Concerted-Misconduct Equitable Estoppel

As you can see, today was a big day at the Texas Supreme Court. The Court handed down three arbitration opinions, as well as a handful of other opinions on other issues. We’ve already blogged about arbitration opinions one and two, but this one is, we think, the most interesting. Today, you see, the Texas Supreme Court refused to adopt concerted-misconduct equitable estoppel as a means by which non-signatories to an agreement to arbitrate can nonetheless compel arbitration.

Juan Alaniz, having settled a personal injury lawsuit, opened several accounts with Merrill Lynch to manage his settlement proceeds. All his contracts with Merrill Lynch contained arbitration clauses. Part of his investment plan, however, required that he also enter into contracts with Merrill Lynch Trust Company (MLT) and Merrill Lynch Life Insurance Company (MLLI), so that he could create a life insurance trust. Mr. Alaniz’ contracts with MLT and MLLI did not contain arbitration clauses. The broker who handled all of these accounts was a fellow named Henry Medina.

In April 2003, Alaniz sued Medina, MLT and MLLI, but not Merrill Lynch. All defendants moved to compel arbitration, based on the Merill Lynch contracts which contained arbitration clauses. The trial court and the 13th Court of Appeals denied motions to compel arbitration.

The Supreme Court reversed those decisions so far as the Alaniz claims against Mr. Medina were concerned. The majority opinion holds that the Plaintiffs cannot sue an agent of the company with whom it had the agreement to arbitrate and thus avoid the agreement to arbitrate. This holding is certainly consistent with prior Texas caselaw.

With respect to the Allaniz claims against MLT and MLLI, however, the majority refused to compel arbitration. MLT and MLLI entered into separate contractual relationships with Alaniz. They had an opportunity to negotiate for an arbitration clause, and they chose not to. Compelling arbitration against them, therefore, would allow them to re-write their agreements with Alaniz after the fact. In other words, in Texas, if you’re a non-signatory hoping to compel arbitration based on someone else’s contract with the Plaintiff, you’re much better off if you don’t have a contract of your own with the Plaintiff that lacks an arbitration clause.

Next, MLT and MLII urge the Court to find an agreement to arbitrate pursuant to a theory called concerted-misconduct equitable estoppel (or “CMEE”). Like direct benefits estoppel (discussed previously here), CMEE is an estoppel theory some courts have adopted to require non-signatories to arbitration agreements to arbitrate claims. Since the Texas Supreme Court has enthusiastically applied direct benefits estoppel to compel arbitration, MLT and MLII apparently decided to have a go at CMEE.

After discussing other jurisdictions’ approach to CMEE, the Supreme Court decides not to adopt it here:

Similarly, while Texas law has long recognized that nonparties may be bound to a contract under traditional contract rules like agency or alter ego, there has never been such a rule for concerted misconduct. Conspiracy is a tort, not a rule of contract law. And while conspirators consent to accomplish an unlawful act, that does not mean they impliedly consent to each other?s arbitration agreements. As other contracts do not become binding on nonparties due to concerted misconduct, allowing arbitration contracts to become binding on that basis would make them easier to enforce than other contracts, contrary to the Arbitration Act?s purpose.

What, then, happens next? The Court has compelled arbitration of claims against one Defendant, but not the other two. Well, the rule in Texas is that the arbitration gets to go first. The Court stays the litigation between Alaniz and the Merrill Lynch companies until the arbitration against Medina is complete; “the case illustrates one of many circumstances in which litigation must be abated to ensure that an issue two parties have agreed to arbitrate is not decided instead in collateral litigation.”

The majority opinion in the case is written by Justice Brister. There are two concurring/dissenting opinions as well, and not all parts are agreed to by all Justices. That being the case, be careful which parts of the opinion you rely on in the future. For example, Section III-B, which refuses to adopt CMEE, has a 5-4 majority, while Section 4, which holds that arbitration gets to go first, was unanimous.

Justice Hecht wrote an opinion concurring in part and dissenting in part to the Brister opinion. First, he writes that he would not have compelled arbitration against Medina. Plaintiffs, he notes, were quite careful in their pleading to sue Medina for his role as agent for MLT and MLLI, not for his role as agent for Merrill Lynch. That being the case, they are not trying to get out of arbitration by suing an agent of the company with whom they had agreed to arbitrate; they are instead suing the agent of a company with whom they had no agreement to arbitrate, who also happened to be an agent of the company with whom they had the agreement. This is an important distinction, it seems. Based on their pleading, Plaintiffs can never recover a judgment against Merrill Lynch based on Medina’s conduct, since the acts of which Plaintiffs complain were performed by Medina in the course and scope of his employment with MLT and MLLI, and not Merrill Lynch. Justices Medina and O’Neill join in this portion of Justice Hecht’s opinion

Justice Hecht (who, I think, wrote the leading recent direct benefits estoppel opinion) also wrote briefly to note that he did not the claims asserted by Alaniz were closely enough related to any claims it might have asserted against Merrill Lynch to have invoked CMEE in the first place.

Finally, Justice Johnson also wrote an opinion concurring in part and dissenting in part to the Brister majority opinion. He writes that estoppel ought to require the Alanizes to arbitrate their claims against MLT and MLLI since they had to arbitrate their claims against Medina, and Medina’s actions, as agents for all the relevant companies, are “the same tap root” of all the claims. In other words, writes Justice Johnson, Alaniz had an overall relationship with Medina, as a Merrill Lynch broker, from which the relationships with MLT and MLII sprung forth. That being the case, the Fifth Circuit and Texas Supreme Court estoppel-based arbitrability cases clearly provide a basis for compelling arbitration of all the claims.

Whew. It is a fascinating case with three interesting and compelling (no pun intended) opinions. We recommend reading them all. Perhaps over the weekend we can opine some on what to make of all this.

In Re: Merrill Lynch Trust Company, ___ S.W.3d ___ (Tex. 2007) (Cause No. 04-0865)

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