direct benefits” under the contract breach of obligations under the general contract. Rather,
that contains the arbitration agreement. Kellogg Brown & Sapphire alleges in its petition that the Other Defendants
Root, 166 S.W.3d at 739. “Whether a claim seeks a direct each breached duties that they each “contractually
benefit from a contract containing an arbitration clause agreed” to perform, and failed to perform them as a
turns on the substance of the claim, not artful pleading.” reasonable professional would have performed them. We
Weekley Homes, 180 S.W.3d at 131–32. agree that Sapphire is not seeking direct benefits under
the general contract. We read Sapphire's allegations to
[35] [36] [37] [38] It is not enough, however, that therefer to separate agreements in which the Engineers
party's claim “relates to” the contract that contains the agreed with Sapphire to provide engineering services,
arbitration agreement. Kellogg Brown & Root, 166 S.W.3d the Insurance Brokers agreed with Sapphire to provide
at 741. Instead, the party must seek “to derive a direct insurance services, and the Subcontractors agreed with
benefit”—that is, a benefit that “stems directly”—from
G.T. Leach to provide construction-related services. 22
that contract. Id.; In re Morgan Stanley & Co., 293 S.W.3d
182, 184 (Tex.2009). The claim must “depend *528 on the
The record and briefs in this case reflect that Sapphire
existence” of the contract, Meyer, 211 S.W.3d at 307, and
contends that the Engineers and Insurance Brokers
be unable to “stand independently” without the contract,
contracted directly with Sapphire and are what the general
Kellogg Brown & Root, 166 S.W.3d at 739–40. The alleged
contract refers to as a “separate contractor” rather than a
liability must “arise[ ] solely from the contract or must
“subcontractor.” Thus, *529 although Sapphire's breach
be determined by reference to it.” Weekley Homes, 180
of contract claims against the Engineers may “relate to”
S.W.3d at 132. But “when the substance of the claim arises
the general contract, they “arise out of” and directly
from general obligations imposed by state law, including
seek the benefits of a separate alleged agreement between
statutes, torts and other common law duties, or federal
Sapphire and the Engineers. Similarly, Sapphire alleges
law,” rather than from the contract, “direct benefits”
that the Insurance Brokers “contracted with Sapphire to
estoppel does not apply, even if the claim refers to or
procure adequate insurance to protect Sapphire while the
relates to the contract. 21 Morgan Stanley, 293 S.W.3d at Sapphire condominiums were being built” and “breached
184 n.2; see also Kellogg Brown & Root, 166 S.W.3d at 740– that agreement thereby damaging Sapphire.” These claims
41 (holding that subcontractor's quantum meruit claim depend on an alleged insurance-procurement agreement
against contractor did not justify direct benefits estoppel between Sapphire and the Insurance Brokers, not the
general contract between Sapphire and G.T. Leach.

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Finally, the Other Defendants argue that Sapphire is


And finally, Sapphire asserts that the Subcontractors equitably estopped from refusing to arbitrate its tort
breached obligations they accepted in their subcontracts claims against them because those claims assert only
with G.T. Leach, not in the general contract to which negligent performance of contractual duties, and thus seek
Sapphire was a party. While these claims may bear some only damages resulting from the breach of contractual
relationship to the general contract, the fact that the duties rather than duties imposed by law. Under these
claims would not have arisen but for the existence of circumstances, they contend, the allegedly negligent
the general contract is not enough to establish equitable breaches can “only be characterized as a breach of
estoppel. See Kellogg Brown & Root, 166 S.W.3d at contract,” and the claims thus “sound in contract, not
739–40. Sapphire's contract claims against the Other tort.” This argument raises a complex legal doctrine: the
Defendants do not, on their face, seek a “direct benefit” “economic loss” rule, sometimes referred to in this context
under the general contract; rather, the record at this stage as the law of “contorts.” See, e.g., Sw. Bell Tel. Co.
indicates that they seek direct benefits under other alleged v. DeLanney, 809 S.W.2d 493, 494–95 (Tex.1991); id. at
contracts. Under these circumstances, we cannot conclude 495 (Gonzales, J., concurring). We need not address this
that the “direct benefits” theory of equitable estoppel doctrine here, however, because even if Sapphire's tort
authorizes the Other Defendants to rely on the arbitration claims sound in contract, they do no arise solely out of or
provision in Sapphire's general contract with G.T. Leach. otherwise seek direct benefits under the general contract.
See Morgan Stanley, 293 S.W.3d at 184; Weekley Homes, See Kellogg Brown & Root, 166 S.W.3d at 740–41. While
180 S.W.3d at 133; Kellogg Brown & Root, 166 S.W.3d at they have some relationship to the general contract, the
739–40. mere fact that the claims would not have arisen but for that
contract is not enough to establish equitable estoppel. See
In addition, the Other Defendants argue that, even if id. at 739–40. We therefore hold that equitable estoppel
Sapphire is not suing them for breach of the general does not apply to enable the Other Defendants to compel
contract, it is seeking to hold them jointly and severally Sapphire to arbitrate its tort claims against them under the
liable for the damages that Sapphire alleges G.T. Leach's general contract.
breach of that contract caused. Specifically, the Insurance
Brokers contend that, “if Sapphire seeks to hold the
Insurance Defendants liable for damages arising from B. Arbitration Under the Subcontracts
G.T. Leach's alleged breach of the [general contract], [39] Finally, we turn to the Subcontractors' arguments
then Sapphire must necessarily rely on the existence of that Sapphire agreed through the subcontracts to arbitrate
its claims against the Subcontractors, or alternatively, that
the [general contract].” 23 But contrary to the Insurance
Sapphire is equitably estopped from denying its assent to
Brokers' argument, Sapphire's pleadings do not assert
the arbitration agreement in the subcontracts. While we
that the Insurance Brokers are jointly and severally liable
note that Sapphire is not a signatory to the subcontracts,
for the damages allegedly resulting from G.T. Leach's
its claims that the Subcontractors “contractually agreed”
breach of contract, 24 and the parties have not identified to perform their services and are liable to Sapphire
any doctrine that would permit Sapphire to hold them for having breached those agreements at least appear
jointly and severally liable *530 under the facts of this to be “based on” and “directly seek benefits” under
case. 25 “Texas law permits joint and several liability for the subcontracts, and thus Sapphire may be equitably
most actions based in tort, as long as ‘the percentage of estopped to deny obligations under the subcontracts. See
responsibility attributed to the defendant with respect to FirstMerit Bank, 52 S.W.3d at 755–56. We need not decide
a cause of action is greater than 50 percent.’ ” Sharyland that issue, however, because we conclude that, even if the
Water Supply Corp. v. City of Alton, 354 S.W.3d 407, 424 subcontracts are binding on Sapphire, they do not require
(Tex.2011) (quoting TEX. CIV. PRAC. & REM. CODE § the parties to arbitrate these claims.
33.013(b)(1)). But the Insurance Brokers' “direct benefits”
estoppel argument is premised on Sapphire seeking to hold *531 The Subcontractors provided their respective
them jointly and severally liable for G.T. Leach's breach services pursuant to essentially identical subcontracts
of contract, not its torts. that they entered into with G.T. Leach. Both of these
subcontracts contain three sections that pertain to the

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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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

law, statute, or regulation ... is ineffective,” the language


of section 12.13 “specifically provide[s] the means for
resolving conflicts” by providing that, in the event IV.
of any conflict, section 12.13 prevails. DeQueen, 325
S.W.3d at 632, 637. There is thus no ambiguity, and
Conclusion
we need not rely on canons of construction like the
rules that earlier or more specific provisions prevail. Id. We affirm in part and reverse in part. We affirm the
Although these canons provide useful tools for resolving portion of the court of appeals' judgment affirming the
conflicting provisions, there is no conflict to resolve here trial court's denial of the Engineers', Insurance Brokers',
because the plain language of section 12.13 resolves the and Subcontractors' motions to compel arbitration of
conflict. Id. at 638. We therefore conclude that, even if Sapphire's claims against them, and we reverse the portion
Sapphire is equitably estopped from denying its assent of the court of appeals' judgment affirming the trial court's
to the agreements contained in the subcontracts, those denial of G.T. Leach's motion to compel arbitration of
agreements do not include a valid, enforceable agreement Sapphire's claims against it. We remand this case to the
to arbitrate its claims against the Subcontractors. The trial court for further proceedings consistent with this
court of appeals, therefore, did not err in affirming the trial opinion.
court's denial of the Subcontractors' motions to compel
arbitration.
All Citations
We therefore affirm the court of appeals with respect
to the trial court's denial of the Insurance Brokers', 458 S.W.3d 502, 58 Tex. Sup. Ct. J. 532
Engineers', and Subcontractors' motions to compel
arbitration.

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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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

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G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502 (2015)
58 Tex. Sup. Ct. J. 532

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 26


Guyton v. Monteau, 332 S.W.3d 687 (2011)

When an applicant is among those named


in the probate code as a person entitled to
KeyCite Yellow Flag - Negative Treatment priority in the grant of letters testamentary,
Distinguished by Aduli v. Aduli, Tex.App.-Hous. (14 Dist.), May 17, 
the party opposing the appointment of an
2012
executor has the burden of establishing the
332 S.W.3d 687
applicant's disqualification. V.A.T.S. Probate
Court of Appeals of Texas,
Code, § 77(d, e).
Houston (14th Dist.).
Cases that cite this headnote
Courtney GUYTON, Appellant,
v.
Cynthia Ann MONTEAU, Appellee. [2] Executors and Administrators
Right to Appointment as Administrator
No. 14–09–00804–CV. Executors and Administrators
| Review
Jan. 13, 2011.
Determination as to who is or is not a
Synopsis suitable person to be appointed administrator
Background: After her mother was removed as original of an estate lies within the trial court's broad
administratrix, decedent's daughter sought appointment discretion; such discretion is not unbridled,
as successor administratrix of decedent's estate. The however, and its exercise is subject to review
County Civil Court at Law No. 3, Brazoria County, for abuse. V.A.T.S. Probate Code, § 78.
Jeremy Warren, J., denied application. Daughter
1 Cases that cite this headnote
appealed.

[3] Executors and Administrators


Review
Holdings: The Court of Appeals, Tracy Christopher, J.,
held that: The trial court abuses its discretion if
its determination that an applicant is
[1] grounds not raised by interested parties could not be unsuitable to be appointed administrator or
used as grounds to deny daughter's application; administratrix of an estate is arbitrary or
unreasonable. V.A.T.S. Probate Code, § 78.
[2] testimony and evidence presented in connection with
1 Cases that cite this headnote
other matters and proceedings relating to decedent's estate
was not subject to judicial notice for the purpose of
evaluating daughter's application; and [4] Executors and Administrators
Right to appointment
[3] estate would not have incurred additional fees as result No allegations of anger, family discord,
of appointing daughter as administratrix and thus could interests inimical to those of decedent's wife,
not serve as grounds to deny her application. or a potential conflict of interest involving
decedent's daughter, her attorney, and the
estate were raised by interested parties and
Reversed. thus could not serve as grounds to deny
daughter's application for appointment as
successor administratrix of estate; prior to the
West Headnotes (12) hearing on the application for appointment,
the only objection was raised by decedent's
wife who alerted the court to daughter's
[1] Executors and Administrators misdemeanor conviction five years earlier,
Evidence

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Guyton v. Monteau, 332 S.W.3d 687 (2011)

which was never accepted by trial court as a


valid ground to deny the application. [9] Evidence
Records or decisions in same case
Cases that cite this headnote It is inappropriate for a trial judge to take
judicial notice of testimony even in a retrial of
[5] Executors and Administrators the same case.
Evidence
14 Cases that cite this headnote
To permit the trial court on its own motion
to raise additional grounds for disqualifying
an applicant from serving as executor or [10] Evidence
administrator of an estate would arguably Testimony of witnesses
shift the burden of proof from the person In order for testimony from a prior hearing
opposing the application. or trial to be considered in a subsequent
proceeding, the transcript of that testimony
Cases that cite this headnote must be properly authenticated and entered
into evidence.
[6] Evidence
7 Cases that cite this headnote
Judicial Proceedings and Records
Testimony and evidence presented in
connection with other matters and [11] Evidence
proceedings relating to decedent's estate Nature and scope in general
was not subject to judicial notice for the When evidence is the subject of improper
purpose of evaluating daughter's application judicial notice, it amounts to no evidence.
for appointment as successor administratrix
of the estate. Rules of Evid., Rule 201(b). 7 Cases that cite this headnote

Cases that cite this headnote


[12] Executors and Administrators
Right to appointment
[7] Evidence Appointment of decedent's daughter as
Nature and scope in general successor administratrix of decedent's estate,
Personal knowledge is not judicial knowledge thereby requiring estate to retain separate
of the sort necessary to take judicial notice; legal counsel, would not increase estate's
the judge may personally know a fact of which expenses nor otherwise serve as independent
he cannot take judicial notice. Rules of Evid., grounds to deem daughter unsuitable
Rule 201(b). for appointment; trial court believed
appointment of same person to fill both roles
5 Cases that cite this headnote would have saved the estate money, but estate
could be charged separately for both legal
[8] Evidence services and estate-administration services at
Judicial Proceedings and Records equivalent cost.

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.

12 Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Guyton v. Monteau, 332 S.W.3d 687 (2011)

turned herself in, and paid the amount due because it


Attorneys and Law Firms was the fastest, easiest way to resolve the matter. She
further testified that if she had known about the third
*689 Don Duane Ford III, Paul Jason Brower, Houston,
check earlier, she would have paid it as she paid the two
for Appellant.
other stolen checks.
A.G. Crouch, Alvin, for Appellee.
The trial court concluded that the conviction was
Panel consists of Justices SEYMORE, BOYCE, and insufficient to disqualify Guyton from appointment as
CHRISTOPHER. successor administratrix. After both sides rested, however,
Monteau's counsel stated that the trial court was not
limited to evidence presented at the hearing, but could
OPINION “consider what would be inimical to the interest of the
estate.” Monteau's counsel further asked the trial court
TRACY CHRISTOPHER, Justice. to reopen the evidence so the trial court could be asked
to take judicial notice of its file “and all proceedings that
In this appeal from a probate proceeding, appellant
have taken place incident to the file.” Over the objections
Courtney Guyton challenges the trial court's denial of her
of Guyton's counsel, the trial court granted the motion,
application for appointment as successor administratrix
and stated that it would “take notice of everything that's in
of her father's estate. Because we conclude that the trial
the Court's file which would include the will, the original
court abused its discretion in so ruling, we reverse and
application, the proof of death and other facts, and all that
remand with instructions to the trial court to grant
stuff as well as every procedure and hearing that's taken
Guyton's request for appointment.
place since.”

*690 After taking judicial notice of material spanning


I. BACKGROUND more than twelve-and-a-half years, the trial court ruled
that Guyton was unsuitable to serve as the successor
After appellee Cynthia Monteau was removed as the administratrix due to “family discord,” hostility between
administratrix of her late husband's estate, Guyton, Guyton and her mother, and a “potential conflict of
the child of Monteau and the decedent, applied to be interest” described in the trial court's conclusions of law
named the successor administratrix. Monteau opposed as follows:
the application on the ground that Guyton had been
convicted of a class C misdemeanor five years previously. Mr. Ford represents Courtney
Guyton in her individual capacity,
Guyton was the only witness to appear at the hearing on i.e. in filing the motion to remove
her application. She testified that she was willing to put and appoint herself as the personal
the interests of the estate and its beneficiaries ahead of her representative. If Courtney Guyton
own personal interest and that it was her intention to fund were to be appointed as the personal
the trust created under the will and not to simply keep representative of the estate, who
the estate's property for herself. She further agreed that if would the estate's lawyer be? It
she was appointed as the successor administratrix and the cannot be Mr. Ford, because he
attorney on behalf of the estate recommended filing suit cannot ethically represent Courtney
to recover proceeds that should not have been removed Guyton individually and the estate
from the estate, she would do so. 1 As to her misdemeanor if they have competing interests.
conviction five years earlier, Guyton testified that when Therefore, because of this potential
two checks that had been stolen from her were returned conflict, the estate could be required
for insufficient funds, she paid them, but she discovered to retain additional counsel at
that a third check was written and returned only when additional expense.
she learned that a warrant had been or was about to be
issued. She stated that she went to the police department,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Guyton v. Monteau, 332 S.W.3d 687 (2011)

guiding principles. Mercedes–Benz Credit Corp. v. Rhyne,


The trial court accordingly denied Guyton's application
925 S.W.2d 664, 666 (Tex.1996). 3
and, on its own motion, appointed a local probate
attorney as the dependent successor administrator.
Here, the trial court's findings of fact and conclusions of
law reveal that its ruling was made without reference to
Guyton obtained original and additional findings of fact
guiding principles. Specifically, the trial court identified
and conclusions of law and timely appealed, arguing
three reasons, each stated as a conclusion of law, for its
that the evidence is legally insufficient to support the
ruling that Guyton is unsuitable to serve as the successor
trial court's finding that she is unsuitable to serve as the
administratrix of her father's estate. One reason concerns
administratrix of her father's estate. 2 a “potential conflict of interest,” discussed infra. The
trial court also concluded that “[t]here is ample evidence
of family discord and anger between Courtney Guyton
II. ANALYSIS and Cynthia Monteau, as well as other members of the
decedent's family.” Finally, the trial court stated that
[1] Because they are beneficiaries under their father's “[t]he relationship between daughter (Applicant Courtney
will and his heirs at law, Courtney Guyton and her sister Guyton) and mother (removed Executrix [sic] Cynthia
have priority over any other applicant to serve as the Monteau) can best be described as ‘inimical.’ ”
successor administratrix of his estate after their mother
was removed from that position. See TEX. PROB.CODE Assuming that family discord or an applicant's feelings
ANN. § 77(d), (e) (Vernon 2003). Nevertheless, a person toward other members of the decedent's family could be
whom the court “finds unsuitable” is not qualified to a sufficient basis for disqualification, 4 we nevertheless
serve as the administrator of an estate. Id. § 78(e). conclude that the trial court abused its discretion by
When, as here, the applicant is among those whom the ruling that Guyton is unsuitable to serve as successor
legislature has granted priority, the party opposing the administratrix for any of the stated reasons.
appointment has the burden of establishing the applicant's
disqualification. In re Estate of Robinson, 140 S.W.3d 801,
805 (Tex.App.-Corpus Christi 2004 pet. dism'd); Powell A. No allegations of anger, family discord, interests
v. Powell, 604 S.W.2d 491, 493–94 (Tex.Civ.App.-Dallas inimical to those of Monteau, or a “potential conflict of
1980, no writ). Thus, as the only opponent of Guyton's interest” were properly before the trial court.
appointment, Monteau bore the burden in the trial court [4] As noted, the burden rests on those opposing
to prove Guyton's unsuitability to serve as the successor an applicant's appointment to allege *692 and prove
administratrix of the estate. grounds for disqualification. Dooley v. Dooley, 240 S.W.
1112, 1113 (Tex.Civ.App.-Beaumont 1922, no writ). Here,
[2] [3] Neither the legislature nor the Texas Supreme however, none of the reasons given by the trial court for
Court has defined the term, “unsuitable” as it is used in its decision was asserted by any interested party. Prior to
section 78 of the Probate Code. See Boyles v. Gresham, the hearing, the only objection to Guyton's appointment
158 Tex. 158, 163, 309 S.W.2d 50, 53–54 (1958). The was her mother's assertion that a misdemeanor conviction
determination of suitability therefore lies within the trial five years earlier rendered Guyton unsuitable, and the trial
court's broad discretion. Kay v. Sandler, 704 S.W.2d court rejected this as a basis for disqualification. After the
430, 433 (Tex.App.-Houston [14th Dist.] 1985, writ ref'd initial close of evidence, Guyton's counsel stated that “the
n.r.e.). Such discretion is not unbridled, however, and its Court can consider what would be inimical to the interest
exercise is subject to review for abuse. See Eastland v. of the estate.” (emphasis added). But, the trial court did
Eastland, 273 S.W.3d 815, 820 (Tex.App.-Houston [14th not find that Guyton's appointment would be inimical to
Dist.] 2008, no pet.). The trial court abuses its discretion the interests of the estate, nor would the evidence support
if its determination that the applicant is unsuitable is such a finding. Guyton's feelings about members of her
arbitrary or unreasonable. Robinson, 140 S.W.3d at 807. family and the “potential conflict of interest” described by
We find such abuse only when the trial court's decision is the trial court were never placed at issue, but instead were
arbitrary, unreasonable, and *691 without reference to raised by the trial court sua sponte after the hearing and
without notice to the parties.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Guyton v. Monteau, 332 S.W.3d 687 (2011)

cannot take judicial notice.” Wilson v. State, 677 S.W.2d


[5] To permit the trial court on its own motion to 518, 524 (Tex.Crim.App.1984). Moreover, the trial court
raise additional grounds for disqualifying an applicant may not take judicial notice of the truth of factual
would arguably shift the burden of proof from the person statements and allegations contained in the pleadings,
opposing the application. Cf. Robinson, 140 S.W.3d at affidavits, or other documents in the file. See, e.g.,
805; Powell, 604 S.W.2d at 493–94. This court has stated In re C.L., 304 S.W.3d 512, 514–15 (Tex.App.-Waco
that an opponent's objection to an applicant's suitability 2009, no pet.); Malekzadeh v. Malekzadeh, Nos. 14–05–
need not be in writing, and taken out of context, the 00113–CV & 14–06–00341–CV, 2007 WL 1892233, at
statement could be read to suggest that the trial court can *9 (Tex.App.-Houston [14th Dist.] 2007, pet. denied)
find an applicant unsuitable on its own motion. See In re (mem. op.); Tschirhart v. Tschirhart, 876 S.W.2d 507, 508
Estate of Gaines, 262 S.W.3d 50, 57 (Tex.App.-Houston (Tex.App.-Austin 1994, no writ); cf. In re C.S., 208 S.W.3d
[14th Dist.] 2008, no pet.) (“Nothing in [sections 78 or 77, 81 (Tex.App.-Fort Worth 2006, pet. denied) (“It is
178 of the Probate Code] requires the filing of a motion appropriate for a court to take judicial notice of a file in
or opposition to disqualify an applicant before the court order to show that the documents in the file are a part of
can find a person unsuitable.”).1 In Gaines, however, the the court's files, that they were filed with the court on a
independent executrix named in the decedent's will was certain date, and that they were before the court at the
disqualified by the trial court on the basis of a verbal time of the hearing.”).
motion by counsel for the decedent's brother. Id. at 56.
Unlike the present case, the applicant in Gaines was [9] [10] It is inappropriate for a trial judge to take
notified of the grounds at issue, which were raised by an judicial notice of testimony even in a retrial of the
interested person and tried by consent. See id. same case. Muller v. Leyendecker, 697 S.W.2d 668, 675
(Tex.Civ.App.-San Antonio 1985, writ ref'd n.r.e.); see
Assuming, however, that the trial court may find an also Garza v. State, 996 S.W.2d 276, 280 (Tex.App.-Dallas
applicant unsuitable for reasons not asserted or argued by 1999, pet. ref'd) (“[T]rial testimony is a mutable product of
any interested party, there is no evidence in the record to human memory and subject to different interpretations. It
support the trial court's denial of Guyton's application. does not carry the high degree of indisputability required
to justify taking judicial notice.”). In order for testimony
from a prior hearing or trial to be considered in a
B. No evidence supports the trial court's ruling. subsequent proceeding, the transcript of that testimony
[6] The transcript of the hearing reveals a complete must be properly authenticated and entered into evidence.
absence of evidence about the “potential conflict of See, e.g., In re M.C.G., 329 S.W.3d 674, 675 (Tex.App.-
interest” described by the trial court and about Guyton's Houston [14th Dist.] 2010, no pet.) (supp. op. on reh'g)
relationship with or feelings toward any member of her (clarifying that this court did not consider testimony from
family. The findings of fact, however, show that the a prior hearing where the testimony was not offered and
trial court's ruling was based on its judicial notice of all admitted into evidence at the subsequent trial).
documents and testimony ever admitted in this case on any
subject. 5 [11] When evidence is the subject of improper judicial
notice, it amounts to no evidence. See, e.g., Augillard
[7] [8] Such sweeping judicial notice of all documents v. Madura, 257 S.W.3d 494, 503 n. 14 (Tex.App.-Austin
and testimony in the twelve-year history of the case was 2008, no pet.) (finding evidence legally insufficient to
an abuse of discretion under well-established case law support judgment where trial court took judicial notice
and evidentiary rules. A judicially-noticed fact “must be of testimony from a hearing held thirteen months earlier
one not subject to reasonable dispute in that it is either in the same case, but the evidence was not offered
(1) generally known within the territorial jurisdiction in the second hearing); Paradigm Oil, Inc. v. Retamco
of the trial court or (2) capable of accurate and ready Operating, Inc., 161 S.W.3d 531, 540 (Tex.App.-San
determination by resort to sources whose accuracy cannot Antonio 2004, pet. denied) (finding evidence legally
reasonably be questioned.” TEX.R. EVID. 201(b). But insufficient to support damage award based on trial
“[p]ersonal knowledge is not judicial knowledge. The court's judicial notice of evidence offered at a hearing
judge may personally *693 know a fact of which he nine months earlier in the same case). Here, the only

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Guyton v. Monteau, 332 S.W.3d 687 (2011)

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).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Guyton v. Monteau, 332 S.W.3d 687 (2011)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

KeyCite Yellow Flag - Negative Treatment West Headnotes (23)


Declined to Follow by Delfingen US-Texas, L.P. v. Valenzuela, 
Tex.App.-El Paso, February 6, 2013
849 S.W.2d 380 [1] Appeal and Error
Court of Appeals of Texas, Power of appellate court in general
Houston (14th Dist.). In standard appeal when appellant raises
no evidence and factual insufficiency points,
HEARTHSHIRE BRAESWOOD PLAZA LIMITED appellate court reviews no evidence point
PARTNERSHIP, SMP Med Center Partners first; if court finds there is some evidence, it
Limited, and James M. Birney, Appellants, then proceeds to consider insufficient evidence
v. point.
BILL KELLY COMPANY, Appellee.
1 Cases that cite this headnote
No. B14–92–00509–CV.
| [2] Alternative Dispute Resolution
Feb. 4, 1993. Scope and standards of review
|
Proper standard of review on appeal from
Rehearing Denied April 8, 1993.
interlocutory order concerning motion to
Contractor sought declaratory judgment that arbitration stay litigation and compel arbitration is “no
of contract disputes was unavailable to owner of property evidence” standard of review.
who had hired contractor to renovate property and
5 Cases that cite this headnote
claimed breach of contract, foreclosure of mechanics'
liens, suit on sworn account, quantum meruit, fraud,
promissory estoppel, and negligent and grossly negligent [3] Appeal and Error
misrepresentation. Owner of property filed plea in Findings of Court or Referee
abatement followed by motions to stay litigation and Appeal and Error
compel arbitration. The 129th District Court, Harris Some or any evidence
County, Hugo Touchy, J., denied motions and stayed In reviewing no evidence or legal sufficiency
arbitration proceedings. Property owner appealed. The points, court considers only evidence and
Court of Appeals, Cannon, J., held that: (1) trial court was inferences, when viewed in most favorable
not required to accept contractor's pleadings in response light, that tend to support finding under
to motions as evidence in support of fraud in inducement attack, and disregards all evidence and
claim; (2) “no evidence” standard of review, rather than inferences to contrary; if there is any evidence
plea in abatement standard was applicable to trial court's of probative force to support finding, point
ruling; (3) no evidence supported contractor's claim of must be overruled and finding upheld.
fraud in inducement of contract as whole or arbitration
provision; (4) contractor's claims arising out of second 4 Cases that cite this headnote
renovation which it was allegedly promised by property
owner did not have to be arbitrated; and (5) foreclosure of
[4] Alternative Dispute Resolution
mechanics' lien was properly stayed pending arbitration.
Evidence

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

with motions to stay litigation and compel


arbitration, and burden of proof was on party 1 Cases that cite this headnote
resisting arbitration.
[10] Alternative Dispute Resolution
3 Cases that cite this headnote
Scope and standards of review
Appeal and Error
[5] Pleading Questions of Fact on Motions or Other
Order or judgment Interlocutory or Special Proceedings
Order overruling plea in abatement is Proper standard of review on appeal from
interlocutory in nature because order does trial court's order denying pleas in abatement
not finally resolve controversy. Vernon's and motions to stay litigation and compel
Ann.Texas Rules Civ.Proc., Rule 85. arbitration was “no evidence” standard,
rather than plea in abatement standard of
Cases that cite this headnote
review.

[6] Pleading 10 Cases that cite this headnote


Abatement in general
Burden of proof in plea in abatement action is [11] Alternative Dispute Resolution
very different from burden of proof in action Evidence
where party is seeking to avoid arbitration. Contracts
Weight and sufficiency
Cases that cite this headnote
Affidavit attached to contractor's response to
property owner's motions to stay litigation
[7] Alternative Dispute Resolution and compel arbitration of contract disputes
Arbitration favored; public policy did not support contractor's fraud in
Arbitration is favored by Texas courts. inducement defense based on alleged promise
by property owner to award contractor
3 Cases that cite this headnote future renovation project, where there was
no evidence that alleged promise was known
[8] Alternative Dispute Resolution by property owner to be false when it was
Validity of assent made, that owner intended contractor to rely
on promise, or that contractor did in fact rely
Alternative Dispute Resolution
by entering into contracts.
Unconscionability
Fraud and unconscionability are defenses to Cases that cite this headnote
enforcement of arbitration provision under
Texas General Arbitration Act. Vernon's
[12] Alternative Dispute Resolution
Ann.Texas Civ.St. arts. 224 et seq., 238–2, §
Particular cases
A(1, 2).
There was no evidence to support finding of
5 Cases that cite this headnote fraud in inducement of arbitration provision
in renovation contract based on alleged
misrepresentation that architect would act as
[9] Alternative Dispute Resolution
initial arbitrator so as to justify denial of
Evidence
property owner's motions to stay litigation
Burden of proof is on party seeking to avoid
and compel arbitration of contract disputes,
arbitration. Vernon's Ann.Texas Civ.St. arts.
where nowhere in affidavit did contractor
238–2, § A(1, 2).
maintain that statement was false when it was
made, that owner intended contractor to rely

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

upon statement, or that, when agreement was


made, owner had no present intent to perform. [16] Alternative Dispute Resolution
Building contracts disputes
2 Cases that cite this headnote Alternative Dispute Resolution
Particular cases
[13] Alternative Dispute Resolution Contractor's claims alleging negligent
Evidence misrepresentation, violations of Deceptive
Court could not infer missing fraud elements Trade Practices Act (DTPA), promissory
that property owner knew statement was estoppel, and breach of oral contract based
false when it was made, owner intended upon promise by property owner that it would
contractor to rely upon statement, or that be given renovation project were separate and
when agreement was made, owner had no distinct from claims arising out of contracts,
present intent to perform in order to support and thus, claims did not have to be arbitrated
finding of fraud in inducement of arbitration pursuant to arbitration clause in contract
provision, where owner did not deny existence and defendant could proceed with litigation,
of contract or arbitration provision but simply where only connection between project and
disagreed with contractor's interpretation of contracts was contractor's claim that promise
provision. of project fraudulently induced it to enter into
contracts.
3 Cases that cite this headnote
5 Cases that cite this headnote

[14] Appeal and Error


Scope and theory of case [17] Alternative Dispute Resolution
Matters Which May Be Subject to
When there are no findings of fact and
Arbitration Under Law
conclusions of law, Court of Appeals must
affirm judgment if there is evidence to support Causes of action sounding in tort are not
it on any legal theory raised by prevailing automatically exempted from arbitration;
party. dispute arising out of contractual relationship
may give rise to breach of contract claims and
1 Cases that cite this headnote tort claims.

5 Cases that cite this headnote


[15] Alternative Dispute Resolution
Particular cases
[18] Alternative Dispute Resolution
Texas Property Code provisions requiring suit
Matters Which May Be Subject to
to be filed to foreclose on mechanics' lien
Arbitration Under Law
and that lien can be foreclosed only by court
of competent jurisdiction did not preclude To determine whether particular tort claim is
arbitration of underlying contract which subject to arbitration, court must determine
formed basis of lien; thus, foreclosure of lien whether particular tort claims is so interwoven
would be stayed until arbitrators determined with contract that it could not stand alone or,
whether party seeking foreclosure prevailed in on other hand, is tort completely independent
underlying dispute. V.T.C.A., Property Code of contract and could be maintained without
§§ 53.154, 53.158; West's C.R.S.A. §§ 38–20– reference to contract.
106, 38–22–105.5, 38–22–110 to 38–22–116,
8 Cases that cite this headnote
38–22–120.

5 Cases that cite this headnote [19] Alternative Dispute Resolution


Construction

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

Alternative Dispute Resolution For contract to be valid, it is not necessary


Arbitrability of dispute that agreement be signed by both parties; if
When dispute arises between contracting one party signs, other may accept by his acts,
parties whose relationship includes agreement conduct or acquiesence in terms of contract.
to arbitrate any dispute arising out of or under
18 Cases that cite this headnote
contract, trial court must determine whether
issues presented are subject to arbitration
under that agreement; parties must have
specifically agreed by clear language to
arbitrate matters in dispute. Attorneys and Law Firms

3 Cases that cite this headnote *382 William K. Andrews, Houston, for appellants.

Stephen A. Mendel, Daryl L. Moore, Houston, for


[20] Alternative Dispute Resolution appellee.
Existence and validity of agreement
Before MURPHY, CANNON and ROBERT E. MORSE
Alternative Dispute Resolution
(sitting by designation), JJ.
Merits of controversy
Issue as to whether there is valid arbitration
provision is separate from issue of whether
OPINION
contract was breached, former is determined
by court, and latter by arbitrator. CANNON, Justice.

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.

Arbitration provision was enforceable even


The appellants in this case are: Hearthshire Braeswood
though party failed to sign contract
Plaza Limited Partnership (Hearthshire), owner of an
containing provision, where party's acts
apartment complex known as the Gardens of Braeswood
including execution of subsequent contract
(the Gardens); James Birney (Birney), a limited partner
and position taken in appeal clearly showed
of and agent for Hearthshire; and SMP Med Center
intent to be bound by original contract.
Partners, Ltd. (SMP), a limited partnership and owner
Vernon's Ann.Texas Civ.St. art. 224.
of the Braesbrook Landing Apartments (the Landing).
7 Cases that cite this headnote Birney is also an agent for SMP. The appellee is Bill Kelly
Company (Kelly), a sole proprietorship owned by Mr.
Bill Kelly (Mr. Kelly). Mr. Kelly's company renovates
[22] Contracts apartment complexes.
Effect in general; enforcement in general
Under general rules of contract law, party is In 1991, Hearthshire and Kelly entered into two contracts
bound by terms of contract that he has signed, concerning renovation work on the Gardens, one on
except upon showing of special circumstances. January 21, 1991 and one on March 28, 1991. Each *383
contract contained an arbitration clause which provided,
1 Cases that cite this headnote in pertinent part:

All claims or disputes between the


[23] Contracts
Contractor and the Owner arising
Acceptance shown by signature
out or relating to the Contract,
or the breach thereof, shall be

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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.

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

that Birney told Kelly that it would receive the Landing


It is apparent from our analysis that the plea in abatement project, and that Kelly did not receive the project. There is
argument proposed by Kelly is flawed. Therefore, we hold no evidence that: (1) Birney knew the statement was false
that Kelly's pleadings are not to be taken as evidence and when it was made; (2) Birney intended Kelly to rely on the
the proper standard of review in this appeal is the “no statement; (3) Kelly did in fact enter into the contracts for
evidence” standard. the Gardens because of this statement; or (4) at the time
the representation was made, appellants did not intend to
[11] Since we have determined that Kelly's pleadings do give Kelly the Landing project. Therefore, we hold that
not constitute evidence in this case, we now look to the two there is no evidence of fraud in the inducement of the
affidavits of Mr. Kelly to determine if they are sufficient contract as a whole. Kelly failed to present evidence on
to sustain Kelly's claim of fraud in the inducement of the each of the elements of fraud. If the trial court based its
contract as a whole. decision on fraudulent inducement of the contract as a
whole, it committed error because there is no evidence to
The affidavit which is attached to Kelly's second support that contention. Appellants' third point of error
amended petition swears to the allegations in the petition is sustained.
concerning Kelly's claim for sworn account. There is
nothing in that affidavit to support Kelly's fraud claim. In their first point of error, appellants allege that fraud
Therefore, the affidavit attached to Kelly's response in the inducement of the contract as a whole cannot be
to appellants' motions to stay litigation and compel used as grounds to defeat an arbitration clause. Because
arbitration is the *387 only document that speaks to we have determined that there was no evidence to support
Kelly's allegation that it was induced to enter the contract fraudulent inducement of the contract as a whole, it is
relating to the Gardens because appellants fraudulently unnecessary for us to decide this point of error. Whether a
represented that Kelly would be given the $4.5 million claim of fraudulent inducement of the contract as a whole
renovation project on the Landing. Now, we must look is sufficient to defeat an arbitration provision is irrelevant
to the affidavit and determine whether it contains some in this instance because Kelly failed to present evidence of
evidence on each of the elements of fraud. such fraud.

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

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

“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

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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.

In their final point of error, appellants contend that


[22] [23] Since article 224 provides that an arbitration
the trial court erred in not consolidating the arbitration
provision may be revoked “upon such grounds as exist at
proceedings because Kelly presented no evidence, or
law or in equity for the revocation of any contract,” we
insufficient evidence that it would be prejudiced by the
must determine whether Hearthshire's failure to sign the
resolution of all disputes in one consolidated proceeding.
January contract is a ground to revoke the contract, and
therefore, the arbitration provision. Under the general
*393 When Hearthshire filed its demands for arbitration
rules of contract law, a party is bound by the terms of
with the AAA, it filed a separate demand for each
the contract that he has signed, except upon a showing
contract. It then immediately sought to consolidate them
of special circumstances. Shearson Lehman Hutton, 763
according to AAA procedures. Appellants want this court
S.W.2d at 937. Kelly has produced no evidence of any
to order the trial court to consolidate the arbitrable claims
special circumstances. Further, for a contract to be valid,
into one proceeding.
it is not necessary that the agreement be signed by
both parties. E.g., Velasquez v. Schuehle, 562 S.W.2d 1,
Because the trial court denied, in error, appellants'
3 (Tex.Civ.App.—San Antonio 1977, no writ). If one
motions to stay litigation and compel arbitration, it never
party signs, the other may accept by his acts, conduct or
reached the issue of whether the arbitration proceedings
acquiescence in the terms of the contract. Id. Kelly signed
should be consolidated. We cannot reverse a trial court on
the January contract, and though Hearthshire did not sign
a decision it never reached. Appellants' twelfth point of
the contract, its acts, including the execution of the March
error is overruled.
contract and the position taken in this appeal, clearly show
intent to be bound by the January contract. Appellants'
The order of the trial court is reversed except as to Kelly's
tenth point of error is sustained.
claims involving the Landing renovation project. The trial
court is directed to make orders such as are necessary to
Point of error number eleven states that even if only some
comply with this court's opinion.
of the claims are arbitrable and others are not, the trial
court erred in not staying the litigation as to any of the
claims that are arbitrable and compelling arbitration of All Citations
those claims. Our holding in point of error eight makes
it unnecessary to review this point of error. We have 849 S.W.2d 380
already determined which claims are not arbitrable and

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).

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Hearthshire Braeswood Plaza Ltd. Partnership v. Bill Kelly Co., 849 S.W.2d 380 (1993)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 14


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

KeyCite Yellow Flag - Negative Treatment West Headnotes (21)


Declined to Follow by Leggett v. EQT Production Company, W.Va., 
November 17, 2016
939 S.W.2d 118 [1] Contracts
Supreme Court of Texas. Ambiguity in general
Question of whether contract is ambiguous is
HERITAGE RESOURCES, INC., Petitioner, one of law for court.
v.
NATIONSBANK, Co–Trustee under the Will of 96 Cases that cite this headnote
David B. Trammell, Deceased et al., Respondents.
[2] Contracts
No. 95–0515. Existence of ambiguity
|
Contract is “ambiguous” when its meaning
Argued Nov. 29, 1995.
is uncertain and doubtful or is reasonably
|
susceptible to more than one interpretation.
Decided April 25, 1996.
| 143 Cases that cite this headnote
Rehearing Overruled March 21, 1997.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

In determining market value at the well for oil


[6] Contracts and gas royalty purposes, “market value” is
Language of Instrument price willing seller obtains from willing buyer.
In construing contract, Supreme Court gives
terms their plain, ordinary, and generally 7 Cases that cite this headnote
accepted meaning unless instrument shows
that parties used them in technical or different [12] Mines and Minerals
sense. Amount and time of payment

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

11 Cases that cite this headnote


[14] Mines and Minerals
Amount and time of payment
[9] Mines and Minerals In determining market value at the
Rights and liabilities well for oil and gas royalty purposes,
For oil and gas purposes, although it is when information about comparable sales
not subject to costs of production, royalty is not readily available, courts use
is usually subject to postproduction costs, method involving subtracting reasonable
including taxes, treatment costs to render it postproduction marketing costs from market
marketable, and transportation costs. value at point of sale.

18 Cases that cite this headnote 11 Cases that cite this headnote

[10] Mines and Minerals [15] Mines and Minerals


Rights and liabilities Amount and time of payment
For oil and gas purposes, parties may by For purposes of determining market value at
agreement modify general rule that royalty is the well for oil and gas royalty purposes when
subject to postproduction costs. information about comparable sales is not
readily available, “postproduction marketing
2 Cases that cite this headnote costs” include transporting gas to market and
processing gas to make it marketable.
[11] Mines and Minerals
11 Cases that cite this headnote
Amount and time of payment

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

division order is not binding, and operator


[16] Mines and Minerals then becomes liable for part of interest owner's
Actions payments the operator retained; basis of rule
For oil and gas royalty purposes, plaintiff is unjust enrichment.
has burden to prove market value at
the well, under either comparable sales 2 Cases that cite this headnote
method or method of subtracting reasonable
postproduction marketing costs from market [20] Mines and Minerals
value at point of sale. Persons entitled in general;
apportionment and division orders
5 Cases that cite this headnote
When oil and gas operator prepares division
order that allocates payments among interest
[17] Mines and Minerals owners in manner that differs from oil and
Amount and time of payment gas lease provisions, operator is not liable to
In calculating royalties to be paid to interest owner for amounts it paid out to other
gas interest royalty owners under oil and interest owners.
gas leases, lessee properly deducted costs
of transporting gas to point of sale, 2 Cases that cite this headnote
despite clauses in leases limiting deduction
from royalty for postproduction costs; [21] Mines and Minerals
postproduction clauses stated that there shall Persons entitled in general;
be no deduction from value of royalty, leases apportionment and division orders
clearly set royalty as fraction of market value
Gas lessee could not be held liable to trustee
at the well, lessee determined market value
for gas interest royalty owners for amounts
at the well by subtracting postproduction
lessee paid to pipeline carrier to transport
transportation costs from amount received
gas to point of sale, which amounts lessee
at point of sale, and commonly-accepted
deducted in calculating owners' royalties,
meaning of “royalty” and “market value at the
under division order that allegedly allocated
well” terms rendered postproduction clauses
payments among interest owners in manner
surplusage.
that differed from lease provisions; lessee
28 Cases that cite this headnote would be liable, if at all, only for amount of
unpaid royalties it retained.

[18] Mines and Minerals 1 Cases that cite this headnote


Persons entitled in general;
apportionment and division orders
For oil and gas purposes, general rule is that
division orders are binding until revoked. *120 Appealed from El Paso Court of Appeals, Eighth
Judicial District; Susan Larsen, Justice.
2 Cases that cite this headnote
Attorneys and Law Firms

[19] Mines and Minerals John R. Woodward, Dallas, for Petitioner.


Persons entitled in general;
apportionment and division orders Robert Scogin, Kermit, Rick K. Disney, Fort Worth,
When oil and gas operator prepares division Cary L. Jennings, Fort Worth, Ben A. Douglas, Fort
order that allocates payments among interest Worth, for Respondents.
owners in manner that differs from oil and gas
lease provisions and operator retains benefits,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

Opinion In January 1989, NationsBank noticed that Heritage


was deducting severance taxes and transportation charges
Justice BAKER delivered the opinion of the Court,
from the purchase price. NationsBank objected to the
in which Chief Justice PHILLIPS, Justice CORNYN,
transportation charge deduction. NationsBank contended
Justice ENOCH, and Justice SPECTOR join.
that the leases specifically prohibited the deduction. Three
This case involves construction of royalty clauses in different leases are in issue. The relevant parts are:
several oil and gas leases. NationsBank sued Heritage
3. The royalties to be paid Lessor are ...
contending that Heritage deducted transportation costs
from the value of NationsBank's royalty in violation of the (b) on gas, including casinghead gas or other
leases. gaseous substances produced from the land, or land
consolidated therewith, and sold or used off the
The trial court rendered a partial summary judgment premises or in the manufacture of gasoline or other
against Heritage deciding liability and damages through products therefrom, the market value at the well of
1991. NationsBank amended its pleading to include 1
/5 of the gas so sold or used, provided that on gas
Heritage's deductions through 1993. After a bench trial,
the trial court awarded NationsBank and other royalty sold at the well the royalty shall be 1 /5 of the amount
owners the transportation costs Heritage deducted plus realized from such sale provided, however, that there
interest and attorney's fees. shall be no deductions from the value of the Lessor's
royalty by reason of any required processing, cost
The court of appeals affirmed the trial court's judgment. of dehydration, compression, transportation or other
895 S.W.2d 833. It held that the royalty clauses showed matter to market such gas.
the parties' intent not to deduct the post-production
transportation costs when determining market value at or:
the well. 895 S.W.2d at 836–37. The court of appeals also
3. In consideration of the premises, Lessee covenants
held that the division orders Heritage and the royalty
and agrees ...
owners executed did not bind the royalty owners and that
Heritage was liable for the full amount deducted. 895 (b) To pay the Lessor ¼ of the market value at the well
S.W.2d at 839. for all gas (including substances contained in such
gas) produced from the leased premises; provided,
We conclude the trial court and the court of appeals however, that there shall be no deductions from the
incorrectly interpreted the royalty clauses. We reverse value of Lessor's royalty by reason of any required
the court of appeals' judgment. We render judgment that processing, cost of dehydration, compression, *121
NationsBank take nothing. Further, we disapprove of transportation, or other matter to market such gas.
the court of appeals' language about the liability of an
operator who underpays royalty interest owners. or

3. Lessee shall pay the following royalties subject to the


following provisions: ...
Facts
(b) Lessee shall pay the Lessor ¼ of the market value
NationsBank is the trustee for owners of interests in at the well for all gas (including all substances
gas, oil, and other minerals inherited under David B. contained in such gas) produced from the leased
Trammel's will. Heritage is the lessee and operator under premises and sold by Lessee or used off the leased
a number of leases. Heritage also owns an undivided premises, including sulphur produced in conjunction
working interest in some of the leases. Heritage sold gas therewith; provided, however, that there shall be
off the leased premises. Heritage deducted the cost to no deductions from the value of Lessor's royalty
transport the gas from the wellhead to the point of sale by reason of any required processing, cost of
as a post-production cost from the sales price before dehydration, compression, transportation, or other
calculating royalties. matter to market such gas.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

is uncertain and doubtful or is reasonably susceptible to


Although the court of appeals states that the leases are more than one interpretation. Coker v. Coker, 650 S.W.2d
virtually identical, the first lease is distinctly different from 391, 393 (Tex.1983). In construing an unambiguous oil
the others. In the first lease, for gas sold on the lease, and gas lease our task is to ascertain the parties' intentions
royalty is on proceeds, with no deduction for marketing as expressed in the lease. Sun Oil Co. v. Madeley, 626
costs, but if sold at a point off the lease, the royalty is S.W.2d 726, 727–28 (Tex.1981); McMahon v. Christmann,
the market value at the well. However, this difference is 157 Tex. 403, 303 S.W.2d 341, 344 (1957). To achieve
irrelevant for purposes of this opinion. All three leases this goal, we examine the entire document and consider
require us to determine if Heritage improperly deducted each part with every other part so that the effect and
transportation costs from the royalty payments. The meaning of one part on any other part may be determined.
critical clause in all three leases is the requirement that Steeger v. Beard Drilling, 371 S.W.2d 684, 688 (Tex.1963).
Heritage pay the royalty interest owners their fractional We presume that the parties to a contract intend every
interest of “the market value at the well” of the gas clause to have some effect. Ogden v. Dickinson State
produced. Bank, 662 S.W.2d 330, 331 (Tex.1983). We give terms
their plain, ordinary, and generally accepted meaning
unless the instrument shows that the parties used them
Royalty Clause Construction in a technical or different sense. Western Reserve Life
Ins. Co. v. Meadows, 152 Tex. 559, 261 S.W.2d 554, 557
Heritage contends that the royalty clauses define the (1953), cert. denied, 347 U.S. 928, 74 S.Ct. 531, 98 L.Ed.
lessor's royalty as a fraction of the market value at the well. 1081 (1954). This Court will enforce the unambiguous
Therefore, the clauses limiting deduction from the value document as written. Sun Oil Co., 626 S.W.2d at 728. Both
of the lessor's royalty simply means that Heritage cannot the trial court and the court of appeals determined that the
deduct an amount from the sales price that would make leases in question were unambiguous. We agree.
the royalty paid less than the required fraction of market
value at the well. Because NationsBank concedes Heritage
only deducted reasonable transportation costs from the
Royalty
market value at the point of sale, Heritage did not make a
deduction from the “value of the Lessor's royalty.” [8] [9] [10] Royalty is commonly defined as the
landowner's share of production, free of *122 expenses
The court of appeals rejected Heritage's interpretation of of production. See Delta Drilling Co. v. Simmons, 161 Tex.
the royalty clause. 895 S.W.2d at 836. The court of appeals 122, 338 S.W.2d 143, 147 (1960); Alamo Nat'l Bank v.
reasoned that because royalty interests are normally Hurd, 485 S.W.2d 335, 338 (Tex.Civ.App.—San Antonio
subject to post-production costs, Heritage's interpretation 1972, writ ref'd n.r.e.); 8 WILLIAMS & MEYERS, OIL
renders the post-production clause meaningless. 895 & GAS LAW, 856–57 (1987); 3 KUNTZ, OIL & GAS
S.W.2d at 837. Although we do not disagree with the court LAW, § 42.2 (1989). Although it is not subject to the
of appeals' reasoning in this respect, we find that applying costs of production, royalty is usually subject to post-
the trade meaning of royalty and market value at the well production costs, including taxes, treatment costs to
renders the post-production clauses surplusage as a matter render it marketable, and transportation costs. Martin
of law. v. Glass, 571 F.Supp. 1406, 1410 (N.D.Tex.1983), aff'd,
736 F.2d 1524 (5th Cir.1984); WILLIAMS & MEYERS,
supra, p. 857. However, the parties may modify this
(a) Applicable Law general rule by agreement. Martin, 571 F.Supp. at 1410.

Oil and Gas Lease Construction


Market Value at the Well
[1] [2] [3] [4] [5] [6] [7] The question of whether a
contract is ambiguous is one of law for the court. R & P [11] Market value at the well has a commonly accepted
Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d 517, meaning in the oil and gas industry. See generally
518 (Tex.1980). A contract is ambiguous when its meaning Wakefield, Annotation, Meaning of, and Proper Method

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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.

We recognize that our construction of the royalty clauses


in two of the three leases arguably renders the post-
(b) Application of Law to the Facts productions clause unnecessary where gas sales occur off
the lease. However, the commonly accepted meaning of
The court of appeals disregarded the generally accepted
the “royalty” and “market value at the well” terms renders
meanings of “market value at the well” and “royalty”
the post-production clause in each lease surplusage as a
to determine that Heritage wrongfully deducted post-
matter of law.
production costs. The court of appeals' construction
results in a royalty clause that specifies royalty payable
To determine if Heritage correctly paid royalties under
as a fraction of the market value at the well, to mean the
the leases, we must first determine the market value of
royalty is payable as a fraction of the market value at the
the gas at the well. NationsBank offered no evidence
point of sale with no deductions for post-production costs.
of comparable sales. However, Heritage conceded in its
response to NationsBank's motion for partial summary
judgment that the price Heritage received for the gas

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Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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.

All proceeds from the sale of gas


shall be paid to the undersigned
Summary
or their assigns in the proportions
as herein set out less taxes In conclusion, we hold that the court of appeals erred in
and any costs incurred in the holding that the lease required Heritage to pay royalties
handling and transportation to the based on the market value at the point of sale. Further, we
point of sale, treating, compressing specifically disapprove of the court of appeals discussion
boosting, dehydrating or any other about an erroneous division order's effects. We reverse
conditioning necessary, subject to the court of appeals' judgment and render judgment that
the terms of any contract of NationsBank take nothing from Heritage.
purchase and sale which affects the
above described property ...

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,

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Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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

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Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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

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Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

of Pan American Petroleum Corp. v. Southland Royalty


Co., 396 S.W.2d 519, 524–25 (Tex.Civ.App.—El Paso To add another point of view on this subject, a Texas
1965, writ dism'd w.o.j.), relied on Miller and reasoned court of appeals recently held that a royalty clause based
that a royalty interest is free of the cost of production and on “market value at the well” was ambiguous. That court
marketing costs. The poorly worded royalty clause in Pan upheld a jury finding that the parties did not intend
American was based on proceeds and also provided for to allow the deduction of compression charges from
delivery of the lessor's share of the minerals “free of cost.” royalties. Judice v. Mewbourne Oil Co., 890 S.W.2d 180
See also Skaggs v. Heard, 172 F.Supp. 813 (S.D.Tex.1959) (Tex.App.—Amarillo 1994), reversed today by this Court
(compression costs could not be charged to the lessor in a companion decision, 939 S.W.2d 133.
where the sale occurred on the lease and the royalty clause
provided for royalties based on proceeds). While it is fair to say that the greater number of courts
considering Texas law have permitted allocation of post-
In contrast, other Texas courts of appeals have allowed production costs to royalty owners, there are decisions
certain marketing costs to be allocated to the royalty reaching the opposite conclusion. It remains for this Court
owner. Only one of those cases dealt with a market value to determine whether “market value at the well” includes
royalty clause, Texas Oil & Gas Corp. v. Hagen, 683 or excludes post-production costs. Decisions from other
S.W.2d 24 (Tex.App.—Texarkana 1984), writ dism'd as jurisdictions illuminate the arguments on both sides of the
moot, 760 S.W.2d 960 (Tex.1988). Hagen held that market issue and offer a variety of potential resolutions.
value at the well is the market value of the gas where
sold, less reasonable and necessary transportation and
processing costs. Id. at 28. Similarly, in *127 Parker v.
B
TXO Prod. Corp., 716 S.W.2d 644 (Tex.App.—Corpus
Christi 1986, no writ), the royalty owner was required One of the most comprehensive discussions of “market
to share in post-production compression costs. In dicta, value at the well” royalty clauses is Judge Wisdom's
the Parker court indicated that all post-production costs decision in Piney Woods Country Life Sch. v. Shell Oil Co.,
could be charged to the royalty owners. Id. at 648. The 726 F.2d 225 (5th Cir.1984), cert. denied, 471 U.S. 1005,
specific terms of the royalty clause cannot be discerned 105 S.Ct. 1868, 85 L.Ed.2d 161 (1985). Although that
from the opinion in Parker. decision applies Mississippi law, the court's review of the
law is not restricted to Mississippi jurisprudence. Among
Marketing costs were also charged to the royalty owners in other authorities, the opinion considers at some length
Le Cuno Oil Co. v. Smith, 306 S.W.2d 190 (Tex.Civ.App. the meaning attributed to “market value at the well” by
—Texarkana 1957, writ ref'd n.r.e.), cert. denied, 356 numerous commentators, concluding that the purpose in
U.S. 974, 78 S.Ct. 1137, 2 L.Ed.2d 1147 (1958). The specifying “at the well” is to distinguish between gas sold
parties agreed that a division order calling for ⅛th of in the form in which it emerges from the wellhead and gas
the price received at the wells governed the royalty, which thereafter has had value added by transportation
and the court held costs of dehydration, gathering, or processing. Id. at 231, 240. The Fifth Circuit held that
transporting, and processing could be deducted from the royalties under a “market value at the well” clause should
gross sales price received by the operator. Id. at 193. compensate only for the value of the gas at the well,
See also Martin v. Glass, 571 F.Supp. 1406, 1411–15 before the operator adds value. Id. Accordingly, that court
(N.D.Tex.1983), aff'd, 736 F.2d 1524 (5th Cir.1984) (post- concluded that royalty owners may be charged with all
production compression charges held deductible under a expenses subsequent to production including processing,
royalty clause based on net proceeds at the well). The transportation, removal of sulfur, and other marketing
court found that “net proceeds” contemplated deductions. costs where the royalty provision measures value “at the
571 F.Supp. at 1411. See also Maddox v. Texas Co., well.” Id. This reasoning is persuasive.
150 F.Supp. 175, 180 (E.D.Tex.1957) (“fair value” was
the measure where there was no market and marketing It has not been followed, however, by the highest courts
costs must be considered where the lease required the of some of our sister states. The implied obligation to
lessor to bear its proportionate cost of rendering gas market gas was held to be paramount in Garman v.
merchantable). Conoco, Inc., 886 P.2d 652 (Colo.1994). After surveying

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Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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

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Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

place of market, royalty is based on market at the well);


Kretni Dev. Co. v. Consolidated Oil Corp., 74 F.2d 497, 500 Having canvassed the law of other states, it can fairly be
(10th Cir.1934), cert. denied, 295 U.S. 750, 55 S.Ct. 829, 79 said that there is no consensus among other jurisdictions
L.Ed. 1694 (1935), (obligation to market did not extend to as to when post-production costs are to be shared by the
providing ninety-mile pipeline for distant market at sole royalty owner, although the majority view appears to be
cost of lessee). that royalty owners do share in costs, at least where the
sale occurs off the lease.
California law appears to allow the deduction of
marketing costs under a “market price at the well” clause,
absent language to the contrary. Atlantic Richfield Co.
C
v. State, 214 Cal.App.3d 533, 262 Cal.Rptr. 683, 688
(1989, review denied) (unless there is clear language to the In the case before us, the court of appeals concluded that
contrary, lessor bears proportionate share of processing “market value at the well” meant that the royalty interests
and transportation costs when term “market price at the were subject to costs incurred after production, including
well” is used). taxes, costs of treating the gas, and costs of transportation
to market, unless other language in the lease modified this
The North Dakota supreme court took a route similar provision. 895 S.W.2d at 836. This is the better-reasoned
to that of our court of appeals in Judice. West v. Alpar view.
Resources, Inc., 298 N.W.2d 484, 490–91 (N.D.1980). The
North Dakota court found a royalty clause ambiguous While Texas recognizes that the lessee has an implied
where it specified only that the royalty was “one-eighth of duty to market gas, Cabot Corp. v. Brown, 754 S.W.2d
the proceeds from the sale of the gas,” and did not specify 104, 106 (Tex.1987), we have never determined who bears
whether proceeds were to be determined at the well or at the cost of marketing gas beyond the wellhead in the
the point of sale. The North Dakota court proceeded to absence of an express agreement. There is an express
construe the lease against the lessor as a matter of law, agreement in this case as to how and where royalty will
requiring the lessor to bear all costs. Id. at 491. be determined. The implied duty to market gas cannot
override that agreement. The words “at the well” should
Finally, courts applying Louisiana law have uniformly be given their straightforward meaning. Market value “at
held that post-production costs are deductible under a the well” means the value of gas at the well, before it is
“market value at the well” clause, commencing with the transported, treated, compressed or otherwise prepared
Louisiana supreme court's decision in Wall v. United Gas for market.
Pub. Serv. Co., 178 La. 908, 152 So. 561, 564 (1934)
(market price means market value in the field and the In construing language commonly used in oil and gas
lessee is not required to bear all the expense of carrying leases, we must keep in mind that there is a need for
gas to a market beyond the field). Louisiana has applied predictability and uniformity as to what the language
a “reconstruction” approach to determine market value. used means. Parties entering into agreements expect that
Value is “reconstructed” by beginning with the gross *130 the words they have used will be given the meaning
proceeds from the sale of the gas and deducting any costs generally accorded to them. As we have seen, the decisions
of taking the gas from the wellhead to the market. See under Texas law are not entirely consistent, but the weight
Merritt v. Southwestern Elec. Power Co., 499 So.2d 210, of the precedent is that post-production costs are to be
213 (La.Ct.App.1986) (compression charges to market shared by the royalty owner under a lease that values
gas, as opposed to produce it, could be deducted). For a the gas based on “market value at the well.” See Phillips
good discussion of the rationale underpinning Louisiana Petroleum Co., 155 F.2d at 198; Martin, 571 F.Supp. at
law in this area, see Freeland v. Sun Oil Co., 277 F.2d 1411–15; Hagen, 683 S.W.2d at 28; and Le Cuno Oil Co.,
154 (5th Cir.1960), cert. denied, 364 U.S. 826, 81 S.Ct. 306 S.W.2d at 193. See also Parker, 716 S.W.2d at 648.
64, 5 L.Ed.2d 55 (processing costs can be deducted). See These decisions are not binding, but are persuasive.
also Sartor v. United Gas Pub. Serv. Co., 84 F.2d 436, 440
(5th Cir.1936) (transportation charges deductible under Having concluded that marketing costs are to be shared
“market value at the well” leases). by the royalty interest owners under a “market value at

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Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 13


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 14


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 15


Heritage Resources, Inc. v. NationsBank, 939 S.W.2d 118 (1996)
39 Tex. Sup. Ct. J. 537

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 16


Horizon Health Corp. v. Tyler-Holmes Memorial Hosp., 284 F.Supp.2d 439 (2003)

Remedies and Proceedings for


Enforcement in General
284 F.Supp.2d 439
United States District Court, When determining whether parties should be
N.D. Mississippi, compelled to arbitrate a dispute, first, the
Western Division. court must determine whether the parties
agreed to arbitrate the dispute; once the court
HORIZON HEALTH CORP., Plaintiff, finds that the parties agreed to arbitrate, it
v. must consider whether any federal statute
TYLER–HOLMES MEMORIAL HOSPITAL; or policy renders the claims nonarbitrable. 9
Board of Trustees of Tyler–Holmes Memorial U.S.C.A. § 1 et seq.
Hospital; and Board of Supervisors of
Cases that cite this headnote
Montgomery County, Mississippi, Defendants.

No. 3:02CV093–D–D. [3] Alternative Dispute Resolution


| Merits of controversy
Aug. 18, 2003. When conducting the two-pronged analysis
in determining whether parties should be
Successor to management consultation company brought
compelled to arbitrate a dispute, courts must
action against hospital, its board of trustees, and
not consider the merits of the underlying
board of supervisors of county arising out of breach
action. 9 U.S.C.A. § 1 et seq.
of a management contract pertaining to company's
management of a geropsychiatric treatment program Cases that cite this headnote
at hospital. Plaintiff moved to compel arbitration.
The District Court, Davidson, Chief Judge, held that
arguments advanced by hospital went to the merits of the [4] Alternative Dispute Resolution
underlying dispute, thus should be decided by arbitrator. Arbitrability of dispute
Alternative Dispute Resolution
Motion granted. Merits of controversy
Under the Federal Arbitration Act (FAA), the
federal district court ascertains only whether
the arbitration clause covers the allegations
West Headnotes (9)
at issue; if the dispute is within the scope
of the arbitration clause, the court may not
[1] Alternative Dispute Resolution delve further into the merits of the dispute. 9
Arbitration favored; public policy U.S.C.A. § 1 et seq.
Alternative Dispute Resolution
Cases that cite this headnote
Construction in favor of arbitration
The Federal Arbitration Act (FAA) expresses
a strong national policy in favor of [5] Alternative Dispute Resolution
arbitration, and any doubts concerning the Merits of controversy
scope of arbitrable issues should be resolved Arguments advanced by hospital, in response
in favor of arbitration. 9 U.S.C.A. § 1 et seq. to motion to compel arbitration brought by
management company related to a contract
Cases that cite this headnote dispute with hospital, that the Mississippi
Community Hospital Act (MCHA) did
[2] Alternative Dispute Resolution not require public hospitals to submit to
Arbitrability of dispute arbitration, that the arbitration agreement
violated the MCHA, and that the MCHA
Alternative Dispute Resolution
did not permit public entities from making a

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Horizon Health Corp. v. Tyler-Holmes Memorial Hosp., 284 F.Supp.2d 439 (2003)

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

[6] Alternative Dispute Resolution


Matters to Be Determined by Court Attorneys and Law Firms

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.

Cases that cite this headnote


OPINION GRANTING MOTION
TO COMPEL ARBITRATION
[7] Alternative Dispute Resolution
Preemption DAVIDSON, Chief Judge.

States Presently before the court is the Plaintiff's motion to


Particular cases, preemption or compel arbitration. Upon due consideration, the court
supersession finds that the motion should be granted.
The strong federal policy favoring arbitration
preempts state laws that act to limit the
availability of arbitration. 9 U.S.C.A. § 1 et
A. Factual Background
seq.
Plaintiff Horizon Health Corporation (“Horizon”) is a
Cases that cite this headnote
corporation organized under the laws of the State of Texas
with its principal place of business in Texas. Horizon
[8] Commerce has asserted claims against Tyler–Holmes Memorial
Arbitration Hospital (“Tyler–Holmes”), the Board of Trustees of
The Federal Arbitration Act (FAA), resting Tyler–Holmes (“Trustees”), and the Board of Supervisors
on Congress's authority under the Commerce of Montgomery County, Mississippi (“Supervisors”),
Clause, creates a body of federal substantive arising out of a breach of a management contract
law that is applicable in both federal and state pertaining to a geropsychiatric treatment program at
courts. U.S.C.A. Const. Art. 1, § 8, cl. 3; 9 Tyler–Holmes hospital. Tyler–Holmes is a community
U.S.C.A. § 1 et seq. hospital organized under the laws of the State of
Mississippi, with its principal place of business in Winona,
Cases that cite this headnote Mississippi.

On or about March 1, 2000, Tyler–Holmes


[9] Alternative Dispute Resolution
and Perspectives Health Management Corporation
Persons affected or bound
(“Perspectives”), entered into an agreement for
Because arbitration is a creature of contract Perspectives to provide management-consultation services
law, when asked to enforce an arbitration to Tyler–Holmes at Winona, Mississippi. Subsequently,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Horizon Health Corp. v. Tyler-Holmes Memorial Hosp., 284 F.Supp.2d 439 (2003)

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

The parties do not dispute that the Agreement at issue


B. Discussion contains the following mandatory arbitration provision:

1. The Agreement's Arbitration Provision


*442 X.
[1] Congress provided in the Federal Arbitration Act
(FAA) that a written agreement to arbitrate in a contract
ARBITRATION, ATTORNEYS' FEES
involving interstate commerce “shall be valid, irrevocable,
and enforceable, save upon such grounds as exist at All disputes and claims relating to any provision
law or in equity for the revocation of any contract.” 9 hereof or relating to or arising out of the parties'
U.S.C. § 2 (1999). Section Three of the FAA specifically relationship or the creation or termination thereof
contemplates that parties, such as the Plaintiff, that are (including, without limitation, any claim that any
aggrieved by another party's failure to arbitrate under a provision of this Agreement, or any specification,
written agreement, may file a motion to stay the trial of an standard or procedure or any other obligation of
action until such arbitration has been had in accordance Hospital or Manager or both is illegal or otherwise
with the terms of the agreement. 9 U.S.C. § 3 (1999). unenforceable or voidable under any law, ordinance, or
In addition, the FAA expresses a strong national policy ruling) shall be settled by arbitration at the Office of the
in favor of arbitration, and any doubts concerning the American Arbitration Association in Mississippi which
scope of arbitrable issues should be resolved in favor is nearest to the Hospital, in accordance with the United
of arbitration. Southland Corp. v. Keating, 465 U.S. 1,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Horizon Health Corp. v. Tyler-Holmes Memorial Hosp., 284 F.Supp.2d 439 (2003)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Horizon Health Corp. v. Tyler-Holmes Memorial Hosp., 284 F.Supp.2d 439 (2003)

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

(1) the Plaintiff's motion to compel arbitration (docket


entry 14–2) is GRANTED;
D. Conclusion
(2) the Plaintiff's claims shall be submitted to
For the above stated reasons, the Plaintiff's motion to arbitration, in accordance with the arbitration
compel arbitration is granted. The court is of the opinion agreement;
that the parties agreed to arbitrate the dispute. The court
is also of the opinion that no federal statute or policy (3) the Plaintiff's motion to stay the case (docket entry
renders the claims nonarbitrable. Finally, the court finds 14–1) is DENIED as moot;
that this cause should be dismissed without prejudice. The
(4) as arbitration has been compelled and all issues in
Fifth Circuit has held that Section Three of the FAA
this case disposed of, this case is CLOSED. Any of
(which provides that the court “shall ... stay the trial of
the parties may seek, by motion, to reopen this case
the action”) was not intended to limit dismissal of a case
in the event further action is required by the court.
in the proper circumstances and that if all of the issues
raised in the district court are arbitrable, dismissal of the
case is proper. See Alford v. Dean Witter Reynolds, Inc., All Citations
975 F.2d 1161, 1164 (5th Cir.1992) (holding that retaining
jurisdiction and staying “serve[s] no purpose” when all 284 F.Supp.2d 439
issues are arbitrable). As was the case in Alford, all of

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)
123 S.Ct. 588, 154 L.Ed.2d 491, 71 USLW 4019, 02 Cal. Daily Op. Serv. 11,847...

for judicial determination unless the parties


clearly and unmistakably provide otherwise.
KeyCite Yellow Flag - Negative Treatment
Not Followed as Dicta American General Home Equity, Inc. v. Kestel,  759 Cases that cite this headnote
Ky., May 22, 2008
123 S.Ct. 588
Supreme Court of the United States [2] Alternative Dispute Resolution
Arbitrability of Dispute
Karen HOWSAM, Individually and as Trustee A gateway dispute about whether the parties
for the E. Richard Howsam, Jr., Irrevocable Life are bound by a given arbitration clause raises
Insurance Trust Dated May 14, 1982, Petitioner, a “question of arbitrability” for a court
v. to decide; similarly, a disagreement about
DEAN WITTER REYNOLDS, INC. whether an arbitration clause in a concededly
binding contract applies to a particular type of
No. 01-800. controversy is for the court.
|
Argued Oct. 9, 2002. 783 Cases that cite this headnote
|
Decided Dec. 10, 2002. [3] Alternative Dispute Resolution
Matters to Be Determined by Court
Brokerage firm brought suit seeking to enjoin customer
from arbitrating dispute with National Association of Alternative Dispute Resolution
Securities Dealers (NASD). The United States District Waiver, Laches, or Estoppel
Court for the District of Colorado dismissed suit, but “Procedural” questions which grow out of
the Court of Appeals for the Tenth Circuit, Ebel, Circuit the dispute and bear on its final disposition
Judge, 261 F.3d 956, reversed. After granting certiorari, are presumptively not for the judge, but for
the United States Supreme Court, Justice Breyer, held an arbitrator, to decide; the presumption is
that: (1) interpretation of NASD rule imposing six-year that the arbitrator should decide allegations of
time limit for arbitration was a matter presumptively for waiver, delay, or a like defense to arbitrability.
the arbitrator, not for the court, abrogating J.E. Liss &
Co. v. Levin, 201 F.3d 848, and (2) parties' contract did not 534 Cases that cite this headnote
call for judicial determination of whether arbitration was
time-barred. [4] Alternative Dispute Resolution
Relations Between Customer-Investors
Reversed. and Broker-Dealers
Issue of whether arbitration of dispute
Justice Thomas filed an opinion concurring in the between brokerage firm and its customer was
judgment. time-barred under the National Association
of Securities Dealers (NASD) Code of
Justice O'Connor did not participate. Arbitration Procedure was a gateway
procedural dispute that did not present
a “question of arbitrability,” and thus
West Headnotes (5) interpretation of NASD time limit rule was
a matter presumptively for the arbitrator,
not for the court; NASD arbitrators were
[1] Alternative Dispute Resolution comparatively more expert about meaning of
Arbitrability of Dispute their own rule and better able to interpret and
The question whether the parties have apply it; abrogating J.E. Liss & Co. v. Levin,
submitted a particular dispute to arbitration, 201 F.3d 848.
i.e., the “question of arbitrability,” is an issue

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)
123 S.Ct. 588, 154 L.Ed.2d 491, 71 USLW 4019, 02 Cal. Daily Op. Serv. 11,847...

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

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Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)
123 S.Ct. 588, 154 L.Ed.2d 491, 71 USLW 4019, 02 Cal. Daily Op. Serv. 11,847...

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.

To obtain NASD arbitration, Howsam signed


Attorneys and Law Firms the NASD's Uniform Submission Agreement. That
agreement specified that the “present matter in
Alan C. Friedberg, Denver, CO, for petitioners. controversy” was submitted for arbitration “in
accordance with” the NASD's “Code of Arbitration
Matthew D. Roberts, for the United States as amicus Procedure.” Id., at 24. And that Code contains the
curiae, by special leave of the Court supporting the provision at issue here, a provision stating that no dispute
petitioners. “shall be eligible for submission ... where six (6) years have
elapsed from the occurrence or event giving rise to the ...
Kenneth W. Starr, Arlington, VA, for respondent.
dispute.” NASD Code § 10304.
Opinion
After the Uniform Submission Agreement was executed,
*81 Justice BREYER delivered the opinion of the Court. Dean Witter filed this lawsuit in Federal District Court. It
asked the court to declare that the dispute was “ineligible
This case focuses upon an arbitration rule of the National for arbitration” because it was more than six years old.
Association of Securities Dealers (NASD). The rule states App. 45. And it sought an injunction that would prohibit
that no dispute “shall be eligible for submission to Howsam from proceeding in arbitration. The District
arbitration ... where six (6) years have elapsed from the Court dismissed the action on the ground that the NASD
occurrence or event giving rise to the ... dispute.” NASD arbitrator, not the court, should interpret and apply the
Code of Arbitration Procedure § 10304 (1984) (NASD NASD rule. The Court of Appeals for the Tenth Circuit,
Code or Code). We must decide whether a court or an however, reversed. 261 F.3d 956 (2001). In its view,
NASD arbitrator should apply the rule to the underlying application of the NASD rule presented a question of the
controversy. We conclude that the matter is for the underlying dispute's “arbitrability”; and the presumption
arbitrator. is that a court, not an arbitrator, will ordinarily decide
an “arbitrability” question. See, e.g., First Options of
Chicago, Inc. v. Kaplan, 514 U.S. 938, 115 S.Ct. 1920, 131
I L.Ed.2d 985 (1995).

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);

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Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)
123 S.Ct. 588, 154 L.Ed.2d 491, 71 USLW 4019, 02 Cal. Daily Op. Serv. 11,847...

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

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Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)
123 S.Ct. 588, 154 L.Ed.2d 491, 71 USLW 4019, 02 Cal. Daily Op. Serv. 11,847...

decide.” Id., § 6, comment 2, 7 U.L.A., at 13 (emphasis


added). We do not see how that is so. For the reasons stated in
Part II, supra, parties to an arbitration contract would
[4] Following this precedent, we find that the normally expect a forum-based decisionmaker to decide
applicability of the NASD time limit rule is a matter forum-specific procedural gateway matters. And any
presumptively for the arbitrator, not for the judge. The temptation here to place special antiarbitration weight on
time limit rule closely resembles the gateway questions the appearance of the word “eligible” in the NASD Code
that this Court has found not to be “questions of rule is counterbalanced by a different NASD rule; that rule
arbitrability.” E.g., **593 Moses H. Cone Memorial states that “arbitrators shall be empowered to interpret
Hospital, supra, at 24-25, 103 S.Ct. 927 (referring to and determine the applicability of all provisions under this
“waiver, delay, or a like defense”). Such a dispute seems Code.” NASD Code § 10324.
an “aspec[t] of the [controversy] which called the grievance
procedures into play.” John Wiley, supra, at 559, 84 S.Ct. Consequently, without the help of a special arbitration-
909. disfavoring presumption, we cannot conclude that the
parties intended to have a court, rather than an arbitrator,
Moreover, the NASD arbitrators, comparatively more interpret and apply the NASD time limit rule. And as we
expert about the meaning of their own rule, are held in Part II, supra, that presumption does not apply.
comparatively better able to interpret and to apply
it. In the absence of any statement to the contrary
in the arbitration agreement, it is reasonable to infer
IV
that the parties intended the agreement to reflect that
understanding. Cf. First Options, 514 U.S., at 944-945, 115 For these reasons, the judgment of the Tenth Circuit is
S.Ct. 1920. And for the law to assume an expectation that
aligns (1) decisionmaker with (2) comparative expertise Reversed.
will help better to secure a fair and expeditious resolution
of the underlying controversy-a goal of arbitration Justice O'CONNOR took no part in the consideration or
systems and judicial systems alike. decision of this case.

We consequently conclude that the NASD's time limit


rule falls within the class of gateway procedural
*87 Justice THOMAS, concurring in the judgment.
disputes that do not present what our cases have called
As our precedents make clear and as the Court notes,
“questions of arbitrability.” *86 And the strong pro-
arbitration is a matter of contract. Ante, at 591. In Volt
court presumption as to the parties' likely intent does not
Information Sciences, Inc. v. Board of Trustees of Leland
apply.
Stanford Junior Univ., 489 U.S. 468, 109 S.Ct. 1248,
103 L.Ed.2d 488 (1989), we held that under the Federal
Arbitration Act courts must enforce private agreements
III to arbitrate just as they would ordinary contracts: in
accordance with their terms. Under Volt, when an
[5] Dean Witter argues that, in any event, i.e., even
arbitration agreement contains a choice-of-law provision,
without an antiarbitration presumption, we should
that provision must be honored, and a court interpreting
interpret the contracts between the parties here as calling
the agreement must follow the law of the jurisdiction
for judicial determination of the time limit matter.
selected by the parties. See id., at 478-479, 109 S.Ct. 1248
Howsam's execution of a Uniform Submission Agreement
(enforcing a choice-of-law provision that incorporated a
with the NASD in 1997 effectively incorporated the
state procedural rule concerning arbitration proceedings);
NASD Code into the parties' agreement. Dean Witter
see also **594 Mastrobuono v. Shearson Lehman Hutton,
notes the Code's time limit rule uses the word “eligible.”
Inc., 514 U.S. 52, 67, 115 S.Ct. 1212, 131 L.Ed.2d 76 (1995)
That word, in Dean Witter's view, indicates the parties'
(THOMAS, J., dissenting) (concluding that the choice-
intent for the time limit rule to be resolved by the court
of-law provision in question was indistinguishable from
prior to arbitration.
the one in Volt and, thus, should have been given effect).

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Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79 (2002)
123 S.Ct. 588, 154 L.Ed.2d 491, 71 USLW 4019, 02 Cal. Daily Op. Serv. 11,847...

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re AdvancePCS Health L.P., 172 S.W.3d 603 (2005)
48 Tex. Sup. Ct. J. 584

KeyCite Yellow Flag - Negative Treatment West Headnotes (16)


Distinguished by Peleg v. Neiman Marcus Group, Inc., Cal.App. 2 Dist., 
April 17, 2012
172 S.W.3d 603 [1] Alternative Dispute Resolution
Supreme Court of Texas. Validity
Alternative Dispute Resolution
In re ADVANCEPCS HEALTH L.P., AdvancePCS Disputes and Matters Arbitrable Under
a/k/a AdvancePCS, Inc., PCS Health Systems, Agreement
Inc., and AdvancePCS Health Systems, L.L.C. A party attempting to compel arbitration
must establish a valid arbitration agreement
No. 04–0182.
whose scope includes the claims asserted.
|
April 15, 2005. 63 Cases that cite this headnote

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,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re AdvancePCS Health L.P., 172 S.W.3d 603 (2005)
48 Tex. Sup. Ct. J. 584

although agreements contained a choice-of- as pharmacies had used management


law provision stating the agreement would company's services and network to obtain
be “construed, governed and enforced” reimbursements for 10 years,.
according to Arizona law; no party asked
court to take judicial notice of Arizona law, 7 Cases that cite this headnote
and all parties agreed that Texas and Arizona
law did not differ on any material point. Rules [9] Alternative Dispute Resolution
of Evid., Rule 202. Consideration

4 Cases that cite this headnote In the context of stand-alone arbitration


agreements, binding promises are required on
both sides as they are the only consideration
[5] Alternative Dispute Resolution rendered to create a contract; but when an
Writing, signature, and acknowledgment arbitration clause is part of an underlying
Neither the Federal Arbitration Act (FAA) contract, the rest of the parties' agreement
nor Texas law requires that arbitration clauses provides the consideration.
be signed, so long as they are written and
agreed to by the parties. 9 U.S.C.A. § 3; 45 Cases that cite this headnote
V.T.C.A., Civil Practice & Remedies Code §
171.001(a). [10] Alternative Dispute Resolution
Validity
28 Cases that cite this headnote
Arbitration clause contained in provider
agreements between pharmacies and
[6] Alternative Dispute Resolution pharmacy benefits management company
Preemption was not illusory based on other clauses in
States agreements; clause which granted company
Particular cases, preemption or the right to amend the agreement provided
supersession 30–day window during which arbitration
Federal Arbitration Act (FAA) preempts clause could not be cancelled, clause which
state contractual requirements that apply only reserved “all rights” company “may have
to arbitration clauses. 9 U.S.C.A. § 1 et seq. at law” did not render express arbitration
clause meaningless, and clause which granted
9 Cases that cite this headnote company termination right in the event of
a breach was superseded by clause which
preserved obligations that arise prior to the
[7] Alternative Dispute Resolution
termination of the agreement.
Formal Requisites
An arbitration agreement does not have to be 13 Cases that cite this headnote
included in each of the contract documents the
agreement purports to cover.
[11] Alternative Dispute Resolution
6 Cases that cite this headnote Unconscionability
Arbitration clause contained in provider
agreements between pharmacies and
[8] Alternative Dispute Resolution
pharmacy benefits management company was
Consideration
not procedurally unconscionable, although
Agreements to arbitrate contained in
pharmacies were forced to accept the
provider agreements between pharmacies
provision.
and pharmacy benefits management
company were not without consideration, 12 Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re AdvancePCS Health L.P., 172 S.W.3d 603 (2005)
48 Tex. Sup. Ct. J. 584

[12] Contracts 2 Cases that cite this headnote


Adhesion contracts; standardized
contracts
[16] Mandamus
Contracts Civil proceedings other than actions
Unconscionable Contracts
A party denied the right to arbitrate under the
Adhesion contracts are not automatically Federal Arbitration Act (FAA) is entitled to
unconscionable. mandamus relief. 9 U.S.C.A. § 1 et seq.

7 Cases that cite this headnote 11 Cases that cite this headnote

[13] Alternative Dispute Resolution


Unconscionability
There is nothing per se unconscionable about Attorneys and Law Firms
arbitration agreements.
*604 Chris A. Brisack, Norquest & Brisack, L.L.P.,
15 Cases that cite this headnote McAllen, Lecia Lynne Chaney, *605 Rodriquez, Colvin
Chaney & Saenz, LLP, Brownsville, Lisa D. Duran,
Quarles & Brady Streich, Lang, LLP, Phoenix, AZ, for
[14] Alternative Dispute Resolution relator.
Unconscionability
Under the Federal Arbitration Act (FAA), David T. Bright, Watts Law Firm, L.L.P., Corpus Christi,
unequal bargaining power does not establish Jaime A. Gonzalez, Gonzalez & Associates, James P. Roy,
grounds for defeating an agreement to Domengeaux, Wright, Roy & Edwards, Lafayette, LA,
arbitrate absent a well-supported claim that Donald Kelly, Kelly, Townsend & Thomas, Henry Cole
the clause resulted from the sort of fraud Gallagan Jr., Natchitoches, LA, Spencer Hoise, Hoise,
or overwhelming economic power that would Frost, Large & McArthur, San Francisco, CA, William
provide grounds for revocation of any Large, Hoise, Frost, Large & McArthur, Anchorage, AK,
contract. 9 U.S.C.A. § 1 et seq. William Hoese, Kohn, Swift & Graf, Philadelphia, PA,
Mikal C. Watts, Watts Law Firm, L.L.P., Corpus Christi,
26 Cases that cite this headnote for real party.

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,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re AdvancePCS Health L.P., 172 S.W.3d 603 (2005)
48 Tex. Sup. Ct. J. 584

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).

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In re AdvancePCS Health L.P., 172 S.W.3d 603 (2005)
48 Tex. Sup. Ct. J. 584

any and all other rights and remedies that may be


Finally, the pharmacies' suit alleges that PCS available to AdvancePCS under this Agreement or at
miscalculated the negotiated discount *607 from the law or equity.
Average Wholesale Price figure (AWP), a term defined
in the record only in the Provider Agreement. Indeed, all • 8.5 Provider Event of Default and AdvancePCS
of the details of the parties' reimbursement arrangements Remedy and Other AdvancePCS Rights.... Nothing
are contained in that Agreement. As the pharmacies' suit in this Agreement shall limit, and the parties agree
is based on that Agreement, they cannot enforce all of it that in addition to the rights specified in this
except the arbitration clause. Allied–Bruce Terminix Cos. Section, AdvancePCS shall retain, any and all rights
v. Dobson, 513 U.S. 265, 281, 115 S.Ct. 834, 130 L.Ed.2d AdvancePCS may have at law, equity or under this
753 (1995); FirstMerit, 52 S.W.3d at 756. Agreement.

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

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In re AdvancePCS Health L.P., 172 S.W.3d 603 (2005)
48 Tex. Sup. Ct. J. 584

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).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re AdvancePCS Health L.P., 172 S.W.3d 603 (2005)
48 Tex. Sup. Ct. J. 584

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


In re Amos, 397 S.W.3d 309 (2013)

The Court of Appeals has concurrent


mandamus jurisdiction with the Court of
397 S.W.3d 309
Criminal Appeals in criminal law matters.
Court of Appeals of Texas,
Dallas. Cases that cite this headnote
In re Heidi AMOS, Relator.
[2] Mandamus
No. 05–12–01500–CV. Remedy at Law
|
Mandamus
March 6, 2013.
Criminal prosecutions
Synopsis Prohibition
Background: Defendant filed motion to recuse original Existence and Adequacy of Other
trial judge. An assigned recusal hearing judge granted Remedies
the motion. Original trial judge filed motion for Prohibition
reconsideration. The recusal hearing judge scheduled a Proceedings in criminal prosecutions
hearing on the motion for reconsideration. Defendant
Mandamus and prohibition are available in
petitioned for writs of mandamus and prohibition as
a criminal proceeding if the relator shows (1)
means to challenging the recusal hearing judge's decision.
that the act she seeks to compel or prohibit
does not involve a discretionary or judicial
decision and (2) that she has no adequate
Holdings: The Court of Appeals, Fitzgerald, J., held that: remedy at law to redress the harm that she
alleges will ensue.
[1] recusal rule prohibited original trial judge's motion for
reconsideration; Cases that cite this headnote

[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.

West Headnotes (16) 2 Cases that cite this headnote

[1] Mandamus [4] Mandamus


Jurisdiction and authority

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Amos, 397 S.W.3d 309 (2013)

Courts and judicial officers subject to


mandamus [7] Judges
Effect on acts and proceedings of judge
Prohibition
Acts and Proceedings of Courts, Judges, If a judge recuses himself or herself, the judge
and Judicial Officers thereby voluntarily steps out of the case for
all purposes and another judge is immediately
When a relator seeks extraordinary relief that
assigned to hear and dispose of the case.
amounts to the undoing of an accomplished
Vernon's Ann.Texas Rules Civ.Proc., Rule
judicial act, that relief is more in the nature of
18a(f)(2)(A).
mandamus than prohibition.
Cases that cite this headnote
Cases that cite this headnote

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Amos, 397 S.W.3d 309 (2013)

When an otherwise qualified assigned judge


[10] Judges renders an order in a criminal case that
Determination of objections exceeds the authority conferred by his or her
Judges order of assignment, the order is erroneous,
Effect on acts and proceedings of judge although not void.
When enforcing the refer rule, requiring the
Cases that cite this headnote
challenged judge to refer a recusal motion to
another judge to decide the motion in the first
instance, courts make no distinction between [14] Constitutional Law
that period during which the recusal motion is Removal; recusal
pending and the period immediately following Judges
the ruling by the assigned judge; once a judge Determination of objections
has been recused, the prudent approach is for
Original trial judge had no protected interest
the recused judge and the assigned judge to
in presiding over defendant's particular
have no further communications with each
criminal case, and thus, any failure to notify
other concerning any aspect of that case.
judge of the hearing on defendant's motion
Vernon's Ann.Texas Rules Civ.Proc., Rule
to recuse did not violate judge's due process
18a.
rights. U.S.C.A. Const.Amend. 14.
3 Cases that cite this headnote
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

[13] Judges [16] Mandamus


Authority and Proceedings of Special or Vacation of judgment or order
Substitute Judges

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Amos, 397 S.W.3d 309 (2013)

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.

Relator Heidi Amos is the defendant in a pending criminal


Amos filed a petition for writ of mandamus or writ of
case. She filed a motion to recuse the trial judge presiding
prohibition in this Court on October 30, see In re Amos,
over her case, a former judge was assigned to decide the
No. 05–12–01463–CV, 2012 WL 5397108 (Tex.App.-
motion to recuse, and that judge granted the motion. The
Dallas Nov. 6, 2012, orig. proceeding) (mem. op.)
recused judge then filed a motion for reconsideration, and
(denying the petition for noncompliance with the Texas
the assigned judge signed an order purporting to grant
Rules of Appellate Procedure), and she filed a revised
rehearing of the motion to recuse and to set the motion
petition seeking the same relief on November 6. Thus, in
for a new hearing. By a petition for writ of mandamus and
this mandamus proceeding, Amos is the relator, Judge
writ of prohibition, Amos asks us to prevent the assigned
Pirtle is the respondent, and the State is the real party
judge from reconsidering her recusal order. We conclude
in interest. See TEX. R. APP. P. 52.2. We stayed Judge
that Amos has a clear right to the relief sought and that
Pirtle's order granting rehearing pending the disposition
she has no adequate remedy by appeal. Accordingly, we
of this original proceeding.
conditionally grant the writ of mandamus.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Amos, 397 S.W.3d 309 (2013)

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.

[7] If a judge recuses himself or herself, the judge thereby


Additionally, there is some authority holding that the
voluntarily steps out of the case for all purposes and
parties to a criminal case are the State and the accused,
another judge is immediately assigned to hear and dispose
and that no third party may intervene in a criminal
of the case. If a judge refers the motion to recuse to
case. See Bell v. State, No. 01–05–01180–CR, 2006 WL
the presiding administrative judge, the rules require the
3628916, at *5 (Tex.App.-Houston [1st Dist.] Dec. 14,
challenged judge to step aside and another judge to
2006, no pet.) (mem. op., not designated for publication)
be assigned to resolve the motion. Once the challenged
(trial judge was not required to refer motion to recuse
judge refers the motion for another judge to decide, the
filed by third-party “public interest organization”); In re
challenged judge must take no further action in the case
Wingfield, 171 S.W.3d 374, 381 (Tex.App.-Tyler 2005,
until the motion is decided, except for good cause stated
orig. proceeding) (“Unlike the Rules of Civil Procedure,
in writing or on the record. TEX. R. CIV. P. 18a(f)(2)

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re Amos, 397 S.W.3d 309 (2013)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re Amos, 397 S.W.3d 309 (2013)

therefore any failure to notify Judge Mullin of the recusal


Based on the language of this order, Judge Pirtle's hearing did not violate Judge Mullin's constitutional
authority in the case arguably expired on September 28, rights.
2012, when she ruled on Amos's motion to recuse. But we
need not decide this issue because in our view Judge Pirtle We conclude Amos has shown a clear right to relief from
definitely lost any authority she had on October 1, 2012, Judge Pirtle's order granting reconsideration of Amos's
when the presiding administrative judge transferred and motion to recuse.
reassigned Amos's criminal case to a new court, Dallas
County Criminal Court of Appeals No. 2. The transfer
order does not recognize or mention any continuing power C. Error preservation and adequate remedy at law
in Judge Pirtle to exercise any judicial authority in the case. [15] We next consider whether we should deny Amos's
Judge Pirtle's attempt to continue acting in the case after petition because she did not present any of her arguments
the case had been transferred in its entirety to a new judge to Judge Pirtle before filing this original proceeding. See
and court was improper and without authority. In re Watkins, 369 S.W.3d 702, 706 (Tex.App.-Dallas
2012, orig. proceeding). Under the particular facts of this
case, we conclude that Amos's failure to oppose or object
3. The State's response to Judge Pirtle's reconsideration order is excusable. The
[14] At our request, the State filed a response to Amos's record indicates that Judge Mullin served her motion for
petition. The State suggests that Judge Pirtle's order reconsideration by first-class mail on October 23, 2012,
granting reconsideration may have been proper as a way and Judge Pirtle granted reconsideration, apparently
of vindicating Judge Mullin's due-process rights. In her without a hearing, by order signed on Friday, October 26.
motion for reconsideration, Judge Mullin averred that Thus, depending on when Amos received the motion for
she had not been given notice of the recusal hearing reconsideration, she had little or no time to respond to
before Judge Pirtle, and she argued, among other things, the motion for reconsideration before Judge Pirtle granted
that the lack of notice violated her rights under the it. Moreover, Judge Pirtle's October 26 order set the new
Due Course of Law Clause of the Texas Constitution. hearing on Amos's motion to recuse at 10:00 a.m. on
See TEX. CONST. art. I, § 19. One element of a claim Thursday, November 1, again giving Amos little time to
under this clause is the existence of a constitutionally react. Amos's decision to seek emergency and mandamus
protected interest. See In re J.W.T., 872 S.W.2d 189, relief from this Court, which she did on October 30, was
194 (Tex.1994). Although the Texas Supreme Court has understandable under the circumstances. Although she
said that a public officer's interest in his or her elected could have presented her argument at the November 1
position is a protected interest, Tarrant Cnty. v. Ashmore, hearing, her contention is that Judge Pirtle could not
635 S.W.2d 417, 422 (Tex.1982), *316 we have found no properly set or conduct such a hearing in the first place.
authority that a trial judge's interest in presiding over a Under these circumstances, we conclude it is proper for us
particular case is constitutionally protected such that she to address the merits in this proceeding instead of directing
must be given notice of a hearing of a motion to recuse. In Amos to make her objections before Judge Pirtle, possibly
cases decided under the federal Due Process Clause, courts resulting in yet another original proceeding afterwards.
have held that possession of a constitutionally protected
interest in public employment generally does not give the [16] The court of criminal appeals has said that appeal
holder a protected interest in any particular job duties or is ordinarily an adequate remedy for an erroneous ruling
responsibilities. See Richards v. City of Weatherford, 145 on a motion to recuse. De Leon, 127 S.W.3d at 6. But
F.Supp.2d 786, 790–91 (N.D.Tex.2001), aff'd, 275 F.3d 46 Amos is not challenging an order granting or denying a
(5th Cir.2001). We generally construe the Due Course of motion to recuse; she is challenging an assigned judge's
Law Clause in the same way as its federal counterpart. consideration of an improper motion for reconsideration
Tex. Workers Comp. Comm'n v. Patient Advocates of filed by a recused judge. “ ‘If a district judge enters
Tex., 136 S.W.3d 643, 658 (Tex.2004). By analogy, Judge an order for which he has no authority, mandamus
Mullin had no protected interest in presiding over Amos's will issue.’ ” State ex rel. Cobb v. Godfrey, 739 S.W.2d
particular criminal case. We conclude that the order 47, 48 (Tex.Crim.App.1987) (orig. proceeding) (quoting
recusing Judge Mullin in a single case did not infringe any State ex rel. Holmes v. Denson, 671 S.W.2d 896, 899
interest protected by the Due Course of Law Clause, and (Tex.Crim.App.1984) (orig. proceeding)). In Godfrey, the

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


In re Amos, 397 S.W.3d 309 (2013)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


In re Bruce Terminix Co., 988 S.W.2d 702 (1998)
41 Tex. Sup. Ct. J. 941

23 Cases that cite this headnote


KeyCite Yellow Flag - Negative Treatment
Distinguished by Perry Homes v. Cull, Tex., May 2, 2008  
[3] Alternative Dispute Resolution
988 S.W.2d 702
Trial or hearing
Supreme Court of Texas.
Whether a party's conduct waives its
In re BRUCE TERMINIX COMPANY, Relator, arbitration rights under the Federal
Arbitration Act is a question of law. 9
No. 98–0030. U.S.C.A. § 1 et seq.
|
June 5, 1998. 9 Cases that cite this headnote

Homeowner brought action against termite exterminator,


alleging fraud, negligent misrepresentation, breach of [4] Mandamus
contract, and violations of Deceptive Trade Practices Remedy at Law
Act. After vacating order compelling arbitration, the Ellis For mandamus purposes, there is no adequate
County Court at Law, Bob Carroll, J., held in favor of remedy by appeal for denial of right to
homeowner, and exterminator petitioned for mandamus. arbitrate, since very purpose of arbitration is
The Court of Appeals, 953 S.W.2d 537, denied petition, to avoid time and expense of trial and appeal.
and exterminator petitioned for mandamus. The Supreme
Court, held that: (1) exterminator did not waive right to 9 Cases that cite this headnote
arbitration by propounding one set of 18 interrogatories
and one set of 19 requests for production, and (2) [5] Alternative Dispute Resolution
exterminator did not waive right to arbitration by failing Stay of Proceedings Pending Arbitration
to initiate arbitration of claim after trial court had Section of Federal Arbitration Act generally
granted exterminator's motion to abate suit and compel requiring “courts of the United States” to stay
arbitration. proceedings where issue therein is referable to
arbitration applies to state as well as federal
Writ conditionally granted. courts. 9 U.S.C.A. § 3.

4 Cases that cite this headnote

West Headnotes (11)


[6] Alternative Dispute Resolution
Arbitration favored; public policy
[1] Mandamus
Alternative Dispute Resolution
Matters of discretion
Evidence
Supreme Court will grant mandamus when
Public policy favors arbitration, and
trial court has clearly abused its discretion and
therefore, Federal Arbitration Act imposes
relator has no adequate remedy by appeal.
a strong presumption against waiver. 9
14 Cases that cite this headnote U.S.C.A. § 3.

24 Cases that cite this headnote


[2] Mandamus
Matters of discretion
[7] Alternative Dispute Resolution
Error in determining what the law is or
Waiver or Estoppel
applying law to the facts constitutes abuse of
Courts will not find that a party has waived
discretion for purposes of mandamus.
its right to enforce an arbitration clause by
merely taking part in litigation unless it has

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Bruce Terminix Co., 988 S.W.2d 702 (1998)
41 Tex. Sup. Ct. J. 941

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.

22 Cases that cite this headnote


[8] Alternative Dispute Resolution
Suing or participating in suit
Substantially invoking judicial process does
not waive a party's arbitration rights unless
Attorneys and Law Firms
opposing party proves that it suffered
prejudice as a result. *703 Roy L. Stacy, Dallas, for Relator.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Bruce Terminix Co., 988 S.W.2d 702 (1998)
41 Tex. Sup. Ct. J. 941

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.

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In re Bruce Terminix Co., 988 S.W.2d 702 (1998)
41 Tex. Sup. Ct. J. 941

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

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In re Bruce Terminix Co., 988 S.W.2d 702 (1998)
41 Tex. Sup. Ct. J. 941

remedy sought.” AMERICAN ARBITRATION ASS'N,


COMMERCIAL ARBITRATION RULES Rule 6(a)
(1996). Moreover, the party who files a claim must pay ***
a filing fee that varies based on the amount of the claim.
Id. at 27. The duty to define the nature of the dispute and Under Texas Rule of Appellate Procedure 59.1, without
the remedy as provided by AAA Rule 6(a) “naturally and hearing oral argument, we conditionally grant Bruce
logically falls on the claimant.” Mamlin, 490 S.W.2d at Terminix Company's petition for writ of mandamus. We
639. It would be anomalous to require the party against are confident that the trial court will abate Bates's lawsuit
whom relief is sought to present its opponent's case and pending arbitration in accordance with this opinion and
pay a filing fee whose amount is based on the size of its we instruct the clerk to issue the writ only if it does not.
opponent's claim. “This scenario is not reasonable and
clearly not the design of the rules.” Moore, 931 S.W.2d
All Citations
at 728–29 (discussing National Association of Securities
Dealers rules). By agreeing to the AAA rules, Terminix 988 S.W.2d 702, 41 Tex. Sup. Ct. J. 941
and Bates placed the burden of initiating arbitration on
the party seeking relief.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

Cases that cite this headnote


231 S.W.3d 475
Court of Appeals of Texas,
Corpus Christi–Edinburg. [2] Mandamus
Presumptions and Burden of Proof
In re CHRISTUS SPOHN HEALTH The relator requesting a writ of mandamus
SYSTEM CORPORATION d/b/ has the burden to establish that the trial court
a Christus Spohn Hospital Shoreline. abused its discretion.

No. 13–07–399–CV. Cases that cite this headnote


|
July 31, 2007.
[3] Mandamus
Synopsis Acts and Proceedings of Courts, Judges,
Background: Decedent's survivors brought wrongful and Judicial Officers
death action against decedent's former employer arising Mandamus
out of murder in employer's parking garage. Employer Civil Proceedings Other Than Actions
filed motion to compel arbitration. The trial court If a trial court erroneously denies a party's
denied the motion, and employer petitioned for writ of motion to compel arbitration under the
mandamus. Federal Arbitration Act (FAA), the movant
has no adequate remedy at law and is entitled
to a writ of mandamus.
Holdings: The Court of Appeals, Corpus Christi–
1 Cases that cite this headnote
Edinburg, Valdez, C.J., held that:

[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.

Cases that cite this headnote


Writ denied.

[5] Alternative Dispute Resolution


Evidence
West Headnotes (23) A heavy burden of proof is required to
establish waiver of arbitration rights, and
[1] Mandamus the court must resolve all doubt in favor of
Remedy by Appeal or Writ of Error arbitration.

Mandamus Cases that cite this headnote


Matters of Discretion
A writ of mandamus will issue to correct a
[6] Alternative Dispute Resolution
clear abuse of discretion when there is no
Trial or Hearing
adequate remedy by appeal; a trial court
abuses its discretion if it reaches a decision so Whether a party has waived its contractual
arbitrary and unreasonable as to amount to a right to arbitrate is a question of law.
clear and prejudicial error of law or if it clearly 1 Cases that cite this headnote
fails to correctly analyze or apply the law.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

opposing party proved that it suffered


[7] Alternative Dispute Resolution prejudice as a result.
Waiver or Estoppel
Waiver of the right to arbitration may be 2 Cases that cite this headnote
express or implied.
[13] Alternative Dispute Resolution
Cases that cite this headnote
Suing or Participating in Suit
The judicial process has been substantially
[8] Alternative Dispute Resolution invoked such that a right to arbitration
Waiver or Estoppel has been waived when the party seeking
Whether waiver of the right to arbitration has arbitration has taken specific and deliberate
occurred depends on the individual facts and actions, after the filing of suit, that are
circumstances of each case. inconsistent with a right to arbitrate or
has actively tried, but failed, to achieve a
Cases that cite this headnote satisfactory result through litigation before
turning to arbitration.
[9] Alternative Dispute Resolution
7 Cases that cite this headnote
Waiver or Estoppel
Waiver of the right to arbitration occurs only
where a party has acted inconsistently with its [14] Alternative Dispute Resolution
right to arbitrate and such actions prejudiced Suing or Participating in Suit
the other party. Actions that are inconsistent with the right to
arbitrate and thus raise the issue of waiver of
Cases that cite this headnote that right may include some combination of
filing an answer, setting up a counterclaim,
[10] Alternative Dispute Resolution pursuing extensive discovery, moving for a
Suing or Participating in Suit continuance, and failing to timely request
A party waives an arbitration clause when it arbitration.
substantially invokes the judicial process to
2 Cases that cite this headnote
the other party's detriment.

1 Cases that cite this headnote [15] Alternative Dispute Resolution


Suing or Participating in Suit
[11] Alternative Dispute Resolution Examples that indicate the party is attempting
Waiver or Estoppel to achieve a satisfactory result through
Waiver of an arbitration right must be litigation before turning to arbitration such
intentional. that the right to arbitration is waived include
moving for summary judgment or seeking a
Cases that cite this headnote final resolution of the dispute.

2 Cases that cite this headnote


[12] Alternative Dispute Resolution
Suing or Participating in Suit
[16] Alternative Dispute Resolution
The test for determining waiver of the right
Suing or Participating in Suit
to arbitration is two-pronged: (1) whether
the party seeking arbitration substantially Attempts at settlement do not evidence waiver
invoked the judicial process, and (2) whether of the right to arbitration.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

opponent's incurring costs and fees due to the


Cases that cite this headnote movant's actions or delay.

Cases that cite this headnote


[17] Alternative Dispute Resolution
Waiver or Estoppel
Delay alone generally does not establish [22] Alternative Dispute Resolution
waiver of the right to arbitration. Suing or Participating in Suit
Decedent's employer substantially invoked
Cases that cite this headnote the judicial process for purposes of waiver
of right to arbitration in wrongful death
[18] Alternative Dispute Resolution action brought by decedent's survivors, where
Suing or Participating in Suit employer did not request arbitration until
14 months after lawsuit was filed, two
Purely defensive measures do not
separate trial settings had been passed and the
substantially invoke the judicial process as
matter had already been set for trial a third
required to waive a right to arbitration.
time, at employer's request, before employer
2 Cases that cite this headnote moved to compel arbitration, employer had
sought substantive discovery on the merits,
pertaining to both liability and damages,
[19] Alternative Dispute Resolution
through numerous discovery requests and
Suing or Participating in Suit
motions, and employer had filed a third-party
A party does not substantially invoke petition, had filed a motion for contempt,
the judicial process and waive a right and had attempted to impose sanctions which
to arbitration merely by participating in suggested that it was attempting to achieve
discovery; in contrast, pursuing extensive a satisfactory result through the judicial
discovery may substantially invoke the process.
judicial process.
1 Cases that cite this headnote
1 Cases that cite this headnote

[23] Alternative Dispute Resolution


[20] Alternative Dispute Resolution Suing or Participating in Suit
Suing or Participating in Suit
Decedent's survivors were prejudiced by
Even when a party has substantially invoked employer's act in invoking the judicial
the judicial process, a party's right to process such that employer waived right
arbitration is not waived absent a clear to arbitration in wrongful death action;
showing that the opposing party has been survivors' counsel testified by affidavit as
prejudiced. to the expenses incurred and the time
spend on depositions and discovery, that
2 Cases that cite this headnote
he would have used a different discovery
strategy had employer timely requested
[21] Alternative Dispute Resolution arbitration, and that he would have limited
Waiver or Estoppel the depositions and expenses incurred because
In determining whether a party has been of the limits customarily proposed in
prejudiced such that the right to arbitration arbitration proceedings, and survivor testified
has been waived, courts focus on factors such by affidavit that he and his children had been
as: (1) the movant's access to information that receiving counseling and were expecting the
is not discoverable in arbitration and (2) the matter to be resolved.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

(orig.proceeding); Serv. Corp. Int'l v. Lopez, 162 S.W.3d


Cases that cite this headnote 801, 808 (Tex.App.-Corpus Christi 2005, no pet.).

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.

