Houston COA Orders All Parties to Arbitration in High Stakes Legal Malpractice Lawsuit

Texas’ Fourteenth Court of Appeals in Houston has reversed a trial court’s order denying arbitration in a legal malpractice dispute. In Greenberg Traurig, LLP v. National American Ins. Co., National American Insurance Company (NAICO) retained the services of an attorney at Greenberg Traurig, LLP (Greenberg) to defend Okie Foundation Drilling Co., Inc. (Okie) in an appeal in an accidental death case. Although another attorney at Greenberg represented NAICO in a number of other matters since 2005, an agent for NAICO signed a flat fee retainer agreement in 2011 that was specifically related to the firm’s services in the Okie case.

The retainer agreement that was executed by NAICO included an arbitration clause stating any disputes related to legal malpractice and other matters would be resolved through binding arbitration in Dallas. By signing the agreement, NAICO warranted to Greenberg that it had the authority to sign on behalf of Okie. The provision at issue also provided NAICO with an opportunity to opt out of arbitration by drawing a line through and initialing the relevant paragraph.

Following execution of the retainer agreement, the attorney involved in the case left Greenberg and moved to another law firm. Although the lawyer engaged NAICO at his new firm, no one filed a timely notice of appeal in the Okie case. About one month after leaving Greenberg, the attorney informed NAICO that this failure to file a timely notice made it impossible for the insurer to appeal the prior decision in the Okie case. NAICO responded by filing a negligence and breach of fiduciary duty lawsuit in Harris County against the attorney, Greenberg, and the attorney’s new law firm. Greenberg responded by filing a motion to compel all of the parties to arbitration under the Texas Arbitration Act (TAA). NAICO also filed an alternative motion to compel arbitration with the former Greenberg attorney and his new law firm.

The trial court denied the law firm’s motion with regard to Okie because the company did not sign the parties’ agreement. The trial court also held that the arbitration agreement NAICO signed was unenforceable under the doctrine of constructive fraud due to the “longstanding fiduciary relationship” between the firm and the insurer as well as Greenberg’s purported failure to disclose or call attention to the arbitral provision included in the flat fee contract. In addition, the court denied NAICO’s motion to compel arbitration with the lawyer and the firm he moved to. Greenberg then appealed the trial court’s decision to Texas’ Fourteenth Court of Appeals.

On appeal, the Houston court first stated a valid arbitration agreement must exist before arbitral proceedings may be ordered. The court added that a trial court normally “conducts a summary proceeding to make the gateway determination of arbitrability” which is reviewed de novo on appeal. Next, the appellate court addressed whether Greenberg had a duty to disclose the existence of the arbitration provision included in the parties’ retainer agreement and if the agreement successfully bound nonsignatory Okie to engage in arbitration.

After examining the parties’ longstanding relationship, the court said:

Although the relationship between parties may be fiduciary in character, their fiduciary duties extend only to dealings within the scope of the underlying relationship of the parties. Rankin v. Naftalis, 557 S.W.2d 940, 944 (Tex.1977); see also Joe v. Two Thirty Nine Joint Venture, 145 S.W.3d 150, 159 (Tex.2004) (applying this principal to attorney-client relationships). In this case, extending the scope of Greenberg’s longstanding relationship with NAICO—and its accompanying fiduciary duties—to the commencement of a new representation presents three distinct problems.

First, it conflicts with the parties’ own agreement. The retainer agreement between the parties specifies that “[t]he representation of NAICO and Okie addressed in this agreement relates only to the [Okie appeal].” The agreement further states that the engagement would commence “upon [Greenberg’s] receipt of the signed copy of this letter.” If Greenberg owed NAICO fiduciary duties which extended to the commencement of all future representations, such language would be unnecessary. Second, a holding that a lawyer’s duties to a repeat-client insurance company extend to the commencement of future representations, even in the absence of a retainer agreement to that effect, would transform arms-length negotiations for services between the insurance-defense bar and its primary customers into fiduciary transactions. And third, as we noted in Pham, the legislature has already considered limitations on arbitration agreements in certain contexts, evidenced by section 171.002 of the Texas Civil Practice and Remedies Code, but has not seen it necessary to extend such protections to the attorney-client context.

Next, the Court of Appeals addressed whether nonsignatory Okie was bound by the parties’ agreement to arbitrate:

…under the doctrine of direct benefits estoppel, a party who is seeking the benefits of a contract or seeking to enforce it is estopped from simultaneously attempting to avoid the contract’s burdens, such as the obligation to arbitrate disputes. Id. at 486 (citing In re Kellogg Brown & Root, Inc., 166 S.W.3d at 739). If the claims are based on the agreement, they must be arbitrated, but if the claims can stand independently of the agreement, they may be litigated. Id. Thus, a nonsignatory should be compelled to arbitrate only if it seeks, through its claims, to derive a direct benefit from the contract containing the arbitration provision. In re Kellogg Brown & Root, Inc., 166 S.W.3d at 741.

Here, Okie’s claims are based on the retainer agreement, which explicitly states that the “engagement will commence upon [Greenberg’s] receipt of the signed copy of this letter.” Each claim that Okie asserts—negligence, malpractice, and breach of fiduciary duty—is based on Greenberg’s legal representation of Okie, which arises out of the agreement. See In re Morgan Stanley & Co., 293 S.W.3d 182, 190 (Tex.2009) (orig.proceeding) (Brister, J., concurring) (stating that breach of fiduciary duty, negligence, and malpractice claims were based on client’s contract with broker). Because Okie insists that Greenberg violated various duties owed to Okie as a client, it cannot avoid the arbitration provision in the agreement providing for Okie’s legal representation. See Rachal, 403 S.W.3d at 846.

The Houston court also reversed the lower court’s decision denying NAICO’s motion to compel arbitration with the attorney and his new firm because the parties’ engagement agreement incorporated the terms of the Greenberg flat fee retainer contract.

Finally, Texas’ Fourteenth Court of Appeals reversed the trial court’s decision and ordered all of the parties to arbitrate NAICO and Okie’s claims.

Photo credit: Cushing Memorial Library and Archives, Texas A&M / Foter / CC BY