Relator, Christus Spohn Health System Corporation d/


b/a Christus Spohn Hospital Shoreline, seeks a writ of III. Applicable Law
mandamus ordering the trial court to compel arbitration
[4] [5] [6] [7] [8] There is a strong presumption
of a wrongful death claim brought by real parties in
against waiver of arbitration rights. In re Bank One, 216
interest, the family of a deceased employee. We deny the
S.W.3d 825, 827 (Tex.2007); In re D. Wilson Constr.
petition for writ of mandamus.
Co., 196 S.W.3d 774, 783 (Tex.2006) (orig.proceeding);
see In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763
(Tex.2006) (orig.proceeding). A “heavy burden of proof”
I. Standard of Review is required to establish waiver of arbitration rights, and
the court must resolve all doubt in favor of arbitration. In
[1] [2] [3] A writ of mandamus will issue to correct
re Bruce Terminix Co., 988 S.W.2d 702, 702 (Tex.1998).
a clear abuse of discretion when there is no adequate
Whether a party has waived its contractual right to
remedy by appeal. See Walker v. Packer, 827 S.W.2d 833,
arbitrate is a question of law. See In re Oakwood Mobile
840 (Tex.1992). A trial court abuses its discretion if it
Homes, 987 S.W.2d 571, 574 (Tex.1999) (orig.proceeding).
reaches a decision so arbitrary and unreasonable as to
Waiver may be express or implied. EZ Pawn Corp. v.
amount to a clear and prejudicial error of law or if it
Mancias, 934 S.W.2d 87, 89 (Tex.1996) (orig.proceeding);
clearly fails to correctly analyze or apply the law. In re
Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730,
Ford Motor Co., 165 S.W.3d 315, 317 (Tex.2005). The
735 (Tex.App.-Eastland 2006, orig. proceeding). Whether
relator has the burden to establish that the trial court
waiver has occurred depends on the individual facts and
abused its discretion. See id. If a trial court erroneously
circumstances of each case. Southwind Group, Inc., 188
denies a party's motion to compel arbitration under the
S.W.3d at 735; Williams Indus., Inc. v. Earth Dev. Sys.
FAA, the movant has no adequate remedy at law and
Corp., 110 S.W.3d 131, 135 (Tex.App.-Houston [1st Dist.]
is entitled *478 to a writ of mandamus. In re Nexion
2003, no pet.); Sedillo v. Campbell, 5 S.W.3d 824, 827
Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex.2005)
(Tex.App.-Houston [14th Dist.] 1999, no pet.).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

$60,000 to $70,000 in expenses in developing this matter


[22] Considering the individual facts and circumstances for trial. Counsel further testified that he and co-counsel
of this case, we conclude that Spohn substantially spent more than 1,000 hours on the case in preparing
invoked the judicial process. Although delay alone does it for trial, and, estimating their hourly rate at $350
not establish waiver, fourteen months passed before per hour, had invested more than $350,000 in attorney's
Christus moved to compel arbitration, and, under these fees. Counsel deposed seventeen witnesses before Spohn
circumstances, we would conclude that Spohn failed to moved to compel arbitration and ordered records through
timely request arbitration. See In re Certain Underwriters depositions on written questions from twenty-three non-
at Lloyd's, 18 S.W.3d at 872–873; Sedillo, 5 S.W.3d at 827. parties. Counsel propounded twelve substantive sets of
Two separate trial settings had been passed and the matter written discovery to Spohn. Counsel testified that, had
had already been set for trial a third time, at Spohn's Spohn requested arbitration before discovery, he would
request via a verified motion for continuance, before have used a different discovery strategy and limited
Spohn moved to compel arbitration. Cf. Interconex, Inc. the depositions and expenses incurred because of the
v. Ugarov, 224 S.W.3d 523, 534–35 (Tex.App.-Houston limits customarily proposed in arbitration proceedings.
[1st Dist.] 2007, no pet.) (movant acted inconsistently with Counsel further testified that Spohn's failure to identify
its right to arbitrate when it requested that the case be fact witnesses and failure to acknowledge the existence of,
reset and failed to file a motion to compel arbitration until or produce, video surveillance of its premises on the date
shortly before trial, which it had specifically requested of the incident, greatly increased the time and expense of
and caused to be set at a certain date). According to this lawsuit. Finally, counsel for real parties testified that
the written discovery contained in the record, Spohn he had relied on representations by Spohn's counsel that
sought substantive discovery on the merits, pertaining to this was not an “event” under Spohn's plan because of a
both liability and damages, through numerous discovery “criminal act by a third party.”
requests and motions. Southwind Group, Inc., 188 S.W.3d
at 736–737; Nationwide of Bryan, Inc., 969 S.W.2d at Corey Slough testified by affidavit that he and his children
522. Moreover, Spohn's third-party petition, motion for were expecting this matter to be resolved by trial in
contempt, and attempt to impose sanctions constitute April or August, and having to continue this matter via
specific and deliberate actions that are inconsistent *482 arbitration, with no specific end date in sight, would be
with the right to arbitrate and suggest that Spohn was “highly prejudicial and detrimental” to him and his three
attempting to achieve a satisfactory result through the daughters. “We have been receiving counseling to get
judicial process. through this ordeal, and it will be very prejudicial for this
to keep going because of Spohn's agreement to the trial
While none of these factors alone would establish waiver setting, and now trying to back out of it....”
of the right to arbitration, the combination herein does.
See In re Certain Underwriters at Lloyd's, 18 S.W.3d at Based on the record, we conclude that real parties in
872–873; Sedillo, 5 S.W.3d at 827; Central Nat'l Ins. Co. interest have made a clear showing of prejudice. See In re
v. Lerner, 856 S.W.2d 492, 494 (Tex.App.-Houston [1st Vesta Ins. Group, 192 S.W.3d at 763.
Dist.] 1993, orig. proceeding).

[23] Having determined that Spohn substantially


V. Conclusion
invoked the judicial process, we next consider whether
real parties in interest have made a clear showing that Even given the strong presumption against waiver, we
they have been prejudiced. See In re Vesta Ins. Group, 192 conclude that Spohn substantially invoked the judicial
S.W.3d at 763; In re Bruce Terminix Co., 988 S.W.2d at process to its opponents' detriment. Real parties in interest
704. have identified acts by Spohn that are inconsistent with
its right to arbitrate and have further shown resultant
In the instant case, counsel for real parties in interest prejudice on their part. Accordingly, the Court, having
testified by affidavit that compelling arbitration would examined and fully considered the petition for writ
“greatly prejudice” real parties in interest. Counsel of mandamus and response thereto is of the opinion
testified that real parties in interest spent approximately that relator has not shown itself entitled to the relief

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


In re Christus Spohn Health System Corp., 231 S.W.3d 475 (2007)

sought. Accordingly, the petition for writ of mandamus All Citations


is DENIED. See Tex.R.App. P. 52.8(a). Any pending
motions are dismissed as moot. 231 S.W.3d 475

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

arbitration clause in loan contract, and thus,


trial court's denial of motion to compel
KeyCite Yellow Flag - Negative Treatment arbitration was reviewable by mandamus,
Disagreed With by Lytle v. CitiFinancial Services, Inc., Pa.Super., 
where contract provided that FAA would
October 24, 2002
govern arbitration. 9 U.S.C.A. § 1 et seq.
19 S.W.3d 562
Court of Appeals of Texas, 1 Cases that cite this headnote
Waco.

In re CONSECO FINANCE SERVICING CORP. f/ [2] Commerce


k/a Green Tree Financial Servicing Corporation. Arbitration
A contract “involves” interstate commerce,
No. 10–00–121–CV. triggering application of the Federal
| Arbitration Act (FAA), if it “affects”
June 7, 2000. interstate commerce, within the broadest
meaning of the word approved by the United
Purchaser of manufactured home, together with his
States Supreme Court. 9 U.S.C.A. § 1 et seq.
wife, sued purchase-money lender for violations of state
Debt Collection Act and state Deceptive Trade Practices Cases that cite this headnote
Act (DTPA). Lender moved to compel arbitration.
The 82nd District Court denied motion. Lender sought
mandamus relief. The Court of Appeals, Vance, J., held [3] Commerce
that: (1) it would apply Federal Arbitration Act (FAA) Arbitration
provisions, and not state arbitration statutes, to dispute, The happenstance of whether the parties
and thus, trial court's denial of motion was reviewable by happened to think to insert a reference
mandamus; (2) purchaser's claim that arbitration clause to interstate commerce in the document is
in loan contract was unconscionable when it was made not determinative of whether the contract
was outside authority of trial court to consider, but had is governed by the Federal Arbitration Act
to be submitted to designated arbitrator for resolution; (3) (FAA). 9 U.S.C.A. § 1 et seq.
purchaser's claims under Debt Collection Act and DTPA
arose from lender's alleged efforts to collect the amounts Cases that cite this headnote
due under terms of loan contract, and thus fell within
scope of contract's arbitration clause; and (4) lender was [4] Alternative Dispute Resolution
entitled to writ of mandamus compelling trial court to Construction
order that claims of purchaser, but not wife, be submitted
The parties may designate which arbitration
to arbitration.
act, whether federal or state, they wish to
control proceedings under the contract, and
Writ conditionally granted.
the courts will honor that choice.

Cases that cite this headnote


West Headnotes (33)
[5] Alternative Dispute Resolution
Constitutional and Statutory Provisions
[1] Alternative Dispute Resolution
and Rules of Court
Construction
The Federal Arbitration Act creates a
Mandamus
substantive body of law that is applicable in
Civil Proceedings Other Than Actions
state courts. 9 U.S.C.A. § 1 et seq.
Court of Appeals would apply Federal
Arbitration Act (FAA) provisions, and not Cases that cite this headnote
state arbitration statutes, to dispute regarding

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

evidence, the trial court must conduct


[6] Alternative Dispute Resolution an evidentiary hearing to determine those
Contractual or Consensual Basis disputed facts before deciding if there is an
Alternative Dispute Resolution enforceable agreement to arbitrate between
Disputes and Matters Arbitrable Under the parties. 9 U.S.C.A. § 1 et seq.
Agreement
2 Cases that cite this headnote
A court called upon to determine if arbitration
should be compelled under the Federal
Arbitration Act (FAA) must determine (1) [10] Alternative Dispute Resolution
whether the parties agreed to arbitrate, and Arbitrability of Dispute
if so, (2) whether the scope of the agreement When addressing whether a dispute falls
encompasses the asserted claims. 9 U.S.C.A. § within the scope of the parties' arbitration
1 et seq. agreement, the court should analyze
the agreement under standard contract
1 Cases that cite this headnote
construction principles; its focus should be on
the factual allegations involved in the dispute
[7] Alternative Dispute Resolution and not on the legal causes of action raised by
Constitutional and Statutory Provisions the parties.
and Rules of Court
1 Cases that cite this headnote
Texas procedure controls the decision by a
Texas court when it is called on to decide if
a disputed claim is subject to an arbitration [11] Alternative Dispute Resolution
clause under the Federal Arbitration Act Construction in Favor of Arbitration
(FAA). 9 U.S.C.A. § 1 et seq. As a matter of federal substantive law, any
doubts as to whether a dispute falls within the
1 Cases that cite this headnote
scope of an arbitration agreement should be
resolved in favor of arbitration. 9 U.S.C.A. §
[8] Alternative Dispute Resolution 1 et seq.
Trial or Hearing
3 Cases that cite this headnote
If the party opposing a motion to
compel arbitration disputes the agreement
to arbitrate, that is, claims that there is no [12] Mandamus
agreement to arbitrate or, conceding that Remedy at Law
the agreement exists, raises a ground in Mandamus
law or in equity for the revocation of any Nature of Acts to Be Commanded
contract, the court may decide the issue on
Mandamus issues only to correct a clear
the basis of affidavits, pleadings, discovery
abuse of discretion or the violation of a
and stipulations, unless the material facts are
duty imposed by law when there is no other
controverted.
adequate remedy by law.
5 Cases that cite this headnote
Cases that cite this headnote

[9] Alternative Dispute Resolution


[13] Mandamus
Trial or Hearing
Matters of Discretion
If the facts regarding whether arbitration
When the trial court's decision rests on
should be compelled under the Federal
the resolution of factual issues or matters
Arbitration Act (FAA) are controverted, by
committed to the court's discretion, the relator
opposing affidavit or otherwise admissible

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

seeking mandamus relief must establish that


the trial court could reasonably have reached Cases that cite this headnote
only one decision.
[18] Appeal and Error
Cases that cite this headnote
Cases Triable in Appellate Court
The scope of an unambiguous arbitration
[14] Mandamus agreement is an issue of contract construction,
Acts and Proceedings of Courts, Judges, thus, a question of law subject to de novo
and Judicial Officers review on appeal.
A trial court's failure to correctly apply the
Federal Arbitration Act (FAA) to the facts Cases that cite this headnote
of a dispute constitutes an abuse of discretion
for which there is no adequate remedy at law, [19] Mandamus
requiring mandamus. 9 U.S.C.A. § 1 et seq. Civil Proceedings Other Than Actions

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

Evidence for violations of Debt Collection Act and


By attaching a copy of the loan contract Deceptive Trade Practices Act. V.T.C.A.,
containing an arbitration clause to its motion Finance Code § 392.301; V.T.C.A., Bus. & C.
to compel arbitration, lender met its burden §§ 17.46(b)(12), 17.50.
of presenting evidence of an arbitration
8 Cases that cite this headnote
agreement, requiring borrower seeking to
avoid being compelled to arbitrate his claims
to come forward with grounds as exist at law [26] Alternative Dispute Resolution
or in equity for the revocation of the contract. Scope and Standards of Review
Court of Appeals would look solely to terms
4 Cases that cite this headnote
of loan contract itself to determine scope
of arbitration agreement contained therein,
[23] Alternative Dispute Resolution absent any claim that arbitration clause was
Existence and Validity of Agreement ambiguous.
Borrower's claim that arbitration clause in
Cases that cite this headnote
loan contract was unconscionable when it was
made, on ground that its terms potentially
required arbitration of intentional torts and [27] Alternative Dispute Resolution
required borrower to arbitrate any claim Disputes and Matters Arbitrable Under
he might have against lender but reserved Agreement
lender's right to litigate most of its claims Borrower's claims for violations of the Texas
against him, was outside the authority of trial Debt Collection Act and the Texas Deceptive
court to consider in determining whether to Trade Practices Act arose from lender's
compel arbitration, but had to be submitted to alleged efforts to collect the amounts due
the designated arbitrator for resolution. under terms of loan contract, and thus fell
within scope of contract's arbitration clause,
3 Cases that cite this headnote
where clause provided for arbitration of any
claims “arising from or relating to” the
[24] Alternative Dispute Resolution contract. V.T.C.A., Finance Code § 392.301;
Remedies and Proceedings for V.T.C.A., Bus. & C. §§ 17.46(b)(12), 17.50.
Enforcement in General
6 Cases that cite this headnote
In Texas, a claim that the substance of an
arbitration clause is unconscionable is not a
ground which can be asserted in court to [28] Alternative Dispute Resolution
defeat a motion to compel arbitration as a Statutory Rights and Obligations
matter of law. Statutory claims may be the subject of an
arbitration agreement, enforceable pursuant
1 Cases that cite this headnote
to the Federal Arbitration Act (FAA). 9
U.S.C.A. § 1 et seq.
[25] Alternative Dispute Resolution
Evidence Cases that cite this headnote

Broad arbitration agreement in loan contract,


in which borrower agreed to arbitrate “[a]ll [29] Alternative Dispute Resolution
disputes, claims or controversies arising Statutory Rights and Obligations
from or relating to” the contract, required Only if Congress itself has evinced an
borrower, seeking to avoid its effect, to intention to preclude a waiver of judicial
present the most forceful evidence of a remedies for the statutory rights at issue may
purpose to exclude from arbitration his claims a party avoid its bargain to arbitrate its

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

claims pursuant to the Federal Arbitration


Act (FAA). 9 U.S.C.A. § 1 et seq. [33] Mandamus
Civil Proceedings Other Than Actions
2 Cases that cite this headnote Borrower's wife was not a party to loan
contract containing arbitration clause, and
[30] Alternative Dispute Resolution thus, lender was not entitled to writ of
Preemption mandamus compelling trial court to order that
wife's claims for violations of Debt Collection
States
Act and Deceptive Trade Practices Act be
Particular Cases, Preemption or
submitted to arbitration, absent any showing
Supersession
that she should be bound by the contract
Because the Federal Arbitration Act (FAA) otherwise. V.T.C.A., Finance Code § 392.301;
preempts state laws to the contrary, a state V.T.C.A., Bus. & C. §§ 17.46(b)(12), 17.50.
may not avoid the application of the FAA to
its statutory claims by its own acts. 9 U.S.C.A. 2 Cases that cite this headnote
§ 1 et seq.

Cases that cite this headnote

Attorneys and Law Firms


[31] Alternative Dispute Resolution
Statutory Rights and Obligations *565 Richard A. McKinney, Higier, Lautin, Foxman &
McKinney, P.C., Addison, for Relator.
States
Particular Cases, Preemption or Ron Butler, Marlin, for Real Parties in Interest.
Supersession
Although a federal statutory claim may escape Before Chief Justice DAVIS Justice VANCE, and Justice
an arbitration clause that is subject to the GRAY.
Federal Arbitration Act (FAA), depending
upon Congress' intent, a state statutory cause
of action, such as a claim for violations of OPINION
the Texas Debt Collections Act, may not. 9
U.S.C.A. § 1 et seq. VANCE, Justice.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

We will not require Candace's claims to be arbitrated KNOWINGLY WAIVE ANY


because she is not a party to the contract with Conseco RIGHT THEY HAVE TO A JURY
and Conseco has not attempted to show that she should TRIAL EITHER PURSUANT TO
be bound by that contract otherwise. ARBITRATION UNDER THIS
CLAUSE OR PURSUANT TO
Jody purchased his home on August 12, 1997. The A COURT ACTION BY YOU
contract is a three-page preprinted, fill-in-the-blank form. (AS PROVIDED HEREIN). The
There are three parties listed: the buyer—Jody Grams, the parties agree and understand that
seller—Budget Mobile Homes, and the assignee—Green all disputes arising under case law,
Tree Financial Servicing Corp. (Conseco's predecessor). statutory law and any other laws
The contract defines “I” to be the buyer and “you” to be including, but not limited to all
the seller and the assignee. The first page lists the details contract, tort and property disputes,
of the transaction, including the number and amounts will be subject to binding arbitration
of payments, the make, model, and serial number of the in accord with this Contract. The
home, and states that Jody is giving a security interest parties agree that the arbitrator shall
in the home. The next two pages state the terms of have all powers provided by law, the
the contract. By these provisions, Jody agrees to make Contract and the agreement of the
payments on the home according to the schedule on the parties. These powers shall include
first page, to keep the home in good condition and to keep all legal and equitable remedies
it fully insured by a policy payable to the seller. He also including, but not limited to, money
agrees that Conseco could accelerate the amount he owed damages, declaratory relief and
if he defaulted in performing any obligation created by the injunctive relief. Notwithstanding
contract. anything hereunto the contrary, you
retain an option to use judicial
The arbitration clause at issue is on the third page of the (filing a lawsuit) or non-judicial
contract and provides, in full: relief to enforce a security agreement
relating to the Manufactured Home
14. ARBITRATION: All disputes, secured in a transaction underlying
claims or controversies arising from this arbitration agreement, to
or *566 relating to this Contract enforce the monetary obligation
or the parties thereto shall be secured by the Manufactured
resolved by binding arbitration by Home or to foreclose on
one arbitrator selected by you with the Manufactured Home. The
my consent. This agreement is institution and maintenance of a
made pursuant to a transaction in lawsuit to foreclose upon any
interstate commerce and shall be collateral, to obtain a monetary
governed by the Federal Arbitration judgment or to enforce the security
Act at 9 U.S.C. Section 1. Judgment agreement shall not constitute a
upon the award rendered may waiver of the right of any party
be entered in any court having to compel arbitration regarding any
jurisdiction. The parties agree other dispute or remedy subject
and understand that they chose to arbitration in this Contract,
arbitration instead of litigation including the filing of a counterclaim
to resolve disputes. The parties in a suit brought by you pursuant to
understand that they have a this provision.
right to litigate disputes in court,
but that they prefer to resolve
On November 12, 1999, the Grams filed suit against
their disputes through arbitration
Conseco, alleging that it had violated both the Texas
except as provided herein. THE
Debt Collection Act and the Deceptive Trade Practices
PARTIES VOLUNTARILY AND

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

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,

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In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

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

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In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 10


In re Conseco Finance Servicing Corp., 19 S.W.3d 562 (2000)

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.

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In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

[3] construction defect claims were within scope of


196 S.W.3d 774
arbitration clauses; and
Supreme Court of Texas.

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.

No. 05–0326, 05–0327.


|
Argued Feb. 14, 2006. West Headnotes (26)
|
Decided June 30, 2006.
[1] Alternative Dispute Resolution
Synopsis Decisions reviewable; finality
Background: Subcontractor for construction of two Supreme Court had jurisdiction to review the
schools for independent school district sought injunctive correctness of the Court of Appeals' decision
relief against district to preserve evidence in personal that it lacked jurisdiction over interlocutory
injury action that students and teachers brought appeal, based on Texas Arbitration Act
against subcontractor in another court, and district (TAA), from trial court's denial of motion to
counterclaimed for alleged defects in construction and compel arbitration. V.T.C.A., Civil Practice &
filed third-party actions against several parties, including Remedies Code § 171.098(a)(1).
general contractors, subcontractors, and second-tier
17 Cases that cite this headnote
subcontractors. The 357th District Court, Cameron
County, denied plaintiff subcontractor's and third-party
defendants' motions to compel arbitration. Plaintiff and [2] Alternative Dispute Resolution
third-party defendants petitioned for writ of mandamus Preemption
under the Federal Arbitration Act (FAA) and filed States
interlocutory appeal under the Texas Arbitration Act Particular cases, preemption or
(TAA). The Corpus Christi - Edinburg Court of Appeals supersession
dismissed the interlocutory appeal and denied the petition.
Federal Arbitration Act (FAA) preempts only
Plaintiff and third-party defendants petitioned for writ of
contrary state law, not consonant state law. 9
mandamus and filed interlocutory appeal.
U.S.C.A. § 1 et seq.

10 Cases that cite this headnote


Holdings: The Supreme Court, Don R. Willett, J., held
that: [3] Alternative Dispute Resolution
Preemption
[1] mere fact that a contract affects interstate commerce,
Commerce
thus triggering the Federal Arbitration Act, does not
Arbitration
preclude, under preemption principles, enforcement under
the Texas Arbitration Act as well; States
Particular cases, preemption or
[2] arbitration clause in construction contracts was not supersession
displaced by another clause in the contracts;

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

Federal Arbitration Act (FAA) preempts the


Texas Arbitration Act (TAA) only if: (1) 2 Cases that cite this headnote
the agreement is in writing; (2) it involves
interstate commerce; (3) it can withstand [7] Mandamus
scrutiny under traditional contract defenses Remedy by Appeal or Writ of Error
under state law; and (4) state law affects the
Mandamus
enforceability of the agreement. 9 U.S.C.A. §
Nature of acts to be commanded
1 et seq.; V.T.C.A., Civil Practice & Remedies
Mandamus is proper to correct a clear abuse
Code § 171.001 et seq.
of discretion when there is no adequate
36 Cases that cite this headnote remedy by appeal.

10 Cases that cite this headnote


[4] Alternative Dispute Resolution
Preemption
[8] Mandamus
Commerce
Civil proceedings other than actions
Arbitration
Mandamus is proper when a party
The mere fact that a contract affects interstate
is erroneously denied its contracted-
commerce, thus triggering the Federal
for arbitration rights under the Federal
Arbitration Act (FAA), does not preclude,
Arbitration Act (FAA). 9 U.S.C.A. § 1 et seq.
under preemption principles, enforcement
under the Texas Arbitration Act (TAA) as 20 Cases that cite this headnote
well. 9 U.S.C.A. § 1 et seq.; V.T.C.A., Civil
Practice & Remedies Code § 171.001 et seq.
[9] Mandamus
29 Cases that cite this headnote Matters of discretion
A trial court has no discretion, for purposes of
mandamus relief, in determining what the law
[5] Alternative Dispute Resolution
is or applying the law to the facts.
Preemption
States 9 Cases that cite this headnote
Particular cases, preemption or
supersession
[10] Alternative Dispute Resolution
For the Federal Arbitration Act (FAA) to Validity
preempt the Texas Arbitration Act (TAA),
Alternative Dispute Resolution
state law must refuse to enforce an arbitration
Disputes and Matters Arbitrable Under
agreement that the FAA would enforce, either
Agreement
because: (1) the TAA has expressly exempted
the agreement from coverage, or (2) the TAA In evaluating a motion to compel arbitration,
has imposed an enforceability requirement a court must determine first whether a
not found in the FAA. 9 U.S.C.A. § 1 et seq.; valid arbitration agreement exists, and then
V.T.C.A., Civil Practice & Remedies Code § whether the agreement encompasses the
171.002(a). claims raised.

59 Cases that cite this headnote 49 Cases that cite this headnote

[6] Constitutional Law [11] Alternative Dispute Resolution


Civil Remedies and Procedure In general; formation of agreement
The Supreme Court may not enlarge appellate When deciding whether the parties agreed to
jurisdiction, absent legislative mandate. arbitrate under the Federal Arbitration Act

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

(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

[12] Alternative Dispute Resolution [18] Alternative Dispute Resolution


Scope and standards of review Construction
Whether a valid arbitration agreement exists Arbitration-related language is no exception
is a legal question subject to de novo review. to the rule that a contractual term is not
rendered invalid merely because it exists in a
66 Cases that cite this headnote document incorporated by reference.

11 Cases that cite this headnote


[13] Contracts
Ambiguity in general
Whether contractual ambiguity exists is a [19] Education
question of law. Performance or Breach
Public Contracts
11 Cases that cite this headnote Alternative dispute resolution;
arbitration of disputes
[14] Contracts Provision of contract for construction of
Existence of ambiguity school for school district, stating that except
Inartful drafting does not alone render a as otherwise provided in the contract, any
contractual provision ambiguous. dispute concerning a question of fact arising
under the contract would be decided by school
8 Cases that cite this headnote district, was subordinate to, and did not
displace or conflict with, another provision of
the contract, under which any controversy or
[15] Contracts
claim arising out of or related to the contract,
Existence of ambiguity
or the breach thereof, would be settled by
A contract is “ambiguous” only if it
arbitration.
is subject to two or more reasonable
interpretations after applying the pertinent Cases that cite this headnote
rules of construction.

17 Cases that cite this headnote [20] Alternative Dispute Resolution


Construction in favor of arbitration
The strong presumption favoring arbitration
[16] Contracts
generally requires that the court resolve
Existence of ambiguity
doubts as to the scope of arbitration
Ambiguity does not exist merely because
agreements in favor of coverage.
the parties to a contract assert forceful and
diametrically opposing interpretations. 15 Cases that cite this headnote

10 Cases that cite this headnote


[21] Alternative Dispute Resolution
Disputes and Matters Arbitrable Under
[17] Contracts
Agreement
Matters annexed or referred to as part of
contract

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

Once an arbitration agreement is established, waive its contractual right to arbitration


a court should not deny arbitration unless of disputes with district regarding alleged
it can be said with positive assurance that construction defects, though subcontractor
an arbitration clause is not susceptible of an filed suit against district to obtain injunctive
interpretation which would cover the dispute relief to preserve evidence in separate personal
at issue. injury action that students and teachers
brought against subcontractor.
20 Cases that cite this headnote
1 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.

William K. Luyties, Paul Goldenberg, Moises R.


[24] Education
Hernandez, James H. Powell, Jr., for person interested in
Performance or Breach
case.
Public Contracts
Alternative dispute resolution; Opinion
arbitration of disputes
Justice WILLETT delivered the opinion of the Court,
Subcontractor for construction of schools
in which Chief Justice JEFFERSON, Justice HECHT,
for independent school district did not
Justice O'NEILL, Justice WAINWRIGHT, Justice

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In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

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

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In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

CODE § 171.002(a) (detailing various claims the TAA


“does not apply to”), or (2) the TAA has imposed an
A. Ambiguity Concerning the
enforceability requirement not found in the FAA, see In
Existence of Valid Agreements
re Nexion Health at Humble, Inc., 173 S.W.3d at 69 (“The
TAA interferes with the enforceability of the arbitration [12] [13] [14] [15] [16] Whether a valid arbitration
agreement by adding an additional requirement—the agreement exists is a legal question subject to de novo
signature of a party's counsel—to arbitration agreements review. J.M. Davidson, Inc., 128 S.W.3d at 227. Whether
in personal injury cases.”). The parties have asserted contractual ambiguity exists is likewise a question of
nothing in the TAA or other state law that would subvert law. See Columbia Gas Transmission Corp. v. New Ulm
enforcement of the agreements at issue. Therefore, the Gas, Ltd., 940 S.W.2d 587, 589 (Tex.1996). Inartful
FAA does not preempt the TAA in this case, and the court drafting does not alone render a contractual provision
of appeals had jurisdiction under both laws. 4 ambiguous. See Universal C.I.T. Credit Corp. v. Daniel,
150 Tex. 513, 243 S.W.2d 154, 157 (1951). A contract
is ambiguous only if it is subject to “two or more
reasonable interpretations after applying the pertinent
III. Ambiguity of the Arbitration Agreements
rules of construction.” Columbia Gas Transmission Corp.,
Trane and the third-party defendants next argue that the 940 S.W.2d at 589. Ambiguity does not exist merely
trial court wrongly deemed the arbitration agreements because the parties assert forceful and diametrically
ambiguous and abused its discretion in denying their opposing interpretations. Id.
motions to compel arbitration. We decide the merits under
BISD contends that the contracts with Wilson and Stotler
our mandamus jurisdiction. 5
(1) contain no arbitration language at all, or (2) contain
ambiguous language. The trial court's three-sentence
[7] [8] [9] [10] [11] Mandamus is proper to correct
letter ruling is silent on the first point, while the court
a clear abuse of discretion when there is no adequate
of appeals, “[a]ssuming without determining that the
remedy by appeal, Walker v. Packer, 827 S.W.2d 833,
contracts contain arbitration language,” concluded that
839 (Tex.1992) (orig.proceeding), as when a party is
“the supplementary conditions create ambiguity.” 2005
erroneously denied its contracted-for arbitration rights
WL 310777, at *3.
under the FAA, Jack B. Anglin *781 Co., 842 S.W.2d
at 272–73. Also, a trial court “has no ‘discretion’ in
[17] [18] We disagree with BISD that its contracts
determining what the law is or applying the law to
with Wilson and Stotler contained no arbitration
the facts.” Walker, 827 S.W.2d at 840. In evaluating a
language. The contracts validly and expressly incorporate
motion to compel arbitration, a court must determine first
by reference the expansive arbitration language of
whether a valid arbitration agreement exists, and then
subparagraph 4.5.1 of A201. Innumerable contracts
whether the agreement encompasses the claims raised.
are consummated every day in Texas that incorporate
In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571,
other documents by reference. A contractual term is
573 (Tex.1999) (per curiam). When deciding whether
not rendered invalid merely because it exists in a
the parties agreed to arbitrate under the FAA, courts
document incorporated by reference, Owen v. Hendricks,
should apply ordinary state law principles regarding the
433 S.W.2d 164, 166 (Tex.1968), and we agree with
formation of contracts. First Options of Chicago, Inc. v.
the courts of appeals that arbitration-related language
Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985
is no exception to this rule. See, e.g., Teal Constr.
(1995); J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223,
Co./Hillside Villas Ltd. v. Darren Casey Interests, Inc.,
227–28 (Tex.2003).
46 S.W.3d 417, 420 (Tex.App.—Austin 2001, pet.
denied) (holding that an unsigned arbitration agreement
In a letter ruling, the trial court found “the contract
contained in a document incorporated by reference into
in question ambiguous”; however, the record does not
the signed contract constitutes an enforceable arbitration
indicate whether the trial court was uncertain as to the
agreement); D. Wilson Constr. Co. v. McAllen Indep.
agreements' existence or merely their scope. We address
Sch. Dist., 848 S.W.2d 226, 230 (Tex.App.—Corpus
these two issues in turn.
Christi 1992, writ dism'd w.o.j.) (rejecting the argument

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In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

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.”

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

jurisdiction, we dismiss the related interlocutory appeal as


moot.
C. Waiver

[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

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In re D. Wilson Const. Co., 196 S.W.3d 774 (2006)
211 Ed. Law Rep. 519, 49 Tex. Sup. Ct. J. 909

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 10


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

Nature of acts to be commanded


A court should issue mandamus only to
KeyCite Yellow Flag - Negative Treatment
correct a clear abuse of discretion or the
Declined to Follow by Figueroa v. THI of New Mexico at Casa Arena 
Blanca, LLC, N.M.App., July 18, 2012 violation of a legal duty when there is no other
52 S.W.3d 749 adequate remedy at law.
Supreme Court of Texas.
8 Cases that cite this headnote
In re FIRSTMERIT BANK, N.A. f/k/a Signal
Bank, N.A. and Mobile Consultants, Inc., Relators. [3] Mandamus
Remedy at Law
No. 00–0548.
When a trial court erroneously denies a party's
|
motion to compel arbitration under the
Argued Feb. 14, 2001.
Federal Arbitration Act (FAA), the movant
|
has no adequate remedy at law and is entitled
Decided June 14, 2001.
to a writ of mandamus. 9 U.S.C.A. § 1 et seq.
Mobile home buyers and donees, their child and son-
30 Cases that cite this headnote
in-law, brought action against lender and its servicing
agent to recover for breach of contract, revocation of
acceptance, breach of warranty, negligence, and fraud in [4] Mandamus
connection with condition of the home. The trial court Civil proceedings other than actions
denied motion by lender and agent to compel arbitration. A party seeking to compel arbitration by
Lender and agent petitioned for writ of mandamus. The mandamus must first establish the existence
Supreme Court, Enoch, J., held that: (1) the installment of an arbitration agreement subject to the
contract related to interstate commerce and, therefore, Federal Arbitration Act (FAA). 9 U.S.C.A. §
was subject to the Federal Arbitration Act (FAA); (2) 1 et seq.
claims by buyers and donees were subject to arbitration;
(3) the donees were subject to the arbitration clause; (4) the 61 Cases that cite this headnote
clause was not unconscionable; (5) sellers' alleged fraud
did not invalidate the agreement; and (6) the revocation
[5] Alternative Dispute Resolution
issue concerning the installment contract was subject to
Disputes and Matters Arbitrable Under
arbitration.
Agreement
Once the movant seeking arbitration
Writ conditionally granted.
establishes an agreement, the court must then
determine whether the arbitration agreement
covers the nonmovant's claims.
West Headnotes (24)
44 Cases that cite this headnote

[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.

36 Cases that cite this headnote


[2] Mandamus
Remedy at Law
[7] Alternative Dispute Resolution
Mandamus

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

Construction in favor of arbitration Sales contracts disputes


Courts must resolve any doubts about an Mobile home buyers' claims against lender
arbitration agreement's scope in favor of and its agent to challenge right to repossess the
arbitration. home and to recover for condition of the home
and sellers' failure to remedy defects were
58 Cases that cite this headnote covered by agreement to arbitrate all disputes,
claims, or other matters arising out of or
[8] Alternative Dispute Resolution relating to the loan, its interpretation, validity,
Discretion performance, or breach; the arbitration clause
defined “loan” to include the installment
Alternative Dispute Resolution
contract and all other loan documents and
Remedies and Proceedings for
was thus not limited to claims relating directly
Enforcement in General
to financing.
Once the trial court concludes that an
arbitration agreement encompasses the claims 33 Cases that cite this headnote
and that the party opposing arbitration has
failed to prove its defenses, the trial court has
[12] Alternative Dispute Resolution
no discretion but to compel arbitration and
Sales contracts disputes
stay its own proceedings.
The question whether mobile home sellers
67 Cases that cite this headnote made any misrepresentations in the
inducement of the underlying contract related
to the validity of the contract and, therefore,
[9] Commerce
was subject to arbitration in buyers' suit
Arbitration
against lender and its agent; the agreement
Installment contract for sale of mobile home
required arbitration of all disputes, claims, or
related to interstate commerce and, therefore,
other matters arising out of or relating to the
was subject to the Federal Arbitration Act
loan, its interpretation, validity, performance,
(FAA); secured lender and its servicing
or breach and defined “loan” to include
agent were corporations in another state
the installment contract and all other loan
and received installment payments there, and
documents.
the arbitration addendum stated that the
loan involved interstate commerce and was 23 Cases that cite this headnote
governed by the FAA. 9 U.S.C.A. § 1 et seq.

17 Cases that cite this headnote [13] Alternative Dispute Resolution


Persons affected or bound
Mobile home donees' suit against lender
[10] Alternative Dispute Resolution
and its agent based on parents' installment
Disputes and Matters Arbitrable Under
contract as buyers and borrowers subjected
Agreement
residents to the contract's terms, including the
To determine whether a party's claims fall
arbitration agreement, even though they never
within an arbitration agreement's scope,
signed it.
courts focus on the complaint's factual
allegations, rather than the legal causes of 13 Cases that cite this headnote
action asserted.

66 Cases that cite this headnote [14] Alternative Dispute Resolution


Validity of assent
Alternative Dispute Resolution
[11] Alternative Dispute Resolution
Unconscionability

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

Defenses of unconscionability, duress,


fraudulent inducement, and revocation 42 Cases that cite this headnote
needed to specifically relate to the arbitration
agreement itself, not the contract as a whole, [19] Alternative Dispute Resolution
in order to defeat arbitration; defenses that Unconscionability
pertained to the entire installment contract
Lender's right to seek judicial relief to enforce
could be arbitrated.
its security agreement, recover payments
42 Cases that cite this headnote from mobile home buyers, and foreclose
did not render unconscionable an arbitration
agreement covering their claims against the
[15] Alternative Dispute Resolution lender to challenge right to repossess the home
Evidence and to recover for condition of the home and
Since the law favors arbitration, the burden of sellers' failure to remedy defects.
proving a defense to arbitration is on the party
opposing arbitration. 11 Cases that cite this headnote

44 Cases that cite this headnote


[20] Contracts
Unconscionable Contracts
[16] Alternative Dispute Resolution The basic test for unconscionability is
Unconscionability whether, given the parties' general commercial
The possibility that arbitration could subject background and the commercial needs of the
mobile home buyers to substantial costs and particular trade or case, the clause involved is
fees did not make the arbitration agreement so one-sided that it is unconscionable under
unconscionable without specific evidence that the circumstances existing when the parties
the buyers would actually be charged excessive made the contract; the principle is one of
fees to arbitrate claims against lender and its preventing oppression and unfair surprise and
agent. not of disturbing allocation of risks because of
superior bargaining power.
16 Cases that cite this headnote
56 Cases that cite this headnote

[17] Alternative Dispute Resolution


Unconscionability [21] Alternative Dispute Resolution
The party opposing arbitration on the ground Validity of assent
that fees and costs make the arbitration clause Mobile home sellers did not commit duress by
unconscionable must prove the likelihood of stating only that they would not sell the home
incurring such costs. if the buyers refused to sign the arbitration
agreement; the sellers had a legal right to
28 Cases that cite this headnote refuse to sell under that condition.

2 Cases that cite this headnote


[18] Alternative Dispute Resolution
Unconscionability
Some specific information of future costs [22] Alternative Dispute Resolution
is required in order to show that an Validity of assent
arbitration agreement is made unconscionable Mobile home sellers' alleged fraud by
by subjecting parties to substantial costs and representing ownership of the land under
fees. the home and the existence of a septic
system and driveway, by failing to refer
to an arbitration clause in advertisements

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

and pre-sale statements, and by inadequately


explaining the consequences of signing the Opinion
agreement did not invalidate the agreement;
Justice ENOCH delivered the opinion of the Court.
nothing indicated that the sellers actually
misrepresented the agreement's terms or made FirstMerit Bank and Mobile Consultants seek mandamus
any false material representations with regard relief after the trial court denied their motion to compel
to the agreement itself. arbitration. Because the Federal Arbitration Act (FAA)
requires the trial court to compel arbitration in this case,
37 Cases that cite this headnote
we conditionally grant their petition and order the trial
court to compel arbitration in accordance with the parties'
[23] Fraud agreement.
Elements of Actual Fraud
The elements of fraud are that: (1) a
material representation was made; (2) the I. BACKGROUND
representation was false; (3) when the
representation was made, the speaker knew Pete and Janie de los Santos purchased a mobile home
it was false or made it recklessly without for their daughter, Sarah, and her husband, Gary
any knowledge of the truth and as a Alvarez. They bought the home from Verde Homes under
positive assertion; (4) the speaker made the Verde's retail installment financing agreement. Verde
representation with the intent that the other assigned this contract, which Pete and Janie signed,
party should act upon it; (5) the party acted to Signal Bank (now FirstMerit Bank). The agreement
in reliance on the representation; and (6) the contained an Arbitration Addendum, which required
party thereby suffered injury. binding arbitration for “all disputes, claims, or other
matters in question arising out of or relating to this Loan,
278 Cases that cite this headnote its interpretation, validity, performance or the breach
thereof.” The word “Loan” referred to “all manufactured
[24] Alternative Dispute Resolution home loan documents, including but not limited to the
Existence and validity of agreement retail installment contract....” The Addendum further
stated that “the scope of arbitrability is broad and
The issue of whether the underlying
includes, without limitation, contractual, tort, statutory,
installment contract for sale of a mobile home
and caselaw claims.” The Addendum also permitted
was revoked was subject to arbitration in
the bank to seek judicial relief to enforce its security
buyers' suit against lender and its agent; the
interest, recover the buyers' monetary loan obligation, and
issue arose from or related to the contract.
foreclose. *753 But aside from these three exceptions,
8 Cases that cite this headnote the Addendum required arbitration for all other disputes
relating to the installment contract.

After Verde delivered the home, the de los Santoses


Attorneys and Law Firms tried to revoke their acceptance, claiming that the home
was defective and that Verde failed to perform certain
*752 John A. Seib, Jr., The Seib Law Firm, Dallas, promised repairs. Although Verde Homes refused to
Michael Deitch, Law Offices of Michael Deitch, Austin, rescind the sale, the de los Santoses apparently stopped
Steven Marc Reback, Law Offices of Michael Deitch, making their monthly loan payments. In response,
Austin, for Relator. Signal Bank took possession of the home. The de los
Santoses then sued Signal Bank, Mobile Consultants
F. Terry Callahan, Law Offices of F. Terry Callahan, San (Signal's servicing agent), Verde Homes, and two Verde
Antonio, for Respondent. employees, alleging breach of contract, revocation of
acceptance, breach of warranty, negligence, and fraud.
They also alleged violations of the Deceptive Trade

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

Practices Act, Fair Debt Collection Practices Act, Equal


Credit Opportunity Act, and Fair Credit Reporting Act.
A. SCOPE OF ARBITRATION
Additionally, the de los Santoses claimed that their
successful revocation of acceptance entitled them to a [9] Here, there is no dispute about the Arbitration
security interest in the home, equal to the amount they had Addendum's existence. The de los Santoses instead
paid on the installment contract. To enforce their security contend that the installment contract was completed
interest, they requested an injunction forcing FirstMerit entirely in Texas, did not involve interstate commerce,
to return possession of the home until it refunded the de and, accordingly, was not subject to the FAA. As defined
los Santoses' loan payments. in the FAA, however, “interstate commerce” is not limited
to the interstate shipment of goods, but includes all
In response, FirstMerit and Mobile moved to compel
contracts “relating to” interstate commerce. 12 In fact,
1
arbitration. The trial court denied their motion. the United States Supreme Court has construed the
FirstMerit Bank and Mobile then petitioned the Third FAA to extend as far as the Commerce Clause of the
Court of Appeals for a writ of mandamus, which the court
United States Constitution will reach. 13 In this case, the
denied. FirstMerit and Mobile now ask this Court for
evidence demonstrates that the loan was made in interstate
mandamus relief.
commerce. Signal Bank and Mobile Consultants were
Ohio corporations, while the de los Santoses were Texas
residents. The installment contract stated that Signal
II. WHETHER TO ORDER ARBITRATION Bank was located in Ohio. The record includes several
photocopies of loan payment checks drawn on a Texas
[1] [2] [3] Mandamus is an extraordinary remedy bank that Signal Bank had deposited in Ohio. And both
available only in limited circumstances. 2 A court should Signal and Mobile Consultants corresponded with the de
issue mandamus only to correct a clear abuse of discretion los Santoses from Ohio. The de los Santoses also listed
or the violation of a legal duty when there is no other Signal's Ohio address at the top of their revocation of
3
adequate remedy at law. When a trial court erroneously acceptance letter. Moreover, the Arbitration Addendum,
denies a party's motion to compel arbitration under the which Pete and Janie de los Santos both signed, states
FAA, the movant has no adequate remedy at law and is that the loan “involves interstate commerce ... and shall
be governed by the Federal Arbitration Act....” In light
entitled to a writ of mandamus. 4 Thus, we must determine
of these facts, we conclude that the installment contract
whether the movants established their right to arbitration.
relates to interstate commerce and is subject to the
14
[4] [5] [6] [7] [8] A party seeking to compel FAA.
arbitration by mandamus must first establish the existence
[10] [11] Because FirstMerit and Mobile have
of an arbitration agreement subject to the FAA. 5 Once
established the existence of an agreement to arbitrate
the movant establishes an agreement, the court must then
under the FAA, we must next determine whether the
determine whether the arbitration agreement covers the
Arbitration Addendum covers the de los Santoses' claims.
nonmovant's claims. 6 Because state and federal policies To determine whether a party's claims fall within an
7
continue to favor arbitration, a presumption exists arbitration agreement's scope, we focus on the complaint's
favoring agreements to arbitrate under the FAA, and 8 factual allegations rather than the legal causes of action
courts must resolve any doubts about an arbitration asserted. 15 And again, we resolve any doubts about
agreement's scope in favor of arbitration. 9 Once the trial the Arbitration Addendum's factual scope in favor
court *754 concludes that the arbitration agreement of coverage. Further, we reiterate that the parties'
encompasses the claims, and that the party opposing Arbitration Addendum covers “all disputes, claims, or
other matters in question arising out of or relating to
arbitration has failed to prove its defenses, 10 the trial
this Loan, its interpretation, validity, performance, or the
court has no discretion but to compel arbitration and stay
breach thereof” and states that “the scope of arbitrability
its own proceedings. 11 is broad and includes, without limitation, contractual,
tort, statutory, and case law claims.”

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

misrepresentations in the inducement of the underlying


We now turn to the de los Santoses' factual allegations. contract relates to the contract's validity and can be
The de los Santoses asserted that the sellers misrepresented arbitrated. 17 As for the de los Santoses' wrongful
that they owned the homesite, and that the homesite repossession allegations, the Addendum provides that
included a driveway and septic system. They also claimed “any counterclaims in suits brought by Seller/Assignee
that the sellers were not properly licensed, misrepresented pursuant to this provision,” including complaints about
*755 the terms of the loan, failed to provide a credit foreclosure, may be arbitrated. Given the Addendum's
report to Sarah and Gary Alvarez, and failed to make language on counterclaims, the Arbitration Addendum
other disclosures regarding interest rates and credit. The covers all of the de los Santoses' complaints about the
de los Santoses further alleged that the sellers fraudulently bank's right to repossess the home.
double-charged them for insurance that was already paid
for in the installment contract. In addition, the de los [13] As a specific challenge, Sarah and Gary Alvarez
Santoses asserted that after taking possession of the home, contend that their claims are exempt from the Arbitration
they learned that the home was not yet complete, that Addendum because they did not sign the contract. But
it lacked carpeting and air conditioning, and that it was a litigant who sues based on a contract subjects him or
not installed properly. They also charged that the sellers
herself to the contract's terms. 18 Here, the Alvarezes
failed to repair these defects in a timely and workmanlike
fully joined the de los Santoses' contract claims. In
manner, that they never installed an air conditioner,
fact, the de los Santoses' original petition *756 makes
and that the sellers' attempts to repair the septic tank
no distinction between the parents' claims and the
were untimely and defective. Finally, the de los Santoses
Alvarezes' claims. Thus, by suing FirstMerit based on
asserted that the bank wrongfully denied their attempt
the de los Santoses' installment contract, the Alvarezes
to revoke the contract, criminally trespassed on their
subjected themselves to the contract's terms, including the
property, and wrongfully repossessed the home.
Arbitration Addendum.

[12] In light of the Addendum's broad language, all


Accordingly, unless the de los Santoses can prove one of
of the de los Santoses' factual allegations fall within
their defenses to the Arbitration Addendum, the FAA
the Addendum's scope. The de los Santoses contend
that because the Addendum “relat(es) to the Loan,” requires arbitration. 19
it only covers claims that relate directly to the home's
financing, and does not cover their allegations about
the home's post-sale condition and repairs. But this B. DEFENSES TO ARBITRATION
interpretation ignores the Addendum's broad definition of
“Loan” to include the installment contract and all other [14] [15] The de los Santoses assert the defenses of
loan documents. Further, irrespective of the Addendum's unconscionability, duress, fraudulent inducement, and
broad language, we also note that the home was the revocation. We again note that these defenses must
bank's collateral under the Loan. The de los Santoses specifically relate to the Arbitration Addendum itself, not
alleged that the sellers' failure to remedy the home's the contract as a whole, if they are to defeat arbitration. 20
physical problems entitled them to a security interest in the Defenses that pertain to the entire installment contract can
home, which would prevent the bank from repossessing
be arbitrated. 21 We further note that the de los Santoses'
16
its collateral. Thus, the home's post-sale condition, defenses against the Addendum are governed by Texas
and the sellers' post-sale failure to remedy the home's
law. 22 Again, since the law favors arbitration, the burden
problems, relate to the bank's right to repossess its
of proving a defense to arbitration is on the party opposing
collateral under the loan. In sum, all of the de los Santoses'
factual allegations arise out of or relate to either the arbitration. 23
sellers' conduct in selling the home and negotiating the
installment contract, or to the performance or alleged [16] [17] The de los Santoses contend that the
breach of the installment contract. Furthermore, while Arbitration Addendum is unconscionable because
fraud in the inducement of an arbitration agreement is arbitration might subject them to substantial costs and
a defense to arbitration, whether the sellers made any fees. On this issue, in Green Tree Financial Corp. v.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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

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In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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.

[24] Finally, the de los Santoses argue that their alleged


revocation of the installment contract also applies to All Citations
the Arbitration Addendum, rendering it unenforceable.
52 S.W.3d 749, 44 Tex. Sup. Ct. J. 900

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).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


In re FirstMerit Bank, N.A., 52 S.W.3d 749 (2001)
44 Tex. Sup. Ct. J. 900

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


In re Fleetwood Homes of Texas, L.P., 257 S.W.3d 692 (2008)
51 Tex. Sup. Ct. J. 1066

A party waives an arbitration clause in a


contract by substantially invoking the judicial
KeyCite Yellow Flag - Negative Treatment process to the other party's detriment or
Distinguished by El Paso Healthcare System, Ltd. v. Green, Tex.App.- 
prejudice.
El Paso, February 29, 2016
257 S.W.3d 692 19 Cases that cite this headnote
Supreme Court of Texas.

In re FLEETWOOD HOMES OF TEXAS, L.P. [3] Alternative Dispute Resolution


and Fleetwood Enterprises, Inc., Relators. Waiver, laches, or estoppel
Waiver of the contractual right to arbitration
No. 06–0943. is a legal question for the court, based on the
| totality of the circumstances.
June 20, 2008.
17 Cases that cite this headnote
Synopsis
Background: Owner of mobile home parks brought
action against manufacturer of mobile homes, relating to [4] Alternative Dispute Resolution
manufacturer's cancellation of parties' dealer agreement. Suing or participating in suit
The 278th District Court, Walker County, Kenneth Defendant manufacturer of mobile homes did
H. Keeling, J., denied defendant's motion to compel not impliedly waive its right to arbitration,
arbitration. Manufacturer petitioned for writ of under dealer agreement with plaintiff owner
mandamus. The Waco Court of Appeals, 2006 WL of mobile home parks, by failing to pursue
3028222, denied the petition. Manufacturer petitioned for its arbitration demand for eight months
writ of mandamus. while discussing a trial setting and allowing
limited discovery, where plaintiff was not
prejudiced; defendant took no depositions
and instead merely noticed one deposition
[Holding:] The Supreme Court held that defendant did not
before canceling it and merely served one set
impliedly waive its contractual right to arbitration.
of written discovery the day before it moved
to compel arbitration, and defendant filed no
Writ conditionally granted. dispositive motions, nor did it wait until eve of
trial to move to compel.

12 Cases that cite this headnote


West Headnotes (7)
[5] Alternative Dispute Resolution
[1] Alternative Dispute Resolution Unconscionability
Suing or participating in suit Arbitration clause of dealer agreement
Parties that conduct full discovery, file between manufacturer of mobile homes
motions going to the merits, and seek and owner of mobile home parks was
arbitration only on the eve of trial waive any not substantively unconscionable, though it
contractual right to arbitration. limited both parties' right to discovery; limited
discovery was one of arbitration's most
17 Cases that cite this headnote distinctive features.

2 Cases that cite this headnote


[2] Alternative Dispute Resolution
Suing or participating in suit
[6] Costs
Prevailing party

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Fleetwood Homes of Texas, L.P., 257 S.W.3d 692 (2008)
51 Tex. Sup. Ct. J. 1066

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Fleetwood Homes of Texas, L.P., 257 S.W.3d 692 (2008)
51 Tex. Sup. Ct. J. 1066

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Flores, Not Reported in S.W.3d (2016)
2016 WL 890969

to cover mass murder, computer crimes resulting in mass


murder, and mass murder which could be constituted
2016 WL 890969
as a threat to the public interest of health and safety.”
Only the Westlaw citation is currently available.
Relator's petition for writ of mandamus does not comply
SEE TX R RAP RULE 47.2 FOR with the rules of appellate procedure. It does not include
DESIGNATION AND SIGNING OF OPINIONS. the certification required by rule 52.3(j) and does not
include an appendix or record. See TEX.R.APP. P.
Court of Appeals of Texas, 52.3(j), 52.3(k), 52.7(a). Although these deficiencies alone
Dallas. are sufficient to deny the petition, see In re Butler, 270
S.W.3d 757, 759 (Tex.App.—Dallas 2008, no pet.), in the
In re Eric Flores, Relator
interest of judicial economy, we consider the petition.
No. 05–16–00210–CV
Mandamus relief is appropriate in a criminal case only
|
when a relator establishes (1) that he has no adequate
Opinion Filed March 9, 2016
remedy at law to redress his alleged harm, and (2)
Original Proceeding from the 416th Judicial District that what he seeks to compel is a ministerial act, not
Court, Collin County, Texas, Trial Court Cause No. 416– a discretionary or judicial decision. In re Allen, 462
81913–2015 S.W.3d 47, 49 (Tex.Crim.App.2015) (orig.proceeding).
The parties to a criminal case are the State and the
Attorneys and Law Firms accused, and no third party may intervene in a criminal
case. In re Amos, 397 S.W.3d 309, 314 (Tex.App.—Dallas
Eric Flores, El Paso, TX, for relator.
2013, orig. proceeding); see also In re Wingfield, 171
Brian W. Wice, Houston, TX, for real party in interest. S.W.3d 374, 381 (Tex.App.—Tyler 2005, orig. proceeding)
(“Unlike the Rules of Civil Procedure, the Code of
Before Justices Bridges, Brown, and Stoddart Criminal Procedure makes no provision for a third party
to intervene in a ‘criminal action.’ ”). A trial court has
no discretion to consider issues raised by third parties in
MEMORANDUM OPINION a criminal case. In re Amos, 397 S.W.3d at 314; In re
Wingfield, 171 S.W.3d at 381. Thus, the trial court had
Opinion by Justice Stoddart no ministerial duty to allow relator to seek joinder of
additional offenses against the defendant in this case.
*1 In this petition for writ of mandamus relator, who
is an inmate, complains that the trial court has refused We DENY the petition for writ of mandamus.
to allow him to file a motion in a criminal case pending
against another criminal defendant “for joinder of certain
offense[s] stating that the defendant had also committed All Citations
other criminal offense[s] such as conspiracy of fabrication
Not Reported in S.W.3d, 2016 WL 890969

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Blackard, Not Reported in S.W.3d (2016)

the State of Texas in this case as attorneys pro tem. He


further requests that the Court prohibit the trial court
2016 WL 1756786
from ordering the payment of any additional invoices
Only the Westlaw citation is currently available.
submitted by the attorney pro tem that vary from the fixed
SEE TX R RAP RULE 47.2 FOR fees or hourly rates set forth in the fee schedule contained
DESIGNATION AND SIGNING OF OPINIONS. in the Collin County District Court Plan. Relator is not a
party in any of the cases in which the order was signed.
Court of Appeals of Texas,
Dallas. Taxpayers may, under certain limited circumstances,
possess standing to challenge the lawfulness of
In re Jeffory Blackard, Relator
government acts. See Bland Indep. Sch. Dist. v. Blue, 34
S.W.3d 547, 555 (Tex.2000); Verney v. Abbott, No. 03–
No. 05–16–00478–CV, No. 05–16–
05–00064–CV, 2006 WL 2082085, at *7 (Tex.App.–Austin
00479–CV, No. 05–16–00480–CV
| July 28, 2006, no pet.). 1 That limited grant of standing
Opinion Filed April 29, 2016 to bring a civil suit to challenge a government act does
not, however, authorize a taxpayer to challenge an order
On Appeal from the 416th Judicial District Court, Collin in a criminal case in which he is not a party. See In re
County, Texas, Trial Court Cause Nos. 416–81913–2015, Amos, 397 S.W.3d 309, 314 (Tex.App.–Dallas 2013, orig.
416–82148–2015, 416–82149–2015 proceeding) (parties to a criminal case are the State and
the accused); see also In re Wingfield, 171 S.W.3d 374,
Attorneys and Law Firms
381 (Tex.App.–Tyler 2005, orig. proceeding) (“Unlike the
Austin Champion, for Jeffory Blackard. Rules of Civil Procedure, the Code of Criminal Procedure
makes no provision for a third party to intervene in a
Before Chief Justice Wright, Justice Lang, and Justice ‘criminal action.’ ”).
Brown
Standing is an element of an appellate court's subject-
matter jurisdiction over an original proceeding. See In
MEMORANDUM OPINION re Baker, 404 S.W.3d 575, 577 (Tex.App.–Houston [1st
Dist.] 2010, orig. proceeding). Because relator lacks
Opinion by Chief Justice Wright standing to challenge the trial court's order, we dismiss the
petition.
*1 In this petition for writ of mandamus and prohibition,
relator requests that the Court order the trial court to
vacate its January 6, 2016 Order on Payment of Attorney's All Citations
Fees to Attorneys Pro Tem to the extent it approves
the hourly rate set for each of the attorneys representing Not Reported in S.W.3d, 2016 WL 1756786

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Kaplan Higher Educ. Corp., 235 S.W.3d 206 (2007)
226 Ed. Law Rep. 343, 50 Tex. Sup. Ct. J. 1058

KeyCite Yellow Flag - Negative Treatment West Headnotes (9)


Distinguished by In re Credit Suisse First Boston Mortg. Capital, L.L.C., 
Tex.App.-Hous. (14 Dist.), December 11, 2008
235 S.W.3d 206 [1] Alternative Dispute Resolution
Supreme Court of Texas. Disputes and Matters Arbitrable Under
Agreement
In re KAPLAN HIGHER EDUCATION Students' claims against private vocational
CORPORATION and Leticia Ventura, Relators. college, for negligence, negligence per se,
negligent misrepresentation, and violations
No. 06–0072. of Deceptive Trade Practices Act, seeking
| refunds of tuition and other costs they would
Aug. 24, 2007. not have incurred had they not enrolled
in college's electrician's program, were in
Synopsis
substance a claim for fraudulent inducement,
Background: Students brought action against private
i.e., that students were fraudulently induced
vocational college, college's corporate parent, college's
to enroll by assurances that upon graduation
president, and college's admissions director, asserting
they would be eligible for licenses as
claims for negligence, negligence per se, negligent
journeymen or master electricians, which
misrepresentation, and violations of Deceptive Trade
fraudulent inducement claim was subject
Practices Act, relating to students' enrollment in college's
to arbitration under arbitration clause of
electrician's program. Defendants brought motion to
enrollment agreement, which applied to any
compel arbitration, and plaintiffs dropped their claims
controversy or claim “arising out of, or
against college and president. The 206th District Court,
relating to” the agreement. V.T.C.A., Bus. &
Hidalgo County, Rose Guerra Reyna, J., denied the
C. § 17.41 et seq.
motion to compel arbitration. Corporate parent and
admissions director petitioned for writ of mandamus. 3 Cases that cite this headnote
The Corpus Christi-Edinburg Court of Appeals, 2006
WL 60673, denied the petition. Corporate parent and
admissions director petitioned for writ of mandamus. [2] Alternative Dispute Resolution
Disputes and Matters Arbitrable Under
Agreement
Claims must be brought on the contract, and
Holdings: The Supreme Court held that:
must be arbitrated pursuant to the contract's
arbitration clause, if liability arises solely from
[1] students' claims were in substance a fraudulent
the contract, but claims can be brought in tort,
inducement claim which was within scope of arbitration
and in court, if liability arises from general
clause of enrollment agreement between students and
obligations imposed by law.
college, and
9 Cases that cite this headnote
[2] non-signatory corporate parent and non-signatory
admissions director could enforce the arbitration clause.
[3] Fraud
Effect of Existence of Remedy by Action
Writ conditionally granted. on Contract
Claims of fraudulent inducement arise from
general obligations imposed by law, not the
underlying contract.

Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Kaplan Higher Educ. Corp., 235 S.W.3d 206 (2007)
226 Ed. Law Rep. 343, 50 Tex. Sup. Ct. J. 1058

Disputes and Matters Arbitrable Under


[4] Alternative Dispute Resolution Agreement
Disputes and Matters Arbitrable Under
When a party signs a contract with a
Agreement
corporation, the party cannot avoid the
If two corporations sign a contract to arbitrate contract's arbitration clause by recasting a
disputes, one cannot avoid it by recasting contract dispute as a fraudulent inducement
a contract dispute as a tortious interference claim against an owner, officer, agent, or
claim against an owner, officer, agent, or affiliate of the corporation.
affiliate of the other.
11 Cases that cite this headnote
8 Cases that cite this headnote

[8] Alternative Dispute Resolution


[5] Contracts Persons Affected or Bound
Particular Capacity
Arbitration clauses in contracts with
A contracting party generally cannot avoid corporations do not automatically cover all
unfavorable contract clauses by suing the corporate agents or affiliates.
other party's agents.
3 Cases that cite this headnote
Cases that cite this headnote

[9] Alternative Dispute Resolution


[6] Alternative Dispute Resolution Construction
Right to Enforcement and Defenses in
Arbitration agreements are enforced
General
according to their terms and according to the
Students were required to arbitrate their intentions of the parties.
claims against corporate parent of private
vocational college and against college's 6 Cases that cite this headnote
admissions director, alleging in substance
that students were fraudulently induced
to enroll in college's electrician's program,
though corporate parent and admissions Attorneys and Law Firms
director were not signatories to enrollment
agreement between students and college, *208 Joy M. Soloway, Richard N. Carrell, Fulbright
which agreement contained arbitration clause; & Jaworski L.L.P., Houston, David G. Oliveira, Roerig
college would ultimately be liable for tuition Oliveira & Fisher, Brownsville, for Relators.
refunds if students established fraudulent
inducement, because Texas Education Code Joe Escobedo Jr., Mauro Fernando Ruiz, David
required vocational schools to provide full H. Hockema, Hockema, Tippit & Escobedo, L.L.P.,
McAllen, Jeffrey D. Small, Law Office of Jeff Small,
refunds if enrollment was procured by
David R. Montpas, Brendan K. McBride, Prichard
representations by owner or representatives of
Hawkins McFarland & Young, L.L.P., San Antonio,
school, and enrollment agreement specifically
Damian Orozco, Pharr, for Real Parties in Interest.
provided for tuition refunds if enrollment
was induced by misrepresentation. V.T.C.A., Opinion
Education Code § 132.061(a)(2).
PER CURIAM.
3 Cases that cite this headnote
A vocational college and 45 of its students agreed to
arbitrate any dispute “arising from or relating to” their
[7] Alternative Dispute Resolution
enrollment agreement. Claiming they were fraudulently
induced to sign up, the students nevertheless seek to avoid

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Kaplan Higher Educ. Corp., 235 S.W.3d 206 (2007)
226 Ed. Law Rep. 343, 50 Tex. Sup. Ct. J. 1058

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.

[2] [3] We disagree with Kaplan that the students are


Further, the students' agreements with the College require
suing on those agreements. “Claims must be brought on
arbitration here because the College will be liable for
the contract (and arbitrated) if liability arises solely from

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Kaplan Higher Educ. Corp., 235 S.W.3d 206 (2007)
226 Ed. Law Rep. 343, 50 Tex. Sup. Ct. J. 1058

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

KeyCite Yellow Flag - Negative Treatment West Headnotes (20)


Distinguished by Zbranek Custom Homes, Ltd. v. Allbaugh, Tex.App.- 
Austin, December 23, 2015
166 S.W.3d 732 [1] Action
Supreme Court of Texas. Moot, Hypothetical or Abstract
Questions
In re KELLOGG BROWN & ROOT, INC., Relator. Appeal and Error
Want of Actual Controversy
No. 03–1129.
A case becomes moot if a controversy ceases
|
to exist between the parties at any stage of the
Argued Dec. 1, 2004.
legal proceedings, including the appeal.
|
Decided May 20, 2005. 118 Cases that cite this headnote
Synopsis
Background: Second-tier subcontractor brought action [2] Alternative Dispute Resolution
against first-tier subcontractor and contractor to recover Review
damages on breach of contract and quantum meruit Conclusion of arbitration between contractor
theories and obtain a declaratory judgment on ownership and first-tier subcontractor did not render
of collateral and liens. Contractor moved to abate suit or moot second-tier subcontractor's challenge to
compel second-tier subcontractor to join arbitration with order compelling arbitration, even though
first-tier subcontractor despite second-tier subcontractor's court could no longer compel the second-tier
status as non-signatory. The District Court, Harris subcontractor to join the arbitration.
County, Mark D. Davidson, J., denied motion.
Contractor appealed and sought writ of mandamus. The Cases that cite this headnote
Houston Court of Appeals, First District, Evelyn V.
Keyes, J., 126 S.W.3d 176, conditionally granted writ
[3] Appeal and Error
and ordered trial court to issue order compelling second-
Want of Actual Controversy
tier subcontractor to arbitrate. Second-tier subcontractor
petitioned for writ of mandamus. A case is not rendered moot simply because
some of the issues become moot during the
appellate process.

Holdings: The Supreme Court, Jefferson, C.J., held that: 28 Cases that cite this headnote

[1] conclusion of arbitration between contractor and


[4] Alternative Dispute Resolution
first-tier subcontractor did not render moot second-tier
Validity
subcontractor's challenge to order compelling arbitration,
Alternative Dispute Resolution
and
Disputes and Matters Arbitrable Under
Agreement
[2] second-tier subcontractor was not required to arbitrate
its quantum meruit claim against contractor under direct In general, a party seeking to compel
benefits estoppel theory. arbitration under the Federal Arbitration Act
(FAA) must establish that: (1) there is a
valid arbitration agreement, and (2) the claims
Relief conditionally granted. raised fall within that agreement's scope. 9
U.S.C.A. § 1 et seq.

111 Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

Persons Affected or Bound


[5] Alternative Dispute Resolution
Under certain circumstances, principles of
Construction in Favor of Arbitration
contract law and agency may bind a non-
Alternative Dispute Resolution signatory to an arbitration agreement. 9
Evidence U.S.C.A. § 1 et seq.
Doubts regarding an agreement's scope are
resolved in favor of arbitration because there 23 Cases that cite this headnote
is a presumption favoring agreements to
arbitrate under the Federal Arbitration Act [10] Alternative Dispute Resolution
(FAA). 9 U.S.C.A. § 1 et seq. Waiver or Estoppel

63 Cases that cite this headnote Estoppel


Contracts
Under “direct benefits estoppel,” a non-
[6] Alternative Dispute Resolution
signatory plaintiff seeking the benefits of
Constitutional and Statutory Provisions
a contract is estopped from simultaneously
and Rules of Court
attempting to avoid the contract's burdens,
Alternative Dispute Resolution such as the obligation to arbitrate disputes.
Evidence
The presumption in favor of agreements to 33 Cases that cite this headnote
arbitrate arises only after the party seeking
to compel arbitration proves that a valid [11] Alternative Dispute Resolution
arbitration agreement exists; the purpose of Waiver or Estoppel
the Federal Arbitration Act (FAA) is to make
A non-signatory plaintiff may be compelled
arbitration agreements as enforceable as other
by direct benefits estoppel to arbitrate if it
contracts, not more so. 9 U.S.C.A. § 1 et seq.
seeks to enforce terms of a contract containing
125 Cases that cite this headnote an arbitration provision.

44 Cases that cite this headnote


[7] Alternative Dispute Resolution
What Law Governs
[12] Alternative Dispute Resolution
Under the Federal Arbitration Act (FAA), Waiver or Estoppel
ordinary principles of state contract law
If a non-signatory's claims can stand
determine whether there is a valid agreement
independently of the underlying contract, then
to arbitrate. 9 U.S.C.A. § 1 et seq.
arbitration generally should not be compelled
35 Cases that cite this headnote under theory of direct benefits estoppel.

13 Cases that cite this headnote


[8] Alternative Dispute Resolution
Contractual or Consensual Basis
[13] Implied and Constructive Contracts
Because arbitration is contractual in nature, Work and Labor in General; Quantum
the Federal Arbitration Act (FAA) generally Meruit
does not require parties to arbitrate when they
“Quantum meruit” is an equitable remedy
have not agreed to do so. 9 U.S.C.A. § 1 et seq.
that is based upon the promise implied by
7 Cases that cite this headnote law to pay for beneficial services rendered and
knowingly accepted.

[9] Alternative Dispute Resolution 38 Cases that cite this headnote

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

containing an arbitration provision, that


[14] Implied and Constructive Contracts relationship does not, in itself, bind the
Contract for Services non-signatory to the arbitration provision;
A party generally cannot recover under instead, a non-signatory should be compelled
quantum meruit when there is a valid contract to arbitrate a claim only if it seeks, through
covering the services or materials furnished. the claim, to derive a direct benefit from the
contract containing the arbitration provision.
47 Cases that cite this headnote
50 Cases that cite this headnote
[15] Implied and Constructive Contracts
Effect of Express Contract [19] Estoppel
A party to a contract may seek alternative Contracts
relief under both contract and quasi-contract Non-signatory second-tier subcontractor
theories. was not bound by arbitration clause
in contractor's agreement with first-tier
20 Cases that cite this headnote subcontractor and, therefore, was not
required to arbitrate its quantum meruit
[16] Alternative Dispute Resolution claim against contractor under direct
Disputes and Matters Arbitrable Under benefits estoppel theory; the second-tier
Agreement subcontractor's asserted right to payment
Alternative Dispute Resolution stemmed directly from the agreement with
Pleading the first-tier subcontractor, and the second-
tier subcontractor was effectively precluded
Pleading in the alternative under both
from asserting rights under main contract
contract and quasi-contract theories does not
which stated that the approved use of
defeat the effect of an arbitration clause
any subcontractor created no contractual
that broadly covers all disputes between
relationship between the subcontractor and
signatories that arise out of the underlying
contractor.
agreement.
5 Cases that cite this headnote
18 Cases that cite this headnote

[20] Mechanics' Liens


[17] Alternative Dispute Resolution
Mechanics and Artisans
Persons Affected or Bound
Mechanics' Liens
Alternative Dispute Resolution
Materialmen
Waiver or Estoppel
The self-executing constitutional lien attaches
Under direct benefits estoppel, a non-
to buildings and special-order articles that are
signatory plaintiff cannot be compelled to
made or repaired by mechanics, materialmen,
arbitrate on the sole ground that, but for the
and artisans who have a direct contractual
contract containing the arbitration provision,
relationship with the owner of the property.
it would have no basis to sue.
Vernon's Ann.Texas Const. Art. 16, § 37.
28 Cases that cite this headnote
5 Cases that cite this headnote

[18] Estoppel
Contracts
Under direct benefits estoppel, although a
non-signatory's claim may relate to a contract

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

compelled, we conditionally grant mandamus relief and


Attorneys and Law Firms order the court of appeals to vacate its order.
*734 Jack G. Carnegie, John L. Hagan, Jones Day,
Kevin B. Finkel, Johnson Finkel DeLuca & Kennedy,
P.C., Houston, for relator. I

Jeffrey Raizner, Doyle Raizner LLP, Jack F. Burleigh,


Houston, Ira E. Hoffman, Grayson Kubli & Hoffman, Factual Background
P.C., McLean, Jeff H. Galloway, John Fellas, Hughes
In October 1999, MacGREGOR (USA), Inc. contracted
Hubbard & Reed LLP, New York, NY, for real party in
with Ingalls Shipbuilding, Inc. (“Ingalls”) to build
interest.
elevator trunks for two cruise ships. MacGREGOR
Jeffery T. Nobles, Beirne Maynard & Parsons, L.L.P., (USA) assigned the contract to its sister company,
Robert Bryan Tobor, Houston, Clint Alexander Corrie, *735 MacGREGOR (FIN) Oy 1 (“MacGregor”). In
Joseph Lawrence Mira, Bierne, Maynard & Parsons, LLP, August 2000, MacGregor subcontracted part of the
Dallas, John D. White, Jones Walker Waechter Poitevent job to Unidynamics, which agreed to fabricate a set
Carrere & Denegre, The Woodlands, for Gulf Coast of the elevator trunks for one of the ships. 2 In June
Holdings Inc. 2001, Unidynamics and KBR entered into a second-tier
subcontract, under which KBR agreed to furnish labor,
Opinion
equipment, and facilities to fabricate the elevator trunks.
Chief Justice JEFFERSON delivered the opinion of the In the fabrication subcontract between MacGregor and
Court. Unidynamics, the parties agreed that: “Any disputes
arising from the interpretation or application of this
In this original proceeding, the question is whether contract including any document pertaining thereto, shall
Kellogg Brown & Root, Inc. (“KBR”), as a non- be settled by arbitration in accordance with General
signatory to a contract containing an arbitration Conditions (ECE 188), (Appendix 10).” 3 The second-
clause, must arbitrate its claims against Unidynamics, tier subcontract between Unidynamics and KBR did not
Inc. (“Unidynamics”) and MacGREGOR (FIN) Oy contain an arbitration provision.
(“MacGregor”)—the signatories to the contract. The
trial court denied MacGregor's motion, which sought to After the ship buyer declared bankruptcy in November
compel KBR to pursue its claims in an ongoing arbitration 2001, Ingalls directed MacGregor to cease work and
between MacGregor and Unidynamics. The court of notify its subcontractors to do the same. MacGregor
appeals held that the trial court abused its discretion and directed Unidynamics to comply with “the same
conditionally granted mandamus relief, ordering the trial instructions that Ingalls gave MacGregor.” Unidynamics
court to vacate its order denying MacGregor's motion and conveyed those instructions to KBR. On or around
“issue an order compelling KBR to arbitrate all claims.” November 5, 2001, KBR ceased work, stored the elevator
126 S.W.3d 176, 184. KBR sought mandamus relief in this trunks and other equipment, and sent Unidynamics
Court. invoices for unpaid fabrication services and storage costs.
Because KBR had not been paid in full, it asserted liens on
Approximately two months after KBR filed its the elevator trunk fabrications, parts, and other materials
petition here, the arbitration between MacGregor and (the “collateral”).
Unidynamics concluded. As a result, the relief MacGregor
requested in the lower courts—that KBR be compelled “to A dispute then arose between MacGregor and
pursue its claims in the arbitration between MacGregor Unidynamics regarding who owned the collateral and
(FIN) and Unidynamics”—is no longer available. The who owed KBR for the fabrication services and
case is not moot, however, because the parties continue to storage costs. The dispute stemmed from MacGregor
dispute whether KBR should be compelled to “arbitrate and Unidynamics' Agreement Concerning Passing of
all claims” pursuant to the court of appeals' order. Id. Title (the “Title Agreement”), executed on December
at 184. Because we conclude that KBR cannot be so 5, 2001, and fully incorporated into their fabrication

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

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

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

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

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

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

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

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

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

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.”

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In re Kellogg Brown & Root, Inc., 166 S.W.3d 732 (2005)
48 Tex. Sup. Ct. J. 678

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.

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In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

KeyCite Yellow Flag - Negative Treatment West Headnotes (15)


Declined to Follow by Boler v. Security Health Care, L.L.C., Okla., 
September 30, 2014
279 S.W.3d 640 [1] Mandamus
Supreme Court of Texas. Modification or Vacation of Judgment or
Order
In re LABATT FOOD SERVICE, L.P., Relator. Mandamus
Civil Proceedings Other Than Actions
No. 07–0419.
A party denied the right to arbitrate pursuant
|
to an agreement subject to the Federal
Argued Sept. 9, 2008.
Arbitration Act (FAA) does not have an
|
adequate remedy by appeal and is entitled to
Decided Feb. 13, 2009.
mandamus relief to correct a clear abuse of
|
discretion. 9 U.S.C.A. § 1 et seq.
Rehearing Denied May 1, 2009.
6 Cases that cite this headnote
Synopsis
Background: Parents and children of employee brought
wrongful death action, in the 150th Judicial District [2] Appeal and Error
Court, Bexar County, Janet Littlejohn, J., against Cases Triable in Appellate Court
employer. The 57th Judicial District Court, Bexar County, Appeal and Error
Joe Frazier Brown, Jr., J., denied employer's motion Abuse of Discretion
to compel arbitration. Employer petitioned for writ of
Under an abuse of discretion standard, the
mandamus. The San Antonio Court of Appeals, 2007 WL
appellate court defers to the trial court's
1424092, denied the petition. Employer petitioned for writ
factual determinations if they are supported
of mandamus.
by evidence, but reviews the trial court's legal
determinations de novo.

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.

20 Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

may be bound to an arbitration clause when


[5] Alternative Dispute Resolution rules of law or equity would bind them to the
What Law Governs contract generally. 9 U.S.C.A. § 1 et seq.
Texas courts apply Texas procedural rules
in determining whether nonsignatories are 27 Cases that cite this headnote
bound by an arbitration agreement that is
subject to the Federal Arbitration Act (FAA). [10] Death
9 U.S.C.A. § 1 et seq. Creation of New Cause of Action

13 Cases that cite this headnote Death


Persons Entitled to Sue
Because, at common law, there was no
[6] Alternative Dispute Resolution
recognized cause of action for the wrongful
What Law Governs
death of another person, the Texas Legislature
Under the Federal Arbitration Act (FAA), enacted the Wrongful Death Act in order to
state law generally governs whether a litigant create a cause of action to allow a deceased
agreed to arbitrate, and federal law governs tort victim's surviving parents, children, and
the scope of the arbitration clause. 9 U.S.C.A. spouse to recover damages for their losses
§ 1 et seq. from the victim's death. V.T.C.A., Civil
Practice & Remedies Code § 71.002 et seq.
8 Cases that cite this headnote
4 Cases that cite this headnote
[7] Alternative Dispute Resolution
What Law Governs [11] Death
Texas Supreme Court would apply Right of Action of Person Injured
Texas substantive law rather than federal Death
substantive law when determining whether Defenses
nonsignatories were bound by an arbitration
Statutory wrongful death beneficiaries' claims
agreement that was subject to the Federal
place them in the exact “legal shoes” of the
Arbitration Act (FAA), and would endeavor
decedent, and they are subject to the same
to keep it consistent with federal law. 9
defenses to which the decedent's claims would
U.S.C.A. § 1 et seq.
have been subject. V.T.C.A., Civil Practice &
15 Cases that cite this headnote Remedies Code § 71.003(a).

9 Cases that cite this headnote


[8] Alternative Dispute Resolution
Constitutional and Statutory Provisions
[12] Alternative Dispute Resolution
and Rules of Court
Persons Affected or Bound
A purpose of the Federal Arbitration Act
Under Texas law, the arbitration provision
(FAA) is to make arbitration agreements as
in an agreement between an employee and
enforceable as other contracts, but not more
his employer, signed before the employee's
so. 9 U.S.C.A. § 1 et seq.
death and requiring arbitration pursuant to
17 Cases that cite this headnote the Federal Arbitration Act (FAA), requires
the employee's wrongful death beneficiaries to
arbitrate their wrongful death claims against
[9] Alternative Dispute Resolution the employer even though they did not sign the
Persons Affected or Bound agreement; disapproving of In re Kepka, 178
Nonsignatories to an arbitration agreement S.W.3d 279, and Gomez v. Zardenetta, 1998
subject to the Federal Arbitration Act (FAA)

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In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

WL 19858. 9 U.S.C.A. § 1 et seq.; V.T.C.A., A court may determine a specific challenge


Civil Practice & Remedies Code § 71.003(a). to the validity of the arbitration clause in a
contract, but a broader challenge to the entire
26 Cases that cite this headnote contract, either on a ground that directly
affects the entire contract or on the ground
[13] Death that one of the contract's provisions is illegal
Right of Action of Person Injured and renders the whole contract invalid, must
go to the arbitrator.
While damages for a wrongful death
action are for the exclusive benefit of the 18 Cases that cite this headnote
wrongful death beneficiaries and are meant to
compensate them for their own personal loss,
the cause of action is entirely derivative of the
decedent's rights. V.T.C.A., Civil Practice &
Attorneys and Law Firms
Remedies Code §§ 71.003(a), 71.004(a).
*642 Robert A. Valadez, Mark A. Giltner, Shelton &
24 Cases that cite this headnote
Valadez, San Antonio, Nissa M. Dunn, for relator.

[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

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In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

the employee will indemnify Labatt from claims and


suits based on injury to or death of the employee from
B. Governing Law
occupational causes, except for claims filed pursuant to
the plan. Paragraph four consists of an arbitration clause [4] Under the FAA, whether an arbitration agreement
providing that disputes related to either the agreement, binds a nonsignatory is a gateway matter to be determined
the plan, or to an employee's occupational injury or by courts rather than arbitrators unless the parties clearly
death must be submitted to binding arbitration pursuant and unmistakably provide otherwise. In re Weekley
to the Federal Arbitration Act (FAA). See 9 U.S.C. §§ Homes, L.P., 180 S.W.3d 127, 130 (Tex.2005); see Howsam
1–16. Paragraph eight provides for the severability of any v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83–84, 123
invalid provision. S.Ct. 588, 154 L.Ed.2d 491 (2002). As this arbitration
agreement is silent about who is to determine whether
Carlos Dancy, Jr., an employee of Labatt, elected to particular persons are bound by the agreement, courts,
participate in the plan and signed an agreement. Dancy rather than the arbitrator, should determine the issue. See
later died from an apparent asthma attack that occurred First Options of Chic., Inc. v. Kaplan, 514 U.S. 938, 944–
while he was working. His parents and children filed a 45, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995).
wrongful death action against Labatt. Labatt responded
by filing a motion to compel arbitration in which it [5] [6] [7] [8] We apply Texas procedural rules in
asserted the arbitration agreement bound the wrongful determining whether nonsignatories are bound by an
death beneficiaries. The beneficiaries argued they were not arbitration agreement. In re Weekley Homes, 180 S.W.3d
bound by Dancy's arbitration agreement for two reasons: at 130. It is not entirely clear, however, if state or
(1) they were not signatories to the agreement, and (2) the federal substantive law governs whether nonsignatories
entire agreement was void because the indemnity clause are bound to arbitrate under an agreement subject to the
was a pre-injury waiver in violation of Texas Labor Code FAA. Id.; see Wash. Mut. Fin. Group, LLC v. Bailey,
section 406.033(e). 364 F.3d 260, 267 n. 6 (5th Cir.2004). Under the FAA,
state law generally governs whether a litigant agreed
The trial court denied Labatt's motion without stating its to arbitrate, and federal law governs the scope of the
reasons. The court of appeals denied mandamus relief. arbitration clause. In re Weekley Homes, 180 S.W.3d
Labatt now seeks mandamus relief from this Court. at 130. But whether nonsignatories are bound by an
arbitration agreement is a distinct issue that may involve
either or both of these matters. Id. at 130–31; see also
II. Are the Beneficiaries Bound to Arbitrate? In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 738
(Tex.2005) (noting whether nonsignatory plaintiffs should
be compelled to arbitrate their claims is related to validity
A. Standard of Review but is also a distinct issue). The FAA does not specify
whether state or federal law governs, and the United
[1] [2] [3] A party denied the right to arbitrate pursuant
States Supreme Court has not directly addressed the issue.
to an agreement subject to *643 the FAA does not
In re Weekley Homes, 180 S.W.3d at 130. Pending an
have an adequate remedy by appeal and is entitled to
answer from the United States Supreme Court, we have
mandamus relief to correct a clear abuse of discretion.
determined to apply state substantive law and endeavor
In re L & L Kempwood Assocs., L.P., 9 S.W.3d 125,
to keep it consistent with federal law. Id. We keep in
128 (Tex.1999). Under an abuse of discretion standard,
mind that a purpose of the FAA is “to make arbitration
we defer to the trial court's factual determinations if
agreements as enforceable as other contracts, but not
they are supported by evidence, but we review the trial
more so.” Prima Paint Corp. v. Flood & Conklin Mfg. Co.,
court's legal determinations de novo. Brainard v. State,
388 U.S. 395, 404 n. 12, 87 S.Ct. 1801, 18 L.Ed.2d 1270
12 S.W.3d 6, 30 (Tex.1999); see Walker v. Packer, 827
(1967); see Fleetwood Enter., Inc. v. Gaskamp, 280 F.3d
S.W.2d 833, 839–40 (Tex.1992). Whether an arbitration
1069, 1074 n. 5 (5th Cir.2002).
agreement is enforceable is subject to de novo review.
See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227
Mindful of the foregoing, we move to the issue before us
(Tex.2003).
—whether an arbitration agreement governed by the FAA

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In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

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.

[10] [11] At common law there was no recognized cause


of action for the wrongful death of another person. Russell
C. Beneficiaries as Nonsignatories
v. Ingersoll–Rand Co., 841 S.W.2d 343, 344 (Tex.1992).
[9] We have previously determined that nonsignatories The Legislature enacted the Wrongful Death Act in
to an agreement subject to the FAA may be bound to order to create a cause of action to allow a deceased
an arbitration clause when rules of law or equity would tort victim's surviving parents, children, and spouse to
bind them to the contract generally. In re Weekley Homes, recover damages for their losses from the victim's death.
180 S.W.3d at 131 (noting that if state law would bind Shepherd v. Ledford, 962 S.W.2d 28, 31 (Tex.1998); see
a nonparty to a contract generally, the FAA appears to TEX. CIV. PRAC. & REM.CODE §§ 71.002–.004. Under
preempt an exception for arbitration clauses because the the Wrongful Death Act as it applies here, wrongful
FAA requires states to place arbitration *644 contracts death beneficiaries may pursue a cause of action “only if
on equal footing with other contracts); see also Allied– the individual injured would have been entitled to bring
Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 281, an action for the injury if the individual had lived.”
115 S.Ct. 834, 130 L.Ed.2d 753 (2005) (noting that a TEX. CIV. PRAC. & REM.CODE § 71.003(a). This
state “may not ... decide that a contract is fair enough to language is not a recent innovation but is a recodification
enforce all its basic terms ... [yet] not fair enough to enforce of language which has consistently been part of the
its arbitration clause”). Therefore, we look to whether Wrongful Death Act. See Russell, 841 S.W.2d at 346.
the agreement signed by Dancy would generally bind his And we have consistently held that the right of statutory
beneficiaries under Texas law. beneficiaries to maintain a wrongful death action is
entirely derivative of the decedent's right to have sued for
Several rules of law and equity may bind nonsignatories to his own injuries immediately prior to his death. See id. at
a contract. For example, we have held that the principles 345–47. Thus, it is well established that statutory wrongful
of equitable estoppel and agency may bind nonsignatories death beneficiaries' claims place them in the exact “legal
to an arbitration agreement. In re Weekley Homes, 180 shoes” of the decedent, and they are subject to the same
S.W.3d at 131–35; see also In re Kellogg Brown & Root, defenses to which the decedent's claims would have been
166 S.W.3d at 739 (noting nonsignatories may be bound to subject. Id. at 347.
arbitration agreement under “direct benefits estoppel”); In
re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 191–95 Accordingly, we long ago held that a decedent's pre-
(Tex.2007) (recognizing estoppel may bind a nonsignatory death contract may limit or totally bar a subsequent
to an arbitration agreement but holding plaintiffs were action by his wrongful death beneficiaries. See Sullivan–
not bound to arbitration agreement under “concerted Sanford Lumber Co. v. Watson, 106 Tex. 4, 155 S.W.
misconduct estoppel” because it was not a recognized 179, 180 (1913); Thompson v. Fort Worth & R.G. Ry.
theory of estoppel under Texas law); In re FirstMerit Co., 97 Tex. 590, 80 S.W. 990, 992 (1904); see also
Bank, N.A., 52 S.W.3d 749, 755–56 (Tex.2001) (holding Russell, 841 S.W.2d at 347 (affirming holdings *645
a nonsignatory who sues based on a contract subjects in Thompson and Sullivan–Sanford Lumber Co.). In
himself to the contract's terms, including its arbitration Thompson, R.K. Thompson sued to recover damages for
agreement). injuries he suffered while riding a train. He accepted a
settlement offer and executed a full release of the railway
Labatt argues that under these circumstances the company. 80 S.W. at 990. Shortly after signing the release,
beneficiaries should be bound by the agreement because Thompson died from his injuries. Id. at 991. His wife
(1) they are third party beneficiaries of the agreement; (2) and children then sued the railway company seeking to
they are bound by the agreement because of the derivative recover damages for his death. Id. at 990. The Court noted
nature of their claims; and (3) Texas Family Code section that if Thompson had survived, he would not have been
151.001 afforded Dancy the legal authority to bind his entitled to bring suit because of the contractual release and
minor children to the agreement. Because we determine it because the Wrongful Death Act provided, in language
is dispositive, we first consider Labatt's argument that the similar to the current Act, that beneficiaries were only

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In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

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

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In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


In re Labatt Food Service, L.P., 279 S.W.3d 640 (2009)
28 IER Cases 1268, 52 Tex. Sup. Ct. J. 352

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571 (1999)
42 Tex. Sup. Ct. J. 377

must compel arbitration and stay its own


proceedings.
KeyCite Red Flag - Severe Negative Treatment
Abrogated by In re Halliburton Co., Tex., May 30, 2002   51 Cases that cite this headnote
987 S.W.2d 571
Supreme Court of Texas.
[3] Alternative Dispute Resolution
In re OAKWOOD MOBILE HOMES, INC., Relator. Evidence
Once mobile home seller met its burden
No. 98–0662. of presenting evidence that arbitration
| agreement governed dispute between itself
Feb. 11, 1999. and buyers, the burden then shifted to the
buyers to present evidence that the agreement
Buyers of mobile home sued seller for rescission of
was procured in an unconscionable manner,
sales contract. Seller moved to compel arbitration under
induced or procured by fraud or duress, or
signed arbitration agreement. The 359th District Court,
that seller had waived arbitration under the
Montgomery County, James H. Keeshan, J., denied
agreement.
motion. Seller petitioned for mandamus relief. The Court
of Appeals denied petition. Seller again petitioned for writ 37 Cases that cite this headnote
of mandamus. The Supreme Court held that buyers failed
to meet burden of presenting evidence that agreement
was procured in an unconscionable manner, induced or [4] Alternative Dispute Resolution
procured by fraud or duress, or that seller had waived Existence and validity of agreement
arbitration under the agreement. Alternative Dispute Resolution
Conditions precedent to arbitration;
Writ of mandamus conditionally granted. procedural arbitrability
Whether the terms and conditions of
an arbitration agreement are themselves
unconscionable is a matter which
West Headnotes (16)
must be submitted to the designated
arbitrator; however, claims of procedural
[1] Alternative Dispute Resolution unconscionability, such as those relating to
Right to Enforcement and Defenses in the actual making or inducement of the
General agreement, are reserved for judicial review.
Party seeking to compel arbitration must
24 Cases that cite this headnote
establish the existence of an arbitration
agreement, and show that the claims raised fall
within the scope of that agreement. [5] Alternative Dispute Resolution
Validity of assent
116 Cases that cite this headnote
To establish fraud in the formation of an
arbitration agreement, a party must prove
[2] Alternative Dispute Resolution that a material misrepresentation was made,
Right to Enforcement and Defenses in and that it was false.
General
10 Cases that cite this headnote
Alternative Dispute Resolution
Stay of Proceedings Pending Arbitration
Once a party establishes a claim within [6] Alternative Dispute Resolution
an arbitration agreement, the trial court Validity of assent

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571 (1999)
42 Tex. Sup. Ct. J. 377

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

[7] Contracts [11] Alternative Dispute Resolution


Adhesion contracts; standardized Evidence
contracts Because public policy favors resolving
Contracts disputes through arbitration, there is a strong
Unconscionable Contracts presumption against the waiver of contractual
Adhesion contracts are not automatically arbitration rights.
unconscionable or void.
8 Cases that cite this headnote
12 Cases that cite this headnote
[12] Alternative Dispute Resolution
[8] Alternative Dispute Resolution Trial or hearing
Unconscionability Whether a party's conduct waives its
There is nothing per se unconscionable about arbitration rights is a question of law.
arbitration agreements.
Cases that cite this headnote
11 Cases that cite this headnote
[13] Alternative Dispute Resolution
[9] Alternative Dispute Resolution Waiver or Estoppel
Unconscionability Any doubts about whether a party has waived
Buyers' bare contention that arbitration its contractual arbitration rights is resolved in
agreement they signed in connection with favor of arbitration.
purchase of mobile home was a classic
13 Cases that cite this headnote
example of a contract of adhesion because
they had absolutely no bargaining power or
ability to change the contract terms, even if [14] Alternative Dispute Resolution
true, would not support claim that arbitration Waiver or Estoppel
contract was unconscionable and that they Waiver may be found when it is shown that
signed agreement under duress, absent some a party acted inconsistently with its right to
evidence of unconscionability or duress. arbitrate and such actions prejudiced the other
party.
34 Cases that cite this headnote
20 Cases that cite this headnote
[10] Alternative Dispute Resolution
Waiver or Estoppel [15] Alternative Dispute Resolution
Seller of mobile home had no burden under Evidence
arbitration agreement, which specifically Agreement between buyers and seller of
provided that the parties would arbitrate in mobile home to arbitrate any dispute

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571 (1999)
42 Tex. Sup. Ct. J. 377

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,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571 (1999)
42 Tex. Sup. Ct. J. 377

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571 (1999)
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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

Hecht, J., filed concurring opinion in which Medina, J.,


joined.
328 S.W.3d 883
Supreme Court of Texas.

In re OLSHAN FOUNDATION REPAIR


West Headnotes (17)
COMPANY, LLC and Olshan Foundation
Repair Company of Dallas, Ltd., Relators.
[1] Mandamus
Nos. 09–0432, 09–0433, 09–0474, 09–0703. Remedy by Appeal or Writ of Error
| Mandamus
Argued March 23, 2010. Matters of discretion
|
Mandamus will not issue unless: (1) the
Decided Dec. 3, 2010.
trial judge has committed a clear abuse of
Synopsis discretion; and (2) there is no adequate remedy
Background: Homeowners brought separate actions on appeal.
against foundation repair company before the 40th
71 Cases that cite this headnote
District Court, Ellis County, Gene Knize, J., the 44th
District Court, Dallas County, Carlos Raul Cortez, J., and
the 271st District Court, Wise County, John H. Fostel, [2] Appeal and Error
J. Foundation repair company's pleas in abatement were Abuse of discretion
denied, and it petitioned for writs of mandamus, seeking A trial court abuses its discretion if it reaches
order to compel arbitration of homeowners' claims. The a decision so arbitrary and unreasonable it
Waco Court of Appeals, 2009 WL 1886648, the Dallas amounts to a clear and prejudicial error of law
Court of Appeals, 277 S.W.3d 124, and the Fort Worth or it clearly fails to correctly analyze or apply
Court of Appeals, 2008 WL 4661815, denied petitions. the law.
Foundation repair company filed petitions for writs of
mandamus, which were consolidated. 86 Cases that cite this headnote

[3] Alternative Dispute Resolution


Holdings: The Supreme Court, Wainwright, J., held that: Constitutional and statutory provisions
and rules of court
[1] choice of law provision in some homeowners' contracts The Federal Arbitration Act (FAA) does not
did not preclude application of Federal Arbitration Act confer a right to compel arbitration of any
(FAA); dispute at any time; rather, the FAA policy
is simply to ensure that private agreements
[2] choice of law provision in remaining homeowners' to arbitrate are enforced according to their
contract precluded application of FAA; terms. 9 U.S.C.A. § 1 et seq.

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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.

7 Cases that cite this headnote


[5] Alternative Dispute Resolution
What law governs
[8] Alternative Dispute Resolution
Alternative Dispute Resolution
Unconscionability
Operation and Effect
State law renders unconscionable contracts
Choice of law provision in contracts between
unenforceable, and recognizes both
homeowners and foundation repair company,
substantive and procedural unconscionability
stating that disputes arising out of contract
with regard to arbitration agreements:
were to be resolved by mandatory and
“substantive unconscionability” refers to the
binding arbitration administered pursuant
fairness of the arbitration provision itself,
to Texas General Arbitration Act (TAA),
whereas “procedural unconscionability”
precluded application of Federal Arbitration
refers to the circumstances surrounding
Act (FAA) provision, which preempted
adoption of the arbitration provision.
state law that would otherwise render
arbitration agreements unenforceable in 20 Cases that cite this headnote
contract involving interstate commerce, to
provision of TAA, which rendered arbitration
agreements unenforceable if they contained [9] Contracts
arbitration clauses for services in which Unconscionable Contracts
total consideration to be furnished was Generally, a contract is unconscionable
not more than $50,000 and agreements if, given the parties general commercial
were not in writing and signed by parties background and the commercial needs of the
and parties' counsel, in homeowners' action particular trade or case, the clause involved is
against company. 9 U.S.C.A. § 2; V.T.C.A., so one-sided that it is unconscionable under

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

unconscionability; homeowners' respective


claims did not exceed $20,000 each, nothing Robert W. Loree, Edwin Todd Lipscomb, Christopher
indicated that homeowners sought to reduce Dean Below, Loree, Hernandez & Lipscomb, PLLC, San
any likely arbitration charges through fee Antonio, Steven W. Thornton, McCorkle Westerburg &
waivers, pro bono arbitrators, or single- Thornton, P.C., David M. Walsh IV, Chamblee & Ryan,
arbitrator panels, and homeowners did not P.C., Dallas, for Real Party in Interest Robert Tingdale in
provide comparison of evidence to their No. 09–0703.
expected costs, amount of claims, or ability to
Opinion
pay such costs.
Justice WAINWRIGHT delivered the opinion of the
Cases that cite this headnote
Court.

[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.

Attorneys and Law Firms I. Factual and Procedural Background

*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.

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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–

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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.

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

However, because the parties in the Kilpatrick, Tisdale,


[5] In contrast, the Waggoner agreement states that and Tingdale contracts chose to arbitrate pursuant to the
disputes arising out of the contract “shall be resolved laws of Texas, which include the FAA, the FAA preempts
by mandatory and binding arbitration ... pursuant to section 171.002(a)(2) of the TAA and precludes those
the Texas General Arbitration Act....” This provision requirements from barring arbitration.
distinguishes the Waggoner agreement from the other
agreements and the agreements in L & L Kempwood and
Mastrobuono. This is not the same general choice-of-law
IV. Unconscionability
provision. This provision chooses a state's substantive
law, specifically the TAA, to govern disputes under Even though the FAA governs the arbitration agreements
the agreement. A valid choice-of-law provision makes in the Kilpatrick, Tisdale, and Tingdale contracts,
a conflicts-of-law analysis unnecessary; this provision if those agreements are unconscionable, they are
expresses a preference between federal and state law. Id. unenforceable. The homeowners contend that the
The FAA is part of the arbitration laws of Texas and arbitration agreements are unconscionable because
can be applied to arbitration administered pursuant to the “mandatory binding arbitration administered by the
laws of Texas. However, the FAA is not part of the TAA, American Arbitration Association ... in accordance with
at least to the extent the two are inconsistent. this arbitration agreement and the commercial arbitration
rules of the AAA” is prohibitively expensive, preventing
*891 The Fifth Circuit has likewise interpreted an their ability to vindicate their claims. Further, they
arbitration clause specifically invoking the TAA as contend the contracts are clearly void because Olshan
designating the TAA to govern all aspects of arbitration violated the Home Solicitation Act, exacerbating the
under the agreement, to the exclusion of the FAA. Ford unconscionability of the agreement.
v. NYLCare Health Plans of the Gulf Coast, Inc., 141
F.3d 243, 246 (5th Cir.1998) (applying Texas law). The
court stated the parties may “specify the law governing
A. Unconscionability of Arbitration Agreements
interpretation of the scope of the arbitration clause.” Id.
at 248. The focus of the determination is on the parties' [6] [7] Section 2 of the FAA states arbitration
choice. Thus, the court held that the parties intended the agreements “shall be valid, irrevocable, and enforceable,
TAA to govern the scope of the arbitration clause. Id. at save upon such grounds as exist at law or in equity
249. for the revocation of any contract.” 9 U.S.C. § 2. A
central purpose of the FAA is “to reverse the longstanding
The language of the Waggoner agreement also indicates judicial hostility to arbitration agreements ... and to
the parties' intention that the TAA govern the scope of place arbitration agreements upon the same footing as
their arbitration agreement. The plain language clearly other contracts.” Gilmer v. Interstate/Johnson Lane Corp.,
indicates that the parties intend their arbitration to be 500 U.S. 20, 24, 111 S.Ct. 1647, 114 L.Ed.2d 26 (1991)
governed by the TAA rather than merely “the law of (citations omitted). Such agreements are enforceable only
the state” or “Texas law.” The parties' intention that if they meet “the requirements of the general contract
arbitration be administered pursuant to the TAA would law of the applicable state.” In re Poly–America, L.P.,
be thwarted if the FAA preempted the TAA's specific 262 S.W.3d 337, 347 (Tex.2008) (citation omitted). When
provisions. Thus, an agreement specifying that arbitration determining whether an agreement to arbitrate is valid,
occur “pursuant to the Texas General Arbitration Act” “state law, whether of legislative or judicial origin, is
excludes the FAA's preemption of section 171.002(a)(2) of applicable if that law arose to govern issues concerning
the TAA. 3 the validity, *892 revocability, and enforceability of
contracts generally.” Perry v. Thomas, 482 U.S. 483, 493
Because the TAA would render the Waggoners' n. 9, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987).
arbitration agreement unenforceable, and because the
FAA was not chosen by the parties, the trial court [8] [9] Texas law renders unconscionable contracts
correctly denied Olshan's plea in abatement, seeking to unenforceable. Poly–America, 262 S.W.3d at 348. Texas
compel arbitration of Waggoner's action against Olshan. further recognizes both substantive and procedural

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

unconscionability. “Substantive unconscionability refers RESTATEMENT (SECOND) OF CONTRACTS § 208


to the fairness of the arbitration provision itself, whereas cmt. b (1981). But as we have recognized previously,
procedural unconscionability refers to the circumstances
surrounding adoption of the arbitration provision.” In there is nothing per se
re Palm Harbor Homes, Inc., 195 S.W.3d 672, 677 unconscionable about arbitration
(Tex.2006). Because the homeowners complain of the agreements. In fact, historically,
prohibitive cost of arbitration, their claim is grounded Texas law favors settling disputes by
in substantive unconscionability. Generally, a contract is arbitration. Arbitration agreements,
unconscionable if, “given the parties' general commercial like the one here, offer a
background and the commercial needs of the particular permissible choice to traditional
trade or case, the clause involved is so one-sided that it is litigation that does not favor either
unconscionable under the circumstances existing when the party. Moreover, assuming unequal
parties made the contract.” FirstMerit Bank, 52 S.W.3d bargaining power between [the
at 757 (citing TEX. BUS. & COM.CODE § 2.302 cmt. parties] exists does not establish
1). “The principle is one of the prevention of oppression grounds for defeating an agreement
and unfair surprise and not of disturbance of allocation of to arbitrate under the FAA.
risks because of superior bargaining power.” TEX. BUS.
EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 90–91
& COM.CODE § 2.302 cmt. 1 (internal citation omitted).
(Tex.1996) (per curiam) (citations omitted). Furthermore,
arbitration clauses in consumer contracts reduce
The U.S. Supreme Court has held that statutory claims
merchants' operating costs and produce savings passed
may be arbitrated “so long as the prospective litigant
on to the consumer in the form of lower prices. Thus, a
effectively may vindicate [his or her] statutory cause of
fairly administered *893 arbitration should not create
action in the arbitral forum.” Green Tree Fin. Corp.-
a gross disparity in the values exchanged. Stephen J.
Ala. v. Randolph, 531 U.S. 79, 90, 121 S.Ct. 513, 148
Ware, Paying the Price of Process: Judicial Regulation
L.Ed.2d 373 (2000) (citing Gilmer, 500 U.S. at 28, 111
of Consumer Arbitration Agreements, 2001 J. DISP.
S.Ct. 1647). Conversely, an arbitration agreement may
RESOL.. 89, 89 (2001); see generally Steven Shavell,
render a contract unconscionable if “the existence of
Alternative Dispute Resolution: An Economic Analysis,
large arbitration costs could preclude a litigant ... from
24 J. LEGAL STUD. 1 (1995). However, we also
effectively vindicating [his or her] federal statutory rights
recognize that arbitration is intended as a lower cost,
in the arbitral forum.” Id.; see also Poly–America, 262
efficient alternative to litigation. See Poly–America, 262
S.W.3d at 355–57; FirstMerit Bank, 52 S.W.3d at 756
S.W.3d at 347 (“[A]rbitration is intended to provide
(citing Green Tree, 531 U.S. at 91, 121 S.Ct. 513).
a lower-cost, expedited means to resolve disputes....”).
Where these justifications are vanquished by excessive
[10] [11] We should be wary of setting the bar for
arbitration costs that deter individuals from bringing
holding arbitration clauses unconscionable too low. First,
valid claims, the unconscionability doctrine may protect
arbitration is favored in both federal and Texas law, and to
unfairly disadvantaged consumers. We agree, as in Green
conclude that an arbitration agreement is unconscionable
Tree, that excessive costs imposed by an arbitration
based merely on the “ ‘risk’ that [the claimant] will be
agreement render a contract unconscionable if the costs
saddled with prohibitive costs” would undermine the “
prevent a litigant from effectively vindicating his or her
‘liberal federal policy favoring arbitration agreements.’
rights in the arbitral forum. See Green Tree, 531 U.S. at
” Green Tree, 531 U.S. at 91, 121 S.Ct. 513 (quoting
90, 121 S.Ct. 513.
Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983));
FirstMerit Bank, 52 S.W.3d at 756. Second, the theory
behind unconscionability in contract law is that courts B. Application of the Standard
should not enforce a transaction so one-sided, with so
The party opposing arbitration bears the burden to show
gross a disparity in the values exchanged, that no rational
that the costs of arbitration render it unconscionable.
contracting party would have entered the contract.
When “a party seeks to invalidate an arbitration
agreement on the ground that arbitration would be

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

[13] Green Tree creates a burden-shifting test in which


the “party seek [ing] to invalidate an arbitration agreement
on the ground that arbitration would be prohibitively
D. Application to the Facts
expensive ... bears the burden of showing the likelihood of
incurring such costs.” Green Tree, 531 U.S. at 92, 121 S.Ct. [16] In applying this analysis to the facts at hand,
513. Once met, the burden shifts to “the party seeking we begin with the agreement itself, which states, “any
arbitration [who] must come forward with contrary matter arising out of this agreement shall be resolved by
evidence.” Id.; see also Poly–America, 262 S.W.3d at 348 mandatory and binding arbitration administered by the
(“The burden of proving such a ground—such as fraud, American Arbitration Association ... in accordance with
unconscionability or voidness under public policy—falls this arbitration agreement and the commercial arbitration
on the party opposing the contract.”); FirstMerit Bank, 52 rules of the AAA.” According to the commercial
S.W.3d at 756 (“Again, since the law favors arbitration, arbitration rules, the AAA:
the burden of proving a defense to arbitration is on the
party opposing arbitration.”). *896 applies the Supplementary
Procedures for Consumer–Related
[14] Evidence of the “risk” of possible costs of Disputes to arbitration clauses
arbitration is insufficient evidence of the prohibitive in agreements between individual
cost of the arbitration forum. Green Tree, 531 U.S. at consumers and businesses where
91, 121 S.Ct. 513 (“The ‘risk’ that [the plaintiff] will the business has a standardized,
be saddled with prohibitive costs is too speculative to systematic application of arbitration
justify the invalidation of an arbitration agreement.”). clauses with customers and where
Rather, “both the United States Supreme Court and the terms and conditions of
this Court require specific evidence that a party will the purchase of standardized,
actually be charged excessive arbitration fees.” U.S. Home consumable goods or services are
Corp., 236 S.W.3d at 764; see also FirstMerit Bank, 52 nonnegotiable or primarily non-
S.W.3d at 757 (“Because the record contains no specific negotiable in most or all of its terms,
evidence that the [plaintiffs] will actually be charged conditions, features, or choices.
excessive arbitration fees, we conclude that there is legally
AAA Commercial Arbitration Rule R–1 (2007, 2009). The
insufficient evidence that the plaintiffs would be denied
Supplementary Procedures for Consumer–Related Disputes
access to arbitration based on excessive costs.”). The
have a separate fee schedule for consumer arbitration:
party opposing arbitration must show the likelihood of
incurring such costs in her particular case. Administrative Fees

[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.

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

allege, “similar cases” to show the likelihood of excessive


In Person Hearing $750 per day of hearing litigation costs. The first was a copy of the invoice from
the AAA to the Ayalas who were plaintiffs in a different
For cases in which a claim or counterclaim exceeds
lawsuit against Olshan. It shows that the Ayalas' claim
$75,000, arbitrators are compensated at the rates set
against Olshan was for $200,000, and that the Ayalas' were
forth on their panel biographies.
charged $35,900 to arbitrate that claim. The second was an
Fees and Deposits to be Paid by the Consumer: invoice from the AAA to an anonymous claimant for the
arbitration of a construction dispute, a similar type of case
If the consumer's claim or counterclaim does not exceed using only one arbitrator. 7 The amount of this claim is
$10,000, then the consumer is responsible for one-half not stated on this invoice, but based on the administrative
the arbitrator's fees up to a maximum of $125. This fee and case service fee charged by the AAA, we can
deposit is used to pay the arbitrator. It is refunded if not deduce that it was between $75,000 and $150,000. The
used. anonymous claimants were charged $11,406 to arbitrate.
If the consumer's claim or counterclaim is greater
Merely showing that other claimants have incurred
than $10,000, but does not exceed $75,000, then the
arbitration costs of some amount falls well short of
consumer is responsible for one-half the arbitrator's fees
specific evidence that these particular parties will be
up to a maximum of $375. This deposit is used to pay
charged excessive fees. There is no evidence that the
the arbitrator. It is refunded if not used.
homeowners' claims are similar in amount or difficulty
If the consumer's claim or counterclaim exceeds as the claims of the Ayalas or the anonymous claimant.
$75,000, or if the consumer's claim or counterclaim In fact, the Ayalas' invoice shows that their claim was
is non-monetary, then the consumer must pay an for $200,000, while none of the homeowners' claims in
Administrative Fee in accordance with the Commercial this case exceeded $20,000. Moreover, there is no evidence
that the homeowners have made any effort to reduce the
Fee Schedule. 6 A portion of this fee is refundable
likely charges through requests for fee waivers, pro bono
pursuant to the Commercial Fee Schedule. The
arbitrators, or even simply requesting a one arbitrator
consumer must also deposit one-half of the arbitrator's
panel. As the court in In re MHI Partnership, Ltd.
compensation. This deposit is used to pay the
aptly noted, “Substantive unconscionability threatens to
arbitrator. This deposit is refunded if not used. The
become the exception that swallows the rule if all that
arbitrator's compensation rate is set forth on the panel
must be done to avoid arbitration is to assume the most
biography provided to the parties when the arbitrator
expensive possible scenario.” No. 14–07–00851–CV, 2008
is appointed.
WL 2262157 at *7 (Tex.App.-Houston [14th Dist.] May
29, 2008, no pet.) (mem.op.).
AAA Supplementary Procedures for Consumer–Related
Disputes, Administrative Fees, Arbitrator Fees, Fees and
Even if we took these invoices as evidence of the
Deposits to be Paid by the Consumer (2005, 2010). Thus,
likely arbitration charges to the homeowners, they have
for a consumer claim up to $75,000, the most a consumer
provided no comparison of these charges to the expected
will have to pay under these rules is $375 for the arbitrator.
cost of litigation, the amount of their claim, or their ability
*897 Id.; see also Green Tree, 531 U.S. at 95, 121
to pay these costs. See Green Tree, 531 U.S. at 90 n.
S.Ct. 513 (Ginsburg, J., dissenting) (describing the AAA's
6, 121 S.Ct. 513 (concluding that a party's unsupported
Consumer Arbitration Rules as a model “for fair cost and
statement that she did not have the resources to pay
fee allocation”).
the high costs of arbitration was insufficient); Bradford,
238 F.3d at 556 n. 5 (“The cost of arbitration, as far
The homeowners bear the burden to show the likelihood
as its deterrent effect, cannot be measured in a vacuum
of incurring excessive costs, yet no homeowners provided
or premised upon a claimant's abstract contention that
any concrete idea of the amount of their claims. It is
arbitration costs are ‘too high.’ ”). The record contains
impossible to know how much they will be charged under
no specific evidence that the homeowners will actually
the AAA rules, even if the fees charged by AAA were
be charged excessive arbitration fees, and thus there is
excessive. Instead, the homeowners provided two invoices
no legally sufficient evidence that such fees prevent the
from the AAA for arbitration in, as the homeowners

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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.

The homeowners acknowledge that, as the Court notes,


the validity of the contracts is a matter for the arbitrator to
Justice HECHT filed a concurring opinion, in which
decide. 3 But the homeowners argue that the invalidity of
Justice MEDINA joined.
the contracts is a foregone conclusion and that “the entire
process ... will be a needless waste of time, energy, and
Justice HECHT, concurring, in which Justice MEDINA money”. 4 I agree with the Court that even if this is true,
joined. the contracts are not unconscionable. But being led on a
I join fully in the Court's opinion and write only with this
wild goose chase, 5 if that is all arbitration comes to, is not
further observation.
without remedy.

The homeowners contend that the contracts at issue


If, as the homeowners predict, the arbitrator concludes
violated the Texas Home Solicitation Act 1 because they that the contracts are indeed void, Olshan and its counsel
did not contain the requisite notice of their right to are subject to being sanctioned by the trial court for filing a
cancellation and are therefore void by express provision
groundless motion to compel arbitration. 6 The trial court
of the Act. 2 In response, Olshan tells us in its briefing certainly has the authority to sanction frivolous resistance
only that it “will present its defenses ... in the arbitral to arbitration, and sanctions are not a one-way ratchet.
forum”. Asked at oral argument what defenses it has to the The court's authority to sanction a frivolous motion
homeowners' contention that their contracts, including to compel is not displaced by the arbitrator's authority
the arbitration provisions, are void and unenforceable, to determine the predicate issue—that the contracts are
counsel answered that “there might be an estoppel unenforceable. If the dispute returns to the trial court, the
defense” because the homeowners did not challenge homeowners may seek full redress for Olshan's lark.
the validity of the contracts until work was completed.
Counsel also argued that even if the contracts are void,
the arbitration provision is severable and valid, and the All Citations
homeowners *900 must still submit their complaints to
328 S.W.3d 883, 54 Tex. Sup. Ct. J. 300

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”).

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In re Olshan Foundation Repair Co., LLC, 328 S.W.3d 883 (2010)
54 Tex. Sup. Ct. J. 300

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.

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953 F.Supp.2d 713 West Headnotes (25)


United States District Court,
N.D. Texas,
Dallas Division. [1] Alternative Dispute Resolution
Matters Which May Be Subject to
In re ONLINE TRAVEL COMPANY Arbitration Under Law
(OTC) Hotel Booking Antitrust Litigation. Alternative Dispute Resolution
Disputes and Matters Arbitrable Under
Civil Action No. 3:12–cv–3515–B. Agreement
|
A two-step procedure is followed in
June 14, 2013.
determining whether to compel arbitration:
Synopsis first, the court must ascertain whether the
Background: Users of online travel company's website parties agreed to arbitrate the dispute at
brought action against online travel company, alleging the issue, and once the court is satisfied that
company's price fixing conspiracy with hotel companies, the parties agreed to arbitrate the dispute,
in violation of federal antitrust laws. Online travel it must then determine whether any external
company filed motion to compel individual arbitration. legal constraints foreclose arbitration of the
dispute.

Cases that cite this headnote


Holdings: The District Court, Jane J. Boyle, J., held that:

[2] Alternative Dispute Resolution


[1] website users manifested their assent to arbitration
Validity
provisions and class arbitration waiver contained in user
agreement, as element for enforceable contract under Alternative Dispute Resolution
Texas law; Disputes and Matters Arbitrable Under
Agreement
[2] arbitration and class waiver provisions in user An agreement to arbitrate a dispute is shown
agreement were not illusory, as would render them where: (1) there exists between the parties
unenforceable under Texas law; a valid agreement to arbitrate, and (2) the
dispute in question falls within the scope of the
[3] class arbitration waiver was enforceable, even if agreement.
high fees for expert witnesses would make individual
arbitration economically irrational; 2 Cases that cite this headnote

[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

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
2013-1 Trade Cases P 78,428

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

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
2013-1 Trade Cases P 78,428

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

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
2013-1 Trade Cases P 78,428

[20] Alternative Dispute Resolution Cases that cite this headnote


Place of arbitration
Generalized attacks, by users of online [24] Alternative Dispute Resolution
travel company's website, on the organization Constitutional and statutory provisions
that would provide arbitrators and on and rules of court
that organization's arbitrators in the county
When class arbitration is “manufactured” by
designated as the arbitral forum did
the courts rather than through consensual
not establish the unreasonableness of the
agreement, it is inconsistent with the Federal
forum designated in arbitration provision of
Arbitration Act (FAA). 9 U.S.C.A. § 1 et seq.
website's user agreement.
Cases that cite this headnote
Cases that cite this headnote

[25] Alternative Dispute Resolution


[21] Alternative Dispute Resolution
Preemption
Arbitration favored; public policy
States
Generalized attacks on arbitration are out
Particular cases, preemption or
of step with the federal policy favoring
supersession
arbitration.
A state cannot require an arbitration
Cases that cite this headnote procedure that is inconsistent with the Federal
Arbitration Act (FAA), even if it is desirable
for unrelated reasons. 9 U.S.C.A. § 1 et seq.
[22] Alternative Dispute Resolution
Evidence Cases that cite this headnote
Courts decline to indulge the presumption
that the parties and arbitral body conducting
a proceeding will be unable or unwilling
to retain competent, conscientious, and Attorneys and Law Firms
impartial arbitrators.
*716 Steve W. Berman, Hagens Berman Sobol Shapiro
Cases that cite this headnote LLP, Seattle, WA, Marc R. Stanley, Stanley Iola LLP,
Dallas, TX, for Plaintiffs.
[23] Alternative Dispute Resolution
Christopher S. Yates, Brendan Andrew McShane, Daniel
Validity
M. Wall, Jason L. Daniels, Latham & Watkins LLP,
Inability of users of online travel company's Gretchen Ann Hoff Varner, Convington & Burling LLC,
website to add hotel companies as defendants, San Francisco, CA, Vance Loren Beagles, Weil Gotshal
in an arbitration proceeding regarding their & Manges, Jessica B. Pulliam, Baker Botts, Dallas, TX,
price fixing claims against online travel Anne Y. Lee, Thomas A. Isaacson, Covington & Burling
company and hotel companies under federal LLP, Washington, DC, Emily Johnson Henn, Covington
antitrust law, did not provide a ground for & Burling LLP, Redwood Shores, CA, for Defendants.
refusing to enforce the arbitration provisions
of user agreement for online travel company's
website; online travel company and hotel
MEMORANDUM OPINION AND ORDER
companies would be jointly and severally
liable, and users could simply seek to hold JANE J. BOYLE, District Judge.
online travel company liable in the arbitration
proceeding. Before the Court is the Motion to Compel
Arbitration (doc. 71) filed April 1, 2013 by

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
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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).

App. 13, 23, 33. 2 Furthermore, subparagraph (e) of


the arbitration clause stipulates that “unless otherwise
mutually agreed by the parties in writing, the arbitrator III.
may not consolidate more than one person's claims,
and may not otherwise preside over any form of a
ANALYSIS
representative or class proceeding.” Travelocity Mot.
Compel 4; see also Travelocity App. 13, 23, 34. In A. Choice of Law
light of such contractual language, Travelocity argues As the User Agreement itself provides, its terms are
that Plaintiffs must arbitrate their claims individually. governed by Texas law. Travelocity *718 Mot. Compel
Plaintiffs respond that their inability to proceed as a App. (“Travelocity App.”) 13, 23, 33 (Exs. B–D). Plaintiffs
class would prohibit them from vindicating their statutory do not contest the application of Texas law. See Pls.' Opp'n
rights and consequently object to Travelocity's request. Mot. Compel (“Pls.' Opp'n”) 2 (citing Texas contract law).

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
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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).

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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

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2013-1 Trade Cases P 78,428

a judicial forum ... [would] be discoverable in the text


C. Federal Policy of the [statute], its legislative history, or an ‘inherent
[10] [11] The Federal Arbitration Act (“FAA”) states conflict’ between arbitration and the [statute]'s underlying
that arbitration agreements “shall be valid, irrevocable, purposes.” 500 U.S. 20, 26, 111 S.Ct. 1647, 114 L.Ed.2d
and enforceable, save upon such grounds as exist at law 26 (1991). Therefore, if Congress did not intend to allow
or in equity for the revocation of any contract.” 9 U.S.C. parties to include a certain type of provision, such as a
§ 2 (2006). In AT & T Mobility LLC v. Concepcion, class-action waiver, in their contracts, this intention would
the Supreme Court held that the FAA preempts state have been clearly expressed. The Court has found no such
law in determining whether a class arbitration waiver language in either the text or legislative history of the
in consumer contracts is enforceable. ––– U.S. ––––, Sherman Act. See 15 U.S.C. § 1 (2006). The class action
131 S.Ct. 1740, 1753, 179 L.Ed.2d 742 (2011). It is waiver itself is not a restriction on Plaintiffs' substantive
the burden of the party seeking to avoid arbitration to remedies; rather, “[a] class action is merely a procedural
establish that Congress intended to preclude the disputed device; it does not create new substantive rights ....” Frazar
statutory claims. See Gilmer v. Interstate/Johnson Lane v. Gilbert, 300 F.3d 530, 545 (5th Cir.2002), rev'd on other
Corp., 500 U.S. 20, 26, 111 S.Ct. 1647, 114 L.Ed.2d 26 grounds, Frew ex rel. Frew v. Hawkins, 540 U.S. 431, 124
(1991); Shearson/Am. Exp. v. McMahon, 482 U.S. 220, S.Ct. 899, 157 L.Ed.2d 855 (2004).
227, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). As evidenced
by the frequent failure of plaintiffs seeking to invalidate Plaintiffs contend that the arbitration clause and its class
arbitration agreements, “the evidentiary record necessary waiver provision should not be enforced because such
to avoid a class- *721 action arbitration waiver is not enforcement would be at odds with the purposes of the
easily assembled.” In re Am. Exp. Litig., 667 F.3d 204, 217 federal antitrust policy. Pls.' Opp'n 8. They argue that their
(2d Cir.2012). inability to proceed as a class would prevent them from
effectively vindicating their statutory rights. Id. at 9. To
[12] [13] [14] [15] Claims may be litigated insupport their argument, Plaintiffs point to Green Tree,
the arbitral forum “so long as the prospective litigant where the Supreme Court recognized that “the existence
effectively may vindicate [his or her] statutory cause of large arbitration costs could preclude a litigant ...
of action.” Mitsubishi Motors Corp. v. Soler Chrysler– from effectively vindicating her federal statutory rights
Plymouth, Inc., 473 U.S. 614, 637, 105 S.Ct. 3346, 87 in the arbitral forum.” 531 U.S. at 90, 121 S.Ct. 513.
L.Ed.2d 444 (1985). Federal policy carries a strong Although the Green Tree Court did not reach the question
presumption in favor of arbitrability. See Concepcion, 131 of how detailed the plaintiff's showing of prohibitive
S.Ct. at 1748; KPMG v. Cocchi, ––– U.S. ––––, 132 S.Ct. expenses must be before the burden of proof shifted to the
23, 25, 181 L.Ed.2d 323 (2011); Moses H. Cone Mem'l defendants to bring forward contrary evidence, see id. at
Hosp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 92, 121 S.Ct. 513, Plaintiffs have not shown that the costs
(1983). In Mitsubishi Motors, the Supreme Court held that of proceeding in arbitration, as opposed to state or federal
antitrust disputes could be settled through arbitration. court, were prohibitive, and thus Plaintiffs have not met
473 U.S. at 628, 105 S.Ct. 3346; see also 54 Am.Jur.2d that burden in this case.
Monopolies and Restraints of Trade § 316 (“Antitrust
claims arising under the Sherman Act and encompassed [16] [17] As an initial matter, the class action waiver
within a valid arbitration clause are arbitrable pursuant contained in the arbitration provision is enforceable. See
to the Federal Arbitration Act.”). As the Supreme Court Carter v. Countrywide Credit Indus., Inc., 362 F.3d 294,
also expressed in Green Tree Financial Corp.-Alabama v. 301 (5th Cir.2004). In Carter, the *722 appellants argued
Randolph, “even claims arising under a statute designed that they would be deprived of substantive rights under
to further important social policies may be arbitrated the statute, in that case the Fair Labor Standards Act
because ‘so long as the prospective litigant effectively may (“FLSA”), because they were not allowed to proceed as
vindicate [his or her] statutory cause of action in the a class. Id. at 298. Unlike the Sherman Act, the FLSA
arbitral forum,’ the statute serves its functions.” 531 U.S. “explicitly provides for class action suits,” but the Fifth
79, 90, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000) (quoting Circuit found the Supreme Court's holding in Gilmer
Mitsubishi Motors, 473 U.S. at 637, 105 S.Ct. 3346). controlling and ruled that the class action waiver was
The Court noted in Gilmer v. Interstate/Johnson Lane enforceable. Id. Further weakening Plaintiffs' argument
Corp. that congressional intent to “preclude a waiver of

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
2013-1 Trade Cases P 78,428

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

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
2013-1 Trade Cases P 78,428

[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

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
2013-1 Trade Cases P 78,428

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.

Travelocity does not attempt to dismiss these claims, and SO ORDERED.


it argues that because no class has been certified, claims
of absent class members are not part of the litigation.
See Travelocity Reply 9–10. Dismissal of putative class All Citations
members' claims would be premature. Kay v. Wells Fargo
& Co. N.A., C 07–01351 WHA, 2007 WL 2141292, at *2 953 F.Supp.2d 713, 2013-1 Trade Cases P 78,428
(N.D.Cal. July 24, 2007). Defendants point to Kay v. Wells

Footnotes
1 Travelocity.com LP is owned by Sabre Holdings Corporation. Consol. Am. Compl. ¶ 39.

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In re Online Travel Co., 953 F.Supp.2d 713 (2013)
2013-1 Trade Cases P 78,428

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


In re Rubiola, 334 S.W.3d 220 (2011)
54 Tex. Sup. Ct. J. 654

Civil proceedings other than actions


A party denied the right to arbitrate pursuant
KeyCite Yellow Flag - Negative Treatment
to an agreement subject to the Federal
Declined to Extend by Osornia v. AmeriMex Motor & Controls, Inc., 
Tex.App.-Hous. (14 Dist.), March 29, 2012 Arbitration Agreement (FAA) does not have
334 S.W.3d 220 an adequate remedy by appeal and is entitled
Supreme Court of Texas. to mandamus relief to correct a clear abuse of
discretion. 9 U.S.C.A. § 4.
In re Joseph Charles RUBIOLA et al., Relators.
4 Cases that cite this headnote
No. 09–0309.
|
[3] Alternative Dispute Resolution
Argued Sept. 16, 2010.
Validity
|
Alternative Dispute Resolution
Decided March 11, 2011.
Disputes and Matters Arbitrable Under
Synopsis Agreement
Background: Vendors of home petitioned for writ of A party seeking to compel arbitration under
mandamus seeking to compel arbitration of underlying the Federal Arbitration Act (FAA) must
claims by purchasers regarding repair of the home establish that there is a valid arbitration
based on arbitration agreement signed by purchasers and clause, and that the claims in dispute fall
mortgagee during financing. within that agreement's scope. 9 U.S.C.A. § 2.

57 Cases that cite this headnote

Holdings: The Supreme Court, Medina, J., held that:


[4] Alternative Dispute Resolution
[1] purchasers granted vendors right to enforce arbitration What law governs
agreement, and Under the Federal Arbitration Act (FAA),
ordinary principles of state contract law
[2] claims fell within arbitration agreement. determine whether there is a valid agreement
to arbitrate. 9 U.S.C.A. § 2.

Writ conditionally granted. 28 Cases that cite this headnote

[5] Alternative Dispute Resolution


West Headnotes (11) Persons affected or bound
An obligation to arbitrate not only attaches
to one who has personally signed the written
[1] Alternative Dispute Resolution
arbitration agreement but may also bind a
What law governs
non-signatory under principles of contract
Parties may expressly agree to arbitrate under
law and agency.
the Federal Arbitration Agreement (FAA). 9
U.S.C.A. § 2. 8 Cases that cite this headnote

27 Cases that cite this headnote


[6] Alternative Dispute Resolution
Persons affected or bound
[2] Mandamus
Generally, parties must sign arbitration
Modification or vacation of judgment or
agreements before being bound by them.
order
Mandamus

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In re Rubiola, 334 S.W.3d 220 (2011)
54 Tex. Sup. Ct. J. 654

When deciding whether claims fall within an


18 Cases that cite this headnote arbitration agreement, courts employ a strong
presumption in favor of arbitration.
[7] Alternative Dispute Resolution
17 Cases that cite this headnote
Persons affected or bound
Although arbitration agreements apply to
nonsignatories only in rare circumstances, the [11] Alternative Dispute Resolution
question of who is actually bound by an Disputes and Matters Arbitrable Under
arbitration agreement is ultimately a function Agreement
of the intent of the parties, as expressed in the To determine whether a claim falls within
terms of the agreement. the scope of the arbitration agreement, courts
must focus on the factual allegations of the
7 Cases that cite this headnote complaint, rather than the legal causes of
action asserted.
[8] Alternative Dispute Resolution
12 Cases that cite this headnote
Persons entitled to enforce
Purchasers and mortgagee, who were parties
to arbitration agreement concerning financing
for sale of home, granted vendors right
Attorneys and Law Firms
to enforce arbitration agreement, where
agreement expressly provided that certain *221 Bernard Lee Shub, The Law Office of Ben Shub,
non-signatories were parties to the agreement, Elizabeth Conry Davidson, San Antonio TX, for Joseph
including all parties that were part of the Charles Rubiola.
transaction.
*222 Bryan A. Woods, Law Office of Bryan A. Woods,
7 Cases that cite this headnote San Antonio TX, for Real Party in Interest Brian Salmon.

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

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In re Rubiola, 334 S.W.3d 220 (2011)
54 Tex. Sup. Ct. J. 654

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:

Rubiola Mortgage Company, and


I each and all persons and entities
signing this agreement or any
The underlying case concerns the sale and financing of other agreements between or
a home. Brian and Christina Salmon agreed to purchase among any of the parties as
the home from Greg Rubiola and his wife Catherine. The part of this transaction. “The
transaction was handled by J.C. Rubiola, Greg's brother, parties” shall also include individual
who served as the listing broker for the property. The partners, affiliates, *223 officers,
Salmons and Rubiolas signed a standard form Texas real directors, employees, agents, and/
estate sales contract, which did not contain an arbitration or representatives of any party to
clause. such documents, and shall include
any other owner and holder of this
Greg and J.C. Rubiola operate a number of real estate agreement.
related businesses in San Antonio. The Rubiola brothers
buy and sell real estate through Rubiola Management, J.C. Rubiola signed the agreement on behalf of Rubiola
L.L.C., which is the general partner of Rubiola Realty, Mortgage Company, and the Salmons signed a form
Ltd. and Rubiola Properties, Ltd. Greg and J.C. are acknowledging J.C.'s dual role as a real estate agent and
also president and vice-president, respectively, of Rubiola mortgage broker. The sale closed, and the Salmons moved
Mortgage Company, a corporation the brothers use to into their new home.
obtain financing for real estate buyers. The Rubiola
brothers' business interests are operated at the same Several months later, the Salmons sued the Rubiolas
location under the name Rubiola Mortgage and Realty, and other entities and individuals involved in repairing
which they advertise as a one-stop shop for customers' real the home (collectively referred to as the Rubiolas). 1
estate needs: offering the ability to buy, sell, build, finance, The Salmons alleged that J.C. Rubiola, acting as
and manage real estate through a single company. both the listing agent and a principal involved in
the home's construction and repair, made a series of
After agreeing to purchase Greg Rubiola's home, the misrepresentations that induced the Salmons to purchase
Salmons applied for mortgage financing with Rubiola the home. They also alleged violations of the Deceptive
Mortgage Company, using J.C. Rubiola as their mortgage Trade Practices Act and negligent supervision of repairs
broker and loan officer. As part of the loan process, made to the home. The Salmons sought either to rescind
the Salmons executed an arbitration agreement with the the sale or to collect damages. The Rubiolas answered and
mortgage company. This agreement provided that: moved to compel arbitration, relying on the arbitration
agreement signed by the Salmons and Rubiola Mortgage
Arbitrable disputes include any
Company during financing.
and all controversies or claims
between the parties of whatever
The trial court denied the Rubiolas' motion to compel,
type or manner, including without
causing the Rubiolas to seek mandamus relief in the
limitation, all past, present and/
court of appeals. The court of appeals also refused to
or future credit facilities and/
compel arbitration, and the Rubiolas filed the present
or agreements involving the
mandamus proceeding, seeking again to enforce the
parties. This arbitration provision
underlying arbitration agreement as a non-signatory.
shall survive any termination,
amendment, or expiration of the
agreement in which this agreement
II

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In re Rubiola, 334 S.W.3d 220 (2011)
54 Tex. Sup. Ct. J. 654

[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.”

The Rubiolas argue, and we agree, that the arbitration


A agreement's broad definition of parties, at a minimum,
[4] [5] [6] [7] Whether a non-signatory can compelmade J.C. and Greg Rubiola parties to the arbitration
arbitration pursuant to an arbitration clause questions agreement. 2 Rubiola Mortgage Company signed the

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Rubiola, 334 S.W.3d 220 (2011)
54 Tex. Sup. Ct. J. 654

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re Rubiola, 334 S.W.3d 220 (2011)
54 Tex. Sup. Ct. J. 654

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re Ruefer, Not Reported in S.W.2d (1999)
1999 WL 371568

in the event of any dispute arising out of the agreement,


the parties would submit the matter to arbitration. As
1999 WL 371568
material here, the arbitration paragraph provided:
Only the Westlaw citation is currently available.
If the parties cannot come to
NOTICE: NOT DESIGNATED FOR PUBLICATION.
an agreement on a mediator, or
UNDER TX R RAP RULE 47.7, UNPUBLISHED
cannot come to an agreement after
OPINIONS HAVE NO PRECEDENTIAL
mediation, then they shall submit
VALUE BUT MAY BE CITED WITH THE
the matter to binding arbitration
NOTATION “(not designated for publication).”
with the American Arbitration
Court of Appeals of Texas, Amarillo. Association. The arbitrator shall
settle the dispute in whatever
In re Bruce G. RUEFER and American Custom manner he or she feels will do
Medical and Company Incorporated, Relators, substantial justice, recognizing the
rights of all parties and commercial
No. 07-99-0114-CV. realities of the marketplace. The
| parties shall abide by the terms
June 8, 1999. of the arbitrator's decision and
shall cooperate fully and do any
BOYD, C.J., QUINN and REAVIS, JJ. acts necessary to implement such
decision.
Opinion
The paragraph concluded that costs of the arbitrator
REAVIS. “shall be advanced by all parties” in accordance with
part 3, entitled “Proportionate Sharing,” i.e. 50% to each
*1 In this original proceeding, Bruce G. Ruefer and
party. 1 At the time the agreement was executed, Bartee
American Custom Medical and Company Incorporated
and Ruefer were residents of Lubbock, Texas.
seek relief from the denial of their motion to compel
arbitration by the Honorable Jim Bob Darnell, in cause
After Bartee and Ruefer executed the Joint Owners
no. 98-501,952 in the 140th District Court of Lubbock
Agreement, by a separate instrument dated November
County. Because the trial court had no discretion but
29,1994, but effective as of October 7, 1994, Bartee
to compel arbitration and stay the litigation as between
and Ruefer, as licensors, executed a Patent License
Barry K. Bartee and Ruefer and American Custom, and
Agreement with American Custom Medical, Inc., a
because relators have no adequate remedy by appeal, we
Texas corporation having its principal office in Lubbock,
conditionally grant the writ of mandamus.
Texas, which was signed by Rebecca U. Ruefer, Vice-
Bartee, real party in interest and plaintiff in the underlying President of American Custom. 2 After identifying the
action, and Ruefer developed an invention which they subject medical barrier tape device and U.S. patent
desired to patent and market, known as medical barrier application number, the license agreement, as relevant
tape. By a Joint Owners Agreement dated September here, provided that (1) Bartee and Ruefer granted
26, 1994, Bartee and Ruefer reduced their agreement American Custom the exclusive, transferable right and
to writing. As relevant here, the agreement provided in license to manufacture, use, market and sell the device
part that (1) Bartee and Ruefer each owned 50% of “throughout the World,” (2) American Custom would
the invention and patent application, (2) each party was pay specified royalties to Bartee and Ruefer, (3) American
entitled to be consulted as to decisions concerning the Custom had the right to assign, in whole or in part, the
patent application process or any opportunity to license, agreement “after consultation with” Bartee and Ruefer,
sell or use the invention, but if the parties were unable and (4) any dispute arising out of or related to the
to reach a consensus, the question would be submitted agreement “shall be settled by arbitration in Texas, by a
to a mutually acceptable arbiter, (3) income derived or panel of three arbitrators and pursuant to the rules and
expenses would be allocated 50% to each party, and (4) procedures of the American Arbitration Association.”

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Ruefer, Not Reported in S.W.2d (1999)
1999 WL 371568

arbitration. In addition to alleging that the defendants,


*2 According to Bartee, in June of 1996, American individually and collectively, conspired to prevent Bartee
Custom discontinued royalty payments due him, and from receiving royalties due him under the agreements,
Ruefer informed him that future royalty payments would Bartee also alleged the defendants (1) breached their
be withheld until a new contract was negotiated with duty of loyalty owed to him, (2) failed to act with
American Custom. Bartee alleges that he met with the care an ordinarily prudent person would exercise,
Ruefer and American Custom in Dallas to discuss failed to act in good faith and that a special relationship
settlement possibilities and that by letter dated February existed between Bartee and each defendant, (3) breached
6, 1997, Bartee's counsel informed counsel for Ruefer fiduciary duties, (4) were liable to him under quantum
and American Custom that Bartee intended to institute meruit for the reasonable value of the work he performed,
arbitration proceedings immediately if their dispute could (5) were unjustly enriched, (6) committed conversion,
not be settled. Notwithstanding his stated intention to fraud, civil conspiracy and intentional infliction of
commence arbitration, instead of initiating arbitration per emotional distress/tortious interference with contract and
the rules of the American Arbitration Association and contractual relations, and (7) Ruefer and American
paying the required fee, Bartee's new counsel filed the Custom breached the agreements. Thereafter, Bartee filed
underlying action against Ruefer, American Custom, and his motion to compel discovery and for sanctions and
other defendants on April 30, 1998. Ruefer and American Custom filed their motion to compel
arbitration and stay litigation, and a response to Bartee's
By his original petition entitled “Petition to Compel motion to compel discovery. On February 11, 1999, the
Arbitration,” Bartee sued Ruefer and American Custom trial court heard all pending motions and objections and
to compel them to “participate in arbitration.” Copies the motion by Ruefer and American Custom to compel
of the Joint Owners Agreement and Patent License arbitration. By order signed March 26, 1999, among
Agreement were made a part of the pleadings. Also, Bartee other things, the trial court denied the motion to compel
joined Lifecore Biomedical, Inc. and Bridger Biomed, Inc. arbitration and stay litigation and denied the motion for
as defendants and sought other relief as to them. After protective order of Ruefer and American Custom, and
service, Ruefer and American Custom responded with granted Bartee's motion to compel discovery. Also, the
special exceptions, a general denial, special denials raising March 26, 1999 order set out a schedule for completion of
non-performance of conditions precedent for initiating discovery. 4
arbitration, that they had not refused to arbitrate,
and affirmative defenses. Also, Ruefer and American *3 The motion of Ruefer and American Custom to
Custom filed a plea in abatement alleging that the compel arbitration and stay the litigation was based on
petition seeking to compel arbitration was premature the provisions of the Joint Owners Agreement and the
because conditions precedent for arbitration had not been Patent License Agreement and the Federal Arbitration
satisfied. Following the answer of Ruefer and American Act, 9 U.S.C. §§ 1-16, or the Texas General Arbitration
Custom, no discovery was conducted awaiting appearance Act, §§ 171.001-171.098 of the Texas Civil Practice and
of new counsel for Bartee on October 16, 1998, after Remedies Code Annotated (Vernon 1997 & Supp.1999).
which efforts for discovery between Bartee and Ruefer Because the two agreements contemplated the processing
and American Custom commenced. On January 6, 1999, of a patent application with the U.S. Patent Office and
Ruefer and American Custom filed a joint motion for the manufacture and marketing of the medical device
protective order, general discovery objections and stay, worldwide, we conclude the contracts and dispute concern
contending among other things that discovery should be a transaction involving commerce and thus, the Federal
stayed until determination of the abatement issue raised Act applies. See Jack B. Anglin Co., Inc. v. Tipps, 842
as to the arbitration provision. S.W.2d 266, 270 (Tex.1992). Indeed, Bartee does not
contend that the Federal Act or the Texas Act do not
Bartee then filed his first amended petition by which he apply, but rather contends the trial court correctly denied
designated Jeffrey W. Hurt, as an additional defendant. 3 the motion to compel arbitration and stay the proceeding
By this pleading, Bartee sought relief in the action against on other grounds discussed below.
all defendants for the reason that not all defendants
were parties to the agreements containing provisions for

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Ruefer, Not Reported in S.W.2d (1999)
1999 WL 371568

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Ruefer, Not Reported in S.W.2d (1999)
1999 WL 371568

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Ruefer, Not Reported in S.W.2d (1999)
1999 WL 371568

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


In re Service Corporation Intern., 85 S.W.3d 171 (2002)
45 Tex. Sup. Ct. J. 1241

Attorneys and Law Firms


KeyCite Yellow Flag - Negative Treatment
Distinguished by Perry Homes v. Cull, Tex., May 2, 2008   *172 Michael D. Hopkins, Bracewell & Patterson,
85 S.W.3d 171 Houston, Herman E. Bate, Fenley & Bate, Lufkin,
Supreme Court of Texas. Michael J. Truncale, Orgain Bell & Tucker, Beaumont,
C. Thomas Kruse, J. Clifford Gunter, III, Bracewell
In re SERVICE CORPORATION INTERNATIONAL, & Patterson, Houston, Martha R. Campbell, Orgain
Robert L. Waltrip, L. William Heiligbrodt, Bell & Tucker, Beaumont, Tracy C. Temple, Bracewell
and George R. Champagne, Relators. & Patterson, Houston, Justice Greg Abbott, Bracewell
& Patterson, Austin, Warren W. Harris, Bracewell &
No. 01–0650. Patterson, Houston, for Relators.
|
Aug. 29, 2002. Mark L.D. Wawro, Susman Godfrey, Houston, Gregory
S. Coleman, Weil, Gotshal & Manges, Austin, Harry Paul
Officers of merged corporations petitioned for writ of Susman, Susman Godfrey, Houston, George Chandler,
mandamus after trial court denied officers' motion to Chandler Law Offices, Lufkin, for Respondent.
compel arbitration of alleged state securities fraud by
stockholder and corporate officer. The Supreme Court Opinion
held that corporate officers did not waive right to arbitrate
PER CURIAM.
state securities dispute.
Relators in this original mandamus proceeding are the
Petition for writ of mandamus granted. four defendants in both a federal court class action
involving only federal law claims and a state court action
involving only state law claims. Both actions raise similar
West Headnotes (1) but not identical factual allegations of securities fraud
in a merger transaction. The two plaintiffs in the state
court action are members of the class in federal court.
[1] Alternative Dispute Resolution At least one of the plaintiffs in state court is bound by
Suing or Participating in Suit an arbitration agreement covering all his claims, state
Corporate officers being sued in state court for and federal, but almost all of the other members of the
alleged securities fraud in the merger of two class in federal court are not. Relators moved the state
corporations did not substantially invoke the to compel arbitration of the state law claims, and the
judicial process to shareholders' detriment to plaintiffs responded that relators had waived any right to
constitute a waiver of the arbitration clause in arbitration by delay and because of their willingness to
the merger agreement, where officers sought litigate the federal law claims in federal court. The trial
no relief from state court, officers' objections court denied relators' motion. We conclude that this was
to setting trial date was to avoid state an abuse of discretion remediable by mandamus.
judicial process, and federal court rulings that
shareholders should try all claims in federal Service Corporation International and Equity
court were taken on court's own initiative, and Corporation International, two large, publicly traded
were not invoked by officers. 9 U.S.C.A. §§ corporations engaged in the death care business, merged
1–307. in a stock-for-stock transaction in January 1999. One
week later, SCI announced that its earnings for the prior
44 Cases that cite this headnote quarter were lower than expected, and its stock fell. Within
days, more than twenty identical class actions were filed
in federal courts against SCI and three of its officers at
the time of the merger 1 alleging securities fraud. The
actions were consolidated, 2 and in August 1999 a class

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Service Corporation Intern., 85 S.W.3d 171 (2002)
45 Tex. Sup. Ct. J. 1241

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Service Corporation Intern., 85 S.W.3d 171 (2002)
45 Tex. Sup. Ct. J. 1241

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Service Corporation Intern., 85 S.W.3d 171 (2002)
45 Tex. Sup. Ct. J. 1241

Hunter, III. We are confident the trial court will comply,


have no adequate legal remedy. 15 Accordingly, we grant
and our writ will issue only if it does not.
relators' petition for mandamus and without hearing oral
argument 16 direct the trial court promptly to vacate
its order of May 7, 2001, denying relators' motion to All Citations
compel arbitration, and to grant the motion as to James P.
85 S.W.3d 171, 45 Tex. Sup. Ct. J. 1241

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

16 Cases that cite this headnote


KeyCite Yellow Flag - Negative Treatment
Declined to Extend by Hernandez v. Allstate Texas Lloyds, S.D.Tex., 
February 7, 2014
[2] Insurance
345 S.W.3d 404 Demand
Supreme Court of Texas. While the time period of a delay in requesting
appraisal in a dispute over the amount of loss
In re UNIVERSAL UNDERWRITERS OF for a covered claim in an insurance policy
TEXAS INSURANCE COMPANY, Relator. may be instructive in interpreting the parties'
intentions, it alone is not the standard by
No. 10–0238. which courts determine the reasonableness of
| a delay.
Argued Dec. 8, 2010.
| 3 Cases that cite this headnote
Decided May 6, 2011.

Synopsis [3] Insurance


Background: Insured brought action against insurer Waiver or loss of appraisal rights;
alleging breach of contract for underpayment of claim. estoppel
Insurer moved to compel appraisal and stay proceedings. While an unreasonable delay in requesting
Following denial by District Court, Tarrant County, appraisal in a dispute over the amount of
John Parrish Chupp, J., of insurer's motion, and Court loss for a covered claim in an insurance
of Appeals denial of insurer's petition for a writ of policy is a factor in finding that the right
mandamus, insurer petitioned the Supreme Court for a to appraisal has been waived, reasonableness
writ of mandamus. must be measured from the point of impasse.

27 Cases that cite this headnote

Holdings: The Supreme Court, Jefferson, C.J., granted the


petition and held that, [4] Insurance
Waiver or loss of appraisal rights;
[1] request for appraisal was made by insurer within a estoppel
reasonable time, and Once the parties to an insurance contract
have reached an impasse—that is, a mutual
[2] insurer was entitled to enforcement of appraisal clause. understanding that neither will negotiate
further—appraisal must be invoked within a
reasonable time in order to avoid waiving the
Petition conditionally granted. right to appraisal under the contract.

13 Cases that cite this headnote

West Headnotes (9)


[5] Insurance
Demand
[1] Contracts
Insurance
Waiver
Waiver or loss of appraisal rights;
Waiver of an contract provision requires estoppel
intent, either the intentional relinquishment
Request for appraisal that was made by
of a known right or intentional conduct
insurer four months after it had paid insured
inconsistent with claiming that right.
for a property damages loss that insured

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

disagreed with amount of payment, and


one month after insured filed a lawsuit [9] Mandamus
against insurer, was within a reasonable Civil proceedings other than actions
time and insurer had not waived right to Insurer was entitled to writ of mandamus to
appraisal; policy contained no time limit for enforce appraisal clause in action for breach
the appraisal request, insurer never denied of contract brought by insured who disputed
liability for the loss, and at no point did amount of loss for a covered property
insured notify insurer that it refused to discuss damages claim; the parties had agreed in the
the matter further, despite insurer's statement contract's appraisal clause to the method by
that it would leave its file open for further which to determine whether a breach had
discussions should insured care to do so. occurred, and, if the appraisal determined that
the full value was what the insurer offered,
1 Cases that cite this headnote there would be no breach of contract.

17 Cases that cite this headnote


[6] Insurance
Waiver or loss of appraisal rights;
estoppel
The court will not infer that a party to an
Attorneys and Law Firms
insurance contract has waived its right to
appraisal in a dispute over the amount of *405 Don Martinson, Rebecca Raper, Fanning Harper
loss for a covered claim when neither explicit Martinson Brandt & Kutchin, P.C., Dallas, TX, for
language nor conduct indicates that such was Relator Universal Underwriters of Texas Insurance
the party's intent. Company.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

requirement that legal action contesting [Universal's]


Howard M. Bookstaff, Hoover Slovacek LLP, Houston, decision on this claim must be brought within 24
TX, for Amicus Curiae Houston Apartment Association, months and 1 day from the date you discover the loss,
Inc. (“HAA”). but no sooner than 90 days after you file a sworn proof
of loss.
Karen Phillips, Texas Automobile Dealers Association,
Austin, TX, for Amicus Curiae Karen Phillips. Please feel free to contact me ... if you should have any
questions.
Connie Niemann Heyer, Niemann & Niemann, L.L.P.,
Austin, TX, for Amicus Curiae Texas Community Universal also sent Grubbs a copy of the engineer's roof
Association Advocates. inspection report. Grubbs made no further inquiries or
demands for payment.
Opinion

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.

.... II. Waiver of appraisal clauses


Appraisal clauses, commonly found in homeowners,
... Should you disagree with [Universal's] decision as automobile, and property *407 policies in Texas, provide
set forth in this letter, please review your policy and a means to resolve disputes about the amount of loss for
govern yourself accordingly being mindful of the policy a covered claim. See State Farm Lloyds v. Johnson, 290

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

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

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In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

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

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In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

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.

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In re Universal Underwriters of Texas Ins. Co., 345 S.W.3d 404 (2011)
54 Tex. Sup. Ct. J. 931

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (2006)
49 Tex. Sup. Ct. J. 445

KeyCite Yellow Flag - Negative Treatment West Headnotes (11)


Superseded by Statute as Stated in In re Santander Consumer USA, Inc., 
Tex.App.-Hous. (1 Dist.), February 21, 2013
192 S.W.3d 759 [1] Alternative Dispute Resolution
Supreme Court of Texas. Persons affected or bound
Former insurance agent's claims against
In re VESTA INSURANCE GROUP, INC., et al. insurer's parent corporation, its corporate
In re James E. Tait officers, and agents for tortious interference
In re Jimmy K. Walker with contract with insurer were subject to
In re William Perry Cronin arbitration under former agent's agreement
In re National Benefit Advisory Association, et al. to arbitrate any dispute with insurer under
or with respect to contract; although the
Nos. 04–0141, 04–0156, 04– corporation, its officers, and agents were
0157, 04–0165, 04–0179. not signatories, the claims arose more from
| contract than general law.
March 17, 2006.
| 22 Cases that cite this headnote
Rehearing Denied June 30, 2006.
[2] Alternative Dispute Resolution
Synopsis
Persons affected or bound
Background: Former insurance agent brought action
against insurer's parent corporation, its officers, and its Nonparties generally must arbitrate claims
agents to recover for tortious interference with agency if liability arises from a contract with an
agreement. Defendants sought to compel arbitration arbitration clause, but not if liability arises
even though they were not signatories to former agent's from general obligations imposed by law.
arbitration agreement with insurer. The 67th Judicial
16 Cases that cite this headnote
District Court, Tarrant County, Donald J. Cosby, J.,
refused to compel arbitration. Defendants petition for writ
of mandamus. The Fort Worth Court of Appeals denied [3] Torts
relief. Tortfeasor as stranger to contract or
relationship, in general
A person must be a stranger to a contract to
tortiously interfere with it.
Holdings: On petition for writ of mandamus, the Supreme
Court held that: 22 Cases that cite this headnote

[1] claims were subject to arbitration under former agent's


agreement to arbitrate any dispute with insurer under or [4] Alternative Dispute Resolution
with respect to contract, and Disputes and Matters Arbitrable Under
Agreement
[2] defendants did not waive right to arbitration by Tortious interference claims between a
litigating for two years. signatory to an arbitration agreement and
agents or affiliates of the other signatory arise
more from the contract than general law, and,
Relief conditionally granted. thus, are subject to arbitration.

29 Cases that cite this headnote

[5] Corporations and Business Organizations

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In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (2006)
49 Tex. Sup. Ct. J. 445

Corporation acts through officers or


agents 39 Cases that cite this headnote

Corporations must act through human


agents. [9] Alternative Dispute Resolution
Evidence
4 Cases that cite this headnote
There is a strong presumption against waiver
under the Federal Arbitration Act (FAA). 9
[6] Alternative Dispute Resolution U.S.C.A. § 1et seq.
Constitutional and statutory provisions
and rules of court 12 Cases that cite this headnote

The Federal Arbitration Act (FAA) directs


courts to place arbitration agreements [10] Alternative Dispute Resolution
on equal footing with other contracts; Suing or participating in suit
accordingly, courts must avoid any rule that Merely taking part in litigation is not enough
makes it easier to avoid arbitration clauses to waive right to arbitration unless a party has
than other clauses of a contract. 9 U.S.C.A. § substantially invoked the judicial process to
1et seq. opponent's detriment.

1 Cases that cite this headnote 49 Cases that cite this headnote

[7] Alternative Dispute Resolution [11] Alternative Dispute Resolution


Disputes and Matters Arbitrable Under Waiver or Estoppel
Agreement
Delay alone generally does not establish
When contracting parties agree to arbitrate all waiver of right to arbitration.
disputes under or with respect to a contract,
they generally intend to include disputes about 32 Cases that cite this headnote
their agents' actions because, as a general rule,
the actions of a corporate agent on behalf of
the corporation are deemed the corporation's
acts. Attorneys and Law Firms

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

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In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (2006)
49 Tex. Sup. Ct. J. 445

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.

Opinion [2] We recently held that Texas law, consistent with


federal law of direct-benefits estoppel, requires a nonparty
PER CURIAM.
to arbitrate a claim “if it seeks, through the claim, to
An insurance company and an independent agent agreed derive a direct benefit from the contract containing the
to arbitrate rather than litigate any dispute “under or arbitration provision.” In re Kellogg Brown & Root, Inc.,
with respect to” their contract. But when the contract 166 S.W.3d 732, 741 (Tex.2005); see also Weekley, 180
was terminated, the agent neither litigated nor arbitrated S.W.3d at 131. While the boundaries of direct-benefits
his dispute with the company; instead, he filed a tortious estoppel are not always clear, nonparties generally must
interference with contract suit against the insurer's parent arbitrate claims if liability arises from a contract with an
company, the agent who took his place, and two officers arbitration clause, but not if liability arises from general
or affiliates of each. The trial court refused to compel obligations imposed by law. Weekley, 180 S.W.3d at 132,
134.
arbitration under the Federal Arbitration Act, 1 and the
Second Court of Appeals denied mandamus relief. We
[3] Tortious interference claims do not fall comfortably
conditionally grant it. See In re Weekley, 180 S.W.3d
in either category. The obligation not to interfere with
127, 130 (Tex.2005) (“Mandamus relief is proper to *761
existing contracts is a general obligation imposed by law.
enforce arbitration agreements governed by the FAA.”).
But it is not imposed on the parties to that contract, as “a
party cannot tortiously interfere with its own contract.”
James Cashion and States General Insurance Company
Holloway v. Skinner, 898 S.W.2d 793, 796 (Tex.1995).
signed a contract on September 28, 1999, in which Cashion
Nor is it imposed on corporate agents, except for actions
agreed to sell health insurance policies as a general agent
completely contrary to corporate interests. Id. In other
for States General. The contract provided that States
words, “a person must be a stranger to a contract to
General could modify or cancel Cashion's commissions
tortiously interfere with it.” Morgan Stanley & Co., Inc.
on 60 days' notice, and either party could terminate the
v. Texas Oil Co., 958 S.W.2d 178, 179 (Tex.1997). Thus,
relationship on 180 days' written notice. The contract also
while liability for tortious interference arises from the
required arbitration of “any dispute between them under
general law, nonliability *762 arises from connections
or with respect to this contract.” 2 States General and with the contract.
Cashion were the only parties to the contract.
[4] For several reasons, we hold that tortious interference
In November 2000, States General gave notice of its claims between a signatory to an arbitration agreement
intent to reduce Cashion's commissions. In December and agents or affiliates of the other signatory arise more
2000, Vesta Insurance Group and Vesta Fire Insurance from the contract than general law, and thus fall on the
Corporation (collectively “Vesta”) purchased 100 percent arbitration side of the scale.
of the stock of States General. A month later, States
General terminated Cashion and replaced him with Jimmy [5] [6] First, corporations must act through human
Walker. agents. Holloway, 898 S.W.2d at 795. As a result, every
contract claim against a corporation could be recast as

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In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (2006)
49 Tex. Sup. Ct. J. 445

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.

*764 Cashion's attorney also averred that Vesta and


We agree with Cashion that he would not be required to
Cronin successfully moved to dismiss his commercial
arbitrate a tortious interference claim against a complete
bribery claims against them, and that Walker
stranger to his contract and its arbitration clause. But
unsuccessfully moved for summary judgment. But the
he did not sue any strangers here; every defendant is a
former motions sought dismissal for lack of standing
current or former owner, officer, agent, or affiliate of
rather than on the merits, and the record reveals nothing
States General, with whom he agreed to arbitrate these
about the latter as it was never tendered into the record
disputes.
or described in any particulars. Without more details than
this, Cashion has not shown that the relators substantially

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In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (2006)
49 Tex. Sup. Ct. J. 445

invoked the judicial process enough to overcome the


Accordingly, without hearing oral argument, see TEX.
strong presumption against waiver.
R. APP. P. 52.8(c), we conditionally grant the writ
of mandamus and direct the trial court to order that
We agree that allowing a party to conduct full discovery,
Cashion's claims proceed to arbitration. We are confident
file motions going to the merits, and seek arbitration only
that the trial court will promptly comply, and our writ will
on the eve of trial defeats the FAA's goal of resolving
issue only if it does not.
disputes without the delay and expense of litigation. See
Com–Tech Assoc. v. Computer Assoc. Int'l, Inc., 938 F.2d
1574, 1576–77 (2nd Cir.1991). We disagree that the record All Citations
here shows that the relators did so, at least not to the
degree necessary to overcome the presumption against 192 S.W.3d 759, 49 Tex. Sup. Ct. J. 445
waiver.

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).

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In re Vesta Ins. Group, Inc., 192 S.W.3d 759 (2006)
49 Tex. Sup. Ct. J. 445

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

Federal Arbitration Act (FAA). 9 U.S.C.A. §


1 et seq.
KeyCite Yellow Flag - Negative Treatment
Distinguished by Rocha v. Marks Transport, Inc., Tex.App.-Hous. (1  17 Cases that cite this headnote
Dist.), December 13, 2016
180 S.W.3d 127
Supreme Court of Texas. [3] Alternative Dispute Resolution
Existence and validity of agreement
In re WEEKLEY HOMES, L.P. Under the Federal Arbitration Act (FAA),
absent unmistakable evidence that the parties
No. 04–0119.
intended the contrary, the courts, rather than
|
arbitrators, must decide gateway matters such
Argued Nov. 30, 2004.
as whether a valid arbitration agreement
|
exists and whether an arbitration agreement is
Decided Oct. 28, 2005.
binding on a nonparty. 9 U.S.C.A. § 1 et seq.
Synopsis
52 Cases that cite this headnote
Background: House purchaser's adult child brought
personal injury action against builder to recover for
asthma allegedly caused by dust from house repairs. [4] Alternative Dispute Resolution
Purchaser and trust that owned the house also sued. What law governs
The 192nd District Court, Merrill Hartman, J., refused Texas procedural rules govern gateway
to compel arbitration of personal injury action. Builder matters such as whether a valid arbitration
petitioned for writ of mandamus. agreement exists and an arbitration agreement
is binding on a nonparty. 9 U.S.C.A. § 1 et seq.

18 Cases that cite this headnote


[Holding:] The Supreme Court, Brister, J., held as a matter
of first impression that arbitration clause was binding on
child, even though she was not party to contract. [5] Alternative Dispute Resolution
Evidence
Party moving to compel arbitration bears
Writ conditionally granted. burden to show a valid agreement to arbitrate.

20 Cases that cite this headnote

West Headnotes (19)


[6] Alternative Dispute Resolution
What law governs
[1] Alternative Dispute Resolution
Generally, under the Federal Arbitration Act
Persons affected or bound
(FAA), state law governs whether a litigant
Nonparties may be bound to an arbitration agreed to arbitrate, and federal law governs
clause when the rules of law or equity would the scope of an arbitration clause. 9 U.S.C.A.
bind them to the contract generally. § 1 et seq.
7 Cases that cite this headnote 24 Cases that cite this headnote

[2] Mandamus [7] Alternative Dispute Resolution


Civil proceedings other than actions What law governs
Mandamus relief is proper to enforce State law applies to whether a nonparty must
arbitration agreements governed by the arbitrate pursuant to agreement governed by

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

the Federal Arbitration Act (FAA), but courts Contractors


will endeavor to keep state law as consistent as A contractor performing repairs has an
possible with federal law. 9 U.S.C.A. § 1 et seq. independent duty under tort law not to injure
bystanders by its activities or by premises
21 Cases that cite this headnote
conditions it leaves behind.

[8] Alternative Dispute Resolution 5 Cases that cite this headnote


Disputes and Matters Arbitrable Under
Agreement [11] Alternative Dispute Resolution
Under Texas and federal law, whether a Persons affected or bound
claim seeks a direct benefit from a contract A nonparty to a contract with an arbitration
containing an arbitration clause and must clause may seek or obtain direct benefits from
be arbitrated turns on the substance of the a contract by means other than a lawsuit, and,
claim, not artful pleading; thus, claims must therefore, may be bound by the arbitration
be brought on the contract and arbitrated if clause.
liability arises solely from the contract or must
be determined by reference to it, but claims 25 Cases that cite this headnote
can be brought in tort and in court if liability
arises from general obligations imposed by
[12] Alternative Dispute Resolution
law.
Persons affected or bound
66 Cases that cite this headnote In some cases, a nonparty may be compelled
to arbitrate if it deliberately seeks and obtains
substantial benefits from the contract itself.
[9] Alternative Dispute Resolution
Persons affected or bound 14 Cases that cite this headnote
Arbitration clause in house purchaser's
contract with builder was binding on
[13] Estoppel
purchaser's adult child, even though she was
Future events; promissory estoppel
nonparty or nonsignatory to the contract,
When a promisor induces substantial action
and the clause required arbitration of
or forbearance by another, “promissory
her personal injury action to recover for
estoppel” prevents any denial of that
asthma allegedly caused by dust from house
promise if injustice can be avoided only by
repairs; the child resided in the house,
enforcement.
directed construction of many features,
repeatedly demanded extensive repairs, 22 Cases that cite this headnote
personally requested and received financial
reimbursement for expenses, conducted
settlement negotiations with builder, obtained [14] Estoppel
substantial and direct benefits from the Future events; promissory estoppel
contract, and could not equitably object to Promissory estoppel does not create liability
the arbitration clause, and she was beneficiary where none otherwise exists, but prevents a
and trustee of trust that owned the house and party from insisting upon his strict legal rights
would benefit from suit by trust and purchaser when it would be unjust to allow him to
on contract. enforce them.

28 Cases that cite this headnote 9 Cases that cite this headnote

[10] Negligence [15] Trusts

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

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.

[18] Alternative Dispute Resolution


Persons affected or bound
I. Background
Direct-benefits estoppel against a nonparty
avoiding arbitration clause after receiving In the summer of 2000, Vernon Forsting contracted with
direct benefits from contract does not apply Weekley for construction of a 4,000 square foot home at
when the benefits alleged are insubstantial or a purchase price of $240,000. At the time, Forsting was
indirect. a seventy-eight year-old widower with an assortment of
health problems. His intention in purchasing such a large
32 Cases that cite this headnote
home was to live with his daughter, Von Bargen (his only
child) and her husband and three sons.
[19] Alternative Dispute Resolution
Persons affected or bound Von Bargen and her husband negotiated directly with
When a nonparty consistently and knowingly Weekley on many issues before and after construction—
insists that others treat it as a party to the paying a $1,000 deposit, selecting the floor plan, signing a

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

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

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

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

contract—in arbitration. 25 Conversely, if they choose not


Here, Von Bargen has not merely resided in the home.
to sue “on the contract,” they may pursue the tort claims
Claiming the authority of the Purchase Agreement, she
in court, but the contract claims will thereby likely be
directed how Weekley should construct many of its

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

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.

[17] [18] Like the equitable doctrine of promissory


Justice WILLETT did not participate in the decision.
estoppel, we do not understand direct-benefits estoppel
to create liability for noncontracting parties that does All Citations
not otherwise exist. As Von Bargen and Weekley
had no contract between them, estoppel alone cannot 180 S.W.3d 127

Footnotes
1 In re FirstMerit Bank, N.A., 52 S.W.3d 749, 755 (Tex.2001).

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

2 See 9 U.S.C. §§ 1–16.


3 In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 n.2 (Tex.1999) (per curiam); EZ Pawn Corp. v. Mancias, 934
S.W.2d 87–88 (Tex.1996) (per curiam).
4 Although Von Bargen asserts that her personal injury claim cannot be arbitrated under the Texas Arbitration Act as it
was not signed by an attorney, see TEX. CIV. PRAC. & REM. CODE § 171.002((a)(3), (C), she does not challenge the
trial court's conclusion that the FAA governs here. The FAA not only contains no such limitation, but also preempts any
state 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).
5 Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003); PacifiCare Health Sys.,
Inc. v. Book, 538 U.S. 401, 407, 123 S.Ct. 1531, 155 L.Ed.2d 578 n.2 (2003).
6 John Wiley & Sons, Inc. v. Livingston, 376 U.S. 543, 546–47, 84 S.Ct. 909, 11 L.Ed.2d 898 (1964).
7 Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 268 (Tex.1992).
8 Id. at 269.
9 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex.2003).
10 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”).
11 Doctor's Assocs., 517 U.S. at 686–87, 116 S.Ct. 1652; First Options of Chi., Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct.
1920, 131 L.Ed.2d 985 (1995); Perry v. Thomas, 482 U.S. 483, 492, 107 S.Ct. 2520, 96 L.Ed.2d 426, n.9 (1987). Parties
may also agree that state law governs their arbitration. Volt Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ.,
489 U.S. 468, 476, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989).
12 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).
13 The United State Supreme Court has not answered this question, though it has applied federal substantive law to bind a
nonparty to labor-union arbitration, a field in which federal law has traditionally yielded little deference to state labor-law
principles. See John Wiley & Sons, 376 U.S. at 548, 84 S.Ct. 909 (citing Textile Workers Union of Am. v. Lincoln Mills,
353 U.S. 448, 456, 77 S.Ct. 912, 1 L.Ed.2d 972 (1957)).
14 Kellogg, 166 S.W.3d at 739.
15 See, e.g., TEX. BUS. CORP. Act art. 2.21(A)(2) (holding shareholders may be liable for corporation's contracts under
alter ego theory if they cause corporation to perpetrate actual fraud for their direct personal benefit); Stine v. Stewart,
80 S.W.3d 586, 590 (Tex.2002) (holding third-party beneficiary could enforce contract); Biggs v. U.S. Fire Ins. Co., 611
S.W.2d 624, 629 (Tex.1981) (holding agent acting within the scope of apparent authority binds the principal).
16 Kellogg, 166 S.W.3d at 738. Accordingly, it is no longer true that “the [Texas] decisions do not even mention the possibility
of additional bases for binding non-signatories to arbitration.” Fleetwood Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1076
(5th Cir. 2002).
17 Doctor's Assocs., 517 U.S. at 686–87, 116 S.Ct. 1652; Allied–Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 281,
115 S.Ct. 834, 130 L.Ed.2d 753 (1995) (“What States may not do is decide that a contract is fair enough to enforce all
its basic terms (price, service, credit), but not fair enough to enforce its arbitration clause. The Act makes any such state
policy unlawful, for that kind of policy would place arbitration clauses on an unequal ‘footing,’ directly contrary to the Act's
language and Congress' intent.”).
18 52 S.W.3d at 755.
19 Id. at 755–56.
20 Kellogg, 166 S.W.3d at 741.
21 Id.
22 Hughes Masonry Co., Inc. v. Greater Clark County Sch. Bldg. Corp., 659 F.2d 836, 838–39 (7th Cir. 1981); Southwestern
Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 495 (Tex.1991).
23 Int'l Paper Co. v. Schwabedissen Maschinen & Anlagen GMBH, 206 F.3d 411, 418 (4th Cir. 2000); DeWitt County Elec.
Coop., Inc. v. Parks, 1 S.W.3d 96, 105 (Tex.1999); DeLanney, 809 S.W.2d at 494.
24 See, e.g., R.J. Griffin & Co. v. Beach Club II Homeowners Ass'n, 384 F.3d 157, 163–164 (4th Cir. 2004); InterGen N.V.
v. Grina, 344 F.3d 134, 145–46 (1st Cir. 2003); Westmoreland v. Sadoux, 299 F.3d 462, 467 (5th Cir. 2002); Fleetwood
Enters., Inc. v. Gaskamp, 280 F.3d 1069, 1076–77 (5th Cir. 2002); DeLanney, 809 S.W.2d at 494; see also Formosa
Plastics Corp. USA v. Presidio Eng'rs & Contractors, Inc., 960 S.W.2d 41, 47 (Tex.1998).

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

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).

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In re Weekley Homes, L.P., 180 S.W.3d 127 (2005)

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.

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In re Wingfield, 171 S.W.3d 374 (2005)

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.

No. 12–05–00151–CV. [2] Mandamus


| Nature of acts to be commanded
July 7, 2005.
For a duty to be “ministerial,” for mandamus
Synopsis purposes, the law must clearly spell out the
Background: State Counsel for Offenders (SCFO), which duty to be performed with such certainty that
had been appointed to represent two indigent inmates nothing is left to the exercise of discretion
charged with crimes allegedly committed during escape or judgment; in other words, the act must
attempt, brought motion to withdraw as counsel for be positively commanded and so plainly
one inmate, citing likely conflict of interest. The 3rd prescribed under the law as to be free from
Judicial District Court, Houston County, Jim Parsons, doubt.
P.J., sitting in the 349th Judicial District, denied the
Cases that cite this headnote
motion and ordered SCFO to erect a “Chinese Wall”
during dual representation. Private attorneys on county
indigent defense appointment list intervened, opposing [3] Mandamus
possible withdrawal state counsel and appointment of Nature and existence of rights to be
private attorneys. The District Court, Jim Parsons, J., protected or enforced
denied SCFO's motions to strike the intervention and The “ministerial act” requirement for
to reconsider the denial of the motion to withdraw, and mandamus relief is a requirement that the
found SCFO's Director in contempt. SCFO and Director relator have a clear right to the relief sought;
petitioned for writ of mandamus. this means that the relief sought must be
clear and undisputable, and its merits must
be beyond dispute, with nothing left to the
Holdings: The Court of Appeals, James T. Worthen, C.J., exercise of discretion or judgment.
held that:
Cases that cite this headnote

[1] trial court had no authority to allow private attorneys


to intervene in criminal proceeding, and [4] Mandamus
Ministerial acts in general
[2] Director's request for mandamus relief was premature. For purposes of ministerial act requirement
for mandamus relief, if there is any discretion
or judicial determination attendant to the act,
Petition conditionally granted in part and denied in part.
it is not “ministerial,” nor is it a “ministerial”
act if the trial court must weigh conflicting
claims or collateral matters that require legal
West Headnotes (14) resolution.

Cases that cite this headnote


[1] Mandamus
Remedy at Law
[5] Mandamus

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


In re Wingfield, 171 S.W.3d 374 (2005)

Exercise of judicial powers and functions Actions in which intervention is


in general authorized
Mandamus may be used to correct judicial Trial court had no authority to allow
action that is contrary to well-settled law, private attorneys on county indigent defense
whether the law is derived from statute, rule, appointment list to intervene in criminal
or clear, binding precedent from a court of proceeding so that attorneys could oppose
superior jurisdiction. trial court's reconsideration of its denial
of motion by State Counsel for Offenders
Cases that cite this headnote (SCFO) to withdraw in part, based on
likely conflict of interest, from its appointed
[6] Mandamus dual representation of two indigent inmates
Specific acts charged with crimes allegedly committed
during escape attempt; civil procedure rule
A court's ruling on withdrawal of counsel is a
on intervention by pleading did not apply to
proper subject of mandamus.
criminal proceedings, and Code of Criminal
1 Cases that cite this headnote Procedure made no provision for a third party
to intervene in a criminal action. Vernon's
Ann.Texas Rules Civ.Proc., Rules 2, 60;
[7] Parties
Vernon's Ann.Texas C.C.P. arts. 1.02, 3.02,
Intervention
26.051(g).
The civil procedure rule on intervention
by pleading does not apply to criminal 6 Cases that cite this headnote
proceedings. Vernon's Ann.Texas Rules
Civ.Proc., Rules 2, 60.
[11] Contempt
3 Cases that cite this headnote Nature and form of remedy and
jurisdiction
An order of contempt is not appealable.
[8] Parties
Actions in which intervention is Cases that cite this headnote
authorized
The Code of Criminal Procedure makes no
[12] Mandamus
provision for a third party to intervene in a
Acts and proceedings of courts, judges,
criminal action. Vernon's Ann.Texas C.C.P.
and judicial officers
arts. 1.02, 3.02.
Generally, if the contemnor has not been
3 Cases that cite this headnote confined, she has no other adequate remedy at
law but mandamus.

[9] Amicus Curiae Cases that cite this headnote


Right to appear and act in general
A true amicus curiae is without interest in
[13] Mandamus
the proceeding in which he appears; he is a
Acts and proceedings of courts, judges,
bystander whose mission is to aid the court to
and judicial officers
act only for the personal benefit of the court.
Director of State Counsel for Offenders
2 Cases that cite this headnote (SCFO) had adequate remedy at law as to
trial court's order finding her in contempt
for failing to comply with prior order
[10] Parties
to erect “Chinese Wall” so that SCFO
could perform dual representation, without

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In re Wingfield, 171 S.W.3d 374 (2005)

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.

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In re Wingfield, 171 S.W.3d 374 (2005)

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)).

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In re Wingfield, 171 S.W.3d 374 (2005)

[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

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In re Wingfield, 171 S.W.3d 374 (2005)

by filing a pleading, subject to being stricken out by the


It is therefore Ordered that State Counsel for Offenders court for sufficient cause on the motion of any party. See
take all reasonable steps to create a “Chinese Wall” TEX.R. CIV. P. 60. However, Rule 60 applies to civil
to protect the confidentiality, secrets, and work cases only. See TEX.R. CIV. P. 2 (Texas Rules of Civil
product and independent professional judgment of Procedure govern the procedure in all actions of a civil
separate defense counsel within the State Counsel for nature.); see also Holloway v. State, 147 Tex.Crim. 106,
Offenders as they discharge their statutory obligation of 108, 178 S.W.2d 688, 689 (Tex.1944) (rules governing civil
representation. actions are applicable and controlling in criminal matters

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

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In re Wingfield, 171 S.W.3d 374 (2005)

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.

The stay of May 2, 2005 is lifted.


CONCLUSION

Relators' petition, the various responses, and the All Citations


supporting record identify the legal issues and resulting
dilemma in rural prison counties when SCFO, because 171 S.W.3d 374
of a potential or an actual conflict of interest, must

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


In re Wingfield, 171 S.W.3d 374 (2005)

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.

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Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

trial court must conduct evidentiary hearing


to determine disputed material facts. Vernon's
KeyCite Yellow Flag - Negative Treatment Ann.Texas Civ.St. art. 225.
Superseded by Statute as Stated in In re Santander Consumer USA, Inc., 
Tex.App.-Hous. (1 Dist.), February 21, 2013 127 Cases that cite this headnote
842 S.W.2d 266
Supreme Court of Texas.
[3] Alternative Dispute Resolution
JACK B. ANGLIN CO., INC. Constitutional and statutory provisions
v. and rules of court
The Honorable Arthur TIPPS, Judge. Commerce
Arbitration
No. D–1750.
Federal Arbitration Act applies to all suits in
|
state and federal court when dispute concerns
Nov. 18, 1992.
a contract evidencing a transaction involving
Construction contractor petitioned for writ of mandamus commerce; Act's application is not limited
to compel arbitration of claims asserted against it by solely to interstate shipment of goods. 9
city. The Supreme Court, Cornyn, J., held: (1) trial court U.S.C.A. § 2.
may summarily decide whether to compel arbitration;
91 Cases that cite this headnote
(2) Federal Arbitration Act applied to city's claims; and
(3) Deceptive Trade Practices Act (DTPA) claims were
subject to arbitration under Federal Arbitration Act. [4] Alternative Dispute Resolution
Constitutional and statutory provisions
Writ conditionally granted. and rules of court
Commerce
Arbitration
West Headnotes (14) Federal Arbitration Act applied to action
by city against contractor arising out of
construction contract dispute; contractor's
[1] Alternative Dispute Resolution transportation of materials across state lines
Disputes and Matters Arbitrable Under pursuant to contract and its preparation
Agreement of billings for the job in a different state
When Texas courts are called on to decide if established interstate activity. 9 U.S.C.A. §§
disputed claims fall within scope of arbitration 1–16.
clause under Federal Arbitration Act, Texas
procedure controls that determination. 9 38 Cases that cite this headnote
U.S.C.A. §§ 1–16; Vernon's Ann.Texas Civ.St.
arts. 224 to 238–6. [5] Alternative Dispute Resolution
Evidence
65 Cases that cite this headnote
In summary procedure to compel arbitration,
trial court and Supreme Court must accept as
[2] Alternative Dispute Resolution true the clear, direct, and positive evidence of
Trial or hearing undisputed affidavit, even of party's agent.
Trial court may summarily decide whether
to compel arbitration on basis of affidavits, 68 Cases that cite this headnote
pleadings, discovery, and stipulations;
however, if material facts necessary to [6] Alternative Dispute Resolution
determine issue are controverted, by opposing Building contracts disputes
affidavit or otherwise admissible evidence,

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Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

City's Deceptive Trade Practices Act restrict enforcement of contractual arbitration


(DTPA) claims, based on contractor's alleged provision. U.S.C.A. Const. Art. 6, cl. 2; 9
misrepresentations regarding quality of its U.S.C.A. §§ 1–16; V.T.C.A., Bus. & C. § 17.42.
services and materials used in its work,
were arbitrable under Federal Arbitration 25 Cases that cite this headnote
Act; although city's misrepresentation claims
were grounded in legal theory distinct from [10] Mandamus
its contract claim, claims were factually Remedy by Appeal or Writ of Error
intertwined and thus are subject to arbitration
Mandamus
provision of contract. 9 U.S.C.A. §§ 1–16;
Nature of acts to be commanded
V.T.C.A., Bus. & C. § 17.42.
Mandamus will issue only to correct clear
49 Cases that cite this headnote abuse of discretion or violation of duty
imposed by law, when that abuse cannot be
remedied by appeal.
[7] States
Particular cases, preemption or 50 Cases that cite this headnote
supersession
Under supremacy clause, Federal Arbitration
[11] Mandamus
Act preempts all otherwise applicable state
Contracts in general
laws to the extent they are inconsistent with
Contractor seeking to enforce arbitration
the Act. U.S.C.A. Const. Art. 6, cl. 2; 9
provision in construction contract dispute
U.S.C.A. §§ 1–16.
between it and city was entitled to issuance
17 Cases that cite this headnote of mandamus because trial court's failure
to correctly apply Federal Arbitration Act
was clear abuse of discretion and contractor
[8] Alternative Dispute Resolution
did not have adequate remedy on appeal;
Constitutional and statutory provisions
absent mandamus relief, contractor would
and rules of court
be deprived of benefits of arbitration clause
Primary purpose of Federal Arbitration Act is it contracted for and purpose of providing
to require courts to compel arbitration when rapid inexpensive alternative to traditional
parties have so provided in their contract, litigation would be defeated. 9 U.S.C.A. §§
despite any state legislative attempts to limit 1–16.
enforceability of arbitration agreements. 9
U.S.C.A. §§ 1–16. 209 Cases that cite this headnote

31 Cases that cite this headnote


[12] Appeal and Error
Necessity of final determination
[9] Alternative Dispute Resolution
Interlocutory orders may be appealed only if
Preemption
permitted by statute.
States
Particular cases, preemption or 267 Cases that cite this headnote
supersession
Federal Arbitration Act preempted [13] Judgment
application of nonwaiver provision of Final judgment
Deceptive Trade Practices Act (DTPA),
“Final judgment” is one which disposes of all
which prevented city from waiving judicial
legal issues between all parties.
determination of its DTPA claims against
construction contractor, to prevent or

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Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

86 Cases that cite this headnote All questions subject to arbitration


under the Contract may be
submitted to arbitration at the
[14] Mandamus
choice of either party to the dispute.
Remedy by Appeal or Writ of Error
Although mandamus relief will not issue Following a mud slide on the downstream side of the
merely because appellate remedy may be dam, the City discovered that excessive moisture had
more expensive and time-consuming than weakened the dam. After remedial work was performed,
mandamus, it will issue when failure to do a dispute arose between the parties over the expenses
so would vitiate and render illusory subject incurred for such work. The City claimed damages for
matter of appeal. extra engineering work and loss of water; Anglin claimed
damages for extra work and the balance of the contract
19 Cases that cite this headnote price. The City then filed this suit for breach of contract
and negligence against Anglin, its bonding company, and
two engineering firms. The City later amended its petition
to add a cause of action against Anglin under the DTPA.
Attorneys and Law Firms
Anglin filed an application to compel arbitration and
*267 Kevin H. Good, M. Kelly Allbritton, Mark M.
stay court proceedings, asserting that all of the City's
Donheiser, Dallas, for petitioner.
claims were subject to arbitration pursuant to the parties'
Mike Willatt, Austin, David Lee Spiller, Jacksboro, contract and must be arbitrated under the Federal Act
Don Holcomb, Austin, John Pierce Griffin, Dallas, for or alternatively the Texas Act. Seeking to establish
respondent. the project's impact on interstate commerce and thus
the applicability of the Federal Act, Anglin tendered
the affidavit of its president, Jack *268 Anglin. 1 In
OPINION response, the City denied that its DTPA claims were
subject to arbitration, claimed that no material issues
CORNYN, Justice. were subject to the arbitration provision, and argued
that arbitration would result in multiple suits because
In this mandamus proceeding we decide three issues: 1) other defendants were not parties to the contract between
whether claims arising out of a construction contract Anglin and the City could not be compelled to arbitrate.
dispute are arbitrable under the Federal Arbitration
Act, 9 U.S.C. § 1—16 (the Federal Act), or the Texas At the hearing on Anglin's application to compel
General Arbitration Act, TEX.REV.CIV.STAT.ANN. arbitration, the trial court admitted Jack Anglin's affidavit
art. 224—238–6 (the Texas Act); 2) whether claims over the City's hearsay objections. The City did not
brought under the Texas Deceptive Trade Practices Act, offer any evidence. The court granted the application in
TEX.BUS. & COMM.CODE § 17.41—17.63 (DTPA), part and denied it in part, ordering arbitration “only
are subject to the Federal Act; and 3) the nature of the with respect to the City's cause of action for breach of
hearing a trial court must conduct on an application contract,” thus denying arbitration of the City's DTPA
for arbitration. Because we hold that the Relator has claim. Anglin first sought a writ of mandamus in the court
established the applicability of the Federal Act and that of appeals, which overruled Anglin's motion for leave to
the Plaintiff's DTPA claims are subject to arbitration, we file its petition. Anglin then filed its motion in this court,
conditionally grant the relief requested. which we granted.

In July 1988, the Jack B. Anglin Company, a Michigan


corporation, agreed to build an earthen dam for the
City of Jacksboro. The contract contains the following I.
arbitration clause:
Arbitration has been defined as:

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Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

is instructed to proceed summarily to the determine the


a contractual proceeding by which issue. TEX.REV.CIV.STAT.ANN. art. 225.
the parties to a controversy or
dispute, in order to obtain a speedy Because the City complains that Anglin failed to offer any
and inexpensive final disposition of evidence other than Jack Anglin's affidavit in support of
matters involved voluntarily select its application to compel arbitration, we must decide how
arbitrators or judges of their own a trial court is to summarily determine the applicability
choice, and by consent submit the of an arbitration clause. The nature of such a hearing is a
controversy to such tribunal for matter of first impression in Texas.
determination in substitution for the
tribunals provided by the ordinary Summary disposition of contested issues is the exception
processes of the law. under our rules of civil procedure. Ordinarily, contested
issues are decided after a plenary hearing, that is, a hearing
Alderman v. Alderman, 296 S.W.2d 312, 315
at which witnesses present sworn testimony in person
(Tex.Civ.App.—San Antonio 1956, writ ref'd) (quoting 6
or by deposition rather than by affidavit. For example,
C.J.S. Arbitration and Award § 1). Arbitration has been
our rules permit trial courts to render final judgments
sanctioned in Texas since at least the time of our first
in civil cases on motions for summary judgment. A
state constitution in 1845. TEX. CONST. art. XVI, §
trial court may render a summary judgment based on a
13 (repealed), interp. commentary (Vernon 1955). The
record consisting of deposition transcripts, interrogatory
public policy of both our state 2 and federal governments answers, and other discovery responses, along with
favors agreements to resolve legal disputes through such the pleadings, admissions, affidavits, stipulations, and
voluntary settlement procedures. See TEX.CIV.PRAC. authenticated or certified public records before the court
& REM.CODE § 154.003 (Texas' Alternative Dispute at the time the motion is heard. TEX.R.CIV.P. 166a(c).
Resolution statute); Southland Corp. v. Keating, 465 U.S. This procedure, as the title suggests, is summary in
1, 10, 104 S.Ct. 852, 858, 79 L.Ed.2d 1 (1984) (citing nature. See In re Price's Estate, 375 S.W.2d 900, 904
“national policy favoring arbitration”). Both Texas and (Tex.1964); see also Dae Won Choe v. Chancellor, Inc.,
federal courts have noted their favorable disposition 823 S.W.2d 740, 742 (Tex.App.—Dallas 1992, no writ)
toward such agreements. See e.g., Volt Information (summary judgment serves to summarily dispose of
Sciences v. Board of Trustees, 489 U.S. 468, 476, 109 S.Ct. patently unmeritorious cases); Beech Aircraft Corp. v.
1248, 1254, 103 L.Ed.2d 488 (1989); Southland Corp., 465 Jinkins, 698 S.W.2d 722, 728 (Tex.App.—Houston [1st
U.S. at 14–16, 104 S.Ct. at 860–61; Neal v. Hardee's Food Dist.] 1985), aff'd, 739 S.W.2d 19 (Tex.1987) (summary
Sys. Inc., 918 F.2d 34, 37 (5th Cir.1990); House Grain Co. judgment summarily disposes of cases when no questions
v. Obst, 659 S.W.2d 903, 905 (Tex.App.—Corpus Christi of fact and judgment may be rendered as a matter of
1983, writ ref'd n.r.e.); Manes v. Dallas Baptist College, law). Our rules also prescribe summary determination
638 S.W.2d 143, 145 (Tex.App.—Dallas 1982, writ ref'd of motions to transfer venue, objections to discovery
n.r.e.). Efficiency and lower costs are frequently cited as requests, and special appearances contesting jurisdiction.
the main benefits of arbitration. 3 These matters are likewise determinable on the basis
of affidavits, pleadings, the results of discovery, and
the stipulations of the parties. TEX.R.CIV.P. 87, 88
(venue); TEX.R.CIV.P. 166b(4) (objections to discovery);
II.
TEX.R.CIV.P. 120a(3) (special appearance). 4
[1] When Texas courts are called on to decide if disputed
claims fall within the scope of an arbitration clause [2] Because the main benefits of arbitration lie in
under the Federal Act, Texas procedure controls that expedited and less expensive disposition of a dispute, and
determination. See Southland Corp., 465 U.S. at 16, n. 10, the legislature has mandated that a motion to compel
104 S.Ct. at 861, n. 10; see also Batton v. Green, 801 S.W.2d arbitration be decided summarily, we think it unlikely
923, 928 (Tex.App.—Dallas 1990, no writ). Under the that the legislature intended the issue to be resolved
Texas Act, when a party contests the *269 applicability following a full evidentiary hearing in all cases. 5 We
of an arbitration provision in an agreement, the court also envision that the hearing at which a motion to

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Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

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

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Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

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

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Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

[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 ...

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Jack B. Anglin Co., Inc. v. Tipps, 842 S.W.2d 266 (1992)
61 USLW 2376

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

KeyCite Yellow Flag - Negative Treatment West Headnotes (13)


Declined to Follow by Soto v. State Industrial Products, Inc., 1st Cir. 
(Puerto Rico), April 15, 2011
128 S.W.3d 223 [1] Alternative Dispute Resolution
Supreme Court of Texas. Arbitrability of Dispute
Party attempting to compel arbitration must
J.M. DAVIDSON, INC. first establish that dispute in question falls
v. within scope of valid arbitration agreement.
Chelsey J. WEBSTER.
110 Cases that cite this headnote
No. 01–0774.
| [2] Alternative Dispute Resolution
Argued Dec. 11, 2002. Scope and Standards of Review
|
Trial court's determination of arbitration
Decided Dec. 31, 2003.
agreement's validity is legal question subject to
Synopsis de novo review.
Background: Employer filed motion to compel arbitration
94 Cases that cite this headnote
of former employee's retaliatory discharge claim. The
343rd District Court, San Patricio County, Alonzo
Torres Rodriguez, J., denied motion, and employer filed [3] Alternative Dispute Resolution
interlocutory appeal. The Corpus Christi-Edinburg Court Evidence
of Appeals, Hinojosa, J., 49 S.W.3d 507, affirmed, and If trial court finds valid arbitration agreement,
employer appealed. burden shifts to party opposing arbitration
to raise affirmative defense to enforcing
arbitration.
[Holding:] The Supreme Court, Wallace B. Jefferson, J.,
158 Cases that cite this headnote
held that provision of arbitration agreement, indicating
that employer reserves right to unilaterally abolish
or modify any personnel policy without prior notice, [4] Alternative Dispute Resolution
was ambiguous as to whether unilateral termination Evidence
right applied to parties' agreement to arbitrate or only Presumption favoring arbitration arises only
to personnel policies concerning at-will employment after party seeking to compel arbitration
relationship, warranting remand for determination of proves that valid arbitration agreement exists.
what parties intended by provision.
173 Cases that cite this headnote

Reversed and remanded.


[5] Alternative Dispute Resolution
Schneider, J., dissented and filed opinion in which O'Neill, Construction
J., joined. Arbitration agreements are interpreted under
traditional contract principles.
Smith, J., dissented and filed opinion.
55 Cases that cite this headnote

[6] Alternative Dispute Resolution


Formal Requisites

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

Employer attempting to enforce arbitration Construing Whole Contract Together


agreement must show that agreement meets all In construing written contract, court's
requisite contract elements. primary concern is to ascertain true intentions
of parties as expressed in instrument; to
32 Cases that cite this headnote
achieve this objective, court must examine and
consider entire writing in effort to harmonize
[7] Labor and Employment and give effect to all provisions of contract so
Formation; Requisites and Validity that none will be rendered meaningless.
Labor and Employment
312 Cases that cite this headnote
Renewal or Continuation
At-will employment does not preclude
formation of other contracts between [11] Contracts
employer and employee, so long as neither Construction as a Whole
party relies on continued employment as No single contract provision, taken alone,
consideration for contract. will be given controlling effect; rather, all
provisions must be considered with reference
13 Cases that cite this headnote to whole instrument.

120 Cases that cite this headnote


[8] Alternative Dispute Resolution
Modification or Termination
Provision of arbitration agreement, indicating [12] Contracts
that employer reserves right to unilaterally Existence of Ambiguity
abolish or modify any personnel policy Contract is unambiguous if it can be given
without prior notice, was ambiguous as to definite or certain legal meaning.
whether unilateral termination right applied
to parties' agreement to arbitrate or only 97 Cases that cite this headnote
to personnel policies concerning at-will
employment relationship, warranting remand [13] Contracts
for determination of what parties intended Existence of Ambiguity
by provision; additional personnel policy
Contracts
language was not included in paragraph
Ambiguity in General
that contained such provision, but was
If contract is subject to two or more
only included in subsequent paragraph that
reasonable interpretations after applying
discussed unrelated unemployment issues.
pertinent rules of construction, contract is
57 Cases that cite this headnote ambiguous, creating fact issue on parties'
intent.

[9] Contracts 131 Cases that cite this headnote


Ambiguity in General
Deciding whether contract is ambiguous is
question of law for court.
Attorneys and Law Firms
86 Cases that cite this headnote
*225 Myra K. Morris, Corpus Christi, Chester J.
[10] Contracts Makowski, Nathan Wesely, Houston, Royston Rayxor
Language of Contract Vickery & Williams, for petitioner.

Contracts Richard Daniel Nielsen, Corpus Christi, for respondent.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

as the “Company”), for itself and all of its officers,


Opinion directors, agents and employees, all of which mutually
agree and contract that any and all claims, disputes
Justice JEFFERSON delivered the opinion of the Court,
or controversies, whether based on the Construction
joined by Chief Justice PHILLIPS, Justice HECHT,
[sic], Statutes, Code(s), Ordinances, Rules, Orders
Justice OWEN, Justice WAINWRIGHT, and Justice
Regulations, and/or common law of he [sic] United
BRISTER.
States and/or of any State, and/or all subdivisions, of
This is an interlocutory appeal of a trial court's order either, and/or asserted on the basis of contract, quasi-
denying an employer's motion to compel arbitration under contract, personal injury, tort, offenses, quasi-offenses
the company's alternative dispute resolution policy. We or otherwise, or arising out of, or in any way relating
recently held that arbitration agreements between an to this application for employment, or any other
employer and an at-will employee are enforceable when application for employment that I may have previously
there is an agreement that is valid under traditional submitted, or may submit in the future, or the
contract principles. In re Halliburton Co., 80 S.W.3d 566, Company's decision to hire or not to hire me; including
573 (Tex.2002). Here, we consider whether an arbitration the arbitrability of any claim, dispute or controversy
agreement between an employer and an employee is shall be exclusively and finally settled by binding
enforceable if the employer reserves the unilateral right arbitration administered by, Conducted [sic] under
to modify or terminate personnel policies without notice. the Arbitration Rules of, and before the Arbitrator(s)
The trial court denied the employer's motion to compel of *226 an Arbitration Tribunal of the National
arbitration, and the court of appeals affirmed. 49 S.W.3d Association for Dispute Resolution, Inc., pursuant to
507. the provisions of the Federal Arbitration Act and/or
any applicable Alternative Dispute Resolutions Act,
We conclude that the arbitration agreement is ambiguous whichever shall have the broadest effect, all claims
because it is not possible to determine from the document of any rights to the contrary, including any right to
itself whether the unilateral termination right applies to trail [sic] by jury, being hereby expressly waived. The
the parties' agreement to arbitrate, or only to “personnel Arbitration Tribunal shall be the sole and existence [sic]
policies” concerning the at-will employment relationship. of its jurisdiction over all parties and issues. Judgment
Accordingly, we reverse the court of appeals' judgment upon any award may be entered in any Court—State or
and remand to the trial court for further proceedings Federal—having jurisdiction.
consistent with this opinion.
I hereby certify that all of the information and
statements made or furnished on this application
are true and correct and I hereby grant the
I “Company” permission to verify such information and
statements. I understand that any false statement or
omission on this application may be considered as
Background
sufficient cause for rejection of this application, or
J.M. Davidson, Inc. hired Chelsey Webster as a mechanic for dismissal, if such false statement or omission is
in December 1997. Soon after, Davidson asked Webster discovered subsequent to my employment. I further
to sign a one-page document as a condition of his at- understand that the “Company” may perform a pre-
will employment. Webster signed the document, which employment investigation to determine my suitability
provided: for employment and I authorize the “Company” to have
access to any and all records concerning my education
J.M. Davidson, Inc. or employment background. I hereby authorize any
person or Entity having such information to release
ALTERNATIVE DISPUTE RESOLUTION POLICY
same to the “Company”. I understand that the pre-
EMPLOYMENT APPLICATION LANGUAGE employment investigation may include contacting my
previous employers, and I hereby authorize such
I, the applicant whose signature is affixed hereto, and previous employers to release any and all information
the above listed Company, (hereinafter referred to relating to my employment to the “Company”.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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

[4] [5] [6] [7] Although we have repeatedly expressed a


Davidson then filed an interlocutory appeal seeking to
strong presumption favoring arbitration, the presumption
compel arbitration under the Texas Arbitration Act, and
arises only after the party seeking to compel arbitration
a mandamus action to compel arbitration pursuant to the
proves that a valid arbitration agreement exists. See,
Federal Arbitration Act. The court of appeals denied the
e.g., Prudential Secs., Inc. v. Marshall, 909 S.W.2d 896,

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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.

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

which contains the promise to arbitrate, but appears only


[9] [10] [11] [12] [13] In construing this agreement, in the second paragraph, which discusses these other,
we first determine whether it is possible to enforce the unrelated employment issues.
contract as written, without resort to parol evidence.
Deciding whether a contract is ambiguous is a question In their attempt to construe the agreement, the court
of law for the court. Coker v. Coker, 650 S.W.2d 391, 394 of appeals' justices could not agree on the scope of
(Tex.1983). In construing a written contract, the primary Davidson's right to terminate the agreement. Although
concern of the court is to ascertain the true intentions silent on ambiguity, the majority held that the “personnel
of the parties as expressed in the instrument. R & P policy” language permitted Davidson to terminate the
Enters. v. LaGuarta, Gavrel & Kirk, Inc., 596 S.W.2d arbitration agreement at any time. 49 S.W.3d at 514
517, 518 (Tex.1980); City of Pinehurst v. Spooner Addition (“Although Davidson agreed to submit ‘any and all
Water Co., 432 S.W.2d 515, 518 (Tex.1968). To achieve claims, disputes or controversies' arising between it and
this objective, we must examine and consider the entire appellee to arbitration, it explicitly retained the absolute
writing in an effort to harmonize and give effect to all the right to modify or terminate the policy at any time.”).
provisions of the contract so that none will be rendered Conversely, the dissent held that Davidson's unilateral
meaningless. Universal C.I.T. Credit Corp. v. Daniel, 150 right to terminate or modify personnel policies did not
Tex. 513, 243 S.W.2d 154, 158 (1951). No single provision *230 affect the parties' separate agreement to arbitrate;
taken alone will be given controlling effect; rather, all in fact, the dissent noted that “[i]n the event the employer
the provisions must be considered with reference to the exercised that right [to modify or terminate] the employee
whole instrument. Myers v. Gulf Coast Minerals Mgmt. retained the right to force arbitration on the issue.” Id. at
Corp., 361 S.W.2d 193, 196 (Tex.1962); Citizens Nat'l 518 (emphasis added). If the dissent had interpreted the
Bank v. Tex. & P. Ry. Co., 136 Tex. 333, 150 S.W.2d “personnel policy” language as applying to the arbitration
1003, 1006 (1941). A contract is unambiguous if it can be agreement itself, Webster would not have the right to
given a definite or certain legal meaning. Columbia Gas seek arbitration on the issue following termination of the
Transmission Corp. v. New Ulm Gas, Ltd., 940 S.W.2d arbitration agreement.
587, 589 (Tex.1996). On the other hand, if the contract
is subject to two or more reasonable interpretations after The proper interpretation of this language is critical. 2 In
applying the pertinent rules of construction, the contract Halliburton, we rejected the argument that the arbitration
is ambiguous, creating a fact issue on the parties' intent. Id. agreement at issue was illusory because, among other
things, it required ten days notice of any modification or
In this case, we cannot give the arbitration agreement termination and stated that any such amendment would
a definite or certain legal meaning because it is unclear apply prospectively only. 80 S.W.3d at 569–70. Thus,
whether Davidson's unrestricted right to “unilaterally we held that “Halliburton cannot avoid its promise to
abolish or modify any personnel policies” gives it the arbitrate by amending the provision or terminating it
right to terminate the arbitration agreement without altogether.” Id. at 570. The termination provision in this
notice. (Emphasis added.) Stated more succinctly, is the case does not contain similar limitations. Accordingly,
arbitration agreement a “personnel policy”? we hold that the agreement is ambiguous and must be
remanded to the trial court to determine what the parties
We cannot answer this question by reading the intended by the clause “The ‘Company’ reserves the *231
agreement's terms. The agreement is titled “Alternative right to unilaterally abolish or modify any personnel
Dispute Resolution Policy” on one line, and policy without prior notice.”
“Employment Application Language” on the next. The
document addresses several issues that refer specifically to We add a brief response to the dissents. The proper
the employment application process but have no bearing interpretation of this document has split both the court
on alternative dispute resolution. For example, Webster of appeals and this Court. Justice Smith contends the
agreed to submit to a background check and physical agreement is unambiguous and clearly compels Webster
examination. He promised to abide by company policies to arbitrate. Justice Schneider says the agreement is
and acknowledged that his employment was at-will. The unambiguous but clearly illusory. We will not reiterate
“personnel policy” language is not in the first paragraph, our thoughts on ambiguity, but believe it helpful to

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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”).

After considering the evidence, the trial court denied the


motion to compel arbitration without stating a reason
FACTS
for the denial. The record must be construed in a light
Chelsey Webster (“Webster”) went to work for J.M. favorable to supporting the judgment. See Keller v. Nevel,
Davidson, Inc. (“Davidson”). A few days after beginning 699 S.W.2d 211, 212 (Tex.1985). Davidson appealed, and
employment, Webster signed the agreement that is at the the court of appeals affirmed the trial court.
heart of the controversy in this matter. The document,
prepared by Davidson, is titled “Alternative Dispute
Resolution Policy” (“ADR Policy”). 1 It is undisputed ANALYSIS
that *233 Webster was employed by Davidson at the time
he signed the agreement. In deciding the motion to compel arbitration, the trial
court should have considered two issues: 1) was there a
Approximately eleven months after commencing his valid arbitration agreement; and 2) if so, did the agreement
employment, Webster was injured on the job. Webster encompass the claim? See In re Oakwood Mobile Homes,
filed for workers' compensation benefits. Then, about one Inc., 987 S.W.2d 571, 573 (Tex.1999); Dallas Cardiology
month later, Davidson terminated Webster. Webster filed Assocs., P.A. v. Mallick, 978 S.W.2d 209, 212 (Tex.App.-
suit, alleging Davidson fired him in retaliation for filing a Texarkana 1998, pet. denied); Dalton Contractors, Inc.
workers' compensation claim. Davidson sought to enforce v. Bryan Autumn Woods, Ltd., 60 S.W.3d 351, 353
the arbitration clause contained in the ADR Policy that (Tex.App.-Houston [1st Dist.] 2001, no pet.). The first of
Webster had signed. these issues is the subject of this appeal; thus, we must
decide if the trial court was correct in concluding there was
A hearing on Davidson's Motion to Compel Arbitration no valid arbitration agreement.
was held before the trial court. During the hearing,
Davidson introduced a copy of the arbitration policy
A. Standard of Review
signed by Webster. Davidson never signed the agreement.
But, Webster has never complained about the absence of We review a trial court's decision to deny a motion
Davidson's signature. to compel arbitration under a legal sufficiency or “no
evidence” standard of review when factual findings are
Davidson had the initial burden of proof to establish in dispute. See Certain Underwriters v. Celebrity Inc., 950
the arbitration agreement's existence and to show that S.W.2d 375, 377 (Tex.App.-Tyler 1996, writ dism'd w.o.j.).
the claims asserted against it fell within the arbitration However, in this case, the only issue before us is the
agreement's scope. See Williams Indus. Inc. v. Earth Dev. trial court's legal interpretation of the arbitration clause;
Sys. Corp., 110 S.W.3d 131, 134 (Tex.App.-Houston [1st no findings of fact were made. Thus, de novo review is

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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).

Here, the ADR Policy reserves Davidson's right to


The Court ignores these well-settled principles of contract
“unilaterally abolish or modify any personnel policy
interpretation when it concludes the agreement is
without prior notice.” Under the plain language of the
ambiguous. Davidson's right to unilaterally abolish or
contract, Davidson reserved the right to abolish or modify
modify any personnel policy without prior notice must
any personnel policy. As explained above, the unilateral
be given its plain and ordinary meaning. Thus, the
termination right would also apply to the agreement to
unilateral termination language must mean that Davidson
arbitrate all claims. By retaining the right to terminate the
can cancel or alter any personnel policy without informing
ADR Policy at any time, Davidson can avoid arbitration.
Webster. Although I ultimately conclude that the ADR
Thus, Davidson is not bound to its promise to arbitrate,
Policy is not binding because it is illusory, the agreement
and its promise to avoid litigation does not amount
is not ambiguous.
to consideration. See In re Halliburton, 80 S.W.3d 566,
570 (Tex.2002) (reciprocal promises are not sufficient
C. The ADR Policy is unenforceable because it is illusory. if one party can avoid its promise). Because there is
no consideration for the ADR Policy, the agreement is
In my view, the unilateral termination right in the ADR illusory and unenforceable.
Policy makes Davidson's performance optional as to the
entire policy, and thus, renders the ADR Policy illusory.
Thus, I would find that the agreement between Davidson 2. Davidson's attempts to create consideration fail.
and Webster fails to rise to the level of a contract as it lacks
In an attempt to create consideration where none
consideration.
exists, Davidson claims that the language regarding the
unilateral termination right complied with contractual
1. The ADR Policy does not contain consideration. mutuality requirements because, “If ... Davidson changed
the ADR policy, or abolished it altogether, the changes
Consideration is an essential element for a valid, would have applied to both parties.” However, because
enforceable contract. Federal Sign v. Texas S. Univ., 951 Davidson alone had the unilateral right to terminate or
S.W.2d 401, 408–09 (Tex.1997). If mutual, reciprocal change the agreement, the agreement is illusory. It is

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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.,

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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.

There is no mystery to drafting an enforceable arbitration


Justice Smith also attempts to distinguish our holding in
agreement. Capable counsel know that limitations on
Hathaway by noting that in that case, while we required
an employer's right to terminate the agreement are
an employer making a change to an at-will employment
necessary so the agreement is not illusory. See, e.g.,
policy to provide notice, we did not specify that the notice
In re Tenet Healthcare, Ltd., 84 S.W.3d at 766–67
had to be given before the change was made. Justice
(arbitration provision was enforceable because the right
Smith contends that under our decision in Hathaway,
to terminate the agreement specifically excepted the
notice could be “either in advance of or contemporaneous
arbitration agreement); In re Kellogg Brown & Root, 80
with the policy change.” 128 S.W.3d 242. However,
S.W.3d 611, 616 (Tex.App.-Houston [1st Dist.] 2002, orig.
Justice Smith misunderstands our holding in Hathaway.
proceeding) (arbitration agreement enforceable because it
In Hathaway, we explained the employee must have
provided that it could be amended or terminated by the
knowledge of the employer's proposed modification to an
company by giving at least 10 days notice to employees
at-will employment policy to constitute effective notice;
and that such amendment would not apply to a dispute
that is, the employee must “know the nature of the
that had been initiated); In re Jebbia, 26 S.W.3d 753, 758
changes and the certainty of their imposition.” Hathaway,
(Tex.App.-Houston [14th Dist.] 2000, orig. proceeding).
711 S.W.2d at 229. Requiring the employer to prove
unequivocal notification of changes to the employment
In this agreement, however, there was no limitation
terms was based, in part, on fairness to the employee.
to Davidson's right to terminate, amend, or cancel
See id. The requirement that an employee be aware
the agreement. *239 The only consideration for the
that changes to the employment policy are certain to
agreement was continued at-will employment, which
be imposed implies that there must be prior notice. It
amounts to no consideration. Light, 883 S.W.2d at
is unreasonable to conclude contemporaneous notice of
644. Thus, the arbitration agreement is illusory and
a policy change is permissible under Hathaway. Indeed,
unenforceable.
permitting an employer to give contemporaneous notice
of changed employment terms undermines Hathaway's
concerns for fairness to an employee and stretches our
holding in Hathaway too far. CONCLUSION

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J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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.

Justice SMITH, dissenting. II


I share the Court's view that the contract executed by
The contract states that Davidson “reserves the right
the parties is far from a model of precise drafting,
to unilaterally abolish or modify any personnel policy
but I disagree that the phrase “any personnel policy”
without prior notice.” The Court professes an inability
cannot be given a definite legal meaning. Like Justice
to decipher whether the arbitration policy ratified by the
Schneider, I believe that the arbitration policy falls within
contract is a “personnel *240 policy” and, sua sponte,
the ambit of the phrase “any personnel policy.” However,
therefore concludes that the contract is ambiguous.
I disagree with the portion of Justice Schneider's dissent
However, uncertainty or lack of clarity is not enough
that concludes the entire contract is unenforceable.
to render a contract ambiguous. Universal C.I.T. Credit
Corp. v. Daniel, 150 Tex. 513, 243 S.W.2d 154, 157
I would hold that the contractual provision allowing
(1951) (“It must be conceded that there is an absence of
Davidson to “abolish or modify any personnel policy
artistry in the grammatical construction and punctuation
without prior notice” applies to the company's alternative
of paragraph 1 of the contract, but is its meaning when
dispute resolution policy, but that it does not waive
properly read and interpreted so dubious as to subject the
Webster's right under Texas at-will employment law to
contract to the charge of ambiguity, thereby justifying the
contemporaneous notice of any change in Davidson's
court in calling into play the rule of strong construction
ADR policy. The rules of contract interpretation
against the author of an instrument? We think not.”);
counsel against construing termination clauses as being
Preston Ridge Fin. Servs. Corp. v. Tyler, 796 S.W.2d 772,
retroactively exercisable and in favor of interpreting
777 (Tex.App.-Dallas 1990, writ denied); Med. Towers,
contracts to be valid. Because the relevant provision
Ltd. v. St. Luke's Episcopal Hosp., 750 S.W.2d 820, 822
is properly construed as applying only prospectively to
(Tex.App.-Houston [14th Dist.] 1988, writ denied).
disputes arising after contemporaneous notice to Webster
of Davidson's decision to abolish or modify its ADR
Contractual provisions must be considered with reference
policy, it does not render illusory the parties' otherwise
to the entire instrument. Myers v. Gulf Coast Minerals
clearly enforceable arbitration agreement.
Mgmt. Corp., 361 S.W.2d 193, 196 (Tex.1962). The
main heading of the parties' contract reads “Alternative
Dispute Resolution Policy” and the text below purports
I to determine the relationship between Davidson and its
personnel. See E.H. Perry & Co. v. Langbehn, 113 Tex.
Whether an agreement imposes a duty on the parties to 72, 252 S.W. 472, 474–75 (1923) (title of an instrument,
arbitrate a dispute is a matter of contract interpretation like every other portion of a contract, may be consulted
and a question of law for the court. Tenet Healthcare in determining its meaning). In this context, we must give

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 13


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 14


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

Monday through Wednesday. Far


The Hathaway requirements are applicable here because from requiring that the employer
the parties sought to modify their pre-existing at-will express an explicit intent to pay
employment relationship to include binding arbitration. $10 per hour for Monday through
The contract, including the arbitration agreement therein, Wednesday's work notwithstanding
is incident to the at-will employment relationship between the employer's freedom to reduce
Davidson and Webster and refers to this relationship wages at any time, the Third
in several places. Therefore, if Davidson abolished or Circuit held that what would have
modified its arbitration policy, this would effect a change to be preserved explicitly would
in the terms of the at-will employment relationship be an employer's right to *243
between it and Webster. apply the reduced wage retroactively
to Monday through Wednesday's
“Words of promise which by their terms make work. A contrary rule would lack
performance entirely optional with the ‘promisor’ do any basis in contract law....
not constitute a promise.” RESTATEMENT (SECOND)
OF CONTRACTS § 77 cmt. a (1981). However, “[a] Abbott v. Schnader, Harrison, Segal & Lewis, LLP, 805
limitation on the promisor's freedom of choice need not be A.2d 547, 559 (Pa.Super.Ct.2002) (quoting Amatuzio v.
stated in words. It may be an implicit term of the promise, Gandalf Sys. Corp., 994 F.Supp. 253, 266 (D.N.J.1998)).
or it may be supplied by law.” Id. cmt. d. The provision at
issue here, while disclaiming advance notice, is consistent Indeed, Justice Schneider's dissent 7 and, if its second
with Hathaway's contemporaneous notice requirement footnote is more than mere dicta, the Court's
and, as such, should not be read as an attempt to disclaim opinion, would render the entire at-will employment
this implied, default legal prerequisite for modifying the contract between Webster and Davidson illusory because
conditions of an at-will employment relationship. 6 Webster's rate of compensation and all other “personnel
policies” would be subject to unilateral, retroactive
Other courts have determined that when a contractual change by Davidson. Certainly, this is not a reasonable
termination or modification provision does not state interpretation.
whether it applies prospectively or retroactively, the
default interpretation should be prospective only, as this Because the disputed provision did not expressly authorize
avoids nullifying the intent of the parties to form an Davidson to retroactively alter the arbitration agreement,
agreement. See Barker v. Ceridian Corp., 122 F.3d 628, I would follow the rule that, unless expressly stated
638 (8th Cir.1997) (where retirement plan was silent otherwise, such provisions should be interpreted to apply
regarding whether terms could be modified retroactively, only prospectively. Consequently, Davidson would be
prospective application favored because it avoids finding perpetually bound to arbitrate any dispute that arose
promise illusory); Kemmerer v. ICI Ams., Inc., 70 F.3d 281, prior to Davidson informing Webster of a change in its
287–88 (3d Cir.1995). arbitration policy. As such, Davidson could not, after a
dispute had arisen, let alone during the final stages of
Several other courts have adopted Kemmerer's rationale: binding arbitration, implement a change in its arbitration
policy that would be applicable to that dispute.
The court's reasoning [in Kemmerer]
can be captured in a simple Finally, reading the contract as allowing Davidson to
illustration. If an employee is unilaterally abolish or modify the arbitration policy only
promised $10 per hour effective prospectively with contemporaneous notice is supported
Monday, and told that her wage by the long-standing rule that contracts should be
can be reduced at any time, and construed in favor of validity. See Wood Motor Co.,
on Wednesday her wage is cut to Inc. v. Nebel, 150 Tex. 86, 238 S.W.2d 181, 183 (1951)
$5 effective Thursday, her employer (“It is elementary that if a contract is susceptible of two
cannot refuse on pay day to give constructions, one of which would render it valid and the
her $10 per hour for her work on other void, the former will be adopted.”); Harris v. Rowe,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 15


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

593 S.W.2d 303, 306 (Tex.1979); Lavaca Bay Autoworld v.


Marshall Pontiac Buick Oldsmobile, 103 S.W.3d 650, 657 IV
(Tex.App.-Corpus Christi 2003, no pet.). Since the parties
are presumed to know the law and intend their contract to By binding itself to arbitration until it provides
have legal effect, their contract will be construed in view contemporaneous notice of a new dispute resolution
of this presumption. Foard County v. Sandifer, 105 Tex. policy that will apply only prospectively, Davidson
420, 151 S.W. 523, 524 (1912); Dewhurst v. Gulf Marine has provided consideration to Webster, and the
Inst. of Tech., 55 S.W.3d 91, 97 (Tex.App.-Corpus Christi parties' contract is therefore not illusory. If the *244
2001, pet. denied). We have specifically held that contracts contract were interpreted as allowing Davidson to
should be construed in favor of mutuality. Tex. Gas Utils. retroactively revoke the arbitration agreement without
Co. v. Barrett, 460 S.W.2d 409, 412 (Tex.1970). contemporaneous notice, it would either be illusory or
unconscionable, as Davidson could decide after a dispute
Under this prospective construction, whereby Davidson arises whether it prefers to arbitrate or go to court.
is free to alter its arbitration policy after giving However, that is not this case.
contemporaneous notice only as to claims that had not
yet arisen, it is clear that the contract is not illusory. Based on the foregoing, I conclude that the contract
Once the parties' contract is read as not disclaiming is neither ambiguous nor illusory, and therefore validly
the contemporaneous notice requirement set forth in compels the parties to arbitrate their dispute. Accordingly,
Hathaway, this case becomes indistinguishable from In I respectfully dissent.
re Halliburton Co., 80 S.W.3d 566 (Tex.2002) in which
we held that a similar arbitration agreement was not
All Citations
illusory because the unilateral termination provision could
be exercised only with notice. 128 S.W.3d 223, 20 IER Cases 1315, 47 Tex. Sup. Ct. J.
196

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 16


J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223 (2003)
20 IER Cases 1315, 47 Tex. Sup. Ct. J. 196

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 17


Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542 (2014)
57 Tex. Sup. Ct. J. 584

433 S.W.3d 542 West Headnotes (7)


Supreme Court of Texas.

KENNEDY HODGES, L.L.P., Petitioner, [1] Alternative Dispute Resolution


v. Scope and standards of review
Ventura GOBELLAN, Jr. and Whether a party's conduct waives its right to
Paula Gobellan, Respondents. arbitrate is a question of law the appellate
court reviews de novo.
No. 13–0321.
| 6 Cases that cite this headnote
May 16, 2014.

Synopsis [2] Alternative Dispute Resolution


Background: Law firm filed suit against former firm Suing or participating in suit
clients under contingency fee agreement, after clients Alternative Dispute Resolution
retained former associate who subsequently left firm. Evidence
Law firm subsequently decided to intervene in clients' A party waives the right to arbitrate by
wrongful death suit against employer and moved to substantially invoking the judicial process to
compel arbitration of fee agreement dispute in that the other party's detriment or prejudice, and
action. The 24th District Court, Jackson County, Kemper the strong presumption against waiver renders
Stephen Williams, J. denied motion to compel arbitration this hurdle a high bar.
based on determination that it waived arbitration, and
law firm appealed. The Corpus Christi Court of Appeals, 13 Cases that cite this headnote
433 S.W.3d 579, 2013 WL 1092239, affirmed. Law firm
petitioned for review. [3] Alternative Dispute Resolution
Waiver or Estoppel
Whether a party has waived arbitration is
Holdings: The Supreme Court held that: decided on a case-by-case basis by assessing
the totality of the circumstances.
[1] law firm did not waive arbitration on claims under
contingency fee agreement by litigating claims against 2 Cases that cite this headnote
former associate for breach of employment agreement and
tort claims; [4] Alternative Dispute Resolution
Suing or participating in suit
[2] law firm did not waive arbitration by filing pleading
In the context of a determination as to
in suit against clients, followed by motion for no-answer
whether a party has waived the right to
default judgment; and
arbitration by substantially invoking the
judicial process, prejudice to the party
[3] law firm did not waive arbitration by intervening in
opposing arbitration is inherent unfairness in
clients' wrongful death suit against client's employer and
terms of delay, expense, or damage to a party's
by moving to compel arbitration.
legal position that occurs when the party's
opponent forces it to litigate an issue and later
Petition for review granted; judgment of Court of Appeals seeks to arbitrate that same issue.
reversed; remanded to District Court.
11 Cases that cite this headnote

[5] Alternative Dispute Resolution

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542 (2014)
57 Tex. Sup. Ct. J. 584

Suing or participating in suit


John W. Griffin Jr., Robert Edward McKnight Jr.,
Law firm did not waive arbitration on claims
Marek, Griffin & Knaupp L.L.P., Robert P. Houston,
under contingency fee agreement against
Attorney at Law, Victoria, TX, for Respondents.
former firm clients by litigating claims against
former associate who took clients with him Opinion
when he left firm; clients were not parties in
law firm's suit against former associate for PER CURIAM.
breach of employment agreement and tort
claims, law firm did not litigate with clients, A party waives its right to arbitration by substantially
and firm's litigation with former associate did invoking the judicial process to the other party's detriment
not cause delay, expense, or damage to clients' or prejudice. Proving waiver is a high hurdle due to the
legal position. strong presumption against waiver of arbitration. This
appeal concerns whether a law firm waived its right to
1 Cases that cite this headnote arbitrate a fee dispute with former clients by litigating
with a former associate. After the associate left the firm
and took several clients with him, the firm sued the
[6] Alternative Dispute Resolution
*544 former associate—with whom it had no arbitration
Suing or participating in suit
agreement—over client contingency fees. The firm also
By filing pleading in suit against former sued the former clients and moved to compel that dispute
clients on claims arising out of contingency fee to arbitration pursuant to an arbitration clause in the
agreement after clients retained firm's former contingency fee agreement between the firm and the
associate who then left firm, and filing motion clients. The trial court and the court of appeals both
for no-answer default judgment, law firm did concluded that because the firm had litigated the fee
not substantially invoke judicial process, as issue with the former associate, it waived its right to
grounds for finding that law firm waived arbitrate any claims stemming from its fee agreement
arbitration of claims. with the former clients. Importantly, the firm could not
arbitrate its dispute with the former associate because it
Cases that cite this headnote
had no arbitration agreement with him. Because the firm's
litigation with the former associate neither prejudiced
[7] Alternative Dispute Resolution the former clients nor substantially invoked the litigation
Suing or participating in suit process with them, we reverse the court of appeals'
Law firm did not waive arbitration of judgment and remand to the trial court.
claims arising out of contingency agreement
with firm clients by intervening in clients' Ventura Gobellan was driving an armored car for his
wrongful death suit against client's employer, employer when the vehicle became unstable and rolled
in which suit clients were represented by over, killing a passenger and injuring Gobellan. Gobellan
former associate who took clients with him and his wife retained Kennedy Hodges, L.L.P. to defend
when he left firm, and by moving to compel against a wrongful death suit and to bring suit against
arbitration. Gobellan's employer and other defendants (the Gobellan
Suit). The Gobellans agreed to pay Kennedy Hodges forty
1 Cases that cite this headnote percent of the gross recovery obtained after suit was filed
but before trial. Their fee agreement provided that the
Gobellans would be liable for the entire contingency fee
if they terminated Kennedy Hodges without cause and
Attorneys and Law Firms required the Gobellans and Kennedy Hodges to arbitrate
any fee dispute. Kennedy Hodges assigned associate
*543 Cory Reed, Thompson, Coe, Cousins & Irons, attorney Canonero Brown to the case.
Kevin F. Risley, Zandra Elayne Foley, Thompson Coe
Cousins & Irons LLP, Houston, TX, for Petitioner.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542 (2014)
57 Tex. Sup. Ct. J. 584

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542 (2014)
57 Tex. Sup. Ct. J. 584

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.

To conclude, Kennedy Hodges's litigation conduct


[6] [7] Likewise, we cannot agree that Kennedy
involved suing a third party with whom it had no
Hodges substantially invoked the litigation process with
arbitration agreement and filing limited pleadings against
its pleadings against the Gobellans. Kennedy Hodges
the Gobellans. Such activity did not substantially invoke
filed pleadings against the Gobellans in two suits. First,
the litigation process against the Gobellans or prejudice
Kennedy Hodges initiated litigation against the Gobellans
them. Thus, Kennedy Hodges did not waive its right
in a separate proceeding in Harris County and filed
to arbitrate its dispute with the Gobellans. Accordingly,
a motion for a no-answer default judgment. But these
without hearing oral argument, TEX.R.APP. P. 59.1, we
pleadings alone do not rise to the level required to show
grant the petition for review, reverse the court of appeals'
waiver. See, e.g., id. at 592 (assessing whether a party
judgment, and remand to the trial court to grant Kennedy
*546 moved for judgment on the merits); In re Vesta Ins.
Hodges's motion to compel arbitration.
Grp., Inc., 192 S.W.3d 759, 763–64 (Tex.2006) (holding
that seeking initial discovery, taking four depositions,
and moving for dismissal did not substantially invoke All Citations
the litigation process). Second, after conferring with the
Gobellans, Kennedy Hodges intervened in the existing 433 S.W.3d 542, 57 Tex. Sup. Ct. J. 584

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Kenny v. Portfolio Recovery Associates, LLC, 464 S.W.3d 29 (2015)

Incompetent evidence disregarded


464 S.W.3d 29 In a bench trial, Court of Appeals presumes
Court of Appeals of Texas, that the trial court, sitting as the fact
Houston (1st Dist.). finder, disregarded any improperly admitted
evidence.
Joe Kenny, Appellant
v. 1 Cases that cite this headnote
Portfolio Recovery Associates, LLC, Appellee
[3] Appeal and Error
NO. 01–14–00058–CV Findings of fact and conclusions of law
|
An appellant may not challenge a trial court's
Opinion issued March 12, 2015
conclusions of law for factual sufficiency,
Synopsis but Court of Appeals may review the legal
Background: Purported assignee of credit card debt conclusions drawn from the facts to determine
brought action against borrower for breach of contract, their correctness.
account stated, and open account. The County Civil
Cases that cite this headnote
Court at Law No. 2, Harris County, No. 1023048,
entered judgment for purported assignee after bench trial.
Borrower appealed. [4] Assignments
Rights of assignee as against debtor
Purported assignee of credit card debt failed to
Holdings: The Houston Court of Appeals, First District, support its causes of action against borrower
Laura Carter Higley, J., held that: for breach of contract, account stated, and
open account, absent evidence that borrower
[1] assertion in employee's affidavit that lender assigned had an obligation to pay a debt specifically to
borrower's account to the purported assignee was the purported assignee.
inadmissible hearsay, and
Cases that cite this headnote

[2] trial court could not take judicial notice of the


assignment based on document not in the record. [5] Affidavits
Use in evidence
Unless specifically permitted by statute or
Reversed and rendered.
rule, affidavits do not constitute evidence at
trial.

Cases that cite this headnote


West Headnotes (11)

[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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Kenny v. Portfolio Recovery Associates, LLC, 464 S.W.3d 29 (2015)

While the trial court can take judicial notice


Cases that cite this headnote of the existence of certain documents in its
records, it may not take judicial notice of
[7] Evidence the truth of factual statements and allegations
Certificates and affidavits contained in the pleadings, affidavits, or other
documents in the file. Tex. R. Evid. 201.
In purported assignee's employee's affidavit,
employee's assertion that lender assigned 4 Cases that cite this headnote
credit card borrower's account to the
purported assignee was extraneous to
authentication of documents as business [11] Evidence
records, and thus the assertion was Effect of judicial notice
inadmissible hearsay in bench trial of When evidence is the subject of improper
assignee's action against borrower for breach judicial notice, it amounts to no evidence.
of contract, account stated, and open account.
Tex. R. Evid. 803(6), 902(10). 2 Cases that cite this headnote

Cases that cite this headnote

[8] Assignments *31 On Appeal from County Civil Court at Law No. 2,
Weight and sufficiency Harris County, Texas, Trial Court Case No. 1023048

An “Assignment and Bill of Sale” document Attorneys and Law Firms


stating that lender assigned some accounts
to another company was legally insufficient Betsy L. Grubbs, Sugar Land, TX, for appellant.
to establish that a particular credit card
borrower's account was assigned to the Anh H. Regent, Regent and Associates, Houston, TX, for
company, where the document did not appellee.
identify which accounts were transferred
Panel consists of Justices Jennings, Higley, and Huddle.
except by referring to another document that
was not in the record.

Cases that cite this headnote OPINION

Laura Carter Higley, Justice


[9] Evidence
Nature and scope in general Portfolio Recovery Associates, LLC sued Joe Kenny for
Trial court could not take judicial notice debt owed on a credit card account originally issued by
of the truth of the fact that credit card HSBC Bank Nevada, N.A. Following a trial, the trial
borrower's account had been assigned to a court issued a judgment against Kenny and in favor
particular company, based on a statement in a of Portfolio Recovery. In five issues on appeal, Kenny
document that had been filed in a case, since argues (1) the evidence is legally insufficient to support
it could not be said that the document could the judgment, (2) certain findings of fact and conclusions
not “reasonably be questioned,” where the of law are unsupported by the record, (3) the trial court
document had not been offered or admitted abused its discretion by admitting a business-records
into evidence. Tex. R. Evid. 201. affidavit that contained assertions beyond the statutory
requirements and that was not served in accordance with
3 Cases that cite this headnote the rules, and (4) the trial court erred by considering
documents that were not offered or admitted at trial.

[10] Evidence
We reverse and render.
Records or decisions in same case

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Kenny v. Portfolio Recovery Associates, LLC, 464 S.W.3d 29 (2015)

consideration of all evidence admitted in the trial, the


Court concluded that an assignment existed, without
reaching a decision on the issue of whether or not it
Background
was necessary for an assignment to include an account
Portfolio Recovery sued Kenny for debt allegedly owed number.
on a credit card account originally issued by HSBC
2) Page 5 of the Notice of Filing of Business Records
Bank Nevada. Over four months before trial, Portfolio
was not admitted into evidence before the parties rested.
Recovery filed a notice of filing business records. The
trial consisted only of Portfolio Recovery's offering four
exhibits into the record, Kenny's presenting various
objections to the exhibits, and the trial court's admitting Legal Sufficiency
all four exhibits.
In his fifth issue, Kenny argues the evidence is legally
All four exhibits were included in the business records insufficient to establish HSBC Bank Nevada assigned
filing. One of the exhibits was the affidavit of Meryl Kenny's account to Portfolio Recovery.
Dreano, a custodian of records for Portfolio Recovery.
Dreano asserted in the affidavit that the other documents
A. Standard of Review
were kept in the regular course of Portfolio Recovery's
[1] [2] In an appeal from a bench trial, the trial court's
business. Dreano also asserted that Portfolio Recovery
findings of fact have the same weight as a jury verdict.
“is the assignee of HSBC Bank Nevada, N.A./GM and
Catalina v. Blasdel, 881 S.W.2d 295, 297 (Tex.1994);
is the current owner of the account of JOE KENNY
Nguyen v. Yovan, 317 S.W.3d 261, 269–70 (Tex.App.–
(‘Defendant’), account number ending in 9702 (the
Houston [1st Dist.] 2009, pet. denied). We review a trial
‘Account’).” Kenny objected to the affidavit, arguing,
court's findings of fact under the same legal sufficiency
among other things, that this assertion of assignment
of the evidence standards used when determining whether
was not necessary to authenticate the other documents as
sufficient evidence exists to support an answer to a
business records and was, therefore, inadmissible hearsay.
jury question. Catalina, 881 S.W.2d at 297; Nguyen, 317
S.W.3d at 270. In a bench trial, we presume that the
All parties acknowledged at trial that the exhibits offered
trial court, “sitting as the fact finder, disregarded any
by Portfolio Recovery did not identify any account held by
improperly admitted evidence.” Sw. Bell Media, Inc. v.
Kenny being specifically assigned to Portfolio Recovery.
Lyles, 825 S.W.2d 488, 498 (Tex.App.–Houston [1st Dist.]
Instead, the exhibits only established that some accounts
1992, writ denied); Tex. Alcoholic Beverage Comm'n v.
had been assigned from HSBC Bank Nevada to Portfolio
Sanchez, 96 S.W.3d 483, 488 (Tex.App.–Austin 2002, no
Recovery, without identifying which accounts had been
pet.).
assigned. At trial, the trial court requested briefing from
the parties on whether the lack of a specific reference to an
In conducting a legal sufficiency review, we credit
account number in the documents showing an assignment
favorable evidence if a reasonable factfinder could and
would prevent recovery.
disregard contrary evidence unless a reasonable factfinder
could not. City of Keller v. Wilson, 168 S.W.3d 802, 827
After signing the judgment, the trial court made findings
(Tex.2005). We consider the evidence in the light most
of fact and conclusions of law. Two of its findings were
favorable to the finding and indulge every reasonable
*32 1) After all parties had rested and the Court inference that would support it. Id. at 822. We will
ordered briefing on the issue of whether or not it was sustain a no-evidence point only if (1) the record reveals
necessary for an assignment to include an account a complete absence of a vital fact, (2) the court is
number, the Court reviewed the Clerk's File[,] and barred by rules of law or of evidence from giving weight
Page 5 of the Notice of Filing Business Records, ... to the only evidence offered to prove a vital fact, (3)
[established] that the account No. –9702 was part the evidence offered to prove a vital fact is no more
of the Sale of Accounts from HSBC Bank Nevada, than a mere scintilla, or (4) the evidence conclusively
N.A. to Portfolio Recovery Associates, LLC, and in establishes the opposite of the vital fact. Id. at 810;
Merrell Dow Pharms., Inc. v. Havner, 953 S.W.2d 706, 711

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Kenny v. Portfolio Recovery Associates, LLC, 464 S.W.3d 29 (2015)

(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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Kenny v. Portfolio Recovery Associates, LLC, 464 S.W.3d 29 (2015)

documents in the file.” Guyton v. Monteau, 332 S.W.3d


687, 693 (Tex.App.–Houston [14th Dist.] 2011, no pet.).
[9] Finally, in its findings of fact, the trial court asserted
that it had reviewed documents filed in that case and found
[11] “When evidence is the subject of improper judicial
a document that it believed established an assignment
notice, it amounts to no evidence.” Id. Accordingly, the
from HSBC Bank Nevada to Portfolio Recovery. The trial
extrinsic document cannot be part of our review for
court acknowledged in another finding that the additional
legal sufficiency of the evidence. See id.; City of Keller,
document had not been offered or admitted into evidence.
168 S.W.3d at 827 (holding legal sufficiency challenge
The trial court did not identify the authority it was relying
sustained when trial court is barred by rules of law or of
on to consider facts outside the evidence presented at trial,
evidence from giving weight to only evidence offered to
and we have found no authority permitting the document's
prove vital fact).
consideration.

No other evidence in the record establishes that Kenny


[10] The trial court is permitted to take judicial notice of
is obligated to pay a debt to Portfolio Recovery.
adjudicative facts. See TEX. R. EVID. 201(c). The facts
it may judicially notice, however, are facts that are “either Accordingly, we sustain Kenny's fifth issue. 1
(1) generally known within the territorial jurisdiction
of the trial court or (2) capable of accurate and ready
determination by resort to sources whose accuracy cannot Conclusion
reasonably be questioned.” TEX. R. EVID. 201(b). It
cannot be said that any document found in the trial court's We reverse the judgment of the trial court and render a
records “cannot reasonably be questioned.” Accordingly, take-nothing judgment against Portfolio Recovery.
while the trial court can take judicial notice of the existence
of certain documents in its records, it “may not take
judicial notice of the truth of factual statements and All Citations
allegations contained in the pleadings, affidavits, or other
464 S.W.3d 29

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

KeyCite Yellow Flag - Negative Treatment West Headnotes (25)


Distinguished by Tranum v. Broadway, Tex.App.-Waco, July 2, 2008  
216 S.W.3d 788
[1] Malicious Prosecution
Supreme Court of Texas.
Nature and Form of Remedy
KROGER TEXAS LIMITED PARTNERSHIP A cause of action for malicious prosecution
and Robert Moody, Petitioners, must sometimes yield to society's greater
v. interest in encouraging citizens to report
Theresa SUBERU, Respondent. crimes, real or perceived.

No. 03–0913. 6 Cases that cite this headnote


|
Argued Nov. 9, 2004. [2] Malicious Prosecution
| Nature and Elements of Malicious
Decided May 5, 2006. Prosecution in General
| Malicious Prosecution
Rehearing Denied Sept. 22, 2006. Weight and Sufficiency of Evidence
Synopsis A claim for malicious criminal prosecution
Background: Following jury's acquittal of shopper on requires plaintiff to prove by a preponderance
shoplifting charge, shopper brought action against of the evidence that: (1) a criminal
grocery store for malicious prosecution and intentional prosecution was commenced against plaintiff;
infliction of emotional distress. The 298th Judicial District (2) defendant initiated or procured that
Court, Dallas County, Adolph Canales, J., entered prosecution; (3) the prosecution terminated
judgment on jury verdict in favor of shopper. Store in plaintiff's favor; (4) plaintiff was innocent
appealed. The Dallas Court of Appeals, 113 S.W.3d 588, of the charges; (5) defendant lacked probable
affirmed. Review was granted. cause to initiate the prosecution; (6) defendant
acted with malice; and (7) plaintiff suffered
damages.

Holdings: The Supreme Court, Wallace B. Jefferson, C.J., 39 Cases that cite this headnote
held that:

[3] Malicious Prosecution


[1] evidence did not establish lack of probable cause, as
Necessity
element of malicious prosecution, and
Malicious Prosecution
[2] evidence did not establish extreme and outrageous Necessity
conduct, as element of intentional infliction of emotional The lack of probable cause and malice
distress. elements of a claim of malicious prosecution
guard against a jury's natural inclination to
punish those who, through error but not
Reversed and rendered. malevolence, commence criminal proceedings
against a person who is ultimately exonerated.
Phil Johnson, J., filed an opinion concurring in part and
dissenting in part, which Medina, J., joined, and which 12 Cases that cite this headnote
Wainwright, J., joined as to Part III.

[4] Malicious Prosecution

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

Time of Acquiring Knowledge or


Receiving Information [8] Appeal and Error
Sufficiency of Evidence in Support
Malicious Prosecution
Belief in Guilt of Accused Evidence does not exceed a scintilla, for
purposes of a legal sufficiency challenge to a
The lack of probable cause element for a
verdict, if it is so weak as to do no more than
claim of malicious prosecution asks whether a
create a mere surmise or suspicion that the fact
reasonable person would believe that a crime
exists.
had been committed given the facts as the
complainant honestly and reasonably believed 94 Cases that cite this headnote
them to be before the criminal proceedings
were instituted.
[9] Malicious Prosecution
14 Cases that cite this headnote Grounds in General
For purposes of lack of probable cause
[5] Malicious Prosecution element for claim of malicious prosecution,
Presumptions and Burden of Proof a private citizen has no duty to investigate a
suspect's alibi or explanation before reporting
In an action for malicious prosecution, courts
a crime.
must presume that the defendant in the action
acted reasonably and had probable cause to 2 Cases that cite this headnote
initiate criminal proceedings, and to rebut this
presumption, the plaintiff in the action must
produce evidence that the motives, grounds, [10] Malicious Prosecution
beliefs, or other information upon which the Grounds in General
defendant acted did not constitute probable If the acts or omissions necessary to
cause. constitute a crime reasonably appear to have
been completed, a complainant's failure to
27 Cases that cite this headnote investigate does not negate probable cause,
for purposes of lack of probable cause element
[6] Appeal and Error for malicious prosecution.
Sufficiency of Evidence in Support
4 Cases that cite this headnote
In reviewing a verdict for legal sufficiency,
the appellate court credits evidence that
supports the verdict if reasonable jurors [11] Malicious Prosecution
could, and disregards contrary evidence unless Grounds in General
reasonable jurors could not. Evidence that grocery store's employees failed
to check, with store's pharmacy technician,
62 Cases that cite this headnote shopper's explanation for her suspicious
conduct did not establish that store's
[7] Appeal and Error employees lacked probable cause to report the
Sufficiency of Evidence in Support shopper to police as suspected shoplifter, as
element of malicious prosecution.
A challenge to the legal sufficiency of evidence
will be sustained when, among other things, 1 Cases that cite this headnote
the evidence offered to establish a vital fact
does not exceed a scintilla.
[12] Malicious Prosecution
75 Cases that cite this headnote Grounds in General
Inconsistencies in trial testimony of defendant
grocery store's pharmacy technician,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

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.

Cases that cite this headnote [19] Appeal and Error


Considering Questions Not Raised or
Passed Upon in Intermediate Court
[15] Malicious Prosecution
Supreme Court had authority to address, on
Presumptions and Burden of Proof
review of Court of Appeals' decision affirming
The civil law presumes, in an action for trial court's judgment on jury's verdict for
malicious prosecution, the defendant's good plaintiff in action against grocery store
faith in reporting the suspected crime, for malicious prosecution and intentional
and requires the plaintiff to rebut this infliction of emotional distress, whether the
presumption, because it is more important evidence was legally sufficient to establish
that a private citizen report an apparent intentional infliction of emotional distress,
subversion of the law than for the wrongly though Court of Appeals had not addressed

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

Suberu testified that Wier said, “Those two people who


*791 Thomas J. Stutz, Thomas J. Stutz, P.C., Thomas just left, you are with them,” and “You are going to jail
B. Cowart, Law Office of Windle Turley, P.C., Dallas, for for a long time.” Wier, however, denied making those
Respondent. statements. She claims Suberu became hostile when Wier
asked to see a receipt, and that Suberu kept shouting,
P. Michael Jung, Strasburger & Price, L.L.P., Dallas, for
“You're crazy!” Suberu testified that she was annoyed
Amicus Curiae Arkoma Basin Exploration Company.
because Wier would not listen to her explanation for
Opinion leaving the store.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

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:

1. Kroger's failure to check Suberu's explanation with


In the court of appeals, Kroger challenged the legal
the pharmacy technician before initiating criminal
sufficiency of the evidence to support the second, fourth,
proceedings;
fifth, and sixth elements of Suberu's claim, 5 and her

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

did not steal groceries, it does not establish the absence of


2. Inconsistencies in Karrah Parkey's testimony probable cause.
regarding whether she saw Suberu with a cart; and
[14] [15] The criminal law presumes Suberu's innocence
3. Suberu's testimony that she did not have a cart.
and presents the State with a heavy burden of proof for
a conviction, because it is more important that the guilty
*794 [9] [10] [11] Starting with the first item, it is
occasionally go free than for the innocent to be jailed. In
well settled that a private citizen has no duty to investigate
re Winship, 397 U.S. 358, 372, 90 S.Ct. 1068, 25 L.Ed.2d
a suspect's alibi or explanation before reporting a crime.
368 (1970) (Harlan, J., concurring). The civil law presumes
Richey, 952 S.W.2d at 518 (citing Marathon Oil Co. v.
Kroger's good faith and requires Suberu to rebut this
Salazar, 682 S.W.2d 624, 627 (Tex.App.—Houston [1st
presumption, because it is more important that a private
Dist.] 1984, writ ref'd n.r.e.)). If the acts or omissions
citizen report an apparent subversion of our laws than for
necessary to constitute a crime reasonably appear to have
the wrongly accused to attain monetary redress from the
been completed, a complainant's failure to investigate
does not negate probable cause. Id. Thus, the fact that no accuser. 6 These presumptions provide benchmarks with
one investigated Suberu's explanation is not evidence that which to evaluate this case.
probable cause was lacking.
[16] Suberu's acquittal does not prove that Kroger lacked
[12] The second item is irrelevant to whether Kroger had probable cause, just as her arrest does not prove her
probable cause, because none of the Kroger employees guilt. Her acquittal is not evidence, then, that she was
spoke to Karrah Parkey before Moody initiated criminal unjustifiably subjected to criminal proceedings; it shows
proceedings. Parkey's credibility does not affect whether only that the government did not prove her guilt beyond
Kroger, at the time it called the police, reasonably a reasonable doubt. United States v. Watts, 519 U.S.
believed Suberu was guilty of shoplifting. Accordingly, 148, 155, 117 S.Ct. 633, 136 L.Ed.2d 554 (1997). Because
this evidence must be disregarded. probable cause is presumed, Suberu was required to
produce evidence that Kroger initiated her prosecution
[13] Suberu relies primarily on the third item—her on the basis of information or *795 motives that do
testimony that she did not have a cart. In contrast to the not support a reasonable belief that she was guilty of
criminal case, however, here the question is not whether shoplifting. See Richey, 952 S.W.2d at 518; Akin, 661
Suberu had a cart, but whether Kroger reasonably S.W.2d at 920. If there was no such evidence, Kroger is
believed she did. See Richey, 952 S.W.2d at 517; Akin, 661 entitled to judgment as a matter of law.
S.W.2d at 920–21. Wier, Belton, and Helwig each testified
that they observed Suberu leaving the store with a cart Suberu was Kroger's regular customer, yet she introduced
containing items she had not purchased. The law presumes no evidence of, for example, prior bad relations,
that Kroger honestly and reasonably acted on the basis preexisting debt, racial animus, or any private motivation
of these observations in reporting Suberu to police. See to harm her. There is no evidence that, on the night in
Richey, 952 S.W.2d at 517; see also City of Keller, 168 question, Wier, Belton, and Helwig caucused prior to
S.W.3d at 817 (discussing legal sufficiency where the fact Suberu's detention; nor is there evidence that there was
finding examined concerns what a party knew or why time for them to confer before recounting their similar
it took a certain course). Kroger contends that Suberu's observations to Moody. Further, there is no evidence that
evidence is legally insufficient to rebut this presumption. Kroger withheld exculpatory information from the police
We agree. or capriciously enforced its shoplifting policy against
customers. Although the critical question in this case was
To rebut the probable cause presumption, Suberu had to Kroger's state of mind, Suberu produced no evidence that
produce evidence that the motives, grounds, beliefs, or Kroger initiated her prosecution on the basis of something
other information upon which Kroger acted demonstrate other than a reasonable belief that she was guilty. See City
that it did not reasonably believe Suberu was guilty of of Keller, 168 S.W.3d at 829–30.
shoplifting. See Richey, 952 S.W.2d at 518; Akin, 661
S.W.2d at 920. While Suberu's evidence supports the jury's [17] [18] Suberu's testimony does no more than create
determination—consistent with her acquittal—that she a surmise or suspicion that Kroger did not believe

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Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

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.

III [25] Kroger contends that the evidence is legally


insufficient to support a finding that its conduct was
Intentional Infliction of Emotional Distress extreme and outrageous. Suberu, however, argues that
knowingly providing false information to police so that
[19] [20] [21] [22] Kroger also challenges the legalan innocent person is prosecuted for shoplifting is extreme
sufficiency of the evidence to support its liability for and outrageous. While we are inclined to agree that
8 Suberu's premise is sound, her argument is hypothetical
intentional infliction of emotional *796 distress. To
prevail on this claim, Suberu had to prove by a in light of the record before us. The only evidence that
preponderance of the evidence that: (1) Kroger acted conceivably suggests Kroger and its employees knew
intentionally or recklessly; (2) its conduct was extreme and Suberu was innocent is her testimony that she did not have
outrageous; (3) its actions caused her emotional distress; a cart. In the preceding analysis, however, we concluded
and (4) the emotional distress was severe. Hoffmann–La that her claimed innocence, by itself, is insufficient
Roche Inc. v. Zeltwanger, 144 S.W.3d 438, 445 (Tex.2004); to find that Kroger did not honestly and reasonably
Wal–Mart Stores, Inc. v. Canchola, 121 S.W.3d 735, 740 believe Suberu was guilty. Further, Suberu produced no
(Tex.2003). A defendant's conduct satisfies the second evidence of prior bad relations, racial animus, or other
element only if it is “ ‘so outrageous in character, and ulterior motives, nor does she allege that Kroger subjected
so extreme in degree, as to go beyond all possible her to outrageous or abusive treatment while she was
bounds of decency, and to be regarded as atrocious, and detained on its premises. We do not doubt that the
utterly intolerable in a civilized community.’ ” Twyman incident caused Suberu embarrassment and emotional
v. Twyman, 855 S.W.2d 619, 621 (Tex.1993) (quoting distress, but there is no evidence that Kroger intentionally

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

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.

See Richey v. Brookshire Grocery Co., 952 S.W.2d


Suberu's testimony contained inconsistencies.
515, 517 (Tex.1997); COMM. On PATTERN JURY
Nevertheless, her testimony that she did not have a cart
CHARGES, STATE BAR Of TEX., TEXAS PATTERN
and that there was no cart next to her at the time Kellie
JURY CHARGES—GENERAL NEGLIGENCE &

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

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

Finally, I note that Kroger does not challenge the


evidentiary sufficiency of the jury findings as to malice,
II except in relation to exemplary damages. Kroger's failure
to challenge the evidentiary support as to malice is
As to petitioner Robert Moody, individually, however, I
understandable in light of our decisions holding that
agree that the evidence was legally insufficient to support
malice may be inferred merely from a lack of probable
the jury's finding that he lacked probable cause; that is,
cause. See, e.g., Shannon v. Jones, 76 Tex. 141, 13 S.W.
that facts and circumstances within his knowledge were
477, 479 (1890); Gulf, Colo. & Santa Fe Ry. Co. v. James,
not such as would have excited belief in a person of
73 Tex. 12, 10 S.W. 744, 747 (1889); Biering v. First Nat'l
reasonable mind that Suberu was guilty of a criminal
Bank of Galveston, 69 Tex. 599, 7 S.W. 90, 92 (1888).
offense. The jury charge required separate findings as to
Evidence of a defendant's subjective motives, state of
whether Kroger maliciously prosecuted Suberu and as
mind, and good faith and honesty of belief in initiating
to whether Moody maliciously prosecuted her. Suberu
or commencing a prosecution is relevant to the malice
alleged that Kroger was liable by and through its
element of the cause of action. A re-examination of our
employees, but she did not allege that Moody was liable
holdings that lack of probable cause will support an
based on the actions or knowledge of anyone other than
inference of malice without further examination of the
himself.
evidence may well be in order.
Moody was not present when Suberu was exiting the store
and thus had to make a decision based on conflicting All Citations
factual reports from Suberu and Kroger employee
witnesses. There is no evidence that Moody, as assistant 216 S.W.3d 788, 49 Tex. Sup. Ct. J. 592

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.

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Kroger Texas Ltd. Partnership v. Suberu, 216 S.W.3d 788 (2006)
49 Tex. Sup. Ct. J. 592

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 11


Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
RICO Bus.Disp.Guide 10,713

[4] allegations in borrower's complaint were insufficient


to state claim for violation of Texas usury law, or
378 F.3d 433
for violation of the Racketeer Influenced and Corrupt
United States Court of Appeals,
Organizations Act (RICO) based on predicate act of
Fifth Circuit.
usury.
Betty R. LOVICK, on behalf of herself and all
others similarly situated, Plaintiff–Appellant,
Affirmed.
v.
RITEMONEY LTD.; SNM Inc.; CPCWA E. Grady Jolly, Circuit Judge, dissented and filed opinion.
Company Ltd., doing business as Power
Financial; GE & CE LLC, Defendants–Appellees.

No. 03–20917. West Headnotes (21)


|
July 14, 2004.
[1] Federal Civil Procedure
Synopsis Clear or certain nature of insufficiency
Background: Borrower brought putative class action Complaint should not be dismissed for failure
against title lender and loan broker to recover under to state claim unless it appears beyond doubt
the Racketeer Influenced and Corrupt Organizations Act that plaintiff can prove no set of facts in
(RICO) based on their alleged predicate acts of usury. support of his claim which would entitle him
The United States District Court for the Southern District to relief. Fed.Rules Civ.Proc.Rule 12(b)(6), 28
of Texas, Kenneth M. Hoyt, J., entered order dismissing U.S.C.A.
complaint as failing to state claim upon which relief may
be granted, and borrower appealed. 21 Cases that cite this headnote

[2] Federal Courts


Holdings: The Court of Appeals, Rhesa Hawkins Pleading
Barksdale, Circuit Judge, held that: District court's dismissal of complaint as
failing to state claim upon which relief may be
[1] special agency relationship that allegedly existed granted is reviewed de novo.
between lender, which supposedly made all of its title
loans through broker, and broker, which allegedly relied 1 Cases that cite this headnote
exclusively on lender to fund its title loans, did not
transform reasonable fees that broker charged into [3] Federal Civil Procedure
“interest” attributable to lender; Construction of pleadings
Federal Civil Procedure
[2] lender's alleged shifting of some of its exposure on title Matters deemed admitted; acceptance as
loans to broker, by having broker perform services which true of allegations in complaint
it would otherwise have performed itself, was insufficient
On motion to dismiss for failure to state
benefit to lender to permit court to regard fee that loan
claim upon which relief may be granted,
broker received for performing such services as “interest”
complaint is construed in light most favorable
attributable to lender;
to plaintiff, accepting as true all well-pleaded
factual allegations and drawing all reasonable
[3] under Texas law, fee that loan broker charges for its
inferences in plaintiff's favor. Fed.Rules
services may not be viewed as “interest” attributable to
Civ.Proc.Rule 12(b)(6), 28 U.S.C.A.
lender, simply because those services could have been part
of lender's overhead in non-brokered transaction; and 245 Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
RICO Bus.Disp.Guide 10,713

[4] Federal Civil Procedure [8] Usury


Matters deemed admitted; acceptance as Compensation for services or expenses or
true of allegations in complaint losses incurred by lender
While court, on motion to dismiss complaint If fee is supported by separate and additional
as failing to state claim upon which relief consideration apart from the lending of
may be granted, must accept as true all money, it is not “interest” and cannot be
well-pleaded factual allegations and must the basis of usury claim under Texas law.
draw all reasonable inferences in plaintiff's V.T.C.A., Finance Code § 302.001.
favor, court may not rely on conclusional
allegations or legal conclusions disguised as 1 Cases that cite this headnote
factual allegations. Fed.Rules Civ.Proc.Rule
12(b)(6), 28 U.S.C.A. [9] Usury
Commission or Bonus to Agent, Broker,
240 Cases that cite this headnote
or Other Third Person
Under Texas law, loan brokers may charge fee
[5] Usury for their services, and this fee is not generally
Elements of Usury considered “interest” for usury purposes.
Under Texas law, elements of usury claim are: V.T.C.A., Finance Code § 302.001.
(1) loan of money; (2) absolute obligation to
repay principal; and (3) exaction of greater 1 Cases that cite this headnote
compensation than is allowed by law for use of
money by borrower. V.T.C.A., Finance Code [10] Usury
§ 302.001. Commission or Bonus to Agent, Broker,
or Other Third Person
1 Cases that cite this headnote
Under Texas law, if loan broker's fee is
not supported by separate and additional
[6] Usury consideration, it “may” be considered interest,
Reservation, taking, or payment of or subject to usury laws. V.T.C.A., Finance Code
agreement for excessive interest § 302.001.
Under Texas law, lender can violate usury
law by charging borrower fees that constitute 1 Cases that cite this headnote
disguised interest. V.T.C.A., Finance Code §
302.001. [11] Usury
Agent or other representative of lender
Cases that cite this headnote
Special agency relationship that allegedly
existed between lender, which supposedly
[7] Usury made all of its title loans through one
Reservation, taking, or payment of or loan broker, and broker, which allegedly
agreement for excessive interest relied exclusively on lender to fund its title
Whether fee is “disguised interest,” which, loans, did not transform reasonable fees
in combination with other interest charged, that broker charged for its services into
causes loan to violate Texas usury law, “interest” attributable to lender, for purpose
turns on substance of transaction. V.T.C.A., of Texas usury laws. V.T.C.A., Finance Code
Finance Code § 302.001. § 302.001.

Cases that cite this headnote Cases that cite this headnote

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Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
RICO Bus.Disp.Guide 10,713

must be added to other interest in deciding


[12] Usury whether loan is usurious. V.T.C.A., Finance
Commission or Bonus to Agent, Broker, Code § 302.001.
or Other Third Person
Under Texas usury law, in order for Cases that cite this headnote
third party fee to be considered “interest”
attributable to lender, borrower must show: [16] Usury
(1) that lender received some benefit from Commission or Bonus to Agent, Broker,
third party fee; and (2) that fee paid to third or Other Third Person
party was subterfuge to evade usury law.
Under Texas law, fee that loan broker charges
V.T.C.A., Finance Code § 302.001.
for its services may not be viewed as “interest”
Cases that cite this headnote attributable to lender, simply because those
services could have been part of lender's
overhead in non-brokered transaction; to
[13] Usury the contrary, these are separate services, in
Commission or Bonus to Agent, Broker, consideration for which broker may charge a
or Other Third Person reasonable fee, which will not cause loan to be
Under Texas usury law, in order for usurious. V.T.C.A., Finance Code § 302.001.
third party fee to be considered “interest”
attributable to lender, the benefit that lender 1 Cases that cite this headnote
receives from third party fee must be more
than incidental; while the benefit could [17] Statutes
include lender's receiving any part of this fee, Plain language; plain, ordinary,
incidental benefit will not suffice. V.T.C.A., common, or literal meaning
Finance Code § 302.001.
When statutory language is unambiguous,
Cases that cite this headnote court applies plain and common meaning of
words and terms used.

[14] Usury Cases that cite this headnote


Agent or other representative of lender
Lender's alleged shifting of some of its [18] Statutes
exposure on title loans to loan broker through Construction in View of Effects,
which it allegedly made all such loans, Consequences, or Results
by having broker perform services which
In interpreting statute, court may not
it would otherwise have performed itself,
strain on policy grounds to manufacture a
was insufficient benefit to lender to permit
modification of statutory language to achieve
court to regard fee that loan broker received
a result obviously not intended by legislature.
for performing such services as “interest”
attributable to lender, for purpose of Texas 1 Cases that cite this headnote
usury law. V.T.C.A., Finance Code § 302.001.

Cases that cite this headnote [19] Usury


Presumptions and burden of proof

[15] Usury Under Texas law, there is specific


Compensation for services or expenses or presumption against finding a loan to be
losses incurred by lender usurious. V.T.C.A., Finance Code § 302.001.

Under Texas law, fees charged by lender for 1 Cases that cite this headnote
ordinary overhead constitute “interest,” that

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Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
RICO Bus.Disp.Guide 10,713

John Dwyre & Associates, San Antonio, TX, for CPCWA


[20] Usury Co. Ltd. and GE & CE LLC.
Construction and operation in general
Usury Stacy Jane Canan, American Ass'n of Retired Persons,
Constitutional and statutory provisions Washington, DC, Stephen Henry Gardner, Law Office
of Stephen Gardner, Dallas, TX, Robert F. Schneider,
Penal statutes, such as those for usury, are
Consumers Union of U.S., Austin, TX, for American
strictly construed under Texas law; recovery
Ass'n of Retired Persons, Nat. Ass'n of Consumer
of penalty must fit within statute's terms.
Advocates, Consumer Federation of America and
V.T.C.A., Finance Code § 302.001.
Consumers Union, Amici Curiae.
1 Cases that cite this headnote
Appeal from the United States District Court for the
Southern District of Texas.
[21] Usury
Pleading Before JOLLY, JONES and BARKSDALE, Circuit
Judges.
Allegations in borrower's complaint, as to the
close relationship allegedly existing between Opinion
lender, which supposedly made all of its
title loans through one loan broker, and RHESA HAWKINS BARKSDALE, Circuit Judge:
broker, which allegedly relied exclusively on
lender to fund its title loans, and regarding Betty R. Lovick's putative class action claims a RICO
the $1,500 fee charged by broker for obtain violation, premised on the collection of a claimed unlawful
$2,000 title loan on borrower's behalf from (usurious) debt. The action was dismissed under Federal
lender, were insufficient to state claim for Rule of Civil Procedure 12(b)(6) for failure to state a
violation of Texas usury law, or for violation claim upon which relief can be granted. Lovick claims the
of the Racketeer Influenced and Corrupt fee charged by an automobile title loan broker amounts
Organizations Act (RICO) based on predicate to disguised interest that, when attributed to the lender,
act of usury, where borrower did not allege causes the loan to be usurious. The Credit Services
that broker had not performed valuable Organization Act (CSOA), TEX. FIN.CODE § 393 et
services for its fee, nor did borrower allege that seq., permits brokers, however, to engage in the activities
broker's fee had resulted in even an incidental alleged in the complaint without attributing those fees
benefit to lender. 18 U.S.C.A. § 1961 et seq.; to lenders. None of Lovick's allegations involve activities
V.T.C.A., Finance Code § 302.001. proscribed by either CSOA or Texas usury law, TEX.
FIN.CODE § 301.001 et seq. Accordingly, she cannot state
1 Cases that cite this headnote a claim for usury. As a result, her RICO claim fails as well.
AFFIRMED.

Attorneys and Law Firms I.


*436 Richard Tomlinson, Houston, TX, Daniel A. As alleged in her operative second amended complaint,
Edelman (argued), Edelman, Combs & Latturner, in responding in January 2002 to an advertisement for
Chicago, IL, for Plaintiff–Appellant. loans secured by automobile title, Lovick requested a
$2000 title loan from CPCWA Company, Ltd. (d/b/
Joseph Alan Callier, Callier & Garza, Houston, TX, for
a “Power Financial” and “Texas Jewelry & Financial
Ritemoney Ltd. and SNM Inc.
Services”). The loan was to originate from Ritemoney
Michael H. Rubin (argued), McGlinchey Stafford, Baton Ltd. as lender, with CPCWA as broker. Lovick signed
Rouge, LA, Juliann Hale Panagos, J. Scott Sheehan, with Ritemoney a Loan Disclosure, Promissory Note and
McGlinchey Stafford, Houston, TX, John Steven Dwyre, Security Agreement (the Note), which provided, inter alia:
the amount financed was $2013 ($2000 to Lovick and

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Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
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$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.

Payment of third-party fees: In connection with any


third-party fees such as fees for loan brokerage or other
credit services, I acknowledge the following: I separately II.
contracted with another company or person to receive
[1] [2] [3] [4] “[A] complaint should not be dismissed
brokerage or other credit services and agreed to pay
[under Rule 12(b)(6) ] for failure to state a claim unless it
for those services; I am responsible for such fees; I am
appears beyond doubt that the plaintiff can prove no set
voluntarily using part of this loan to pay for those
of facts in support of his claim which would entitle him
fees; and I understand that this loan is made by lender
to relief”. Ramming v. United States, 281 F.3d 158, 161
[Ritemoney] under Section 302.001 of the Texas Finance
(5th Cir.2001) (quoting Conley v. Gibson, 355 U.S. 41, 45–
Code at a rate of interest not greater than 10% per annum
46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957)). Such a dismissal is
and that a fee paid to a third-person [CPCWA] for
reviewed de novo. E.g., Herrmann Holdings Ltd. v. Lucent
arranging this loan (though required to be treated as
Tech. Inc., 302 F.3d 552, 557–58 (5th Cir.2002). For
finance charge for purposes of federal law disclosures)
that review, the complaint is construed in the light most
is for a separate service and not interest for purposes of
favorable to plaintiff, accepting as true all well-pleaded
Texas law.
factual allegations and drawing all reasonable inferences
(Emphasis added.) Upon signing the Note, Lovick in plaintiff's favor. Id. at 558. On the other hand, “we may
received a $2000 check, which she cashed at the CPCWA not rely upon conclusional allegations or legal conclusions
office. Subsequently, she made all of the required disguised as factual allegations”. Jeanmarie v. United
payments to, and through, CPCWA. States, 242 F.3d 600, 602–03 (5th Cir.2001).

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,

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12(b)(6) dismissals are reviewed de novo; in so doing, we


will apply Rule 8(a). To say the least, a $1500 fee for a $2000 loan is more than
questionable. And, Texas caselaw describes circumstances
For the claimed usury, Lovick alleges: (1) CPCWA under which brokerage fees may be attributed to the
handled all the usual tasks of the lender, including lender as disguised interest for purposes of assessing usury.
arranging advertising, credit review, collateral inspection, That caselaw, however, has been supplanted by Texas
approval decision, paperwork preparation, issuance and *439 usury statutes, see TEX. FIN.CODE § 301.001 et
cashing of checks, collection of payment, and deciding seq., and the Credit Services Organization Act (CSOA),
when to repossess collateral, and, in this way, Ritemoney enacted in 1987, see TEX. FIN.CODE § 393. These
shifted substantially all of its overhead to CPCWA; (2) statutes govern interest and the conditions under which
CPCWA acted as an agent of, or joint participant with, a broker may assess fees. First, we examine Lovick's
Ritemoney, as evidenced by CPCWA's brokering all of allegations under pre-CSOA caselaw; then, we assess their
its title loans to Ritemoney as lender and Ritemoney's viability under the usury statutes and CSOA. Because
making all of its title loans through CPCWA, and these statutes permit the alleged activities by CPCWA, its
CPCWA was authorized to act as Ritemoney's agent fee is not usurious interest.
for the purposes of disbursing cash advances by signing
checks on Ritemoney's account and collecting loan
payments; (3) because all borrowers were expected to
A.
pay a brokerage fee to CPCWA to obtain a loan
from Ritemoney, payment of the fee was effectively a [6] [7] [8] Lenders can violate the usury laws
prerequisite for a Ritemoney loan, and Ritemoney was by charging borrower fees that constitute “disguised
aware from the Note and payment of the fees from loan interest”. E.g., First USA Mgmt., Inc. v. Esmond,
proceeds that borrowers were expected to pay those fees 960 S.W.2d 625, 627 (Tex.1997). Whether a fee is of
to obtain a loan; and (4) these facts demonstrate a scheme that nature turns, of course, on the substance of the
both to evade the ten percent Texas usury ceiling for transaction. Id. If the fee is supported by “separate and
unlicensed lenders and to falsely suggest that CPCWA is additional consideration apart from the lending of money
separate from Ritemoney. [, it] is not interest and cannot be the basis of usury”. Tex.
Commerce Bank–Arlington v. Goldring, 665 S.W.2d 103,
In the light of these allegations, Lovick contends: this 104 (Tex.1984).
alleged relationship between Ritemoney, as lender, and
CPCWA, as broker, is sufficient under Texas law to Lovick maintains that the brokerage fee paid CPCWA
impute CPCWA's brokerage fee to Ritemoney; and, is attributable to Ritemoney because: (1) CPCWA is
because Ritemoney is already charging ten percent, the Ritemoney's “general agent” or “joint participant”; (2)
addition of the fee raises the interest rate above the ten Ritemoney shifted its overhead to CPCWA, and lender
percent limit. overhead is treated as interest; and (3) CPCWA's having
performed most of the tasks ordinarily performed by the
[5] Interest is compensation “for the use, forbearance, lender, CPCWA is not a bona fide third party.
or detention of money”. TEX. FIN.CODE § 301.002(a)
(4). In the absence of other law, interest greater than
ten percent is usurious. TEX. FIN.CODE §§ 302.001(b);
1.
342.004(a). Under Texas law, the elements for a usury
claim are: “(1) a loan of money; (2) an absolute obligation [9] [10] Texas courts have long recognized that loan
to repay the principal; and (3) the exaction of a greater brokers may charge a fee for their services; the fee is not
compensation than allowed by law for the use of the generally considered interest for usury purposes.
money by the borrower”. First Bank v. Tony's Tortilla
Factory, 877 S.W.2d 285, 287 (Tex.1994). The third It is recognized ... that charges
element for usury is at issue: whether the allegations made to the borrower by the
are sufficient to withstand a Rule 12(b)(6) challenge on lender's special agent for special
whether the fee paid to CPCWA is interest. services such as legal work in

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Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
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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.—

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Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
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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:

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Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
RICO Bus.Disp.Guide 10,713

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
RICO Bus.Disp.Guide 10,713

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

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Lovick v. Ritemoney Ltd., 378 F.3d 433 (2004)
RICO Bus.Disp.Guide 10,713

here. Lovick makes the following factual allegations in her


*445 6) The Promissory Note discloses the interest rate
Second Amended Complaint, which, at this stage of the
for TILA purposes to be 131.019%, but that, “for state law
case, we must assume are true:
purposes,” the “loan brokerage or other credit services”
fee is being financed by the Note, while the interest rate
1) CPCWA handled all the usual tasks of the lender:
is 10%.
arrangement of advertising, credit review, collateral
inspection, approval decision, paperwork preparation,
In other words, Lovick alleges that CPCWA was doing
issuance and cashing of checks, collecting payment,
more than serving as a mere arranger of loans, because it
deciding when to repossess;
served as the lender's agent, and thus the 75% broker's fee
was not for a separate service. Consequently, she alleges
2) Ritemoney shifted all, or substantially all, of its
that the actual interest rate was usurious.
overhead expenses, thereby disguising extra interest;

In short, Lovick has, in my opinion, pled enough facts to


3) CPCWA acted as an agent of or joint participant with
permit discovery and to allow the case to proceed at least
Ritemoney, as evidenced by its brokering all its title loans
to the summary judgment stage.
to this particular lender, and Ritemoney's making all its
title loans through CPCWA;
For the foregoing reasons, I would vacate the district
court's judgment and remand for further proceedings and,
4) Ritemoney required that all loans be negotiated by
for that reason, I respectfully dissent.
CPCWA and knew that the payment of the broker fee was
a prerequisite for a loan;
All Citations
5) Ritemoney entrusted the entire management of its title
loan business to CPCWA, and CPCWA was Ritemoney's 378 F.3d 433, RICO Bus.Disp.Guide 10,713
agent rather than the borrowers' agent;

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

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McReynolds v. Elston, 222 S.W.3d 731 (2007)

KeyCite Yellow Flag - Negative Treatment West Headnotes (26)


Declined to Follow by Delfingen US-Texas, L.P. v. Valenzuela, 
Tex.App.-El Paso, February 6, 2013
222 S.W.3d 731 [1] Alternative Dispute Resolution
Court of Appeals of Texas, Review
Houston (14th Dist.). Alternative Dispute Resolution
Decisions reviewable; finality
L. Bland McREYNOLDS and Mandamus
Judith Bauman, Appellants Civil proceedings other than actions
v.
Mandamus
Lanelle ELSTON, Appellee. Jurisdiction and authority
In re L. Bland McReynolds
Court of Appeals had interlocutory rather
and Judith Bauman, Relators. than mandamus jurisdiction to consider
denial of former husband's motion to
Nos. 14–06–00974–CV, 14–06–00980–CV.
stay arbitration which former wife initiated
|
under partnership agreement and to compel
March 27, 2007.
arbitration under settlement agreement, as
Synopsis trial court order denied former husband his
Background: Former husband brought motion to compel alleged right to arbitration, where former
arbitration pursuant to settlement agreement with former husband sought not simply to change
wife regarding their partnership and to stay other arbitrators, but rather to enforce his express
arbitration which former wife initiated pursuant to contractual right of arbitration under the
partnership agreement. The 129th District Court, Harris settlement agreement, motion to compel that
County, Samuel Grant Dorfman, J., denied the motion, arbitration constituted the predominant relief
and former husband appealed. sought in former husband's motion, and trial
court's order was titled as a denial of the
motion to compel arbitration. V.T.C.A., Civil
Practice & Remedies Code § 171.098(a)(1).
Holdings: The Court of Appeals, Leslie B. Yates, J., held
that: 6 Cases that cite this headnote

[1] Court of Appeals had interlocutory rather than


[2] Appeal and Error
mandamus jurisdiction;
Interlocutory and Intermediate Decisions
[2] former wife's claims fell under settlement agreement's Court of Appeals has jurisdiction to consider
arbitration clause rather than partnership agreement's appeals of interlocutory orders only if a
arbitration clause; statute explicitly so provides.

Cases that cite this headnote


[3] former husband did not substantially invoked
arbitration under partnership agreement; and
[3] Alternative Dispute Resolution
[4] any act by former husband in invoking arbitration Validity
under partnership agreement did not result in prejudice to Alternative Dispute Resolution
former wife. Disputes and Matters Arbitrable Under
Agreement

Reversed and remanded. Under Texas Arbitration Act (TAA), a party


moving to compel arbitration must establish

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


McReynolds v. Elston, 222 S.W.3d 731 (2007)

(1) the existence of a valid, enforceable


arbitration agreement and (2) that the Cases that cite this headnote
claims asserted fall within the scope of
that agreement. V.T.C.A., Civil Practice & [8] Alternative Dispute Resolution
Remedies Code § 171.001 et seq. Disputes and Matters Arbitrable Under
Agreement
6 Cases that cite this headnote
Former wife's claims against former
husband regarding the acquisition, sale,
[4] Alternative Dispute Resolution and distribution of partnership assets fell
Evidence under settlement agreement's arbitration
If the movant for arbitration establishes clause rather than partnership agreement's
that an arbitration agreement governs the arbitration clause; language of settlement
dispute, the burden then shifts to the party agreement, which expressly stated that
opposing arbitration to establish a defense transfers were intended to “effect” the
to the arbitration agreement. V.T.C.A., Civil liquidation and dissolution of the partnership
Practice & Remedies Code § 171.001 et seq. and which broadly released claims “relating
to” the partnership and “all other matters
5 Cases that cite this headnote relating to assets or liabilities” of the
partnership and former husband and wife,
[5] Alternative Dispute Resolution indicated that it superseded the partnership
Modification or termination agreement, and settlement agreement's
arbitration clause itself contained sweeping
A party may revoke an agreement to arbitrate
language which purported to cover claims
only on a ground that exists at law or in equity
arising under that agreement or “any matter
for the revocation of a contract. V.T.C.A.,
relating hereto.”
Civil Practice & Remedies Code § 171.001.
3 Cases that cite this headnote
Cases that cite this headnote

[9] Alternative Dispute Resolution


[6] Alternative Dispute Resolution
Scope and standards of review
Right to Enforcement and Defenses in
General On review of whether a claim falls within
the scope of an arbitration agreement,
If the trial court concludes the movant for
the appellate court focuses on the factual
arbitration has met its burden and the party
allegations of the complaint rather than the
opposing arbitration has failed to prove its
legal causes of action asserted.
defenses, the trial court has no discretion but
to compel arbitration. 6 Cases that cite this headnote
7 Cases that cite this headnote
[10] Alternative Dispute Resolution
Evidence
[7] Alternative Dispute Resolution
Existence and validity of agreement The burden lies with the party opposing
arbitration to show that the claims fall outside
Issue of whether former husband fraudulently
the scope of the arbitration agreement.
induced former wife to enter entire settlement
agreement, which contained arbitration 6 Cases that cite this headnote
clause, was an issue for the arbitrators rather
than the court.
[11] Alternative Dispute Resolution
Arbitration favored; public policy

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


McReynolds v. Elston, 222 S.W.3d 731 (2007)

Alternative Dispute Resolution Whether a party has waived its right to


Construction in favor of arbitration arbitrate presents a question of law reviewed
There is a presumption favoring arbitration, de novo.
which generally requires that the court resolve
4 Cases that cite this headnote
doubts as to the scope of the agreements in
favor of coverage.
[16] Alternative Dispute Resolution
1 Cases that cite this headnote Waiver or Estoppel
Waiver of an arbitration right must be
[12] Alternative Dispute Resolution intentional.
Construction in favor of arbitration
1 Cases that cite this headnote
A court should not deny arbitration unless
it can be said with positive assurance that
an arbitration clause is not susceptible of an [17] Alternative Dispute Resolution
interpretation that would cover the dispute at Suing or participating in suit
issue. Merely taking part in litigation is not enough
to waive a right to arbitration unless a party
2 Cases that cite this headnote
has (1) substantially invoked the judicial
process (2) to its opponent's prejudice.
[13] Alternative Dispute Resolution
Disputes and Matters Arbitrable Under 1 Cases that cite this headnote
Agreement
The presumption of arbitrability is [18] Alternative Dispute Resolution
particularly applicable where the clause is Evidence
broad; that is, it provides for arbitration of Because of the strong federal and state policies
“any dispute arising between the parties,” favoring arbitration, a presumption exists
or “any controversy or claim arising out of against the waiver of a contractual right to
or relating to the contract thereof,” or “any arbitration.
controversy concerning the interpretation,
performance or application of the contract.” Cases that cite this headnote

2 Cases that cite this headnote


[19] Alternative Dispute Resolution
Suing or participating in suit
[14] Alternative Dispute Resolution
Former husband did not substantially invoke
Construction in favor of arbitration
arbitration under partnership agreement and
The presumption of arbitrability is not thus did not waive right to arbitration under
without limits and cannot serve to stretch a settlement agreement, even though former
contractual clause beyond the scope intended husband filed motion to stay after panel
by the parties or authorize an arbitrator heard his objections to the arbitration, filed a
to disregard or modify the plain and counterclaim and paid the filing fee, requested
unambiguous provisions of the agreement. documents from the arbitration association
and complied with their order to produce
2 Cases that cite this headnote
documents, allowed arbitration association
to pre-screen arbitrators and objected to
[15] Alternative Dispute Resolution arbitrators chosen for the panel, participated
Scope and standards of review in a conference call to discuss the appointment
of the panel, scheduling, discovery, and
other parameters of the arbitration, and

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


McReynolds v. Elston, 222 S.W.3d 731 (2007)

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.

1 Cases that cite this headnote [25] Alternative Dispute Resolution


Waiver or Estoppel
[21] Alternative Dispute Resolution Loss of time alone does not constitute
Waiver or Estoppel sufficient prejudice to establish waiver of a
right to arbitration.
A party does not demonstrate an intent to
waive arbitration by consistently and timely Cases that cite this headnote
seeking to invoke its contractual right to
arbitration.
[26] Alternative Dispute Resolution
Cases that cite this headnote Waiver or Estoppel
Generalized complaints about delay and
[22] Alternative Dispute Resolution expense, absent explanation and evidentiary
Suing or participating in suit support, will not establish prejudice necessary
to find a waiver of a right to arbitration.
Purely defensive measures do not
substantially invoke the judicial process in a Cases that cite this headnote
manner that waives a right to arbitration.

Cases that cite this headnote

Attorneys and Law Firms


[23] Alternative Dispute Resolution
Waiver or Estoppel *734 Kevin Dubose and John H. Boswell, Houston, for
Delay alone generally does not establish appellants.
waiver of a right to arbitration.
Alex Jerome Brown, Emilio F. Deayala, and Marc E.
Cases that cite this headnote Grossberg, Houston, for appellees.

*735 Panel consists of Justices YATES, ANDERSON,


[24] Alternative Dispute Resolution and HUDSON.
Suing or participating in suit

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


McReynolds v. Elston, 222 S.W.3d 731 (2007)

settled by arbitration in accordance


with the Commercial Arbitration
OPINION Rules of the American Arbitration
Association.
LESLIE B. YATES, Justice.
The partnership terminated on December 31, 1998
In this consolidated interlocutory appeal and mandamus
and subsequently entered liquidation. At some point
proceeding, appellants L. Bland McReynolds and Judith
thereafter, a dispute arose, and Elston initiated arbitration
Bauman challenge the trial court's order denying their
against McReynolds pursuant to the Partnership
motion to compel arbitration. We deny the petition for
Agreement, alleging he “improperly liquidat[ed]
writ of mandamus and reverse and remand the trial court's
Partnership assets and treat[ed] them as his sole property.”
order under our interlocutory appellate jurisdiction.
As a result of this arbitration, on August 18, 1999, the
parties entered into a “Settlement Agreement and Full
and Complete Joint and Mutual Release” (“Settlement
BACKGROUND Agreement”) to “settle[ ] the issues relating to the
various claims made or that could have been made.”
This proceeding arises from a dispute over competing The Settlement Agreement is multifaceted and contains
arbitration agreements. On March 1, 1997, McReynolds numerous provisions relating to the partnership and
and Elston executed an agreement incident to their divorce
liquidation of the assets. First, the agreement specifically
creating a limited partnership (“Partnership Agreement”) outlines how each partnership asset should be liquidated
whose “sole intent and purpose” was to “liquidate all of and contains residual language stating that Elston
the partnership assets ... and distribute the proceeds.” The “quitclaims to McReynolds all other assets of and
partnership assets listed in the agreement consist of the interests in Partnership assets not disposed of herein.”
parties' community property and include, among other To this end, the agreement states that “[t]he transfers
things, a large tract of real property (the “242 Tract”). contemplated by the settlement are intended to effect
The agreement names McReynolds as general partner and the liquidation and dissolution of the Partnership by
grants him authority to control the partnership assets and, distribution of all its assets and the payment or
upon dissolution, to liquidate and sell or distribute the assumption of all its liabilities.” Second, the agreement
assets; however, it does not expressly itemize transactions releases “all ... claims [by McReynolds and/or Elston]
that will effect liquidation of the assets. The agreement relating to ... the Partnership and any and all other matters
names Elston as a limited partner and gives her various relating to assets or liabilities of McReynolds, Elston,
rights to the assets. The agreement also contains the
or the Partnership.” 1 *736 Finally, the Settlement
following arbitration clause:
Agreement contains an arbitration clause of its own:
If a dispute among the Partners
arises out of or relates to
In the event of any dispute under this Settlement
this Partnership, or the breach
Agreement or any matter relating hereto ... the parties
of this Agreement, and if the
agree to submit each dispute to Daniel Goldberg, for
dispute cannot be settled through
binding disposition.... If the parties cannot agree on
direct discussions, the parties agree
the rules and procedures for the arbitration then the
to first endeavor to settle the
AAA Rules for Commercial Disputes shall apply.... If
dispute in an amicable manner by
Dan Goldberg is unable to act as the arbitrator and the
mediation under the Commercial
parties cannot agree on the selection of an arbitrator[,]
Mediation Rules of the American
the arbitrator shall be selected pursuant to the AAA
Arbitration Association, before
Rules.
resorting to arbitration. Thereafter,
Some years later, a further dispute arose between Elston
any unresolved controversy or
and McReynolds. On October 5, 2005, pursuant to the
claim arising out of or relating
Partnership Agreement's arbitration clause, Elston filed
to this Partnership or breach
a claim with the American Arbitration Association (the
of this Agreement, shall be

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


McReynolds v. Elston, 222 S.W.3d 731 (2007)

“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

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McReynolds v. Elston, 222 S.W.3d 731 (2007)

“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

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McReynolds v. Elston, 222 S.W.3d 731 (2007)

(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

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McReynolds v. Elston, 222 S.W.3d 731 (2007)

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.

Furthermore, the Settlement Agreement's arbitration


clause itself contains sweeping language encompassing 1. Substantial Invocation of the AAA Arbitration
Elston's claims, as the agreement purports to cover [19] Elston claims the following actions establish that
claims arising under that agreement or “any matter McReynolds substantially invoked the AAA Arbitration:
relating hereto.” Courts have interpreted such language to (1) waiting an “inordinate” amount of time to file
require only that a claim “touch upon” or be “factually the motion to stay the AAA Arbitration, which
intertwined” with matters covered by the arbitration McReynolds filed after the AAA panel heard his
agreement. See Marshall, 909 S.W.2d at 900; AutoNation objections to the arbitration, (2) filing a counterclaim
and paying the filing fee, (3) requesting documents from

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McReynolds v. Elston, 222 S.W.3d 731 (2007)

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

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McReynolds v. Elston, 222 S.W.3d 731 (2007)

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

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McReynolds v. Elston, 222 S.W.3d 731 (2007)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


Mendelsohn v A & D Catering Corp., 119 Misc.2d 581 (1983)
464 N.Y.S.2d 331

Bressler, Lipsitz & Rothenberg (William R. Kutner of


counsel), for petitioners. Vann & Borenstein (Abraham
119 Misc.2d 581, 464 N.Y.S.2d 331
Borenstein of counsel), for respondent.
Jacob Mendelsohn et al., Petitioners,
OPINION OF THE COURT
v.
A & D Catering Corporation, Respondent Vincent Pizzuto, J.

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:

“30.1 The Lessee shall make application on or before


APPEARANCES OF COUNSEL February 1, 1976 to the State Liquor Authority for a

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Mendelsohn v A & D Catering Corp., 119 Misc.2d 581 (1983)
464 N.Y.S.2d 331

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Mendelsohn v A & D Catering Corp., 119 Misc.2d 581 (1983)
464 N.Y.S.2d 331

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Mendelsohn v A & D Catering Corp., 119 Misc.2d 581 (1983)
464 N.Y.S.2d 331

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Mendelsohn v A & D Catering Corp., 119 Misc.2d 581 (1983)
464 N.Y.S.2d 331

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

KeyCite Yellow Flag - Negative Treatment West Headnotes (34)


Distinguished by Hickory Farms, Inc. v. Snackmasters, Inc., N.D.Ill., 
May 29, 2007
376 F.Supp.2d 877 [1] Copyrights and Intellectual Property
United States District Court, Persons Liable
N.D. Illinois, To support a claim for contributory copyright
Eastern Division. infringement, plaintiff must demonstrate (1)
direct infringement by a primary infringer, (2)
MONOTYPE IMAGING, INC. a Delaware defendant's knowledge of the infringement,
corporation (f/k/a/ Agfa Monotype Corp.) and (3) defendant's material contribution to
and International Typeface Corporation, the infringement.
a New York corporation, Plaintiffs,
11 Cases that cite this headnote
v.
BITSTREAM INC., a Delaware
corporation, Defendant. [2] Copyrights and Intellectual Property
Persons Liable
No. 03 C 4349. Defendant is liable for contributory copyright
| infringement when it, with knowledge of
July 12, 2005. the infringing activity, induces. causes, or
materially contributes to the infringing
Synopsis
conduct of another.
Background: Font software distributors sued competitor,
alleging copyright infringement, trademark infringement, 7 Cases that cite this headnote
and violation of Digital Millennium Copyright Act
(DMCA).
[3] Copyrights and Intellectual Property
Defenses
The capability of substantial noninfringing
Holdings: Following bench trial, the District Court, St.
uses of copying equipment may be a
Eve, J., held that:
defense to liability for contributory copyright
infringement.
[1] distributors did not establish direct infringement of
their copyrights by competitor's licensees; Cases that cite this headnote

[2] distributors failed to show competitor's knowledge of


[4] Copyrights and Intellectual Property
alleged direct copyright infringement by its licensees;
Persons Liable
[3] competitor did not materially contribute to alleged Even with evidence of substantial lawful use,
copyright infringement; one who distributes a device with the object
of promoting its use to infringe copyright, as
[4] competitor was not liable for contributory trademark shown by clear expression or other affirmative
infringement; and steps taken to foster infringement, is liable
for the resulting acts of infringement by third
[5] competitor did not violate DMCA. parties.

Cases that cite this headnote


Judgment for competitor.
[5] Copyrights and Intellectual Property

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

Knowledge element for contributory made by defendant to eliminate or reduce


copyright infringement is met in those cases infringing uses.
in which a party has been notified of specific
infringing uses of its technology and fails to Cases that cite this headnote
act to prevent future such infringing uses, or
willfully blinds itself to such infringing uses. [15] Copyrights and Intellectual Property
Persons Liable
3 Cases that cite this headnote
Competitor did not materially contribute
to alleged direct copyright infringement of
[12] Copyrights and Intellectual Property distributors' font software by its licensees,
Persons Liable and thus was not liable to distributors for
Absence of evidence that competitor's contributory copyright infringement, given
licensees committed alleged acts of distributors' failure to prove that infringing
infringement of distributors' font software uses of competitor's font technology were
precluded showing that competitor substantial, evidence that number of
contributed to infringement, as required for noninfringing uses of competitor's technology
competitor to be liable for contributory vastly outweighed any potential infringing
copyright infringement. uses, absence of evidence that competitor
knew of or encouraged allegedly infringing
Cases that cite this headnote uses of its product, and competitor's efforts
to reduce risk of infringement of third parties'
[13] Copyrights and Intellectual Property intellectual property.
Other Works
1 Cases that cite this headnote
Even if distributors of font software
established that competitor's licensees had
engaged in acts of infringement of [16] Copyrights and Intellectual Property
distributors' software, they did not show Persons Liable
that competitor knew its licensees were using Plaintiffs asserting claim of contributory
its font technology to do so, as required copyright infringement must provide reliable
for competitor's liability for contributory estimate of magnitude of infringing
copyright infringement; although competitor uses compared to noninfringing uses in
made statements to the effect that its licensees showing defendant's material contribution to
could use its product with any font, that infringement.
statement reflected product's capabilities, and
did not reflect intent on competitor's part 4 Cases that cite this headnote
that its product would be used with other
distributors' fonts without permission. [17] Copyrights and Intellectual Property
Persons Liable
Cases that cite this headnote
Competitor of font software distributors did
not have knowledge of its licensees' alleged
[14] Copyrights and Intellectual Property infringement of distributors' software or
Persons Liable promote use of its font technology to infringe
In determining whether alleged contributory distributors' copyrights, and thus was not
copyright infringer acted with requisite liable for contributory copyright infringement
culpable intent, court considers (1) the under intentional inducement theory.
respective magnitudes of infringing and
noninfringing uses, (2) whether defendant Cases that cite this headnote
encouraged the infringing uses, and (3) efforts

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

single factor being dispositive, and court may


[18] Trademarks assign varying weights to each of the factors
Contributory Liability depending on the facts presented.
To prove contributory trademark
infringement, plaintiff must demonstrate that Cases that cite this headnote
defendant (1) intentionally induced a third
party to infringe plaintiff's mark, or (2) [22] Trademarks
supplied a product to a third party with actual Internet Cases
or constructive knowledge that the product
Mere presence of trademarks of font software
was being used to directly infringe the mark.
distributors on websites of competitor's
2 Cases that cite this headnote licensees, without evidence as to how
marks were being used and whether they
were being used in association with any
[19] Trademarks particular product or service, did not establish
Contributory Liability likelihood of confusion, and thus direct
Contributory trademark infringement infringement, for purposes of distributors'
requires proof of direct infringement by a claim against competitor for contributory
third party, as well as defendant's intent and trademark infringement.
knowledge of the wrongful activities of its
distributors. Cases that cite this headnote

5 Cases that cite this headnote


[23] Trademarks
Contributory Liability
[20] Trademarks Even if distributors of font software showed
Infringement that direct infringement of their trademarks
To make out a claim for direct trademark occurred, absence of evidence that such
infringement under the Lanham Act, plaintiff infringement was committed by competitor's
must establish that (1) its mark is protectable licensees precluded showing that competitor
and (2) defendant's use of the mark is likely to contributed to or induced such infringement,
cause confusion among consumers. Lanham and thus precluded competitor's liability for
Trade-Mark Act, § 1 et seq., 15 U.S.C.A. § contributory trademark infringement.
1051 et seq.
Cases that cite this headnote
Cases that cite this headnote

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

knowingly or intentionally contributed to that


[25] Copyrights and Intellectual Property use. 17 U.S.C.A. § 1202(b)(3).
Other Works
Provision of Digital Millennium Copyright Cases that cite this headnote
Act (DMCA) barring unauthorized
intentional removal or alteration of copyright [28] Trademarks
management information applies only to Alphabetical Listing
the removal of copyright management
GALLIARD.
information on or from plaintiff's product or
original work. 17 U.S.C.A. § 1202(b)(1). Cases that cite this headnote

Cases that cite this headnote


[29] Trademarks
Alphabetical Listing
[26] Copyrights and Intellectual Property
Other Works ITC HIGHLANDER.

Competitor of font software distributors Cases that cite this headnote


did not violate provision of Digital
Millennium Copyright Act (DMCA)
barring unauthorized intentional removal [30] Trademarks
or alteration of copyright management Alphabetical Listing
information, given absence of evidence ITC MENDOZA ROMAN.
that competitor, or any of its licensees,
Cases that cite this headnote
used competitor's font technology with
distributors' fonts, and thus that
either competitor or licenses intentionally [31] Trademarks
removed or altered copyright management Alphabetical Listing
information, and absence of evidence ITC SLIMBACH.
that competitor knowingly or intentionally
contributed to any use by its licensees of Cases that cite this headnote
its technology with distributors' software. 17
U.S.C.A. § 1202(b).
[32] Trademarks
Cases that cite this headnote Alphabetical Listing
ITC TEMPUS.

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

Woburn, Massachusetts. (R. 95-1; Pl.'s Proposed Findings


of Fact (“PPFF”) at ¶ 1.) ITC is a New York corporation
that is wholly owned by Monotype and is run by
Attorneys and Law Firms
employees of Monotype. (Id. ¶ 2.) Monotype is engaged
*881 Paul F. Stack, Cori A. Szczucki, Robert A. Filpi, in creation, production, licensing, and distribution of
Stack & Filipi, Chtd., Chicago, IL, for Plaintiffs. computer software programs which, when used with
appropriate hardware and software, generate human
Jeffrey L. Snow, Daniel E. Rosenfeld, Tara C. Clancy, readable typeface designs on computer screens, printers,
Kirkpatrick & Lockhart Nicholson Graham LLP, and other output devices. (Id. ¶ 6.) These programs are
Boston, MA, Eric Richard Lifvendahl, Peter C. John, commonly known as “fonts.” 1 (Id.) Monotype is the
Williams, Montgomery & John, Ltd., Chicago, IL, for owner of approximately 400 fonts. (Id ) ITC is the owner
Defendant. of the ITC Typeface Library, which contains over 1,500
fonts. (Id.) In addition, Monotype and ITC distribute the
fonts of other font owners under license from them. (Id.)
MEMORANDUM OPINION AND ORDER
Bitstream is a Delaware corporation with its principal
ST. EVE, District Judge.
place of business in Cambridge, Massachusetts. (Id.
Plaintiffs Monotype Imaging, Inc. (“Monotype”) ¶ 3.) Bitstream is a software development company
and International Typeface Corporation (“ITC”), that develops and licenses font software and related
(collectively “Plaintiffs”), sued Defendant Bitstream Inc. font technology software. (R. 95-1; Def.'s Proposed
(“Bitstream”) for copyright infringement, trademark Findings of Fact (“DPFF”) at ¶ 1.) Bitstream licenses
infringement, and violation of the Digital Millennium and distributes font software, including over 1,000 fonts
Copyright Act (“DMCA”). The Court held a bench trial that it owns, to equipment manufacturers, software
on June 20, 2005 through June 27, 2005. For the reasons developers and individual users. Bitstream has licensed
discussed below, the *882 Court finds that Bitstream is and distributed font software since it was founded in 1981.
not liable under any of Plaintiffs' claims. (Id. ¶ 3.) Bitstream and Monotype directly compete in the
field of font software and font technologies. (Id. ¶ 5.)

BACKGROUND III. TrueDoc


Bitstream developed and licenses a software program and
I. Procedural Background technology called TrueDoc. (Id. ¶ 6.) Bitstream introduced
Bitstream filed a Motion for Summary Judgment on TrueDoc to the marketplace and made it commercially
October 27, 2004. The Court granted summary judgment available in 1995. (Id.) The purpose of the TrueDoc
for Bitstream on Plaintiffs' claims of direct trademark technology is to replicate typeface designs regardless of
and copyright infringement and vicarious copyright whether the recipient of a document at a remote location
infringement. Monotype Imaging, Inc. v. Bitstream, Inc., has the same fonts installed on his or her computer that
No. 03 C 4349, 2005 WL 936882 (N.D.Ill. April 21, 2005). the creator of the document used. (Id. ¶ 7.) The TrueDoc
The Court also denied summary judgment on Plaintiffs' software includes a component called a Character Shape
claims for indirect trademark infringement, contributory
Recorder, 2 which creates a compact file format called a
copyright infringement, and under the DMCA because
Portable Font Resource (“PFR”) based on an underlying
genuine issues of fact existed.
font software program. *883 (Id. ¶ 8.) As an example
of its use, a PFR file may be transmitted electronically
II. Findings Of Fact with a document to a recipient for reproducing typeface
designs. (Id ) The Character Shape Recorder obtains
A. Parties data that describes the shape of the typeface characters
Monotype is a Delaware corporation with its of the underlying font program from the computer's
typographical division located primarily in Elk Grove operating system, which utilizes the font program. (Id.
Village, Illinois, and its principal place of business in ¶ 9.) Bitstream explains this function by stating that

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77 U.S.P.Q.2d 1424

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

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77 U.S.P.Q.2d 1424

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

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77 U.S.P.Q.2d 1424

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.)

Initially, the Court notes that Plaintiffs concede that


they do not know who allegedly directly infringed their C. The Seventh Circuit's Aimster Factors
copyrights. (Tran. 773:7-13.) Because Plaintiffs maintain [14] [15] The Supreme Court has recognized that a
that they have not authorized anyone to use their fonts court may impute culpable intent as a matter of law from
with Bitstream's Character Shape Recorder, it is true the characteristics or uses of an accused product. See
that the identity of the alleged direct infringer may not Grokster, 125 S.Ct. 2764, 2778-79; Sony Corp., 464 U.S.
be necessary to prove the act of direct infringement in at 434, 104 S.Ct. 774. In determining whether the alleged
this case. For purposes of determining whether Bitstream contributory infringer acted with such culpable intent, the
contributed to that specific direct infringement, however, Seventh Circuit considers: (1) the respective magnitudes
it is necessary in this case to know generally the identity of infringing and noninfringing uses; (2) whether the
of the direct infringer. As Bitstream points out, there defendant encouraged the infringing uses; and (3) efforts
made by the defendant to eliminate or reduce infringing
is no credible 9 evidence in the record for the Court to
uses. Aimster, 334 F.3d at 649-51. The Court addresses
determine whether or not the *887 specific infringer
each of these factors in turn.
in Exhibits 15 and 17 was in fact a Bitstream licensee.
Accordingly, even if Exhibits 15 and 17 evidenced acts of
direct copyright infringement, Plaintiffs failure to prove 1. The Respective Magnitudes Of Infringing And
that Bitstream's licensees committed those acts is fatal Noninfringing Uses
to Plaintiffs' claim because there is no evidence that [16] As discussed in Section I.A.2 of this Analysis,
Bitstream contributed to that infringement. Plaintiffs elicited testimony about the respective number
of Bitstream fonts and non-Bitstream fonts available
[13] Even if Plaintiffs did prove acts of infringement for Bitstream licensees to use with the Character Shape
by Bitstream's licensees, Plaintiff did not present any Recorder. Plaintiffs, however, did not offer any evidence
evidence that Bitstream ever knew that its licensees to tie that ratio of Bitstream fonts to non-Bitstream fonts
were using TrueDoc's Character Shape Recorder with available in the marketplace to the proportion of such
Plaintiffs' fonts. Plaintiffs never notified Bitstream of fonts that Bitstream's customers actually used with the
their infringement claims prior to filing this action. Character Shape Recorder. Accordingly, Plaintiffs failed
In arguing that Bitstream either knew or should have to prove that the infringing uses of the TrueDoc Character
known of the alleged copyright infringement, Plaintiffs
Shape Recorder were substantial. 10 Plaintiffs do not
rely on numerous statements in Bitstream documents that
dispute *888 that TrueDoc's Character Shape Recorder
TrueDoc could be used with any font. (See e.g., Ex.
can be legally used with Bitstream fonts or with fonts from
45 at 1.) The Court found the testimony of Bitstream's
distributors that have given permission for their fonts to
CEO and General Counsel, Anna Chagnon, and Vice
be used with TrueDoc. Based on the evidence provided at
President and Chief Technical Officer, John Collins on
trial, the number of noninfringing uses of the Character
this issue to be highly credible. These Bitstream witnesses
Shape Recorder vastly outweighs any potential infringing
consistently testified that they never intended Bitstream's
uses. This factor heavily favors Bitstream.
licensees to use TrueDoc's Character Shape Recorder with

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77 U.S.P.Q.2d 1424

contributory copyright infringement. Adopting the theory


2. Whether Defendant Encouraged The Infringing Use of “intentional inducement of infringement” from the field
As discussed in Section I.B. of this Analysis, Plaintiff has of patent law, see 35 U.S.C. § 271(b), the Court held that
failed to present any evidence that Bitstream knew of “one who distributes a device with the object of promoting
or encouraged the allegedly infringing uses of TrueDoc. its use to infringe copyright, as shown by clear expression
While Bitstream openly advertised that TrueDoc could or other affirmative steps taken to foster infringement,
be used with any font in order to encourage other is liable for the resulting acts of infringement by third
font distributors to permit Bitstream's licensees to use parties.” Id.
TrueDoc with their fonts, Plaintiff has not presented any
credible evidence that Bitstream was in fact encouraging The Supreme Court's “intentional inducement” theory
its licensees to use those non-Bitstream fonts absent such does not apply to Bitstream's *889 distribution of its
permission. TrueDoc software. As discussed above in Section I.B.
of this Analysis, Bitstream did not have knowledge of
Plaintiffs infringement, let alone act with the “purposeful,
3. Bitstream's Efforts To Eliminate Or Reduce The
culpable expression and conduct” that the Supreme Court
Infringement
found present in the Grokster defendants' conduct. Id.
Bitstream has made at least some efforts to reduce the
at 2779-80. The record here is simply devoid of any
risk of infringement of third parties' intellectual property
such evidence. In Grokster, the Supreme Court noted
through the use of TrueDoc. Bitstream developed a “doc-
three features of the evidence that especially demonstrated
lock” feature with the capability of preventing a third
the requisite intent. First, the defendants targeted “a
party from using a PFR that they receive for any purpose
known source of demand for copyright infringement,
other than viewing the document with which the PFR
came. (Tran. 107:4-8.) Bitstream also engineered TrueDoc the market comprising former Napster 11 users.” Second,
to honor the embedding flags that font foundries include neither defendant took any steps to diminish the infringing
in their font data, which prohibit a third party from activity that they knew about. And, third, the defendants'
embedding that font into another technology. (Tran. models of business were such that they made money by
106:22-107:3.) While Plaintiffs dispute the effectiveness increasing the volume of use of their software, therefore
of these technologies and argue that Bitstream could do increasing the volume of infringement.
more, this argument does not weigh heavily in favor
of finding contributory infringement and certainly does Here, the most that Plaintiffs can point to are Bitstream's
not outweigh the first two factors that decisively weigh repeated advertisements that its TrueDoc software could
in favor of Bitstream. Balancing the above factors, and be used with any fonts and did not infringe upon
especially in light of Plaintiffs' failure to demonstrate intellectual property rights. As several Bitstream witnesses
substantial infringing uses of the TrueDoc Character credibly explained, however, the statement that the
Shape Recorder, Bitstream is not liable for contributing software could be used with any fonts, referred to the
to the alleged copyright infringement. fact that it could work with both Bitstream fonts, as well
as fonts from other font distributors that had authorized
the use of their fonts with TrueDoc. (Tran. 121:6-20;
D. The Supreme Court's Decision in Grokster 129:2-9; 131:11-132:6; 134:9-136:2; 658:16-18; 665:6-8;
[17] On the day that the parties made their closing 665:19-666:4.) This differs substantially from the situation
arguments to the Court, the Supreme Court issued its in Grokster where the defendants specifically targeted
opinion in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, an audience that was seeking to download copyrighted
Ltd., --- U.S. ----, 125 S.Ct. 2764, --- L.Ed.2d ---- (2005). material. Further, unlike in Grokster, here, as discussed
The Supreme Court reversed the Ninth Circuit's decision in Section I.C.3. above, Bitstream submitted evidence
affirming the district court's grant of summary judgment that it had taken steps to avoid the use of its TrueDoc
for the defendants of no liability for contributory with protected fonts of other companies. Lastly, unlike
copyright infringement. Specifically, the Supreme Court in Grokster, there is no evidence in the record to show
found that the Ninth Circuit had misapplied the that Bitstream's business was benefited by increasing
Sony decision in finding that the defendants' software's the number of infringing uses of TrueDoc. Instead, the
capability for noninfringing uses precluded liability for record shows that it was not in Bitstream's business

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77 U.S.P.Q.2d 1424

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).

II. Monotype's Contributory Trademark Infringement


1. Plaintiffs' Ownership Of A Protectable Mark
Claim
At trial, Plaintiffs introduced into evidence the federal
[18] [19] To prove contributory trademark
registrations for various trademarks, including “ITC
infringement, a plaintiff must demonstrate *890 that
HIGHLANDER,” registered on April 25, 1995 (Ex.
a defendant: (1) intentionally induced a third party to
infringe the plaintiff's mark; or (2) supplied a product 32). 14 The Court presumes that Plaintiffs' registered
to a third party with actual or constructive knowledge marks are properly owned and valid. 15 U.S.C. § 1057(b)
that the product was being used to directly infringe the (providing that a certificate of registration is prima facie
mark. Inwood Labs., Inc. v. Ives Labs., Inc., 456 U.S. 844, evidence that the registrant owns the mark and that
854, 102 S.Ct. 2182, 72 L.Ed.2d 606 (1982); Hard Rock the mark is valid). As discussed in Section I.A.1 in this
Cafe Licensing Corp. v. Concession Services, Inc., 955 F.2d Analysis, the Court gives little weight to Exhibit 1 and
1143, 1148 (7th Cir.1992); SB Designs v. Reebok Int'l, Ltd., Plaintiffs failed to prove ownership of a valid trademark
338 F.Supp.2d 904, 911-12 (N.D.Ill.2004). Contributory for any mark other than those for which it provided
infringement requires proof of direct infringement by certificates of registration.
a third party, as well as the defendant's intent and
knowledge of the wrongful activities of its distributors.
2. Whether There Is Evidence That Bitstream's
David Berg & Co. v. Gatto Int'l Trading Co., Inc., 884 F.2d
Licensees Ever Used Plaintiffs' Fonts With The
306, 311 (7th Cir.1989).
Character Shape Recorder
[22] As discussed in Section I.A.2. in this Analysis,
A. Whether Bitstream's Licensees Have Directly there is no evidence in the *891 record that Bitstream's
Infringed Plaintiffs' Trademarks licensees ever used Plaintiffs' fonts with TrueDoc's
[20] [21] To make out a claim for direct trademark Character Shape Recorder. The Court recognizes that
infringement under the Lanham Act, a plaintiff must the limited purposes for which it admitted Exhibits 15
establish that (1) its mark is protectable and (2) the and 17 into evidence impact the copyright and trademark
defendant's use of the mark is likely to cause confusion analyses differently. For instance, Plaintiffs would require
among consumers. See CAE, Inc. v. Clean Air Eng'g, Inc., the Court to accept those exhibits for the truth of the
267 F.3d 660, 673-74 (7th Cir.2001) (citing Eli Lilly & Co. matter asserted in order for those documents to evidence
v. Natural Answers, Inc., 233 F.3d 456, 461 (7th Cir.2000); that the author of those websites used TrueDoc to create
Smith Fiberglass Prod., Inc. v. Ameron, Inc., 7 F.3d 1327, a PFR of one of Plaintiffs' fonts. On the other hand, the
1329 (7th Cir.1993)). The Seventh Circuit applies a seven- Court does not need to accept those exhibits for their
factor test to determine likelihood of confusion, including truth in order for those exhibits to evidence that Plaintiffs'
(1) the similarity of the marks; (2) the similarity of the marks were present on the respective websites on the dates
products; (3) the area and manner of concurrent use; (4) that Mr. Levontovsky printed them from his computer.
the degree of care likely to be used by consumers; (5) the This evidence, however, does not prove that trademark
strength of the plaintiffs' mark; (6) whether any actual infringement occurred. The mere presence of these marks
confusion exists; and (7) the defendant's intent to palm on the Internet does not demonstrate how the marks were
off its goods as those of the plaintiffs. Promatek Indus., being used and, in particular, whether they were being
Ltd. v. Equitrac Corp., 300 F.3d 808, 812 (7th Cir.2002). used in association with any particular product or service.
The likelihood of confusion test is an equitable balancing Absent any evidence of how the authors of Exhibits 15
and 17 used Plaintiffs' marks, Plaintiffs have failed to

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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

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77 U.S.P.Q.2d 1424

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.

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Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

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).

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Monotype Imaging, Inc. v. Bitstream, Inc., 376 F.Supp.2d 877 (2005)
77 U.S.P.Q.2d 1424

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 15


Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

review by contemporaneous ordinary appeal.


28 U.S.C.A. § 1651.
KeyCite Yellow Flag - Negative Treatment
Superseded by Statute as Stated in Finnie v. H & R Block Financial  47 Cases that cite this headnote
Advisors, Inc., 8th Cir.(Mo.), January 12, 2009
103 S.Ct. 927
Supreme Court of the United States [2] Federal Courts
Continuance and stay
MOSES H. CONE MEMORIAL Order staying action seeking order compelling
HOSPITAL, Petitioner arbitration under United States Arbitration
v. Act, pending resolution of state court suit
MERCURY CONSTRUCTION CORPORATION. was appealable as a “final decision” to Court
of Appeals, since arbitrability issue was only
No. 81–1203. issue present, so that stay of federal suit
| pending resolution of state suit meant that
Argued Nov. 2, 1982. there would be no further litigation in federal
| forum. 9 U.S.C.A. § 4; 28 U.S.C.A. § 1291.
Decided Feb. 23, 1983.
432 Cases that cite this headnote
Contractor sought arbitration under Federal Arbitration
Act of its dispute with hospital. The United States
[3] Federal Courts
District Court for the Middle District of North Carolina,
Continuance and stay
at Greensboro, Hiram H. Ward, J., denied arbitration
pending disposition of a state action, and contractor Stay order is final for appealability purposes
sought relief both by way of petition for mandamus when sole purpose and effect of stay is to
and by appeal. The Court of Appeals, 656 F.2d 933, surrender jurisdiction of federal suit to state
Donald Russell, Circuit Judge, reversed and remanded court.
with directions. Rehearing was denied, 664 F.2d 936,
158 Cases that cite this headnote
and certiorari was granted. The Supreme Court, Justice
Brennan, held that: (1) district court's stay order was
appealable as a “final decision” to the Court of Appeals; [4] Alternative Dispute Resolution
(2) district court abused its discretion in granting stay; Decisions reviewable; finality
and (3) Court of Appeals acted within its authority in If district court order which stayed action
deciding legal issues presented in order to facilitate prompt seeking order compelling arbitration under
arbitration that Congress envisaged. United States Arbitration Act, pending
resolution of state court suit, were not final for
Affirmed. appealability purposes, it would nevertheless
be appealable within exception to finality
Justice Rehnquist filed dissenting opinion in which Chief rule, as order that conclusively determined
Justice Burger and Justice O'Connor joined. disputed question, that resolved important
issue completely separable from merits of
action and that was effectively unreviewable
West Headnotes (18) on appeal from final judgment.

310 Cases that cite this headnote


[1] Federal Courts
Mandamus [5] Courts
Court of Appeals has no occasion to engage Scope and effect of proceedings pending
in extraordinary review by mandamus in aid in state court
of its jurisdiction, when it can exercise same

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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

[6] Mandamus [10] Action


Nature and existence of rights to be Actions in state and federal courts
protected or enforced In determining whether to stay federal suit out
Party moving for writ of mandamus must of deference to parallel litigation brought in
show that his right to writ is clear and state court, “priority” element of governing
indisputable. 28 U.S.C.A. § 1651. balancing test should not be measured
exclusively by which complaint was filed first,
22 Cases that cite this headnote but rather in terms of how much progress has
been made in the two actions.
[7] Courts
473 Cases that cite this headnote
Scope and effect of proceedings pending
in state court
Federal district court may decline to exercise [11] Alternative Dispute Resolution
its jurisdiction because of parallel state court Liberal or strict construction
litigation only in exceptional circumstances; Policy of Arbitration Act requires liberal
only clearest of justifications will warrant reading of arbitration agreement. 9 U.S.C.A.
dismissal. § 1 et seq.

563 Cases that cite this headnote 2117 Cases that cite this headnote

[8] Action [12] Federal Courts


Nature and subject matter of actions in Alternative dispute resolution
general Effect of section of Arbitration Act
District court abused its discretion in staying declaring liberal federal policy favoring
action seeking order compelling arbitration arbitration agreements, notwithstanding any
under United States Arbitration Act, pending state substantive or procedural policies to
resolution of state court suit, absent showing the contrary, is to create body of federal
of requisite exceptional circumstances; factors substantive law of arbitrability, applicable to
of avoidance of piecemeal litigation, order in any arbitration agreement within coverage of
which current forums obtained jurisdiction, Act. 9 U.S.C.A. § 2.
presence of federal issues and probable
inadequacy of state court proceeding to 3393 Cases that cite this headnote
protect contractor's rights counseled against
stay. 9 U.S.C.A. § 4. [13] Alternative Dispute Resolution
Construction in favor of arbitration
1361 Cases that cite this headnote
Arbitration Act establishes that, as a matter
of federal law, any doubts concerning scope
[9] Alternative Dispute Resolution of arbitrable issues should be resolved in favor
Discretion of arbitration, whether problem at hand is

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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.

258 Cases that cite this headnote

**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

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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.

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

(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

*4 Jack W. Floyd argued the cause for petitioner. With


“All claims, disputes and other matters in question
him on the briefs were Stephen P. Millikin and Douglas W.
arising out of, or relating to, this Contract or the breach
Ey, Jr.
thereof, ... shall be decided by arbitration in accordance
A.H. Gaede, Jr., argued the cause for respondent. With with the Construction Industry Arbitration Rules of
him on the brief were Joseph B. Mays, Jr., Charles Nichols, the American Arbitration Association then obtaining
and Frank H. McFadden. unless the parties mutually agree otherwise. This
agreement to arbitrate shall be specifically enforceable
Opinion under the prevailing arbitration law. The award
rendered by the arbitrators shall be final, and judgment
Justice BRENNAN delivered the opinion of the Court. may be entered upon it in accordance with applicable
law in any court having jurisdiction thereof.” App. 29–
This case, commenced as a petition for an order to compel
30.
arbitration under § 4 of the United States Arbitration Act
The contract also specified the time limits for
of 1925 (Arbitration Act or Act), 9 U.S.C. § 4, presents
the question whether, in light of the policies of the Act arbitration demands. 2
and of our decisions **931 in Colorado River Water Construction on the project began in July 1975.
Conservation District v. United States, 424 U.S. 800, 96 Performance was to be completed by October 1979. 3
S.Ct. 1236, 47 L.Ed.2d 483 (1976), and Will v. Calvert Fire In fact, construction was substantially completed in
Insurance Co., 437 U.S. 655, 98 S.Ct. 2552, 57 L.Ed.2d February 1979, and final inspections were made that June.
504 (1978), the District Court for the Middle District
of North Carolina properly stayed this diversity action *6 At a meeting in October 1977 (during construction),
pending resolution of a concurrent state-court suit. The attended by representatives of Mercury, the Hospital, and
Court of Appeals for the Fourth Circuit reversed the stay. the Architect, Mercury agreed, at the Architect's request,
656 F.2d 933, rehearing denied, 664 F.2d 936 (CA4 1981). to withhold its claims for delay and impact costs (i.e.,
We granted certiorari. 455 U.S. 937, 102 S.Ct. 1426, 71 claims for extended overhead or increase in construction
L.Ed.2d 647 (1982). We affirm. costs due to delay or inaction by the Hospital) until the
work was substantially completed. On this record, the
Hospital does not contest the existence of this agreement,
I although it asserts that the Architect lacked **932
authority to agree to a delay in presentation of claims or
Petitioner Moses H. Cone Memorial Hospital to entertain claims after the contract work was completed.
(“Hospital”) is located in Greensboro, North Carolina.
Respondent Mercury Construction Corp. (“Mercury”), In January 1980, Mercury submitted to the Architect
a construction contractor, has its principal place of its claims for delay and impact costs. Mercury and

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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:

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

reason, this order would be entirely unreviewable if not


appealed now. Once the state court decided the issue of
“The Court of Appeals properly rejected the argument arbitrability, the federal court would be bound to honor
that the order of the District Court ‘was not final and that determination as res judicata.
hence unappealable under 28 U.S.C. §§ 1291, 1292,’
pointing out that ‘[a]ppellant was effectively out of The Hospital contends nevertheless that the District
8
court.’ ” Id., at 715, n. 2, 82 S.Ct., at 1296, n. 2. Court's stay order did not meet the first of the criteria,
[3] *10 Here, the argument for finality of the District namely that it “conclusively determine the disputed
Court's order is even clearer. **934 A district court question.” But this is true only in the technical sense that
stay pursuant to Pullman abstention is entered with the every order short of a final decree is subject to reopening
expectation that the federal litigation will resume in the at the discretion of the district judge. 14 In this case,
event that the plaintiff does not obtain relief in state court however, there is *13 no basis to suppose that the District
on state-law grounds. 9 Here, by contrast, the District Judge contemplated any reconsideration of his decision
Court predicated its stay order on its conclusion that the to defer to the parallel state-court suit. He surely would
federal and state actions involved “the identical issue of not have made that decision in the first instance unless he
arbitrability of the claims of Mercury Construction Corp. had expected the state court to resolve all relevant issues
against the Moses H. Cone Memorial Hospital.” App. to adequately. See infra, at Part IV E. It is not clear why
Pet. for Cert. A–38. That issue of arbitrability was the the Judge chose to stay the case rather than to dismiss it
only substantive issue present in the federal suit. Hence, outright; for all that the record shows, there was no reason
a stay of the federal suit pending resolution of the state other than the form of the Hospital's motion. Whatever
suit meant that there would be no further litigation in the reason, however, the practical effect of his order was
the federal forum; the state court's judgment on the issue entirely the same for present purposes, and the order was
would be res judicata. 10 Thus, here, even more surely appealable.
than in Idlewild, Mercury was “effectively out of court.”
Hence, as the Court of Appeals held, this stay order
amounts to a dismissal of the suit. 11 III

[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.

“To come within the ‘small class' of decisions excepted


from the final-judgment rule by Cohen, the order must
A
conclusively determine the disputed question, resolve an
important issue completely **935 separate from the Colorado River involved the effect of the McCarran
merits of the action, and be effectively unreviewable on Amendment, 66 Stat. 560, 43 U.S.C. § 666, on the
appeal *12 from a final judgment.” Coopers & Lybrand existence and exercise of federal-court jurisdiction to
v. Livesay, 437 U.S. 463, 468, 98 S.Ct. 2454, 2458, 57 adjudicate federal water rights, 28 U.S.C. § 1345. The
L.Ed.2d 351 (1978) (footnote omitted). 12 Amendment waives the Government's **936 sovereign
immunity to permit the joinder of the United States in
There can be no dispute that this order meets the second some state-court suits for the adjudication of water rights.
and third of these criteria. An order that amounts to In Colorado River, however, the Government proceeded
a refusal to adjudicate the merits plainly presents an in Federal District Court, bringing suit against some
important issue separate from the merits. 13 For the same 1,000 nonfederal water users, seeking a declaration of the
water rights of certain federal entities and Indian tribes.

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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-

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

federal policy ... [of] avoidance of piecemeal adjudication


of water rights in a river system,” id., at 819, 96 S.Ct., **938 [6] *18 Even on the basis of Justice
at 1247, as evinced in the McCarran Amendment. We REHNQUIST's opinion, however, there is an obvious
recognized that the Amendment represents Congress's distinction between Calvert and this case. The key
judgment that the field of water rights is one peculiarly to Calvert was the standard for issuance of a writ
appropriate for comprehensive treatment in the forums of mandamus under 28 U.S.C. § 1651. 21 As Justice
having the greatest experience and expertise, assisted by REHNQUIST stressed, such extraordinary writs are used
state administrative officers acting under the state courts. in aid of appellate jurisdiction only to confine an inferior
Id., at 819–820, 96 S.Ct., at 1247–48. In addition, we noted court to a lawful exercise of its prescribed authority, or to
that other factors in the case tended to support dismissal compel it to exercise its authority when it is its duty to do
—the absence of any substantial progress in the federal- so. The movant must show that his right to the writ is clear
court litigation; the presence in the suit of extensive rights and indisputable. 437 U.S., at 661–662, 664, 665–666, 98
governed by state law; the geographical inconvenience S.Ct., at 2556–57, 2558, 2559 (opinion of REHNQUIST,
of the federal forum; and the Government's previous J.). Justice REHNQUIST concluded that the movant in
willingness to litigate similar suits in state court. Id., at 820, Calvert had failed to meet this burden. At the same time,
96 S.Ct., at 1247. he noted that the movant might have succeeded on a
proper appeal. Id., at 665, 98 S.Ct., at 2558. In this case
we have held that the Court of Appeals did have appellate
B jurisdiction; it properly exercised that jurisdiction to find
that the District Court's stay was impermissible under
Before discussing the application of Colorado River Colorado River.
's exceptional-circumstances test, we must address the
Hospital's argument that that test was undermined by our [7] The Hospital further contends that Calvert
subsequent decision in Will v. Calvert Fire Insurance Co., requires reversal here because the opinions of Justice
437 U.S. 655, 98 S.Ct. 2552, 57 L.Ed.2d 504 (1978). We REHNQUIST and *19 Justice BLACKMUN require
find no merit in this argument for at least two reasons. greater deference to the discretion of the District Court
than was given by the Court of Appeals in this case. Under
*17 The Hospital relies on the opinion of Justice both Calvert and Colorado River, of course, the decision
REHNQUIST, announcing the judgment of the Court. whether to defer to the state courts is necessarily left to
The Hospital argues that Justice REHNQUIST's opinion, the discretion of the district court in the first instance.
if not expressly overruling Colorado River, at least Yet to say that the district court has discretion is not to
modifies its holding substantially. But it is clear that a say that its decision is unreviewable; such discretion must
majority of the Court reaffirmed the Colorado River test be exercised under the relevant standard prescribed by
in Calvert. Justice REHNQUIST's opinion commanded this Court. In this case, the relevant standard is Colorado
only four votes. It was opposed by the dissenting opinion, River 's exceptional-circumstances test, as elucidated by
in which four Justices concluded that the Calvert District the factors discussed in that case. As we shall now explain,
Court's stay was impermissible under Colorado River. we agree with the Court of Appeals that the District Court
437 U.S., at 668–669, 672–674, 98 S.Ct., at 2560, 2562– in this case abused its discretion in granting the stay.
63 (BRENNAN, J., dissenting). Justice BLACKMUN,
although concurring in the judgment, agreed with the
dissent that Colorado River 's exceptional-circumstances
IV
test was controlling; he voted to remand to permit the
District Court to apply the Colorado River factors in the [8] Applying the Colorado River factors to this case,
19
first instance. Id., at 667–668, 98 S.Ct., at 2559–60. it is clear that there was no showing of the requisite
On remand, the Court of Appeals correctly recognized exceptional circumstances to justify the District Court's
that the four dissenting Justices and Justice BLACKMUN stay.
formed a majority to require application of the Colorado
River test. Calvert Fire Insurance Co. v. Will, 586 F.2d 12 The Hospital concedes that the first two factors mentioned
(CA7 1978). 20 in Colorado River are **939 not present here. There was

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

no assumption by either court of jurisdiction over any res


or property, nor is there any contention that the federal
B
forum was any less convenient to the parties than the state
forum. The remaining factors—avoidance of piecemeal The order in which the concurrent tribunals obtained and
litigation, and the order in which jurisdiction was obtained exercised jurisdiction cuts against, not for, the District
by the concurrent forums—far from supporting the stay, Court's stay in this case. The Hospital argues that the stay
actually counsel against it. was proper because the state-court suit was filed some
19 days before the federal suit. In the first place, this
argument disregards the obvious reason for the Hospital's
A priority in filing. An indispensable element of Mercury's
cause of action under § 4 for an arbitration order is the
There is no force here to the consideration that was Hospital's refusal to arbitrate. See n. 27, infra. That refusal
paramount in Colorado River itself—the danger of did not occur until less than a day before the Hospital filed
piecemeal litigation. its state suit. Hence, Mercury simply had no reasonable
opportunity to file its § 4 petition **940 first. Moreover,
[9] The Hospital points out that it has two substantive the Hospital succeeded in obtaining an ex parte injunction
disputes here—one with Mercury, concerning Mercury's from the state court forbidding Mercury from taking any
claim for delay and impact costs, and the other with the steps to secure arbitration. 24 Mercury filed its § 4 petition
Architect, concerning the Hospital's claim for indemnity
the same day that the injunction was dissolved. 25
for any liability it may have to Mercury. The latter dispute
cannot be sent *20 to arbitration without the Architect's
[10] That aside, the Hospital's priority argument gives
consent, since there is no arbitration agreement between
too mechanical a reading to the “priority” element of the
the Hospital and the Architect. It is true, therefore, that if
Colorado River balance. This factor, as with the other
Mercury obtains an arbitration order for its dispute, the
Colorado River factors, is to be applied in a pragmatic,
Hospital will be forced to resolve these related disputes
flexible manner with a view to the realities of the case at
in different forums. That misfortune, however, is not the
hand. Thus, priority should not be measured exclusively
result of any choice between the federal and state courts; it
by which complaint was filed first, but rather in terms of
occurs because the relevant federal law requires piecemeal
how much progress has been made in the two actions.
resolution when necessary to give effect to an arbitration
Colorado River illustrates *22 this point well. There,
agreement. 22 Under the Arbitration Act, an arbitration the federal suit was actually filed first. Nevertheless, we
agreement must be enforced notwithstanding the presence pointed out as a factor favoring dismissal “the apparent
of other persons who are parties to the underlying dispute absence of any proceedings in the District Court, other
but not to the arbitration agreement. 23 If the dispute than the filing of the complaint, prior to the motion to
between Mercury and the Hospital is arbitrable under dismiss.” 424 U.S., at 820, 96 S.Ct., at 1248. Here, the
the Act, then the Hospital's two disputes will be resolved opposite was true. It was the state-court suit in which
separately—one in arbitration, and the other (if at all) in no substantial proceedings (excepting only the abortive
state-court litigation. Conversely, if the dispute between temporary injunction) had taken place at the time of the
Mercury and the Hospital is not arbitrable, then both decision to stay. In the federal suit, by contrast, the parties
disputes will be resolved in state court. But neither of those had taken most of the steps necessary to a resolution of the
two outcomes depends at all on which court decides the arbitrability issue. 26 In realistic terms, the federal suit was
question of arbitrability. Hence, a decision to allow that running well ahead of the state suit at the very time that
issue to be decided in federal rather than state court does the District Court decided to refuse to adjudicate the case.
not cause piecemeal resolution of the parties' underlying
disputes. Although *21 the Hospital will have to litigate [11] This refusal to proceed was plainly erroneous in
the arbitrability issue in federal rather than state court, view of Congress's clear intent, in the Arbitration Act, to
that dispute is easily severable from the merits of the move the parties to an arbitrable dispute out of court and
underlying disputes. into arbitration as quickly and easily as possible. The Act
provides two parallel devices for enforcing an arbitration

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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,

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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.

There was no reason to believe that the District Court


Given my view of appealability, I do not find it necessary
would not have acted promptly to resolve the dispute on
to decide whether the District Court's order was proper
the merits after being reversed on the stay. That judges of
in this case. I am disturbed, however, that the Court has
a court of appeals believe they know how a case should
sanctioned an extraordinary departure from the usual and
be decided is no reason for them to substitute their own
accepted course of judicial proceedings by affirming the
judgment for that of a district judge without regard to the
Court of Appeals decision on an issue that was not decided
normal course of appellate procedure.
in the District Court.

The judgment below should be vacated and the case


The Court of Appeals ordered the District Court to enter
remanded to the Court of Appeals with directions to
an order compelling arbitration, even though that issue
dismiss the appeal for want of jurisdiction. Failing that,
was not considered by the District Court. This Court has
even if the Court is correct that the stay order was an error,
maintained the difference between appellate jurisdiction
the judgment should be reversed, insofar as it decides
and original jurisdiction at least since Marbury v.
the question of arbitrability, and remanded to the district
Madison, 1 Cranch 137, 174–176, 2 L.Ed. 60 (1803) (“It
court for further proceedings under the Arbitration Act.
is the essential criterion of appellate jurisdiction that it
revises and corrects the proceedings in a case already

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

All Citations

460 U.S. 1, 103 S.Ct. 927, 74 L.Ed.2d 765

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).

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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.

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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.

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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).

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Moses H. Cone Memorial Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983)
103 S.Ct. 927, 74 L.Ed.2d 765

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 20


Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338 (1986)

KeyCite Yellow Flag - Negative Treatment West Headnotes (10)


Distinguished by Global Oil Tools v. Barnhill, E.D.La., October 16, 2012 
804 F.2d 338
[1] Alternative Dispute Resolution
United States Court of Appeals,
Decisions reviewable; finality
Fifth Circuit.
Order granting stay pending arbitration is not
MUNICIPAL ENERGY AGENCY OF final appealable order; however, order may be
MISSISSIPPI, Plaintiff-Appellant, appealable as interlocutory order granting or
v. refusing injunction. 28 U.S.C.A. § 1292(a)(1).
BIG RIVERS ELECTRIC
1 Cases that cite this headnote
CORPORATION, Defendant-Appellee.

No. 86–4479 [2] Alternative Dispute Resolution


| Scope and standards of review
Summary Calendar. District court order refusing to enjoin
| electrical company from proceeding with
Nov. 17, 1986. petition to compel arbitration was appealable;
thus, companion order staying declaratory
Municipal energy agency filed declaratory judgment
judgment action of municipal energy agency
action seeking determination that power supply
against company pending arbitration was also
agreement with electrical company had terminated.
reviewable. 28 U.S.C.A. § 1292(a)(1).
Electrical company, which had filed petition in another
district court to compel arbitration, filed motion to stay 6 Cases that cite this headnote
agency's proceeding. The United States District Court
for the Northern District of Mississippi, Neal Biggers,
J., entered order staying arbitration and refused to [3] Alternative Dispute Resolution
enjoin petition to compel arbitration, and appeal was Stay of Proceedings Pending Arbitration
taken. The Court of Appeals, Clark, Chief Judge, held District court should grant application for
that: (1) order refusing to enjoin electrical company stay pending arbitration where arbitration
from proceeding with petition to compel arbitration was clause on its face covers dispute.
appealable; thus, companion order staying declaratory
judgment action was also reviewable; (2) arbitration 3 Cases that cite this headnote
clause was broad enough to cover dispute over whether
agreement terminated; (3) language of arbitration clause [4] Alternative Dispute Resolution
that arbitration provision would survive termination Merits of controversy
of underlying agreement controlled over more general If dispute is within scope of arbitration clause,
provisions of termination clause; and (4) district court court may not delve further into merits of
did not abuse its discretion in refusing to enjoin electrical dispute.
company from proceeding with its action to compel
arbitration. 9 Cases that cite this headnote

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

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Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338 (1986)

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.

4 Cases that cite this headnote

Attorneys and Law Firms


[7] Alternative Dispute Resolution
Modification or termination *339 Hunt, Spell & Henson, David R. Hunt, Clarksdale,
Alternative Dispute Resolution Miss., Gerald, Brand, Watters, Cox & Hemleben, Jack
Construction W. Brand, Scott P. Hemleben, James Kenneth Harmon,
Jackson, Miss., for plaintiff-appellant.
Alternative Dispute Resolution
Severability Alex A. Alston, Jr., Jackson, Miss., Holbrook, Gary,
Language in arbitration clause that Wible & Sullivan, Morton Joshua Holbrook, Lizabeth
arbitration provisions survived termination Ann Tully, Allen Woodrow Holbrook, Owensboro, Ky.,
of agreement controlled over more general for defendant-appellee.
provisions of termination clause.
Appeal from the United States District Court for the
5 Cases that cite this headnote Northern District of Mississippi.

Before CLARK, Chief Judge, GARWOOD, and HILL,


[8] Federal Courts
Circuit Judges.
Injunction Against Proceedings
District courts have discretion to enjoin filing Opinion
of related lawsuits in other United States
district courts. CLARK, Chief Judge:

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

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Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338 (1986)

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

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Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338 (1986)

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

only if (A) the action in which


III.
the order was made is an action
which, before the fusion of law
and equity, was by its nature an A.
action at law; and (B) the stay
was sought to permit the prior MEAM's first contention is that it is not obligated
determination of some equitable to arbitrate the dispute because the arbitration clause
defense or counterclaim. terminated along with the rest of the Power Supply
Agreement when Big Rivers failed to reach a satisfactory
Jackson Brewing Co., 303 F.2d at 845 (emphasis and agreement with TVA. MEAM argues that the contractual
footnote omitted). requirement that Big Rivers enter a long-term agreement
with TVA was a condition precedent to the “secondary”
Big Rivers' motion based on the existence of a contractual ten-year term of the contract, and contends that the
agreement to arbitrate clearly raises an equitable defense. termination clause should override the arbitration clause
Shanferoke Coal & Supply Corp. v. Westchester Service because the termination clause goes “to the heart and
Corp., 293 U.S. 449, 452, 55 S.Ct. 313, 314–15, 79 L.Ed. substance of the contract.” As a result, MEAM concludes,
583 (1935). However, the dispute here is whether MEAM's the district court erred in staying the proceeding pending
cause of action is legal or equitable. We must look behind arbitration or, in the alternative, in failing to hold an
the declaratory judgment action to determine the form evidentiary hearing on the proper construction of the
that the action would have taken if the Declaratory provisions of the contract.
Judgment Act were not in existence. See American Safety
Equipment Corp. v. J.P. Maguire & Co., 391 F.2d 821, 824 [3] [4] The issues in this case are governed by the Federal
(2d Cir.1968). Big Rivers characterizes MEAM's suit as Arbitration Act, 9 U.S.C. §§ 1–14, because the contract
seeking “damages based on a reformation of the contract between MEAM and Big Rivers obviously is “a contract
price,” and points out that contract reformation is an evidencing a transaction involving commerce.” Id. § 2. In
equitable claim, Mar-Len of Louisiana, Inc. v. Parsons- enacting the Federal Arbitration Act, Congress declared

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Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338 (1986)

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.

MEAM's second contention is that the district court


[6] This dispute over contract termination is an arbitrable
erred in refusing to enjoin Big Rivers from proceeding
dispute under the arbitration clause in this case. An
in its Kentucky action to compel arbitration. MEAM
arbitration clause is separable from the contract in which
argues that the facts and issues involved in the Mississippi
it is embedded. Prima Paint Corp. v. Flood & Conklin
action—the circumstances surrounding the making of the
Mfg. Co., 388 U.S. 395, 402–03, 87 S.Ct. 1801, 1805–
contract and the proper interpretation of the contractual
06, 18 L.Ed.2d 1270 (1967). A federal court can only
provisions—are the same facts and issues involved in
adjudicate challenges to “the making and performance
the Kentucky action. MEAM finds support in Dupuy-
of the agreement to arbitrate,” not challenges to the
Busching General Agency, Inc. v. Ambassador Insurance
enforceability of the contract as a whole. Id. at 404, 87
Co., 524 F.2d 1275, 1277 (5th Cir.1975), in which this
S.Ct. at 1806. Thus, in Prima Paint, the United States
court considered the effect of the defendant's answer and
Supreme Court held that the district court properly stayed
counterclaim petitioning for an order directing arbitration
proceedings before it when the party seeking to avoid
as a defense to an action on the contract. Asserting that
arbitration did not allege that it was fraudulently *343
the facts and issues in the two actions are similar, MEAM
induced to enter the arbitration agreement but only
urges that the district court in the Mississippi action erred
claimed that it was fraudulently induced to execute the
by not asserting “paramount jurisdiction” over the motion
contract. Id. at 406, 87 S.Ct. at 1807.
to compel arbitration in the present proceeding. In letter
and spirit, Dupuy-Busching is distinguishable.
[7] MEAM does not deny that it was bound by the
Power Supply Agreement before that Agreement allegedly
[8] District courts have discretion to enjoin the filing
terminated. It thus necessarily concedes that it was bound
of related lawsuits in other U.S. district courts. Kerotest
by the arbitration clause as well. Because MEAM does
Mfg. Co. v. C–O–Two Fire Equipment Co., 342 U.S. 180,
not contest the making of the arbitration agreement, its
183–84, 72 S.Ct. 219, 221, 96 L.Ed. 200 (1952); Schauss v.
reliance on Pollux Marine Agencies, Inc. v. Louis Dreyfus
Metals Depository Corp., 757 F.2d 649, 654 (5th Cir.1985).

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Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338 (1986)

“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.

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Municipal Energy Agency of Mississippi v. Big Rivers Elec. Corp., 804 F.2d 338 (1986)

[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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Myers v. Rosenberg, Not Reported in F.Supp. (1986)
1986 WL 3329

here accepted a judicial decision in his favor on a motion


to dismiss the securities count. Unlike the defendant in
1986 WL 3329
Dickinson, defendant here has confined neither his motion
Only the Westlaw citation is currently available.
to dismiss nor his discovery to “non-arbitrable” claims.
United States District Court,
And while the defendant may have had reservations
N.D. Illinois, Eastern Division.
concerning the arbitrability of the Securities Act claim,
Nancy MYERS, Plaintiff, he expressed no reason for postponing his request for
v. arbitration of certain pendent state claims.
Robert ROSENBERG, Defendant.
Unlike in Dickinson, here the delay pending the motion
No. 83 C 1342. to compel arbitration did not arise from “good faith
| efforts to resolve the controversy without reference to an
March 7, 1986. adjudicatory body.” Indeed there is little question that had
defendant's motion to dismiss been granted by this Court,
the defendant would not now attempt to insist upon his
MEMORANDUM OPINION AND ORDER arbitration “right”. Having actively sought adjudication
of claims including those subject to the arbitration
PARSONS, District Judge. agreement, the defendant should not now attempt to
recant from substantive arguments and discovery, and
*1 The defendant Rosenberg here presents the stand upon a boilerplate arbitration agreement. As the
interesting question of whether a defendant, after 2 Seventh Circuit concluded in Midwest Windows, supra, at
½ years of litigation, having filed an answer and a 537: the case has “gone too far with too much prejudice to
motion to dismiss, and having substantially engaged shift part of the responsibility for resolution elsewhere.”
in discovery, may thereafter seek to compel arbitration See also Barrantine v. Arkansas Best Freight System, Inc.,
of the claims all purportedly covered by a standard 450 U.S. 728, 101 S.Ct. 1427 (1981) at 744–5.
arbitration agreement. One of the claims sought to be
arbitrated alleges a violation of the Racketeer Influenced Furthermore, I cannot find that RICO claims are
and Corrupt Organizations Act (“RICO”), 18 U.S.C. § subject to arbitration agreements. While the defendant
1961 et seq.; the other claims allege a breach of fiduciary attempts to analogize civil RICO claims with the antitrust
duty owed to the plaintiff. The plaintiff's claim under the provisions of the Sherman Act, 15 U.S.C. § 1 et
Securities and Exchange Act of 1934, 15 U.S.C. § 78, has seq., the analogy is not persuasive for the purpose
already been dismissed by the Court. of determining the scope of an arbitration agreement.
RICO was enacted as part of the criminal code; not
It is well established that “a waiver of arbitration is not as a criminal provision of a civil code. Its purpose
lightly to be inferred.” See Midwest Window Systems, Inc. is to allow victims of a racketeering enterprise to act
v. Amcor Industries, Inc., 630 F.2d 535, 536 (7th Cir.1980); as true arms of the state. A plaintiff under RICO
Dickinson v. Heinold Securities, Inc., 661 F.2d 638 (1981). becomes, in essence, a civil prosecutor. The strict pleading
The court must determine whether the defaulting party requirements in this Circuit for effectively stating a
acted “inconsistently” with the arbitration right under the claim under RICO are designed to protect the innocent
totality of the circumstances. Dickinson, supra, at 641. defendant from the stigma attached to being publically
Delay alone will not constitute a waiver of arbitration labelled a criminal “racketeer”. This concern should
rights, nor are preliminary negotiations for settlement not be undermined by allowing a boilerplate arbitration
inconsistent with the right to arbitrate. agreement to circumvent this judicial protection.

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Myers v. Rosenberg, Not Reported in F.Supp. (1986)
1986 WL 3329

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


NCP Finance Ltd. Partnership v. Escatiola, 350 S.W.3d 152 (2011)

for violation of the Deceptive Trade


Practices Act, and violation of the Credit
350 S.W.3d 152
Services Organization Act, where the parties'
Court of Appeals of Texas,
arbitration agreement expressly assigned
San Antonio.
“any dispute about the validity, effect or
NCP FINANCE LIMITED PARTNERSHIP enforceability of the prohibitions against class
and NMCapital, Inc., Appellants, proceedings” to the trial court, not the
v. arbitrator. V.T.C.A. Bus. & C., § 17.41 et seq.
Humberto ESCATIOLA, Appellee. Cases that cite this headnote

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:

[1] trial court was required to rule on lender's motion to


compel individual arbitration, and Attorneys and Law Firms

[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.

John Steven Dwyre, John Dwyre & Associates, San


Reversed and remanded. Antonio, TX, for Appellee.

Sitting: SANDEE BRYAN MARION, Justice,


REBECCA SIMMONS, Justice, STEVEN C. HILBIG,
West Headnotes (2) Justice.

[1] Alternative Dispute Resolution


OPINION
Matters to Be Determined by Court
Trial court was required to rule on lender's Opinion by: SANDEE BRYAN MARION, Justice.
motion to compel individual arbitration of
borrower's purported class actions claims

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


NCP Finance Ltd. Partnership v. Escatiola, 350 S.W.3d 152 (2011)

In this accelerated appeal, appellants, NCP Finance


Limited Partnership and NMCapital, Inc. (collectively The arbitration agreement commits any “claim,” which
“NCP”), appeal from the trial court's order on their it defines as “any legal dispute between [Escatiola],
motion to compel individual arbitration and stay on the one hand, and ACE and/or [NCP], on the
litigation pending arbitration. We reverse and remand. other hand,” to the arbitrator. However, the arbitration
agreement also states: “[A]ny dispute about the validity,
effect or enforceability of the prohibitions against class
proceedings, private attorney general proceedings and/
*153 BACKGROUND or multiple-party proceedings ... shall be resolved by a
court and not by an arbitrator or arbitration administrator
ACE Credit Service, LLC (“ACE”) is a registered Texas
” (emphasis added). Escatiola refinanced the loan three
credit services organization, and NMCapital is an out-of-
times over the next two months, and he signed identical
state lender and a general partner of NCP Finance Limited
arbitration agreements on each occasion.
Partnership, a Texas limited partnership. On February
16, 2008, appellee, Humberto Escatiola, obtained a loan
On behalf of a purported class, Escatiola sued ACE and
from NCP through credit services provided by ACE. On
NCP for usury, violation of the Texas Deceptive Trade
that same date, Escatiola, ACE, and NCP signed a credit
Practices Act, and violation of the Texas Credit Services
services agreement, a loan agreement, a promissory note,
Organization Act. NCP filed a motion in the trial court to
and an arbitration agreement. The arbitration agreement
compel individual arbitration, to strike Escatiola's request
states:
for class action certification, and to stay the litigation
[U]pon the election of either pending completion of arbitration. The trial court's order
[Escatiola], [ACE] ..., or [NCP] ..., on the motion reads, in part: “IT IS ... ORDERED THAT
any legal dispute between [NCP's] Motion as to individual arbitration is denied and
[Escatiola], on the one hand, that the case shall proceed in arbitration and [Escatiola]
and ACE and/or [NCP], on the may seek class certification therein.” The trial court stayed
other hand, will be resolved the litigation and appointed an arbitrator.
by binding arbitration.... (1) NO
PARTY MAY PARTICIPATE On appeal, NCP argues the trial court was required to
IN A CLASS ACTION IN grant the motion as to individual arbitration because (a)
COURT OR IN CLASS– the parties' arbitration agreement specifically prohibits
WIDE ARBITRATION ...; (2) class arbitration, and (b) the United States Supreme
NO PARTY MAY ACT Court recently ruled in Stolt–Nielsen S.A. v. AnimalFeeds
AS A PRIVATE ATTORNEY International Corp. that class arbitration may not be
GENERAL IN COURT OR IN compelled absent express agreement of the parties.
AN ARBITRATION; (3) CLAIMS
BROUGHT BY OR AGAINST
[ESCATIOLA] MAY NOT BE DISCUSSION
JOINED OR CONSOLIDATED
WITH CLAIMS BROUGHT [1] Several years ago, the United States Supreme Court
BY OR AGAINST ANY held that whether an arbitration agreement forbids a class
OTHER PERSON; AND (4) action is a question for the arbitrator, not the trial court,
THE ARBITRATOR SHALL to decide. Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444,
HAVE NO AUTHORITY TO 452, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003) (plurality
CONDUCT A CLASS–WIDE opinion). In Green Tree, Lynn and Burt Bazzle (“the
ARBITRATION, PRIVATE Bazzles”) obtained a home improvement loan from Green
ATTORNEY GENERAL Tree *154 Financial Corporation (“Green Tree”). Id. at
ARBITRATION OR MULTIPLE– 447, 123 S.Ct. 2402. The Bazzles and Green Tree signed
PARTY ARBITRATION. a contract, which included this arbitration clause: “ ‘All
disputes, claims, or controversies arising from or relating

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


NCP Finance Ltd. Partnership v. Escatiola, 350 S.W.3d 152 (2011)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


NCP Finance Ltd. Partnership v. Escatiola, 350 S.W.3d 152 (2011)

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

350 S.W.3d 152


CONCLUSION

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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.

15 Cases that cite this headnote


Holdings: The Supreme Court, Brister, J., held that:

[1] order compelling arbitration could be reviewed post- [3] Courts


arbitration; Operation and effect in general
Appellate courts' denial, without comment,
[2] waiver of arbitration by litigation conduct is an issue of home builder and warranty companies'
for the courts, rather than arbitrators; petitions for mandamus relief from trial
court order compelling arbitration of
[3] waiver of arbitration by litigation conduct must be faulty construction claim did not foreclose
decided on a case-by-case basis, and courts should look to Supreme Court's review of order compelling
the totality of the circumstances; arbitration, on appeal from confirmation of
arbitration award.
[4] waiver of arbitration requires a showing of prejudice;
7 Cases that cite this headnote
[5] homeowners substantially invoked the litigation
process to defendants' prejudice and, thus, waived
[4] Mandamus
arbitration; and
Remedy by Appeal or Writ of Error

[6] warranty companies also waived arbitration.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

Mandamus is only available when a final


appeal would be inadequate. [10] Alternative Dispute Resolution
Matters to Be Determined by Court
3 Cases that cite this headnote Alternative Dispute Resolution
Existence and validity of agreement
[5] Alternative Dispute Resolution Arbitrators generally must decide defenses
Scope and Standards of Review that apply to the whole contract, while
Trial court order compelling arbitration could courts decide defenses relating solely to the
be reviewed post-arbitration. arbitration clause; thus, arbitrators must
decide if an entire contract was fraudulently
9 Cases that cite this headnote induced, while courts must decide if an
arbitration clause was.
[6] Appeal and Error 10 Cases that cite this headnote
Interlocutory and Intermediate Decisions
Parties waive nothing by foregoing
[11] Alternative Dispute Resolution
interlocutory review and awaiting a final
Suing or participating in suit
judgment to appeal.
Waiver of arbitration by litigation conduct
1 Cases that cite this headnote must be decided on a case-by-case basis, and
courts should look to the totality of the
circumstances.
[7] Alternative Dispute Resolution
Decisions reviewable; finality 16 Cases that cite this headnote
Courts may review an order compelling
arbitration if the order also dismisses the
[12] Alternative Dispute Resolution
underlying litigation so it is final rather than
Suing or participating in suit
interlocutory.
Waiver of arbitration by litigation conduct
3 Cases that cite this headnote was not ruled out solely because plaintiffs,
who moved to compel arbitration, did not ask
the court to make any judicial decisions on the
[8] Alternative Dispute Resolution
merits of their faulty construction claim; while
Scope and standards of review
that was a factor to consider, it was not the
Alternative Dispute Resolution only one.
Scope and Standards of Review
Courts conduct ordinary review of a trial 1 Cases that cite this headnote
court's initial referral to arbitration and
deferential review only of the arbitrator's final [13] Alternative Dispute Resolution
award. Suing or participating in suit
4 Cases that cite this headnote Waiver of arbitration by litigation conduct
involves substantial invocation of the judicial
process, not just judgment on the merits.
[9] Alternative Dispute Resolution
Waiver, laches, or estoppel 10 Cases that cite this headnote
Waiver of arbitration by litigation conduct is
an issue for the courts, rather than arbitrators. [14] Alternative Dispute Resolution
Remedies and Proceedings for
18 Cases that cite this headnote
Enforcement in General

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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

[19] Alternative Dispute Resolution


[15] Alternative Dispute Resolution Contractual or consensual basis
Suing or participating in suit The answers to most questions regarding
While whether the party who moves to compel arbitration flow inexorably from the fact that
arbitration is the plaintiff or the defendant arbitration is simply a matter of contract
is a factor to consider in determining waiver between the parties.
of arbitration by litigation conduct, it does
not alone justify a finding of waiver or 8 Cases that cite this headnote
change the basic nature of the totality-of-the-
circumstances test. [20] Alternative Dispute Resolution
Waiver or Estoppel
10 Cases that cite this headnote
Like any other contract right, arbitration can
be waived if the parties agree instead to resolve
[16] Alternative Dispute Resolution a dispute in court.
Suing or participating in suit
How much litigation conduct will be 6 Cases that cite this headnote
“substantial,” for purposes of rule that a party
waives arbitration by substantially invoking [21] Alternative Dispute Resolution
the judicial process to the other party's Waiver or Estoppel
prejudice, depends very much on the context;
Waiver of arbitration can be implied from a
three or four depositions may be all the
party's conduct, although that conduct must
discovery needed in one case, but purely
be unequivocal, and in close cases, the strong
preliminary in another.
presumption against waiver should govern.
52 Cases that cite this headnote
13 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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

Waiver of arbitration requires a showing of


prejudice. 33 Cases that cite this headnote

14 Cases that cite this headnote


[29] Alternative Dispute Resolution
Waiver or Estoppel
[25] Alternative Dispute Resolution A party should not be allowed purposefully
Suing or participating in suit and unjustifiably to manipulate the exercise
Homeowners who filed action claiming of its arbitral rights simply to gain an unfair
faulty construction substantially invoked tactical advantage over the opposing party.
the litigation process to home builder
and warranty companies' prejudice and, 8 Cases that cite this headnote
thus, waived arbitration clause in warranty
agreement, where homeowners vigorously [30] Alternative Dispute Resolution
opposed arbitration in their pleadings and in Suing or participating in suit
open court, then requested hundreds of items
Under the Federal Arbitration Act,
of merits-based information and conducted
“prejudice” relates to inherent unfairness; that
months of discovery under the rules of court,
is, a party's attempt to have it both ways by
and finally, only four days before the trial
switching between litigation and arbitration
setting, changed their minds and decided they
to its own advantage. 9 U.S.C.A. § 1 et seq.
would prefer to arbitrate after all.
26 Cases that cite this headnote
30 Cases that cite this headnote

[31] Appeal and Error


[26] Alternative Dispute Resolution
Abuse of discretion
Suing or participating in suit
Every abuse-of-discretion review is not
Under the totality-of-the-circumstances test,
identical because a trial judge's discretion may
discovery is not the only measure of waiver of
be applied to scores of situations and in many
arbitration by litigation conduct.
different ways.
Cases that cite this headnote
10 Cases that cite this headnote

[27] Alternative Dispute Resolution


[32] Alternative Dispute Resolution
Applicant's default, delay, or laches
Suing or participating in suit
The rule that one can not wait until the eve of
The totality-of-the-circumstances test for
trial to request arbitration is not limited to the
determining waiver of arbitration by litigation
evening before trial; it is a rule of proportion.
conduct presumes a multitude of potential
6 Cases that cite this headnote factors and a balancing of evidence on either
side.

[28] Alternative Dispute Resolution 4 Cases that cite this headnote


Suing or participating in suit
For purposes of a waiver of an arbitration [33] Appeal and Error
agreement, “prejudice” refers to the inherent Power to Review
unfairness in terms of delay, expense, or
Under a proper abuse-of-discretion review,
damage to a party's legal position that occurs
waiver is a question of law for the court, and
when the party's opponent forces it to litigate
an appellate court does not defer to the trial
an issue and later seeks to arbitrate that same
court on questions of law.
issue.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

31 Cases that cite this headnote [39] Alternative Dispute Resolution


Suing or participating in suit

[34] Appeal and Error Prejudice, as required to establish waiver of


Sufficiency of Evidence in Support arbitration by litigation conduct, should be
easier to show against a party that initially
Appellate court defers to a trial court's factual
opposed arbitration than against one who
findings if they are supported by evidence.
sought it from the start.
21 Cases that cite this headnote
2 Cases that cite this headnote

[35] Alternative Dispute Resolution


[40] Alternative Dispute Resolution
Discovery and depositions
Suing or participating in suit
Arbitrators have almost unbridled discretion
A party who requests lots of discovery is not
regarding discovery.
prejudiced, as required to establish waiver of
1 Cases that cite this headnote arbitration by litigation conduct, by getting
it and taking it to arbitration in the same
way that a party who produces lots of
[36] Alternative Dispute Resolution discovery outside the stricter discovery limits
Suing or participating in suit in arbitration.
Defendants asserting that plaintiffs waived
their right to arbitration had to show 14 Cases that cite this headnote
substantial invocation of the litigation process
that prejudiced them, not precisely how much [41] Alternative Dispute Resolution
it all was. Suing or participating in suit
5 Cases that cite this headnote Warranty companies that originally
requested arbitration of homeowners' faulty
construction claim waived arbitration by
[37] Alternative Dispute Resolution extensively co-participating in months of
Trial or hearing discovery.
Referral to arbitration should be decided
summarily with the evidence limited to Cases that cite this headnote
disputed facts. V.T.C.A., Civil Practice &
Remedies Code § 171.021(b). [42] Alternative Dispute Resolution
Presentation and reservation of grounds
Cases that cite this headnote
for review
Fact that the only objection to trial
[38] Alternative Dispute Resolution court's order compelling arbitration was
Remedies and Proceedings for signed by home builder's attorneys, not
Enforcement in General co-defendant warranty companies, did not
The amount of discovery needed to show preclude warranty companies from objecting
prejudice, for purposes of rule that a party to arbitration on appeal from confirmation
waives arbitration by substantially invoking of arbitration award, where, in the motion
the judicial process to the other party's objecting to order compelling arbitration
prejudice, will vary depending on what the and at the hearing held on it, home
other circumstances are. builder's attorneys represented that they were
authorized to do so on behalf of all the
36 Cases that cite this headnote
defendants; if the homeowners wanted to

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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

*584 Geoffrey H. Bracken, Gardere Wynne Sewell,


L.L.P., Houston, TX, Stacy R. Obenhaus, Gardere I. Background
Wynne Sewell LLP, Dallas, TX, Kent Hance, Hance
In 1996, Robert and Jane Cull bought a house
Scarborough Wright Woodward & Weisbart LLP,
from Perry Homes for $233,730. They also bought a
Austin, TX, Gary W. Javore, Johnson Cristopher Javore
warranty from Home Owners Multiple Equity, Inc.
& Cochran, Inc., San Antonio, TX, for Petitioners.
and Warranty Underwriters Insurance Company. The
Thomas M. Michel, Griffith, Jay, & Michel LLP, Fort warranty agreement included a broad arbitration clause
Worth, TX, Evan (Van) Lane Shaw, Law Offices of Van providing that all disputes the Culls might have against
Shaw, Dallas, TX, for Respondent. Perry Homes or the warranty companies were subject to
the Federal Arbitration Act, and would be submitted to
M. Scott Norman Jr., Texas Association of Builders, the American Arbitration *585 Association (AAA) or
Austin, TX, for Amicus Curiae. another arbitrator agreed upon by the parties. 4
Opinion
Over the next several years, the home suffered serious
Justice BRISTER delivered the opinion of the Court, structural and drainage problems. According to the Culls,
in which Justice HECHT, Justice O'NEILL, Justice the Defendants spent more effort shifting blame than
WAINWRIGHT, and Justice MEDINA joined, and repairing the home. When the Culls sued in October
in which Chief Justice JEFFERSON, Justice GREEN, 2000, the warranty companies (but not Perry Homes)
Justice JOHNSON, and Justice WILLETT joined as to immediately requested arbitration; the Culls vigorously
parts I–V. opposed it, and no one ever pressed for a ruling. At the
same time, the Culls' attorneys began seeking extensive
[1] [2] Since 1846, Texas law has provided that parties discovery from all of the Defendants.
to a dispute may choose to arbitrate rather than litigate. 1
But that choice cannot be abused; a party cannot After most of the discovery was completed and the case
substantially invoke the litigation process and then switch was set for trial, the Culls changed their minds about
2
to arbitration on the eve of trial. There is a strong litigating. Instead they asked the trial court to compel
arbitration under precisely the same clause and conditions
presumption against waiver of arbitration, 3 but it is not
to which they had originally objected. The trial judge
irrebuttable and was plainly rebutted here. The Plaintiffs
expressed reservations, saying:
vigorously opposed (indeed spurned) arbitration in their
pleadings and in open court; then they requested hundreds I really have a problem with people
of items of merits-based information and conducted who have competent counsel who
months of discovery under the rules of court; finally wait 14 months and after all this
only four days before the trial setting they changed their much effort in the courthouse has
minds and decided they would prefer to arbitrate after taken place, to come in and say
all. Having gotten what they wanted from the litigation that they have not waived that
process, they could not switch to arbitration at the last arbitration. That arbitration clause
minute like this. was there when the lawsuit was filed.

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

subsequent appeal.” 7 Mandamus is only available when a


Nevertheless, the trial court ordered arbitration because
the Defendants had not shown any prejudice from final appeal would be inadequate; 8 if filing for mandamus
litigation conduct: precluded a final appeal, that requirement would be self-
fulfilling. Because the earlier proceedings here were denied
[A]ll I have heard from [defense without comment on the merits, they do not foreclose our
counsel] insofar as what is the review.
prejudice suffered by people you
represent is that they have [5] [6] Second, the Culls argue that an order compelling
participated in litigation activities arbitration can only be reviewed before arbitration occurs.
that may or may not have been The Culls address none of the cases in which this Court
required by the arbitrator. So and the United States Supreme Court have reviewed such
without anything further, I am going orders after arbitration. 9 Nor do they address the general
to grant the motion to abate the case rule that parties waive nothing by foregoing interlocutory
for arbitration.
review and awaiting a final judgment to appeal. 10
The order was signed December 6, 2001, four days before
the case was set for trial. The Defendants filed petitions [7] But most important, the Culls do not address
for mandamus in the court of appeals and this Court, both section 16 of the Federal Arbitration Act, which expressly
prohibits pre-arbitration appeals:
of which were denied without opinion within a few days. 5
Except as otherwise provided in
After a year in arbitration, on December 24, section 1292(b) of title 28 [providing
2002, the arbitrator awarded the Culls $800,000, for certified questions to federal
including restitution of the purchase price of their circuit courts], an appeal may not
home ($242,759), mental anguish ($200,000), exemplary be taken from an interlocutory
damages ($200,000), and attorney's fees ($110,000). The order ... directing arbitration to
Defendants moved to vacate the award, again arguing proceed under section 4 of this title
(among other things) that the case should never have been [providing for orders compelling
sent to arbitration after so much activity in court. The trial
arbitration].... 11
court overruled the objection, confirmed the award, and
added post-judgment interest duplicating that already in
the award; the court of appeals affirmed after deleting the This ban on interlocutory appeals of orders compelling
arbitration was added by Congress in 1988 to prevent
duplicative interest. 6 We granted the Defendants' petition
to consider whether the arbitration award should be set arbitration from bogging down in preliminary appeals. 12
aside because the Culls waived their right to arbitration. We have held that routine mandamus review of such
orders in state court would frustrate this federal law. 13

*587 [8] The Culls assert that post-arbitration review is


II. When Should Orders Compelling
unavailable because an arbitration award can be vacated
Arbitration Be Reviewed?
only for statutory grounds like corruption, fraud, or
[3] [4] At the outset, the Culls assert it is too late evident partiality. 14 But reviewing the trial court's initial
to review the trial court's order referring this case referral to arbitration is not the same as reviewing the
to arbitration. First, they argue the pre-arbitration arbitrator's final award; as the United States Supreme
mandamus proceedings establish the law of the case Court has held, courts conduct ordinary review of the
*586 and preclude the Defendants from raising the former and deferential review only of the latter. 15
same arguments now. We recently rejected this argument,
holding that as mandamus is a discretionary writ, “its We agree that post-arbitration review of referral may
denial, without comment on the merits, cannot deprive create (as the Culls allege) a “huge waste of the
another appellate court from considering the matter in a parties' resources.” But if review is available before

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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.

*589 Third, as the Howsam Court itself stated, parties


generally intend arbitrators to decide matters that “grow
III. Do Courts or Arbitrators Decide Waiver? out of the dispute and bear on its final disposition,” while
they intend courts to decide gateway matters regarding
[9] The Culls also assert that waiver of arbitration by “whether the parties have submitted a particular dispute
litigation conduct is an issue to be decided by arbitrators
to arbitration.” 27 Waiver of a substantive claim or
rather than courts. To the contrary, this Court and the
delay beyond a limitations deadline could affect final
federal courts have held it is a question of law for the
disposition, but waiver by litigation conduct affects only
court. 17 Rather than referring such claims to arbitrators,
the gateway matter of where the case is tried. 28
we have decided them ourselves at least eight times, 18 as
does every federal circuit court. 19 [10] Finally, arbitrators generally must decide defenses
that apply to the whole contract, while courts decide
*588 The Culls argue this was all changed in 2002 by defenses relating solely to the arbitration clause. 29 Thus,
Howsam v. Dean Witter Reynolds, in which the United for example, arbitrators must decide if an entire contract
States Supreme Court said the “presumption is that the was fraudulently induced, while courts must decide if an
arbitrator should decide ‘allegation[s] of waiver, delay, or
arbitration clause was. 30 As waiver by litigation conduct
a like defense to arbitrability.’ ” 20 For several reasons, goes solely to the arbitration clause rather than the whole
we disagree that this single sentence changed the federal contract, consistency suggests it is an issue for the courts.
arbitration landscape.
Every federal circuit court that has addressed this issue
First, “waiver” and “delay” are broad terms used in since Howsam has continued to hold that substantial
many different contexts. Howsam involved the National invocation of the litigation process is a question for
Association of Securities Dealers' six-year limitations the court rather than the arbitrator—including the
period for arbitration claims, not waiver by litigation
First, 31 Third, 32 Fifth, 33 and Eighth Circuits. 34 Legal
conduct; indeed, it does not appear the United States
Supreme Court has ever addressed the latter kind of commentators appear to agree. 35 So do we.
waiver. Although the federal courts do not defer to
arbitrators when waiver is a question of litigation conduct,
they consistently do so when waiver concerns limitations IV. When Is the Litigation Process Substantially Invoked?
21
periods or waiver of particular claims or defenses. As
22 We have said on many occasions that a party waives
Howsam involved the latter rather than the former, its
an arbitration clause by substantially *590 invoking
reference to waiver must be read in that context.
the judicial process to the other party's detriment or

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

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

• 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

• how much of it would be useful in arbitration; 63 and


• whether the movant was plaintiff (who chose to file in
court) or defendant (who merely responded); 48 • whether the movant sought judgment on the merits. 64
[12] [13] Thus, we disagree with the court of appeals that
• how long the movant delayed before seeking waiver is ruled out in this case solely because the Culls “did
arbitration; 49 not ask the court to make any judicial decisions on the
merits of their case.” 65 While this is surely a factor, 66 it is
• whether the movant knew of the arbitration clause all not the only one. Waiver involves substantial invocation
along; 50 of the judicial process, not just judgment on the merits.

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

[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

denying an arbitration clause in the same contract. 75 By


*595 [23] Under Texas law, waiver may not include
the same token, a party who enjoys substantial direct
a prejudice requirement, but estoppel does. In cases of
benefits by gaining an advantage in the pretrial litigation
waiver by litigation conduct, the precise question is not so
process should be barred from turning around and seeking
much when waiver occurs as when a party can no longer
arbitration with the spoils.
take it back. As noted above, Texas estoppel law does
not allow a party to withdraw a representation once the
[19] [20] [21] The answer to most questions regarding
other party takes “action or forbearance of a definite and
arbitration “flow inexorably from the fact that arbitration
substantial character.” 87 Using precisely the same terms,
is simply a matter of contract between the parties.” 76
the Restatement does not allow a party to withdraw an
Like any other contract right, arbitration can be waived
option contract when the offeree has taken substantial
if the parties agree instead to resolve a dispute in court.
Such waiver can be implied from a party's conduct, action based upon it. 88 In these contexts, prejudice is an
element of the normal contract rules.

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

all persons they had studied under, and all reference


[24] Thus, we agree with the courts below that waiver of books or treatises in their libraries).
arbitration requires a showing of prejudice.
There is simply no question on this record that the Culls
conducted extensive discovery about every aspect of the
merits. 89
VI. Was Arbitration Waived Here?

[26] But under the totality-of-the-circumstances test,


A. Did the Culls Waive Arbitration? discovery is not the only measure of waiver. Here,
when the warranty defendants initially moved to compel
It remains only to apply these rules to this case. arbitration, the Culls filed a 79–page response opposing
it, asserting that the AAA “is incompetent, is biased, and
[25] Unquestionably, the Culls substantially invoked fails to provide fair and appropriate arbitration panels.”
the litigation process, as their conduct here far exceeds They complained of the AAA's fees, and asserted that as a
anything we have reviewed before. Before arbitration was result the “purported arbitration clause is unconscionable
ordered, the Culls did not deny taking ten depositions, and unenforceable, and this Court's enforcement of such
and the court's file (of which the trial judge took judicial would be nothing short of ridiculous and absurd.” This,
notice) included: plus their prayer asking the trial court to deny the motion
to compel arbitration “in its entirety,” belies the court of
• their initial objection to arbitration covering 79 pages;
appeals' conclusion that “the Culls merely opposed the
• the Defendants' responses to requests for disclosure; use of the AAA” rather than arbitration itself. 90 In some
federal courts, the Culls' objection alone could suffice to
• the Culls' five motions to compel, attached to
which were 76 requests for production of documents waive arbitration. 91
regarding complaints, inspections, repairs, and
settlements relating to eight other homes in the same [27] The Culls also moved for arbitration very late in
subdivision; the trial process. It is true that Perry Homes moved
to continue the trial setting when the Culls sought
• Perry Homes' two motions for protective orders arbitration, requesting about ten weeks to finish deposing
regarding six designees noticed for deposition by experts. Because the trial court ordered arbitration, no
the Culls on nine issues (including purchase and one knows whether the case would have gone to trial
preparation of the lot, design and construction of (including the unnamed court clerk cited by the dissent).
the foundation, sale of this home and others in the But in view of the written discovery and depositions
subdivision, and attempts to deal with the Culls' and already completed, the record is nevertheless clear that
other foundation complaints), with an attachment most of the discovery in the case had already been
requesting 67 categories of documents (including all completed before the Culls requested arbitration. The rule
photos, videos, correspondence, insurance policies, that one cannot wait until “the eve of trial” to request
plans, soil tests, permits, subcontractors, contracts arbitration is not limited to the evening before trial; it is a
for sale, and repairs relating to the house or the suit, rule of proportion that is implicated here. 92
all complaints about any house in the subdivision,
and Perry Homes' articles of incorporation, by-laws, Then 14 months after filing suit and shortly before the
minutes, and financials); and December 2001 trial setting, the Culls changed their minds
and requested arbitration. They justified their change of
• the Culls' notices of depositions for three of the
heart on the basis that they wanted to avoid the delays
Defendants' experts with 24 categories of documents
of an appeal. But their change unquestionably delayed
requested from each (including all documents
adjudication of the merits; instead of a trial beginning in a
relating to this case, all their articles, *596
few days or weeks, the plenary arbitration hearing did not
publications, or speeches given in their fields of
begin until late September of 2002—almost ten months
expertise, all courses or seminars they had attended,
after the Culls abandoned their trial setting. Moreover,
to the extent arbitration reduces delay, it does so by

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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

*599 [35] Second, the dissents define prejudice in a


B. A Response to the Dissents
way that makes it impossible to prove. While recognizing
Although we have repeatedly said arbitration agreements that “waiver” has a special definition in the arbitration
can be waived, today's dissents would effectively hold they context, the dissents overlook that “prejudice” does too.
cannot. That would favor arbitration too much; because Instead of the inherent-unfairness standard used by the

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

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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.

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

*601 C. Did the Warranty Justice O'NEILL, concurring.


Companies Waive Arbitration? Most members of the Court agree that the Culls
substantially invoked the litigation process before
[41] Finally, the Culls argue the warranty companies requesting arbitration; the point of disagreement is
cannot object to arbitration for two reasons. whether Perry Homes adequately proved it suffered
prejudice as a result. I join the Court's opinion, but
First, the warranty companies originally requested write separately to note that I believe the proof required
arbitration (which the Culls opposed), so it could be to demonstrate prejudice in any given case should be
argued that it is unfair to hold the Culls to their original measured by the degree to which the litigation process has
position without holding the warranty companies to been invoked. In some circumstances, a party's invocation
theirs. Of course, we cannot hold both parties to their of the judicial process may be so substantial that a court
original positions as those positions were contradictory. could presume the party resisting arbitration has been
More important, while the parties' original demands prejudiced and the right to arbitration has been waived.
are relevant factors, the test is the totality of the In my view, such a presumption may easily be drawn on
circumstances. Looking to all the circumstances, it is this record.
quite clear from the parties' extensive co-participation in
months of discovery that everyone waived their right to
arbitration—whether they asserted that right early (as did
the warranty companies) or late (as did the Culls). Justice JOHNSON, joined by Chief Justice JEFFERSON
and Justice GREEN, concurring in part and dissenting in
[42] Second, the Culls argue that the only objection to part.
the trial court's order compelling arbitration was filed I disagree that the trial court abused its discretion in
by Perry Homes, not the warranty companies. It is true compelling arbitration. I concur with the disposition of
that only Perry Homes' attorneys signed the motion, part VI–C. I dissent from parts VI–A and VI–B of the
but in that motion and at the hearing held on it they Court's opinion and dissent from its judgment.
represented that they were authorized to do so on behalf
of all the Defendants. If the Culls wanted to question The parties agree that their arbitration agreement covers
their authority to speak for the warranty companies, they the dispute and that the Federal Arbitration Act (FAA)
applies. Thus, whether the Culls waived the right to
should have done so by sworn motion. 117
arbitrate is a question of law. *602 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). The
*** Court has said previously, and says again today, that
prejudice is a required element of waiver of the right to
Accordingly, we reverse the court of appeals' judgment, arbitrate cases subject to the FAA. 258 S.W.3d at 595; see
vacate the arbitration award, and remand this case to the In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex.2007). The
trial court for a prompt trial. party asserting waiver has the burden to prove prejudice.
See In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753–
54 (Tex.2001) (noting that if an agreement to arbitrate
Justice O'NEILL filed a concurring opinion. exists and the party opposing arbitration fails to prove
its defenses, then a trial court has no discretion and its
Justice JOHNSON filed an opinion concurring in part and only option is to compel arbitration); In re Bruce Terminix
dissenting in part, in which Chief Justice JEFFERSON Co., 988 S.W.2d at 704 (“Even substantially invoking
and Justice GREEN joined. the judicial process does not waive a party's arbitration
rights unless the opposing party proves that it suffered
Justice WILLETT filed an opinion concurring in part and
prejudice as a result.”). In the context of the issue before
dissenting in part.
us, prejudice means detriment. See In re Bank One, 216
S.W.3d at 827 (“A party waives an arbitration clause

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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.

*605 (Emphasis added). An affidavit was attached


The question is, I think, when it deals with waiver is are setting out that the law firm representing Perry Homes
the defendants prejudiced by this delay, and if they are not had spent 122 attorney hours and 20 paralegal hours in
prejudiced or if there is not proof of prejudice, then the responding to the Culls' discovery requests and related

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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,

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
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they were prejudiced because during post-arbitration


does not show whether these proceedings, the Culls' attorney testified that he reviewed
requests were limited or extensive, deposition testimony in preparing for the arbitration and
whether they sought information for
depositions are not generally available in arbitration. 6
affirmative claims or defensive ones,
First, Defendants did not introduce the AAA rules
or even whether they addressed the
into evidence at the hearing or ask the trial court to
merits or merely the arbitration
take judicial notice of them. Second, to the extent the
issue. Further, [plaintiff] does not
arguments encompass discovery depositions, Defendants
allege that the discovery already
did not complain in the trial court that they were
conducted would not be useful in
prejudiced by the taking of depositions or that the Culls
arbitration; to the contrary, he
planned to use them in arbitration, and the argument
concedes *611 it would be useful
cannot be raised here. See TEX.R.APP. P. 33.1; Mack
whether the case is arbitrated or
Trucks, Inc. v. Tamez, 206 S.W.3d 572, 577 (Tex.2006)
tried.
(noting that except for fundamental error, appellate courts
Id. at 763. are not authorized to consider issues not properly raised
by the parties). Third, even if the AAA rules had been
Neither party here claimed before arbitration (nor, for before the trial court, there was no evidence that all, most,
that matter, after arbitration) that the litigation discovery or any arbitrators would have refused to require disclosure
would not be useful in arbitration. On the other hand, and of any of the matters disclosed by Defendants. Finally,
as addressed below, Defendants claimed after arbitration Defendants' attorneys had access to the same deposition
that they suffered prejudice because Plaintiffs' attorney testimony to use for arbitration preparation, so there
used the discovery depositions to prepare for arbitration. could not have been an unfair advantage to the Culls by
In this regard, there are further inferences from the record use of the depositions.
that the Court does not credit but that the trial court
could have made when it compelled arbitration: both I conclude the record is not conclusive either that
parties would use the litigation discovery and depositions Defendants suffered prejudice as they claimed or that the
to prepare for arbitration, the discovery would be useful Culls obtained an unfair advantage by litigation conduct
in arbitration, and neither party was unfairly advantaged as the Court holds. I also conclude that evidence before the
or suffered detriment from the discovery. trial court required the court to weigh and draw inferences
from it and that some evidence supports the trial court's
In summary, the Court (1) does not limit its review determination that Defendants did not prove prejudice to
to Defendants' claims of prejudice made in the trial themselves *612 or unfair advantage to the Culls by use
court, (2) disregards factors that presented the trial court of the litigation process. Accordingly, I would hold that
with decisions to make based on evidence allowing for the trial court did not abuse its discretion by compelling
different interpretations and inferences, and (3) assumes the parties to arbitrate and I would affirm the judgment
“inherent unfairness” equates to Defendants' prejudice or of the court of appeals.
the Culls' unfair advantage from litigation conduct and
effectively forgives Defendants' failure to prove detriment
Justice WILLETT, concurring in part and dissenting in
to themselves or advantage to the Culls.
part.
Arbitration has become a hot-button topic for the Court
Defendants make other contentions not reached by the
of late—in this Term alone we have decided at least three
Court, but none of them warrant holding that the trial
court abused its discretion. In their brief to this Court, arbitration-related cases 1 and heard argument in four
Defendants reference rules of the American Arbitration more. 2 As the range of opinions in this case demonstrates,
Association and urge that the AAA Rules of Procedure the invocation and operation of arbitration provisions can
provide for limited discovery in that the arbitrator is present tricky legal questions that spark honest differences
limited to directing “(i) the production of documents of opinion. I agree with Parts I–V of the Court's decision,
and other information, and (ii) the identification of and also with much of Part VI regarding waiver. However,
any witnesses to be called.” Defendants also assert that I respectfully dissent from the Court's ultimate result, not

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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).

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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.

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24 Id. at 85, 123 S.Ct. 588.


25 Tristar Fin. Ins. Agency, Inc. v. Equicredit Corp. of Am., 97 Fed.Appx. 462, 464 (5th Cir.2004).
26 Id.
27 Howsam, 537 U.S. at 83–84, 123 S.Ct. 588 (internal quotations omitted); see also Green Tree Fin. Corp. v. Bazzle, 539
U.S. 444, 451–52, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003).
28 See Marie v. Allied Home Mortgage Corp., 402 F.3d 1, 13 (1st Cir.2005).
29 Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 449, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006) (“We reaffirm
today that ... a challenge to the validity of the contract as a whole, and not specifically to the arbitration clause, must
go to the arbitrator.”).
30 In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 190 (Tex.2007) (holding claim that contract was illusory went to
contract as a whole and thus was for arbitrators); In re FirstMerit Bank, N.A., 52 S.W.3d 749, 756 (Tex.2001) (“The de
los Santoses assert the defenses of unconscionability, duress, fraudulent inducement, and revocation. We again note
that these defenses must specifically relate to the Arbitration Addendum itself, not the contract as a whole, if they are
to defeat arbitration.”); see also In re Kaplan Higher Educ. Corp., 235 S.W.3d 206, 210 (Tex.2007) (holding claim of
“unclean hands” that went to contract as a whole rather than arbitration clause was question for arbitrators).
31 In re Tyco Int'l Ltd. Sec. Litig., 422 F.3d 41, 45–47 (1st Cir.2005); Marie, 402 F.3d at 13–14; In re Citigroup, Inc., 376
F.3d 23, 27–29 (1st Cir.2004); Rankin v. Allstate Ins. Co., 336 F.3d 8, 12–14 (1st Cir.2003); Restoration Pres. Masonry,
Inc. v. Grove Eur. Ltd., 325 F.3d 54, 61–63 (1st Cir.2003).
32 Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217–21 (3d Cir.2007).
33 Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 344–47 (5th Cir.2004); Tristar Fin. Ins. Agency, Inc. v.
Equicredit Corp. of Am., 97 Fed.Appx. 462, 464 (5th Cir.2004).
34 Lewallen v. Green Tree Servicing, L.L.C., 487 F.3d 1085, 1090–94 (8th Cir.2007); Kelly v. Golden, 352 F.3d 344, 349–
50 (8th Cir.2003). The Eighth Circuit did refer to Howsam in one case as requiring waiver to be referred to arbitrators, but
that case involved an allegation of waiver by previous arbitration, not litigation. See Nat'l Am. Ins. Co. v. Transamerica
Occidental Life Ins. Co., 328 F.3d 462, 463–66 (8th Cir.2003).
35 See David LeFevre, Note, Whose Finding is it Anyway?: The Division of Labor Between Courts and Arbitrators with
Respect to Waiver, 2006 J. DISP. RESOL. 305, 316–17 (2006); Stephen K. Huber, The Arbitration Jurisprudence of the
Fifth Circuit, Round II, 37 TEX. TECH L.REV. 531, 542 (2005).
36 In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex.2007); In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex.2006);
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 Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 574 (Tex.1999); In re Bruce Terminix Co., 988 S.W.2d 702, 704
(Tex.1998); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex.1996); Prudential Sec. Inc. v. Marshall, 909 S.W.2d
896, 898–99 (Tex.1995).
37 In re Bank One, N.A., 216 S.W.3d at 827; In re D. Wilson Constr. Co., 196 S.W.3d at 783; In re Vesta Ins. Group, Inc.,
192 S.W.3d at 763; In re Serv. Corp. Int'l, 85 S.W.3d at 174; In re Bruce Terminix Co., 988 S.W.2d at 704; EZ Pawn
Corp., 934 S.W.2d at 89.
38 In re D. Wilson Constr. Co., 196 S.W.3d at 783.
39 In re Vesta Ins. Group, Inc., 192 S.W.3d at 764.
40 In re Bank One, N.A., 216 S.W.3d at 827.
41 In re Serv. Corp. Int'l, 85 S.W.3d at 174–75.
42 Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898–99 (Tex.1995).
43 In re Bruce Terminix Co., 988 S.W.2d at 704.
44 EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 90 (Tex.1996).
45 In re Vesta Ins. Group, Inc., 192 S.W.3d at 763 (holding requests for disclosure, four depositions, and request for
production did not waive arbitration absent proof regarding extent of requests and whether they addressed merits or
arbitrability).
46 Id. at 764.
47 In re Tyco Int'l Ltd. Sec. Litig., 422 F.3d 41, 46 (1st Cir.2005) (“[E]ach case is to be judged on its particular facts.”);
Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir.2004) (“Ultimately, however, the question of
what constitutes a waiver of the right of arbitration depends on the facts of each case.”); accord, Ivax Corp. v. B. Braun
of Am., Inc., 286 F.3d 1309, 1315 (11th Cir.2002); Grumhaus v. Comerica Sec., Inc., 223 F.3d 648, 650 (7th Cir.2000);

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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).

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51 Tex. Sup. Ct. J. 819

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.”).

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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:

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

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;

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Perry Homes v. Cull, 258 S.W.3d 580 (2008)
51 Tex. Sup. Ct. J. 819

(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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 29


Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

U.S.C.A. § 1 et seq.; U.S.C.A. Const. Art. 1,


§ 8, cl. 3.
KeyCite Yellow Flag - Negative Treatment
Not Followed on State Law Grounds Hoover v. American Income Life  90 Cases that cite this headnote
Ins. Co., Cal.App. 4 Dist., May 16, 2012
107 S.Ct. 2520
Supreme Court of the United States [2] Alternative Dispute Resolution
Constitutional and statutory provisions
Barclay PERRY and James Johnston, Appellants and rules of court
v. Federal Arbitration Act embodies clear
Kenneth Morgan THOMAS. federal policy of requiring arbitration unless
agreement to arbitrate is not part of
No. 86–566. contract evidencing interstate commerce or is
| revocable upon such grounds as exist at law
Argued April 28, 1987. or equity for revocation of any contract. 9
| U.S.C.A. § 2.
Decided June 15, 1987.
54 Cases that cite this headnote
Former employee of securities brokerage firm brought
action against his former employer and two of his
coemployees alleging breach of contract, conversion, civil [3] Labor and Employment
conspiracy to commit conversion, and breach of fiduciary What law governs
duty, for which former employee sought compensation States
and punitive damages, in connection with dispute over Labor and Employment
commissions on sale of securities. Coemployees filed Under Supremacy Clause, provision
petition to compel arbitration. The California Superior of Federal Arbitration Act governing
Court denied petition to compel arbitration, and appeal enforcement of arbitration agreements
was taken. The California Court of Appeal, Second preempts provision of California Labor Code
Appellate District, affirmed. Following denial of petition which states that wage collection actions may
for review by the California Supreme Court, the Supreme be maintained without regard to existence of
Court noted probable jurisdiction. The Supreme Court, any private agreement to arbitrate. U.S.C.A.
Justice Marshall, held that under the Supremacy Clause, Const. Art. 6, cl. 2; 9 U.S.C.A. § 2; West's
the Federal Arbitration Act pre-empted provision of Ann.Cal.Labor Code § 229.
California Labor Law which stated that wage collection
actions may be maintained without regard to existence of 342 Cases that cite this headnote
any private agreement to arbitrate.
[4] Federal Courts
Reversed. Review of state courts
Contention that parties seeking enforcement
Justices Stevens and O'Connor filed dissenting opinions.
of arbitration agreement lack standing to
enforce agreement would not be considered by
Supreme Court, where courts below did not
West Headnotes (7) address that argument for refusing to compel
arbitration.

[1] Courts 23 Cases that cite this headnote


Exclusive or Concurrent Jurisdiction
Federal Arbitration Act, enacted pursuant to [5] Federal Courts
Commerce Clause, is body of substantive law
enforceable in both state and federal courts. 9

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

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.

**2521 Syllabus * *484 2. Appellee's contention that resolving in


appellants' favor the question of their “standing” to

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Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

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

Reversed and remanded. The demands for arbitration were based on a


provision found in a Uniform Application for Securities
MARSHALL, J., delivered the opinion of the Court, in Industry Registration form, which Thomas completed
which REHNQUIST, C.J., and BRENNAN, WHITE, and executed in connection with his application for
BLACKMUN, POWELL, and SCALIA, JJ., joined. employment with Kidder, Peabody. That provision states:
STEVENS, J., post, p. ––––, and O'CONNOR, J., post, p.
––––, filed dissenting opinions. “I agree to arbitrate any dispute, claim or controversy
that may arise between me and my firm, or a
customer, or any other person, that is required to be
Attorneys and Law Firms arbitrated under the rules, constitutions or by-laws of
the organizations with which I register....” App. 33a.
Peter Brown Dolan argued the cause for appellants. With
him on the briefs was Maren E. Nelson. Rule 347 of the New York Stock Exchange, Inc. (1975),
with which Thomas registered, provides that
Bruce Gelber argued the cause and filed a brief for
appellee. “[a]ny controversy between a registered representative
and any member or member organization arising out of
Opinion
the employment or termination of employment of such
Justice MARSHALL delivered the opinion of the Court. registered representative by and with such member or
member organization shall be settled by arbitration, at
In this appeal we decide whether § 2 of the the instance of any such party....” App. 34a.
Federal Arbitration Act, 9 U.S.C. § 1 et seq., which
mandates enforcement of arbitration agreements, pre- *486 Kidder, Peabody sought arbitration as a member
empts **2523 § 229 of the California Labor Code, which organization of the New York Stock Exchange (NYSE).
provides that actions for the collection of wages may be Perry and Johnston relied on Thomas' allegation that they
maintained “without regard to the existence of any private had acted in the course and scope of their employment and
agreement to arbitrate.” Cal.Lab.Code Ann. § 229 (West argued that, as agents and employees of Kidder, Peabody,
1971). they were beneficiaries of the arbitration agreement.

Thomas opposed both petitions on the ground that § 229


of the California Labor Code authorized him to maintain
I
an action for wages, defined to include commissions, 2
Appellee, Kenneth Morgan Thomas, brought this action despite the existence of an agreement to arbitrate. He
in California Superior Court against his former employer, relied principally on this Court's decision in Merrill Lynch,
Kidder, Peabody & Co. (Kidder, Peabody), and two Pierce, Fenner & Smith, Inc. v. Ware, 414 U.S. 117, 94 S.Ct.
of its employees, appellants Barclay Perry and James 383, 38 L.Ed.2d 348 (1973), which had also considered the
Johnston. His complaint arose from a dispute over validity of § 229 in the face of a pre-emption challenge

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Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

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

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Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

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,

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Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

The judgment of the California Court of Appeal is


reversed, and the case is remanded for further proceedings Even if I were not to adhere to my position that the
not inconsistent with this opinion. Act is inapplicable to state court proceedings, however,
I would still dissent. We have held that Congress can
It is so ordered. limit or preclude a waiver of a judicial forum, and
that Congress' intent to do so will be deduced from a
statute's text or legislative history, or “from an inherent
conflict between arbitration and the statute's underlying
Justice STEVENS, dissenting.
purposes.” Shearson/American Express Inc. v. McMahon,
Despite the striking similarity between this case and
482 U.S. 220, 227, 107 S.Ct. 2332, ––––, 96 L.Ed.2d 185
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Ware,
(1987). As Justice STEVENS has observed, the Court has
414 U.S. 117, 94 S.Ct. 383, 38 L.Ed.2d 348 (1973), the
not explained why state legislatures should not also be able
Court correctly concludes that the precise question now
to limit or preclude waiver of a judicial forum:
presented was not decided in Ware. Even though the
Arbitration Act had been on the books for almost 50 years “We should not refuse to exercise independent
in 1973, apparently neither the Court nor the litigants even judgment concerning the conditions under which an
considered the possibility that the Act had pre-empted arbitration agreement, generally enforceable under the
state-created rights. It is only in the last few years that Act, can be held invalid as contrary to public policy
the Court has effectively rewritten the statute to give it a simply because the source of the substantive law to
pre-emptive scope that Congress certainly did not intend. which the arbitration agreement attaches is a State
See Southland Corp. v. Keating, 465 U.S. 1, 18–21, 104 rather than the Federal Government. I find no evidence
S.Ct. 852, 862–864, 79 L.Ed.2d 1 (1984) (STEVENS, J., that Congress intended such a double standard to apply,
concurring in part and dissenting in part). The dicta in and I would not lightly impute such an intent to the 1925
some of these recent cases are admittedly broad enough to Congress *495 which enacted the Arbitration Act.”
cover this case, see ante, at 2525–2526, but since none of Southland Corp. v. Keating, supra, 465 U.S., at 21, 104
our prior holdings is on point, the doctrine of stare decisis S.Ct. at 863.
is not controlling. Cf. Shearson/American Express Inc. v.
McMahon, 482 U.S. 220, ––––, 107 S.Ct. 2332, ––––, 96 Under the standards we most recently applied in Shearson/
L.Ed.2d 185 (1987) (STEVENS, J., concurring in part American Express Inc. v. McMahon, supra, there can be
and dissenting in part). Accordingly, **2528 because little doubt that the California Legislature intended to
I share *494 Justice O'CONNOR's opinion that the preclude waiver of a judicial forum; it is clear, moreover,
States' power to except certain categories of disputes from that this intent reflects an important state policy. Section
arbitration should be preserved unless Congress decides 229 of the California Labor Code specifically provides
otherwise, I would affirm the judgment of the California that actions for the collection of wages may be maintained
Court of Appeal. in the state courts “without regard to the existence of any
private agreement to arbitrate.” Cal.Lab.Code Ann. § 229
(West 1971). The California Legislature thereby intended
Justice O'CONNOR, dissenting.
“to protect the worker from the exploitative employer who
The Court today holds that § 2 of the Federal Arbitration
would demand that a prospective employee sign away in
Act (Act), 9 U.S.C. § 1 et seq., requires the arbitration
advance his right to resort to the judicial system for redress
of appellee's claim for wages despite clear state policy
of an employment grievance,” and § 229 has “manifested
to the contrary. This Court held in Southland Corp.
itself as an important state policy through interpretation
v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1
by the California courts.” Merrill Lynch, Pierce, Fenner &
(1984), that the Act applies to state court as well as
Smith v. Ware, 414 U.S. 117, 131, 132–133, 94 S.Ct. 383,
federal court proceedings. Because I continue to believe
391, 392, 38 L.Ed.2d 348 (1973).
that this holding was “unfaithful to congressional intent,
unnecessary, and in light of the [Act's] antecedents and the
In my view, therefore, even if the Act applies to state
intervening contraction of federal power, inexplicable,”
court proceedings, California's policy choice to preclude
id., at 36, 104 S.Ct., at 871 (O'CONNOR, J., dissenting),
waivers of a judicial forum for wage claims is entitled to
I respectfully dissent.

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Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

respect. Accordingly, I would affirm the judgment of the All Citations


California Court of Appeal.
482 U.S. 483, 107 S.Ct. 2520, 96 L.Ed.2d 426, 28 Wage
& Hour Cas. (BNA) 137, 55 USLW 4832, 106 Lab.Cas.
P 55,735

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

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Perry v. Thomas, 482 U.S. 483 (1987)
107 S.Ct. 2520, 28 Wage & Hour Cas. (BNA) 137, 96 L.Ed.2d 426, 55 USLW 4832...

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

than reasonable market value to the reinsurers for services


actually provided; and
KeyCite Red Flag - Severe Negative Treatment
Rehearing en banc Granted, Order Vacated February 16, 2017  
[4] Dodd-Frank Act applies 3-year statute of limitations
839 F.3d 1
found in RESPA applied to CFPB's administrative and
United States Court of Appeals,
judicial enforcement of RESPA.
District of Columbia Circuit.

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.

No. 15–1177 Henderson, Circuit Judge, filed opinion concurring in part


| and dissenting in part.
Argued April 12, 2016
|
Decided October 11, 2016
| West Headnotes (27)
Rehearing En Banc Granted,
Order Vacated February 16, 2017 * [1] Constitutional Law
Separation of Powers
Synopsis History and tradition are critical factors
Background: Mortgage lender petitioned for review in separation of powers cases where the
of Consumer Financial Protection Bureau's (CFPB) constitutional text does not otherwise resolve
enforcement action that resulted in $109 million the matter.
order against it for referring mortgage customers to
mortgage insurers that purchased mortgage reinsurance Cases that cite this headnote
from wholly owned subsidiary of mortgage lender,
and mortgage lender challenged CFPB's status as an [2] Antitrust and Trade Regulation
independent agency under Article II of constitution. Officers and employees
Constitutional Law
Appointment, tenure and removal of
Holdings: The Court of Appeals, Kavanaugh, Circuit public employees and officials
Judge, held that: Public Employment
Authority to impose adverse action;
[1] the CFPB was unconstitutionally structured, in manner and mode of imposition
violation of Article II of the Constitution; United States
In general; power to remove
[2] court would strike down only the provision of
The Consumer Financial Protection Bureau
Dodd-Frank Act limiting the President to removing the
(CFPB) was unconstitutionally structured, in
single director of CFPB for cause in order to remedy
violation of Article II of the Constitution,
constitutional violation;
because it was an independent agency headed
by a single director who was not removable
[3] provision of Real Estate Settlement Procedures Act
at will by the President, whereas independent
(RESPA) prohibiting kickbacks in real estate settlement
agencies historically had multiple directors.
agreements allows captive reinsurance arrangements, so
U.S. Const. art. 2; 12 U.S.C.A. § 5491.
long as the mortgage insurance companies pay no more

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

3 Cases that cite this headnote 1 Cases that cite this headnote

[3] Constitutional Law [7] Public Employment


Nature and scope in general Cause in general
Constitutional Law United States
Nature and scope in general Grounds
In separation of powers cases not resolved For-cause removal requirements prohibit
by the constitutional text alone, historical dismissal of a head of an independent agency
practice matters a great deal in defining the by the President due to lack of trust in the
constitutional limits on the executive and administrator, differences in policy outlook,
legislative branches. or the mere desire to install administrators of
the President's choosing.
Cases that cite this headnote
Cases that cite this headnote

[4] Constitutional Law


Nature and scope in general [8] Constitutional Law
Constitutional Law Nature and scope in general
Nature and scope in general The separation of powers does not depend
If the constitutional text is sufficiently clear on the views of individual Presidents, nor
regarding the limits on the executive and on whether the encroached-upon branch
legislative branches, then the existence of any approves the encroachment.
historical practice departing from that text is
Cases that cite this headnote
not persuasive in defining the constitutional
limits on the branches.
[9] United States
Cases that cite this headnote Executive Authority, Powers, and
Functions
[5] United States A President cannot choose to bind his
Executive departments and department successors by diminishing their powers.
heads
Cases that cite this headnote
A single person at the helm of an executive
agency, removable at will by the President, is
perfectly constitutional under Article II. U.S. [10] Statutes
Const. art. 2. Administrative agencies and proceedings
Provision of Dodd-Frank Act that created
Cases that cite this headnote
the Consumer Financial Protection Bureau
(CFPB) as an independent agency headed
[6] Constitutional Law by a single director who was removable by
Encroachment on Executive the President only for cause, which violated
In the context of Congress's creation Article II of the Constitution, was severable
of an independent agency, congressional from remainder of Act, and thus court would
aggrandizement of power is not a necessary strike down only the provision limiting the
condition for an Article II violation impairing President to removing the single director
the President's executive powers, which would for cause in order to remedy constitutional
violate separation of powers. U.S. Const. art. violation; Act specified that if any provision
2. of it were held unconstitutional, the remainder

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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

[16] Consumer Credit


[12] Statutes Regulations in general
Effect of Partial Invalidity; Severability Provision of Real Estate Settlement
The normal rule is that partial, rather than Procedures Act prohibiting kickbacks in
facial, invalidation of an unconstitutional real estate settlement agreements allows
statute is the required course, so long as the captive reinsurance arrangements, in which
court concludes that: (1) Congress would have a mortgage lender refers a borrower to a
preferred the law with the offending provision mortgage insurer that agrees to use a reinsurer
severed over no law at all, and (2) the law with affiliated with the mortgage lender, so long
the offending provision severed would remain as the mortgage insurance companies pay no
fully operative as a law. more than reasonable market value to the
reinsurers for services actually provided. Real
2 Cases that cite this headnote Estate Settlement Procedures Act of 1974 § 8,
12 U.S.C.A. §§ 2607(a), 2607(c).
[13] Statutes
Cases that cite this headnote
Effect of Partial Invalidity; Severability
In considering Congress's intent with respect
to severability of a statute, courts first must [17] Administrative Law and Procedure
decide, or often speculate, whether Congress Plain, literal, or clear meaning;
would have preferred what is left of its statute ambiguity
to no statute at all. Chevron instructs courts at step one of
evaluating agency interpretation of a statute
1 Cases that cite this headnote to first employ all of the traditional tools of
statutory interpretation.
[14] Statutes
Cases that cite this headnote
Effect of severability clause
Courts need not speculate and can presume
that Congress wanted to retain the [18] Administrative Law and Procedure
constitutional remainder of a statute when Permissible or reasonable construction

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

After a court employs the ordinary tools


of statutory interpretation in evaluating an [21] Administrative Law and Procedure
agency interpretation of a statute under Consistent or longstanding construction;
Chevron, only if an ambiguity remains approval or acquiescence
does the court defer to the agency, if its An agency's change in its interpretation of
interpretation is at least reasonable. a statute becomes a fatal problem, when
the government decides to turn around and
Cases that cite this headnote retroactively apply that new interpretation to
proscribe conduct that occurred before the
[19] Constitutional Law new interpretation was issued.
Financial institutions, transactions, and
Cases that cite this headnote
services
Consumer Credit
Regulations in general [22] Constitutional Law
Retrospective laws and decisions; change
Even assuming Consumer Financial
in law
Protection Bureau's (CFPB) changed
interpretation of provision of Real The Due Process Clause limits the extent
Estate Settlement Procedures Act (RESPA) to which the government may retroactively
prohibiting kickbacks in real estate alter the legal consequences of an entity's or
settlement agreements, to disallow captive person's past conduct. U.S. Const. Amend. 14.
reinsurance arrangements, was a permissible
Cases that cite this headnote
interpretation of statute, CFPB violated
mortgage lender's due process rights by
retroactively applying its new interpretation [23] Constitutional Law
to lender's conduct that occurred before the Retrospective laws and decisions; change
date of the new interpretation; Department in law
of Housing and Urban Development (HUD), Constitutional Law
which had previously administered RESPA, Administrative Agencies and Proceedings
had provided clear guidance to mortgage in General
lenders interpreting RESPA as allowing Retroactivity, in particular, a new agency
captive reinsurance arrangements. U.S. interpretation that is retroactively applied
Const. Amend. 14; Real Estate Settlement to proscribe past conduct, contravenes the
Procedures Act of 1974 § 8, 12 U.S.C.A. § bedrock due process principle that the people
2607(c)(2); 12 C.F.R. § 1024.14(g); 24 C.F.R. should have fair notice of what conduct is
§§ 3500.01-3500.14. prohibited. U.S. Const. Amend. 14.
Cases that cite this headnote Cases that cite this headnote

[20] Administrative Law and Procedure [24] Constitutional Law


Consistent or longstanding construction; Rules and regulations
approval or acquiescence
Due process requires agencies to provide
A change in an agency's interpretation of a regulated parties fair warning of the conduct
statute is not a fatal flaw in and of itself, so a regulation prohibits or requires. U.S. Const.
long as the change is reasonably explained and Amend. 14.
so long as the new interpretation is consistent
with the statute. 1 Cases that cite this headnote

Cases that cite this headnote


[25] Consumer Credit

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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.

Kirk D. Jensen and Alexandar S. Leonhardt were on the


[26] Criminal Law
brief for amicus curiae Consumer Mortgage Coalition in
Nature and scope of limitations
support of petitioners.
Limitation of Actions
Nature of statutory limitation Joseph R. Palmore and Bryan J. Leitch were on the brief
The general working presumption in federal for amici curiae American Financial Services Association,
civil and criminal cases is that a federal civil et al. in support of petitioners.
cause of action or criminal offense must have
Andrew J. Pincus, Matthew A. Waring, Kathryn
some statute of limitations and must not allow
Comerford Todd, and Steven P. Lehotsky were on the
suits to be brought forever and ever after
brief for amicus curiae The Chamber of Commerce of the
the acts in question. 18 U.S.C.A. § 3282; 28
United States in support of petitioners.
U.S.C.A. § 2462.
Jay N. Varon and Jennifer M. Keas were on the brief for
1 Cases that cite this headnote
amici curiae American Land Title Association, et al. in
support of petitioners.
[27] Consumer Credit
Time to sue and limitations Phillip L. Schulman and David T. Case were on the brief
for amicus curiae National Association of Realtors in
Dodd-Frank Act applies 3-year statute
support of petitioners.
of limitations found in Real Estate
Settlement Procedures Act (RESPA) Lawrence DeMille–Wagman, Senior Litigation Counsel,
applied to Consumer Financial Protection Consumer Financial Protection Bureau, argued the cause
Bureau's (CFPB) administrative and judicial for respondent. With him on the brief were *5 Meredith
enforcement of RESPA. Real Estate Fuchs, General Counsel, and John R. Coleman.
Settlement Procedures Act of 1974 § 16, 12
U.S.C.A. § 2614; 12 U.S.C.A. §§ 5563, 5564. Julie Nepveu was on the brief for amicus curiae AARP in
support of respondent.
1 Cases that cite this headnote

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

to assure effective government but to preserve individual


Before: Henderson and Kavanaugh, Circuit Judges, and freedom.” Morrison v. Olson, 487 U.S. 654, 727, 108 S.Ct.
Randolph, Senior Circuit Judge. 2597, 101 L.Ed.2d 569 (1988) (Scalia, J., dissenting).

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.

In 1935, however, the Supreme Court carved out an


INTRODUCTION AND SUMMARY
exception to Myers and Article II by permitting Congress
This is a case about executive power and individual to create independent agencies that exercise executive
liberty. The U.S. Government's executive power to power. See Humphrey's Executor v. United States, 295
enforce federal law against private citizens—for example, U.S. 602, 55 S.Ct. 869, 79 L.Ed. 1611 (1935). An agency
to bring criminal prosecutions and civil enforcement is considered “independent” when the agency heads are
actions—is essential to societal order and progress, but removable by the President only for cause, not at will,
simultaneously a grave threat to individual liberty. and therefore are not *6 supervised or directed by
the President. Examples of independent agencies include
The Framers understood that threat to individual liberty. well-known bodies such as the Federal Communications
When designing the executive power, the Framers first Commission, the Securities and Exchange Commission,
separated the executive power from the legislative and the Federal Trade Commission, the National Labor
judicial powers. “The declared purpose of separating and Relations Board, and the Federal Energy Regulatory
dividing the powers of government, of course, was to Commission. Those and other established independent
‘diffus[e] power the better to secure liberty.’ ” Bowsher agencies exercise executive power by bringing enforcement
v. Synar, 478 U.S. 714, 721, 106 S.Ct. 3181, 92 L.Ed.2d actions against private citizens and by issuing legally
583 (1986) (quoting Youngstown Sheet & Tube Co. v. binding rules that implement statutes enacted by
Sawyer, 343 U.S. 579, 635, 72 S.Ct. 863, 96 L.Ed. 1153 Congress.
(1952) (Jackson, J., concurring)). To ensure accountability
for the exercise of executive power, and help safeguard The independent agencies collectively constitute, in effect,
liberty, the Framers then lodged full responsibility for the a headless fourth branch of the U.S. Government. They
executive power in the President of the United States, who exercise enormous power over the economic and social
is elected by and accountable to the people. The text of life of the United States. Because of their massive
Article II provides quite simply: “The executive Power power and the absence of Presidential supervision and
shall be vested in a President of the United States of direction, independent agencies pose a significant threat
America.” U.S. CONST. art. II, § 1. And Article II assigns to individual liberty and to the constitutional system of
the President alone the authority and responsibility to separation of powers and checks and balances.
“take Care that the Laws be faithfully executed.” Id.
§ 3. As Justice Scalia explained: “The purpose of the To help mitigate the risk to individual liberty, the
separation and equilibration of powers in general, and independent agencies, although not checked by the
of the unitary Executive in particular, was not merely President, have historically been headed by multiple

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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.

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

The CFPB's concentration of enormous executive power


Two recent Supreme Court decisions exemplify that in a single, unaccountable, unchecked Director not
historical analysis. In its 2010 decision in Free Enterprise only departs from settled historical practice, but also
Fund v. Public Company Accounting Oversight Board, the poses a far greater risk of arbitrary decisionmaking
Supreme Court held that the new Accounting Oversight and abuse of power, and a far greater threat to
Board at issue in that case—with two levels rather individual liberty, than does a multi-member independent
than one level of for-cause protection insulating the agency. The overarching constitutional concern with
independent agency heads from the President—exceeded independent agencies is that the agencies are unchecked
the bounds on traditional independent agencies and by the President, the official who is accountable to the
thus violated Article II. 561 U.S. 477, 514, 130 S.Ct. people and who is responsible under Article II for the
3138, 177 L.Ed.2d 706 (2010). In so ruling, the Court exercise of executive power. Recognizing the broad and
emphasized, among other things, the novelty of the unaccountable power wielded by independent agencies,
Board's structure: “Perhaps the most telling indication of Congresses and Presidents of both political parties have
the severe constitutional problem with the PCAOB is the therefore long endeavored to keep independent agencies
lack of historical precedent for this entity.” Id. at 505, in check through other statutory means. In particular, to
130 S.Ct. 3138 (internal quotation marks omitted). In its check independent agencies, Congress has traditionally
2014 decision in NLRB v. Noel Canning, the Supreme required multi-member bodies at the helm of every
Court held that recess appointments in Senate recesses of independent agency. In lieu of Presidential control, the
fewer than 10 days were presumptively unconstitutional multi-member structure of independent agencies acts
under Article II. ––– U.S. ––––, 134 S.Ct. 2550, 2567, 189 as a critical substitute check on the excesses of any
L.Ed.2d 538 (2014). Why 10 days? The Court explained: individual independent agency head—a check that helps
“Long settled and established practice is a consideration to prevent arbitrary decisionmaking and thereby to
of great weight in a proper interpretation of constitutional protect individual liberty.
provisions regulating the relationship between Congress
and the President.” Id. at 2559 (internal quotation marks This new agency, the CFPB, lacks that critical check and
and alteration omitted). And the historical practice of structural constitutional protection, yet wields vast power
Presidents and Senates had established a de facto 10-day over the U.S. economy. So “this wolf comes as a wolf.”
line so that recess appointments in recesses of fewer than Morrison v. Olson, 487 U.S. at 699, 108 S.Ct. 2597 (Scalia,
10 days were impermissible. See id. at 2567. J., dissenting).

[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

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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.

Third, in light of our ruling on the constitutional and


statutory issues, the CFPB on remand still will have an I
opportunity to demonstrate that the relevant mortgage
insurers in fact paid more than reasonable market PHH is a large home mortgage lender. When PHH and
value to the PHH-affiliated reinsurer for reinsurance, other lenders provide mortgage loans to homebuyers, they

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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).

To supervise and direct executive officers, the President


A must be able to remove those officers at will. See generally
Myers v. United States, 272 U.S. 52, 47 S.Ct. 21, 71 L.Ed.
We begin by describing the background of independent
160 (1926). Otherwise, a subordinate could ignore the
agencies in general and the CFPB in particular.
President's supervision and direction without fear, and
the President could do nothing about it. See Bowsher v.

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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,

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among others, led the Court to conclude that Congress


could create an independent agency “wholly disconnected But Congress ultimately strayed from the Warren
from the executive department.” Id. at 630, 55 S.Ct. and Executive Branch proposals, and from the House
869. According to the Court, Congress could therefore bill, as well as from historical practice, by creating
limit the President's power to remove the commissioners an independent agency with only a single Director.
of the Federal Trade Commission and, by extension, See Dodd–Frank Wall Street Reform and Consumer
Congress could limit the President's power to remove the Protection Act, § 1011, 12 U.S.C. § 5491. Congress made
commissioners and board directors of similar independent the Director of the CFPB removable only for cause—that
agencies. Id. at 628–30, 55 S.Ct. 869. 2 is, for “inefficiency, neglect of duty, or malfeasance in
office”—during the Director's fixed five-year term. See 12
In the wake of the 1935 Humphrey's Executor decision, U.S.C. § 5491(c)(3); Humphrey's Executor, 295 U.S. at 620,
independent agencies have continued to play an enormous 55 S.Ct. 869. Under the statute, the President therefore
role in the U.S. Government. The independent agencies may not supervise, direct, or remove at will the Director.
possess massive authority over vast swaths of American As a result, this statute means that a Director appointed
economic and social life. by a President may continue to serve in office even if the
President later wants to remove the Director based on
Importantly, however, the independent agencies have policy disagreement, for example. This statute also means
traditionally operated—and continue to operate—as that a Director may even continue to serve under a new
multi-member “bod[ies] of experts appointed by law and President (at least until the Director's statutory five-year
informed by experience.” Id. at 624, 55 S.Ct. 869 (internal tenure has elapsed), even though the new President might
strongly disagree with the Director about policy issues or
quotation marks omitted). 3
the overall direction of the agency.

The independent agency at issue here, the CFPB, arose


At the same time, Congress granted the CFPB broad
out of an idea originally proposed by then-Professor and
authority to enforce U.S. consumer protection laws.
now-Senator Elizabeth Warren. In 2007, concerned about
Under the Dodd–Frank Act, the CFPB possesses the
balkanized and inconsistent federal law enforcement
power to “prescribe rules or issue orders or guidelines
of consumer protection statutes, Professor Warren
pursuant to” 19 distinct consumer protection laws.
advocated that Congress create a new independent
12 U.S.C. § 5581(a)(1)(A); see also id. § 5481(14).
agency, which she called a Financial Product Safety
That power was previously exercised by seven different
Commission. This new agency would centralize and
government agencies. See id. § 5581(b) (transferring to
unify federal law enforcement to protect consumers. See
the CFPB “[a]ll consumer financial protection functions”
Elizabeth Warren, Unsafe at Any Rate: If It's Good Enough
previously exercised by the Board of Governors of the
for Microwaves, It's Good Enough for Mortgages. Why We
Federal Reserve, the *16 Comptroller of the Currency,
Need a Financial Product Safety Commission, Democracy,
the Office of Thrift Supervision, the Federal Deposit
Summer 2007, at 8, 16–18.
Insurance Corporation, the National Credit Union
Administration, and select functions of the Department
The agency proposed by Professor Warren was to
of Housing and Urban Development and the Federal
operate as a traditional multi-member independent
Trade Commission). The CFPB may pursue actions to
agency. The subsequent Executive Branch proposal
enforce the consumer protection laws in federal court, as
for such a new agency likewise contemplated a
well as in administrative actions before administrative law
multi-member structure. See DEPARTMENT OF
judges, and may issue subpoenas requesting documents or
THE TREASURY, FINANCIAL REGULATORY
testimony in connection with those enforcement actions.
REFORM: A NEW FOUNDATION: REBUILDING
See id. §§ 5562–5564. The CFPB has the power to impose
FINANCIAL SUPERVISION AND REGULATION
a wide range of legal and equitable relief, including
58 (2009). The originally passed House bill sponsored by
restitution, disgorgement, money damages, injunctions,
Congressman Barney Frank and supported by Speaker
and civil monetary penalties. Id. § 5565(a)(2). And all of
Nancy Pelosi also would have created a traditional multi-
this massive power is lodged in one person—the Director
member independent agency. See H.R. 4173, 111th Cong.
§ 4103 (as passed by House, Dec. 11, 2009).

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—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.

The Act also, in theory, allows a supermajority of the


Financial Stability Oversight Council to veto certain
B
regulations of the Director. See id. § 5513. But by statute,
the veto power may be used only to prevent regulations As a single-Director independent agency exercising
(not to prevent enforcement actions or adjudications); substantial executive authority, the CFPB is the first
only when two-thirds of the Council members agree; and of its kind and a historical anomaly. Until this
only when a regulation puts “the safety and soundness of point in U.S. history, independent agencies exercising
the United States banking system or the stability of the substantial executive authority have all been multi-
financial system of the United States at risk,” a standard member commissions or boards. A sample list includes:
unlikely to be met in practice in most cases. Id. § 5513(c)(3)
(B)(ii); see S. Rep. No. 111–176, at 166 (“The Committee • Interstate Commerce Commission (1887)
notes that there was no evidence provided during its
• Federal Reserve Board (1913)

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Fed. Sec. L. Rep. P 99,434

only for cause. The CFPB found only three examples:


• Federal Trade Commission (1914) the Social Security Administration, the Office of Special
Counsel, and the Federal Housing Finance Agency. Tr. of
• U.S. International Trade Commission (1916)
Oral Arg. at 19. But none of the three examples has deep
• Federal Deposit Insurance Corporation (1933) historical roots. Indeed, the Federal Housing Finance
Agency was created only in 2008, about the same time as
• Federal Communications Commission (1934) the CFPB. The other two are likewise relatively recent.
And those other two have been constitutionally contested
• National Mediation Board (1934) by the Executive Branch, and they do not exercise the core
Article II executive power of bringing law enforcement
• Securities and Exchange Commission (1934)
actions or imposing fines and penalties against private
• National Labor Relations Board (1935) citizens for violation of statutes or agency rules. For those
reasons, as we will explain, the three examples are different
• Federal Maritime Commission (1961) in kind from the CFPB and other independent agencies
such as the FCC, the SEC, and FERC. Those examples
• National Transportation Safety Board (1967)
therefore do not count for much when weighed against
• National Credit Union Administration (1970) the deeply rooted historical practice demonstrating that
independent agencies are multi-member agencies. To
• Occupational Safety and Health Review Commission borrow the words of Justice Breyer in Noel Canning, as
(1970) compared to the settled historical practice, “we regard
these few scattered examples as anomalies.” NLRB v.
• Postal Regulatory Commission (1970) Noel Canning, ––– U.S. ––––, 134 S.Ct. 2550, 2567, 189
L.Ed.2d 538 (2014); see also Free Enterprise Fund v. Public
• Consumer Product Safety Commission (1972)
Company Accounting Oversight Board, 561 U.S. 477, 505–
• Nuclear Regulatory Commission (1974) 06, 130 S.Ct. 3138, 177 L.Ed.2d 706 (2010).

• 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

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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

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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

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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

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two levels of for-cause removal between the President and


In Noel Canning, the Supreme Court speaking through the Accounting Oversight Board.
Justice Breyer stressed the importance of history when
assessing the constitutionality of a novel practice—in that The Supreme Court drew a line between one level of
case, Presidential recess appointments in Senate recesses for-cause removal, which was the structure of traditional
of fewer than 10 days. The Court said: “Long settled independent agencies, and two levels of for-cause removal,
and established practice is a consideration of great weight the novel structure of the new Accounting Oversight
in a proper interpretation of constitutional provisions Board. See Free Enterprise Fund, 561 U.S. at 484, 130 S.Ct.
regulating the relationship between Congress and the 3138. The Court ruled that the latter was unconstitutional.
President.” Noel Canning, 134 S.Ct. at 2559 (internal The Court drew that line in part because historical practice
quotation marks and alteration omitted). Based on that had settled on one level of for-cause removal for a
history, the Supreme Court ruled that a Senate recess President to remove the head of an independent agency.
of “less than 10 days is presumptively too short” for There were at most “only a handful of isolated” precedents
constitutional purposes. Id. at 2567. Importantly, the text for the new Board. Id. at 505, 130 S.Ct. 3138. The vast
of the Constitution did not draw any such 10-day line. majority of the extant independent agencies had only one
But the historical practice between the President and the level of for-cause removal. And as the Court noted, there
Senate had settled on a 10-day line. was a meaningful difference between one level of for-cause
removal and two levels of for-cause removal in terms of
In ruling out recess appointments in recesses of fewer than an agency's insulation from Presidential control. See id. at
10 days, the Noel Canning Court stated that it had “not 495–96, 130 S.Ct. 3138. Therefore, the Court invalidated
found a single example of a recess appointment made the structure of the new Board. 11
during an intra-session recess that was shorter than 10
days.” Id. at 2566. The Court explained that the “lack Those two cases well illustrate the broader jurisprudential
of examples suggests that the recess-appointment power principle long applied by the Supreme Court: In
is not needed in that context.” Id. Although the Court separation of powers cases not resolved by the
did find “a few historical examples of recess appointments constitutional text alone, historical practice matters.
made during inter-session recesses shorter than 10 days,”
the Court stated: “But when considered against 200 years
of settled practice, we regard these few scattered examples
as anomalies.” Id. at 2567. D

The CFPB marks a major departure from the settled


According to the Court, therefore, allowing recess
historical practice requiring multi-member bodies at the
appointments in Senate recesses of fewer than 10 days
helm of independent agencies. Because this case is not
would depart from the settled historical practice and alter
resolved solely by the constitutional text, at least as
the relative powers of the President and Senate over
the text was interpreted in Humphrey's Executor, the
appointments. So, too, disallowing recess appointments in
CFPB's departure from historical practice matters to
Senate recesses of 10 or more days would depart from
the analysis. And the departure from historical practice
settled historical practice. In Noel Canning, the Supreme
matters even more in this instance because this departure
Court therefore converted that historical 10-day practice
from historical practice threatens individual liberty. The
into a constitutional rule. 10 historical practice of structuring independent agencies as
multi-member commissions or boards is the historical
The Supreme Court engaged in the same kind of history- practice for a reason: It reflects a deep and abiding concern
based analysis in Free Enterprise Fund. Independent for safeguarding the individual liberty protected by the
agency heads are ordinarily removable for *25 cause by Constitution.
the President. In that case, however, the new Accounting
Oversight Board's members were removable only for “The Framers recognized that, in the long term, structural
cause by the Commissioners of the SEC, and the SEC protections against abuse of power were critical to
Commissioners in turn were understood to be removable preserving liberty.” Bowsher v. Synar, 478 U.S. 714,
only for cause by the President. In other words, there were 730, 106 S.Ct. 3181, 92 L.Ed.2d 583 (1986); see also

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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

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that an agency does not wrongly bring an enforcement


action or adopt rules that unduly infringe individual Moreover, multi-member independent agencies are better
liberty. structured than single-Director independent agencies to
guard against “capture” of—that is, undue influence
As compared to a single-Director structure, a multi- over—the independent agencies by regulated entities or
member independent agency also helps to avoid arbitrary interest groups, for example. As then-Professor Elizabeth
decisionmaking and to protect individual liberty because Warren noted in her original proposal for a multi-
the multi-member structure—and its inherent requirement member consumer protection agency: “With every agency,
for compromise and consensus—will tend to lead to the fear of regulatory *28 capture is ever-present.”
decisions that are not as extreme, idiosyncratic, or Elizabeth Warren, Unsafe at Any Rate: If It's Good
otherwise off the rails. Cf. Stephen M. Bainbridge, Why Enough for Microwaves, It's Good Enough for Mortgages.
a Board? Group Decisionmaking in Corporate Governance, Why We Need a Financial Product Safety Commission,
55 Vand. L. Rev. 1, 12–19 (2002) (summarizing Democracy, Summer 2007, at 8, 18. Capture can infringe
experimental evidence finding group decisionmaking to be individual liberty because capture can prevent a neutral,
superior to individual decisionmaking). A multi-member impartial agency assessment of what rules to issue and
independent agency can only go as far as the middle what enforcement actions to undertake. In a multi-
vote is willing to go. Conversely, under a single-Director member agency, however, the capturing parties “must
structure, an agency's policy goals “will be subject to the capture a majority of the membership rather than just
whims and idiosyncratic views of a single individual.” one individual.” Lisa Schultz Bressman & Robert B.
Joshua D. Wright, The Antitrust/Consumer Protection Thompson, The Future of Agency Independence, 63
Paradox: Two Policies at War with Each Other, 121 Vand. L. Rev. 599, 611 (2010); see also ROBERT E.
Yale L.J. 2216, 2260 (2012) (internal quotation marks CUSHMAN, THE INDEPENDENT REGULATORY
omitted); cf. Recent Legislation, Dodd–Frank Act Creates COMMISSIONS 153 (Octagon Books 1972) (1941)
the Consumer Financial Protection Bureau, 124 Harv. (noting, in reference to Federal Reserve Act of 1913, that
L. Rev. 2123, 2128 (2011) (multi-member commission it “seemed easier to protect a board from political control
structure “reduces the variance of policy and improves than to protect a single appointed official”); Barkow,
accuracy through aggregation”); Michael B. Rappaport, Insulating Agencies, 89 Tex. L. Rev. at 38 (“[O]nly one
Essay, Replacing Independent Counsels with Congressional person at the apex can also mean that the agency is
Investigations, 148 U. Pa. L. Rev. 1595, 1601 n.17 more easily captured.”); Robinson, On Reorganizing the
(2000) ( “[I]ndependent agencies tend to be headed by Independent Regulatory Agencies, 57 Va. L. Rev. at 962
multimember commissions, which function to prevent (“[T]he single administrator may be more vulnerable” to
aberrant actions....”). interest group pressures “because he provides a sharper
focus for the concentration of special interest power and
Relatedly, as compared to a single-Director independent influence.”).
agency, a multi-member independent agency provides
the added benefit of “a built-in monitoring system for Importantly, all of those features and benefits of multi-
interests on both sides because that type of body is member independent agencies are not merely accidental
more likely to produce a dissent if the agency goes or coincidental byproducts. Those points were in the
too far in one direction.” Rachel E. Barkow, Insulating minds of the Members of Congress who helped launch
Agencies: Avoiding Capture Through Institutional Design, independent agencies. For example, Senator Newlands,
89 Tex. L. Rev. 15, 41 (2010). A dissent, in turn, can the sponsor of the legislation creating the Federal Trade
serve “as a ‘fire alarm’ that alerts Congress and the Commission, emphasized the need for a commission
public at large that the agency's decision might merit rather than a single Director: “If only powers of
closer scrutiny.” Id.; see also Dodd–Frank Act Creates investigation and publicity are given[,] a single-headed
the Consumer Financial Protection Bureau, 124 Harv. L. organization, like the Bureau of Corporations, might be
Rev. at 2128 (the “presence of dissenters” in agency the best for the work; but if judgment and discretion
proceedings “provides new information and forces the are to be exercised, or if we have in contemplation the
proponent to articulate a coherent rationale, thus acting exercise of any corrective power hereafter, or if the broad
as a constraining force”). ends above outlined are to be attained, it seems to me

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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

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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.

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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

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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

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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

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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

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in a manner consistent with congressional intent.”).


That prong of the severability analysis in essence turns In similar circumstances, the Supreme Court in Free
on whether the truncated statute is “fully operative as Enterprise Fund severed the unconstitutional for-cause
a law.” Free Enterprise Fund, 561 U.S. at 509, 130 provision but did not otherwise disturb the Sarbanes–
S.Ct. 3138 (internal quotation marks omitted). To take Oxley Act or the operation of the new Accounting
just one example, in Marbury v. Madison, the Court Oversight Board created by that Act. See id. at 508–
concluded that Section 13 of the Judiciary Act of 1789 was 10, 130 S.Ct. 3138. Similarly, in a recent case involving
unconstitutional in part. 5 U.S. 1 Cranch 137, 148, 179– the Copyright Royalty Board, we severed the for-cause
80, 2 L.Ed. 60 (1803). But the Court did not disturb the provision that rendered that Board unconstitutional,
remainder of the Judiciary Act. Id. at 179–80. but did not otherwise disturb the copyright laws or
the operation of the Copyright Royalty Board. See
Here, the Dodd–Frank Act and its CFPB-related Intercollegiate Broadcasting System, Inc. v. Copyright
provisions will remain “fully operative as a law” without Royalty Board, 684 F.3d 1332, 1340–41 (D.C. Cir. 2012).
the for-cause removal restriction. Free Enterprise Fund, We do the same here.
561 U.S. at 509, 130 S.Ct. 3138 (internal quotation
marks omitted). Operating without the for-cause removal In light of Congress's clear textual expression of its intent
provision and under the supervision and direction of the regarding severability, and because the Dodd–Frank Act
President, the CFPB may still “regulate the offering and and the CFPB may function without the CFPB's for-cause
provision of consumer financial products or services under removal provision, we remedy the constitutional violation
the Federal consumer financial laws,” 12 U.S.C. § 5491(a), here by severing the for-cause removal provision from the
much as the Accounting Oversight Board has continued statute. As a result, the CFPB now will operate as an
fulfilling its regulatory mission in the wake of the Supreme executive agency. The President of the United States now
Court's decision in Free Enterprise Fund. 18 Moreover, the has the power to supervise and direct the Director of the
CFPB's operation as an executive agency will not in any CFPB, and may remove the Director at will at any time. 19
way prevent the overall Dodd–Frank Act from remaining
operative as a law.

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

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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

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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,

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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

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Fed. Sec. L. Rep. P 99,434

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

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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.

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
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The Due Process Clause does not allow retroactive


In SmithKline, in a sentence that all but decides the case application of such a change.
before us, the Supreme Court further stated: An “agency
should not change an interpretation in an adjudicative The CFPB responds that nothing, including the 1997
proceeding where doing so would impose new liability on letter, gave regulated entities such as PHH a reason to
individuals for past actions which were taken in good-faith rely on HUD's interpretation. CFPB Br. 44–45. But in
reliance on agency pronouncements.” Id. at 2167 (internal the 1997 letter, the Presidentially appointed and Senate-
quotation marks and alterations omitted) (quoting NLRB confirmed Assistant Secretary of HUD stated: “I trust
v. Bell Aerospace Co., 416 U.S. 267, 295, 94 S.Ct. 1757, that this guidance will assist you to conduct your business
40 L.Ed.2d 134 (1974)). The Court elaborated: “It is one in accordance with RESPA.” Letter from Nicolas P.
thing to expect regulated parties to conform their conduct Retsinas, Assistant Secretary for Housing, Department
to an agency's interpretations once the agency announces of Housing and Urban Development, to Countrywide
them; it is quite another to require regulated parties to Funding Corporation 8 (Aug. 6, 1997) (J.A. 258). We
divine the agency's interpretations in advance or else be therefore find this particular CFPB argument deeply
held liable when the agency announces its interpretations unsettling in a Nation built on the Rule of Law. When
for the first time in an enforcement proceeding and a government agency officially and expressly tells you
demands deference.” Id. at 2168. Because automatically that you are legally allowed to do something, but later
accepting the Department of Labor's new interpretation tells you “just kidding” and enforces the law retroactively
“would result in precisely the kind of unfair surprise against you and sanctions you for actions you took in
against which our cases have long warned,” the Supreme reliance on the government's assurances, that amounts to
Court refused to defer to the Department of Labor's a serious due process violation. The rule of law constrains
retroactive application of a changed interpretation of its the governors as well as the governed.
own regulations. Id. at 2167 (internal quotation marks
omitted). The CFPB protests that the HUD pronouncements were
not reflected in a binding HUD rule. To begin with,
*48 All of those fundamental anti-retroactivity that is wrong. As discussed, Regulation X reflected
principles are Rule of Law 101. And all of those HUD's longstanding interpretation that Section 8(c)
fundamental anti-retroactivity principles fit this case allowed payments of reasonable market value for services
precisely. PHH did not have fair notice of the CFPB's actually performed. See 12 C.F.R. § 1024.14 (2012) (CFPB
interpretation of Section 8 at the time PHH engaged in codification of Regulation X Section 8 provisions); 24
the conduct at issue here. PHH participated in captive C.F.R. § 3500.14 (2011) (HUD Regulation X Section 8
reinsurance arrangements in justifiable reliance on the provisions). In any event, the CFPB is confusing (i) the
interpretation stated by HUD in 1997 and restated administrative law issue of whether an agency rule is
in 2004. The CFPB therefore violated due process by sufficiently authoritative to obtain Chevron deference or
retroactively applying its changed interpretation to PHH's to constitute a norm of proscribed conduct that the agency
past conduct and requiring PHH to pay $109 million for may enforce and (ii) the due process issue of whether
that conduct. an agency statement pronouncing the legality of certain
conduct was sufficiently official for citizens to rely on it
The CFPB retorts that there is a presumption in favor as the citizens arranged their conduct. To trigger the latter
of retroactive application of agencies' interpretations due process protection, an agency pronouncement about
of ambiguous statutes. CFPB Br. 42–43. But here, the legality of proposed private conduct need not have
the CFPB was changing the Government's longstanding been set forth in a rule preceded by notice and comment
interpretation of that statute and then applying that rulemaking, or the like. Here, the agency guidance was
changed interpretation retroactively. The CFPB's decision provided by top HUD officials and was given repeatedly.
was a reversal of position—an “abrupt departure” from Although we do not imply that those two conditions
a consistent, longstanding position. Clark–Cowlitz Joint are necessary to justify citizens' reliance for purposes of
Operating Agency v. FERC, 826 F.2d 1074, 1081 (D.C. the Due Process Clause, they are surely sufficient. Here,
Cir. 1987) (en banc) (internal quotation marks omitted). the regulated industry reasonably relied on those agency
pronouncements.

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

remand, to reiterate, the CFPB may determine whether


*49 Put aside all the legalese for a moment. Imagine the relevant mortgage insurers paid more than reasonable
that a police officer tells a pedestrian that the pedestrian market value to the reinsurer Atrium, which is what
can lawfully cross the street at a certain place. The the statute proscribes and what HUD's longstanding
pedestrian carefully and precisely follows the officer's pronouncements provided. 27
direction. After the pedestrian arrives at the other side
of the street, however, the officer hands the pedestrian a
$1,000 jaywalking ticket. No one would seriously contend
that the officer had acted fairly or in a manner consistent *50 V
with basic due process in that situation. See Cox v.
In order to hold PHH liable, the CFPB must therefore
Louisiana, 379 U.S. 559, 571, 85 S.Ct. 476, 13 L.Ed.2d
show that the relevant mortgage insurers paid more than
487 (1965). Yet that's precisely this case. Here, the CFPB
reasonable market value to Atrium for the reinsurance.
is arguing that it has the authority to order PHH to
On remand, the CFPB may attempt to make that showing,
pay $109 million even though PHH acted in reliance
assuming that any relevant conduct by PHH occurred
upon numerous government pronouncements authorizing
within the applicable statute of limitations period. That
precisely the conduct in which PHH engaged.
in turn brings us to the statute of limitations issue. PHH
contends that most of its relevant activity occurred outside
The Due Process Clause does not countenance the CFPB's
of the three-year statute of limitations applicable in this
gamesmanship. As Justice Kennedy eloquently explained
case.
in a related scenario: “If retroactive laws change the
legal consequences of transactions long closed, the change
“Statutes of limitations are intended to promote justice
can destroy the reasonable certainty and security which
by preventing surprises through the revival of claims that
are the very objects of property ownership.... Groups
have been allowed to slumber until evidence has been lost,
targeted by retroactive laws, were they to be denied all
memories have faded, and witnesses have disappeared.”
protection, would have a justified fear that a government
Gabelli v. SEC, ––– U.S. ––––, 133 S.Ct. 1216, 1221, 185
once formed to protect expectations now can destroy
L.Ed.2d 297 (2013) (internal quotation marks omitted).
them. Both stability of investment and confidence in the
Statutes of limitations also “provide security and stability
constitutional system, then, are secured by due process
to human affairs” by affording “certainty” about “a
restrictions against severe retroactive legislation.” Eastern
defendant's potential liabilities.” Id. (internal quotation
Enterprises, 524 U.S. at 548–49, 118 S.Ct. 2131 (Kennedy,
marks omitted).
J., concurring in the judgment and dissenting in part); see
also General Electric Co. v. EPA, 53 F.3d 1324, 1328–29
[26] The general working presumption in federal civil and
(D.C. Cir. 1995) (“In the absence of notice—for example,
criminal cases is that a federal civil cause of action or
where the regulation is not sufficiently clear to warn
criminal offense must have some statute of limitations and
a party about what is expected of it—an agency may
must not allow suits to be brought forever and ever after
not deprive a party of property by imposing civil or
the acts in question. See 28 U.S.C § 2462; 18 U.S.C. § 3282.
criminal liability.”); Satellite Broadcasting Co. v. FCC,
As Chief Justice Marshall stated, allowing parties to sue
824 F.2d 1, 3–4 (D.C. Cir. 1987) (“Traditional concepts
“at any distance of time” would be “ utterly repugnant
of due process ... preclude an agency from penalizing a
to the genius of our laws. In a country where not even
private party for violating a rule without first providing
treason can be prosecuted after a lapse of three years,
adequate notice of the substance of the rule.... Otherwise
it could scarcely be supposed that an individual would
the practice of administrative law would come to resemble
remain forever liable to a pecuniary forfeiture.” Adams v.
‘Russian Roulette.’).
Woods, 6 U.S. 2 Cranch 336, 342, 2 L.Ed. 297 (1805).

[25] In sum, even if the CFPB's new interpretation of


The Dodd–Frank Act authorizes the CFPB to “conduct
Section 8 were a permissible interpretation of the statute,
hearings and adjudication proceedings” to enforce the
which it is not, the CFPB's interpretation could not
Real Estate Settlement Procedures Act. 12 U.S.C. §
constitutionally be applied retroactively to PHH's conduct
5563(a). The Real Estate Settlement Procedures Act, in
that occurred before that new interpretation. 26 On turn, provides that the CFPB may “bring an action to

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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

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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

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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

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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

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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

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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.

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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

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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).

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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

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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

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PHH Corporation v. Consumer Financial Protection Bureau, 839 F.3d 1 (2016)
Fed. Sec. L. Rep. P 99,434

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.

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

[6] employer did not “substantially invoke” litigation


416 S.W.3d 168
process, as required to establish waiver of employer's
Court of Appeals of Texas,
contractual right to arbitration; and
Dallas.

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).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

2 Cases that cite this headnote 3 Cases that cite this headnote

[3] Alternative Dispute Resolution [7] Alternative Dispute Resolution


What law governs Remedies and Proceedings for
When a party asserts a right to arbitrate Enforcement in General
under the Federal Arbitration Act (FAA), the A court has no discretion and must compel
question of whether the dispute is subject to arbitration under the Federal Arbitration Act
arbitration is determined under federal law. 9 (FAA) if it is established that there is a valid
U.S.C.A. § 1 et seq. arbitration agreement and the claims raised
fall within the scope of that agreement. 9
Cases that cite this headnote U.S.C.A. § 1 et seq.

3 Cases that cite this headnote


[4] Alternative Dispute Resolution
Construction in favor of arbitration
As a matter of federal law under the [8] Alternative Dispute Resolution
Federal Arbitration Act (FAA), any doubts Disputes and Matters Arbitrable Under
concerning the scope of arbitrable issues Agreement
are resolved in favor of arbitration, whether Under Federal Arbitration Act (FAA), an
pertaining to the construction of the contract order to arbitrate should not be denied unless
or a defense to arbitrability. 9 U.S.C.A. § 1 et it can be said with positive assurance that
seq. the arbitration cause is not susceptible of an
interpretation that covers the asserted dispute.
Cases that cite this headnote 9 U.S.C.A. § 1 et seq.

Cases that cite this headnote


[5] Alternative Dispute Resolution
Validity
Alternative Dispute Resolution [9] Alternative Dispute Resolution
Disputes and Matters Arbitrable Under Disputes and Matters Arbitrable Under
Agreement Agreement
In general, a party seeking to compel To determine if a claim falls within the scope
arbitration under the Federal Arbitration Act of an arbitration agreement under the Federal
(FAA) must establish (1) the existence of a Arbitration Act (FAA), the court focuses on
valid, enforceable arbitration agreement and the facts alleged, not the causes of action
(2) that the claims at issue fall within that asserted. 9 U.S.C.A. § 1 et seq.
agreement's scope. 9 U.S.C.A. § 1 et seq.
1 Cases that cite this headnote
2 Cases that cite this headnote
[10] Alternative Dispute Resolution
[6] Alternative Dispute Resolution Employment disputes
Evidence Under terms of employer's occupational
Party seeking to avoid arbitration under the injury benefit plan, valid agreement to
Federal Arbitration Act (FAA) bears the arbitrate all claims arising from a work-
burden of raising an affirmative defense to related injury or illness under the Federal
enforcement of the otherwise valid arbitration Arbitration Act (FAA) existed between
provision. 9 U.S.C.A. § 1 et seq. employer and employee who died as a
result of injuries sustained within the
course of his employment, even though

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

employee's wrongful death beneficiaries refers to the fairness of the arbitration


challenged the validity of employee's provision itself.
signature on document acknowledging
employee's receipt of mandatory arbitration 3 Cases that cite this headnote
provision of occupational injury benefit
plan in their wrongful death action [14] Alternative Dispute Resolution
against employer, where wrongful death Unconscionability
beneficiaries failed to file verified pleading
Mere inequality of bargaining power is
denying that employee had executed
not a sufficient reason to hold an
challenged document acknowledging receipt
arbitration agreement unenforceable, on
of arbitration agreement. 9 U.S.C.A. § 1 et
grounds of procedural unconscionability, in
seq.; Vernon's Ann.Texas Rules Civ.Proc.,
the employment context.
Rule 93(7).
1 Cases that cite this headnote
Cases that cite this headnote

[15] Alternative Dispute Resolution


[11] Alternative Dispute Resolution
Unconscionability
Persons affected or bound
Fee provision of arbitration agreement
Employee's wrongful death beneficiaries,
between employer and employee who died
as derivative claimants, were bound by
as a result of injuries sustained within the
employee's agreement to arbitrate, pursuant
course of his employment, which required
to employer's occupational injury benefit plan
that parties arbitrate all claims arising
that contained an agreement to arbitrate all
from a work-related injury or illness, that
claims arising from a work-related injury
party seeking arbitration pay filing fee,
or illness under the Federal Arbitration
and that arbitrators' costs and fees be
Act (FAA), even though wrongful death
borne equally by the parties, was not
beneficiaries had not signed the arbitration
substantively unconscionable, as a defense to
agreement. 9 U.S.C.A. § 1 et seq.
enforcement of agreement in wrongful death
Cases that cite this headnote action by deceased employee's wrongful death
beneficiaries; although beneficiaries resided
in Alabama and employer requested that
[12] Alternative Dispute Resolution arbitration be held in Texas, beneficiaries filed
Evidence wrongful death action in Texas and failed to
Because the law favors arbitration, the party demonstrate that cost of arbitration in Texas
opposing arbitration bears the burden to would be greater than cost of litigation in
prove unconscionability. Texas, and beneficiaries failed to demonstrate
that they lacked financial ability to pay a
2 Cases that cite this headnote portion of arbitrator's fees.

Cases that cite this headnote


[13] Alternative Dispute Resolution
Unconscionability
Unconscionability of an arbitration [16] Alternative Dispute Resolution
agreement may exist in one or both of Unconscionability
two forms: (1) procedural unconscionability, An arbitration agreement that provides for
which refers to the circumstances surrounding fee-splitting is not, by itself, unconscionable.
the adoption of the arbitration provision,
and (2) substantive unconscionability, which 3 Cases that cite this headnote

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

[17] Alternative Dispute Resolution [21] Alternative Dispute Resolution


Unconscionability Evidence
Provision of arbitration agreement between When presented with question of whether a
employer and employee, who died as a result party waived its contractual arbitration rights,
of injuries sustained within the course of his court is required to resolve any doubts in favor
employment, limiting amount of discovery to of arbitration.
be conducted during arbitration proceedings
in a matter involving work-related injury or Cases that cite this headnote
illness was not substantively unconscionable,
as a defense to enforcement of agreement [22] Alternative Dispute Resolution
in wrongful death action by deceased Evidence
employee's wrongful death beneficiaries,
Waiver of a party's contractual arbitration
where agreement permitted each party the
rights may be implied from the party's
same amount of discovery, and agreement
conduct, so long as that conduct is
provided that, upon a showing of good cause,
unequivocal, and in close cases, the strong
either party could obtain an order from the
presumption against waiver should govern.
arbitrator for taking additional depositions
and could obtain approval from the arbitrator 1 Cases that cite this headnote
to utilize requests for production and for
admissions.
[23] Alternative Dispute Resolution
Cases that cite this headnote Suing or participating in suit
The judicial process is “substantially
invoked,” as required to establish waiver of
[18] Alternative Dispute Resolution
arbitration by litigation conduct, when the
Unconscionability
party seeking arbitration has taken specific
Substantive unconscionability refers to
and deliberate actions, after the filing of the
fairness of an arbitration provision.
suit, that are inconsistent with the right to
3 Cases that cite this headnote arbitrate or has actively tried, but failed, to
achieve a satisfactory result through litigation
before turning to arbitration.
[19] Alternative Dispute Resolution
Suing or participating in suit 2 Cases that cite this headnote
A party may waive contractual arbitration
rights by substantially invoking the judicial [24] Alternative Dispute Resolution
process to the detriment of the other party. Suing or participating in suit

1 Cases that cite this headnote Factors considered in determining whether a


movant has substantially invoked the judicial
process, as required to establish waiver of
[20] Alternative Dispute Resolution arbitration by litigation conduct, include
Evidence when the movant knew of the arbitration
Because public policy favors resolving clause, how much discovery has been initiated
disputes through arbitration, the law imposes and who initiated it, the extent to which
a strong presumption against the waiver of discovery related to the merits rather than
contractual arbitration rights. arbitrability or standing, how much of the
discovery would be useful in arbitration,
Cases that cite this headnote whether the movant sought judgment on the

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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

[25] Alternative Dispute Resolution [28] Alternative Dispute Resolution


Suing or participating in suit Suing or participating in suit
“Prejudice,” as required to establish waiver of Litigation conduct of employer of employee
arbitration by litigation conduct, refers to the who died from injuries sustained within the
inherent unfairness in terms of delay, expense, course of his employee did not prejudice
or damage to a party's legal position that employee's wrongful death beneficiaries in
occurs when the party's opponent forces it to their wrongful death action against employer,
litigate an issue and later seeks to arbitrate as required to establish waiver of employer's
that same issue; thus, a party should not contractual right to arbitration pursuant to
be allowed purposefully and unjustifiably to agreement in which employer and employee
manipulate the exercise of its arbitral rights agreed to arbitrate all claims arising from
simply to gain an unfair tactical advantage a work-related injury or illness; although
over the opposing party. employer waited over one year to file motion
to compel arbitration, discovery that had been
Cases that cite this headnote conducted in judicial proceedings would be
useful in arbitration, employer did not seek
[26] Alternative Dispute Resolution to compel arbitration in order to gain an
Suing or participating in suit unfair tactical advantage, and record failed
to demonstrate other detriment suffered by
Employer of employee who died from
beneficiaries.
injuries sustained within the course of his
employee did not “substantially invoke” the Cases that cite this headnote
litigation process in wrongful death action
by employee's wrongful death beneficiaries,
as required to establish waiver of employer's [29] Alternative Dispute Resolution
contractual right to arbitration pursuant to Employment disputes
agreement in which employer and employee Commerce
agreed to arbitrate all claims arising from a Arbitration
work-related injury or illness, even though Truck stop maintenance worker who
employer waited over one year to file maintained parking lots and facilities within
motion to compel arbitration, where employer one state did not qualify as “transportation
asserted affirmative defense that wrongful worker,” within meaning of provision of
death claims were the subject of a binding Federal Arbitration Act (FAA) exempting
arbitration agreement in its original answer, contracts of employment of workers engaged
did not file any motions on the merits, and in foreign or interstate commerce from its
did not engage in extensive discovery, but coverage, since maintenance worker was
rather participated in discovery initiated by not engaged in the movement of goods in
employer's co-defendants. interstate commerce. 9 U.S.C.A. § 1.

Cases that cite this headnote Cases that cite this headnote

[27] Alternative Dispute Resolution [30] Alternative Dispute Resolution


Waiver or Estoppel Employment disputes
Commerce

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

Arbitration or illness, and neither an employee nor Pilot Travel “may


Federal Arbitration Act's (FAA) exclusion of bring a lawsuit in any state or federal court against the
“contracts of employment of workers engaged other regarding a work related injury or illness or the
in foreign or interstate commerce” from the severity of alleged damages arising from a work related
Act's coverage applies only to employment injury or illness.” More specifically, paragraph 1.05 of the
contracts of those workers actually engaged in arbitration agreement provides:
movement of goods in interstate commerce. 9
U.S.C.A. § 1.
All employees, by applying for, accepting or by
Cases that cite this headnote continuing employment after the implementation of
this Plan, shall be required to submit any legally
recognized claim for a work related injury or illness
to arbitration, rather than to litigation, according to
this Plan and the rules established for its enforcement.
Attorneys and Law Firms
The Company shall also be required to proceed to
*172 Carl Evans Jr., Stephanie Almeter, Jeffrey C. arbitration on all work related injury or illness matters
Wright, McCathern, PLLC, Dallas, TX, for Appellant. brought for arbitration by an employee. The duty
imposed on both the Company and Employee to
Augustus Corbett, The Corbett Law Firm, Dallas, TX, for arbitrate all legally recognized claims arising from a
Appellees. work related injury or illness shall continue beyond and
not be affected by, the termination of an employee's
Before Justices MOSELEY, FILLMORE, and MYERS.
employment.
A document captioned “Employer Notice to Current
Texas Employees” (Employer Notice), dated January 18,
OPINION 2011, contains Tony's signature, initialing of paragraphs,
and social security number, as well as the witness
Opinion by Justice FILLMORE.
signature of Pilot Travel's representative, Brandy Allen.
In this interlocutory appeal, Pilot Travel Centers, LLC The Employer Notice contains an “Acknowledgment
(Pilot Travel) asserts the trial court erred by denying its Receipt Regarding Mandatory Arbitration Plan for Texas
motion to compel arbitration and for a stay of the trial Employees” which provides:
court proceedings against it. We reverse the trial court's
I, James McCray hereby certify
order denying Pilot Travel's motion to compel arbitration
by my initials and signature below
and for stay of the trial court proceedings.
that I have received a copy of
the Mandatory Arbitration Plan. I
also understand that ALL issues
Background related to the work related injury
or illness or benefits pertaining
On January 18, 2011, James Antonio McCray (Tony) 1 thereto MUST be settled through
began employment with *173 Pilot Travel as a binding arbitration, not litigation,
maintenance worker. Pilot Travel was a non-subscriber per Pilot Travel Centers' Mandatory
to the Texas Workers' Compensation insurance system; Arbitration Plan. Neither party shall
it provided an Occupational Injury Benefit Plan (Benefit have the right to file a suit in
Plan) for its Texas employees. Amendment 1 to the Benefit any state or federal court. Any
Plan is a Mandatory Arbitration Plan for Resolution such arbitration will be governed
of Work Related Injury or Illness Claims of Texas by the Federal Arbitration Act
Employees (arbitration agreement). By its terms, the and administered by the American
arbitration agreement indicates it is the exclusive and Mediation Association.
mandatory means for an employee and Pilot Travel to
resolve their disputes arising from a work-related injury (Emphasis in original.)

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

signature date of December 12, 2012, the December 12,


On January 26, 2011, Tony was working within the course 2012 Order is identical to the November 12, 2012 Order.
and scope of his employment with Pilot Travel at a truck On December 28, 2012, Pilot Travel filed its notice of
stop in Dallas, Texas, when he was struck by a tractor interlocutory appeal of the denial of its motion to compel
trailer rig owned by Smile Transportation and operated arbitration.
by Ljubo Dilber. Tony died several weeks later as a result
of the injuries he sustained. At the time of his death, On January 16, 2013, the trial judge signed an order
Tony was survived by his parents, appellees Joan and granting appellees' “Motion for Judgment Nunc Pro
James McCray, and his son, appellee Brandon Gullatte, Tunc” (January 16, 2013 Order). 2 In the January 16,
as represented by his next friend, Shamekia Gullatte. 2013 Order, the trial court found that the December 12,
2012 Order contained a clerical error; according to the
The record contains Pilot Travel's July 20, 2011 trial court, the signature date of December 12, 2012 was
demand for arbitration before the American Mediation incorrect and should have been November 16, 2012. In
Association, which was received by the American the January 16, 2013 Order, the trial court ordered the
Mediation *174 Association on July 21, 2011. Pilot December 12, 2012 Order corrected to reflect the finding
Travel referenced the “respondents in this arbitration” that the date of the trial judge's signature should be
as “Joan and James McCray, Individually and as Next November 16, 2012.
Friends of James Antonio McCray, Deceased; The Estate
of James Antonio McCray; and Shemekia Gullatte, On February 6, 2013, Pilot Travel filed its verified
as next Friend of Brandon Gullatte, a Minor.” Pilot objection to the January 16, 2013 Order and motion to
Travel requested the arbitration be conducted in Dallas,
vacate that order. 3 In its motion to vacate the January
Texas, where the accident occurred and where Tony was
16, 2013 Order, Pilot Travel stated that on December 14,
employed.
2012, it received the trial court's December 12, 2012 Order
denying Pilot Travel's motion to compel arbitration. Pilot
On July 22, 2011, appellees Joan and James McCray,
Travel stated the December 12, 2012 Order was the only
and Shamekia Gullatte, as next friend of Brandon
signed order it received regarding its motion to compel
Gullatte, filed their original petition in a district court of
arbitration. Citing rule of civil procedure 306a and rule of
Dallas County, Texas, against Pilot Travel and others in
appellate procedure 26.1(b), *175 Pilot Travel asserted
the lawsuit underlying this appeal. Appellees allege the
its timetable for filing an interlocutory appeal of the denial
negligence of Pilot Travel and the other named defendants
of its motion to compel arbitration began to run on
proximately caused Tony's death and appellees' damages
December 12, 2012.
resulting from his death. On August 29, 2011, Pilot Travel
filed its answer to appellees' lawsuit. Included in Pilot
On May 1, 2013, the trial court signed an “Order on [Pilot
Travel's answer is the affirmative defense that the claims
Travel's] Motion for Court to Vacate Order Granting
asserted in the lawsuit were the subject of a mandatory
[Appellees'] Judgment Nunc Pro Tunc and Order Denying
arbitration agreement signed by Tony. On September 6,
Motion to Compel Arbitration” (May 1, 2013 Order). In
2012, Pilot Travel filed its motion to compel arbitration of
the May 1, 2013 Order, the trial court vacated its January
appellees' claims and for a stay of appellees' lawsuit against
16, 2013 Order, and again denied Pilot Travel's motion to
it.
compel arbitration.

By order with a signature date of November 12, 2012,


By letter dated February 19, 2013, this Court
the trial court denied Pilot Travel's motion to compel
communicated to the parties to this interlocutory appeal
arbitration (November 12, 2012 Order). The November
that, after review of the record, it appeared Pilot Travel's
12, 2012 Order indicates that Pilot Travel's motion to
notice of appeal of the trial court's denial of its motion to
compel arbitration was considered on November 16, 2012.
compel arbitration was untimely under rule of appellate
By order with a signature date of December 12, 2012, the
procedure 26.1(b) and requested that the parties file
trial court again denied Pilot Travel's motion to compel
a jurisdictional brief explaining how this Court has
arbitration (December 12, 2012 Order). Other than a mark
jurisdiction over this appeal. See TEX.R.APP. P. 26.1(b).
through the November 12, 2012 date and a handwritten

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

[1] If applicable, rule of civil procedure 306a may operate


Jurisdiction
to extend the deadline for filing a notice of appeal of an
Section 51.016 of the civil practice and remedies code interlocutory order. See TEX.R. CIV. P. 306a; see also
provides that in a matter subject to the Federal John v. Marshall Health Servs., Inc., 58 S.W.3d 738, 740
Arbitration Act (FAA), a party may appeal from an (Tex.2001). If a party affected by an appealable order or
interlocutory order of a district court “under the same the party's attorney has not, within twenty days after the
circumstances that an appeal from a federal district court's order was signed, either received notice required by rule
order ... would be permitted by 9 U.S.C. Section 16.” of civil procedure 306a(3) or acquired actual knowledge
TEX. CIV. PRAC. & REM.CODE ANN. § 51.016 (West of the signing, then any period that, under the rules of
Supp.2012); see CMH Homes v. Perez, 340 S.W.3d 444, appellate procedure, runs from the signing of the order
448–49 (Tex.2011) (explaining that section 51.016 of the will begin on the earlier of the date when the party or
civil practice and remedies code provides for interlocutory the party's attorney receives notice or acquires actual
appeals in FAA cases so long as “it would be permitted knowledge of the signed order; however, no such period
under the same circumstances in federal court under [9 may begin to run more than ninety days after the judgment
U.S.C] section 16”). Section 16 of the FAA provides or order was signed. TEX.R.APP. P. 4.2(a)(1); see also
an appeal may be taken from an order “denying an TEX.R.CIV.P. 306a(4).
application under section 206 of this title to compel
arbitration.” 9 U.S.CA. § 16(a)(1)(C) (West 2009); Austin [2] Subsection (5) of rule of civil procedure 306a provides
Commercial Contractors, L.P. v. Carter & Burgess, Inc., a procedure that enables the trial court to change the date
347 S.W.3d 897, 900 (Tex.App.-Dallas 2011, pet. denied); the appellate timetable begins to run from the actual date
Texas La Fiesta Auto Sales, LLC v. Belk, 349 S.W.3d 872, of the interlocutory order to the date on which the party or
877 (Tex.App.-Houston [14th Dist.] 2011, no pet.). the party's attorney received the clerk's notice or acquired
actual knowledge that the trial court signed the order,
An appeal from an interlocutory order denying a motion whichever occurs first, as long as that date is not more than
to compel arbitration is an accelerated appeal. See ninety days after the trial court signed the interlocutory
TEX.R.APP. P. 28.1 (“Appeals from interlocutory orders order. TEX.R. CIV. P. 306a(5). A party must obtain
(when allowed by statute) ... are accelerated appeals.”). an order from the trial court that reflects the date the
In an accelerated appeal, absent a rule of appellate party or the party's attorney first either received notice
procedure 26.3 motion, the deadline for filing a notice of or acquired actual knowledge that the order was signed.
appeal is strictly set at twenty days after the appealable Hone v. Hanafin, 105 S.W.3d 15, 18 (Tex.App.-Dallas
interlocutory order is signed. TEX.R.APP. P. 26.1(b); 2002), rev'd on other grounds, 104 S.W.3d 884 (Tex.2003)
TEX.R.APP. P. 26.3; see also In re K.A.F., 160 S.W.3d (per curiam); see TEX.R.APP. P. 4.2(c); Moore Landrey,
923, 927 (Tex.2005); Iron Mountain Bison Ranch, Inc. v. L.L.P. v. Hirsch & Westheimer, P.C., 126 S.W.3d 536,
Easley Trailer Mfg., Inc., 964 S.W.2d 762, 763 (Tex.App.- 540 (Tex.App.-Houston [1st Dist.] 2003, no pet.); Nedd–
Amarillo 1998, no pet.) (interlocutory appeal is perfected Johnson v. Wells Fargo Bank, N.A., 338 S.W.3d 612, 613
by filing notice of appeal with trial court within twenty (Tex.App.-Dallas 2010, no pet.); Mem'l Hosp. of Galveston
days after judgment or order is signed). Cnty. v. Gillis, 741 S.W.2d 364, 366 (Tex.1987) ( “Rule
306a plainly requires that this proof be made in the trial
The notice of accelerated appeal of the November 12, 2012 court, not the court of appeals.”).
Order denying Pilot Travel's motion to compel arbitration
and for stay had to be filed within twenty days after the On September 25, 2013, the trial court signed an order on
date the order was signed. Because the twentieth day after Pilot Travel's motion to reconsider Pilot Travel's request
the November 12, 2012 Order fell on Sunday, December 2, for factual finding under rule of civil procedure 306a(5).
2012, Pilot Travel's deadline for perfecting the appeal from In that order, the trial court found that the date Pilot
that order fell on the following day, Monday, December Travel or its attorney first received notice or acquired
actual knowledge of a signed order denying its motion to
3, 2012. See TEX.R.APP. P. 4.1(a). 4 Pilot *176 Travel
compel arbitration and for stay was December 11, 2012,
filed its notice of appeal on December 28, 2012, more than
more than twenty days after the November 12, 2012 Order
twenty days after the November 12, 2012 Order.

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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.).

[5] [6] [7] [8] [9] In general, a party seeking


to compel arbitration under the FAA must establish

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

instrument in writing shall be verified by affidavit; where


party denying execution of a document by person then
Arbitration Agreement
deceased, affidavit shall be sufficient if it states affiant has
reason to believe and does believe that such instrument
Existence of Arbitration Agreement was not executed by the decedent or by his authority);
Between Pilot Travel and Tony TEX.R. EVID. 601(b) (Dead Man's Rule); Munden v.
Chambless, 315 S.W.2d 355, 358 (Tex.Civ.App.-Dallas
[10] Pilot Travel argues that it established a valid 1958, writ ref'd n.r.e.) (test of whether evidence should
arbitration agreement existed between it and Tony. The be excluded under Dead Man's Statute is whether, “in
record contains the “Acknowledgment Receipt Regarding case the witness testified falsely, the deceased, if living
Mandatory Arbitration Plan for Texas Employees” could contradict the testimony of his own knowledge”).
reflecting Tony's certification “by [his] initials and Based on the documentation in the record, we agree with
signature” on the date he was hired by Pilot Travel Pilot Travel that it established a valid and enforceable
that he received a copy of the arbitration agreement arbitration agreement existed between it and Tony.
and understood that all issues “related to the work
related injury or illness or benefits pertaining thereto
must be settled through binding arbitration” governed by
the FAA and administered by the American Mediation Appellees as Non–Signatories to Arbitration Agreement
Association, and that neither he nor Pilot Travel had
[11] Appellees Joan and James McCray are Tony's
the right to file suit in any state or federal court.
surviving parents, and appellee Brandon Gullatte,
Further, that Acknowledgment was signed by a company
represented by his mother as his next friend, is Tony's
representative.
*179 surviving son. Appellees' wrongful death claims
against Pilot Travel are made in their capacities as the
While appellees do not contest that the arbitration
surviving parents and child of Tony. See TEX. CIV.
agreement was incorporated into Pilot Travel's Benefit
PRAC. & REM.CODE ANN. § 71.004 (West 2008)
Plan, appellees contend Pilot Travel failed to establish
(action to recover damages as provided by this subchapter
the arbitration agreement was signed by Tony
is for exclusive benefit of surviving spouse, children, and
or that he “assented to arbitration.” Pilot Travel
parents of the deceased). Appellees argue that as non-
is unable to “authenticate” Tony's signature on
signatories to the arbitration agreement between Pilot
the “Acknowledgement Receipt Regarding Mandatory
Travel and Tony, their claims are not subject to the
Arbitration Plan for Texas Employees” through
arbitration agreement. They argue their claims are not
questioning him. Cf. In re Halliburton Co., 80 S.W.3d
derivative of any rights that belonged to Tony had he
566, 568 n. 2 (Tex.2002) (orig. proceeding) (in response
survived.
to motion to compel arbitration of employee's claim of
employment discrimination, employee asserted signature
Paragraph 1.02 of the arbitration agreement defines the
on a document agreeing to binding arbitration was
term “employee” to include the employee and “any
not his). During her deposition, appellee Joan McCray
individual, child, dependent, spouse, relative, executor,
testified she recognized Tony's signature on the arbitration
estate or guardian which would have the legal standing
agreement, although she later apparently “disavowed” her
required to bring a lawsuit for damages arising out of
answer “since she is neither a handwriting expert nor had
a claim.” Paragraph 1.04 of the arbitration agreement
she paid close attention to [Tony's] signature in more than
provides as follows with regard to claims arising from
ten years.”
work-related injuries or illnesses:

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

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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.

Pursuant to the arbitration agreement, if Tony sued Pilot


Travel for his own injuries prior to his death, he would
have been compelled to arbitrate his claims. Texas law Procedural Unconscionability
and the arbitration agreement therefore provide that all
In response to Pilot Travel's motion to compel
of the claims asserted by appellees against Pilot Travel
arbitration, appellees argued the arbitration agreement is
are subject to mandatory binding arbitration as agreed to
procedurally unconscionable because it was difficult for
by Tony. Accordingly, appellees' argument that they are
an unsophisticated man like Tony to understand, and
not bound to arbitrate because they are not signatories
Pilot Travel knew Tony's level of education, and was
to Tony's arbitration agreement with Pilot Travel is not
aware of his lack of sophistication, based on information
persuasive.
contained in his application for employment. Appellees
further argue the procedural unconscionability of the
arbitration agreement based on Tony's lack of input
Conclusion concerning the terms of the agreement and the one-sided
character of the agreement which Tony had to accept or
We conclude Pilot Travel established the existence of an forego employment by Pilot Travel.
arbitration agreement and *180 that appellees' claims
against it fall within that agreement's scope. [14] Appellees' unverified response to Pilot Travel's
motion to compel arbitration contained no evidence the
arbitration agreement is procedurally unconscionable.
Unconscionability of Arbitration Agreement Further, there is no evidence in the record establishing
Tony's lack of education and “sophistication” as argued
[12] [13] Appellees contend the arbitration agreement is by appellees. With regard to appellees' argument that the
invalid and unenforceable because under Texas contract arbitration agreement was procedurally unconscionable
law it is procedurally and substantively unconscionable. because Tony had to accept the arbitration agreement
Because the law favors arbitration, the party opposing terms to be employed by Pilot Travel, the Texas Supreme

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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.

[17] By the express terms of the arbitration agreement,


*181 Substantive Unconscionability
remedies available to appellees in arbitration shall be
With regard to their argument the arbitration agreement the same remedies available to them in a state court
is substantively unconscionable, appellees contended proceeding. With regard to the amount of discovery
in their response to Pilot Travel's motion to compel permitted, paragraph 1.17 of the arbitration agreement
arbitration that the costs and fees to arbitrate their provides:
wrongful death claims effectively preclude them from
Unless so ordered by the arbitrator,
vindicating their rights because they are indigent. Further,
and only upon a showing of good
appellees stated they live in Alabama and the travel
cause, no more than three (3)
expenses to Texas are more than they can bear; yet
depositions, excluding depositions
appellees also indicated that “court costs” to litigate
of expert witnesses, may be taken
before a jury have been “very costly but manageable.”
by any party. No single deposition
Finally, appellees argued the limitations on discovery
may exceed four (4) hours.
contained in the arbitration agreement are substantively
Interrogatories may be utilized by
unconscionable.
any party. Each party is allowed
two (2) sets of Interrogatories
[15] [16] Addressing first appellees' argument that
requiring no more than twenty
arbitration conducted in Texas will be prohibitively
(20) separate responses per set
expensive for them, we note appellees filed their wrongful
(subset requests such as IA, IB
death lawsuit in Texas, and there is no evidence in the
or questions requesting multiple
record that arbitration in Texas will entail greater travel
answers shall each count as one
expense than litigation of the wrongful death case in a
response). The arbitrator shall have
Texas state court. Moreover, the arbitration agreement
sole authority to determine which
indicates that the party seeking arbitration (Pilot Travel)
discovery procedures are necessary
shall pay the American Mediation Association filing fee.
and appropriate in the case to
The arbitration agreement further provides that the costs
reduce the time, cost and expense
and fees charged by the arbitrator shall be borne equally
of the discovery process, while
by the parties; however, the arbitrator shall have the
still affording each party a fair
discretion, upon request of a party and for good cause, “to
opportunity to prepare its case.
reapportion the arbitration fees (except attorney fees) and
Requests for Production may be
costs in a manner which the arbitrator deems equitable.”
utilized by any party upon approval
According to the terms of the arbitration agreement, “in
by the arbitrator. Requests for

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

Admission may be utilized by any


party upon *182 approval by
Waiver of Arbitration Agreement
the arbitrator. Unless a greater
time is allowed by the requesting [19] A party may waive contractual arbitration rights by
party, Interrogatories, Requests substantially invoking the judicial process to the detriment
for Production and Requests for of the other party. Perry Homes v. Cull, 258 S.W.3d
Admission shall be answered or 580, 589–90 (Tex.2008). As a defense to Pilot Travel's
objected to within thirty (30) days motion to compel arbitration, appellees contend Pilot
from the date of service. Travel waived arbitration and that they were prejudiced
by Pilot Travel invoking the judicial process.
Under the arbitration agreement, the parties are permitted
the same amount of discovery. See In re Poly–America,
262 S.W.3d at 357–58 (discovery limitations in arbitration
agreement applied equally to both sides and were not Standard of Review and Applicable Law
per se substantively unconscionable; limitations that
[20] [21] [22] Waiver of contractual arbitration rights
operate to prevent effective presentation of claim are
is a question of law that this Court reviews de novo.
unenforceable, but that determination is best left to
Id. at 598; see also Small v. Specialty Contractors, Inc.,
arbitrator as case unfolds). Appellees contend they need
310 S.W.3d 639, 644 (Tex.App.-Dallas 2010, no pet.).
to conduct discovery beyond that contemplated by the
Because public policy favors resolving disputes through
arbitration agreement. However, appellees acknowledge
arbitration, the law imposes a strong presumption against
written discovery has been exchanged and depositions
the waiver of contractual arbitration rights. See In re
have previously been taken in the lawsuit. In addition,
Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex.1998)
the arbitration agreement provides that upon a showing
(orig. proceeding); see also In re Vesta Ins. Group, Inc.,
of good cause, a party may obtain an order from the
192 S.W.3d 759, 763 (Tex.2006) (orig. proceeding) (per
arbitrator for taking additional depositions, and may
curiam) (there is a strong presumption against waiver
obtain approval from the arbitrator to utilize requests
under the FAA). When presented with questions of
for production and for admissions. At this point in
waiver, we are required to resolve any doubts in favor
the proceeding, we cannot conclude that the evidence
of arbitration. In re Oakwood Mobile Homes, 987 S.W.2d
presented to the trial court compelled a finding that the
at 574. The standard for determining waiver is the same
discovery limitations were per se unconscionable. See id.
under federal and state law. See Holmes, Woods &
at 358.
Diggs v. Gentry, 333 S.W.3d 650, 654 (Tex.App.-Dallas
2009, no pet.). Waiver may be implied from a party's
[18] Substantive unconscionability refers to fairness of
an arbitration provision. See In re Halliburton, 80 S.W.3d *183 conduct, so long as that conduct is unequivocal.
Perry Homes, 258 S.W.3d at 593. In “close cases, the
at 571. Here, the terms of the arbitration agreement do
‘strong presumption against waiver’ should govern.” Id.
not favor either party. Appellees have not established
(quoting In re D. Wilson Constr. Co., 196 S.W.3d 774, 783
that the cost of arbitration or the discovery limitations
contained in the arbitration agreement will prevent them (Tex.2006) (orig. proceeding)).
from effectively presenting their wrongful death claims.
[23] [24] As the parties claiming waiver, appellees had
On this record, appellees failed to establish the terms of the
the heavy burden of establishing Pilot Travel substantially
arbitration agreement arc substantively unconscionable.
invoked the judicial process. See Bruce Terminix, 988
S.W.2d at 704; Adams v. StaxxRing, Inc., 344 S.W.3d 641,
648 (Tex.App.-Dallas 2011, pet. denied). In determining
Conclusion whether appellees met their burden, we must examine
the case-specific facts and look to the totality of the
Appellees failed to establish procedural or substantive
circumstances. See Perry Homes, 258 S.W.3d at 591
unconscionability as a defense to Pilot Travel's motion to
(whether a party has waived arbitration must be decided
compel arbitration.
on a case-by-case basis, based upon an examination of
the totality of the circumstances). The judicial process is

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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.

We note there was no evidentiary hearing and no


reporter's record of argument before the trial court
Substantial Invocation of Judicial Process
concerning Pilot Travel's motion to compel arbitration.
[26] On July 20, 2011, Pilot Travel demanded arbitration The trial court made no findings pertinent to the merits
before the American Mediation Association. On July 22, of Pilot Travel's motion to compel arbitration. Appellees
2011, appellees filed their original petition and request do not cite to evidence purportedly presented to the trial
for disclosures. Pilot Travel's original answer filed on court, nor can appellees cite to any evidence in the record,
August 29, 2011 included the affirmative defense that that demonstrates Pilot Travel substantially invoked the
appellees' claims against Pilot Travel were the subject judicial process. See Small, 310 S.W.3d at 645–46, 649
of a binding arbitration agreement. See In re H & R (record did not support argument that movants had
Block Fin. Advisors, Inc., 262 S.W.3d 896, 901 (Tex.App.- waived their right to arbitration by invoking the judicial
Houston [14th Dist.] 2008, orig. proceeding) (burden of process to the prejudice of nonmovant; record contained
demonstrating waiver “falls even more heavily” when no reporter's record of argument before the trial court,
the party seeking arbitration included a demand for no evidentiary hearing regarding the motion to compel
arbitration in its original answer) (quoting Keytrade arbitration, and no trial court findings).

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

argue that by merely participating in the depositions, Pilot


The quantum of litigation conduct that will be deemed Travel invoked the judicial process.
“substantial” depends very much on the context. See
Perry Homes, 258 S.W.3d at 593; EZ Pawn Corp. v. Appellees' arguments regarding discovery concern matters
Mancias, 934 S.W.2d 87, 89–90 (Tex.1996) (per curiam) that are not reflected in the record. No discovery was
(party did not waive arbitration right by answering admitted into evidence or attached to appellees' response
the suit, participating in docket control conference, to Pilot Travel's motion to compel arbitration. Because
propounding requests for production and interrogatories, appellees offered none of the discovery documents as
noticing plaintiff's deposition, and entering into an agreed evidence in the trial court and presented no details about
order to reset the original trial date); Walker v. J.C. any of them, the record does not show whether the written
Bradford & Co., 938 F.2d 575, 576–78 (5th Cir.1991) discovery was limited or extensive, sought information for
(party did not waive arbitration right by propounding affirmative or defensive issues, or whether the discovery
interrogatories and requests for production, attending addressed the merits of the lawsuit. Further, appellees
pretrial conference, and delaying thirteen months before do not allege that the discovery already conducted
filing motion to compel arbitration). would not be useful in arbitration. See In re Vesta Ins.
Group, 192 S.W.3d at 763 (noting that no prejudice from
In response to Pilot Travel's motion to compel arbitration, allegedly “extensive discovery” was shown where party
appellees argued Pilot Travel invoked the judicial process opposing arbitration failed to present evidence detailing
by consenting to co-defendants' removal of the state court the discovery conducted and failed to allege discovery
litigation to federal court, participating in scheduling already conducted would not be useful in arbitration); see
conferences in federal and state court, agreeing to trial Small, 310 S.W.3d at 648 (appellee did not claim discovery
dates in state and federal court, and signing scheduling already exchanged could not be used in arbitration).
orders in federal and state court. 6 By appellees' own
admission, Pilot *185 Travel did not “invoke” the The supreme court in Perry Homes emphasized facts that
judicial process with regard to removal of the case to would constitute waiver: “allowing a party to conduct
federal court, but rather consented to co-defendants' full discovery, file motions going to the merits, and seek
removal of the case. We disagree that by purported arbitration only on the eve of trial.” Perry Homes, 258
agreement to trial settings, Pilot Travel “sought judgment S.W.3d at 590 (quoting In re Vesta Ins. Group, 192 S.W.3d
on the merits” as argued by appellees. Further, the record at 764). Here, the record does not show Pilot Travel filed
contains no evidence of scheduling orders or trial dates in a motion on the merits, engaged in extensive discovery,
the lawsuit during its pendency in either federal or state or sought arbitration on the eve of trial. See Small, 310
S.W.3d at 645–47.
court. 7

In their appellate brief, appellees state the discovery in


this lawsuit “has been pretty extensive” between appellees Prejudice
and Pilot Travel's co-defendants, and the exchange
of discovery between appellees and Pilot Travel's co- [28] Additionally, appellees did not present any evidence
defendants has “greatly benefitted” Pilot Travel because it that they suffered *186 prejudice. “Prejudice” in the
received copies of the discovery exchanged. Appellees do context of waiver of a contractual right to arbitration
not contend Pilot Travel has initiated discovery; instead, means “the inherent unfairness in terms of delay, expense,
they argue Pilot Travel has not needed to initiate discovery or damage to a party's legal position that occurs when
because of the discovery exchanged between appellees the party's opponent forces it to litigate an issue and later
and Pilot Travel's co-defendants. Further, appellees assert seeks to arbitrate that same issue.” Perry Homes, 258
Pilot Travel participated in discovery by “significantly” S.W.3d at 597; see also In re Bruce Terminix Co., 988
deposing three parties, co-defendant Dilber and appellees S.W.2d at 704 (noting that even substantial invocation
Joan McCray and Shamekia Gullatte. However, appellees of judicial process does not constitute waiver absent
do not contend Pilot Travel invoked the judicial process proof of prejudice). In appellees' brief they state Pilot
by noticing any of the parties for deposition; instead, they Travel's “delay” and “actions” caused them “detriment
and prejudice in terms of burgeoning and unnecessary

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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

416 S.W.3d 168

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

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Pilot Travel Centers, LLC v. McCray, 416 S.W.3d 168 (2013)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 18


Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (1996)

KeyCite Yellow Flag - Negative Treatment West Headnotes (10)


Distinguished by In re Godt, Tex.App.-Corpus Christi, August 24, 2000 
935 S.W.2d 217
[1] Mandamus
Court of Appeals of Texas,
Vacation of judgment or order
Houston (1st Dist.).
Writ of mandamus is required to allow court
PORTER & CLEMENTS, L.L.P., John O'Neill, to review order refusing to compel arbitration
Evelyn V. Keyes, and J. Eugene Clements, Relators, under Federal Arbitration Act. 9 U.S.C.A. § 2.
v.
1 Cases that cite this headnote
The Honorable Kathleen S. STONE,
Judge of the 55th District Court of
Harris County, Texas, Respondent. [2] Alternative Dispute Resolution
Constitutional and statutory provisions
PORTER & CLEMENTS, L.L.P., John O'Neill,
and rules of court
Evelyn V. Keyes, and Eugene Clements, Appellants,
v. Alternative Dispute Resolution
Disputes and Matters Arbitrable Under
Scarlett RABALAIS, Alvin Rabalais,
Agreement
and Hot Diggity Dog, Inc., Appellees.
Mandamus
Nos. 01–96–00872–CV, 01–96–00873–CV. Civil proceedings other than actions
| Fee agreement between law firm and
Dec. 5, 1996. client was not “contract evidencing
| transaction involving commerce” under
Rehearing Overruled Feb. 24, 1997. Federal Arbitration Act and, accordingly,
order granting motion for leave to file petition
Clients sued law firm, and firm filed motion to compel
for writ of mandamus, contending arbitration
binding arbitration and to stay litigation based on
as provided for in agreement was required
arbitration provision in fee agreement with client.
under Act, was improvidently granted; parties
The 55th District Court, Harris County, Kathleen S.
to agreement were Texas residents, agreement
Stone, J., denied motion. Firm filed motion for leave
involved providing legal services in Texas,
to file petition for writ of mandamus, contending
dispute giving rise to claim for arbitration
arbitration was required by Federal Arbitration Act, and
involved misrepresentations allegedly made in
contemporaneously filed interlocutory appeal, contending
Texas and underlying lawsuit, the handling of
arbitration was required by Texas Arbitration Act.
which gave rise to claim, was filed in federal
The Court of Appeals, Mirabal, J., held that: (1) fee
court in Texas. 9 U.S.C.A. § 2.
agreement was not “contract evidencing transaction
involving commerce” under Federal Arbitration Act and, 8 Cases that cite this headnote
accordingly, order granting motion for leave to file
petition for writ of mandamus was improvidently granted;
[3] Alternative Dispute Resolution
(2) dispute was governed by Arbitration Act, rather
What law governs
than Alternative Dispute Resolution Act (ADR Act);
(3) arbitration under Arbitration Act is mechanism by Dispute as to whether fee agreement between
which parties to contract reach binding resolution to client and law firm provided for binding
their differences; and (4) arbitration clause provided for arbitration was governed by Arbitration Act,
binding arbitration. rather than Alternative Dispute Resolution
Act (ADR Act); dispute did not involve
Ordered accordingly. court–ordered referral of pending litigation to
ADR procedure with which ADR Act deals.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (1996)

V.T.C.A., Civil Practice & Remedies Code §§


154.021, 171.017(a)(1). 1 Cases that cite this headnote

5 Cases that cite this headnote


[8] Alternative Dispute Resolution
Nature, purpose, and right to arbitration
[4] Attorney and Client in general
Questions for jury Arbitration is generally a contractual
Neither party contended that fee agreement proceeding by which parties to controversy,
was ambiguous and, therefore, agreement was in order to obtain speedy and inexpensive
construed as matter of law. final disposition of disputed matter, select
arbitrators or judges of their own choice,
Cases that cite this headnote and by consent, submit controversy to these
arbitrators for determination.
[5] Alternative Dispute Resolution
4 Cases that cite this headnote
Contractual or consensual basis
Alternative Dispute Resolution
In general; formation of agreement [9] Alternative Dispute Resolution
Scope and Standards of Review
Alternative Dispute Resolution
Construction Alternative Dispute Resolution
Construction and operation in general
Arbitration agreement need not be in any
particular form, but no party is under duty Arbitrator's award has same effect as
to arbitrate unless by clear language he has judgment of court of last resort, and trial
so agreed, and it must clearly appear that court may not substitute its judgment for
intention of parties was to submit their dispute arbitrator's merely because it would have
to arbitrators and to be bound by that reached different conclusion.
decision.
3 Cases that cite this headnote
8 Cases that cite this headnote
[10] Alternative Dispute Resolution
[6] Alternative Dispute Resolution Disputes and Matters Arbitrable Under
Construction Agreement
Arbitration clause is interpreted under Under Arbitration Act, arbitration clause
contract principles, and language contained in fee agreement provided for binding
within will be enforced according to its plain arbitration; clause provided that arbitrator
meaning unless this would defeat parties' would set fair value of intangible assets
intention. received in settlement, indicating arbitrator's
decision would be final, clause did not provide
13 Cases that cite this headnote for appeal mechanism, and mere omission
of term “binding” did not automatically
transform clause into nonbinding agreement.
[7] Alternative Dispute Resolution
V.T.C.A., Civil Practice & Remedies Code §
Nature, purpose, and right to arbitration
171.001 et seq.
in general
Arbitration under Arbitration Act is 7 Cases that cite this headnote
mechanism by which parties to contract
reach binding resolution to their differences.
V.T.C.A., Civil Practice & Remedies Code §
171.001 et seq.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (1996)

On May 29, 1996, Porter & Clements filed a motion


Attorneys and Law Firms to compel arbitration and stay litigation based on an
arbitration provision in the fee agreement with the
*218 Sam Cruse, Jr., Stephen Bailey, Billy Shepherd,
Rabalais. Porter & Clements then filed a motion to clarify
Houston, for Appellant.
that it was requesting binding arbitration. The Rabalais
Sean F. O'Neill, San Antonio, for Appellees. filed a response in which they agreed to arbitration,
but objected to binding arbitration. After considering the
Before MIRABAL, O'CONNOR and WILSON, JJ. motion, the response, and the attached exhibits, the trial
court denied Porter & Clements' motion to compel binding
arbitration. No evidentiary hearing was held.
OPINION
[1] Porter & Clements filed a motion for leave to
MIRABAL, Justice. file a petition for writ of mandamus, contending that
arbitration was required by the Federal Arbitration
By way of an interlocutory appeal and a mandamus
action, Porter & Clements, L.L.P., and several attorneys Act. 1 Porter & Clements contemporaneously filed
employed by the firm attack the trial court's denial of their an interlocutory appeal, contending that arbitration
motion to compel arbitration. We reverse and remand in was required by the Texas Arbitration Act. 2 Parallel
the interlocutory appeal and overrule the motion for leave proceedings were required because an interlocutory
to file a petition for writ of mandamus as improvidently appeal is only available to pursue a claim under the
granted. Texas Arbitration Act. TEX.CIV.PRAC. & REM.CODE
ANN. § 171.017(a)(1) (Vernon Supp.1996). A writ of
On May 9, 1991, Porter & Clements entered into a fee mandamus is required to allow a Texas court to review
agreement with Alvin and Scarlett Rabalais, owners of an order refusing to compel arbitration under the Federal
a food services company known as Hot Diggity Dog Arbitration Act. Jack B. Anglin v. Tipps, 842 S.W.2d 266,
(HDD). Porter & Clements is a law firm located in 272 (Tex.1992); Smith Barney Shearson, Inc. v. Finstad,
Houston, Texas. Scarlett Rabalais is a resident of Harris 888 S.W.2d 111, 113 (Tex.App.—Houston [1st Dist.] 1994,
County, Texas. Alvin Rabalais is a resident of Dallas no writ).
County, Texas. *219 HDD's principal place of business
is Dallas, Texas. The trial court did not specify whether state or federal
arbitration laws applied to the contract in question. Porter
The Rabalais hired Porter & Clements to represent & Clements argues that under either Act, arbitration is
them in a suit against Sam's Wholesale Clubs (Sam's). required.
Sam's is a Delaware corporation with its headquarters
in Arkansas. The lawsuit concerned HDD's rights to [2] The Federal Arbitration Act applies to “a contract
operate hot dog carts at Sam's locations throughout the evidencing a transaction involving commerce.” 9 U.S.C §
country. The Rabalais' claims against Sam's included 2. In this case, the only possible connection to commerce
unfair competition, trademark infringement, breach of is the fact that one of the parties to the underlying
contract, breach of fiduciary duties, and other business- lawsuit, Sam's, is a foreign corporation doing business
related torts. Ultimately, a take nothing judgment was in several different states. However, all parties to the fee
entered against the Rabalais. agreement at issue in this case are residents of Texas. The
fee agreement involves the providing of legal services in
On August 31, 1995, the Rabalais sued their attorneys, Texas. The dispute giving rise to the claim for arbitration
Porter & Clements. The Rabalais claimed that Porter & involves misrepresentations that were allegedly made
Clements had misrepresented to them the potential for a to the Rabalais in Texas. The underlying lawsuit, the
recovery in the Sam's lawsuit, and that if they had known handling of which gives rise to the Rabalais' claim against
the weakness of their legal position they would not have Porter & Clements, was filed in federal court in Texas.
pursued the lawsuit, but would have accepted a settlement The fee agreement does not fall within the terms of the
offer made by Sam's. Federal Arbitration Act. See Withers–Busby Group v.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (1996)

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

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Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (1996)

circumstances. See TEX.CIV.PRAC. & REM.CODE


Arbitration is binding only if a court may enter ANN. § 171.014 (Vernon Supp.1996).
judgment on the award made pursuant to the
arbitration. While the Louisiana Arbitration Law These authorities, as well as the reasoning of McKee, lead
generally parallels the Federal Arbitration Act, there us to conclude that, by its very nature, arbitration under
is a significant difference between the sections dealing the Texas Arbitration Act is a mechanism by which the
with entry of judgment. Disputes about whether *222 parties to a contract reach a binding resolution to
arbitration is binding can arise under the Federal their differences.
Arbitration Act because the Federal Arbitration Act
provides that a court may enter judgment on the In McDonnell Douglas Finance Corp. v. Pennsylvania
arbitration only if the parties agreed that a court Power & Light Co., 858 F.2d 825, 830–31 (2nd Cir.1988),
may enter judgment. See 9 U.S.C. § 9. Such disputes the court considered whether the parties had entered
do not arise under the Louisiana Arbitration Law a binding arbitration agreement. The clause at issue
because the Louisiana law provides that a court may provided:
enter judgment if the parties agreed to arbitration; the
Louisiana law simply makes no provision for non- If the Company should disagree with
binding arbitration. See LSA–R.S. 9:4209. Thus under any Owner's computation of the
the Louisiana Arbitration Law, if the parties agreed amount of the required indemnity
to a non-binding procedure, they did not agree to payment or refund thereof as
arbitration. provided below or if any Owner
McKee, 45 F.3d at 985.0011 should disagree with such good
The Texas Arbitration Act is similar to the Louisiana faith determination of the Company
arbitration statute in that it also authorizes the trial court that there is substantial risk, the
to enter a final judgment based upon the arbitrator's Company and the Owner shall
award. TEX.CIV.PRAC. & REM.CODE ANN. §§ appoint an independent tax counsel to
171.011(b), 171.013 (Vernon Supp.1996). We agree with resolve the dispute, and if the parties
the Fifth Circuit's interpretation of the similar statute cannot agree to the appointment of
in McKee. By providing that a trial court “shall such counsel, said independent tax
confirm an award,” the Texas Arbitration Act necessarily counsel shall be appointed by the
contemplates that the arbitration award will be binding. American Arbitration Association
The Texas Arbitration Act makes no provision for a non- and the Company shall not be
binding arbitration procedure. obligated to pay, and such Owner
shall not be obligated to refund, the
[8] [9] This interpretation of the Texas Arbitration disputed portion of such amount
Act is consistent with the historical nature of arbitration until and only to the extent that such
in Texas law. In Texas, “arbitration” is generally dispute is resolved adversely to the
a contractual proceeding by which the parties to a party required to make payment.
controversy, in order to obtain a speedy and inexpensive
final disposition of the disputed matter, select arbitrators Id. at 827 (emphasis added). The Second Circuit stated
or judges of their own choice, and by consent, submit the that it was irrelevant that the clause did not use the word
controversy to these arbitrators for determination. Manes, “arbitration;” what was important was that the parties
638 S.W.2d at 145; Alderman v. Alderman, 296 S.W.2d agreed to submit their dispute for binding resolution by
312, 315 (Tex.Civ.App.—San Antonio 1956, writ ref'd). a third party. Id. at 830–31. Similarly, the absence of the
An arbitrator's award has the same effect as a judgment of words “final” or “binding” was considered insignificant.
a court of last resort, and the trial court may not substitute Id. at 830.
its judgment for the arbitrator's merely because it would
have reached a different conclusion. City of Baytown [10] The agreement in this case designates a mechanism
v. C.L.Winter, Inc., 886 S.W.2d 515, 518 (Tex.App.— for choosing an arbitrator. The agreement also gives an
Houston [1st Dist.] 1994, writ denied). An arbitrator's example of the type of claim that will be referred to
award can only be set aside by the courts under limited arbitration. In the example, the agreement states that the

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Porter & Clements, L.L.P. v. Stone, 935 S.W.2d 217 (1996)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Prescott-Follett & Associates, Inc. v. Delasa/Prescott Follett..., Not Reported in...
2002 WL 31528463

In November 1999, the Parties allegedly negotiated a


new operating agreement (the “November Operating
2002 WL 31528463
Agreement”). The terms of the November Operating
Only the Westlaw citation is currently available.
Agreement were substantially different from the March
United States District Court,
Operating Agreement, but contained the same dispute
E.D. Louisiana.
resolution clause as the original March Operating
PRESCOTT–FOLLETT & ASSOCIATES, INC. et al Agreement, in that it required the members to resolve “any
v. dispute under this Agreement ... by arbitration in New
DELASA/PRESCOTT York.” 5
FOLLETT & ASSOCIATES, et al
The Delaware Company was ultimately successful in
No. Civ.A. 01–3178. securing the lease and it assumed control of the port
| at Puerto Cabezas in July, 2001. 6 As a prerequisite for
Nov. 8, 2002. doing business in Nicaragua, Nicaraguan law required
the Delaware Company to be registered in Nicaragua
Opinion
and to appoint an agent who resided in Nicaragua. 7 The
AFRICK, J. Delaware Company appointed Arnaldo Talavera to act as
its agent and it granted him power of attorney to handle,
*1 Before this Court is the motion of defendants, Delasa/
inter alia, certain banking transactions for the Delaware
Prescott Follett & Associates, a Delaware limited liability
company, Alma Finance Group, Kris N. Mahabir, Arete, Company. 8
LLC, and Mary Wright, to compel arbitration pursuant
to an operating agreement of Delasa/Prescott Follett & In August, 2001, the majority shareholder of the
Associates. Plaintiffs, Prescott–Follett & Associates, Inc. Delaware Company requested that Talavera provide
and Latin American Energy Development, Inc. d/b/a an accounting of funds he handled on behalf of the
Delasa oppose the motion. For the following reasons, the Delaware Company. 9 Talavera failed to respond to
motion is GRANTED. these requests. Shortly thereafter, it was discovered that
John Wheelock 10 had allegedly opened a bank account
in Nicaragua under the same name as the Delaware
FACTUAL BACKGROUND Company and that he wrongfully deposited checks
belonging to the Delaware Company. 11
In 1999, Prescott–Follett & Associates, Inc., Latin
American Energy Development, Inc. d/b/a Delasa, 1 Consequently, the Delaware Company filed charges in
Alma Finance Group, and Arete, LLC, (the “Parties”) Nicaragua against Talavera on September 18, 2002,
formed a Delaware limited liability company, Delasa/ seeking an accounting of the Delaware Company's
Prescott–Follett & Associates LLC (the “Delaware funds. 12 On December 12, 2001, a judge of the Criminal
Company”), for the purpose of securing a twenty five year Court of Puerto Cabezas convicted Talavera of the
lease of the port facilities at Puerto Cabezas, Nicaragua. 2 crime of theft with abuse of trust in violation of
Shortly after forming the Delaware Company, the Parties the Nicaraguan Criminal Code. 13 In the judgment of
signed an operating agreement dated March 29, 1999, conviction, defendants allege that the judge also set
(the “March Operating Agreement”) to formalize their
forth a criminal complaint 14 against Wheelock for being
3
agreement to work together on the project. The March
presumed to be Talavera's co-conspirator. 15 Plaintiffs
Operating Agreement contained a clause requiring that,
agree that Wheelock was subsequently convicted of this
“[i]n the Event of any dispute under this Agreement, such
dispute shall be settled by arbitration in New York, New alleged crime in absentia. 16
York, in accordance with the rules then promulgated by
*2 On October 19, 2001, plaintiffs filed the present
the American Arbitration Association ...” 4
lawsuit seeking to have the November Operating

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Prescott-Follett & Associates, Inc. v. Delasa/Prescott Follett..., Not Reported in...
2002 WL 31528463

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Prescott-Follett & Associates, Inc. v. Delasa/Prescott Follett..., Not Reported in...
2002 WL 31528463

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Prescott-Follett & Associates, Inc. v. Delasa/Prescott Follett..., Not Reported in...
2002 WL 31528463

the Delaware Company or a party to the March and/or


In sum, the Court finds that there is no impediment
November agreements. 36 Accordingly, the Court fails to
to the arbitration of plaintiffs' claims. All of the
see how litigation against a non-party to an agreement
parties, including the plaintiffs, admittedly signed the
can result in a waiver of arbitration rights pursuant to
operating agreements. 40 All agreed to arbitrate “any
that agreement. 37 Further, defendants' actions in filing
dispute under th[e] Agreement[s].” 41 Further, plaintiffs
proceedings against Talavera for theft of funds could not
point to no federal statute or policy that may render
have resulted in any detriment or prejudice to plaintiffs
their claims nonarbitrable. Consequently, considering the
with respect to this action. Plaintiffs were not even parties
to the litigation against Talavera and did not have to broad nature of the arbitration clause 42 and the U.S.
bear the expense of burdensome litigation. Plaintiffs' Supreme Court's pronouncement in Prima Paint, this
claims against defendants for breach of the operating Court holds that plaintiffs' claims, including their claim
agreements are unrelated to any claims against Talavera, for fraud in the inducement of the operating agreement,
individually, for alleged theft of funds. Consequently, the must be submitted to arbitration. 43
Court finds that any proceeding by defendants against
Talavera, whether civil or criminal, did not result in a Accordingly,
waiver of arbitration rights in this matter. See Subway,
169 F.2d at 328 (holding that franchisor did not waive IT IS ORDERED that the motion to compel arbitration
right to arbitration under franchise agreement by filing of defendants, Delasa/Prescott Follett & Associates, a
previous lawsuit against franchisees where the earlier Delaware Limited Liability Company, Alma Finance
action involved claims that were different from the one the Group, Kris N. Mahabir, Arete, LLC, and Mary Wright,
franchisor now sought to arbitrate); Amalgamated Local is GRANTED.
No. 55, United Automobile, Aerospace & Agricultural
Implement Workers of America v. Metal and Alloy Division IT IS FURTHER ORDERED that the claims of
of Silver Creek Precision Corporation, 396 F.Supp. 667, plaintiffs, Prescott–Follett & Associates, Inc. and Latin
670 (N.D.N.Y.1975)(finding that union did not waive American Energy Development, Inc. d/b/a Delasa, shall
arbitration under collective bargaining agreement by be submitted to arbitration, in accordance with the parties'
filing criminal charge against one of employer's officers arbitration agreement.
where criminal action was based upon different issues
than those before the court and was brought against an IT IS FURTHER ORDERED that this case BE AND IS
individual and not the defendant corporation). HEREBY STAYED PENDING ARBITRATION.

*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

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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,

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Prescott-Follett & Associates, Inc. v. Delasa/Prescott Follett..., Not Reported in...
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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.

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Prescott-Follett & Associates, Inc. v. Delasa/Prescott Follett..., Not Reported in...
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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.

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Preston v. Ferrer, 552 U.S. 346 (2008)
128 S.Ct. 978, 169 L.Ed.2d 917, 76 USLW 3437, 76 USLW 4097, 27 IER Cases 257...

When parties agree to arbitrate all disputes


arising under their contract, questions
KeyCite Yellow Flag - Negative Treatment concerning the validity of the entire contract
Declined to Extend by Dalton v. Santander Consumer USA, Inc., N.M., 
are to be resolved by the arbitrator in the first
September 22, 2016
instance, not by a federal or state court.
128 S.Ct. 978
Supreme Court of the United States 132 Cases that cite this headnote

Arnold M. PRESTON, Petitioner,


v. [2] Alternative Dispute Resolution
Alex E. FERRER. Arbitration favored; public policy
National policy favoring arbitration applies in
No. 06–1463. state as well as federal courts and forecloses
| state legislative attempts to undercut the
Argued Jan. 14, 2008. enforceability of arbitration agreements. 9
| U.S.C.A. § 2.
Decided Feb. 20, 2008.
129 Cases that cite this headnote
Synopsis
Background: Attorney who rendered services for
personnel in motion picture-television industry initiated [3] Alternative Dispute Resolution
arbitration proceeding against television performer, Preemption
seeking to recover fees to which he claimed he was Labor and Employment
entitled under their contract. The Superior Court of Los Employment Agencies
Angeles County, No. BC342454, Haley J. Fromholz, J., States
denied arbitration and granted performer's motion to stay Labor and Employment
action pending proceedings before Labor Commissioner. Federal Arbitration Act (FAA) preempts
Attorney appealed. The California Court of Appeal, California Talent Agencies Act (TAA)
Jackson, J., 145 Cal.App.4th 440, 51 Cal.Rptr.3d 628, provisions granting Labor Commissioner
affirmed. Certiorari was granted. exclusive jurisdiction to decide issue that
parties agreed to arbitrate and imposing
prerequisites to enforcement of arbitration
[Holding:] The Supreme Court, Justice Ginsburg, held that agreement that are not applicable to contracts
when parties agree to arbitrate all questions arising under generally. West's Ann.Cal.Labor Code §§
contract, Federal Arbitration Act (FAA) supersedes state 1700.44(a), 1700.45.
laws lodging primary jurisdiction in another forum,
130 Cases that cite this headnote
whether judicial or administrative.

[4] Alternative Dispute Resolution


Reversed and remanded. Nature, purpose, and right to arbitration
in general
Justice Thomas filed dissenting opinion.
Prime objective of agreement to arbitrate
is to achieve streamlined proceedings and
expeditious results.
West Headnotes (5)
27 Cases that cite this headnote

[1] Alternative Dispute Resolution


[5] Alternative Dispute Resolution
Existence and validity of agreement
Preemption

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Preston v. Ferrer, 552 U.S. 346 (2008)
128 S.Ct. 978, 169 L.Ed.2d 917, 76 USLW 3437, 76 USLW 4097, 27 IER Cases 257...

States that Buckeye was inapposite because it did not involve an


Particular cases, preemption or administrative agency with exclusive jurisdiction over a
supersession disputed issue.
When parties agree to arbitrate all questions
arising under a contract, the Federal Held: When parties agree to arbitrate all questions arising
Arbitration Act (FAA) supersedes state under a contract, the Federal Arbitration Act (FAA),
laws lodging primary jurisdiction in another 9 U.S.C. § 1 et seq., supersedes state laws lodging
forum, whether judicial or administrative. 9 primary jurisdiction in another forum, whether judicial or
U.S.C.A. § 1 et seq. administrative. Pp. 982 – 988.

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.

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Preston v. Ferrer, 552 U.S. 346 (2008)
128 S.Ct. 978, 169 L.Ed.2d 917, 76 USLW 3437, 76 USLW 4097, 27 IER Cases 257...

proceedings to avoid the possibility of conflicting rulings


(c) Ferrer attempts to distinguish Buckeye, urging that on a common issue. Here, in contrast, the arbitration
the TAA merely requires exhaustion of administrative clause speaks to the matter in controversy; both parties
remedies before the parties proceed to arbitration. This are bound by the arbitration agreement; the question of
argument is unconvincing. Pp. 984 – 987. Preston's status as a talent agent relates to the validity
or legality of the contract; there is no risk that related
(1) Procedural prescriptions of the TAA conflict with the litigation will yield conflicting rulings on common issues;
FAA's dispute resolution regime in two basic respects: and there is no other procedural void for the choice-of-law
(1) One TAA provision grants the Labor Commissioner clause to fill. Second, the Court is guided by its decision
exclusive jurisdiction to decide an issue that the parties in Mastrobuono v. Shearson Lehman Hutton, Inc., 514
agreed to arbitrate, see Buckeye, 546 U.S., at 446, U.S. 52, 115 S.Ct. 1212, 131 L.Ed.2d 76. Although the
126 S.Ct. 1204; (2) another imposes prerequisites to Volt contract provided for arbitration in accordance with
enforcement of an arbitration agreement that are not AAA rules, 489 U.S., at 470, n. 1, 109 S.Ct. 1248, Volt
applicable to contracts generally, see Doctor's Associates, never argued that incorporation of those rules by reference
Inc. v. Casarotto, 517 U.S. 681, 687, 116 S.Ct. 1652, 134 trumped the contract's choice-of-law clause, so this Court
L.Ed.2d 902. Pp. 984 – 985. never addressed the import of such incorporation. In
Mastrobuono, the Court reached that open question,
(2) Ferrer contends that the TAA is compatible with declaring that the “best way to harmonize” **981 a
the FAA because the TAA provision vesting exclusive New York choice-of-law clause and a clause providing
jurisdiction in the Labor Commissioner merely postpones for arbitration in accordance with privately promulgated
arbitration. That position is contrary to the one Ferrer arbitration rules was to read the choice-of-law clause “to
took in the California courts and does not withstand encompass substantive principles that New York courts
examination. Arbitration, if it ever occurred following would apply, but not to include [New York's] special
the Labor Commissioner's decision, would likely be long rules limiting [arbitrators'] authority.” 514 U.S., at 63–
delayed, in contravention of Congress' intent “to move 64, 115 S.Ct. 1212. Similarly here, the “best way to
the parties to an arbitrable dispute out of court and into harmonize” the Ferrer–Preston contract's adoption of the
arbitration as quickly and easily as possible.” Moses H. AAA rules and its selection of California law is to read the
Cone Memorial Hospital v. Mercury Constr. Corp., 460 latter to encompass prescriptions governing the parties'
U.S. 1, 22, 103 S.Ct. 927, 74 L.Ed.2d 765. Pp. 985 – 986. substantive rights and obligations, but not the State's
“special rules limiting [arbitrators'] authority.” Ibid. Pp.
(3) Ferrer contends that the conflict between 987 – 989.
the arbitration clause and the TAA should be
overlooked because Labor Commissioner proceedings are 145 Cal.App. 4th 440, 51 Cal.Rptr.3d 628, reversed and
administrative rather than judicial. The Court rejected remanded.
a similar argument in Gilmer v. Interstate/Johnson Lane
Corp., 500 U.S. 20, 28–29, 111 S.Ct. 1647, 114 L.Ed.2d 26. GINSBURG, J., delivered the opinion of the Court,
Pp. 986 – 987. in which ROBERTS, C.J., and STEVENS, SCALIA,
KENNEDY, SOUTER, BREYER, and ALITO, JJ.,
(d) Ferrer's reliance on Volt Information Sciences, Inc. v. joined. THOMAS, J., filed a dissenting opinion, post, at
Board of Trustees of Leland Stanford Junior Univ., 489 989.
U.S. 468, 109 S.Ct. 1248, 103 L.Ed.2d 488, is misplaced
for two reasons. First, arbitration was stayed in Volt
to accommodate litigation involving third parties who Attorneys and Law Firms
were strangers to the arbitration agreement. Because the
Joseph D. Schleimer, Beverly Hills, CA, for petitioner.
contract at issue in Volt did not address the order of
proceedings and included a choice-of-law clause adopting G. Eric Brunstad, Jr., Hartford, Connecticut, for
California law, the Volt Court recognized as the gap respondent.
filler a California statute authorizing the state court to
stay either third-party court proceedings or arbitration

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Preston v. Ferrer, 552 U.S. 346 (2008)
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**982 program, and petitioner Arnold M. Preston, a


Robert M. Dudnik, Mitchell, Silberberg & Knupp California attorney who renders services to persons in the
LLP, Los Angeles, CA, G. Eric Brunstad, Jr., Counsel entertainment industry. Seeking fees allegedly due under
of Record, Rheba Rutkowski, Brian R. Hole, Collin the contract, Preston invoked the parties' agreement to
O'Connor Udell Bingham McCutchen LLP, Hartford, arbitrate “any dispute ... relating to the terms of [the
Connecticut, for Respondents. contract] or the breach, validity, or legality thereof ... in
accordance with the rules [of the American Arbitration
Joseph D. Schleimer, Counsel of Record, Kenneth D.
Association].” App. 18.
Freundlich, Schleimer & Freundlich, LLP, Beverly Hills,
CA, for Petitioner.
Preston's demand for arbitration, made in June 2005,
Opinion was countered a month later by Ferrer's petition
to the California Labor Commissioner charging that
Justice GINSBURG delivered the opinion of the Court. the contract was invalid and unenforceable under the
California Talent Agencies Act (TAA), Cal. Lab.Code
[1] *349 As this Court recognized in Southland Corp. v. Ann. § 1700 et seq. (West 2003 and Supp.2008). Ferrer
Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1 (1984), asserted that Preston acted as a talent agent without the
the Federal Arbitration Act (FAA or Act), 9 U.S.C. § license required by the TAA, and that Preston's unlicensed
1 et seq. (2000 ed. and Supp. V), establishes a national
status rendered the entire contract void. 1
policy favoring arbitration when the parties contract for
that mode of dispute resolution. The Act, which rests on
The Labor Commissioner's hearing officer, in November
Congress' authority under the Commerce Clause, supplies
2005, determined that Ferrer had stated a “colorable basis
not simply a procedural framework applicable in federal
for exercise of the Labor Commissioner's jurisdiction.”
courts; it also calls for the application, in state as well
App. 33. The officer denied Ferrer's motion to stay
as federal courts, of federal substantive law regarding
the arbitration, however, on the ground that the Labor
arbitration. 465 U.S., at 16, 104 S.Ct. 852. More recently,
Commissioner lacked authority to order such relief. Ferrer
in Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S.
then filed suit in the Los Angeles Superior Court, seeking
440, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006), the Court
a declaration that the controversy between the parties
clarified that, when parties agree to arbitrate all disputes
“arising from the [c]ontract, including in particular the
arising under their contract, questions concerning the
issue of the validity of the [c]ontract, is not subject to
validity of the entire contract are to be resolved by the
arbitration.” *351 Id., at 29. As interim relief, Ferrer
arbitrator in the first instance, not by a federal or state
sought an injunction restraining Preston from proceeding
court.
before the arbitrator. Preston responded by moving to
compel arbitration.
The instant petition presents the following question: Does
the FAA override not only state statutes that refer certain
In December 2005, the Superior Court denied Preston's
state-law controversies initially to a judicial forum, but
motion to compel arbitration and enjoined Preston from
also state statutes that refer certain disputes initially to an
proceeding before the arbitrator “unless and until the
administrative agency? We hold today that, when parties
Labor Commissioner determines that ... she is without
agree to arbitrate all questions arising under a contract,
jurisdiction over the disputes between Preston and
state laws lodging primary jurisdiction in another forum,
Ferrer.” No. BC342454 (Dec. 7, 2005), App. C to Pet.
*350 whether judicial or administrative, are superseded
for Cert. 18a, 26a–27a. During the pendency of Preston's
by the FAA.
appeal from the Superior Court's decision, this Court
reaffirmed, in Buckeye, that challenges to the validity of
a contract providing for arbitration ordinarily “should ...
I be considered by an arbitrator, not a court.” 546 U.S., at
446, 126 S.Ct. 1204.
This case concerns a contract between respondent Alex E.
Ferrer, a former Florida trial court judge who currently
In a 2–to–1 decision issued in November 2006, the
appears as “Judge Alex” on a Fox television network
California Court of Appeal affirmed the Superior

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Preston v. Ferrer, 552 U.S. 346 (2008)
128 S.Ct. 978, 169 L.Ed.2d 917, 76 USLW 3437, 76 USLW 4097, 27 IER Cases 257...

Court's judgment. The appeals court held that the


relevant provision of the TAA, Cal. Lab.Code Ann. The dispositive issue, then, contrary to Ferrer's
§ 1700.44(a) (West 2003), vests “exclusive original suggestion, is not whether the FAA preempts the TAA
jurisdiction” over the dispute in the Labor Commissioner. wholesale. See id., at 44–48. The FAA plainly has no such
145 Cal.App.4th 440, 447, 51 Cal.Rptr.3d 628, 634. destructive aim or effect. Instead, the question is simply
Buckeye is “inapposite,” the court said, because that case who decides whether Preston acted as personal manager
“did not involve an administrative agency with exclusive or as talent agent.
jurisdiction over a disputed issue.” 145 Cal.App.4th, at
447, 51 Cal.Rptr.3d, at 634. The dissenting judge, in
contrast, viewed Buckeye as controlling; she reasoned
III
that the FAA called for immediate recognition and
enforcement of the parties' agreement to arbitrate and [2] Section 2 of the FAA states:
afforded no basis for distinguishing prior resort to a state
administrative agency from prior resort to a state court. “A written provision in any ... contract evidencing a
145 Cal.App.4th, at 450–451, 51 Cal.Rptr.3d, at 636–637 transaction involving commerce to settle by arbitration
(Vogel, J., dissenting). a controversy thereafter arising out of such contract
or transaction ... shall be valid, irrevocable, and
The California Supreme Court denied Preston's petition enforceable, *353 save upon such grounds as exist at
for review. No. S149190 (Feb. 14, 2007), 2007 Cal. LEXIS law or in equity for the revocation of any contract.” 9
1539, App. A to Pet. for Cert. 1a. We granted certiorari U.S.C. § 2.
to determine whether the FAA overrides a state law
Section 2 “declare[s] a national policy favoring
vesting *352 initial adjudicatory **983 authority in an
arbitration” of claims that parties contract to settle in
administrative agency. 551 U.S. 1190, 128 S.Ct. 31, 168
that manner. Southland Corp., 465 U.S., at 10, 104 S.Ct.
L.Ed.2d 807 (2007).
852. That national policy, we held in Southland, “appli
[es] in state as well as federal courts” and “foreclose[s]
state legislative attempts to undercut the enforceability
II of arbitration agreements.” Id., at 16, 104 S.Ct. 852. The
FAA's displacement of conflicting state law is “now well-
An easily stated question underlies this controversy.
established,” Allied–Bruce Terminix Cos. v. Dobson, 513
Ferrer claims that Preston was a talent agent who operated
U.S. 265, 272, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995),
without a license in violation of the TAA. Accordingly,
and has been repeatedly reaffirmed, see, e.g., Buckeye, 546
he urges, the contract between the parties, purportedly for
U.S., at 445–446, 126 S.Ct. 1204; Doctor's Associates, Inc.
“personal management,” is void, and Preston is entitled
v. Casarotto, 517 U.S. 681, 684–685, 116 S.Ct. 1652, 134
to no compensation for any services he rendered. Preston,
L.Ed.2d 902 (1996); Perry v. Thomas, 482 U.S. 483, 489,
on the other hand, maintains that he acted as a personal
manager, not as a talent agent, hence his contract with 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987). 2
Ferrer is not governed by the TAA and is both lawful and
fully binding on the parties. A recurring question under § 2 is who should decide
whether “grounds ... exist at law or in equity” to invalidate
Because the contract between Ferrer and Preston provides an arbitration agreement. In **984 Prima Paint Corp. v.
that “any dispute ... relating to the ... validity, or legality,” Flood & Conklin Mfg. Co., 388 U.S. 395, 403–404, 87 S.Ct.
of the agreement “shall be submitted to arbitration,” App. 1801, 18 L.Ed.2d 1270 (1967), we held that attacks on
18, Preston urges that Ferrer must litigate “his TAA the validity of an entire contract, as distinct from attacks
defense in the arbitral forum,” Reply Brief 31. Ferrer aimed at the arbitration clause, are within the arbitrator's
insists, however, that the “personal manager” or “talent ken.
agent” inquiry falls, under California law, within the
exclusive original jurisdiction of the Labor Commissioner, The litigation in Prima Paint originated in federal court,
and that the FAA does not displace the Commissioner's but the same rule, we held in Buckeye, applies in state
primary jurisdiction. Brief for Respondent 14, 30, 40–44. court. 546 U.S., at 447–448, 126 S.Ct. 1204. The plaintiffs

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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

The TAA permits arbitration in lieu of proceeding before


the Labor Commissioner if an arbitration provision “in
IV a contract between a talent agency and [an artist]”
both “provides for reasonable notice to the Labor
Ferrer attempts to distinguish Buckeye by arguing that
Commissioner of the time and place of all arbitration
the TAA merely requires exhaustion of administrative
hearings” and gives the Commissioner *356 “the right
remedies before the parties proceed to arbitration. We
to attend all arbitration hearings.” § 1700.45. This
reject that argument.
prescription demonstrates that there is no inherent conflict
between the TAA and arbitration as a dispute resolution
mechanism. But § 1700.45 was of no utility to Preston. He
A has consistently maintained that he is not a talent agent
as that term is defined in § 1700.4(a), but is, instead, a
The TAA regulates talent agents and talent agency personal manager not subject to the TAA's regulatory
agreements. “Talent agency” is defined, with exceptions regime. 145 Cal.App.4th, at 444, 51 Cal.Rptr.3d, at 631.
not relevant here, as “a person or corporation who To invoke § 1700.45, Preston would have been required to
engages in the occupation of procuring, offering, concede a point fatal to his claim for compensation—i.e.,
promising, or attempting to procure employment or that he is a talent agent, albeit an unlicensed one—and to
engagements for an artist or artists.” Cal. Lab.Code Ann. have drafted his contract in compliance with a statute that
§ 1700.4(a) (West 2003). The definition *355 “does not he maintains is inapplicable.
cover other services for which artists often contract, such
as personal and career management (i.e., advice, direction, Procedural prescriptions of the TAA thus conflict with
coordination, and oversight with respect to an artist's the FAA's dispute resolution regime in two basic respects:
career or personal or financial affairs).” Styne v. Stevens, First, the TAA, in § 1700.44(a), grants the Labor
26 Cal.4th 42, 51, 109 Cal.Rptr.2d 14, 26 P.3d 343, 349 Commissioner exclusive jurisdiction to decide an issue
(2001) (emphasis deleted). The TAA requires talent agents that the parties agreed to arbitrate, see Buckeye, 546 U.S.,
to procure a license from the Labor Commissioner. § at 446, 126 S.Ct. 1204; second, the TAA, in § 1700.45,
1700.5. “In furtherance of the [TAA's] protective aims, an imposes prerequisites to enforcement of an arbitration
agreement that are not applicable to contracts generally,

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128 S.Ct. 978, 169 L.Ed.2d 917, 76 USLW 3437, 76 USLW 4097, 27 IER Cases 257...

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

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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

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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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


Preston v. Ferrer, 552 U.S. 346 (2008)
128 S.Ct. 978, 169 L.Ed.2d 917, 76 USLW 3437, 76 USLW 4097, 27 IER Cases 257...

* 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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 10


Primerica Life Ins. Co. v. Brown, 304 F.3d 469 (2002)

Construction in Favor of Arbitration


Federal Arbitration Act (FAA) expresses
KeyCite Yellow Flag - Negative Treatment
strong national policy favoring arbitration
Disagreed With by Spahr v. Secco, 10th Cir.(Colo.), June 3, 2003  
of disputes, and all doubts concerning
304 F.3d 469
arbitrability of claims should be resolved in
United States Court of Appeals,
favor of arbitration. 9 U.S.C.A. § 1 et seq.
Fifth Circuit.
61 Cases that cite this headnote
PRIMERICA LIFE INSURANCE
CO.; et al., Plaintiffs,
Primerica Life Insurance Co.; Primerica Financial [3] Alternative Dispute Resolution
Services, Inc.; Citigroup, Inc.; Sanford L. Weill; Merits of Controversy
and CitiFinancial, Inc., Plaintiffs-Appellants, Court, when determining whether parties
v. should be compelled to arbitrate dispute, must
Catherine E. BROWN, individually and not consider merits of underlying action.
in her representative capacity for John E. 67 Cases that cite this headnote
Brown; John E. Brown, Defendants-Appellees.

No. 01-60852. [4] Alternative Dispute Resolution


| Unconscionability
Aug. 28, 2002. Party could avoid arbitration on ground
that costs made arbitration requirement
Borrower brought action against lender for breach of
unconscionable absent showing of likelihood
contract. The United States District Court for the
of incurring prohibitive costs.
Northern District of Mississippi, Glen H. Davidson, Chief
Judge, declined to compel arbitration, and appeal was 7 Cases that cite this headnote
taken. The Court of Appeals, Edith H. Jones, Circuit
Judge, held that plaintiff's incapacity defense had to be
[5] Alternative Dispute Resolution
submitted to arbitrators.
Existence and Validity of Agreement
Reversed and remanded. Issue of whether party to contract containing
arbitration clause had mental capacity to
Dennis, Circuit Judge, concurred and filed opinion. execute contract was question for arbitrators;
party's capacity defense did not relate
specifically to arbitration clause, but rather
was part of underlying dispute. 9 U.S.C.A. § 4.
West Headnotes (5)
64 Cases that cite this headnote

[1] Alternative Dispute Resolution


Scope and Standards of Review
Grant or denial of petition to compel
Attorneys and Law Firms
arbitration is subject to de novo review. 9
U.S.C.A. § 4. *470 Fred H. Krutz, III, John Chase Bryan, Forman,
Perry, Watkins, Krutz & Tardy, Jackson, MS, Phillip
6 Cases that cite this headnote
S. McKinney, Christopher J. Willis, Richard H.
Sinkfield (argued), Rogers & Hardin, Atlanta, GA, for
[2] Alternative Dispute Resolution CitiFinancial, Inc.
Arbitration Favored; Public Policy
Alternative Dispute Resolution

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Primerica Life Ins. Co. v. Brown, 304 F.3d 469 (2002)

to arbitrate the dispute. Once the court finds that the


William Eason Mitchell (argued), Albert Gamaliel parties agreed to arbitrate, it must consider whether any
Lewis, III, Susan Mason Donovan, Lewis & Mitchell, federal statute or policy renders the claims nonarbitrable.”
Tuscaloosa, AL, Winston James Thompson, The Colom R.M. Perez & Assoc., Inc. v. Welch, 960 F.2d 534, 538
Law Firm, Columbus, MS, for Defendants-Appellees. (5th Cir.1992) (citing Mitsubishi Motors Corp. v. Soler
Chrysler-Plymouth, 473 U.S. 614, 105 S.Ct. 3346, 87
Appeals from the United States District Court for the
L.Ed.2d 444 (1985)). When conducting this two-pronged
Northern District of Mississippi.
analysis, courts must not consider the merits of the
Before JONES, WIENER and DENNIS, Circuit Judges. underlying action. Snap-On Tools Corp. v. Mason, 18
F.3d 1261, 1267 (5th Cir.1994). “Under § 4 of the FAA,
Opinion the federal district court ascertains only whether the
arbitration clause covers the allegations at issue. ‘If the
EDITH H. JONES, Circuit Judge: dispute is within the scope of the arbitration clause, the
court may not delve further into the merits of the dispute.’
John Brown sued CitiFinancial, Inc., and its affiliates
” Id. (quoting Municipal Energy Agency of Miss. v. Big
(“Appellants”), in state court alleging breach of contract
Rivers Elec. Corp., 804 F.2d 338, 342 (5th Cir.1986)).
and related claims. Brown's contract with CitiFinancial
contains an arbitration clause requiring arbitration of his
[4] Brown's contract with CitiFinancial contains an
claims. CitiFinancial *471 filed a petition to compel
express arbitration agreement. Brown's state court claims
arbitration of Brown's claims in federal district court,
fall within the scope of the arbitration agreement. There
pursuant to § 4 of the Federal Arbitration Act (“FAA”),
are no external impediments to the arbitrability of Brown's
9 U.S.C. § 4. The district court determined that Brown
lacked the mental capacity to execute a contract under claims. 1 Therefore, a straightforward application of the
Mississippi law, and that Brown's entire contract with required two-pronged inquiry supports CitiFinancial's
CitiFinancial was void. On this basis, the district court petition to compel arbitration.
refused to compel arbitration of Brown's claims.
[5] The district court nevertheless refused to compel
CitiFinancial now appeals and contends that the district arbitration by delving into the merits of the underlying
court erred by reaching the merits of Brown's capacity dispute. Specifically, the district court determined that
defense. Appellants contend that Prima Paint Corp. v. Brown lacked the capacity to contract under Mississippi
Flood & Conklin Mfg. Co., 388 U.S. 395, 87 S.Ct. 1801, law. As explained above, the district court's inquiry when
18 L.Ed.2d 1270 (1967), requires arbitration of Brown's reviewing a petition to compel arbitration is limited.
capacity defense. We agree, and reverse the judgment of “[T]he merits of the underlying dispute are for the
the district court. arbitrator to consider, not for this Court or the district
court.” Snap-On *472 Tools Corp., 18 F.3d at 1267.
Brown's capacity defense is part of the underlying dispute
between the parties, and the defense must be submitted to
DISCUSSION
the arbitrator.
[1] [2] This court reviews de novo the grant or denial
of a petition to compel arbitration pursuant to § 4 of In Prima Paint, the Court held that, under § 4 of the
the FAA. Webb v. Investacorp, 89 F.3d 252, 257 (5th FAA, the “making” of an agreement to arbitrate was
Cir.1996). The FAA expresses a strong national policy not called into question by an allegation that the entire
favoring arbitration of disputes, and all doubts concerning contract was void as fraudulently induced. 388 U.S. at
the arbitrability of claims should be resolved in favor of 403-04, 87 S.Ct. 1801. “[The FAA] does not permit the
arbitration. Southland Corp. v. Keating, 465 U.S. 1, 10, 104 federal court to consider claims of fraud in the inducement
S.Ct. 852, 79 L.Ed.2d 1 (1984). of the contract generally ... A federal court may consider
only issues relating to the making and performance of the
[3] “Courts perform a two-step inquiry to determine agreement to arbitrate.” Id. Accordingly, unless a defense
whether parties should be compelled to arbitrate a dispute. relates specifically to the arbitration agreement, it must
First, the court must determine whether the parties agreed

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Primerica Life Ins. Co. v. Brown, 304 F.3d 469 (2002)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Primerica Life Ins. Co. v. Brown, 304 F.3d 469 (2002)

All Citations

304 F.3d 469

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Principal Investments v. Harrison, 366 P.3d 688 (2016)
132 Nev. Adv. Op. 2

Saitta, J., concurred with opinion.


366 P.3d 688
Supreme Court of Nevada.

PRINCIPAL INVESTMENTS, INC., d/b/a Rapid


West Headnotes (13)
Cash; Granite Financial Services, Inc., d/b/a Rapid
Cash; FMMR Investments, Inc., d/b/a Rapid
Cash; Prime Group, Inc., d/b/a Rapid Cash; and [1] Alternative Dispute Resolution
Waiver, laches, or estoppel
Advance Group, Inc., d/b/a Rapid Cash, Appellants,
v. Claims of waiver of the right to arbitration
Cassandra HARRISON; Concepcion Quintino; based on active litigation in court are
presumptively for a court, not an arbitrator,
and Mary Dungan, Individually and on behalf
to decide.
of All Persons Similarly Situated, Respondents.
Cases that cite this headnote
No. 59837.
|
Jan. 14, 2016. [2] Alternative Dispute Resolution
Contractual or consensual basis
Synopsis
Alternative Dispute Resolution
Background: Borrowers, against whom payday loan
Construction
company had received default judgments, brought class
Because arbitration is fundamentally a matter
action against company and its process server, alleging
of contract, whether enforcing an agreement
fraud upon the court, abuse of process, negligent hiring,
to arbitrate or construing an arbitration
supervision, and retention, negligence, civil conspiracy,
clause, courts and arbitrators must give effect
and violation of fair debt collection laws and sought,
to the contractual rights and expectations of
inter alia, declaratory relief deeming default judgments
the parties.
void and uncollectible. The District Court, Clark County,
Elizabeth Goff Gonzalez, J., denied company's motion to Cases that cite this headnote
compel arbitration. Company appealed.

[3] Alternative Dispute Resolution


Waiver or Estoppel
Holdings: The Supreme Court, Pickering, J., held that:
The right to enforce an agreement to arbitrate,
like any contract right, can be waived.
[1] claims of waiver of the right to arbitration based on
active litigation in court are presumptively for court to Cases that cite this headnote
decide;

[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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Principal Investments v. Harrison, 366 P.3d 688 (2016)
132 Nev. Adv. Op. 2

Issues that are presumptively for the court,


not an arbitrator, to solve involve gateway Cases that cite this headnote
questions of arbitrability, such as whether
the parties are bound by a given arbitration [9] Alternative Dispute Resolution
clause, or whether an arbitration clause in Evidence
a concededly binding contract applies to a
Presumption that courts decide litigation-
particular type of controversy.
conduct waiver of the right to arbitration is
Cases that cite this headnote rooted in presumed party intent and probable
expectations.

[6] Alternative Dispute Resolution Cases that cite this headnote


Arbitrability of dispute
Because courts presume that the parties intend [10] Alternative Dispute Resolution
courts, not arbitrators, to decide gateway Evidence
questions of arbitrability, these gateway
Silence or ambiguity is resolved against the
questions are for the court to decide, unless
party seeking to overcome the presumption
the parties' agreement or, possibly, conduct,
that courts decide litigation-conduct waiver of
provides clear and unmistakable evidence that
the right to arbitration.
they intended to commit the questions to the
arbitrator in the first instance. Cases that cite this headnote

Cases that cite this headnote


[11] Alternative Dispute Resolution
Suing or participating in suit
[7] Alternative Dispute Resolution
Payday loan company waived its right
Waiver, laches, or estoppel
to arbitrate, in class action brought by
Payday loan company's arbitration
borrowers, against whom company had
agreements with its borrowers did not provide
received default judgments, against company
clear and unmistakable evidence to overcome
and its process server, alleging fraud upon
presumption that litigation-conduct waiver
the court, abuse of process, negligent
of right to arbitration was issue for court,
hiring, supervision, and retention, negligence,
not arbitrator, to decide; agreements did not
civil conspiracy, and violation of fair
manifest contrary intent to presumption that
debt collection laws; borrowers claims
waiver was issue for court to decide, had
arose out of and were integrally related
company intended to delegate issue of waiver
to individual collection actions company
to arbitrator, agreements could and should
previously conducted against them.
have been written to say that explicitly, and
litigants would have expected court to decide 2 Cases that cite this headnote
question of waiver.

Cases that cite this headnote [12] Alternative Dispute Resolution


Presentation and reservation of grounds
for review
[8] Alternative Dispute Resolution
Payday loan company waived for appellate
Matters to Be Determined by Court
review claim that Supreme Court should
An issue that is presumptively for the court
differentiate among claims borrowers, against
to decide will be referred to the arbitrator
whom company had received default
for determination only where the parties'
judgments, brought in their class action
arbitration agreement contains clear and
against company and its process server,
unmistakable evidence of such an intent.
alleging fraud upon the court, abuse of

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Principal Investments v. Harrison, 366 P.3d 688 (2016)
132 Nev. Adv. Op. 2

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.:

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Principal Investments v. Harrison, 366 P.3d 688 (2016)
132 Nev. Adv. Op. 2

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:

Even if all parties have elected


to litigate a Claim in court, you
B. or we may elect arbitration with
respect to any Claim made by a new
Rapid Cash moved to compel arbitration based on the party or any new Claim asserted in
arbitration provisions in its loan agreements, which take that lawsuit, and nothing in that
one of two forms, depending on the date of the loan. The litigation *692 shall constitute a
Dungan/Harrison form of agreement provides that either waiver of any rights under this
party may elect binding arbitration of any “Claim,” and Arbitration Provision.
broadly defines “Claim” as follows:

2. DEFINITION OF “CLAIM.” Quintino's form of agreement differs. It includes a


The term “Claim” means any claim, preliminary “Mediation Agreement,” requiring that
dispute or controversy between you before either party proceeds with arbitration or litigation,
the party must submit all “Claims ... to neutral, individual

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Principal Investments v. Harrison, 366 P.3d 688 (2016)
132 Nev. Adv. Op. 2

(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)).

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[5] [6] Despite the FAA's robust pro-arbitration


[3] [4] The right to enforce an agreement to arbitrate, presumption, Moses H. Cone, 460 U.S. at 24–25, 103 S.Ct.
like any contract right, can be waived. But the FAA 927, the Supreme Court has instructed that certain issues
“establishes that, as a matter of federal law, any doubts —the kind that “contracting parties would likely have
concerning the scope of arbitrable issues should be expected a court to have decided”—are presumptively for
resolved in favor of arbitration, whether the problem at the court, not the arbitrator, to resolve. Howsam v. Dean
hand is the construction of the contract language itself Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S.Ct. 588, 154
or an allegation of waiver, delay, or a like defense to L.Ed.2d 491 (2002). These court-committed issues involve
arbitrability.” Moses H. Cone Mem'l Hosp. v. Mercury gateway questions of arbitrability, “such as ‘whether
Constr. Corp., 460 U.S. 1, 24–25, 103 S.Ct. 927, 74 L.Ed.2d the parties are bound by a given arbitration clause,’ or
765 (1983). Given the “strong presumption in favor of ‘whether an arbitration clause in a concededly binding
arbitration[,] ... waiver of the right to arbitration is not to contract applies to a particular type of controversy.’ ”
be lightly inferred.” Coca–Cola Bottling Co. v. Soft Drink BG Grp., 572 U.S. at ––––, 134 S.Ct. at 1206 (quoting
& Brewery Workers Union Local 812, 242 F.3d 52, 57 (2d Howsam, 537 U.S. at 84, 123 S.Ct. 588). Because “courts
Cir.2001) (internal quotations omitted); accord Tallman, presume that the parties intend courts, not arbitrators,
––– Nev. ––––, 359 P.3d at 123 (quoting Clark Cty. v. to decide [gateway questions of] arbitrability,” id., these
Blanchard Constr. Co., 98 Nev. 488, 491, 653 P.2d 1217, gateway questions are for the court to decide, unless
1219 (1982)). Under the FAA, “any doubts concerning the parties' agreement (or, possibly, conduct) provides
whether there has been a waiver are resolved in favor “clear and unmistakable evidence” that they intended to
of arbitration.” Louis Dreyfus Negoce S.A. v. Blystad commit the questions to the arbitrator in the first instance.
Shipping & Trading Inc., 252 F.3d 218, 229 (2d Cir.2001) First Options, 514 U.S. at 944, 115 S.Ct. 1920 (internal
(quoting Leadertex, Inc. v. Morganton Dyeing & Finishing quotation omitted). But the Supreme Court applies an
Corp., 67 F.3d 20, 25 (2d Cir.1995)). exactly opposite set of rules to procedural gateway matters:
“On the other hand, courts presume that the parties
intend arbitrators, not courts, to decide disputes about
the meaning and application of particular procedural
B.
preconditions for the use of arbitration.” BG Grp., 572
We must decide whether Rapid Cash waived its right U.S. at ––––, 134 S.Ct. at 1207. Procedural gateway
to arbitrate the named plaintiffs' equitable, common- matters “include the satisfaction of prerequisites such
law and statutory claims against them by its litigation as time limits, *694 notice, laches, estoppel, and other
activities in justice court. Before we can do so, we must conditions precedent to an obligation to arbitrate.” Id.
address the threshold issue of who decides the question of (internal quotations omitted).
waiver-by-litigation-conduct—the court or the arbitrator?
The answer depends on presumptions the Supreme Court In Howsam, and again in BG Group, the Supreme Court
has developed to guide division-of-labor determinations characterized “waiver” as a procedural gateway question,
under the FAA and the text of the arbitration agreements not a gateway “question of arbitrability,” stating that,
themselves. See BG Grp., PLC v. Republic of Argentina, under the FAA, the arbitrator presumptively “should
572 U.S. ––––, ––––, 134 S.Ct. 1198, 1206–07, 188 L.Ed.2d decide ‘allegation[s] of waiver, delay, or a like defense to
220 (2014) (stating that since arbitration is a matter of arbitrability.’ ” 537 U.S. at 84, 123 S.Ct. 588 (emphasis
contract, “it is up to the parties to determine whether a added) (alteration in original) (quoting Moses H. Cone,
particular matter is primarily for arbitrators or for courts 460 U.S. at 25, 103 S.Ct. 927); BG Grp., 572 U.S. at
to decide.... If the contract is silent on the matter of ––––, 134 S.Ct. at 1207. These pronouncements have
who primarily is to decide ‘threshold’ questions about generated uncertainty in the lower courts as to who
arbitration, courts determine the parties' intent with the decides litigation-conduct waiver. See Thomas J. Lilly, Jr.,
help of presumptions.”); First Options of Chi., Inc. v. Participation in Litigation as a Waiver of the Contractual
Kaplan, 514 U.S. 938, 944–45, 115 S.Ct. 1920, 131 L.Ed.2d Right to Arbitrate: Toward a Unified Theory, 92 Neb. L.
985 (1995). Rev. 86, 100–01 (2013). Before Howsam, most courts held
that, under the FAA, litigation-conduct waiver challenges
were for the court to resolve. Marie v. Allied Home

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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

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Principal Investments v. Harrison, 366 P.3d 688 (2016)
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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

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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

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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

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Principal Investments v. Harrison, 366 P.3d 688 (2016)
132 Nev. Adv. Op. 2

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 11


Prudential Securities Inc. v. Marshall, 909 S.W.2d 896 (1995)
39 Tex. Sup. Ct. J. 116

dilatory tactics apparently involved various


discovery disputes, and record evidenced only
KeyCite Yellow Flag - Negative Treatment single dispute spanning period of slightly more
Distinguished by Perry Homes v. Cull, Tex., May 2, 2008  
than a month arising from broker's efforts
909 S.W.2d 896
to obtain certain discovery, and defendants'
Supreme Court of Texas.
opposition to discovery was not inconsistent
with intent to invoke arbitration rights.
PRUDENTIAL SECURITIES INCORPORATED,
John Rhoades, Kevin O'Friel, Kent Varner, 24 Cases that cite this headnote
Joe Nittolo, and Mike McClain, Relators,
v.
[2] Alternative Dispute Resolution
The Honorable John McClellan
Arbitration favored; public policy
MARSHALL, Judge, Respondent.
Arbitration of disputes is strongly favored
No. 95–0698. under federal and state law.
|
66 Cases that cite this headnote
Nov. 16, 1995.

Stockbrokers previously employed by securities firm [3] Alternative Dispute Resolution


brought libel and slander action against firm and its Evidence
employees. After trial court denied arbitration, defendants
Presumption exists against waiver of
sought mandamus relief. The Supreme Court held that:
contractual right to arbitration.
(1) defendants did not waive right to arbitration, and (2)
allegations of brokers' complaint established that their 14 Cases that cite this headnote
claims fell within the scope of their arbitration agreements.

Writ conditionally granted. [4] Alternative Dispute Resolution


Waiver or Estoppel
Party does not waive right to arbitration
merely by delay; instead, party urging waiver
West Headnotes (11) must establish that any delay resulted in
prejudice.
[1] Alternative Dispute Resolution
31 Cases that cite this headnote
Performance, breach, enforcement, and
contest of agreement
Securities firm and its employees did not [5] Alternative Dispute Resolution
waive their right to arbitrate libel and slander Suing or participating in suit
claims asserted by stockbrokers previously Party does not waive right to arbitration
associated with firm by invoking judicial by invoking judicial process, in absence of
process to strike one broker's intervention, by prejudice to opposing party.
seeking and resisting discovery, by delaying
seeking mandamus relief from orders of trial 31 Cases that cite this headnote
court, or by not pursuing arbitration of
claims that trial court ruled were subject to [6] Alternative Dispute Resolution
arbitration; record revealed that defendants Agreements to arbitrate
consistently and timely sought to invoke Stockbrokers' allegations of libel and slander
contractual right to arbitration; moreover, against securities firm and its employees
while one broker claimed that defendants' fell within scope of contractual arbitration
dilatory tactics had cost him time and money agreements entered into by brokers while
and prevented him from earning a living,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Prudential Securities Inc. v. Marshall, 909 S.W.2d 896 (1995)
39 Tex. Sup. Ct. J. 116

employed by firm; one broker alleged that Mandamus


firm and its employees had conspired to Matters of discretion
blackball him from industry and had made Mandamus will issue only to correct clear
libelous and slanderous statements to further abuse of discretion when abuse cannot be
such conspiracy, and second broker alleged remedied by appeal.
that he had been accused of being “dishonest
person” and to having churned accounts 2 Cases that cite this headnote
as part of similar conspiracy, and brokers'
standard arbitration agreements provided
[11] Mandamus
for arbitration of any controversy between
Modification or vacation of judgment or
registered representative and any member
order
or member organization arising out of
Defendants in defamation action were entitled
employment or termination of employment of
to mandamus relief in connection with trial
representative.
court's misapplication of Federal Arbitration
14 Cases that cite this headnote Act to preclude arbitration of plaintiffs'
claims; party who is erroneously denied right
to arbitration has no adequate remedy at law
[7] Courts
because fundamental purpose of arbitration
Decisions of United States Courts as
—to provide rapid, less expensive alternative
Authority in State Courts
to traditional litigation—would be defeated. 9
When party asserts right to arbitration under U.S.C.A. §§ 1–14.
Federal Arbitration Act, question of whether
dispute is subject to arbitration is determined 14 Cases that cite this headnote
under federal law. 9 U.S.C.A. §§ 1–14.

40 Cases that cite this headnote


Attorneys and Law Firms
[8] Alternative Dispute Resolution
Disputes and Matters Arbitrable Under *897 Stephen J. Pierce, Jr., Dallas, Steven J. Berry,
Agreement Dallas, John L. Hill, Houston, James E. Essig, Houston,
Corbet F. Bryant, Jr., Dallas, Robert L. Wright, Dallas,
In determining whether claim falls within
for Relators.
scope of arbitration agreement, court focuses
on factual allegations of complaint rather Joe B. Abbey, Dallas, Dean Carlton, Dallas, Joseph E.
than legal causes of action asserted. Ackels, Dallas, for Respondent.

111 Cases that cite this headnote Opinion

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Prudential Securities Inc. v. Marshall, 909 S.W.2d 896 (1995)
39 Tex. Sup. Ct. J. 116

thief, a criminal and should be in jail,” and “is a dishonest


While employed at Prudential, Hawkins and Moise person and should not be hired [and] omitted truths.”
each signed Uniform Applications for Securities Industry Two weeks later, the defendants filed a motion asking
Registration or Transfer in which they agreed to arbitrate the trial court to reconsider its decision and rule that all
“any dispute, claim or controversy that may arise between of Hawkins' claims were subject to arbitration. Hawkins
[them and Prudential] ... that is required to be arbitrated then filed an amended petition, in which he limited his
under the rules” of organizations with which they were libel and slander allegations to the specific statements the
registered. Hawkins and Moise were both registered trial court had ruled were not subject to arbitration. He
with the New York Stock Exchange. Rule 347 of the retained, however, the allegations that the statements were
Board of Directors of the New York Stock Exchange made to blackball him from the securities industry, that
provides that “[a]ny controversy between a registered the individual defendants were acting in the course and
representative and any member or member organization scope of their employment, and that the statements tended
arising out of the employment or termination of employment to injure him in his profession as a broker.
of such registered representative ... shall be settled by
arbitration.” (Emphasis added). Hawkins and Moise do Five weeks later, Moise intervened in Hawkins' lawsuit as
not dispute that they are bound by this rule. a third-party plaintiff. Moise's third-party petition alleged
libel and slander claims against Prudential, O'Friel, and
Prudential fired Moise April 25, 1994 and terminated another Prudential employee, McClain. The allegedly
Hawkins on September 6, 1994. Prudential filed criminal libelous or slanderous statements forming the basis for
charges against Hawkins for allegedly stealing customer Moise's lawsuit were that “Moise is a dishonest person”
lists shortly after he was fired, but a grand jury declined and “Moise churned accounts.” Like Hawkins, Moise
to indict him. Later, he sued Prudential and its employees, alleged that the defendants made these statements to
Rhoades, O'Friel, Varner, and Nittolo. Hawkins alleged further a conspiracy to blackball him from the securities
that the defendants had conspired to blackball him from industry and that the statements tended to injure him
the brokerage industry and had made several libelous or in his profession as a broker. The defendants moved to
slanderous statements to further the conspiracy. He also strike Moise's intervention; the trial court overruled their
asserted that the individual defendants were acting in the motions on June 14, 1995.
course and scope of their employment for Prudential and
that their allegedly defamatory statements injured him in The defendants then moved to compel arbitration of the
his profession as a broker. claims alleged by Moise in his third party petition and to
stay, dismiss, or abate the lawsuit. The trial court denied
Prudential and the individual defendants moved to this motion on June 20, 1995; it signed an order overruling
stay the trial court proceedings and compel arbitration the defendants' motion for reconsideration of the order
of Hawkins' claims. They argued that the Federal denying arbitration of some of Hawkins' claims on July
Arbitration Act, 9 U.S.C. §§ 1–14 (1970), and the Texas 19, 1995. Prudential then sought mandamus relief from
General Arbitration Act, TEX.REV.CIV.STAT.ANN. the orders denying arbitration of Hawkins' and Moise's
art. 224 to 238–6, 238–20 (Vernon Supp.1995), required claims.
the trial court to enforce the arbitration agreement.
[1] Before we reach the merits of the defendants'
*898 The trial court ruled that three of Hawkins' mandamus petition, we must consider Hawkins' and
claims were subject to arbitration. These included claims Moise's contention that the defendants waived any right
based upon statements that Hawkins was fired “for to arbitration. They contend that the defendants waived
insubordination, and the office has been broken into and their rights to arbitration by invoking the judicial process
records stolen,” “because he lost so much money,” and to strike Moise's intervention, by seeking and resisting
because he made an “unauthorized entry into his office discovery, by delaying seeking mandamus relief from the
using a false name to seize files of customer complaints.” trial court's orders, and by not pursuing arbitration of
The trial court also ruled that three claims were not Hawkins' claims that the trial court ruled were subject to
subject to arbitration. These included claims based upon arbitration. We disagree.
statements that Hawkins “lied, cheated and stole,” “is a

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Prudential Securities Inc. v. Marshall, 909 S.W.2d 896 (1995)
39 Tex. Sup. Ct. J. 116

[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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Prudential Securities Inc. v. Marshall, 909 S.W.2d 896 (1995)
39 Tex. Sup. Ct. J. 116

—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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

Reversed and remanded.

KeyCite Yellow Flag - Negative Treatment


Distinguished by Rendon v. Walgreens, N.D.Tex., October 24, 2015  
465 S.W.3d 612 West Headnotes (12)
Supreme Court of Texas.

Randol Mill Pharmacy, KVG Enterprises, Inc., [1] Statutes


Gary G. Daley, John Wayne Bailey, James Plain Language; Plain, Ordinary, or
Common Meaning
Robert Forsythe, Kevin Lynn Heide, Julie
Knowlton Lubbert, and Cara Morrell, Petitioners, Statutes
Context
v.
Stacey Miller and Randy Miller, Respondents In construing statutes, Supreme Court starts
with the ordinary meaning of the statutory
No. 13–1014 text; Supreme Court analyzes that language
| in context, considering the specific sections at
Argued January 14, 2015 issue as well as the statute as a whole.
|
OPINION DELIVERED: April 24, 2015 1 Cases that cite this headnote
|
Rehearing Denied September 11, 2015 [2] Health
Actions and Proceedings
Synopsis
Background: Patient who had an adverse reaction to a Texas Medical Liability Act provides
dose of compounded injectable lipoic acid administered a comprehensive statutory framework
by her physician brought action against, among others, governing health care liability claims; it is
pharmacy that compounded the lipoic acid and several intended to strike a careful balance between
of its employees, alleging negligence in compounding the eradicating frivolous health care liability
drug as well as the inclusion of inadequate warnings and claims and preserving meritorious ones. Tex.
instructions. The 348th District Court, Tarrant County, Civ. Prac. & Rem. Code Ann. § 74.001.
Dana M. Womack, J., denied pharmacy's and employees'
2 Cases that cite this headnote
motion to dismiss for failure to comply with the expert
report requirement of the Texas Medical Liability Act.
Pharmacy and employees appealed, and the Fort Worth [3] Evidence
Court of Appeals, Sue Walker, J., 413 S.W.3d 844, Pleadings
affirmed. Pharmacy and employees filed petition for Evidence
review. Pleadings
Allegation, in patient's petition against
pharmacy and several of its employees for
Holdings: In case of first impression, the Supreme Court, alleged negligence in compounding injectable
Lehrmann, J., held that: lipoic acid that was given to patient by
her physician, that patient sent pharmacy
[1] pharmacy and its employees were engaged in and employees pre-suit notice pursuant to
“the dispensing of prescription medicines” when they the Texas Medical Liability Act was not a
compounded the injectable lipoic acid, and dispositive judicial admission that pharmacy
and employees were “health care providers”
[2] patient's claims against pharmacy and its employees within the meaning of the Act, so as to trigger
were health care liability claims. the Act's expert report requirement. Tex. Civ.
Prac. & Rem. Code Ann. § 74.351(a).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

claims.” Tex. Civ. Prac. & Rem. Code Ann. §§


Cases that cite this headnote 74.001(12)(B)(ii), 74.001(22).

3 Cases that cite this headnote


[4] Evidence
Pleadings
A “judicial admission” occurs when an [8] Statutes
assertion of fact is conclusively established in Statute as a Whole; Relation of Parts to
live pleadings. Whole and to One Another
Statutes
1 Cases that cite this headnote Giving effect to entire statute and its
parts; harmony and superfluousness
[5] Evidence Well-settled rules of statutory interpretation
Judicial admissions in general require court to examine the entire act to glean
The consequence of a judicial admission is its meaning and to presume that the entire
that jury questions concerning the admitted statute is intended to be effective.
fact need not be submitted.
Cases that cite this headnote
Cases that cite this headnote
[9] Statutes
[6] Health Superfluousness
Actions and Proceedings Supreme Court may not interpret a statute in
Only claims brought against physicians or a way that renders any part of it meaningless.
health care providers may qualify as health
Cases that cite this headnote
care liability claims under the Texas Medical
Liability Act. Tex. Civ. Prac. & Rem. Code
Ann. § 74.001(13). [10] Health
Actions and Proceedings
4 Cases that cite this headnote
Products Liability
Drugs in general
[7] Health Products Liability
Actions and Proceedings Actions
Fact that pharmacy was licensed under the Pharmacy and its employees were engaged
Pharmacy Act did not necessarily mean that in the “dispensing” of medication when
pharmacy and its employees were “health they compounded injectable lipoic acid
care providers” within meaning of Texas that physician administered to patient, as
Medical Liability Act, which defined term necessary to be “pharmacists” within meaning
to include any facility “duly licensed” to of Texas Medical Liability Act, even though
provide health care as well as employees acting physician's compounding order did not
within the scope of employment; interpreting specify the patient for whom the lipoic
all pharmacies and pharmacy employees acid was intended; Pharmacy Act allowed a
as health care providers would render pharmacist to dispense a reasonable quantity
superfluous Act's definition of “pharmacist,” of a compounded drug to a practitioner
which expressly narrowed the circumstances for office use, which implied both that the
under which they could be considered health pharmacist might not know the identity of
care providers by limiting the qualifying the ultimate user of the drug and that the
activities to “the dispensing of prescription practitioner would be the one administering
medicines that result in health care liability the drug. Tex. Civ. Prac. & Rem. Code

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

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.

[12] Health Michael W. Minton, Law Offices of Michael W. Minton,


Affidavits of merit or meritorious PLLC, Fort Worth, TX, Robert G. “Greg” Fitzgerald,
defense; expert affidavits Law Offices of Greg Fitzgerald, Bedford, TX, for
Products Liability Respondent Stacey Miller.
Drugs in general
Opinion
Products Liability
Affidavit or certification of expert Justice Lehrmann, delivered the opinion of the Court.
Patient's claims against pharmacy and its
employees arising out of her adverse reaction After suffering a severe adverse reaction to a compounded
to a dose of injectable lipoic acid compounded drug administered by her physician, Stacey Miller sued
by pharmacy and administered by patient's the compounding pharmacy and several of its licensed-
physician were “health care liability claims” pharmacist employees. We are asked whether Miller's
within meaning of Texas Medical Liability claims against these defendants are health care liability
Act, and thus patient's failure to timely serve claims subject to the requirements of the Texas Medical
expert reports on pharmacy and employees Liability Act. If they are, then Miller's failure to serve
required dismissal of her claims, despite them with an expert report pursuant to the Act requires
contention that claims were in the nature dismissal of her suit. Holding that Miller's causes of action
of product liability claims; patient's assertion are not health care liability claims, the trial court denied

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

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

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Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

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.

B. General Definition of Health Care


Provider vs. Specific Definition of Pharmacist
C. The Defendants Are Pharmacists
[7] As an initial matter, we address the pharmacist
defendants' argument that they qualify as health care This is our first opportunity to examine the Medical
providers under the term's general definition irrespective Liability Act's application to claims against pharmacists
of the more specific definition of pharmacist. *617 in general and compounding pharmacists in particular. In
The argument is as follows: (1) As a licensed Class A the typical case against a pharmacy involving claims of
pharmacy, Randol Mill is a “facility ... duly licensed ... by misfilled prescriptions, the courts of appeals are generally

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Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

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:

1. Pharmacy Compounding (A) as the result of a practitioner's prescription drug


order based on the practitioner-patient-pharmacist
Generally, drug compounding is the process by which relationship in the course of professional practice;
a pharmacist mixes or alters drugs to create a
medication that is tailored to the needs of an individual (B) for administration to a patient by a practitioner
patient and that is not otherwise commercially *618 as the result of a practitioner's initiative based on
available. Thompson v. W. States Med. Ctr., 535 the practitioner-patient-pharmacist relationship in the
U.S. 357, 360–61, 122 S.Ct. 1497, 152 L.Ed.2d 563 course of professional practice;
(2002). Pharmacists engaging in this process may
customize a drug's dose, delivery vehicle, binding agents, (C) in anticipation of a prescription drug order based
or flavor. Jesse M. Boodoo, Note and Comment, on a routine, regularly observed prescribing pattern; or
Compounding Problems and Compounding Confusion:
(D) for or as an incident to research, teaching, or
Federal Regulation of Compounded Drug Products and
chemical analysis and not for selling or dispensing,
the FDAMA Circuit Split, 36 AM. J.L. & MED.
except as allowed under Section 562.154 or Chapter 563
220, 223 (2010). Common recipients of compounded
[of the Occupations Code].
drugs include hospice patients who require higher doses
and alternate delivery vehicles, children who require TEX. OCC. CODE § 551.003(9); 22 TEX. ADMIN.
lower doses in liquid rather than tablet form, and CODE §§ 291.131(b)(3), .133(b)(14). Pertinent to this
patients who are allergic to a drug's inactive ingredient. case, the Pharmacy Act permits a pharmacy to “dispense
Id. Further, compounding is “constantly used” in
and deliver a reasonable quantity 5 of a compounded
the hospital setting “to prepare intravenous mixtures
‘ranging from simple fluid replacement to the delivery of drug to a practitioner for office *619 use,” 6 requiring
complicated, individualized chemotherapy regiments.’ ” the pharmacy to verify the source of the raw materials,
Id. at 224 (quoting Federal and State Role in Pharmacy comply with applicable United States Pharmacopoeia
Compounding and Reconstitution: Exploring the Right guidelines, 7 and comply with the State Board of
Mix to Protect Patients: Hearing Before the S. Comm. Pharmacy's applicable standards and rules. TEX. OCC.
on Health, Educ., Labor and Pensions, 108th Cong. 54 CODE §§ 562.152, .153. In turn, the Pharmacy Board
(2003) (statement of Daniel A. Herbert, President-elect, has enacted detailed regulations governing pharmacy
American Pharmaceutical Association)). Compounded compounding for a practitioner's office use. See 22 TEX.
medications “are traditionally created only upon receiving ADMIN. CODE §§ 291.131(f), .133(f). Notably, the

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Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

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.

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Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

The requirement that a compounded drug be prescribed


TEX. OCC. CODE § 551.003(36). The ordinary meaning by a practitioner is consistent with the purpose served
of prescription drug—“a drug that can be bought only as by the practice, which is to supply a drug in a form
prescribed by a physician”—is similar to subsection (A) or dose that is not commercially available, but that the
of the statutory definition. WEBSTER'S THIRD NEW practitioner has concluded will best meet her patient's
INT'L DICTIONARY 1792 (2002). Miller argues that no
needs. 9 Thompson, 535 U.S. at 360–61, 122 S.Ct. 1497.
evidence shows that lipoic acid, in any form, qualifies as
In this case, Dr. Tan, in the exercise of his professional
a prescription drug.
medical judgment, prescribed some of his patients,
including Miller, a particular dose and form of lipoic
We first note that the Legislature's choice of the term
acid that required compounding. He ordered a specific
“medicine” rather than “drug” in the Medical Liability
quantity of the compounded drug from Randol Mill for
Act likely will not affect the statute's application in most
office use and administered the drug to Miller in his office,
circumstances. The dictionary definition of medicine is “a
as contemplated by the Pharmacy Act. We hold that the
substance or preparation used in treating disease.” Id. at
injectable lipoic acid compounded by Randol Mill and
1402. The Pharmacy Act's definition of drug is broader,
administered to Miller was a prescription medicine under
but includes “a substance intended for use in the diagnosis,
the Medical Liability Act. Accordingly, in compounding
cure, mitigation, treatment, or prevention of disease.”
the lipoic acid for Dr. Tan's office use, the pharmacist
TEX. OCC. CODE § 551.003(18)(B). The parties do not
defendants were engaged in “activities limited to the
argue that the injectable lipoic acid at issue meets the
dispensing of prescription medicines.” TEX. CIV. PRAC.
definition of drug but not medicine, or vice versa. They
& REM. CODE § 74.001(22).
dispute only whether a prescription is required for patient
use.

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

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Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

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

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Randol Mill Pharmacy v. Miller, 465 S.W.3d 612 (2015)
58 Tex. Sup. Ct. J. 733

All Citations

465 S.W.3d 612, 58 Tex. Sup. Ct. J. 733

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 10


Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

Ranzy obtained a payday loan from Extra Cash for


$500.00 in September of 2008. Dkt. 28. Ranzy alleges that
KeyCite Yellow Flag - Negative Treatment Extra Cash required her to leave a post-dated check for
On Reconsideration in Part Ranzy v. Extra Cash of Texas, Inc., 
$625.00, which would run on her next payday. Id. Ranzy
S.D.Tex., March 22, 2012
claims that she could not afford to pay the $625.00 on her
2011 WL 6719881
next payday, so Extra Cash allowed her to renew the loan
Only the Westlaw citation is currently available.
by making a renewal payment of $125.00 per month. Id.
United States District Court,
According to Ranzy, she made the $125.00 payments from
S.D. Texas,
September 2008 through February or March of 2009. Id.
Houston Division.
Then, in spring of 2009, Ranzy claims that she was unable
Cheryl RANZY, Plaintiff, to work and therefore could not make any payments to
v. Extra Cash. Id. Extra Cash attempted to contact Ranzy by
telephone to collect the debt. Dkt. 33. Ranzy also received
EXTRA CASH OF TEXAS, INC., et al., Defendants.
a letter demanding payment “and threatening to send the
Civil Action No. H–09–3334. [original post-dated] check to the ‘investigations office’ to
| have the check ‘filed on.’ ” Dkt. 103, Exh. LL. Ranzy
Dec. 21, 2011. claims that she told Extra Cash that she was out of work
and could not pay. Dkt. 28.
Attorneys and Law Firms
In the summer of 2009, Ranzy's husband, her mother, her
Matthew Brian Probus, Wauson Probus, Sugar Land, TX,
supervisor at her job, and a student assistant at her job
for Plaintiff.
allegedly advised her that “someone representing himself
Kimbra Kathryn Ogg, The Ogg Law Firm, Houston, TX, as an agent in the ‘check fraud investigations' department
for Defendants. was calling for [Ranzy].” Id. Ranzy claims that she
contacted the person at the “check fraud department”
who had been leaving messages with her family and at
her workplace and that she recognized the person's voice
ORDER
as being the voice of “Eddy,” the loan representative at
GRAY H. MILLER, District Judge. Extra Cash that she had dealt with in the past. Id. Eddy
allegedly advised Ranzy that she owed $125.00 on the
*1 Pending before the court are the (1) defendants Extra debt. Id. Ranzy obtained a cashier's check for $125.00 and
Cash of Texas, Inc. (“Extra Cash”), Edmundo Tijerina, went to Extra Cash to pay off the debt. Id. When she made
Cynthia Salinas, Amigo Capital LLC, Amigo Financial the payment, Eddy allegedly gave Ranzy a receipt that
Services LP (“Amigo Financial”), St. Croix Financial reflected that the principal on her loan was still $500.00. 1
Group, Inc., Z Cash of Texas, Inc., and Z Holdings, Inc.'s Id.
(collectively “Defendants”) motion for more definitive
statement, motion to dismiss, or motion for partial Ranzy filed her original complaint on October 15, 2009
summary judgment (Dkt.104); and (2) plaintiff Cheryl (Dkt.1), and she filed an amended complaint on December
Ranzy's motion for partial summary judgment (Dkt.103). 15, 2009 (Dkt.9). Extra Cash, Salinas, and Tijerina then
Having considered the motions, related documents, and filed a motion to dismiss Ranzy's first amended complaint,
applicable law, the court is of the opinion that Defendants' or, alternatively, for a more definite statement, and
motion for more definitive statement, motion to dismiss, a motion to compel arbitration. Dkts. 15, 16. Ranzy
or motion for summary judgment should be DENIED, requested permission to amend her complaint in lieu
and Ranzy's motion for summary judgment should be of dismissal. Dkt. 20. The court denied the motion to
GRANTED IN PART AND DENIED IN PART. dismiss and granted the motion to amend the complaint.
Dkt. 24. On March 22, 2010, Ranzy filed her second
amended complaint. Dkt. 28. Ranzy's second amended
I. FACTUAL AND PROCEDURAL BACKGROUND complaint made claims on behalf of herself and those
similarly situated, pursuant to Federal Rule of Civil

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Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

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,

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Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

550 U.S. at 570). Thus, the plaintiff must demonstrate


“more than a sheer possibility that the defendant has
acted unlawfully.” Id. Furthermore, while the court must 2. Usury
accept well-pleaded facts as true, it will not “strain to Defendants contend that Ranzy's usury claim “sounds in
find inferences favorable to the plaintiff.” Southland Secs. fraud” because it relies on her assertion that Defendants
Corp. v. Inspire Ins. Solutions, Inc., 365 F.3d 353, 361 (5th made a material false representation to Ranzy, knowing
Cir.2004). it was false. Dkt. 104–2. However, Ranzy need not show
that Defendants made a material false representation
*3 In addition to meeting the plausibility standard, to prevail on her common-law usury claim, which has
under Federal Rule of Civil Procedure 9(b), if a party three elements—(1) a loan of money; (2) an absolute
is alleging fraud or mistake, the pleading must “state obligation to repay the principal; and (3) the exaction of
with particularity the circumstances constituting fraud or a greater compensation than allowed by law for the use
mistake.” Fed.R.Civ.P. 9(b); United States ex rel. Grubbs of the money by the borrower—none of which involves a
v. Kanneganti, 565 F.3d 180, 185 (5th Cir.2009) (noting material misrepresentation. 3 Lovick v. Ritemoney LTD.,
that Rule 9(b) does not “supplant” Rule 8(a)). By its plain 378 F.3d 433, 438 (5th Cir.2004). The heart of Ranzy's
language, Rule 9(b) applies only to “averments of fraud or usury allegation is that Extra Cash, Amigo Financial,
mistake,” and not to claims where fraud is not an element and St. Croix charged interest in excess of the maximum
and has not been averred. Lone Star Ladies Inv. Club v. interest charge allowed. Dkt. 85–1 at 20. Ranzy need only
Schlotzsky's Inc., F.3d 363, 368–69 (5th Cir.2001). Instead, prove that the Defendants loaned her money that she
claims not subject to Rule 9(b) are subject to the more was obligated to repay and required interest in excess of
lenient standard of Rule 8(a). In re Elec. Data Sys. Corp. that allowed by law. Thus, Rule 9(b) particularity is not
“ERISA” Litig., 305 F.Supp.2d 658, 677 (E.D.Tex.2004). necessary. Cf. Lovick, 378 F.3d at 436–38 (considering
a case under Texas law in which the plaintiff brought
The Fifth Circuit interprets Federal Rule of Civil suit against an automobile title loan broker claiming
Procedure 9(b) strictly, “requiring a plaintiff pleading the broker's fees were disguised interest which caused
fraud to specify the statements contended to be the loans to be usurious, and applying Rule 8(a), rather
fraudulent, identify the speaker, state when and where the than Rule 9(b), to Lovick's usury claims). Ranzy's usury
statements were made, and explain why the statements claim meets the Rule 8(a) pleading standard. Accordingly,
were fraudulent.” Id. (quoting Herrmann Holdings Ltd. v. Defendants' motion for a more particular statement of,
Lucent Techs. Inc., 302 F.3d 552, 564–65 (5th Cir.2002)). dismissal of, or summary judgment on Ranzy's usury
Thus, Rule 9(b) generally requires the complaint to “set claim is DENIED.
forth ‘the who, what, when, where, and how’ of the events
at issue.” Id . (quoting ABC Arbitrage Plaintiffs Grp. v.
Tchuruk, 291 F.3d 336, 350 (5th Cir.2002)). However, 3. CSOA Violations
“Rule 9(b)'s ultimate meaning is context-specific.” Grubbs, *4 Defendants assert that Ranzy's CSOA claim likewise
565 F.3d at 185. Thus, “[d]epending on the claim, a sounds in fraud yet is not pled with Rule 9(b) particularity.
plaintiff may sufficiently ‘state with particularity the Ranzy's CSOA claim is that Defendants violated section
circumstances constituting fraud or mistake’ without 393.201 of the Texas Finance Code, and that those
including all the details of any single court-articulated violations have provided her a cause of action pursuant
standard—it depends on the elements of the claim at to sections 393.204, 393.502, and 393.503. While there
hand.” Id. However, this particularity requirement “does are other sections of the CSOA that sound in fraud and
not ‘reflect a subscription to fact pleading.’ “ Grubbs, 565 must be pled with particularlity, none of the sections
F.3d at 186 (quoting Williams v. WMX Techs., Inc., 112 of the CSOA listed in Ranzy's live complaint involves
F.3d 175, 178 (5th Cir.1997)). Instead, pleadings alleging fraud. Compare Tex. Fin.Code Ann. §§ 393.201, 204, 502,
fraud must contain “simple, concise, and direct allegations 503 (sections in Ranzy's complaint), with Tex. Fin.Code
of the circumstances constituting the fraud, which ... must Ann. § 393.304 (prohibiting CSOs from “mak [ing] or
make relief plausible, not merely conceivable, when taken us[ing] a false or misleading representation in the offer
as true.” Id. (internal quotations omitted) (referring to the or sale of the services of the organization”), and §
standard enunciated in Twombly ). 393.305 (prohibiting CSOs from “directly or indirectly
engag[ing] in a fraudulent or deceptive act, practice,

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Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

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

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Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

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.

6. Conspiracy 1. Legal Standard


*6 Defendants also request a more particular Summary judgment is proper if “the pleadings,
statement of, dismissal of, or summary judgment on depositions, answers to interrogatories, and admissions on
Ranzy's conspiracy claim. However, Ranzy alleges that file, together with the affidavits, if any, show that there
Defendants conspired to charge unlawful interest, finance is no genuine issue as to any material fact and that the
charges, and fees in violation of the CSOA, and the moving party is entitled to a judgment as a matter of
portion of the CSOA Defendants allegedly conspired law.” Fed.R.Civ.P. 56(c); Carrizales v. State Farm Lloyds,
to violate does not involve fraud. The facts alleged 518 F.3d 343, 345 (5th Cir.2008). The mere existence
supporting the conspiracy claim state a plausible claim for of some alleged factual dispute between the parties will
relief, and it does not need to be pled with particularity. not defeat an otherwise properly supported motion for
Accordingly, Defendants' motion as it relates to Ranzy's summary judgment; there must be an absence of any
conspiracy claim is DENIED. genuine issue of material fact. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 247–48, 106 S.Ct. 2505, 91 L.Ed.2d 202
In sum, none of Ranzy's claims is subject to Rule 9(b) (1986). An issue is “material” if its resolution could affect
particularity, so Defendants' motion for a more particular the outcome of the action. Burrell v. Dr. Pepper/Seven
statement or to dismiss for lack of Rule 9(b) specificity Up Bottling Grp., Inc., 482 F.3d 408, 411 (5th Cir.2007).
is DENIED. Additionally, while Defendants move for “[A]nd a fact is genuinely in dispute only if a reasonable
dismissal pursuant to Rule 12(b)(6) and Rule 56, all of jury could return a verdict for the non-moving party.”
their arguments hinge on their theory that Ranzy's claims Fordoche, Inc. v. Texaco, Inc., 463 F.3d 388, 392 (5th
sound in fraud and should be pled with particularity. The Cir.2006).
motion to dismiss or for summary judgment is DENIED.
*7 The moving party bears the initial burden of
informing the court of all evidence demonstrating the
B. Plaintiff's Motion absence of a genuine issue of material fact. Celotex Corp.
Also pending before the court is Ranzy's Motion for v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d
Partial Summary Judgment. Dkt. 103. Ranzy moves for 265 (1986). Only when the moving party has discharged
summary judgment on her usury claims against Extra this initial burden does the burden shift to the non-moving
Cash and Amigo Financial, and her breach of contract party to demonstrate that there is a genuine issue of
claims, CSOA claims, DTPA claims, and FDCPA claims material fact. Id. at 322. If the moving party fails to
against Extra Cash. Id. She also asserts that, because meet this burden, then it is not entitled to a summary
he failed to pay Extra Cash's franchise tax, Tijerina is judgment, and no defense to the motion is required. Id.
individually liable for Ranzy's damages. Id. She requests “For any matter on which the non-movant would bear
an award of monetary damages as well as an injunction. the burden of proof at trial ..., the movant may merely
Id. Defendants have not responded to Ranzy's motion. point to the absence of evidence and thereby shift to the
non-movant the burden of demonstrating by competent
Under the local rules of the Southern District of Texas, summary judgment proof that there is an issue of material
failure to respond to a motion for summary judgment fact warranting trial.” Transamerica Ins. Co. v. Avenell,
will be taken as a representation of no opposition. S.D. 66 F.3d 715, 718–19 (5th Cir.1995); Celotex, 477 U.S.
of Tex.R. 7.4. Although the motion is unopposed, Ranzy at 323–25, 106 S.Ct. 2548, 91 L.Ed.2d 265. To prevent
must show “that there is no genuine dispute as to any summary judgment, “the non-moving party must come
material fact and the [she] is entitled to judgment as forward with ‘specific facts showing that there is a genuine
a matter of law.” Fed.R.Civ.P. 56(a). Ranzy has failed issue for trial.’ ” Matsushita Elec. Indus. Co., Ltd. v. Zenith
to meet this burden for her usury claim, her breach Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d
of contract claim, and her FDCPA claim. Ranzy has, 538 (1986) (quoting Fed.R.Civ.P. 56(e)).
however, shown she is entitled to judgment as a matter of

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Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

S.W.3d 345, 351 (Tex.App.-Houston [1st Dist.] 2001, no


2. Usury pet.)). Ranzy bases her breach of contract claim on the
In Texas, the elements of usury are: (1) a loan of money; assertion that each CSO “renewal fee” was a breach of
(2) an absolute obligation to repay the principal; and contract, because her original agreement only authorized
(3) the exaction of a greater compensation than allowed an initial, one-time CSO fee of $125. This assertion is
by law for the use of the money by the borrower. contradicted, however, by the relevant documents. Both
Lovick, 378 F.3d at 438. Ranzy's usury claims turn on the CSO Agreement and the CSO Disclosure Statement
whether Extra Cash and Amigo Financial were separate read in their relevant parts, underlined and in capital
entities, the implication being that the shared benefit from letters, “YOU WILL BE CHARGED ADDITIONAL
the fees makes the fees interest. See Dkt. 103. Ranzy FEES IF YOU OBTAIN NEW CREDIT SERVICES
alleges that the two companies were separate only on AND A NEW THIRD–PARTY LOAN TO PAY OFF
paper, and that the use of the CSO model was merely AN EXISTING LOAN.” Dkt. 103, Exhs. GG, HH. Both
a sham to avoid Texas usury laws. Id. To support her documents also provide a method for calculating these
assertion, Ranzy cites to evidence that Edmundo Tijerina additional fees. Id. The initial agreement thus allowed
is the CEO of both Extra Cash and Z Cash, which are Extra Cash to charge renewal fees, and the renewal fees
both CSOs. Id. & Exhs. B–1, G–I, K–M. She cites to were thus not breaches of the contract. Ranzy's motion
evidence that Edmundo Tijerina was also in charge of for summary judgment on her breach of contract claim is
both lending institutions involved—Amigo Financial or DENIED.
St. Croix—at the same time that he was CEO of the
CSOs. Dkt. 103 & Exhs. G–I, K–M. Ranzy also cites to
the deposition of Eduardo Tijerina, Edmundo Tijerina's 4. CSOA Violations
brother, in support of the assertion that the CSOs and Ranzy asserts that Extra Cash violated the CSOA by
lenders in question were not distinct entities. Dkt. 103, breaching the original CSO agreement, not providing
Exh. B. Eduardo Tijerina's deposition, however, does the name of its agent for service of process in the CSO
not support Ranzy's allegations, and instead supports agreement, not properly setting forth the amount due for
the inference that Edmundo left Extra Cash in order to renewed CSO agreements, and not having new written
maintain the distinction between lenders and CSOs. Id. agreements each time it charged her a $125 renewal fee.
Ranzy cites to no evidence to support the assertion that, Dkt. 103. As a preliminary matter, the court finds the
beyond Edmundo Tijerina's involvement, the CSOs were agreement between Amigo Financial and Ranzy was a
indistinct from the lenders. Even if she had succeeded loan under the Texas Finance Code. Tex. Fin.Code Ann.
in demonstrating that Edmundo Tijerina was involved § 341.001(9). The court finds that Ranzy is a consumer,
in both the CSOs and lending institutions, this evidence and Extra Cash is a Credit Service Organization under
would still not carry Ranzy's summary judgment burden the Texas Finance Code. § 393.001(1), 393.001(3). Finally,
because she has not shown that the CSO fees were shared the court finds Ranzy is a consumer, and Extra Cash a
between the entities. Ranzy has presented no evidence that debt collector, under the FDCPA. 15 U.S.C. § 1692a(3); §
Amigo Financial received more than incidental benefits 1692a(6) (2006).
from Extra Cash's fees, and in turn fails to show that such
fees were in fact interest. She thus fails to meet her burden The CSOA, as codified in the Texas Finance Code,
under Rule 56 for her usury claim, and her motion for has several requirements for CSO agreements, including
summary judgment on this claim is DENIED. that CSO agreements be in writing and contain certain
information about the total payment and payment terms
as well as set forth the name and address of the
3. Breach of Contract organization's agent for service of process and the address
*8 The elements for a breach of contract claim in Texas of the organization's principal place of business. See Tex.
are (1) the existence of a valid contract; (2) performance Fin.Code Ann. § 393.201. Ranzy moves for summary
or tendered performance by plaintiff; (3) breach of the judgment on her claims that the CSO agreement or
contract by the defendant; and (4) damages sustained by agreements between her and Extra Cash violated sections
the plaintiff as a result of the breach. Smith Int'l, Inc. 393.201(a), (b)(1), (b)(4) and 204, and she seeks an
v. Egle Group, LLC, 490 F.3d 380, 387 (5th Cir.2007) injunction pursuant to section 393.502 and monetary
(citing Valero Mktg. & Supply Co. v. Kalama Int'l, 51 damages pursuant to section 393.503.

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Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

Fin.Code Ann. § 393.204. Ranzy argues that Extra Cash


Under section 393.201(a), CSO agreements must be in failed and refused to perform its obligations under the
writing. Tex. Fin.Code Ann. § 393.201(a). According CSO agreement by charging and collecting additional
to the terms of the initial CSO agreement, a service fees beyond the initial CSO fee. Dkt. 103. However, as
fee could only be charged if Ranzy used Extra Cash's noted above, even though the original CSO agreement did
credit services—“new credit services”—to obtain a new not provide sufficient details about obtaining new credit
third-party loan from Amigo Financial. Dkt. 103, Exh. services if Ranzy failed to pay the initial loan on time,
GG. Here, Ranzy presents evidence that extra fees were the CSO agreement did indicate that additional fees would
charged to her account and that there were no new be charged if new credit services and a new third-party
written agreements relating to the new fees. Dkt. 103, loan was needed. Ranzy has not shown that Extra Cash
Exh. BB (Ranzy's customer history report, which includes violated the original CSO agreement in this respect as a
all payments made); Dkt. 103, Exh B (citing Eduardo matter of law, and is thus not entitled to judgment on her
Tijerina's testimony that Ranzy's account renewals were claim of a violation of section 393.204 as a matter of law.
done over the phone). Under the CSOA, each time Ranzy
obtained new credit services, the agreements for these In sum, Ranzy is not entitled to summary judgment
services were required to be in writing. Tex. Fin.Code on her claim of a violation of section 393.204 of the
Ann. § 393.201(a). Since Ranzy has shown there were CSOA, but she has shown that Extra Cash violated section
additional agreements that were not in writing, she has 393.201 of the CSOA by not setting forth the renewal
shown that Extra Cash violated section 393.201(a) of the agreements in writing, not setting forth the total amount
CSOA. due under these agreements, and failing to provide the
appropriate information about its agent for service of
*9 Section 393.201(b)(1) requires CSO agreements to process within the agreement or agreements. She is thus
contain payment terms, including total payments. Tex. entitled to summary judgment for her claims against Extra
Fin.Code Ann. § 393.201(b) (1). Since the renewed Cash under section 393.201 the CSOA. Her motion for
agreements are not written, they obviously do not set summary judgement as it relates to claims under section
forth payment terms. Ranzy would have had to consult 393.201 of the CSOA is GRANTED, and her motion for
the original CSO agreement for payment terms. While the summary judgment as it relates to claims under section
original agreement and disclosure statement do state that 303.204 of the CSOA is DENIED.
Ranzy would be charged additional fees if she obtained
new credit services to pay off her loan, they do not provide
any information about these additional fees. See Dkt. 5. DTPA Violations
103, Exhs. GG, HH. Instead, they provide a hypothetical The Texas Deceptive Trade Practices Act (“DTPA”)
example about additional finance charges. See Dkt. “grants consumers a cause of action for false, misleading,
103, Exhs. GG, HH. Thus, the original agreement and or deceptive acts or practices.” Amstadt v. U.S. Brass
subsequent unwritten agreements (or renewals) violate Corp., 919 S.W.2d 644, 649 (Tex.1996); see Tex. Bus. &
Com Code Ann. § 17.50(a)(1) (West 2006). The elements of
section 393.201(b)(1). 4
a DTPA cause of action are: (1) the plaintiff is a consumer;
(2) the defendant committed acts “in connection with
Under section 393.201(b)(4), a CSO agreement must
the purchase or lease of any goods or services”; (3) the
“contain the name and address of the organization's agent
defendant's acts were false, misleading or deceptive; and
in this state authorized to receive service of process.” Tex.
(4) the acts were a producing cause of plaintiffs injuries.
Fin.Code Ann. § 393.201(b)(4). Here, neither the CSO
Amstadt, 919 S.W.2d at 649; Washington v. U.S. HUD,
agreement nor the CSO disclosure statement contains
953 F.Supp. 762, 777 (N.D.Tex.1996). The DTPA also
the name or address of Extra Cash's agent authorized
acknowledges that other acts may provide a basis for
to receive service of process. Dkt. 103, Exhs. GGHH.
action under the DTPA. Tex. Bus. & Com.Code Ann. §§
This omission violates section 393.201(b)(4) of the Texas
17.43, 17.50(h).
Finance Code.

*10 “A violation of [the CSOA] is a deceptive trade


Finally, under section 393.204, a breach by the CSO
practice actionable under Subchapter E, Chapter 17,
of a CSO agreement is a violation of the CSOA. Tex.
Business & Commerce Code.” Tex. Fin.Code Ann. §

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

the CSOA. These claims are technical statutory violations C. Damages


relating to the form of the contract or contracts. Unlike in In her Motion for Summary Judgment, Ranzy makes
Jonnet, where the Railroad Commission may have decided several assertions regarding the amount of damages she is
not to impose liability even though the administrative owed by Extra Cash, Amigo Financial, and Tijerina. The
rule was not followed, here Ranzy is entitled, under the court declines to rule on damages at this time.
CSOA, “to recover: (1) actual damages in an amount
not less than the amount the consumer paid the credit
services organization; (2) reasonable attorney's fees; and D. Injunction
(3) court costs.” Tex. Fin.Code Ann. § 393.503. This Ranzy also requests an injunction against Extra Cash
entitlement arose as soon as the violations occurred. under section 393.502 of the Texas Finance Code, barring
Entitlement to damages under the DTPA likewise arose the use of the CSO Agreement. Dkt. 103. Section 393.502
as soon as the violations occurred. See Tex. Bus. & states, “A district court on the application of the attorney
Com.Code Ann. § 17.50. The debts from violations of general or a consumer may enjoin a violation of this
these statutes were thus “created” at the time the corporate chapter.” Tex. Fin.Code Ann. § 393.502. Here, the CSO
privileges were forfeited, even though the judgment occurs agreement Extra Cash used for Ranzy does not contain
after the privileges have been regained. Moreover, the the information required by the CSOA. The court finds,
debt resulting from judgment relates back to the time at therefore, that an injunction against the further use of this
which the violation occurred. This conclusion fulfills the form is appropriate. Extra Cash is hereby ENJOINED
statutory purpose of preventing wrongful acts of culpable from using the form CSO agreement that it used with
officers of a corporation and protecting members of the Ranzy. Any form agreements Extra Cash uses in the future
public who deal with the corporation, as it would hardly must contain the information required by the CSOA.
be fair to allow directors and officers of corporations who
fail to pay their taxes to escape the consequences of their
actions during that time period simply by paying their
III. Conclusion
taxes before judgment is entered. See Schwab., 198 S.W.2d
at 81–82 (discussing the statutory purpose). *14 Defendants' motion for a more definite statement,
dismissal, or partial summary judgment is DENIED.
The court notes, however, that its conclusion that the Ranzy's motion for partial summary judgment is
debts relating to Extra Cash's violations of the CSOA and GRANTED IN PART AND DENIED IN PART. Her
the DTPA were created at the time the violations occurred motion for summary judgment for violations of the
or relate back to that time does not necessarily apply to FDCPA and section 393.204 of the CSOA and on her
Ranzy's other causes of action. Given the disparate rulings common law usury and breach of contract claims is
of the Texas appellate courts with regard to the relate-back DENIED. Her motion for summary judgment on her
doctrine, the court finds that the most prudent course is to claim that Extra Cash violated section 393.201 of the
determine whether Tijerina can be held individually liable CSOA and the related DTPA violation is GRANTED.
for Ranzy's other claims only after (and if) Extra Cash's Additionally, the court finds that Tijerina may be held
liability has been established. individually liable for the CSOA and DTPA violations.
The court defers ruling on Tijerina's individual liability on
In sum, the court finds that the debts associated with Ranzy's other claims until (and if) liability is established.
the violations of the CSOA and DTPA were created or Additionally, the court defers ruling on damages until
relate back to the time of contract, during which Extra after a trial is held on the merits of the remaining claims.
Cash's corporate privileges were forfeited. Thus, under
section 171.255(a) of the Texas Tax Code, Tijerina may It is so ORDERED.
be held individually liable for these debts. The court,
however, defers ruling on Tij erina's potential individual
liability for Ranzy's other causes of action until liability All Citations
is established for those claims, if indeed Ranzy is able to
establish liability. Not Reported in F.Supp.2d, 2011 WL 6719881

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 10


Ranzy v. Extra Cash of Texas, Inc., Not Reported in F.Supp.2d (2011)
2011 WL 6719881

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 11


Reed v. Lindley, 240 S.W. 348 (1922)

[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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Reed v. Lindley, 240 S.W. 348 (1922)

Cases that cite this headnote [11] Malicious Prosecution


Nature and Form of Remedy

[7] Malicious Prosecution The action for malicious prosecution is not


Acts, Conduct, and Declarations of favored in law, and recovery will only be
Parties allowed when the requirements limiting it
have been fully complied with.
In malicious prosecution suit,
uncomplimentary expressions made by 3 Cases that cite this headnote
defendant to the officer before whom he made
the complaint and to others relating to the
plaintiff were relevant to and admissible upon [12] Malicious Prosecution
the issue of malice. Questions for Jury
While it is the function of the jury to determine
Cases that cite this headnote what the facts are in a suit for malicious
prosecution, it is for the court to declare the
[8] Trial legal effect of the facts found.
Nature of Counts or Issues
2 Cases that cite this headnote
When malicious prosecution and slander and
libel all arise out of the same transaction,
they may all be considered by the jury and [13] Evidence
recompensed by a single verdict. Particular Facts
It is common knowledge that in the search for
Cases that cite this headnote an unknown criminal a motive for the crime is
diligently sought.
[9] Malicious Prosecution
Cases that cite this headnote
Nature and Elements of Malicious
Prosecution in General
To support an action for malicious criminal [14] Malicious Prosecution
prosecution, the plaintiff must prove the fact Belief in Guilt of Accused
of the prosecution was without probable In action for damages for malicious
cause, and with malice, and that the defendant prosecution and slander, where plaintiff was
was the prosecutor, or that he instigated its charged with burning defendant's house and
commencement, and that it finally terminated barn, facts and information as to plaintiff's
in the plaintiff's acquittal. threats communicated to defendant held to
show, as a matter of law, that defendant had
3 Cases that cite this headnote probable cause for instituting the prosecution.

4 Cases that cite this headnote


[10] Malicious Prosecution
Presumptions and Burden of Proof
In suit for malicious prosecution, burden of
proof in the first instance is upon the plaintiff
Attorneys and Law Firms
to prove all the essential facts and elements,
and, if he fails to prove any one of them, *349 W. O. Davis, of Gainesville, and Donald & Donald,
the defendant has no occasion to offer any of Bowie, for appellant.
evidence in his defense.
Alcorn & Jameson, of Montague, and Homer B. Latham,
2 Cases that cite this headnote of Bowie, for appellee.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Reed v. Lindley, 240 S.W. 348 (1922)

Opinion Appellee in his accusation of his wife's infidelity named no


person, nor does it appear that he made any answer to her
CONNER, C. J. suit for divorce.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Reed v. Lindley, 240 S.W. 348 (1922)

that it was good as a peaceable, law-abiding citizen. Such


Mrs. Ruby Reed, appellant's widowed daughter-in-law, other parts of the testimony as are deemed material will be
testified that she passed through Nocona on the 18th of stated in connection with the topics discussed.
April, 1920, together with two of her cousins and two
of her children; that as she passed through Nocona she The court charged the jury that before they could find
saw Tom Lindley sitting on some trucks at the depot, and for the plaintiff he must show by a preponderance of the
that she so informed appellant, Reed, on the following evidence: First, that the defendant, Reed, in instituting
Monday, before the fire. Upon being informed of the the prosecution against the plaintiff in the justice court,
*350 fire, appellant called up the sheriff, and told him “was instigated by malice, and that he acted in said
that he believed that appellee, Lindley, was the person matter without probable cause for believing the plaintiff,
who burned his house and barn, and requested the sheriff Tom Lindley, guilty of the charge preferred against
to come over at once so that they might catch him. The him;” second, “that the alleged charge of arson made by
sheriff, however, did not go until about 10 or 11 o'clock defendant against plaintiff was not true;” third, “that the
the next morning. Appellant then went to Nocona and saw plaintiff has been damaged by reason of said prosecution.”
the constable or city marshal, and endeavored to get that
officer to take the train going in the direction of Wichita Probable cause and malice were defined, and the court,
Falls and Foard City to see if Lindley was on it, but the in the eighth paragraph of his charge, gave the following
officer said he did not know Lindley, and suggested that instruction, to which error is assigned in this court, to wit:
appellant himself take the train. He did go, and, together “It is immaterial in this case whether
with the conductor and one of the trainmen, went through the plaintiff was guilty or innocent of
the train and inspected all parts in the effort to discover the charge of arson. If you believe
Lindley, as he expected he would do, but in which he plaintiff innocent of the crime, but
failed. Appellant then returned to his home, and upon believe that defendant had reasonable
further investigation found tracks made by a No. 5 or 6 grounds of suspicion, supported by
size shoe, the size worn by appellee, with a run-down heel, circumstances sufficiently strong in
going toward and returning from the burned house and themselves to warrant a cautious man
barn. in the belief that the plaintiff was guilty
of the offense, then you will find for the
One R. B. Price also testified to the effect that after the fire defendant.”
he had occasion to go, and did go, to Foard City, where he
met appellee, and that in a conversation there had appellee
stated that: Error is also assigned to the refusal of the court to give
“I knew it (the house) was going to a special instruction to the effect that, if the jury believed
be burned * * * but I didn't burn it. from the evidence that the plaintiff, Lindley sought to be
He said they identified the shoe tracks. prosecuted in order to have a pretext for a damage suit,
That he left his shoes there, and that and that in furtherance thereof he wrote threatening letters
the man who burned the house wore and made threats against the defendant, and did other
them.” things thereby intending to engender in defendant's mind
the belief that he (plaintiff) had burned the defendant's
house and barn, that then they should find for defendant.
Appellee, by a number of witnesses living at Foard City, [1] [2] [3] A majority, consisting of Justices
seemed to establish with reasonable certainty that he was DUNKLIN and BUCK, are of the opinion that the
in Foard City during the day preceding, and during the special charge mentioned above should have been given,
night of the fire, and on the following morning, and hence it being their view that the evidence raised the issue, and
that he could not have been at the scene of the fire, and, that, under the rule announced in the McGlamory and
further that appellant had been so informed before the other familiar cases following it, appellant was entitled to
service of the warrant of arrest, but notwithstanding that have the issue presented to the jury for determination. We
appellant insisted upon its execution. He also introduced are all agreed, however, that paragraph 8 of the court's
a number of witnesses who testified to the effect that they charge was erroneous, and that the error is one which
knew his reputation while living in Montague county, and authorizes a reversal of the judgment. All authorities on

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Reed v. Lindley, 240 S.W. 348 (1922)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Reed v. Lindley, 240 S.W. 348 (1922)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Reed v. Lindley, 240 S.W. 348 (1922)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Richmont Holdings, Inc. v. Superior Recharge Systems, L.L.C., 455 S.W.3d 573 (2015)
58 Tex. Sup. Ct. J. 179

Whether a party has substantially invoked


the judicial process, and thereby waived
455 S.W.3d 573
an arbitration clause, depends on the
Supreme Court of Texas.
totality of the circumstances; key factors
Richmont Holdings, Inc., Nukote Holding, Inc., include the reason for delay in moving to
Nukote International, Inc., Inkbrary, L.L.C., enforce arbitration, the amount of discovery
Superior Acquisitions L.L.C., John P. Rochon, Sr., conducted by the movant, and whether the
movant sought disposition on the merits.
John P. Rochon, Jr., Kelly Kittrell, Russell Mack, C &
R Services, Inc. and Kenneth R. Schlag, Petitioners, 9 Cases that cite this headnote
v.
Superior Recharge Systems, L.L.C.,
[2] Alternative Dispute Resolution
and Jon Blake, Respondents
Suing or participating in suit
NO. 13–0907 Merely filing suit does not waive arbitration,
| even when the movant files a second, separate
Opinion issued: December 19, 2014 suit in another county based in part on a
| contract at issue in the first action; nor does
Rehearing Denied March 13, 2015 moving to transfer venue.

Synopsis 2 Cases that cite this headnote


Background: Former employee brought action against
former employer and others, alleging claims related to [3] Venue
employment agreement and to asset purchase agreement Objections and exceptions, estoppel, and
that contained an arbitration clause. The 211th District waiver
Court, Denton County, Lawrence Dee Shipman, Jr., J.,
Objections to improper venue must be made
denied former employer's motion to compel arbitration.
at the outset of the case. Tex. R. Civ. P. 86.
Former employer appealed. The Fort Worth Court of
Appeals, 392 S.W.3d 174, affirmed. Review was granted, Cases that cite this headnote
and the Supreme Court, 392 S.W.3d 633, reversed and
remanded. On remand, the Court of Appeals, 2013 WL
4517220, found that former employer waived arbitration [4] Alternative Dispute Resolution
by substantially invoking the judicial process. Waiver or Estoppel
Mere delay in moving to compel arbitration
is not enough for waiver of the right to
arbitration.
[Holding:] On petition for review, the Supreme Court held
that former employer did not substantially invoke the 13 Cases that cite this headnote
judicial process and waive right to arbitration of former
employee's breach of contract claims.
[5] Alternative Dispute Resolution
Suing or participating in suit
Reversed and remanded. Former employer did not substantially invoke
the judicial process and waive right to
arbitration of former employee's breach of
contract claims, even though former employer
West Headnotes (5)
had sued former employee in another county
based on the same contract, had moved
[1] Alternative Dispute Resolution to transfer venue, had engaged in minimal
Suing or participating in suit discovery and had been sanctioned $5000
for failing to respond to discovery requests,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Richmont Holdings, Inc. v. Superior Recharge Systems, L.L.C., 455 S.W.3d 573 (2015)
58 Tex. Sup. Ct. J. 179

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.

Superior Recharge and Blake (collectively “Blake”) sued


Richmont and several of its affiliates and principals
*574 ON PETITION FOR REVIEW FROM (collectively “Richmont”) in Denton County for fraud,
THE COURT OF APPEALS FOR THE SECOND breach of contract, a declaration that the covenant not to
DISTRICT OF TEXAS compete was unenforceable, and an injunction. Richmont
sued Blake individually in Dallas County to enforce the
Attorneys and Law Firms covenant not to compete, invoking a forum selection
clause in that agreement, and moved to transfer venue
Scott Ryan Doody, Law Offices of Scott R. Doody, Fort
of the Denton County suit to Dallas County or Collin
Worth, for Petitioner.
County. The Dallas County suit was abated, and the
Stephen D. Colbert, Colbert Johnston Dion PLLC, motion to transfer was never decided.
Flower Mound, for Respondents.
In the Denton County suit, Richmont does not appear to
Opinion have sought discovery other than a request for disclosure.
See TEX. R. CIV. P. 194.1 and 194.2. Richmont failed to
PER CURIAM
respond to Blake's discovery requests and was sanctioned
In holding that petitioner waived arbitration by $5,000. No trial date appears to have been set. Nineteen
substantially invoking the judicial process, the court of *576 months after being sued, Richmont moved to
appeals, ––– S.W.3d –––– (Tex.App.–Fort Worth 2013), compel arbitration, asserting that Blake's claims arose
misapplied our decision in Perry Homes v. Cull, 258 out of the Asset Purchase Agreement and were therefore
S.W.3d 580 (Tex. 2008). Accordingly, we reverse the court subject to arbitration. Blake did not dispute that assertion
of appeals' judgment and remand the case to the trial but argued that Richmont had waived arbitration by
court. TEX. GOV'T CODE § 22.225(b)(3), (c). engaging in litigation. The trial court denied the motion
to compel.
[1] “We have said on many occasions that a party
waives an arbitration clause by substantially invoking the The court of appeals affirmed, but not on waiver, the
judicial process *575 to the other party's detriment or only ground Blake raised. Rather, it held that Blake's
prejudice,” but “[d]ue to the strong presumption against claims were not covered by the arbitration agreement.
waiver of arbitration, this hurdle is a high one.” Perry 392 S.W.3d 174, 182–83 (Tex.App.–Fort Worth 2011)
Homes, 258 S.W.3d at 589–90 (footnotes omitted). We (mem.op.). On Richmont's petition for review in this
Court, Blake conceded that the court of appeals had erred.
have often determined that arbitration was not waived. 1
Accordingly, we reversed, stating:
Whether a party has substantially invoked the judicial
process depends on the totality of the circumstances; key The court of appeals' conclusion
factors include the reason for delay in moving to enforce that the arbitration provision in
arbitration, the amount of discovery conducted by the the asset purchase agreement has
movant, and whether the movant sought disposition on no application to Blake's lawsuit is
the merits. Perry Homes, 258 S.W.3d at 590–93. contrary to the parties' contentions
and has no support in the record.
Moreover, the court's failure to

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Richmont Holdings, Inc. v. Superior Recharge Systems, L.L.C., 455 S.W.3d 573 (2015)
58 Tex. Sup. Ct. J. 179

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).

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Richmont Holdings, Inc. v. Superior Recharge Systems, L.L.C., 455 S.W.3d 573 (2015)
58 Tex. Sup. Ct. J. 179

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (2006)
168 Collier Bankr.Cas.2d 655, 36 Envtl. L. Rep. 20,115, 49 Tex. Sup. Ct. J. 744

the scope of the operator's authority, provide


for the allocation of costs and production
KeyCite Yellow Flag - Negative Treatment among the parties to the agreement, and
Distinguished by Indian Oil Co., LLC v. Bishop Petroleum Inc., 
provide for recourse among the parties if one
Tex.App.-Hous. (14 Dist.), April 25, 2013
or more default in their obligations.
207 S.W.3d 342
Supreme Court of Texas. 6 Cases that cite this headnote

SEAGULL ENERGY E & P, INC., Petitioner,


v. [2] Mines and Minerals
ELAND ENERGY, INC., Respondent. Rights and Liabilities as to Third Persons
Despite assigning its oil and gas working
No. 04–0662. interest, which was subject to an operating
| agreement, assignor remained liable under
Argued Nov. 30, 2005. operating agreement for future costs or
| expenses, where operating agreement did not
Decided June 16, 2006. explain the consequences of an assignment of
| working interest to a third party, and operator
Rehearing Denied Dec. 29, 2006. did not expressly release assignor from its
obligations under agreement.
Synopsis
Background: Operator brought action against assignor 13 Cases that cite this headnote
of working interests and assignee for breach of oil and
gas operating agreements, seeking reimbursement of costs
incurred after assignor assigned interests to assignee. The [3] Contracts
127th District Court, Harris County, Sharolyn P. Wood, Existence of Ambiguity
J., granted operator's motion for summary judgment and A contract is not ambiguous merely because
entered judgment holding assignor and assignee jointly the parties disagree on its meaning.
and severally liable to operator. Assignor appealed. The
25 Cases that cite this headnote
Houston Court of Appeals, Fourteenth District, 135
S.W.3d 122, reversed.
[4] Contracts
Existence of Ambiguity
[Holding:] On petition for review, the Supreme Court, An ambiguity exists only if the contract
Medina, J., held that despite assigning its oil and gas language is susceptible to two or more
working interest, assignor remained liable under operating reasonable interpretations.
agreement for future costs or expenses.
24 Cases that cite this headnote

Reversed and rendered. [5] Mines and Minerals


Contracts for Testing or Working
The meaning of an operating agreement for oil
West Headnotes (9) and gas working interest that is unambiguous
is a question of law.

[1] Mines and Minerals 5 Cases that cite this headnote


Contracts for Testing or Working
An “operating agreement” is a contract [6] Contracts
typical to the oil and gas industry whose Construction as a Whole
function is to designate an operator, describe

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (2006)
168 Collier Bankr.Cas.2d 655, 36 Envtl. L. Rep. 20,115, 49 Tex. Sup. Ct. J. 744

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.

In July 1996, Eland sold its interest in these leases to Nor–


Tex Gas Corporation, also assigning to Nor–Tex its rights
Attorneys and Law Firms and obligations under the operating agreements. Not long
thereafter, Nor–Tex failed to reimburse Seagull for its
*343 William P. Maines, William J. Boyce, Fulbright share of operating costs, and Seagull sought these costs
& Jaworski L.L.P., Paul J. Franzetti, McDade Fogler, from Eland as an interest owner. Eland, however, refused
Houston, for petitioner. to pay because it no longer owned an interest in the leases.

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Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (2006)
168 Collier Bankr.Cas.2d 655, 36 Envtl. L. Rep. 20,115, 49 Tex. Sup. Ct. J. 744

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

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Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (2006)
168 Collier Bankr.Cas.2d 655, 36 Envtl. L. Rep. 20,115, 49 Tex. Sup. Ct. J. 744

working interest was to operate as a novation, effectively


14.1 Platform Salvage and Removal Costs. When the ending any further obligation of the assignor under the
Parties owning a platform mutually agree to dispose of operating agreement.
such platform, it shall be disposed of by the Operator
as approved by such Parties. The costs, risks, and [8] [9] Generally speaking, a party cannot escape its
net proceeds, if any, resulting from such disposition obligations under a contract merely by assigning the
shall be shared by such Parties in proportion to their contract to a third *347 party. Farah v. Mafrige &
Participating Interests. Kormanik, P.C., 927 S.W.2d 663, 677 (Tex.App.-Houston
[1st Dist.] 1996, no writ); Univ. of Tex. Med. Branch
*** at Galveston v. Allan, 777 S.W.2d 450, 453 (Tex.App.-
Houston [14th Dist.] 1989, no writ). Thus, as a general
14.4 Abandonment Operations Required by
rule, a party who assigns its contractual rights and duties
Governmental Authority. Any well abandonment or
to a third party remains liable unless expressly or impliedly
platform removal required by governmental authority
released by the other party to the contract. See W. Oil
shall be accomplished by Operator with the costs, risks,
Sales Corp. v. Bliss & Wetherbee, 299 S.W. 637, 638
and net proceeds, if any, to be shared by the Parties
(Tex. Comm'n App.1927, judgm't adopted); Cauble v.
owning such well or platform in proportion to their
Hanson, 249 S.W. 175, 178 (Tex. Comm'n App.1923,
Participating Interests.
judgm't adopted); see also 29 RICHARD A. LORD,
Eland concludes from these provisions that its obligation WILLISTON ON CONTRACTS § 74.30, at 436–38
to reimburse the operator continued only so long as it (4th ed. 2003). The principle is similarly recognized by
owned a participating interest. Once it assigned its interest, statute and the Restatement. See TEX. BUS. & COM.
it was, according to Eland's interpretation, released from CODE § 2.210(a) (“No delegation of performance relieves
any continuing obligation to the operator for future costs the party delegating of any duty to perform or any
or expenses. liability for breach.”); RESTATEMENT (SECOND) OF
CONTRACTS § 318(3) (unless the obligee agrees to
Eland, however, reads far too much into these provisions. delegation of performance, the delegation does not effect
Nowhere do they mention the subject of release or the a discharge of the delegating obligor).
consequences which are to follow the assignment of a
working interest. These subjects are, however, mentioned Even when the contract does not expressly provide for
elsewhere in the agreement. the consequences resulting from the assignment of one's
interest, the contract's subject or other circumstances may
indicate that obligations were not intended to survive
For example, section 15.1, entitled “Withdrawal,” 2
assignment. For example, the Restatement of Property
permits a party to withdraw from the agreement by
provides that “[w]hether a promise respecting the use of
assigning its interest to the other parties, while section
land of the promisor will continue to bind the promisor
14.3, entitled “Assignment of Interest,” 3 provides that after he has ceased to have an interest in the land with
a party desiring to abandon a well shall assign its respect to which the promise was made depends upon
interest to the non-abandoning parties. Moreover, Article the intention manifested in the making of the promise.”
26 pertains generally to the subject of assignment, RESTATEMENT OF PROP.: SERVITUDES § 538. The
providing that the “[a]greement shall be binding upon comment notes that “[s]uch promises are often of such a
and inure to the benefit of the parties and their character that they can be satisfactorily performed only
respective heirs, successors, representatives and assigns” by the possessor of the land affected.” Id. cmt. a. As
and providing further that any assignment be made an example, the Restatement suggests that a promise
subject to the operating agreement. But like the cost to maintain a dam on one's property to provide a
allocation provisions on which Eland relies, none of certain water level for a neighbor would cease upon the
these provisions deals specifically with the present conveyance of the land. Id. cmt. c, illus. 2. Eland does
circumstances. The operating agreement simply does not not argue that this contract's subject or circumstances
explain the consequences of an assignment of a working imply that it should be released of its obligations after
interest to a third party. Thus, we disagree with Eland assignment. Even if it were to argue this, it is not
that the parties expressly agreed that an assignment of a

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Seagull Energy E & P, Inc. v. Eland Energy, Inc., 207 S.W.3d 342 (2006)
168 Collier Bankr.Cas.2d 655, 36 Envtl. L. Rep. 20,115, 49 Tex. Sup. Ct. J. 744

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Smith Barney Shearson, Inc. v. Boone, 838 F.Supp. 1156 (1993)

Cases that cite this headnote


838 F.Supp. 1156
United States District Court,
N.D. Texas, [3] Alternative Dispute Resolution
Wichita Falls Division. Merits of controversy
In determining what claims parties may
SMITH BARNEY SHEARSON, INC. arbitrate, court must not inquire into merits of
v. underlying dispute.
Warren BOONE, Individually and as Trustee
for Watercol Profit Sharing Plan, Dated 1/7/90. Cases that cite this headnote

Civ. A. 7:93–CV–146–K. [4] Alternative Dispute Resolution


| Arbitrability of dispute
Dec. 6, 1993.
Alternative Dispute Resolution
Investment company sought declaration that investor's Conditions precedent to arbitration;
claims were not subject to arbitration, and it moved procedural arbitrability
for preliminary injunction barring arbitration of claims. Judicial inquiry is limited to issues of
The District Court, Belew, J., held that American Stock “substantive arbitrability,” which is question
Exchange (AMEX) arbitration rule requiring claims to be of whether or not dispute is covered by
filed within six years from event giving rise to claim was parties' arbitration agreement, and matters
procedural limitation on arbitrability of investor's claims, of procedural arbitrability are to be left to
and thus timeliness of claims was for arbitral, not judicial, arbitrator.
determination.
1 Cases that cite this headnote
Complaint denied.
[5] Alternative Dispute Resolution
Conditions precedent to arbitration;
West Headnotes (7) procedural arbitrability
Questions as to timeliness of claim subject to
arbitration are procedural issues for arbitral,
[1] Alternative Dispute Resolution not judicial, determination.
Contractual or consensual basis
Submission to arbitration is matter bound by Cases that cite this headnote
parties' contract, and party cannot be forced
to arbitrate what it has not agreed to arbitrate. [6] Alternative Dispute Resolution
Conditions precedent to arbitration;
Cases that cite this headnote
procedural arbitrability
Only exception to rule requiring arbitrator
[2] Alternative Dispute Resolution to decide questions as to timeliness of claim
Arbitrability of dispute subject to arbitration is that court may decide
Since there must be forum to determine what procedural arbitrability questions if, and only
parties have agreed to arbitrate, and because if, court can confidently say that claim would
it would be unfair to force party to arbitrate be barred.
the arbitrability issue, courts are body which
decides disputes over what claims parties may Cases that cite this headnote
arbitrate.
[7] Alternative Dispute Resolution

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Smith Barney Shearson, Inc. v. Boone, 838 F.Supp. 1156 (1993)

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.

The Customer Agreement that Boone signed on opening


AMENDED MEMORANDUM OPINION AND his accounts with SBS provided that all disputes arising
ORDER DENYING SMITH BARNEY SHEARSON'S out of his SBS accounts would be arbitrated by Boone's
COMPLAINT FOR DECLARATORY JUDGMENT choice of one of several arbitration bodies listed in the
AND MOTION FOR PRELIMINARY INJUNCTION Customer Agreement. Boone elected to pursue his claims
with the American Stock Exchange (AMEX) and to be
BELEW, District Judge.
bound by its procedural rules.
The Court enters this Amended Memorandum Opinion
and Order to supersede its December 2, 1993 Boone claims that he knew nothing about the nature of
Memorandum Opinion Denying Smith Barney Shearson's limited partnerships at the time he invested in them and
Motion for Preliminary Injunction. that he relied entirely on the assurances SBS employee
Larry Robb that these limited partnerships were risk-
*1157 Pursuant to Fed.R.Civ.P. 65(a)(2), the Court proof and right for the retirement income strategy Boone
sua sponte consolidates Smith Barney Shearson's (SBS) was pursuing.
Motion for Preliminary Injunction with a determination
of the merits of SBS' Complaint for Declaratory Judgment Boone seeks $1,301,000.00 in damages under a variety
for reasons discussed infra. of theories including violation of Texas Deceptive Trade
Practices and Consumer Protection Act; fraud in real
After a hearing on SBS' application for a temporary estate and stock transactions under Tex.Bus. & Com.Code
restraining order, the parties agreed to waive their § 27.01; violation of the Racketeer Influenced and
preliminary injunction hearing and submit their dispute Corrupt Organizations Act (18 U.S.C. §§ 1961–1968);

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Smith Barney Shearson, Inc. v. Boone, 838 F.Supp. 1156 (1993)

breach of contract; negligence; breach of fiduciary duty;


common law fraud and misrepresentation; and fraudulent [2] [3] Since there must be a forum to determine just
concealment. what the parties have agreed to arbitrate, the courts are
the body which decides disputes over what claims the
parties may arbitrate, AT & T Technologies, 475 U.S.
II. DISCUSSION at 649, 106 S.Ct. at 1418, quoting, John Wiley & Sons
The dispute SBS and Boone have brought to the Court v. Livingston, 376 U.S. 543, 546–47, 84 S.Ct. 909, 912,
requires the Court to divine which side the Fifth Circuit 11 L.Ed.2d 898 (1964), because it would be unfair to
will take in a dispute that is currently dividing the other force a party to “arbitrate the arbitrability issue.” Litton
Courts of Appeal. Financial Printing Division v. NLRB, 501 U.S. 190, ––––,
111 S.Ct. 2215, 2226, 115 L.Ed.2d 177 (1991), quoting,
SBS asks the Court to enjoin an arbitration panel of the AT & T Technologies, 475 U.S. at 651, 106 S.Ct. at
American Stock Exchange (AMEX) from hearing Boone's 1420. In making this determination, a court must not
complaints. SBS argues that Rule 605 2 of the AMEX inquire into the merits of the underlying dispute. AT & T
Rules precludes this issue from arbitration because the Technologies, 475 U.S. at 649, 106 S.Ct. at 1418; United
events complained of occurred over six years before Boone Steelworkers of America, AFL–CIO v. ASARCO, 970 F.2d
filed his arbitration claim. 1448, 1451 (5th Cir.1992) citing, Oil Chemical Atomic
Workers' International Union, Local 4–447 v. Chevron
The Court's determination of whether Rule 605 is a Chemical Co., 815 F.2d 338, 343 (5th Cir.1987) ( “Local
condition precedent for arbitration eligibility for the 4–447 ”).
Court to decide or whether Rule 605 is a procedural
limitation for the arbitration panel to apply will determine [4] Judicial inquiry is therefore limited to issues of
the outcome of this dispute. substantive arbitrability, the question of whether or
not the dispute is covered by the parties' arbitration
agreement. Matters of procedural arbitrability are to be
*1158 A. PRELIMINARY INJUNCTION left to the arbitrator. John Wiley & Sons, 376 U.S. at 557,
Because the Court is denying SBS' declaratory judgment, 84 S.Ct. at 918.
SBS is obviously not entitled to a preliminary injunction.
Canal Authority of State of Florida v. Callaway, 489 F.2d
567, 572 (5th Cir.1974). Accordingly, the Court DENIES 1. Are Boone's claims Covered by the Arbitration
SBS' Motion for Preliminary Injunction. Agreement?
The Fifth Circuit has drawn a clear line separating judicial
determination of questions of substantive and procedural
B. THE MERITS OF SBS' APPLICATION FOR arbitrability in Local 4–447, 815 F.2d at 340. “Once it is
DECLARATORY JUDGMENT determined that the parties are obligated to submit the
In deciding this issue, the Court must examine the state of subject matter of a dispute to arbitration, ‘procedural’
the law in the Fifth Circuit, in other Circuits and what the questions which grow out of the dispute and bear on
Supreme Court has said in analogous areas to determine its final disposition should be left to the arbitrator.” Id.,
what the proper rule should be. citing, John Wiley & Sons, 376 U.S. at 557, 84 S.Ct. at 918.

[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

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Smith Barney Shearson, Inc. v. Boone, 838 F.Supp. 1156 (1993)

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

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Smith Barney Shearson, Inc. v. Boone, 838 F.Supp. 1156 (1993)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Snap-on Tools Corp. v. Mason, 18 F.3d 1261 (1994)

In determining whether to abstain from


exercising jurisdiction over case, federal court
KeyCite Yellow Flag - Negative Treatment should consider whether state or federal
Distinguished by Will-Drill Resources, Inc. v. Samson Resources Co., 
court has assumed jurisdiction over res;
5th Cir.(La.), November 26, 2003
inconveniences of federal forum; desirability
18 F.3d 1261
of avoiding piecemeal litigation; order in
United States Court of Appeals,
which jurisdiction was obtained by concurrent
Fifth Circuit.
forums; and whether federal policy is
SNAP–ON TOOLS CORPORATION, involved, and none of these factors are
Plaintiff–Appellant, determinative but, rather, require careful
balancing of important factors as they apply
v.
in given case, with balance heavily weighted in
Barney MASON, Jr. and Sandra
favor of exercise of jurisdiction.
Mason, Defendants–Appellees.
30 Cases that cite this headnote
No. 93–7317.
|
April 15, 1994. [3] Federal Courts
Torts in general
Tool manufacturer, which was being sued by nonexclusive Colorado River/Moses H. Cone did not
distributor in state court for torts arising out of require district court to abstain from
distributorship relationship, brought action in federal deciding manufacturer's motion to compel
court to compel arbitration of dispute. The United States arbitration of distributor's tort claims,
District Court for the Southern District of Texas, Samuel although distributor had filed state court
B. Kent, J., abstained. Manufacturer appealed. The Court action against manufacturer and four of its
of Appeals, Frank A. Kaufman, District Judge, sitting present or former employees; distributor's
by designation, held that District Court should not have only claim as to inconvenience of federal
abstained from deciding motion to compel arbitration. forum was that he would suffer increased
costs if federal court asserted jurisdiction
Reversed and remanded. because state court was closer to home,
terms of arbitration agreement suggested
that piecemeal litigation would not result
West Headnotes (3) inasmuch as tort claims all arose out
of business relationship between opposing
parties, although state court action was
[1] Federal Courts filed first, manufacturer had no notice that
Colorado River abstention distributor would repudiate its duty to
Colorado River permits federal courts to arbitrate until state suit was filed, and federal
abstain from exercising their jurisdiction over law provided rule of decision on merits. 9
case where considerations of wise judicial U.S.C.A. § 4.
administration, giving regard to conservation
of judicial resources and comprehensive 93 Cases that cite this headnote
disposition of litigation, so warrant.

10 Cases that cite this headnote


Attorneys and Law Firms
[2] Federal Courts
*1262 Stacy Obenhaus, Harold H. Walker, Jr., Gardere
Federal-state relations, questions of state
& Wynne, Dallas, TX, James F. Stern, Michael Bowen,
law, and parallel state proceedings
Foley & Lardner, Milwaukee, WI, for plaintiff-appellant.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Snap-on Tools Corp. v. Mason, 18 F.3d 1261 (1994)

fiduciary duty, and negligent and intentional infliction of


Frank W. Mitchell, G.P. Hardy, III, Houston, TX, for emotional distress.
defendants-appellees.
In response to the state court complaint Snap-on and
Appeal from the United States District Court for the
its co-defendants filed a general denial and a motion to
Southern District of Texas.
stay proceedings in the state court pending arbitration. 1
Before HIGGINBOTHAM and WIENER, Circuit On October 5, 1992, Snap-on sent a written demand for
Judges, and KAUFMAN, * District Judge. arbitration to the Masons to which the Masons did not
respond. On February 12, 1993, Snap-on filed a petition
Opinion and complaint in the United States District Court for the
Southern District of Texas to compel arbitration pursuant
FRANK A. KAUFMAN, District Judge: to section 4 of the Federal Arbitration Act (“FAA” or
On January 24, 1989, Barney Mason entered into a “the Act”), 9 U.S.C. § 4. 2 Snap-on invoked the diversity
written Dealer Agreement with Snap–On, pursuant to jurisdiction of the district court on the basis of complete
which Mason became a non-exclusive distributor of diversity of citizenship between Snap-on and the Masons.
various Snap-on tools. The Dealer Agreement includes The four non-diverse co-defendants in the state court
the following provision governing arbitration of disputes action are not plaintiffs in the federal court action and are
between the parties: not parties to the arbitration agreement.

RESOLUTION OF DISPUTES— The Masons responded to the petition to compel


ARBITRATION. Any controversy arbitration with a motion to dismiss. On April 30, 1993,
or dispute arising out of or relating the district court granted the Masons' motion to dismiss
to this Agreement, or breach thereof
on abstention grounds. 3 The district court gave primarily
including, but not limited to, any
five reasons for its grant of the motion, stating that:
claim by the Dealer relating to
(1) in order to determine whether Snap-on is entitled to
termination of this Agreement by
arbitration the court would have to hold a trial, a course
the Company or any other claim
of action it did not want to pursue; (2) there was no reason
against an employee, officer or
why Snap-on should not pursue its arbitration claim in
director of the Company, shall
the state court; (3) Snap-on had likely filed the motion to
be submitted to final and binding
compel arbitration because it had missed the thirty day
arbitration as the sole and exclusive
deadline for filing a petition of removal; (4) a plaintiff's
remedy for any such controversy or
choice of forum is entitled to deference; and (5) Snap-on
dispute. Any request for arbitration
was motivated to file its federal claim because it feared
shall be filed in writing within six
the pro-plaintiff orientation of the state court. Snap-on
(6) months following the alleged
appeals the district court's dismissal.
breach; otherwise, the right to any
remedy shall be deemed forever
“In enacting the Federal Arbitration Act, Congress
waived and lost.
declared a national policy in favor of arbitration,”
Municipal Energy Agency of Mississippi v. Big Rivers Elec.
On September 9, 1992, Barney and his wife, Sandra Corp., 804 F.2d 338, 342 (5th Cir.1986) (citing Southland
Mason, served Snap-on with a petition which they had Corp. v. Keating, 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1
filed in the District Court for Matagorda County, Texas, (1984)). “[C]ongress' clear intent, in the Arbitration Act,
against Snap-on and four of its present or former *1263 [was] to move the parties to an arbitrable dispute out
employees. Snap-on is a Delaware corporation with of court and into arbitration as quickly and easily as
its principal place of business in Wisconsin; the four possible.” Moses H. Cone Memorial Hospital v. Mercury
individual-employee defendants and the Masons are all Construction Corp., 460 U.S. 1, 22, 103 S.Ct. 927, 940, 74
citizens of Texas. In the state court complaint, the Masons L.Ed.2d 765 (1983).
allege fraudulent inducement into the dealership contract,
fraud during the executory time of the contract, breach of

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Snap-on Tools Corp. v. Mason, 18 F.3d 1261 (1994)

*1264 In its opinion granting the motion to dismiss,


the district court noted the federal policy in favor Moses H. Cone, 460 U.S. at 14, 103 S.Ct. at 936 (emphasis
of arbitration, but declined nonetheless to enforce the added) (quoting Colorado, 424 U.S. at 813, 96 S.Ct. at
arbitration agreement. “We review de novo the district 1244) (quoting County of Allegheny v. Frank Mashuda Co.,
court's decision not to compel arbitration.” Catholic 360 U.S. 185, 188–89, 79 S.Ct. 1060, 1062–63, 3 L.Ed.2d
Diocese of Brownsville v. A.G. Edwards & Sons, Inc., 919 1163 (1959)). Colorado River permits federal courts to
F.2d 1054, 1056 (5th Cir.1990). abstain from exercising their jurisdiction over a case
where “considerations of ‘[w]ise judicial administration,
The district court's decision conflicts with the Supreme giving regard to conservation of judicial resources and
Court's decision in Moses H. Cone, 460 U.S. 1, 103 comprehensive disposition of litigation’ ” so warrant.
S.Ct. 927, 74 L.Ed.2d 765 (1983). In Moses H. Cone, Colorado River, 424 U.S. at 817, 96 S.Ct. at 1246 (quoting
a hospital filed a state court suit against a construction Kerotest Mfg. Co. v. C–O–Two Fire Equip. Co., 342 U.S.
contractor and an architect raising a number of claims 180, 183, 72 S.Ct. 219, 221, 96 L.Ed. 200 (1952)).
against the contractor arising out of the construction
contract between the hospital and the contractor and also [2] The considerations discussed in Colorado River, and/
contending that the contractor had, by not proceeding or in Moses H. Cone, include the following: (1) whether
timely, lost its right to arbitrate. That contract contained the state or federal court has assumed jurisdiction over the
a broadly worded arbitration provision. In the state res; (2) the inconveniences of the federal forum; (3) the
court suit, the hospital included several claims against an desirability of avoiding piecemeal litigation; and (4) the
architect who was involved in the construction project, order in which jurisdiction was obtained by the concurrent
but who was not a party to the disputed contract. forums. Moses H. Cone, 460 U.S. at 16, 103 S.Ct. at
The contractor mailed a demand for arbitration to the 937 (citing Colorado River, 424 U.S. at 818–820, 96 S.Ct.
hospital the same day the hospital's complaint was served at 1246–1248). In Moses H. Cone the Supreme Court
upon the contractor. The hospital then obtained an ex added an additional factor to the balance—(5) whether
parte injunction from the state court prohibiting the a federal policy is involved. Id. 460 U.S. at 23, 103 S.Ct.
contractor from taking any steps toward arbitration. at 941. None of these factors are determinative; rather,
After the contractor objected, that stay was dissolved they require “a careful balancing of the important factors
and the contractor filed an action in federal district as they apply in a given case, with the balance heavily
court seeking an order compelling arbitration under § 4 weighted in favor of the exercise of jurisdiction.” Moses
of the FAA. After the district court stayed the federal H. Cone, 460 U.S. at 16, 103 S.Ct. at 937.
proceedings before it, the Fourth Circuit, on appeal by
the contractor, reversed and directed the district court to Applying these considerations to the facts before it, the
order arbitration. The Supreme Court affirmed. Court in Moses H. Cone concluded that the exceptional
circumstances test of Colorado River was not met, and that
[1] In so doing, Justice Brennan noted the principles of therefore abstention was inappropriate. Id. 460 U.S. at
abstention set forth in Colorado River Water Conservation 19, 103 S.Ct. at 938 (“[T]he first two factors mentioned
District v. United States, 424 U.S. 800, 96 S.Ct. 1236, 47 in Colorado River are *1265 not present here.... The
L.Ed.2d 483 (1976): remaining factors—avoidance of piecemeal litigation, and
the order in which jurisdiction was obtained by the
“Abstention from the exercise of federal jurisdiction is concurrent forums—far from supporting the stay, actually
the exception, not the rule. ‘The doctrine of abstention, counsel against it.”).
under which a District Court may decline to exercise
or postpone the exercise of its jurisdiction, is an [3] A careful review of the five factors enunciated in
extraordinary and narrow exception to the duty of a Moses H. Cone reveals that the district court should have
District Court to adjudicate a controversy properly ordered arbitration in this case. 4 As in Moses H. Cone,
before it. Abdication of the obligation to decide cases can the first factor, regarding the res, has no bearing on the
be justified under this doctrine only in the exceptional facts of the instant case. The second factor, inconvenience
circumstances where the order to the parties to repair of the federal forum, while a relevant consideration,
to the State Court would clearly serve an important does not support abstention here. The Masons argue
countervailing interest.’ ”

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Snap-on Tools Corp. v. Mason, 18 F.3d 1261 (1994)

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

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Snap-on Tools Corp. v. Mason, 18 F.3d 1261 (1994)

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

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Snap-on Tools Corp. v. Mason, 18 F.3d 1261 (1994)

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.

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Snap-on Tools Corp. v. Mason, 18 F.3d 1261 (1994)

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).

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

KeyCite Yellow Flag - Negative Treatment West Headnotes (9)


Overruling Recognized by Cohen v. DirecTV, Inc., Cal.App. 2 Dist., 
September 18, 2006
104 S.Ct. 852 [1] Federal Courts
Supreme Court of the United States Validity of state constitution or statutes
Judgment of California Supreme Court
SOUTHLAND CORPORATION, et al., Appellants that claims asserted under state Franchise
v. Investment Law were not arbitrable and that
Richard D. KEATING et al. the state law did not contravene Federal
Arbitration Act was immediately appealable
No. 82–500. and the court would determine whether
| the federal act preempted the state law. 9
Argued Oct. 4, 1983. U.S.C.A. §§ 1 et seq., 2; U.S.C.A. Const. Art.
| 6, cl. 2; West's Ann.Cal.Corp.Code §§ 31000 et
Decided Jan. 23, 1984. seq., 31512; 28 U.S.C.A. § 1257(2).

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).

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

limitation on the power of federal courts but is


279 Cases that cite this headnote a necessary qualification on a statute intended
to apply in state and federal courts. 9 U.S.C.A.
[4] Commerce § 2.
Arbitration
128 Cases that cite this headnote
Provision of California Franchise Investment
Law requiring judicial consideration of claims
brought under the statute and precluding [8] Alternative Dispute Resolution
enforceability of contract to arbitrate such Mode and course of proceedings in
claims conflicts with United States arbitration general
as regards transactions involving commerce Although Federal Arbitration Act preempts
and violates the supremacy clause. West's state law that withdraws power to enforce
Ann.Cal.Corp.Code § 31512; 9 U.S.C.A. § 2; arbitration agreements that are enforceable
U.S.C.A. Const. Art. 6, cl. 2. under the Federal Act, provision of Federal
Act that the federal rules apply in proceedings
332 Cases that cite this headnote to arbitration is not applicable in state court
proceedings. 9 U.S.C.A. §§ 2, 4.
[5] Alternative Dispute Resolution
442 Cases that cite this headnote
Contractual or consensual basis
Alternative Dispute Resolution
Arbitration favored; public policy [9] Alternative Dispute Resolution
Right to Enforcement and Defenses in
Commerce
General
Arbitration
A party may assert general contract defenses
In enacting provision of federal arbitration
such as fraud to avoid enforcement of an
act that an arbitration provision is valid and
arbitration agreement. 9 U.S.C.A. § 2.
irrevocable the Congress declared a national
policy favoring arbitration and withdrew 88 Cases that cite this headnote
power of the states to require a judicial forum
for resolution of claims which the contracting
parties agreed to resolve by arbitration. 9
U.S.C.A. § 2.

466 Cases that cite this headnote **853 *1 Syllabus *

Appellant Southland Corp. (hereafter appellant) is the


[6] Commerce owner and franchisor of 7-Eleven convenience stores.
Arbitration Appellees are 7-Eleven franchisees. Each franchise
Federal Arbitration Act rests on the authority agreement between appellant and appellees contains
of Congress to enact substantive rules under a clause requiring arbitration of any controversy or
the commerce clause. 9 U.S.C.A. § 1 et seq.; claim arising out of or relating to the agreement or
U.S.C.A. Const. Art. 1, § 8, cl. 3. breach thereof. Several of the appellees filed individual
actions against appellant in California Superior Court,
78 Cases that cite this headnote alleging fraud, misrepresentation, breach of contract,
breach of fiduciary duty, and violation of the disclosure
requirements of the California Franchise Investment Law.
[7] Commerce
These actions were consolidated with a subsequent class
Arbitration
action filed by another appellee making substantially the
The “involving commerce” requirement of
same claims. Appellant moved to compel arbitration of
Federal Arbitration Act is not an inexplicable
the claims pursuant to the contract. The Superior Court

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

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.*

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

* 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.

Opinion In May 1977, appellee Keating filed a class action against


Southland on behalf of a class that assertedly includes
Chief Justice BURGER delivered the opinion of the
approximately 800 California franchisees. Keating's
Court.
principal claims were substantially the same as those
We noted probable jurisdiction to consider (a) whether the asserted by the other franchisees. After the various actions
California Franchise Investment Law, which invalidates were consolidated, Southland petitioned to compel
certain arbitration agreements covered by the Federal arbitration of the claims in all cases, and appellees moved
Arbitration Act, violates the Supremacy Clause and (b) for class certification.
whether arbitration under the Federal Act is impaired
when a class action **855 structure is imposed on the The Superior Court granted Southland's motion to
process by the state courts. compel arbitration of all claims except those claims based
on the Franchise Investment Law. The court did not pass
on appellees' request for class certification. Southland
appealed from the order insofar as it excluded from
I
arbitration the claims based on the California statute.
Appellant The Southland Corporation is the owner and Appellees filed a petition for a writ of mandamus or
franchisor of 7-Eleven convenience stores. Southland's prohibition in the California *5 Court of Appeal arguing
standard franchise agreement provides each franchisee that the arbitration should proceed as a class action.
with a license to use certain registered trademarks, a lease
or sublease of a convenience store owned or leased by The California Court of Appeal reversed the trial
Southland, inventory *4 financing, and assistance in court's refusal to compel arbitration of appellees' claims
advertising and merchandising. The franchisees operate under the Franchise Investment Law. 109 Cal.App.3d
the stores, supply bookkeeping data, and pay Southland 784, 167 Cal.Rptr. 481 (1980). That court interpreted
a fixed percentage of gross profits. The franchise the arbitration clause to require arbitration of all
agreement also contains the following provision requiring claims asserted under the Franchise Investment Law,
arbitration: and construed the Franchise Investment Law not to
invalidate such agreements to arbitrate. 1 Alternatively,
“Any controversy or claim arising the court concluded that if the Franchise Investment
out of or relating to this Agreement Law rendered arbitration agreements involving commerce
or the breach thereof shall be unenforceable, it would conflict with § 2 of the Federal
settled by arbitration in accordance Arbitration Act, 9 U.S.C. § 2 (1976), and therefore be
with the Rules of the American invalid under the Supremacy Clause. 167 Cal.Rptr. at
Arbitration Association ... and 493–494. The Court of Appeal also determined that
judgment upon any award rendered there was no “insurmountable obstacle” to conducting
by the arbitrator may be entered an arbitration on a classwide basis, and issued a writ
in any court having jurisdiction of mandate directing the trial court to conduct class
thereof.” certification proceedings. Id., at 492.

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

[1] [2] The judgment of the California Supreme


The California Supreme Court, by a vote of 4–2, reversed Court with respect to this claim is reviewable under
the ruling that claims asserted under the Franchise Cox Broadcasting, supra. Without immediate review of
Investment Law are arbitrable. 31 Cal.3d 584, 183 the California holding by this Court there may be no
Cal.Rptr. 360, 645 P.2d 1192 (1982). The California opportunity to pass on the federal issue and as a result
Supreme Court interpreted the Franchise Investment Law “there would remain in effect the unreviewed decision
to require judicial consideration of claims brought under of the State Supreme Court” holding that the California
**856 that statute and concluded that the California statute does not conflict with the Federal Arbitration Act.
statute did not contravene the federal Act. Id., at 604, 183 Id., at 485, 95 S.Ct., at 1041. On the other hand, reversal
Cal.Rptr., at 371–372, 645 P.2d, at 1203–1204. The court *7 of a state court judgment in this setting will terminate
also remanded the case to the trial court for consideration litigation of the merits of this dispute.
of appellees' request for classwide arbitration.
Finally, the failure to accord immediate review of the
*6 We postponed consideration of the question of decision of the California Supreme Court might “seriously
jurisdiction pending argument on the merits. 459 U.S. erode federal policy.” Plainly the effect of the judgment
1101, 103 S.Ct. 721, 74 L.Ed.2d 948 (1983). We reverse in of the California court is to nullify a valid contract made
part and dismiss in part. by private parties under which they agreed to submit all
contract disputes to final, binding arbitration. The federal
Act permits “parties to an arbitrable dispute [to move]
out of court and into arbitration as quickly and easily as
II
possible.” Moses H. Cone Memorial Hospital v. Mercury
Construction Corp., ––– U.S. ––––, ––––, 103 S.Ct. 927,
A 940, 74 L.Ed.2d 765 (1983).

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.

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

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:

“Any condition, stipulation or provision purporting


B
to bind any person acquiring any franchise to waive
[3] That part of the appeal relating to the propriety compliance with any provision of this law or any rule or
of superimposing class action procedures on a contract order hereunder is void.” Cal.Corp.Code § 31512 (West
arbitration raises other questions. Southland did not 1977).
contend in the California courts that, and the State courts
The California Supreme Court interpreted this statute to
did not decide whether, State law imposition class action
require judicial consideration of claims brought under
procedures was preempted by federal law. When the
the State statute and accordingly refused to enforce the
California Court of Appeal directed Southland to address
parties' contract to arbitrate such claims. So interpreted
the question whether state or federal law controlled the
the California Franchise Investment Law directly conflicts
class action issue, Southland responded that State law did
with § 2 of the Federal Arbitration Act and violates the
not permit arbitrations to proceed as class actions, that
Supremacy Clause.
the Federal Rules of Civil Procedure were inapplicable,
and that requiring arbitrations to proceed as class actions
[5] In enacting § 2 of the federal Act, Congress declared
“could well violate the [federal] constitutional guaranty
a national policy favoring arbitration and withdrew the
of procedural due process.” 2 Southland did not claim in power of the states to require a judicial forum for the
the Court of Appeal that if State law required class action resolution of claims which the contracting parties agreed
procedures, it would conflict with the federal Act and thus to resolve by arbitration. The Federal Arbitration Act
violate the Supremacy Clause. 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

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

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

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

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

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The limited objective of the Federal Arbitration Act was


to abrogate the general common law rule against specific
Justice STEVENS, concurring in part and dissenting in
enforcement of arbitration agreements, S.Rep. No. 536,
part.
68th Cong., 1st Sess., 2–3 (1924), and a state statute which
The Court holds that an arbitration clause that is
merely codified the general common law rule—either
enforceable in an action in a federal court is equally
directly by employing the prior doctrine of revocability
enforceable if the action is brought in a state court. I agree
or indirectly by declaring all such agreements void—
with that conclusion. Although Justice O'CONNOR'S
would be preempted by the Act. However, beyond this
review of the legislative history of the Federal Arbitration
conclusion, which seems compelled by the language of § 2
Act demonstrates that the 1925 Congress that enacted
and case law concerning the Act, it is by no means clear
**862 the statute viewed the statute as essentially
that Congress intended entirely to displace State authority
procedural in nature, I am persuaded that the intervening
in this field. Indeed, while it is an understatement to say
developments in the law compel the conclusion that the
that “the legislative history of the ... Act ... reveals little
Court has reached. I am nevertheless troubled by one
awareness on the part of Congress that *19 state law
aspect of the case that seems to trouble none of my
might be affected,” it must surely be true that given the
colleagues.
lack of a “clear mandate from Congress as to the extent to
which state statutes and decisions are to be superseded, we
For me it is not “clear beyond question that if this
must be cautious in construing the act lest we excessively
suit had been brought as a diversity action in a Federal
encroach on the powers which Congressional policy, if
District Court, the arbitration clause would have been
not the Constitution, would reserve to the states.” Metro
enforceable.” Ante, at 860. The general rule prescribed by
Industrial Painting Corp. v. Terminal Construction Co., 287
§ 2 of the Federal *18 Arbitration Act is that arbitration
F.2d 382, 386 (CA2 1961) (Lumbard, C.J., concurring).
clauses in contracts involving interstate transactions are
enforceable as a matter of federal law. That general
The textual basis in the Act for avoiding such
rule, however, is subject to an exception based on “such
encroachment is the provision of § 2 which provides that
grounds as exist at law or in equity for the revocation of
arbitration agreements are subject to revocation on such
any contract.” I believe that exception leaves room for the
grounds as exist at law or in equity for the revocation
implementation of certain substantive state policies that
of any contract. The Act, however, does not define what
would be undermined by enforcing certain categories of
grounds for revocation may be permissible, and hence
arbitration clauses.
it would appear that the judiciary must fashion the
limitations as a matter of federal common law. Cf. Textile
The exercise of State authority in a field traditionally
Workers v. Lincoln Mills, 353 U.S. 448, 77 S.Ct. 912, 1
occupied by State law will not be deemed preempted by
L.Ed.2d 972 (1957). In doing so, we must first recognize
a federal statute unless that was the clear and manifest
that as the “ ‘saving clause’ in § 2 indicates, the purpose
purpose of Congress. Ray v. Atlantic Richfield Co., 435
of Congress in 1925 was to make arbitration agreements
U.S. 151, 157, 98 S.Ct. 988, 994, 55 L.Ed.2d 179 (1978);
as enforceable as other contracts, but not more so.” Prima
see generally, Hamilton, The Federalist, No. 32, 300
Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395,
(Van Doren Ed.1945). Moreover, even where a federal
404 n. 12, 87 S.Ct. 1801, 1806 n. 12, 18 L.Ed.2d 1270
statute does displace State authority, it “rarely occupies
(1967); see also, H.R.Rep. No. 96, 68th Cong., 1st Sess.
a legal field completely, totally excluding all participation
1 (1924). The existence of a federal statute enunciating
by the legal systems of the states.... Federal legislation,
a substantive **863 federal policy does not necessarily
on the whole, has been conceived and drafted on an
require the inexorable application of a uniform federal
ad hoc basis to accomplish limited objectives. It builds
rule of decision notwithstanding the differing conditions
upon legal relationships established by the states, altering
which may exist in the several States and regardless of
or supplanting them only so far as necessary for the
the decisions of the States to exert police powers as they
special purpose.” P. Bator, P. Mishkin, D. Shapiro, & H.
deem best for the welfare of their citizens. Cf. Wallis v.
Wechsler, Hart and Wechsler's The Federal Courts and
Pan American Petroleum Corp., 384 U.S. 63, 69, 86 S.Ct.
the Federal System 470–471 (2d ed. 1973).
1301, 1304, 16 L.Ed.2d 369 (1966); see generally, Wilson
v. Omaha Indian Tribe, 442 U.S. 653, 671–672, 99 S.Ct.

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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

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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.

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procedure, a rule therefore applicable only in the federal


courts. 11
*25 A
If characterizing the FAA as procedural was not enough,
One rarely finds a legislative history as unambiguous as the draftsmen of the Act, the House Report, and the early
the FAA's. That history establishes conclusively that the commentators all flatly stated that the Act was intended
1925 Congress viewed the FAA as a procedural statute, to affect only federal court proceedings. Mr. Cohen,
applicable only in federal courts, derived, Congress the American Bar Association member who drafted the
believed, largely from the federal power to control the bill, assured two congressional subcommittees in joint
jurisdiction of the federal courts. hearings:

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

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not one of substantive law to be determined by the law


Nothing in the Prima Paint majority opinion contradicts
of the forum in which the contract is made....” 16
this statement.
Plainly, a power derived from Congress's Article III
control over federal court jurisdiction would not by any
The Prima Paint majority gave full but precise effect
flight of fancy permit Congress to control proceedings in
to the original congressional intent—it recognized that
state courts.
notwithstanding the intervention of Erie the FAA's
restrictive focus on maritime and interstate contracts
*29 The foregoing cannot be dismissed as “ambiguities”
permits its application in federal diversity courts. Today's
in the legislative history. It is accurate to say that the entire
decision, in contrast, glosses over both the careful crafting
history contains only one ambiguity, and that appears in
of Prima Paint and the historical reasons that made Prima
the single sentence of the House Report cited by the Court
Paint necessary, and gives the FAA a reach far broader
ante, at 859. That ambiguity, however, is definitively
resolved elsewhere in the same House Report, see supra, than Congress intended. 19
at 857, and throughout the rest of the legislative history.

*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

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misapprehension of federal law. The state court should


The unelaborated terms of § 2 certainly invite flexible determine, at least in the first instance, what procedures it
enforcement. At common law many jurisdictions were will follow to vindicate the newly articulated federal rights.
hostile to arbitration agreements. Kulukundis Shipping Compare Missouri ex rel. Southern R. v. Mayfield, 340
Co. v. Amtorg Trading Corp., 126 F.2d 978, 982– U.S. 1, 5, 71 S.Ct. 1, 3, 95 L.Ed. 3 (1950).
984 (CA2 1942). That hostility was reflected in two
different doctrines: “revocability,” which allowed parties
to repudiate arbitration agreements at any time before
IV
the arbitrator's award was made, and “invalidity” or
“unenforceability,” equivalent rules 22 that flatly denied The Court, ante, at 860 – 861, rejects the idea of requiring
any remedy for the failure to honor an arbitration the FAA to be applied only in federal courts partly out of
agreement. In contrast, common law jurisdictions that concern with the problem of forum shopping. The concern
enforced arbitration agreements did so in at least three is unfounded. Because the FAA makes the federal courts
different ways—through actions for damages, actions for equally accessible to both parties to a dispute, no forum
specific enforcement, or by enforcing sanctions imposed shopping would be possible even if we gave the FAA a
by trade and commercial associations on members who construction *34 faithful to the congressional intent. In
violated arbitration agreements. 23 In 1925 a forum controversies involving incomplete diversity of citizenship
allowing any one of these remedies would have been there is simply no access to federal court and therefore
thought to recognize the “validity” and “enforceability” no possibility of forum shopping. In controversies with
of arbitration clauses. complete diversity of citizenship the FAA grants federal
court access equally to both parties; no party can gain
This Court has previously rejected the view that state any advantage by forum shopping. Even when the party
courts can adequately protect federal rights only if “such resisting arbitration initiates an action in state court, the
courts in enforcing the Federal right are to be treated opposing party can invoke FAA § 4 and promptly secure a
as Federal courts and subjected pro hac vice to [federal] federal court order to compel arbitration. See, e.g., Moses
limitations....” Minneapolis & St. Louis R. v. Bombolis, 241 H. Cone, supra.
U.S. 211, 221, 36 S.Ct. 595, 598, 60 L.Ed. 961 (1916). As
explained by Professor Hart, Ironically, the FAA was passed specifically to rectify
forum shopping problems created by this Court's decision
*33 “The general rule, bottomed deeply in belief in Swift v. Tyson, 41 U.S. 1, 16 Pet. 1, 10 L.Ed. 865
in the importance of state control of state judicial (1842). 25 By 1925 several major commercial states had
procedure, is that federal law takes the state courts passed state arbitration laws, but the federal courts
as it finds them.... Some differences in remedy and
refused to enforce those laws in diversity cases. 26 The
procedure are inescapable if the different governments
drafters of the FAA might have anticipated Bernhardt
are to retain a measure of independence in deciding
by legislation and required federal diversity courts to
how justice should be administered. If the differences
adopt the arbitration law of the state in which they sat.
become so conspicuous as to affect advance calculations
But they deliberately chose a different approach. As was
of outcome, and so to induce an undesirable shopping
between forums, the remedy does not lie in the sacrifice pointed out at congressional hearings, 27 an additional
of the independence of either government. It lies rather goal of the Act was to make arbitration agreements
in provision by the federal government, confident of the enforceable even in federal courts located in states that
justice of its own procedure, **870 of a federal forum had no arbitration law. The drafters' plan for maintaining
reasonable harmony between state and federal practices
equally accessible to both litigants.” 24
was not to bludgeon states into compliance, but rather
to adopt a uniform federal law, patterned after New
In summary, even were I to accept the majority's reading
of § 2, I would disagree with the Court's disposition of York's path-breaking state statute, 28 and simultaneously
this case. After articulating the nature and scope of the to press for passage of coordinated *35 state legislation.
federal right it discerns in § 2, the Court should remand The key language of the Uniform Act for Commercial
to the state court, which has acted, heretofore, under a

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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.

V *36 Today's decision is unfaithful to congressional


intent, unnecessary, and, in light of the FAA's antecedents
Today's decision adds yet another chapter to the FAA's and the intervening contraction of federal power,
already colorful history. In 1842 this Court's ruling in inexplicable. Although arbitration is a worthy alternative
Swift v. Tyson, 41 U.S. 1, 16 Pet. 1, 10 L.Ed. 865 (1842), set to litigation, today's exercise in judicial revisionism goes
up a major obstacle to the enforcement of state arbitration too far. I respectfully dissent.
laws in federal diversity courts. In 1925 Congress sought
to rectify the problem by enacting the FAA; the intent
was to create uniform law binding only in the federal All Citations
courts. In Erie (1938), and then in Bernhardt (1956), this
Court significantly curtailed federal power. In 1967 our 465 U.S. 1, 104 S.Ct. 852, 79 L.Ed.2d 1
decision in Prima Paint upheld the application of the

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).

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

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

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

(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

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Southland Corp. v. Keating, 465 U.S. 1 (1984)
104 S.Ct. 852, 79 L.Ed.2d 1

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).

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© 2017 Thomson Reuters. No claim to original U.S. Government Works. 18


Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

188 S.W.3d 730 West Headnotes (24)


Court of Appeals of Texas,
Eastland.
[1] Alternative Dispute Resolution
SOUTHWIND GROUP, INC., Appellant, Review
v. If the Texas Arbitration Act (TAA) applies,
Jesstin R. LANDWEHR and a party must seek relief, from a trial court's
Joyce Landwehr, Appellees. order denying a motion to compel arbitration,
In re Southwind Group, Inc. through an interlocutory appeal. V.T.C.A.,
Civil Practice & Remedies Code § 171.001 et
Nos. 11–05–00247–CV, 11–05–00324–CV. seq.
|
Feb. 2, 2006. Cases that cite this headnote

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

involved or affected. U.S.C.A. Const. Art. 1, regarding the existence or scope of an


§ 8, cl. 3; 9 U.S.C.A. § 1 et seq. agreement are resolved in favor of arbitration.

Cases that cite this headnote Cases that cite this headnote

[5] Alternative Dispute Resolution [8] Alternative Dispute Resolution


Review Evidence
Mandamus If a party seeking arbitration carries its
Modification or Vacation of Judgment or initial burden of proving that an arbitration
Order agreement exists and that the claims asserted
Arbitration clause of employment agreement fall within the scope of the agreement, the
for employer's director of operations was burden shifts to the party resisting arbitration
governed by Texas Arbitration Act (TAA) to present evidence on its defenses to the
rather than Federal Arbitration Act (FAA), arbitration agreement.
and thus, employer's method for seeking relief
1 Cases that cite this headnote
from trial court's order denying employer's
motion to compel arbitration of employee's
claims of breach of employment agreement [9] Alternative Dispute Resolution
was through interlocutory relief rather Waiver or Estoppel
than mandamus; neither the employment The standard for determining waiver of the
agreement, nor the employment, nor right to arbitration is the same under the
employer's business operations in any way Texas Arbitration Act (TAA) and the Federal
involved or affected interstate commerce. 9 Arbitration Act (FAA). 9 U.S.C.A. § 1 et seq.;
U.S.C.A. § 1 et seq.; V.T.C.A., Civil Practice V.T.C.A., Civil Practice & Remedies Code §
& Remedies Code § 171.001 et seq. 171.001 et seq.

Cases that cite this headnote 3 Cases that cite this headnote

[6] Alternative Dispute Resolution [10] Alternative Dispute Resolution


Validity Scope and Standards of Review
Alternative Dispute Resolution Whether a party has waived its right to
Disputes and Matters Arbitrable Under arbitrate presents a question of law that is
Agreement reviewed de novo.
A party seeking to compel arbitration must
first prove that an arbitration agreement exists Cases that cite this headnote
and that the claims asserted fall within the
scope of the agreement. [11] Alternative Dispute Resolution
Evidence
Cases that cite this headnote
Because public policy favors arbitration, there
is a strong presumption against finding that a
[7] Alternative Dispute Resolution party has waived its right to arbitration, and
Construction in Favor of Arbitration the burden to prove waiver is thus a heavy one.
Alternative Dispute Resolution
Evidence 3 Cases that cite this headnote

The law presumes the existence of an


arbitration agreement, and any doubts [12] Alternative Dispute Resolution
Evidence

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

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.

2 Cases that cite this headnote


[13] Alternative Dispute Resolution
Waiver or Estoppel
Waiver of the right to arbitration may be [18] Alternative Dispute Resolution
express or implied, but it must be intentional. Suing or Participating in Suit
Courts will not find that a party has waived
1 Cases that cite this headnote its right to enforce an arbitration clause by
merely taking part in litigation, unless it has
[14] Alternative Dispute Resolution substantially invoked the judicial process to its
Suing or Participating in Suit opponent's detriment.
Whether waiver of the right to arbitration 2 Cases that cite this headnote
occurs depends on the individual facts and
circumstances of each case.
[19] Alternative Dispute Resolution
2 Cases that cite this headnote Suing or Participating in Suit
Substantially invoking the judicial process
[15] Alternative Dispute Resolution may occur, as element for waiver of right
Waiver or Estoppel to arbitration, when the party seeking
arbitration actively tried, but failed, to achieve
A party does not waive arbitration merely by
a satisfactory result in litigation before turning
delay; instead, the party urging waiver must
to arbitration, and examples include moving
establish that any delay resulted in prejudice.
for summary judgment or otherwise seeking
2 Cases that cite this headnote final judicial resolution of the dispute but
failing to receive satisfactory result.

[16] Alternative Dispute Resolution 6 Cases that cite this headnote


Suing or Participating in Suit
Waiver of the right to arbitration will be found
[20] Alternative Dispute Resolution
only when: (1) the party seeking arbitration
Suing or Participating in Suit
has substantially invoked the judicial process,
A party substantially invokes the judicial
and (2) the party opposing arbitration suffers
process, as element for waiver of right to
actual prejudice as a result.
arbitration, by taking specific and deliberate
4 Cases that cite this headnote actions after a suit has been filed that are
inconsistent with the right to arbitrate.

[17] Alternative Dispute Resolution 1 Cases that cite this headnote


Suing or Participating in Suit
Employer, by participating in discovery,
[21] Alternative Dispute Resolution
seeking continuance of trial setting, asking
Suing or Participating in Suit
trial court to reset the case for trial, and filing
Employer, by filing action against employee
response to employee's motion for summary
raising a claim that was not subject to
judgment on employer's non-arbitrable claim,
arbitration under employment agreement,
did not substantially invoke the judicial
did not substantially invoke the judicial

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Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

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

Cases that cite this headnote

[22] Alternative Dispute Resolution Attorneys and Law Firms


Suing or Participating in Suit
*733 Billy W. Boone, Abilene, for appellant.
A party does not substantially invoke the
judicial process, as element for waiver of John R. Saringer, Wagstaff, Alvis, Stubbeman, Seamster
right to arbitration, merely by participating & Longacre, Abilene, for appellees.
in discovery; however, pursuing extensive
discovery may substantially invoke the Panel consists of WRIGHT, C.J., and McCALL, J., and
judicial process. STRANGE, J.

1 Cases that cite this headnote


OPINION
[23] Alternative Dispute Resolution
TERRY McCALL, Justice.
Suing or Participating in Suit
Even assuming that employer substantially Southwind Group, Inc. challenges the trial court's
invoked the judicial process, as element for order denying its motion to compel arbitration of
waiver of right to arbitration, with respect Jesstin R. Landwehr and Joyce Landwehr's breach of
to employee's claim of breach of employment employment agreement claims. Southwind has brought an
agreement, employee did not establish he was interlocutory appeal pursuant to the Texas Arbitration
prejudiced, as additional element for waiver; Act (TAA) 1 and a petition for writ of mandamus
employee did not identify any discovery
pursuant to the Federal Arbitration Act (FAA). 2 The
obtained by employer in trial court that
primary issue in these proceedings is whether Southwind
employer would not have been entitled to
waived its right to arbitrate the Landwehrs' claims.
receive in arbitration, and employee did not
We conclude that the TAA applies to the employment
present any evidence of expenses, relating to
agreement and that Southwind did not waive its right to
litigation of employee's claim in trial court,
arbitration. Therefore, in Cause No. 11–05–00247–CV, we
that employee would not have incurred in
reverse the trial court's order and remand the cause with
arbitration.
instructions that the trial court enter an order compelling
1 Cases that cite this headnote arbitration of the Landwehrs' claims. Because the FAA
does not apply to the employment agreement, we deny
Southwind's petition for writ of mandamus in Cause No.
[24] Alternative Dispute Resolution 11–05–00324–CV.
Suing or Participating in Suit
In determining whether non-moving party
was prejudiced by moving party's conduct
Background Facts
in substantially invoking the judicial process
before bringing motion to compel arbitration, Southwind and Jesstin R. Landwehr entered into an
so that moving party waived the right to employment agreement on October 30, 2001, whereby
arbitration, courts focus on such things as: Southwind employed Jesstin as its director of operations.
(1) movant's access to information that is The employment agreement provided that Jesstin would
not discoverable in arbitration, and (2) non- work at Southwind's offices in Abilene, Texas, and that he
movant's incurring costs and fees due to would receive a base compensation of $50,000 per year,

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

resolution of the Landwehrs' claims before moving the


trial court to compel arbitration. The Landwehrs filed Actual Prejudice
a motion for summary judgment on Southwind's claims, [23] [24] Even if Southwind's actions had substantially
and Southwind responded to the motion. Southwind did invoked the judicial process, the Landwehrs did not meet
not substantially invoke the judicial process by responding their heavy burden of showing that they were prejudiced
to the Landwehrs' motion for summary judgment for at by those actions. In determining the prejudice issue,
least two reasons. First, the Landwehrs' motion covered courts focus on such things as (1) the movant's access to
Southwind's nonarbitrable claims. Second, Southwind did information that is not discoverable in arbitration and (2)
not file a motion for summary judgment seeking a judicial the opponent's incurring costs and fees due to the movant's
resolution of any claims. Southwind merely responded to actions or delay. Williams Indus., Inc., 110 S.W.3d at
the Landwehrs' motion for summary judgment. 135. The Landwehrs claim that they incurred substantial
litigation costs and expenses as a result of Southwind's
[22] A party does not substantially invoke the judicial delay in moving to compel arbitration.
process merely by participating in discovery. In re Bruce
Terminix Co., 988 S.W.2d at 704; In re Nasr, 50 S.W.3d In Section 9.04 of the employment agreement, the parties
23, 27 (Tex.App.-Beaumont 2001, orig. proceeding). agreed to arbitrate under the rules of the American
However, pursuing extensive discovery may substantially Arbitration Association. Those rules permit the arbitrator
invoke the judicial process. Nationwide of Bryan, Inc. v. to allow discovery. See In re Bruce Terminix Co., 988
Dyer, 969 S.W.2d 518, 522 (Tex.App.-Austin 1998, no S.W.2d at 704–05; Williams Indus., Inc., 110 S.W.3d
pet.). Southwind and the Landwehrs exchanged written at 140. The Landwehrs did not identify any discovery
discovery and took depositions before Southwind sought obtained by Southwind in the trial court that Southwind
to compel arbitration. The record shows that Southwind would not have been entitled to receive in arbitration. The
sent the Landwehrs a request for disclosure, a request Landwehrs did not present any evidence of the expenses
for admissions, and two requests for production. The relating to litigation of their claims in the trial court.
record does not contain copies of the written discovery The record does not demonstrate that the Landwehrs
or the depositions. Without copies of the discovery, the incurred any expenses in litigating their claims that they
record does not demonstrate the extent of the discovery would not have incurred in arbitration. The record does
undertaken by the parties or the extent of discovery related not establish that the Landwehrs were prejudiced by
to the Landwehrs' claims. Thus, the record does not show Southwind's actions.
that Southwind engaged in extensive discovery related to
the Landwehrs' claims. The trial court erred in denying Southwind's motion to
compel arbitration of the Landwehrs' claims. We sustain
The discovery in this case is similar to the discovery Southwind's issue in Cause No. 11–05–00247–CV.
in Nasr. The Nasr court held that the party seeking
arbitration did *737 not substantially invoke the judicial
process by participating in discovery. In re Nasr, 50
S.W.3d at 27. Likewise, we find that Southwind did not This Court's Ruling
substantially invoke the judicial process by participating
In Cause No. 11–05–00247–CV, we reverse the trial court's
in discovery.
order and remand the cause with instructions for the
trial court to compel arbitration of the Landwehrs' claims
Southwind moved for a continuance of a trial setting
against Southwind. In Cause No. 11–05–00324–CV, we
and requested a new trial setting. These actions did not
deny Southwind's petition for writ of mandamus.
seek a resolution of the merits of the Landwehrs' claims.
Southwind did not try to obtain a satisfactory result on
the Landwehrs' claims in the trial court before moving All Citations
to compel arbitration. Southwind did not substantially
invoke the judicial process. 188 S.W.3d 730

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Southwind Group, Inc. v. Landwehr, 188 S.W.3d 730 (2006)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 8


Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

465 S.W.3d 623 Judgment of Court of Appeals affirmed.


Supreme Court of Texas.

Edith Suarez, Individually and as Surviving Parent


of A.S. and S.S., Deceased, and as Surviving West Headnotes (18)
Spouse of Hector Suarez, Deceased, Petitioner,
v.
[1] Municipal Corporations
The City of Texas City, Texas, Respondent Parks and public squares and places
No. 13–0947 When gross negligence of a governmental
| entity is alleged, immunity is waived, under
Argued January 14, 2015 the “recreational use” limitation to waiver
| under the Texas Tort Claims Act, only if
Delivered June 19, 2015 the governmental entity (1) knew about a
condition of the property giving rise to an
Synopsis extreme degree of risk and (2) proceeded with
Background: Suit was brought against city under Texas conscious indifference to the rights, safety, or
Tort Claims Act (TTCA) and under Wrongful Death welfare of others. Tex. Civ. Prac. & Rem.
Act, by mother of children who drowned in water off Code Ann. §§ 41.001(11), 75.002, 101.021.
man-made beach, and as surviving spouse of children's
father who drowned while attempting to save them. 4 Cases that cite this headnote
The 212th Judicial District Court, Galveston County,
denied city's plea to jurisdiction and motion for summary [2] Municipal Corporations
judgment on grounds of immunity, and city appealed. Capacity to sue or be sued in general
The Houston Court of Appeals, First District, 2013
Absent a valid statutory or constitutional
WL 867428, reversed and dismissed complaint for lack
waiver of immunity, trial courts lack subject-
of subject matter jurisdiction. Petition for review was
matter jurisdiction to adjudicate lawsuits
granted.
against municipalities.

5 Cases that cite this headnote


Holdings: The Supreme Court, Guzman, J., held that:
[3] Pleading
[1] city's failure to replace warning signs along beach after Plea to the Jurisdiction
hurricane did not constitute gross negligence, as required
Whether subject-matter jurisdiction exists in
for waiver of immunity from suit under TTCA based on
an action against a municipality is a question
limitation under recreational use statute;
of law that can be challenged by a plea to the
jurisdiction.
[2] city's failure to re-designate swim area after hurricane
was not gross negligence; 4 Cases that cite this headnote

[3] evidence of prior drownings did not show that city's


[4] Appeal and Error
failure to warn visitors about dangers rose to level of gross
Cases Triable in Appellate Court
negligence; and
An appellate court reviews de novo the
[4] mayor's deposition testimony did not show that city's disposition of a plea to the jurisdiction.
failure to warn visitors of risk rose to level of gross
1 Cases that cite this headnote
negligence.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

[5] Appeal and Error [9] Municipal Corporations


Matters or Evidence Considered in Parks and public squares and places
Determining Question Gross negligence by a municipality sufficient
In addressing a plea to the jurisdiction to waive its governmental immunity under the
in which disputed evidence implicates both recreational use statute has both objective and
the court's subject-matter jurisdiction and subjective components: (1) viewed objectively
the merits of the case, the appellate court from the standpoint of the actor at the time
considers relevant evidence submitted by the of its occurrence, the act or omission involves
parties to determine if a fact issue exists. an extreme degree of risk, considering the
probability and magnitude of the potential
6 Cases that cite this headnote harm to others; and (2) the actor has actual,
subjective awareness of the risk involved,
[6] Pleading but nevertheless proceeds with conscious
Presumptions and Burden of Proof indifference to the rights, safety, or welfare of
others. Tex. Civ. Prac. & Rem. Code Ann. §§
On a plea to the jurisdiction, the court takes as
41.001(11), 75.002.
true all evidence favorable to the nonmovant,
indulges every reasonable inference, and 4 Cases that cite this headnote
resolves any doubts in the nonmovant's favor.

5 Cases that cite this headnote [10] Municipal Corporations


Actions for injuries
[7] Pleading To raise a fact issue regarding a municipality's
Questions of law and fact gross negligence, as required to waive its
immunity from suit on a premises liability
On a plea to the jurisdiction, if the evidence
claim under the recreational use statute's
creates a fact question regarding jurisdiction,
limitation of waiver under the Texas Tort
the plea must be denied pending resolution of
Claims Act, there must be legally sufficient
the fact issue by the fact finder; however, if the
evidence that the municipality had actual,
evidence fails to raise a question of fact, the
subjective awareness that a condition of the
plea to the jurisdiction must be granted as a
land involved an extreme degree of harm
matter of law.
but nevertheless was consciously indifferent
7 Cases that cite this headnote to the rights, safety, or welfare of others; in
other words, the plaintiff must show that the
municipality knew about the peril, but that its
[8] Negligence
acts or omissions demonstrate that it did not
Duty to warn
care. Tex. Civ. Prac. & Rem. Code Ann. §§
Negligence 41.001(11), 75.002, 101.021.
Property, conditions, activities and
persons covered 4 Cases that cite this headnote
Obvious naturally occurring conditions of
land used for recreational purposes, for the [11] Municipal Corporations
purposes of a landowner's duty to warn, Parks and public squares and places
include dangers that are not necessarily visible
To satisfy the subjective-knowledge
but are inherent in the recreational use. Tex.
component of the “gross negligence” standard
Civ. Prac. & Rem. Code Ann. § 75.002.
for a claim against a governmental entity
1 Cases that cite this headnote under the recreational use statute's limitation
on the waiver of governmental immunity from
suit under the Texas Tort Claims Act, the

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

governmental entity must have knowledge


that the dangerous condition of the land that [15] Municipal Corporations
caused the injury existed at the time of the Parks and public squares and places
accident. Tex. Civ. Prac. & Rem. Code Ann. Signs that city had posted along man-made
§§ 41.001(11), 75.002, 101.021. beach prior to hurricane, which warned
visitors about undertows, wakes, rip currents,
8 Cases that cite this headnote and sink holes, and cautioned visitors either
not to swim or to swim at their own
[12] Municipal Corporations risk, referred to common marine hazards
Actions for injuries associated with entering water that reasonable
recreational user would know or expect to
Circumstantial evidence can establish a
exist, and thus, did not show that city had
governmental entity's actual knowledge of a
actual knowledge of unusual concealed risk
dangerous condition on the land open to the
relating to submerged beach which, when
public for recreational use, for the purposes
combined with rough current, caused nine-
of determining whether the governmental
year-old children wading in knee-deep water
entity acted with gross negligence, as required
along beach to lose footing and to be swept
to waive its immunity from suit under the
out to rougher, deeper water, and therefore,
recreational use statute's limitation of waiver
that city's failure to replace signs after
of immunity under the Texas Tort Claims Act,
Hurricane Ike rose to level of gross negligence,
but such evidence must either directly or by
as required to waive city's immunity from
reasonable inference support that conclusion;
suit for drowning deaths of children and
however, an inference is not reasonable if
their father while attempting to save children,
it is premised on mere suspicion, as some
under recreational use statute's limitation on
suspicion linked to other suspicion produces
waiver of immunity under Texas Tort Claims
only more suspicion, which is not the same as
Act. Tex. Civ. Prac. & Rem. Code Ann. §§
some evidence. Tex. Civ. Prac. & Rem. Code
41.001(11), 75.002, 101.021.
Ann. §§ 41.001(11), 75.002, 101.021.
Cases that cite this headnote
8 Cases that cite this headnote

[16] Municipal Corporations


[13] Evidence
Actions for injuries
Weight and Conclusiveness in General
Evidence that, prior to Hurricane Ike, city
When the evidence offered to prove a vital
had established “designated swimming area”
fact is so weak as to do no more than create
at man-made beach, and that after hurricane,
a mere surmise or suspicion of its existence,
city did not redesignate area, did not
the evidence is no more than a scintilla and, in
demonstrate that city had actual knowledge of
legal effect, is no evidence.
unusual concealed risk relating to submerged
3 Cases that cite this headnote beach which, when combined with rough
current, caused nine-year-old children wading
in knee-deep water along beach to lose footing
[14] Evidence and to be swept out to rougher, deeper
Inferences from evidence water, and therefore, that city's failure to
An inference is not reasonable if it is redesignate swimming area after hurricane
susceptible to multiple, equally probable rose to level of gross negligence, as required to
inferences, requiring the factfinder to guess in waive city's immunity from suit for drowning
order to reach a conclusion. deaths of children and their father while
trying to save children, under recreational use
5 Cases that cite this headnote
statute's limitation on waiver of governmental

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

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.

[18] Municipal Corporations This interlocutory appeal involves a municipality's plea to


Actions for injuries the jurisdiction in a *627 premises-liability case arising
from the drowning deaths of three family members at a
City mayor's deposition testimony that he
man-made beach. The surviving spouse and mother of
knew that wakes from passing ships could
the decedents alleges that the drowning deaths resulted
affect wave action along man-made beach and
from a peculiar risk of harm created by a confluence of
that choppy water from wind, undertows, and
artificial and natural conditions at the beach and that the
rip tides increased risk of drowning did not
municipality was grossly negligent in failing to warn or
demonstrate that city had actual notice of
protect the public against those dangers. The trial court
unusual, concealed risk relating to submerged
denied the jurisdictional plea, but the court of appeals
beach which, when combined with rough
reversed and dismissed the claims for want of jurisdiction.
current, caused nine-year-old children wading
No. 01–12–00848–CV, 2013 WL 867428, at *1 (Tex.App.–
in knee-deep water along beach to lose footing
Houston [1st Dist.] March 7, 2013). At issue on appeal

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

is whether there is some evidence of the municipality's


liability to invoke the Texas Tort Claims Act's waiver
of governmental immunity, as limited by the recreational
I. Background
use statute. See TEX. CIV. PRAC. & REM. CODE §§
75.003(e)-(g), 101.021–.022, .025. The tragic deaths of a young father and his twin daughters
occurred in the waters adjacent to the Texas City Dike, a
The Tort Claims Act generally waives governmental man-made peninsula jutting 5.4 miles into Galveston Bay
immunity in premises-liability cases when a governmental off the coast of Texas City, Texas. The Dike was initially
unit breaches the duty of care that a private party would created more than 100 years ago to help preserve the Texas
owe to a licensee. Id. §§ 101.021–.022, .025. If premises City Ship Channel from excessive siltation.
are open to the public for recreational activities, however,
the recreational use statute elevates the burden of proof Because of the ship channel's location in Galveston Bay
required to invoke the Tort Claims Act's immunity near an inlet to the Gulf of *628 Mexico, currents carry
waiver by classifying recreational users as trespassers and silt into the man-made channel and frequent dredging
requiring proof of gross negligence, malicious intent, or is required to keep the water navigable. The United
bad faith. Id. § 75.002; State v. Shumake, 199 S.W.3d 279, States Army Corps of Engineers constructed the Dike
281 (Tex.2006). In previous cases applying these statutes, to help stop the flow of silt into the channel. Originally
we have held that landowners owe a duty to warn or completed in 1915, the Dike was extended to its current
protect recreational users when artificial conditions create length in 1934. To maintain the ship channel, the Corps
dangerous conditions that are not open and obvious, of Engineers regularly dredges the channel and deposits
but have no duty to warn or protect against conditions dredged materials consisting of fine-grain sediment at a
that are open or inherent, and thus obvious, regardless “spoil area” on the north side of the Dike. Over time, the
of whether such conditions are naturally or artificially spoil area has developed into a man-made beach.
created. Compare Shumake, 199 S.W.3d at 281–82, 288
(man-made culvert created dangerous, hidden undertow), In 1931, the State conveyed ownership of the Dike to
with City of Waco v. Kirwan, 298 S.W.3d 618, 626 Texas City and required that the Dike be used only for
(Tex.2009) (edge of cliff is inherently dangerous) and public purposes. See Act “Granting Dike” to City of
Stephen F. Austin State Univ. v. Flynn, 228 S.W.3d 653, Texas City, 42nd Leg., R.S., ch. 54, § 1, 1931 Tex. Spec.
660 (Tex.2007) (artificial condition was visible and known Laws 134, 134–35. Texas City has owned, maintained,
to recreational cyclist). The allegation in this case is that and operated the Dike ever since. In 1963, the Texas
artificial conditions interacted with natural conditions to Legislature opened the Dike up to recreational activity.
exacerbate and increase inherent risks well beyond what a Act of May 22, 1963, 58th Leg., R.S., ch. 503, § 2, 1963
reasonable recreational user might reasonably anticipate. Tex. Gen. Laws 1316, 1317. To facilitate access, an asphalt
This case thus involves a convergence of natural and road stretches the length of the five-mile peninsula.
artificial conditions as well as open, inherent, and latent
dangers. With coastal waters accessible via 10 miles of shoreline,
visitors to the Dike engage in recreational activities
[1] Regardless of whether a duty exists, however, when including boating, fishing, crabbing, and swimming, in
gross negligence is alleged, immunity is waived only if addition to non-water-related activities like picnicking,
the governmental entity (1) knew about a condition of running, and cycling. Amenities at the Dike include
the property giving rise to an extreme degree of risk and boat ramps, piers, parking areas, picnic shelters, portable
(2) proceeded with conscious indifference to the rights, restrooms, fish-cleaning tables, and street and boat-
safety, or welfare of others. Shumake, 199 S.W.3d at 287; ramp lights. At some point, signs were erected at
see also TEX. CIV. PRAC. & REM. CODE § 41.001(11). several locations along the Dike bearing the following
Construing the record in the light most favorable to admonitions:
the petitioner, as we must, there is no evidence that the
municipality had knowledge of concealed conditions at • “Warning! No Swimming [or] Diving. Beware [of]
the beach creating an extreme risk of harm. We therefore undertow and wake from passing ships.”
affirm the court of appeals' judgment.

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Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

prohibited swimming or warned of swimming dangers at


• “Beware [of] undertow[,] wake, rip current, and sink that location. The tide was high, the wind was strong, and
holes.” the water was choppy with breaking waves. As soon as the
Suarez family had parked their vehicle, the twin girls, still
• “No lifeguard on duty. Swim in designated area only.”
dressed in street clothes, waded into the water up to their
• “No lifeguard on duty. Swim at your own risk. Beware knees. Very shortly thereafter, they were seen struggling
of undertow from passing ships.” to stay afloat in deeper water approximately 10 feet from
the beach. Hector Suarez and two other men struggled to
Some of the signs' warnings were in English only and save the girls, but the rescue attempt failed. Hector and
others were in both Spanish and English. 1 his daughters drowned as they were swept farther from the
shore, and the other two rescuers had to help one another
On September 13, 2008, Hurricane Ike made landfall back to the beach to escape the strong current. 3
near Galveston, Texas. The hurricane caused considerable
damage to the Dike—eroding beaches, damaging the William Worsham, a coastal engineer retained to ascertain
roadway, upending and damaging improvements, and how the incident had occurred, determined that breaking
destroying or damaging all the warning signs. Due to waves and the “noticeably slippery” surface of the
ongoing repairs, Texas City closed the Dike to the public submerged beach caused the young victims to lose their
for nearly two years. footing despite standing in shallow water; the scalloped
shape of the beach's surface was characteristic of a beach
While public access was suspended, Texas City repaired that can generate rip currents when interacting with
or replaced the road, piers, boat ramps, picnic shelters, waves; and the convergence of these conditions caused the
and lighting structures. But, not all warning signs were girls to be swept from knee-deep water “to waters deep
replaced. The only warning signs the City replaced were and rough enough to result in drowning.” According to
“monument” signs at two boat ramps that were reopened Worsham, on the day of the incident, “[w]ater conditions
following the hurricane. 2 Those signs, which are large, adjacent to the beach were turbulent and highly variable,
wooden destination markers, are similar to signs that had consisting of choppy water, breaking waves, oscillating
been in place at the same locations before the hurricane. onshore and offshore currents, and longshore currents. It
The signs include the following *629 warning in English is clear upon inspection that these are difficult swimming
and Spanish: “Warning! No Swimming [or] Diving.” The conditions.” Moreover, “[g]iven the wave and current
signs also caution in English: “Beware [of] Undertow conditions, upon reaching a water depth of even half
and Wake from Passing ships.” Texas City elected not a person's height[,] it would be quite difficult ... to
to replace other warning signs destroyed by the storm. maintain sufficient contact with the bottom to resist being
The evidence in the record does not establish the location moved in the direction of water motion.” In Worsham's
or number of those signs but it is undisputed that the opinion, “[e]ven water depths of less than two feet were
signs that were not replaced had warned about swimming capable of causing loss of balance,” a condition that
outside designated areas, cautioned that no lifeguard was “was prevalent within 25 feet of the shore in the case
on duty, advised recreational users to swim at their own of the children involved.” Worsham's “[i]nitial analysis
risk, or warned about rip tides and sink holes. showed wind-generated waves interacted with the [man-
made] beach and caused the upset and loss of footing
On October 3, 2010, less than a month after the Dike of the young victims, and that [stronger] tidal currents
re-opened to the public, Edith and Hector Suarez visited and local currents resulting from the interaction of waves
the Dike along with their nine-year-old twin daughters with the beach surface would transport a person toward
and other family members and friends. They paid the $5 *630 deeper water once he/she had lost contact with the
entrance fee charged to nonresidents on the weekends and bottom....”
drove to the beach area that had been formed over time by
the deposition of silt dredged from the ship channel. The Edith Suarez, individually and on behalf of the decedents,
beach, which was appointed with covered picnic tables, sued Texas City, alleging it had actual or constructive
afforded visitors unimpeded access to the water. No area knowledge that hidden, dangerous conditions existed in
was designated for swimming at the beach, and no signs the water where the family drowned and was therefore

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Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

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

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Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

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

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Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

[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

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Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

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,

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Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

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.

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Suarez v. City of Texas City, 465 S.W.3d 623 (2015)
58 Tex. Sup. Ct. J. 1259

Considering the Dike's size, the plethora of hazards


Construing the evidence and every reasonable inference
inherently present there, and the length of time it has been
in Suarez's favor, we conclude there is no evidence
open to the public, the bare fact that other drownings have
from which a reasonable factfinder could conclude that
occurred does not create a reasonable inference that Texas
Texas City possessed actual, subjective awareness that the
City had subjective knowledge of an extreme risk of harm.
combined effect of the Dike's size and location, along
with the deposition of fine-grained sediment, altered the
[18] *637 Finally, Suarez cites deposition testimony
natural conditions in the water at the beach. There is
from the current mayor, Matthew Doyle, who was
likewise no evidence that Texas City knew about or
responsible for determining whether and to what extent
appreciated the gravity of any danger created by the
to replace warning signs at the Dike that were damaged
combined effect of man-made and natural conditions in
or destroyed by Hurricane Ike. Doyle admitted that
the water at the beach. Because the evidence fails to
he knew that wakes from passing ships could affect
raise a genuine and material fact issue concerning gross
wave action along the Dike and that choppy water
negligence, Texas City retains immunity from suit and the
from wind, undertows, and rip tides increases the risk
trial court lacks jurisdiction over Suarez's claims.
of drowning. Again, these are risks and conditions
that would ordinarily be anticipated by reasonable
recreational users interacting with coastal waters along
a peninsula stretching five miles into Galveston Bay. III. Conclusion
The mayor consistently asserted that undertows “occur[ ]
out in the water, period” and “[a]ny time you enter the We hold Suarez failed to produce evidence sufficient to
water, you're taking on some kind of risk.” Moreover, invoke the Texas Tort Claims Act's waiver of immunity
while the mayor acknowledged that the Dike affects the from suit. We therefore affirm the court of appeals'
natural conditions in the water, he also asserted the effects judgment dismissing the petitioner's claims for want of
were no different from those other land masses would jurisdiction.
cause and, even without the Dike, dangers would still
exist because “[w]e're on the Gulf Coast.” No knowledge
All Citations
of the particular risk alleged can be inferred from mere
knowledge that marine activities are inherently dangerous 465 S.W.3d 623, 58 Tex. Sup. Ct. J. 1259
and can be affected by variable conditions.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 12


Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc., 468 F.3d 523 (2006)

Construction in Favor of Arbitration


468 F.3d 523 Pursuant to the Federal Arbitration Act
United States Court of Appeals, (FAA),the Court of Appeals construes an
Eighth Circuit. arbitration clause resolving any doubts in
favor of arbitration. 9 U.S.C.A. § 1 et seq.
SUBURBAN LEISURE CENTER, INC., Appellee,
v. 2 Cases that cite this headnote
AMF BOWLING PRODUCTS, INC.; AMF
Billiards & Games, LLC, Appellants. [3] Alternative Dispute Resolution
Construction in Favor of Arbitration
No. 06-1865.
The Court of Appeals may not deny a
|
party's request to arbitrate an issue unless
Submitted: Oct. 20, 2006.
it may be said with positive assurance that
|
the arbitration clause is not susceptible of an
Filed: Nov. 17, 2006.
interpretation that covers the asserted dispute.
Synopsis
1 Cases that cite this headnote
Background: Franchisee brought action in state court
against franchisor alleging that it was entitled to damages
from the cancellation of the parties' oral franchise [4] Alternative Dispute Resolution
agreement. Following removal, the United States District Contractual or Consensual Basis
Court for the Eastern District of Missouri, Donald J. A party cannot be required to submit to
Stohr, J., 2006 WL 680964, denied franchisor's motion to arbitration any dispute which he has not
dismiss or in the alternative to compel arbitration and stay agreed so to submit.
proceedings. Franchisor appealed.
3 Cases that cite this headnote

[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

[2] Alternative Dispute Resolution [6] Evidence

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc., 468 F.3d 523 (2006)

Completeness of Writing and


Presumption in Relation Thereto; Opinion
Integration
SHEPHERD, Circuit Judge.
Under Virginia law, parol evidence
is inadmissible to vary, contradict, AMF Bowling Products, Inc. and AMF Billiards &
add to, or explain the terms of Games LLC (collectively “AMF”) appeals from an
a complete, unambiguous, unconditional order of the district court 1 denying its motion to
written instrument. dismiss or in the alternative to compel arbitration and
stay proceedings with regard to claims brought by
Cases that cite this headnote
Suburban Leisure Center, Inc. (“Suburban”) after AMF
terminated its oral franchise agreement with Suburban.
[7] Evidence We possess jurisdiction of this appeal pursuant to the
Contracts in General Federal Arbitration Act (“FAA”), 9 U.S.C. § 16(a)(1)
Under Virginia law, a merger clause does (C), providing that “[a]n appeal may be taken from ...
not prohibit the admission of parol evidence *525 an order ... denying an application ... to compel
which does not contradict or vary the terms of arbitration....” For the reasons discussed below, we
the contract. affirm.

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.

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Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc., 468 F.3d 523 (2006)

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

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Suburban Leisure Center, Inc. v. AMF Bowling Products, Inc., 468 F.3d 523 (2006)

[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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324 (1999)

KeyCite Yellow Flag - Negative Treatment West Headnotes (8)


Declined to Follow by Schuster v. Prestige Senior Management, L.L.C., 
Wash.App. Div. 3, April 28, 2016
169 F.3d 324 [1] Alternative Dispute Resolution
United States Court of Appeals, Scope and standards of review
Fifth Circuit. Court of Appeals reviews the issue of whether
a party's conduct amounts to a waiver of
SUBWAY EQUIPMENT LEASING CORPORATION; arbitration de novo.
Subway Restaurants, Inc., Plaintiffs–Appellants,
v. 8 Cases that cite this headnote
Bonnie FORTE, wife of/and; Charles N. Forte;
Selena Rankins, wife of/and; Frank R. Rankins; [2] Federal Courts
Dorothy Sims, wife of/and; Earl Sims, Jr., Estoppel and waiver
Defendants–Counter Claimants–Appellees, Factual findings underlying a district court's
v. waiver of arbitration determination are
Doctor's Associates, Inc., doing business reviewed for clear error.
as Subway; Frederick A. DeLuca,
1 Cases that cite this headnote
Counter Defendants–Appellants.
Earl Sims; Subway Development of
[3] Alternative Dispute Resolution
Louisiana, Inc.; Subway Management
Evidence
Group of Louisiana, Plaintiffs–Appellees,
v. There is a strong presumption against waiver
of arbitration; accordingly, a party alleging
Doctor's Associates, Inc.; Frederick DeLuca;
waiver of arbitration must carry a heavy
Subway Restaurants, Inc., Defendants–Appellants.
burden.
No. 97–31236.
45 Cases that cite this headnote
|
March 24, 1999.
[4] Alternative Dispute Resolution
Sandwich shop franchisees brought action against Suing or participating in suit
franchisor and related entities. The United States District
Party only invokes the judicial process, as
Court for the Eastern District of Louisiana, Patrick E.
required to establish waiver of arbitration,
Carr, J., denied defendants' motion for a stay pending
to the extent it litigates a specific claim it
arbitration, and they appealed. The Court of Appeals, E.
subsequently seeks to arbitrate.
Grady Jolly, Circuit Judge, held that: (1) franchisor did
not invoke judicial process, so as to waive arbitration, 76 Cases that cite this headnote
when affiliated entities sued franchisees for breach of
equipment and real estate leases; (2) franchisor did
[5] Alternative Dispute Resolution
not invoke judicial process by allegedly encouraging
Suing or participating in suit
affiliates to file involuntary bankruptcy petitions against
franchisees; and (3) Federal Arbitration Act (FAA) Sandwich shop franchisor did not invoke
required stay to extend to claims against franchisor's judicial process, so as to waive arbitration of
affiliates. franchisees' claims under franchise agreement,
when affiliated entities sued the franchisees for
Reversed and remanded. breach of equipment and real estate leases;
affiliates' actions involved claims different for
the one franchisor sought to arbitrate.

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Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324 (1999)

11 Cases that cite this headnote


Attorneys and Law Firms

[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

36 Cases that cite this headnote E. GRADY JOLLY, Circuit Judge:

Doctor's Associates, Inc. (“DAI”) and companies


[7] Alternative Dispute Resolution associated with DAI appeal a district court ruling denying
Suing or participating in suit their motion for a stay pending arbitration. The district
To invoke the judicial process, as required court held that DAI and its associates had invoked
to waive arbitration, the waiving party must the judicial process thereby creating a significant delay
do more than call upon unrelated litigation that prejudiced the opposing parties and that DAI had
to delay an arbitration proceeding; the party therefore waived its right to arbitration. Because DAI has
must, at the very least, engage in some overt not invoked the judicial process with respect to the claim
act in court that evinces a desire to resolve it wishes to arbitrate and because there is no evidence that
the arbitrable dispute through litigation rather the opposing parties have been prejudiced by any delay,
than arbitration. we reverse.

59 Cases that cite this headnote

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,

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Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324 (1999)

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.

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Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324 (1999)

[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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324 (1999)

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

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Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324 (1999)

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.”).

[8] Having concluded that DAI is entitled to a stay


pending arbitration, we now must address the scope of
the stay order. DAI argues that, even though SEL, SRI, V
and SSS have no right to arbitrate the claims brought
For the foregoing reasons, we hold that DAI, SEL, SRI,
against them by the franchisees, the district court should
and SSS are entitled to a stay pending arbitration of the
stay the litigation with respect to them as well. DAI argues
franchisees' claims against DAI. We therefore REVERSE
that the FAA requires the district court to stay litigation
the district court and REMAND for further proceedings
where issues presented in the litigation are the subject of
not inconsistent with the opinion.
an arbitration agreement. See 9 U.S.C. § 3.

REVERSED and REMANDED.


Based on the record before us, we find merit in DAI's
argument. In Sam Reisfeld & Son Import Co. v. S.A. Eteco,
we held that an order to stay covering claims against all All Citations
defendants was proper, even though two defendant were
not part of the arbitration agreement. 530 F.2d 679, 681 169 F.3d 324
(5th Cir.1976). Although the DAI affiliates themselves

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.

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Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324 (1999)

End of Document © 2017 Thomson Reuters. No claim to original U.S. Government Works.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 7


Taft v. Burttram, 254 Ga. 687 (1985)
333 S.E.2d 585

Attorneys and Law Firms


254 Ga. 687
Supreme Court of Georgia. **585 *688 Rex M. Lamb III, Henry D. Fellows, Jr.,
Hurt, Richardson, Garner, Todd & Cadenhead, Atlanta,
TAFT for William H. Taft and Kevin P. Kilroy.
v.
BURTTRAM, Jr., et al. *689 Robert M. Axelrod, Rogers & Hardin, Atlanta,
KILROY Phillip S. McKinney, for H. Dyar Burttram, Jr., et al.
v.
Opinion
BURTTRAM, Jr., et al.
*687 SMITH, Justice.
Nos. 42329, 42330.
| Appellants, William H. Taft and Kevin P. Kilroy, each
Sept. 5, 1985. sued appellees, H. Dyar Burttram, Jr., and Robert
Rosenberg, officers of appellee Norris and Hirshberg,
Former account executives with securities brokerage Inc., for malicious prosecution, libel, abuse of process,
corporation brought action against officers of the slander, wrongful interference with an employment
corporation for malicious prosecution, libel, abuse of relationship, and intentional infliction of emotional harm.
process, slander, wrongful interference with employment Taft and Kilroy appeal the trial court's grants of appellees'
relationship and intentional infliction of emotional harm. motions to stay the lawsuits pending arbitration. The
The Superior Court, Fulton County, William W. Daniel, appeals have been consolidated. We reverse.
J., granted defendants' motions to stay lawsuits pending
arbitration, and plaintiffs appealed. The Supreme Court, Norris and Hirshberg, a securities brokerage business,
Smith, J., held that defendants, by swearing out criminal hired Taft and Kilroy as account executives in August,
warrants against former account executives rather than 1983. Taft and Kilroy resigned in August, 1984, to
arbitrating dispute as required by employment contract, join a similar business. They allege that the appellees
waived right to compel arbitration. altered their employment records to show that they
were terminated for cause, and that the appellees mailed
Reversed. libelous material and related slanderous charges about
them to various people involved in the securities business.

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.

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Taft v. Burttram, 254 Ga. 687 (1985)
333 S.E.2d 585

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.

When the appellees failed to abide by this policy, in Judgment reversed.


swearing out criminal warrants against the appellants
“instead of seeking to arbitrate, this was the clearest kind
of waiver on their part of an agreement to arbitrate.” 1 All the Justices concur.
Morales Rivera v. Sea Land of Puerto Rico, 418 F.2d
725, 726 (1st Cir.1969). Any other holding would be All Citations
contrary to the clear federal policy of encouraging parties
254 Ga. 687, 333 S.E.2d 585
to resolve disputes through arbitration, rather than a
resort to the courts. See Sweater Bee By Banff, Ltd. v.

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Taylor v. Gately, 870 S.W.2d 204 (1994)

[3] Criminal Law


870 S.W.2d 204 Requisites and Sufficiency
Court of Appeals of Texas,
Discretion is necessary ingredient in
Waco.
determination of whether requisites for
Frenando Ray TAYLOR, Appellant, accepting and filing criminal complaint have
v. been met. Vernon's Ann.Texas C.C.P. arts.
2.04, 2.05. 2.12, 2.13.
Sandy GATELY, Appellee.
Cases that cite this headnote
No. 10–93–244–CV.
|
Feb. 9, 1994.

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.

[1] Mandamus Frenando Taylor, an inmate, appeals from a judgment


Criminal Prosecutions dismissing his petition for a writ of mandamus in the
court below. See Hogan v. Turland, 428 S.W.2d 316,
Mandamus was not available to require
317 (Tex.1968). He complains that the court abused its
district attorney to initiate criminal
discretion in refusing to compel the District Attorney to
prosecution for assault and battery and
initiate a prosecution by accepting a complaint charging
violation of inmate's civil rights. Vernon's
assault and battery and a violation of his civil rights. He
Ann.Texas C.C.P. art. 2.01; Vernon's
asserts that articles 2.04, 2.05, 2.12, and 2.13 of the Code
Ann.Texas Const. Art. 5, § 21.
of Criminal Procedure impose a “ministerial duty” upon
1 Cases that cite this headnote the District Attorney to accept and file his complaint. See
TEX.CODE CRIM.PROC.ANN. arts. 2.04, 2.05, 2.12,
2.13 (Vernon 1977). In support of this proposition, he
[2] Mandamus cites language from Anderson v. City of Seven Points, 806
Remedy at Law S.W.2d 791, 793 (Tex.1991): “An act is ministerial when
Mandamus the law clearly spells out the duty to be performed by the
Nature of Acts to Be Commanded official with sufficient certainty that nothing is left to the
Writ of mandamus will not issue unless exercise of discretion.”
petitioner establishes that he has no adequate
remedy at law and that the act sought to [1] We have been directed to no case, nor has our
be compelled is ministerial, as opposed to research revealed any case, in which mandamus has issued
discretionary. against a prosecuting attorney for failure to institute
a criminal case. District Attorneys are constitutional
Cases that cite this headnote officers. TEX. CONST. art. 5, § 21. Their duties
are specified by article 2.01 of the Code of Criminal

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Taylor v. Gately, 870 S.W.2d 204 (1994)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Thomas v. Cisneros, 596 S.W.2d 313 (1980)

16 Cases that cite this headnote


KeyCite Yellow Flag - Negative Treatment
Not Followed as Dicta Browning-Ferris Industries, Inc. v. Lieck, Tex., 
June 2, 1994
[2] Malicious Prosecution
596 S.W.2d 313 Nature and elements of malicious
Court of Civil Appeals of Texas, Austin. prosecution in general
The elements of malicious prosecution are:
J. C. THOMAS, Appellant, the commencement of a criminal prosecution
v. against plaintiff; which has been caused by
Kathy CISNEROS, Appellee. defendant or through defendant's aid or
cooperation; which terminated in favor of
No. 13149. plaintiff; that plaintiff was innocent; that there
| was no probable cause for such proceedings;
March 12, 1980. that it was done with malice; and resulted in
| damage to plaintiff.
Rehearing Denied April 2, 1980.
6 Cases that cite this headnote
In suit for malicious prosecution, the 53rd District
Court, Travis County, Harley Clark, P. J., entered
summary judgment in favor of defendant, and plaintiff [3] Judgment
appealed. The Court of Civil Appeals, Smith, J., Motion or Other Application
held that: (1) defendant's grounds for her motion for In suit for malicious prosecution, defendant's
summary judgment gave fair notice of her claims and grounds for her motion for summary
were sufficiently specific to raise grounds of lack of judgment gave fair notice of her claims and
causation, probable cause, and malice before court, and were sufficiently specific to raise grounds of
(2) defendant negated, as matter of law, causation element lack of causation, probable cause, and malice
of malicious prosecution action, by proving, as matter of before court. Rules of Civil Procedure, rules
law, that she did not cause or aid or cooperate in causation 45(b), 47(a), 166–A(c).
of alleged malicious prosecution of plaintiff.
17 Cases that cite this headnote
Affirmed.
[4] Malicious Prosecution
Instigation of or participation in
prosecution
West Headnotes (9)
Causation element of malicious prosecution
requires that criminal prosecution be caused
[1] Judgment by defendant or through defendant's aid or
Motion or Other Application cooperation.
In judging specificity requirement for motion
for summary judgment, Court of Civil Cases that cite this headnote
Appeals is to be guided by sufficiency
requirements as made applicable to pleadings [5] Malicious Prosecution
by certain civil procedure rules, and Instigation of or participation in
thus, grounds for summary judgment are prosecution
sufficiently specific if they consist of a concise For purposes of causation element of
statement sufficient to give fair notice of claim malicious prosecution, it is not necessary for
involved to nonmoving party. Rules of Civil defendant to have signed complaint or to have
Procedure, rules 45(b), 47(a), 166–A(c). communicated subject matter to person who
did if making of statement proximately caused

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Thomas v. Cisneros, 596 S.W.2d 313 (1980)

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

[6] Malicious Prosecution [9] Malicious Prosecution


Instigation of or participation in Institution or continuation of
prosecution prosecution
Public policy requires that there be wide In suit for malicious prosecution, proof
latitude in reporting facts to prosecuting established that criminal charges were filed
authorities in order that exposure of crime not by district attorney as a unilateral exercise of
be discouraged. his discretion, and this made prosecution sole
endeavor of district attorney and completely
4 Cases that cite this headnote insulated defendant from any liability for
malicious prosecution.
[7] Malicious Prosecution
Cases that cite this headnote
Advice of prosecuting officer or
magistrate
State Board of Insurance employee, being
sued for malicious prosecution by another
Attorneys and Law Firms
State Board of Insurance employee because
he had been charged with “retaliation,” had *315 Jim H. Arnold, Jr., Austin, for appellant.
made full and fair disclosure of material facts
to district attorney, as she was not required Philip Juarez, Austin, for appellee.
to disclose other employee's reputation as
jokester and his knowledge that she was Opinion
not serving on that grand jury investigating
SMITH, Justice.
State Board of Insurance, and thus fact
that district attorney determined that facts This appeal presents the questions of whether motion for
disclosed constituted crime and proceeded to summary judgment was sufficiently specific so as to allow
formulate necessary papers to set prosecution consideration of certain grounds on appeal and whether
in motion meant that defendant employee was appellee proved, as a matter of law, that she did not cause
not liable in action for malicious prosecution. or aid or cooperate in the causation of an alleged malicious
V.T.C.A., Penal Code § 36.06. prosecution of the appellant. We hold that appellee's
motion for summary judgment was sufficient to place the
14 Cases that cite this headnote
elements of causation, probable cause and malice before
the court and that appellee negated, as a matter of law,
[8] District and Prosecuting Attorneys the element of causation. Accordingly, the judgment of
Duties the trial court granting appellee's motion for summary
Having received information revealing judgment is in all things affirmed.
possible commission of crime of “retaliation,”
it was duty of district attorney to investigate

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Thomas v. Cisneros, 596 S.W.2d 313 (1980)

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.

“III. Plaintiff contends that Defendant caused a


criminal action to be instituted against him and

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Thomas v. Cisneros, 596 S.W.2d 313 (1980)

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Thomas v. Cisneros, 596 S.W.2d 313 (1980)

“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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Thomas v. Cisneros, 596 S.W.2d 313 (1980)

granted appellee's motion for summary judgment. Gibbs


Affirmed.
v. General Motors Corporation, supra; Citizens First
National Bank of Tyler v. Cinco Exploration Company,
supra. All Citations

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717 (2014)

Cases that cite this headnote


KeyCite Yellow Flag - Negative Treatment
Distinguished by Cooper Industries, LLC v. Pepsi-Cola Metropolitan 
Bottling Co., Inc., Tex.App.-Hous. (14 Dist.), August 25, 2015
[2] Alternative Dispute Resolution
438 S.W.3d 717 Suing or participating in suit
Court of Appeals of Texas, Party waives arbitration clause by
Houston (1st Dist.). substantially invoking judicial process to
other party's detriment or prejudice.
TUSCAN BUILDERS, LP, Appellant
v. 2 Cases that cite this headnote
1437 SH6 L.L.C. d/b/a Sweetwater Aesthetic
SPA & Wellness Center, Shelena C. Lalji, [3] Alternative Dispute Resolution
M.D., P.A. d/b/a Dr. Shel Wellness & Medical Suing or participating in suit
SPA and Lalji Dental, P.C. d/b/a Lake Party substantially invokes judicial process,
Pointe Dental And Specialty, Appellees. so as to waive arbitration clause, if it
takes specific and deliberate actions that are
No. 01–13–00685–CV. inconsistent with the right to arbitrate or if it
| actively tries, but fails to achieve, satisfactory
May 15, 2014. result through litigation before turning to
arbitration.
Synopsis
Background: Commercial building owners sued builder 2 Cases that cite this headnote
for breach of warranty associated with alleged
construction defects. The 151st District Court, Harris
County, denied builder's motion to compel arbitration. [4] Alternative Dispute Resolution
Builder appealed. Suing or participating in suit
For purposes of a waiver of arbitration
agreement, prejudice refers to inherent
unfairness caused by party's attempt to have it
[Holding:] On rehearing, the Court of Appeals, Jane
both ways by switching between litigation and
Bland, J., held that builder substantially invoked judicial
arbitration to its own advantage.
process to detriment of owners.
Cases that cite this headnote

Affirmed and remanded.


[5] Alternative Dispute Resolution
Evidence
Courts apply strong presumption against
West Headnotes (10)
waiver of arbitration and resolve any doubt on
the issue in favor of arbitration.
[1] Estoppel
Nature and elements of waiver Cases that cite this headnote

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717 (2014)

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

[7] Alternative Dispute Resolution [10] Alternative Dispute Resolution


Suing or participating in suit Presentation and reservation of grounds
In determining whether party waived for review
arbitration clause, courts can consider, among Builder waived any complaint about
other factors: (1) whether movant for evidentiary value of counsel's statement
arbitration was plaintiff, who chose to file in regarding status of discovery, as relating to
court, or defendant, who merely responded; builder's motion to compel arbitration of
(2) when movant learned of arbitration contract dispute, by failing to object in trial
clause and how long movant delayed before court.
seeking arbitration; (3) amount of movant's
pretrial activity related to merits rather than 1 Cases that cite this headnote
arbitrability or jurisdiction; (4) amount of
discovery conducted; and (5) whether movant
sought judgment on the merits.
Attorneys and Law Firms
Cases that cite this headnote
*718 Michael B. Gerstle, Patrick T. Mulry, Gerstle,
Minissale & Snelson, LLP, Dallas, TX, for Appellant.
[8] Alternative Dispute Resolution
Waiver or Estoppel E. Michelle Bohreer, Todd Zucker, Pritesh Soni, Bohreer
Courts analyze whether waiver of arbitration & Zuccker LLP Houston, TX, for Appellees.
agreement occurred based on the totality of
the circumstances presented in each case. Panel consists of Chief Justice RADACK and Justices
BLAND and HUDDLE.
Cases that cite this headnote

[9] Alternative Dispute Resolution OPINION ON REHEARING


Suing or participating in suit
JANE BLAND, Justice.
Builder of commercial building substantially
invoked judicial process to the prejudice of Appellant Tuscan Builders, LP has moved for rehearing
building owners in owners' suit against builder and en banc consideration. We grant rehearing, withdraw
for breach of warranty associated with alleged our opinion and judgment of January 30, and issue the
construction defects, such that builder waived following in their stead. We dismiss as moot Tuscan's
arbitration clause incorporated by reference motion for en banc consideration. Our disposition of the
in construction contract; builder did not appeal remains unchanged.
accompany its answer or third-party claims
against subcontractors with any notice of In this construction dispute, a builder appeals the trial
intent to pursue arbitration, builder joined in court's order denying its motion to compel arbitration
motions that prolonged discovery period and against the building's owners. The builder contends that
postponed trial date and mediation deadline the trial court erred in finding that the builder had
to allow additional discovery on the merits, waived enforcement of an arbitration clause by invoking
and by the time builder moved to compel the judicial process and delaying its effort to compel
arbitration, parties had completed written arbitration for more than a year. Finding no error, we
discovery, designated their experts for trial, affirm.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 2


Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717 (2014)

currently in effect. The demand for


arbitration shall be filed in writing
with the other party to the Contract
*719 Background
and with the American Arbitration
The contract dispute Association, and a copy shall be filed
The commercial building owners, 1437 SH6 L.L.C. d/b/ with the Architect.
a Sweetwater Aesthetic Spa & Wellness Center, Shelena
C. Lalji, M.D., P.A. d/b/a Dr. Shel Wellness & Medical After it moved in, Sweetwater noticed water leaking into
Spa, and Lalji Dental, P.C. d/b/a Lake Pointe Dental the building. It informed Mirador and Tuscan of the
and Specialty (collectively, Sweetwater) sued Tuscan, the problem, and they attempted to repair the leaks. During
builder, for breach of warranty associated with alleged a rainstorm in July 2010, however, significant water
construction defects. Sweetwater had contracted with a leaks appeared in the exterior walls and roof, causing
construction design team, the Mirador Group, Inc., and substantial damage to the structure and interior walls.
an architect, Todd Blitzer, to design a building suitable Sweetwater again sought to have Mirador and Tuscan
for a dental office, a wellness clinic, and other health- repair the building, but Sweetwater was not satisfied with
related businesses. Sweetwater's design services agreement the results.
with Mirador provides that venue for any suit “shall be
in a Texas State District Court in Harris County, Texas.”
The design agreement incorporates by reference specific Course of proceedings
provisions of the “Standard Form of Agreement between In June 2012, Sweetwater sued Mirador, Tuscan, and
Owner and Architect (AIA Document B141–1997),” but Blitzer for negligence, breach of contract, and breaches of
it expressly excludes “Sections 1.3.4, Mediation and 1.3.5, express and implied warranties, as well as statutory claims
Arbitration.” under the Texas Deceptive Trade Practices Act. Tuscan
answered the suit on June 29. Tuscan denied Sweetwater's
Sweetwater hired Tuscan to construct the building allegations, raised several specific defenses, and made a
according to Mirador's design specifications. Tuscan verified denial; it did not mention arbitration in the filing.
prepared the construction contract using AIA Document In November, Tuscan sued its five subcontractors, seeking
AlOl–1997, the “Standard Form of Agreement between indemnification under the indemnification provisions
Owner and Contractor where the basis of payment is in each subcontractor agreement. Tuscan sued each
a stipulated sum.” The parties' construction contract subcontractor for negligence, breach of contract, and
incorporates by reference an industry form document breach of warranty. Sweetwater later *720 amended
—AIA Document A201–1997, the “General Conditions its petition to include its own claims against the
of the Contract for Construction” [General Conditions] subcontractors. The subcontractors answered, and several
—but it does not attach a copy of that document. demanded a jury trial. In addition to pursuing written
Like AIA Document B141–1997, incorporated into the discovery, the subcontractors also sought to inspect the
design agreement, A201–1997 calls for mediation in Sweetwater property, pursuant to Texas Rule of Civil
the first instance, followed by arbitration. Unlike the Procedure 196.7. Tuscan participated with the third-party
design agreement, the construction contract does not defendants in the inspection.
exclude the AIA Document's arbitration provisions that
were incorporated by reference, but not attached to the The trial court's docket control order called for the
contract. The pertinent sections of A201–1997 provide: discovery period to end in March 2013 and trial to
commence in April 2013. In January 2013, Tuscan joined
Claims not resolved by mediation Sweetwater in filing an agreed motion for continuance.
shall be decided by arbitration The joint motion requested the continuance for the
which, unless the parties mutually “opportunity to conduct discovery and identify the
agree otherwise, shall be in relevant issues.” Tuscan did not mention arbitration. The
accordance with the Construction trial court granted the motion and extended the discovery,
Industry Arbitration Rules of the motion, and pleading deadlines. It set trial to commence
American Arbitration Association on September 16, 2013.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717 (2014)

turning to arbitration. In re Christus Spohn Health Sys.


On June 6, 2013, Tuscan, the other defendants, and the Corp., 231 S.W.3d 475, 478–79 (Tex.App.-Corpus Christi
third-party defendants moved to extend the mediation 2007, *721 orig. proceeding); see In re Vesta Ins. Grp.,
deadline complaining that, before mediating the dispute, Inc., 192 S.W.3d 759, 763 (Tex.2006) (orig. proceeding).
they required additional information concerning the Prejudice refers to the inherent unfairness caused by “a
various components of Sweetwater's alleged damages, party's attempt to have it both ways by switching between
responses to additional interrogatories, answers to litigation and arbitration to its own advantage.” Perry
requests for admissions they had propounded, and the Homes, 258 S.W.3d at 597.
depositions of Sweetwater's corporate representatives and
management agents, which, the motion represented, were [5] Whether a party has participated in the litigation
scheduled for July 2 and 8. process and thus waived the right to arbitrate is a question
of law for the court. Id. at 587. We apply a strong
By July 14, the expert witnesses had been designated and presumption against waiver of arbitration and resolve any
the expert designation deadlines for all parties had passed; doubt on the issue in favor of arbitration. Id. at 584; see In
approximately one month remained of the discovery re Bruce Terminix Co., 988 S.W.2d 702, 705 (Tex.1998).
period. The parties had completed their paper discovery.
On that date, Tuscan invoked the arbitration provision [6] [7] [8] For a waiver to have occurred, the
incorporated by reference into the construction contract appellant “must, at the very least, [have] engage[d] in some
and included with its motion an unsigned copy of the overt act in court that evince[d] a desire to resolve the
General Conditions form containing that provision. [same] arbitrable dispute through litigation rather than
arbitration.” Haddock v. Quinn, 287 S.W.3d 158, 177
The trial court held an evidentiary hearing on Tuscan's (Tex.App.-Fort Worth 2009, pet. denied). In assessing
motion to compel arbitration and denied the motion on whether Tuscan waived its right to arbitrate, we consider
August 1. whether Tuscan's conduct in the litigation portrays the
kind of “aggressive litigation strategy” that substantially
invokes the litigation process. See Okorafor v. Uncle Sam
& Assocs., 295 S.W.3d 27, 40 (Tex.App.-Houston [1st
Discussion
Dist.] 2009, pet. denied); see also In re Christus Spohn
Tuscan challenges the trial court's ruling, contending that Health Sys. Corp., 231 S.W.3d at 479 (explaining that
it erred in denying Tuscan's motion to compel arbitration actions inconsistent with right to arbitrate may include
because the evidence does not establish that Tuscan had “some combination of filing an answer, setting up a
waived its contractual right to arbitrate by substantially counterclaim, pursuing extensive discovery, moving for a
continuance, and failing to timely request arbitration”)
invoking the judicial process. 1
(citing Cent. Nat'l Ins. Co. of Omaha v. Lerner, 856
S.W.2d 492, 494 (Tex.App.-Houston [1st Dist.] 1993,
Applicable Law and Standard of Review orig. proceeding)). In determining whether a party waived
[1] [2] [3] [4] Waiver is the intentional relinquishmentan arbitration clause, the courts can consider, among
of a known right or intentional conduct inconsistent other factors: (1) whether the movant for arbitration
with claiming that right. Jernigan v. Langley, 111 S.W.3d was the plaintiff (who chose to file in court) or the
153, 156 (Tex.2003); Interconex, Inc. v. Ugarov, 224 defendant (who merely responded), (2) when the movant
S.W.3d 523, 533 (Tex.App.-Houston [1st Dist.] 2007, learned of the arbitration clause and how long the movant
no pet.). “[A] party waives an arbitration clause by delayed before seeking arbitration, (3) the amount of the
substantially invoking the judicial process to the other movant's pretrial activity related to the merits rather than
party's detriment or prejudice.” Perry Homes v. Cull, arbitrability or jurisdiction, (4) the amount of discovery
258 S.W.3d 580, 589–90 (Tex.2008) (footnote omitted). conducted, and (5) whether the movant sought judgment
A party substantially invokes the judicial process if it on the merits. See Perry Homes, 258 S.W.3d at 591–
takes specific and deliberate actions that are inconsistent 92; In re Hawthorne Townhomes, L.P., 282 S.W.3d 131,
with the right to arbitrate or if it actively tries, but fails 141 (Tex.App.-Dallas 2009, no pet.). We analyze whether
to achieve, a satisfactory result through litigation before waiver occurred based on the totality of the circumstances

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717 (2014)

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

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 5


Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717 (2014)

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.

The purpose of the presumption against finding a waiver


All Citations
of contractual arbitration is to preserve the purpose of the
parties' agreement to obtain a speedy and inexpensive final 438 S.W.3d 717

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 6


Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

In determining whether to compel arbitration,


the court must decide two issues: (1) whether
KeyCite Yellow Flag - Negative Treatment a valid, enforceable arbitration agreement
Declined to Extend by American Allied Securities, Inc. v. American 
exists, and (2) if so, whether the claims
General Securities, Inc., Tex.App.-Hous. (14 Dist.), September 21, 2000
asserted fall within the scope of the agreement.
2 S.W.3d 576
V.T.C.A., Civil Practice & Remedies Code §
Court of Appeals of Texas,
171.001 et seq.
Houston (14th Dist.).
8 Cases that cite this headnote
VALERO ENERGY CORP., et al., Appellants,
v.
TECO PIPELINE CO., Appellee. [2] Alternative Dispute Resolution
Right to Enforcement and Defenses in
No. 14–96–01234–CV. General
| The court has no discretion but to compel
Aug. 26, 1999. arbitration if valid, enforceable arbitration
| agreement exists, and claims asserted fall
Rehearing Overruled Oct. 7, 1999. within scope of agreement. V.T.C.A., Civil
Practice & Remedies Code § 171.001 et seq.
Successor of partner in gas pipeline joint venture
brought suit against defendant partners and related 8 Cases that cite this headnote
parties for breach of fiduciary duty, fraud, tortious
interference, and professional malpractice. Defendant
partner counterclaimed for breach of contract, breach [3] Alternative Dispute Resolution
Existence and validity of agreement
of fiduciary duty, and fraud. The 215 th District
Court, Harris County, Dwight E. Jefferson, J., denied Whether the parties have agreed to arbitrate is
motion to compel arbitration, and granted motion to a question of fact to be summarily determined
stay arbitration. Defendant partner took interlocutory by the trial court. V.T.C.A., Civil Practice &
appeal. The Court of Appeals, Anderson, J., held that: (1) Remedies Code § 171.021(b).
Texas General Arbitration Act (TGAA) was not limited
5 Cases that cite this headnote
to disputes involving non-profit entities; (2) compliance
with contractual conditions precedent to arbitration was
question for the arbitrator; (3) arbitration clause of [4] Alternative Dispute Resolution
operating agreement was not superseded by agreement Questions of law or fact
settling ownership dispute; (4) tort claims were sufficiently De novo review is appropriate when the legal
related to operating agreement to be subject to arbitration; interpretation of the arbitration clause, and
and (5) earlier suit did not waive arbitration. no fact issue, is before the appellate court.
V.T.C.A., Civil Practice & Remedies Code §
Reversed and remanded. 171.001 et seq.

3 Cases that cite this headnote

West Headnotes (30)


[5] Alternative Dispute Resolution
Constitutional and statutory provisions
[1] Alternative Dispute Resolution and rules of court
Arbitrability of dispute Application of Texas General Arbitration Act
Alternative Dispute Resolution (TGAA) was not limited to disputes involving
Remedies and Proceedings for non-profit entities, and to extent provision of
Enforcement in General Act could be read to support contrary result,
it was result of error during recodification.

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

V.T.C.A., Civil Practice & Remedies Code §


171.022 (1996). [10] Alternative Dispute Resolution
Modification or termination
1 Cases that cite this headnote Arbitration clause in operating agreement
for gas pipeline joint venture was not
[6] Alternative Dispute Resolution revoked or superseded by settlement
Conditions precedent to arbitration; agreement resolving ownership dispute, where
procedural arbitrability settlement agreement expressly modified only
specific provisions of operating agreement
Whether partners in gas pipeline joint
and other contracts governing relationship,
venture complied with contractual conditions
and subsequent amendment to operating
precedent to enforce the agreement to
agreement referred to arbitration clause.
arbitrate partnership issues was question for
V.T.C.A., Civil Practice & Remedies Code §
the arbitrator, not the court. V.T.C.A., Civil
171.001 et seq.
Practice & Remedies Code § 171.001 et seq.
4 Cases that cite this headnote
3 Cases that cite this headnote

[11] Alternative Dispute Resolution


[7] Partnership
Contractual or consensual basis
Sharing Profits and Losses
Without an agreement to arbitrate,
Without agreement to share profits and
arbitration cannot be compelled. V.T.C.A.,
losses, there was no separate partnership
Civil Practice & Remedies Code § 171.001 et
between parties to joint venture outside
seq.
scope of arbitration clause of gas pipeline
operating agreement. V.T.C.A., Civil Practice 2 Cases that cite this headnote
& Remedies Code § 171.001 et seq.

2 Cases that cite this headnote [12] Alternative Dispute Resolution


Validity of assent

[8] Partnership To establish fraud in the inducement in the


Form, Requisites, and Validity of formation of arbitration agreement, party
Agreement opposing arbitration must prove (1) a material
representation was made, and (2) it was false.
An express or implied partnership agreement
V.T.C.A., Civil Practice & Remedies Code §
has four essential elements: (1) a community
171.001 et seq.
of interest in the venture, (2) an agreement
to share profits, (3) an agreement to share 1 Cases that cite this headnote
losses, and (4) a mutual right of control or
management of the enterprise.
[13] Contracts
3 Cases that cite this headnote Presumptions and burden of proof
The law presumes that a written agreement
[9] Partnership correctly embodies the parties' intentions, and
Presumptions and burden of proof is an accurate expression of the agreement the
parties reached in prior oral negotiations.
The burden of proof is on the party seeking to
establish partnership. 1 Cases that cite this headnote

3 Cases that cite this headnote


[14] Contracts
Mutual mistake

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

A mutual mistake occurs when both parties


to a transaction have a belief in the 2 Cases that cite this headnote
present existence of a thing, material to the
transaction, that does not exist. [19] Alternative Dispute Resolution
Construction
4 Cases that cite this headnote
Language of arbitration contract will be
enforced according to its plain meaning unless
[15] Evidence such a reading would defeat the intentions
Contracts in general of the parties. V.T.C.A., Civil Practice &
Parol evidence is admissible to show mutual Remedies § 171.001 et seq.
mistake in contract.
2 Cases that cite this headnote
3 Cases that cite this headnote

[20] Alternative Dispute Resolution


[16] Alternative Dispute Resolution Scope and standards of review
Disputes and Matters Arbitrable Under Trial court's interpretation of arbitration
Agreement clause is subject to de novo review. V.T.C.A.,
Exception to arbitration under operating Civil Practice & Remedies Code § 171.001 et
agreement for gas pipeline joint venture was seq.
limited to disputes over transportation fees
and did not apply to all disputes over third 1 Cases that cite this headnote
party contracts; thus, exception did not cover
suit against partner for allegedly diverting [21] Alternative Dispute Resolution
or usurping business opportunities. V.T.C.A., Disputes and Matters Arbitrable Under
Civil Practice & Remedies Code § 171.001 et Agreement
seq.
In determining whether a tort claim falls
Cases that cite this headnote within the scope of an agreement to arbitrate,
the focus should be on the factual allegations
contained in the petition rather than on the
[17] Alternative Dispute Resolution legal causes asserted; test should be based on
Disputes and Matters Arbitrable Under a determination of whether the particular tort
Agreement claim is so interwoven with the contract that it
Once the existence of an arbitration agreement could not stand alone or, on the other hand, is
is shown, the party seeking to avoid the effects a tort completely independent of the contract
of the arbitration agreement may do so by and could be maintained without reference
establishing that the dispute is not within to the contract. V.T.C.A., Civil Practice &
the terms of the agreement. V.T.C.A., Civil Remedies Code § 171.001 et seq.
Practice & Remedies Code § 171.001 et seq.
10 Cases that cite this headnote
Cases that cite this headnote

[22] Alternative Dispute Resolution


[18] Alternative Dispute Resolution Construction in favor of arbitration
Matters to Be Determined by Court Any doubts regarding the scope of an
Whether the parties' agreement imposes a arbitration agreement are to be resolved in
duty to arbitrate is a matter of contract favor of arbitration.
interpretation and a question of law for the
court. V.T.C.A., Civil Practice & Remedies 6 Cases that cite this headnote
Code § 171.001 et seq.

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

[23] Alternative Dispute Resolution [26] Alternative Dispute Resolution


Disputes and Matters Arbitrable Under Suing or participating in suit
Agreement A party waives its right to arbitration if
Tort claims for allegedly diverting business it substantially invokes the judicial process
opportunities of gas pipeline joint venture and to the detriment of the opposing party.
providing improper transportation discount V.T.C.A., Civil Practice & Remedies Code §
to third parties were so interwoven with 171.001 et seq.
operating agreement that they could not
stand independently from it, and thus claims 5 Cases that cite this headnote
were subject to agreement's arbitration clause,
which covered any dispute with respect to any [27] Alternative Dispute Resolution
matter within operating agreement. V.T.C.A., Evidence
Civil Practice & Remedies Code § 171.001 et
Party claiming waiver of right to arbitration
seq.
bears the burden of showing other party acted
1 Cases that cite this headnote inconsistently with the arbitration agreement
and that first party was prejudiced by such
conduct. V.T.C.A., Civil Practice & Remedies
[24] Alternative Dispute Resolution Code § 171.001 et seq.
Waiver or Estoppel
Successor to partner in gas pipeline 2 Cases that cite this headnote
joint venture, by suing not only other
partners, but also related parties that were [28] Alternative Dispute Resolution
nonsignatories to operating agreement, was Evidence
equitably estopped to deny the enforceability
There is a strong presumption against waiver
of the arbitration clause in agreement
of right to arbitration, which must be
by nonsignatory parties, where claims
intentional and may only be implied from a
against partners and nonsignatory parties
party's actions if the facts demonstrate that the
were based on the same operative facts,
party seeking to enforce arbitration intended
involving alleged diversion and usurpation of
to waive its arbitration right. V.T.C.A., Civil
business opportunities, and were inherently
Practice & Remedies Code § 171.001 et seq.
inseparable. V.T.C.A., Civil Practice &
Remedies Code § 171.001 et seq. 1 Cases that cite this headnote

18 Cases that cite this headnote


[29] Alternative Dispute Resolution
Waiver or Estoppel
[25] Alternative Dispute Resolution
Any doubts regarding waiver should be
Suing or participating in suit
resolved in favor of arbitration. V.T.C.A.,
Earlier suit challenging partner's merger
Civil Practice & Remedies Code § 171.001 et
as violation of fiduciary duties under gas
seq.
pipeline ownership agreement did not waive
right to invoke arbitration under operating 1 Cases that cite this headnote
agreement in partner's suit for allegedly
diverting and usurping business opportunities
[30] Alternative Dispute Resolution
of gas pipeline joint venture. V.T.C.A., Civil
Trial or hearing
Practice & Remedies Code § 171.001 et seq.
Whether a party waives arbitration is a
Cases that cite this headnote question of law. V.T.C.A., Civil Practice &
Remedies Code § 171.001 et seq.

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

of intent to form a joint venture for the purpose of


Cases that cite this headnote purchasing, transporting, and marketing natural gas.
This agreement was formalized *580 on February 1,
1985, when Valero and Northern Intrastate Pipeline
Company entered into a partnership agreement, forming
Attorneys and Law Firms the Nor–Val Gas Company (“Nor–Val”). On February
28, 1985, Valero entered into a Purchase Agreement
*579 J. Clifford Gunter, III, Gayle A. Boone, Martin with InterNorth and Northern Texas Intrastate Pipeline
Edward Loeber, Gael Plauche, Andrew M. Edison, Company (“NorTex”), a wholly owned subsidiary of
Houston, for appellants. InterNorth, for the purpose of transporting natural
gas via the TranTexas Pipeline. Under the Purchase
Craig B. Glidden, Timothy J. Hill, Donald B. McFall,
Agreement, Valero sold a one-half undivided interest in
Houston, for appellees.
the TransTexas Pipeline to NorTex and 125,000 shares of
Panel consists of Chief Justice MURPHY and Justices Valero stock to InterNorth.
ANDERSON and EDELMAN.
As exhibits to the Purchase Agreement, Valero entered
into three additional agreements with InterNorth
OPINION and NorTex. The first agreement was the Operating
Agreement, which created a joint venture for the
JOHN S. ANDERSON, Justice. purpose of providing for the operation, management,
and maintenance of the TransTexas Pipeline. Valero
This is an interlocutory appeal of an order denying a Transmission Company (“VTC”) was appointed
motion to stay proceedings and compel arbitration. See operator. The second agreement was the Ownership
TEX. CIV. PRAC. & REM.CODE ANN. § 171.098(a) Agreement, which set forth a mutual understanding
(Vernon Supp.1999). 1 Teco Pipeline Company has sued between the parties with regard to the rights of each
Valero Energy Corp., 24 related companies, and two party in the joint ownership of the TransTexas Pipeline.
officers and directors, Stan L. McLelland and William L. The third agreement was the Transportation Agreement,
Greehey (collectively “Valero”). 2 Valero filed a motion which allowed InterNorth to transport gas from New
to stay proceedings and compel arbitration. In response, Braunfels to Houston on other portions of Valero's
Teco filed a motion to stay arbitration. The trial court integrated pipeline system.
granted Teco's motion, while denying Valero's motion. In
two points of error, Valero asserts the trial court erred Two months later, InterNorth merged with Houston
in denying its motion to stay proceedings and compel Natural Gas (“HNG”) to form Enron, Inc. At that time,
arbitration and granting Teco's motion to stay arbitration. HNG was a primary Valero competitor, owning a 50%
We reverse and remand. interest in the only other pipeline delivering gas from
West Texas to the Texas Gulf Coast. Seeking to block the
merger, Valero filed suit against InterNorth and NorTex
in the United States District Court for the Western District
Background of Texas, San Antonio Division. Valero asserted that
the merger violated NorTex's fiduciary duties under the
From 1969 to 1985, Valero was the sole operator and
Ownership Agreement.
owner of the TransTexas Pipeline System, which delivered
gas from Waha, Texas to New Braunfels, Texas. Through
On May 28, 1985, the parties entered into a Settlement
a merger with a network of pipelines, the TransTexas
Agreement (“1985 Settlement Agreement”). Under the
Pipeline was also able to deliver gas to the Texas Gulf
1985 Settlement Agreement: (1) Nor–Val was to be
Coast. InterNorth, Inc. owned an interstate pipeline
dissolved, (2) NorTex agreed to sell its one-half interest to
connecting West Texas to northern states.
an acceptable purchaser, (3) Valero retained the right to
disapprove of any pipeline purchaser tendered by NorTex,
On November 6, 1984, Valero and Northern Natural
and (4) Valero reaffirmed its right of first refusal to
Gas Company, a division of InterNorth, signed a letter

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

venture, (2) *585 an agreement to share profits, (3) an


agreement to share losses, and (4) a mutual right of control Q. And how were the partnership profits and
or management of the enterprise. See Schlumberger Tech. expenses to be split up or accounted for?
Corp. v. Swanson, 959 S.W.2d 171, 176 (Tex.1997). As
A. The — all of the revenues and all of the expenses
a matter of law, a partnership does not exist if any one
were going to be divided, or were divided equally
of these elements is not established. See id.; Stephanz v.
between the partners.
Laird, 846 S.W.2d 895, 900 (Tex.App.-Houston [1 st Dist.]
1993, no writ); State v. Houston Lighting & Power Co., 609 Q. Was there any agreement that provided that?
S.W.2d 263, 268 (Tex.Civ.App.-Corpus Christi 1980, writ
ref'd n.r.e.). The burden of proof is on the party seeking A. The — in the Operating Agreement, which
to establish the partnership. See Stephanz, 846 S.W.2d at was an agreement between Valero as operator
899; Ben Fitzgerald Realty Co. v. Muller, 846 S.W.2d 110, and the partners, Valero and Teco, Valero was
120 (Tex.App.-Tyler 1993, writ denied). elected to be the operator and also had a long
accounting procedure that was appended to
At his deposition, Craig New, President of Teco, testified that agreement that provided for accounting
as to his beliefs concerning the existence of a relationship for revenues, costs, allocations of overhead,
independent of the Operating Agreement: whatnot.

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?

A. Yes, sir, I did. A. Yes, sir, I believe that's right.


Teco also points to several documents, which it contends
Q. What did you believe existed? establishes the existence of a separate partnership. The
first document is a Valero “offering memorandum,”
A. I believed that a partnership, a commercial which states, in part:
partnership existed outside of these written
documents. In February, 1985, Valero sold a
50% undivided interest to Northern
Natural Gas Company forming the
TransTexas Pipeline Partnership.
***
The second document is an internal Valero memorandum
Q. Now, what did you believe the terms of the
stating, in part:
partnership were on July the 15 th , 1987?
... whether TransTexas Pipeline
A. I believed that it was — on July 15, '87, it Company (“TPC”), a joint venture
was a partnership that existed between Valero between Valero Transmission,
and NorTex. Valero was the general partner or L.P. and TECO on the
managing general partner. They were to conduct West Texas pipeline, can
the business affairs, commercial affairs of the enjoin and/or prohibit the use
partnership. of “TransTexas Transmission
Corporation” (“TTC”) as the new
*** name of TransAmerican Natural
*586 Gas Corporation due to
A. That Valero would manage this partnership. similarity of name and possible
With respect to the division of profits and losses, New customer confusion.
further testified:

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

relationship exists constitutes a legal conclusion and is not


The third document is the minutes of a meeting of the determinative of the relationship. See id. at 2 n. 3 (citing
Management Committee stating: Coastal Plains Dev. Corp., 572 S.W.2d at 288) (stating
“[j]ust as the words used by the parties in a contract do not
Need to structure TransTexas as Partnership — As
necessarily control the substance of the relationship, the
a result of previous conversations between Teco and
terms used by the parties in referring to the arrangement
Valero concerning the TransTexas Extension Project,
do not control”); see also Murphy, 807 S.W.2d at 613
there was some thought given to drafting a partnership
(finding summary judgment proof that one party referred
agreement between Teco and Valero to formalize the
to another as a partner was a legal conclusion, which
actions taken jointly as TransTexas Pipeline in the past.
cannot give rise to an issue of disputed fact of the existence
After some discussion, the Management Committee
of a partnership). Accordingly, we find no evidence of any
took the posture of “if it isn't broke, don't fix it” and
partnership separate from the joint venture established
tabled the issue pending any future input Teco may have
under the terms of the Operating Agreement.
on the matter.

While concluding that a partnership existed, New did


not testify as to any facts to support his conclusion. Agreement to Arbitrate
Without more, New's belief that there was a separate
partnership relationship between Valero and Teco is not [10] [11] Teco contends that even if its claims are based
probative evidence of a separate partnership. See Ben on the Operating Agreement, there is no agreement to
Fitzgerald Realty Co., 846 S.W.2d at 1211 (finding mere arbitrate because the arbitration clause was revoked by
legal conclusions by a lay witness do not prove existence the 1985 Settlement Agreement. Without an agreement
of a partnership) (citing Murphy v. McDermott, Inc., 807 to arbitrate, arbitration cannot be compelled. See Freis
S.W.2d 606, 613 (Tex.App.-Houston [14 th Dist.] 1991, v. Canales, 877 S.W.2d 283, 284 (Tex.1994) (original
writ denied)). Moreover, Teco has failed to present any proceeding) (per curiam). Teco asserts the May 1985
evidence of an agreement to share either profits or losses. Settlement Agreement redefined the parties relationship
New's belief that the partners would divide revenues and and governed all aspects of the relationship in place of
expenses in accordance with accounting procedures set the four agreements, including the Operating Agreement,
forth in the Operating Agreement is not sufficient to signed *587 in February 1985. The May 1985 Settlement
establish an agreement to share profits or losses necessary Agreement provides:
to prove the existence of the separate partnership. If
14.3 Governing Law and Jurisdiction.
anything, this suggests the relationship is based on the
Operating Agreement. Without an agreement providing (b) Each party irrevocably consents and agrees that any
for the sharing of profits and losses, there can be no legal action, suit or proceeding against any of them
partnership. See, e.g., Schlumberger Tech. Corp., 959 with respect to their obligations, liabilities, or any other
S.W.2d at 176; Coastal Plains Dev. Corp. v. Micrea, Inc., matter under or arising out of or in connection with
572 S.W.2d 285, 288 (Tex.1978); Ben Fitzgerald Realty this Agreement may be brought in the United States
Co., 846 S.W.2d at 121; Houston Lighting & Power Co., District Court for the Western District of Texas, San
609 S.W.2d at 268. Antonio Division, or in the courts of the State of Texas,
and hereby irrevocably accepts and submits to the
With respect to the documents evidencing a separate jurisdiction of each of the aforesaid court in personam,
partnership, we reach the same conclusion, i.e., without generally and unconditionally with respect to any such
an agreement to share profits and losses there is no action, suit or proceeding for itself and in respect of its
partnership agreement. See Grimmett, 907 S.W.2d at 2– properties, assets and revenues.
3 (finding that although there were numerous documents
reflecting the existence of a partnership, in addition Teco asserts the above clause provides for the procedure
to witness testimony of party representations of a to be used in future disputes, i.e., that the parties will
partnership, there was no partnership in the absence of an go through judicial channels, not arbitration. Teco also
agreement to share losses). A representation contained in asserts the intent to revoke the arbitration clause is
a document or made to a third party that a partnership

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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.

Second, while the Settlement Agreement may have


Teco, however, argues that a letter dated February
modified some select terms of the Purchase, Operating,
10, 1986, between Valero and InterNorth confirms
Ownership, and Transportation Agreements, those
the revocation of the arbitration clause. In referencing
modifications are expressly set forth. Section 14.10 of the
Amendment No. 1 to the Purchase Agreement and
Settlement Agreement specifically amends the Operating
Amendment No. 2 to the Operating Agreement, both
Agreement:
dated January 1, 1986, the letter states, in relevant part:
14.10 Operating Agreement
Execution of the attached
Amendment. Simultaneously with
Amendments by InterNorth and
the execution of this Agreement,
NorTex is not, and shall in no way be
Transmission and NorTex have
deemed or construed to be, a waiver
executed Amendment No. 1 to
of InterNorth's or NorTex's right or
Pipeline Operating Agreement in the
rights to pursue any remedies now or
form attached hereto as Schedule D.
in the future, at law or in equity, with
Amendment No. 1, as referenced above, relates to the regard to any matter arising out of
direction of gas flow. or in connection with the Purchase
Agreement, dated February 28, 1985
Third, there is nothing to indicate that all the terms of or the Operating Agreement, dated
those previous agreements have been superceded by the February 28, 1985.
Settlement Agreement. If this were the case, then nearly
Teco claims that NorTex was not waiving its right to
all material aspects of the relationship between the parties
pursue any remedies available to it with regard to matters
would be left undetermined.
arising from the Purchase and Operating Agreements
and that all matters arising out of or connected with
On June 12, 1985, Valero Transmission Company and
the Operating Agreement were not subject to forced
InterNorth entered into an agreement regarding the
arbitration. Valero responds by pointing out the letter
distribution of NorTex's share of net revenues from
agreement merely states the execution of the referenced
its joint ownership of the TransTexas Pipeline. This
amendments would not be interpreted as a waiver of
agreement further provided:
any rights arising under the Operating Agreement, which
Should InterNorth, Inc. desire to includes compelling arbitration. Therefore, according to
audit the amount of such payment, Valero, the letter agreement confirms that the right to
then, notwithstanding the sale of compel arbitration under the Operating Agreement is still
NorTex to a third party, VTC will available.
permit InterNorth, Inc. to audit
such payment amount in accordance On October 1, 1991, Valero and Teco amended several
with the provisions of the Operating provisions of the Operating Agreement. One such

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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.

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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

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Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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);

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 16


Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

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 -

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 17


Valero Energy Corp. v. Teco Pipeline Co., 2 S.W.3d 576 (1999)

***
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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 18


Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

KeyCite Yellow Flag - Negative Treatment West Headnotes (17)


Distinguished by Bonded Builders Home Warranty Association of 
Texas, Inc. v. Smith, Tex.App.-Dallas, April 21, 2016
435 S.W.3d 222 [1] Alternative Dispute Resolution
Supreme Court of Texas. Decisions reviewable; finality
Courts
VENTURE COTTON COOPERATIVE Review by or certificate to Supreme
and Noble Americas Corp., Petitioners, Court by Court of Civil Appeals of questions
v. where its decision conflicts with or overrules
Shelby Alan FREEMAN, et al., Respondents. that of another Court of Civil Appeals or
that of the Supreme Court
No. 13–0122. Supreme Court has jurisdiction to hear an
| appeal from an interlocutory order denying
Argued Jan. 9, 2014. arbitration when the court of appeals' decision
| conflicts with prior precedent.
Delivered June 13, 2014.
1 Cases that cite this headnote
Synopsis
Background: Cotton growers who entered into contract
with cooperative marketing pool brought action against [2] Alternative Dispute Resolution
cooperative pool. Cooperative pool moved to compel Preemption
arbitration pursuant to an arbitration agreement States
contained in the contracts between growers and Particular cases, preemption or
cooperative pool. The 106th District Court, Gaines supersession
County, Kelly Moore, J., denied motion, finding the Although the Federal Arbitration Act (FAA)
arbitration agreement to be unconscionable. Cooperative preempts state law that conflicts with
pool appealed, and the Eastland Court of Appeals, 395 its objectives, state law remains relevant
S.W.3d 272, Jim R. Wright, C.J., affirmed. Cooperative to declare an arbitration agreement itself
pool filed petition for review. unenforceable on such grounds as exist in law
or in equity for the revocation of any contract.
9 U.S.C.A. § 2.
Holdings: The Supreme Court, Devine, J., held that:
1 Cases that cite this headnote

[1] any implied waiver of growers' statutory right to


recover attorney fees was invalid as contrary to public [3] Alternative Dispute Resolution
policy; Validity
Alternative Dispute Resolution
[2] unenforceable limitation on growers' right to recover Validity of assent
attorney fees was severable from the remainder of the
Alternative Dispute Resolution
arbitration agreement; and
Unconscionability
The “saving clause” of the Federal
[3] one-sided attorney fee provision of the arbitration
Arbitration Act (FAA) permits agreements
agreement was insufficient to invalidate agreement as
to arbitrate to be invalidated by generally
unconscionable.
applicable contract defenses, such as fraud,
duress, or unconscionability, but not by
Reversed and remanded. defenses that apply only to arbitration or that
derive their meaning from the fact that an

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

agreement to arbitrate is at issue. 9 U.S.C.A.


§ 2. 5 Cases that cite this headnote

6 Cases that cite this headnote


[7] Contracts
Unreasonable or Oppressive Contracts
[4] Alternative Dispute Resolution Contracts
Unconscionability Presumptions and burden of proof
Alternative Dispute Resolution Unambiguous contracts are presumed to
Construction reflect the intent of the contracting parties and
In determining an arbitration agreement's are generally enforced as written regardless of
validity, a court may not construe the whether one or more of the parties contracted
agreement differently from how it would wisely or foolishly, or created a hardship for
construe contracts generally under state law, himself; courts therefore do not ordinarily
nor may a court rely on the uniqueness inquire into the reasons for the contract or the
of an arbitration agreement as a basis for relative fairness of its terms.
a state-law holding that enforcement would
be unconscionable; but if the circumstances 1 Cases that cite this headnote
would render any contract unconscionable
under Texas law, they are appropriate to [8] Contracts
invalidate the agreement to arbitrate as well. Unconscionable Contracts
9 U.S.C.A. § 2.
Unconscionable bargains are an exception to
11 Cases that cite this headnote the freedom that generally pervades contract
law.

[5] Alternative Dispute Resolution 1 Cases that cite this headnote


Preemption
States [9] Alternative Dispute Resolution
Particular cases, preemption or Statutory rights and obligations
supersession
When parties agree to arbitrate a statutory
Special state rules for interpreting arbitration claim, a party does not forego the substantive
agreements cannot coexist with the Federal rights afforded by the statute; it only submits
Arbitration Act (FAA) because Congress to their resolution in an arbitral, rather than a
intended the act as its response to a judicial, forum.
longstanding judicial hostility to arbitration
agreements. 9 U.S.C.A. § 1 et seq. Cases that cite this headnote

Cases that cite this headnote


[10] Alternative Dispute Resolution
Writing, signature, and acknowledgment
[6] Alternative Dispute Resolution
Alternative Dispute Resolution
Evidence
Validity
A party seeking to compel arbitration under
Any implied waiver of cotton growers' right
the Federal Arbitration Act (FAA) must
to recover attorney fees under the Consumer
establish that the dispute falls within the scope
Protection-Deceptive Trade Practices Act
of an existing agreement to arbitrate; upon
arising out of their execution of arbitration
such proof, the burden shifts to the party
agreement that incorporated arbitration rules
opposing arbitration to raise an affirmative
limiting recovery of attorney fees was invalid
defense to the agreement's enforcement. 9
as contrary to public policy; arbitration
U.S.C.A. §§ 3, 4.

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Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

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

[13] Alternative Dispute Resolution


Unconscionability [17] Contracts
Unconscionable Contracts
Provision of arbitration agreement between
cotton growers and cooperative marketing Courts usually analyze unconscionability
pool that entitled pool, but not growers, issues in light of a variety of factors, which aim
to recover attorney fees for any breach to prevent oppression and unfair surprise.

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Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

51.016 (permitting interlocutory appeals of orders denying


1 Cases that cite this headnote
arbitration under the FAA). 1

*225 The trial court has concluded that the parties'


agreement to arbitrate should not be enforced because
Attorneys and Law Firms it is unconscionable, and the court of appeals has
affirmed the trial court's order denying arbitration. 395
*224 R. Carson Fisk, Ford Nassen & Baldwin P.C.,
S.W.3d 272, 275–76 (Tex.App.–Eastland 2013). The court
Austin, TX, for Amicus Curiae Fisk R. Carson.
of appeals reasons that the arbitration agreement is
Amber S. Miller, ZS Brady & Co., Lubbock, TX, for unconscionable because it prevents the farmers from
Amicus Curiae Plains Cotton Growers, Inc. pursuing the statutory remedies and attorney's fees alleged
in their pleadings. Id. at 277. We conclude that this
Zachary S. Brady, ZS Brady & Co., Lubbock, TX, for limitation of statutory remedies is insufficient to defeat
Amicus Curiae Texans for Lawsuit Reform. arbitration under the FAA and accordingly reverse the
court of appeals' judgment. We conclude further that,
Danica Lynn Milios, Kent C. Sullivan, Sean D. Jordan,
because the court has not fully considered the parties'
Sutherland Asbill & Brennan LLP, Austin, H. Grady
arguments on the issue of unconscionability, the case
Terrill III, Craig Terrill Hale & Grantham LLP, Lubbock,
should be remanded to the court of appeals.
TX, for Petitioner.

Don David Martinson, McCleskey Harriger Brazill &


Graf, L.L.P., Lubbock, Dustin Slade, Fernando Manuel I. Background
Bustos, Bustos Law Firm, P.C., Lubbock, Jennifer Lea
Kelley, Fanning Harper Martinson Brandt & Kutchin PC, Venture Cotton Cooperative is a cotton cooperative-
Dallas, TX, for Respondent Freeman, Shelby Alan. marketing association, incorporated in Texas, and
managed by Noble Americas Corp., a foreign
Dennis R. Burrows, William P. Lane, McCleskey Harriger corporation. In 2010, Venture operated a pool for the
Brazill & Graf, L.L.P., Lubbock, Don Martinson, exclusive sale and marketing of its members' cotton
Fanning Harper Martinson Brandt & Kutchin, P.C., production. Venture promoted this pool through various
Dallas, Jennifer Lea Kelley, Texans for Lawsuit Reform, cotton-gin companies, which arranged meetings with local
Austin, TX, for Respondent Neitsch, Roger. farmers. Venture would explain the pool's terms and
solicit membership at these meetings. One such meeting
H. Alan Carmichael, Wetsel & Carmichael, LLP,
was arranged by Ocho Gin Company in Seminole, Texas.
Sweetwater, TX, for Respondent OCHO Gin Company,
Ltd.
Farmers, who agreed to join the 2010 pool, signed
Opinion Venture's Membership and Marketing Agreement and
other related documents. These documents asked each
Justice DEVINE delivered the opinion of the Court. farmer to designate the acreage committed to the pool
and to estimate the production Venture might expect to
[1] Two groups of cotton farmers sue to rescind market. After the meeting in Seminole, Venture left copies
contracts in which they agreed to sell cotton through a of these documents with Ocho for farmers to execute,
cooperative marketing pool. The farmers allege that they should they decide to join the cooperative. Several farmers
were fraudulently induced to join the cooperative and decided to join the pool.
seek damages, declaratory relief, and attorney's fees under
various statutes. Because the agreements provide for During the growing season, the price of cotton rose
arbitration of all disputes under the Federal Arbitration significantly. By harvest, Venture had become concerned
Act, 9 U.S.C §§ 1–16, the cotton cooperative moved to that members of the pool might be tempted to sell their
stay the litigation and compel arbitration. This appeal committed production on the open market. This concern
is from the trial court's interlocutory order, denying blossomed into a dispute with some member-farmers
those motions. See TEX. CIV. PRAC. & REM.CODE § over the quantity of cotton committed to the pool and

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

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.

*226 Venture generally denied the allegations in both


Venture denies making any such representations. It also
suits and moved to stay the litigation and compel
argues that its contract clearly calls for the commitment
arbitration under the United States Arbitration Act
of acres, not bales, making overages subject to the
(also known as the Federal Arbitration Act or FAA). 9
agreement. In any event, Freeman and Brewer maintain
U.S.C §§ 1–16. The farmers' membership and marketing
that they signed with the cooperative after being led to
agreements with the cooperative provided for the
believe that they would control overages.
arbitration of all disputes under the FAA and the
arbitration rules of the American Cotton Shippers
After considering the parties' pleadings, motions,
Association (ACSA). The arbitration provision referred
responses, and briefs, as well as evidence presented at
to the farmers as “producers” and provided in pertinent
the hearing, the trial court refused to stay the litigation
part:
or compel arbitration, finding the arbitration agreements
• All disputes will be resolved pursuant to binding unconscionable. Findings of fact and conclusions of
arbitration pursuant to the arbitration rules of the law were requested and filed, but these findings and
American Cotton Shippers Association. conclusions shed no light on the court's reasoning. 4

• 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.

The farmers opposed Venture's motions, asserting a


number of reasons why the arbitration agreement was

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Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

make at least a threshold determination of arbitrability


—that the dispute is subject to an enforceable agreement
II. The FAA and State Law
to arbitrate—before enforcing the arbitration agreement
[2] [3] [4] Although the Federal Arbitration Act by compelling arbitration or staying litigation. 9 U.S.C. §§
preempts state law that conflicts with its objectives, 3–4. 5
Southland Corp. v. Keating, 465 U.S. 1, 10–17, 104
S.Ct. 852, 79 L.Ed.2d 1 (1984), state law remains
relevant to declare an arbitration agreement itself
*228 A. Unconscionability
unenforceable on “such grounds as exist in law or in
equity for the revocation of any contract.” 9 U.S.C. [7] [8] The farmers do not dispute that their claims are
§ 2 (the saving clause). “This saving clause permits covered by the agreements with Venture and subject to
agreements to arbitrate to be invalidated by ‘generally arbitration under the FAA, if their arbitration agreement
applicable contract defenses, such as fraud, duress, or itself is valid and enforceable. They contend, of course,
unconscionability,’ but not by defenses that apply only that it cannot be enforced because the agreement is one-
to arbitration or that derive their meaning from the sided and grossly unfair in several respects. Unambiguous
fact that an agreement to arbitrate is at issue.” AT & contracts, however, are presumed to reflect the intent
T Mobility LLC v. Concepcion, ––– U.S. ––––, ––––, of the contracting parties and are generally enforced as
131 S.Ct. 1740, 1746, 179 L.Ed.2d 742 (2011) (quoting written “regardless of whether one or more of the parties
Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681, 687, contracted wisely or foolishly, or created a hardship for
116 S.Ct. 1652, 134 L.Ed.2d 902 (1996)). In determining himself.” Wooten Props., Inc. v. Smith, 368 S.W.2d 707,
the arbitration agreement's validity then, a court may not 709 (Tex.Civ.App.–El Paso 1963, writ ref'd). Texas courts
construe the agreement differently from how it would therefore do not ordinarily inquire into the reasons for
construe contracts generally under state law, nor may a the contract or the relative fairness of its terms. El Paso
court rely on the uniqueness of an arbitration agreement Field Services, L.P. v. MasTec N. Am., Inc., 389 S.W.3d
as a basis for a state-law holding that enforcement 802, 810–11 (Tex.2012) (observing that a court's role
would be unconscionable. Perry v. Thomas, 482 U.S. 483, “is not to protect parties from their own agreements”).
492, 107 S.Ct. 2520, 96 L.Ed.2d 426 (1987). But if the But this notion that parties are free to negotiate their
circumstances would render any contract unconscionable own bargains conflicts with the equally compelling notion
under Texas law, they are appropriate to invalidate the that grossly unfair bargains should not be enforced.
agreement to arbitrate as well. In re Poly–America, 262 49 DAVID R. DOW & CRAIG SMYSER, TEXAS
S.W.3d 337, 348 (Tex.2008). PRACTICE SERIES: CONTRACT LAW § 3.9 (2005).
Unconscionable bargains are therefore an exception to the
[5] [6] Special state rules for interpreting arbitration freedom that generally pervades contract law.
agreements cannot coexist with the FAA because
Congress intended the act as its response to Unconscionability, however, is not easily defined. The
a “longstanding judicial hostility to arbitration term defies a precise legal definition because “it is not
agreements.” Green Tree Fin. Corp.–Ala. v. Randolph, a concept, but a determination to be made in light of
531 U.S. 79, 89, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000). a variety of factors not unifiable into a formula.” 27
Under the FAA, an agreement to arbitrate that is valid STEPHEN COCHRAN, TEXAS PRACTICE SERIES:
under general state law principles and involves interstate CONSUMER RIGHTS AND REMEDIES § 4.2 at 394
commerce is “valid, irrevocable, and enforceable.” 9 (3d ed.2002); see also 1 JAMES J. WHITE & ROBERT
U.S.C. § 2. A party seeking to compel arbitration under S. SUMMERS, UNIFORM COMMERCIAL CODE §
the FAA, however, must establish that the dispute falls 4–3 at 294 (5th ed.2006). Although difficult to define, the
within the scope of an existing agreement to arbitrate. In defense has a long history. One of the earliest decisions
re Rubiola, 334 S.W.3d 220, 223 (Tex.2011). Upon such to apply the defense described an unconscionable contract
proof, the burden shifts to the party opposing arbitration as one that “no man in his senses and not under delusion
to raise an affirmative defense to the agreement's would make on the one hand, and as no honest and
enforcement. J.M. Davidson, Inc. v. Webster, 128 S.W.3d fair man would accept on the other.” Earl of Chesterfield
223, 227 (Tex.2003). The FAA thus requires a court to v. Janssen, 28 Eng. Rep. 82, 100, 2 Ves. Sr. 125, 155

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Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

(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

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Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

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.

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Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

arbitration agreement did not waive the farmers' statutory


That section provides, in relevant part, that “[a] person right to attorney's fees under section 38.001 and so
may recover reasonable attorney's fees from an individual its relevancy to the court's unconscionability analysis is
or corporation, in addition to the amount of a valid claim unclear.
and costs, if the claim is for ... an oral or written contract.”
TEX. CIV. PRAC. & REM.CODE 38.001. The court of In Olshan, we observed that the “crucial inquiry” in
appeals ultimately decides, however, that the arbitration determining unconscionability was “whether the arbitral
agreement fails effectively to waive the farmers' rights forum in a particular case is an adequate and accessible
under section 38.001 because the agreement and ACSA substitute to litigation, a forum where the litigant can
rules do not reference the statute or otherwise specifically effectively vindicate his or her rights.” In re Olshan Found.
inform the farmers of the intended waiver of such rights. Repair Co., *232 LLC, 328 S.W.3d 883, 894 (Tex.2010).
See 395 S.W.3d at 276 (concluding that waiver of these That inquiry is not satisfied by speculation but by
statutory rights cannot occur absent specific notice and specific proof in the particular case of the arbitral forum's
reference to § 38.001). inadequacy. Id. at 896. If speculation about possible
harm was insufficient to establish unconscionability in
Venture, on the other hand, argues that whether the Olshan, then clearly the court's determination here that
agreement waives these rights is irrelevant because no harm has been done will not suffice. See 395 S.W.3d
the statute simply does not apply to the farmers' at 276 (concluding that arbitration agreement did not
circumstances. The statute does not apply, according waive cotton farmers' right to attorney's fees under section
to Venture, because the farmers seek to cancel the 38.001).
contract rather than recover under its terms. In short,
Venture contends that the farmers' pleadings do not assert In Olshan, we cautioned that courts “should be wary
contractual rights and therefore do no invoke a right to of setting the bar for holding arbitration clauses
attorney's fees under section 38.001. unconscionable too low” as that would undermine the
“liberal federal policy favoring arbitration agreements.”
[13] The farmers respond that they have pled a breach of Olshan, 328 S.W.3d at 893. Courts should also use care not
contact claim. Their pleadings are not clear on the subject, to intrude upon arbitral jurisdiction under the guise of an
but even were we to recognize some deficiency in the unconscionability defense.
present pleadings, the result would be merely to postpone
the issue, much the same as the court of appeals has done [15] [16] Questions of waiver, illegality, remedies, and
with the severance question. The appeal is interlocutory, attorney's fees often relate to the broader, container
and the farmers are free to amend their pleadings to clarify contract, rather than the separable agreement to arbitrate,
the matter. For purposes of this appeal then, we accept and, as such, are matters entrusted to the arbitrators. 6
that the farmers intended to plead an alternative breach And, when authority over the matter is unclear, “a strong
of contract claim, as they assert. We conclude, however, federal presumption” favors arbitration. Poly–America,
that neither the contract's attorney's fee provision nor its 262 S.W.3d at 348. Thus, the United States Supreme
effect on attorney's fees under section 38.001 is sufficient Court has indicated that arbitration provisions should
to invalidate the arbitration agreement as unconscionable. not be held unconscionable based on speculation about
their potential effect. See PacifiCare Health Sys., Inc. v.
[14] Parties are generally free to contract for attorney's Book, 538 U.S. 401, 407 n. 2, 123 S.Ct. 1531, 155 L.Ed.2d
fees as they see fit. Intercontinental Group P'ship v. KB 578 (2003) (noting that “the preliminary question [of]
Home Lone Star L.P., 295 S.W.3d 650, 653 (Tex.2009). whether the remedial limitations at issue ... prohibit[ed]
Thus, a contract that expressly provides for one party's an award of RICO treble damages [was] not a question of
attorney's fees, but not another's, is not unconscionable arbitrability”).
per se. Although perhaps relevant to a broader inquiry
into contractual oppression or an imbalance in bargaining In PacifiCare, several physicians filed suit against
power, the attorney's fee provision here is not, standing managed healthcare organizations, including PacifiCare
alone, decisive proof of an unconscionable bargain. and UnitedHealth, alleging breach of contract, unjust
Moreover, the court of appeals itself concludes that the enrichment, and violations of several federal and state

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 9


Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

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

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Venture Cotton Co-op. v. Freeman, 435 S.W.3d 222 (2014)
57 Tex. Sup. Ct. J. 730

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.

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 11


Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

[5] a stay of proceedings was warranted pending lenders'


2016 WL 8138799
interlocutory appeal.
Only the Westlaw citation is currently available.
United States District Court,
W.D. Texas, El Paso Division. Motion to reconsider denied, motion for stay granted.
Lucinda VINE, Kristy Pond, on behalf of themselves
and for all others similarly situated, Plaintiffs
v. West Headnotes (14)
PLS FINANCIAL SERVICES, INC., and
PLS Loan Store of Texas, Inc., Defendants. [1] Federal Civil Procedure
Grounds and Factors
EP–16–CV–31–PRM
| To prevail on a motion to alter or amend a
Signed 08/11/2016 judgment, the movant must show at least one
of the following: (1) an intervening change
Synopsis in controlling law, (2) the availability of new
Background: Borrowers brought putative class action evidence not previously available, or (3) the
against short-term lenders that required borrowers to need to correct a clear error of law or prevent
submit a post-dated personal check for the amount manifest injustice. Fed. R. Civ. P. 59.
borrowed plus a finance charge, and allegedly threatened
borrowers with prosecution for theft by check if Cases that cite this headnote
they missed a payment, alleging inter alia, malicious
prosecution. Lenders moved to dismiss and compel [2] Alternative Dispute Resolution
arbitration. The United States District Court for the Pleading
Western District of Texas, 2016 WL 8138800, Philip
District Court was required to accept
R. Martinez, denied lenders' motion to dismiss and
allegations in borrowers' complaint as true
compel arbitration. Lenders moved for reconsideration
when considering short-term lenders' motion
and moved to stay the proceedings pending interlocutory
to compel arbitration, in borrowers' putative
appeal.
class action alleging malicious prosecution
against lenders, who required borrowers to
submit a post-dated personal check for the
Holdings: The District Court, Philip R. Martinez, J., held amount borrowed plus a finance charge
that: and allegedly threatened borrowers with
prosecution for theft by check if they
[1] it was required to accept borrowers' allegations as true missed a payment; while lenders sought
when considering lenders' motion to compel arbitration; reconsideration of denial of their motion to
compel arbitration on the basis that factual
[2] when lenders filed worthless-check affidavits against allegations in complaint were inaccurate,
borrowers, they substantially invoked the judicial process, asserting that no criminal charges were filed
so as to waive their right to arbitrate; against borrowers, and such charges were
barred by statute of limitations, the District
[3] lenders' filing of worthless-check affidavits against Court accepted facts alleged in borrowers'
borrowers prejudiced borrowers, so as to waive lenders' complaint as true when deciding lenders'
right to arbitrate; motion, and complaint indicated that lenders
initiated criminal process by filing worthless-
[4] question of whether lenders' litigation conduct waived check affidavits.
their right to arbitrate was for District Court rather than
arbitrator; and

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 1


Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

had been convicted of theft by check, and the


Cases that cite this headnote process to secure a criminal conviction was
initiated unilaterally by lenders' strategy of
[3] Alternative Dispute Resolution filing worthless-check affidavits.
Suing or participating in suit
Cases that cite this headnote
When short-term lenders filed worthless-
check affidavits against borrowers, they
substantially invoked the judicial process with [6] Federal Civil Procedure
respect to specific claim they subsequently Further evidence or argument
wanted to arbitrate, pursuant to arbitration A motion for reconsideration may not be used
provision in loan agreement, in borrowers' to rehash rejected arguments or introduce new
putative class action alleging malicious arguments.
prosecution, so as to waive arbitration; while
criminal statutes were not arbitrable, lenders Cases that cite this headnote
would have been entitled to parallel civil relief
under Texas law to recover on theft by check [7] Federal Civil Procedure
claims, so the lenders' filing of worthless-check Further evidence or argument
affidavits amounted to a specific claim they
Motions to reconsider based on recycled
subsequently wanted to arbitrate. Tex. Bus. &
arguments only serve to waste the resources
C. Code § 3.414(b).
of the court, and are not the proper vehicle
Cases that cite this headnote to rehash old arguments or advance legal
theories that could have been presented
earlier.
[4] Bills and Notes
Liability of drawer Cases that cite this headnote
Under Texas law, when a bank dishonors a
check, the drawer of the check is obligated to [8] Alternative Dispute Resolution
pay the amount of the check to the check's Waiver, laches, or estoppel
holder according to its terms at the time it was
Question of whether short-term lenders'
issued. Tex. Bus. & C. Code § 3.414(b).
litigation conduct waived lenders' right,
Cases that cite this headnote set forth in loan agreements, to arbitrate
borrowers' putative class action malicious
prosecution claims, after lenders required
[5] Alternative Dispute Resolution borrowers to submit a post-dated personal
Suing or participating in suit check for the amount borrowed plus a finance
Short-term lenders' filing of worthless- charge and allegedly threatened borrowers
check affidavits against borrowers prejudiced with prosecution for theft by check if they
borrowers, so as to waive lenders' right to missed a payment, was for the District Court,
arbitrate, pursuant to arbitration provision rather than an arbitrator; it was for District
in loan agreement, borrowers' putative class Court to decide the issue of waiver since
action alleging malicious prosecution against it was equipped with greater expertise in
lenders that required borrowers to submit a recognizing and controlling abusive forum
post-dated personal check for the amount shopping, and sending waiver claims to an
borrowed plus a finance charge and allegedly arbitrator would have been exceptionally
threatened borrowers with prosecution for inefficient, encouraging the case to bounce
theft by check if they missed a payment; back and forth between tribunals without
borrowers' legal position would have been making progress.
compromised in a civil action if borrowers

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Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

in the proceeding, and (4) where the public


Cases that cite this headnote interest lies.

Cases that cite this headnote


[9] Alternative Dispute Resolution
Review
A stay of proceedings was warranted in [12] Federal Courts
borrowers' putative class action alleging Supersedeas or Stay of Proceedings
malicious prosecution against short-term When determining whether to stay
lenders that required borrowers to submit a proceedings pending appeal, questions of
post-dated personal check for the amount whether the stay applicant has made a strong
borrowed plus a finance charge and allegedly showing that he is likely to succeed on the
threatened borrowers with prosecution for merits and whether the applicant will be
theft by check if they missed a payment, irreparably injured absent a stay are the most
pending lenders' interlocutory appeal of order critical.
denying their motion to compel arbitration
pursuant to loan agreement; lenders made a Cases that cite this headnote
strong showing they were likely to succeed
on merits of their appeal, given that question [13] Federal Courts
of whether filing criminal charges resulted in Supersedeas or Stay of Proceedings
arbitration waiver was one of first impression
Where there is a serious legal question
before the Fifth Circuit Court of Appeals,
involved and the balance of the equities
which also had yet to address whether
heavily favors a stay, a party moving to stay
arbitration waiver claims based on litigation
the proceedings pending appeal only needs to
activity were to be decided by an arbitrator or
present a substantial case on the merits.
a court.
Cases that cite this headnote
Cases that cite this headnote

[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.

Cases that cite this headnote

Attorneys and Law Firms


[11] Federal Courts
Supersedeas or Stay of Proceedings H. Mark Burck, Daniel R. Dutko, Hanszen Laporte LLP,
Houston, TX, M. Mitchell Moss, Finger & Thurmond,
Courts look to four factors when
P.C., El Paso, TX, Priscilla Marquez, Scott Hulse, P.C.,
contemplating a motion for stay pending
El Paso, TX, for Plaintiffs.
appeal: (1) whether the stay applicant has
made a strong showing that he is likely Richard Andrew Bonner, Jose Abelardo Howard-
to succeed on the merits, (2) whether the Gonzalez, Mark N. Osborn, Shelly W. Rivas, Kemp
applicant will be irreparably injured absent Smith LLP, El Paso, TX, for Defendants.
a stay, (3) whether issuance of the stay will
substantially injure the other parties interested

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 3


Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

After due consideration, the Court is of the opinion that


Defendants' Motion will be denied for the reasons that
MEMORANDUM OPINION AND ORDER follow. Additionally, the Court will grant Defendants'
DENYING DEFENDANTS' MOTION Motion to Stay.
TO RECONSIDER AND GRANTING
DEFENDANTS' MOTION TO STAY
I. FACTUAL AND PROCEDURAL BACKGROUND
PHILIP R. MARTINEZ, UNITED STATES Plaintiffs instituted this class action lawsuit against
DISTRICT JUDGE Defendants for, inter alia, malicious prosecution. Pls.'
First Am. Class Action Compl. 5, Mar. 11, 2016, ECF No.
*1 On this day, the Court considered: 17 [hereinafter “Complaint”]. Defendants provide short-
term loans to borrowers who are required to present post-
dated blank personal checks for the amount borrowed
Motion to Reconsider plus a finance charge. Compl. 3. Plaintiffs were clients
• Defendants PLS Financial Services, Inc. and PLS who obtained these short-term loans. Id. As holders, 2
Loan Store of Texas, Inc.'s “Motion to Reconsider Defendants would allegedly deposit these post-dated or
the Court's Order Denying Defendants' Motions blank personal checks if a borrower missed a payment. Id.
To Compel Arbitration” (ECF No. 39) [hereinafter According to Plaintiffs, after their checks would “bounce
“Motion”], filed on June 17, 2016; [ ],” Defendants would threaten the delinquent borrowers
with criminal prosecution. Id.
○ Plaintiffs Lucinda Vine and Kristy Pond's 1
“Response to Defendants' Motion to Reconsider On June 6, 2016, the Court denied Defendants' motions
the Court's Order Denying Defendants' Motions to dismiss and to compel arbitration. Mem. Op. &
to Compel Arbitration” (ECF No. 41) [hereinafter Order Den. Defs.' Mots, to Dismiss and to Compel
“Response”], filed on June 23, 2016; Pls. to Arbitration, June 6, 2016, ECF No. 37
[hereinafter “Order”]. Despite the presence of an
○ Defendants' “Reply to Plaintiffs' Response to arbitration agreement between Defendants and Plaintiffs,
Defendants' Motion to Reconsider the Court's the Court concluded that Defendants waived their right
Order Denying Defendants' Motions to Compel to arbitrate. Order 17–18. Specifically, the Court held that
Arbitration” (ECF No. 42) [hereinafter “Reply”], Defendants had invoked the judicial process resulting in
filed on June 30, 2016; prejudice to Plaintiffs. Id. at 15–19.

*2 Defendants now request that the Court reconsider


Motion to Stay
its Order, arguing that (1) criminal charges were not filed
• Defendants' “Motion to Stay Proceedings Pending against Plaintiffs; (2) criminal matters are non-arbitrable;
Defendants' Motion to Reconsider and Interlocutory (3) the In re Christus Spohn Health System Corp., 231
Appeal” (ECF No. 44) [hereinafter “Motion to S.W.3d 475, 481 (Tex. App.–Corpus Christi 2007, no pet.)
Stay”], filed on July 1, 2016; decision is different from the instant action; (4) Plaintiffs
did not suffer any prejudice; and (5) that an arbitrator
○ Plaintiffs' “Response to Defendants' Motion to should decide the issue of waiver. The Court will address
Stay Proceedings Pending Defendants' Motion to each argument in turn.
Reconsider and Interlocutory Appeal” (ECF No.
46), filed on July 8, 2016; and
II. LEGAL STANDARD
○ Defendants' “Reply in Support of their Motion to [1] The Federal Rules of Civil Procedure do not recognize
Stay Proceedings” (ECF No. 48), filed on July 15, a “motion for reconsideration” by that name, and
2016; Defendants did not provide a rule of procedure under
which they urge their Motion. A court may reconsider
in the above-captioned cause. an interlocutory order pursuant to Federal Rule of
Civil Procedure 54(b). While the Court has authority

© 2017 Thomson Reuters. No claim to original U.S. Government Works. 4


Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

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

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Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

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.

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Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

Plaintiffs have asserted, and the Court is duty-bound to


All three of Defendants' arguments are unavailing. The accept, that criminal charges were filed. See id.
Court recognizes—then and now—that the facts in the
Christus Spohn are different than those in the instant *6 Therefore, the Court finds Defendants' “recycled
action. In fact, in its Order, the Court never indicated that arguments” about prejudice unpersuasive.
the cases were identical or that the Christus Spohn decision
was controlling. See Order 13. Rather, the Court found
Christus Spohn's *5 reasoning “instructive” because, akin E. An Arbitrator Should decide the Issue of Waiver
to the instant action, the Christus Spohn hospital took [8] For the first time, Defendants argue that an arbitrator,
action as part of their “strategic plan of defense in the and not a court, should decide whether Defendants
underlying matter that would be inconsistent with a right waived their right to arbitrate. Mot. 8. 6 To bolster
their contention, Defendants cite to a 2014 United States
to arbitrate.” See id. at 13, 16 (quoting In re Christus Spohn
Health Sys. Corp., 231 S.W. at 481). 4 Supreme Court case where it held that “courts presume
that the parties intend arbitrators, not courts, to decide
disputes about the meaning and application of particular
D. Plaintiffs Did Not Suffer Any Prejudice procedural preconditions for the use of arbitration.” BG
[5] [6] [7] Finally, Defendants contend that Plaintiffs Grp., PLC v. Republic of Argentina, ––– U.S. ––––,
did not suffer any prejudice from the filing of the 134 S.Ct. 1198, 1207, 188 L.Ed.2d 220 (2014) (emphasis
worthless-check affidavits. Mot. 7. Defendants renew added) (citing Howsam v. Dean Witter Reynolds, Inc., 537
5
their previously unavailing arguments: “A motion for U.S. 79, 86, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002)). “These
reconsideration may not be used to rehash rejected procedural matters include claims of waiver, delay, or a
arguments or introduce new arguments.” LeClerc v. like defense to arbitrability.” Id. (citation omitted).
Webb, 419 F.3d 405, 412 n.13 (5th Cir. 2005). “Motions
to reconsider based on recycled arguments only serve In Howsam, the Supreme Court held that the arbitrator,
to waste the resources of the court, and are not the and not a court, should decide the issue of whether an
proper vehicle to rehash old arguments or advance legal arbitration claim was barred by a six-year limitations
theories that could have been presented earlier.” Krim v. period embedded in the arbitration rules under which
pcOrder.com, Inc., 212 F.R.D. 329, 331 (W.D. Tex. 2002) the parties had agreed to arbitrate. Howsam, 537 U.S.
(alterations and citation omitted). at 85–86, 123 S.Ct. 588. In BG Group, the Supreme
Court held that the arbitrator, and not a court, should
Defendants have presented “recycled arguments”—all of decide whether a precondition to arbitrate had been
which have been fully considered in the Court's Order. satisfied. BG Grp., 134 S.Ct. at 1207–08. Ultimately, the
See Krim, 212 F.R.D. at 331. The Court draws the same Supreme Court has held that arbitrators are authorized
conclusion as before: Plaintiffs' legal position would be to “interpret and apply” “procedural provisions” of
compromised in a civil action if Plaintiffs were convicted arbitration agreements. See BG Grp., 134 S.Ct. at 1207.
of theft by check—a process initiated unilaterally by
Defendants' strategy of filing worthless-check affidavits. Despite the holdings in BG Group and Howsam, the
See Order 19 (citing Nicholas v. KBR, Inc., 565 F.3d 904, “Supreme Court did not intend ... to upset the ‘traditional
910 (5th Cir. 2009)). rule’ that courts, not arbitrators, should decide the
question of whether a party has waived its right to
Moreover, Defendants contend that the Court erred arbitrate by actively litigating the case in court.” See
when it “found that Plaintiffs suffered prejudice on Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217–18 (3d
contingencies that could happen if criminal charges Cir. 2007) (analyzing Howsam).
were filed.” Mot. 7 (emphasis in original). As discussed
supra, Defendants simply reassert their argument that Courts have generally viewed themselves as the
no criminal charges were filed against Plaintiffs. See appropriate forum for deciding whether litigation activity
supra Section III.A. Again, because the Court must view waives the right to compel arbitration. See, e.g., Grigsby
Plaintiffs' Complaint in the light most favorable to them, & Assocs., Inc. v. M. Sec. Inv., 664 F.3d 1350, 1353 (11th
Cir. 2011) (“Today we conclude that it is presumptively

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Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

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.

The Fifth Circuit has peripherally weighed in on this


issue in an unpublished case decided after Howsam, but F. Motion to Stay
before BG Group. See Tristar Fin. Ins. Agency, Inc., 97 [9] [10] [11] [12] “A stay is not a matter of right .... It is
Fed.Appx. at 464. In Tristar, the Fifth Circuit held that instead an exercise of judicial discretion, and the propriety
the defendant had not waived their right to arbitration of its issue is dependent upon the circumstances of the
even after they threatened litigation, filed motions in the particular case.” Nken v. Holder, 556 U.S. 418, 433, 129
district court action, conducted discovery, and waited S.Ct. 1749, 173 L.Ed.2d 550 (2009) (alteration omitted).
eight months to file a motion to compel arbitration The Court looks to four factors when contemplating a

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Vine v. Pls Financial Services, Inc., --- F.Supp.3d ---- (2016)
2016 WL 8138799

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

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