Houston’s First Appellate District has stated an arbitrator exceeded his authority when he determined that a non-signatory to an arbitration agreement was bound to arbitrate under the agreement. In Elgohary v. Herrera, No. 01-11-00550-CV (Tex. App. 1st March 5, 2013), Victor S. Elgohary entered into a written employment agreement with Herrera Partners, L.P., a Texas Limited Partnership with Gilbert A. Herrera as the limited partner. The employment agreement contained a clause that required any disputes between the parties to be decided through binding arbitration. Elgohary was subsequently terminated for cause in May 2007 and Herrera Partners was formally dissolved one month later. After unsuccessfully pursuing a claim for unemployment compensation, Elgohary sought to compel arbitration with both Herrera Partners and Gilbert Herrera despite that Gilbert Hererra was not a signatory to the agreement. In response, Herrera Partners filed a counterclaim against Elgohary. In addition, Herrera stated he could not be compelled to arbitrate because he was not a signatory to the parties’ arbitral agreement. Herrera also argued throughout the arbitral proceeding that “whether he as a non-signatory should be compelled to arbitrate was a ‘gateway matter’ for the court to decide, not the arbitrator.” The arbitrator found that a “successors and assigns” clause in the agreement “clearly and unmistakably” incorporated Herrera as the successor to Herrera Partners. According to the arbitrator, this rendered Herrera a proper party to the arbitration. The arbitrator then awarded Elgohary unpaid wages and business expenses. When Elgohary sought to confirm the arbitral award, Herrera filed an objection with the trial court. The lower court confirmed the arbitral award as it related to Herrera Partners and vacated the award against Herrera. Elgohary then filed an appeal with Houston’s First District. The appeals court first examined whether the fact that Herrera signed the agreement as an agent of Herrera Partners constituted “clear and unmistakable evidence” of individual consent to arbitrate. After examining several prior cases, the Court stated the fact that Herrera signed “the agreement as agent is not clear and unmistakable agreement to submit claims against him personally to arbitration.” Likewise, the court also found that his agreement to arbitrate under AAA rules did not evidence Herrera’s agreement arbitrate any claims brought against him in his individual capacity. Next, the appellate court examined the agreement’s “successors and assigns” clause, which read: The rights and obligations of this Agreement shall be binding on the Partnership’s successors and assigns and inure to the benefit of any successor or assign of the Partnership. The Houston court then held that the arbitrator exceeded his authority by deciding this “gateway issue.” According to the court, [d]eciding that Herrera was bound by the “successors and assigns” clause of the employment agreement, the arbitrator skipped to the ‘merits’ of the dispute without there first being a judicial determination as to whether Herrera, individually agreed to arbitrate. We agree with the Fifth Circuit, that evidence of a successor, assigns, or affiliates clause in the contract between the signatories is not evidence that the non-signatory intended that an arbitrator decide whether the non-signatory was bound under the contract’s provisions about successors. The appellate court continued, The trial court properly decided that it, and not the arbitrator, had the authority to decide whether Herrera, as a non-signatory, had agreed to be bound the arbitration. However, the trial court did not then conduct an independent review to determine whether arbitration could nonetheless be compelled because of either successor liability under the contract or under any of the six theories for compelling a non-signatory to arbitrate set forth In re Merill Lynch, 235 S.W.3d at 191. Absent such an independent review of arbitrability by the trial court, its action denying the application to confirm and vacating the arbitration award against Herrera was premature. Finally, because the trial court failed to conduct an independent review of the arbitrability issue, Houston’s First District reversed and remanded the case.

Last week, Professor Linda S. Mullenix, Morris & Rita Atlas Chair in Advocacy at the University of Texas School of Law, published a timely article entitled, Round Five and Down for the Count? Class Arbitration on the Ropes – Again, 6 Preview of Supreme Court Cases 270 (March 18, 2013). In her article, Professor Mullenix examines the upcoming United States Supreme Court decision in Oxford Health Plans LLC v. Sutter (No. 12-135). Oral argument regarding the case was held on Monday, March 25th. Here is the abstract: This article previews the issues and arguments in Oxford Health Plans LLC v. Sutter, to be argued before the U.S. Supreme Court on March 25, 2013. The primary issue the Court will address is whether an arbitrator exceeds his powers under the Federal Arbitration Act when the arbitrator concludes that the parties authorized class arbitration based on an arbitration clause that contained language broadly precluding litigation of any dispute, arising under the contract, in any court? In Oxford Health Plans LLC, the Court for the second time during the 2012-13 Term and the sixth time in recent years again addresses the problem of class arbitration. This appeal focuses on the specific issue whether an arbitrator, under the Federal Arbitration Act, legitimately construed the broad language of the parties’ arbitration clause to conduct class arbitration, where the provision contained no specific language authorizing class arbitration. Based on its growing body of jurisprudence relating to class arbitration, Oxford’s appeal will require the Court to further clarify exactly when parties agree and consent to authorize class arbitration, based on specific contractual language in their arbitration agreement. With the increased use of arbitration clauses throughout commercial transactions, the battle over class arbitration has resulted in repeated appeals to the Court for guidance and clarification concerning the precise contract language authorizing or not authorizing class arbitration. The professional services contract between Oxford and Sutter contained a relatively short arbitration clause. The core arbitration provision specified that “No civil action concerning any dispute arising under this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration in New Jersey, pursuant to the rules of the American Arbitration Association with one arbitrator.” The arbitrator concluded that the arbitration clause was much broader than even the usual broad arbitration provision, because it prohibited any conceivable court action and required that all such disputes be sent to arbitration. Consequently, because a class action was plainly a form of civil action that could be brought in court, the clause must have been intended to prohibit court adjudication of class litigation, but intended to permit class arbitration. Conversely, if the arbitration clause did not authorize class proceedings, then Sutter would not be able to pursue a class action in any forum. The arbitrator subsequently certified a class in March 2005, and issued an “award” defining the class and delineating the class claims to be resolved in the arbitration. From the defense perspective, Oxford Health Plans is significant because the appeal demonstrates the need for the Court to provide clarity for attorneys tasked with drafting arbitration provisions where a client desires to avoid class arbitration. This seems especially compelling in light of a broad and seemingly clear arbitration provision intended for bilateral arbitration of disputes. Notwithstanding multiple decisions in recent years, the repetition of this problem suggests that the Court needs to bring order to the array of possible language that might or might not authorize class arbitration. The cases demonstrate that apart from the concerted efforts of corporate attorneys to draft class-proof arbitration provisions, plaintiffs continue to find nuanced means to discern parties’ intent to agree to class arbitration. From the plaintiffs’ perspective, the two class arbitration cases currently before the Court will have significant impact on broader questions of access to justice. In Italian Colors, the Court will determine whether to uphold the effective vindication rule which would enable class arbitration for small value claimants where the costs of arbitration might otherwise preclude redress in any forum. Similarly, in Oxford Health Plan the Court may weigh whether the broad language of an arbitration provision barring any disputes from court, coupled with a mandatory arbitration provision, is so sweeping as to effectively foreclose class resolution anywhere. To some extent, the narrow language issues presented in these two appeals may essentially constitute a self-correcting problem. In Italian Colors, the arbitration provision was drafted years ago before the Court’s major arbitration decisions setting forth the contours of class arbitration jurisprudence. Several commentators have pointed out that successive generation arbitration clauses now include mitigating concessions to make the prospect of arbitration more palatable and fair. In a similar vein, the arbitration provision entailed in Oxford Health Plan was drafted more than a decade ago, and its broad, boilerplate language may now be a thing of the distant past. The full text of this and other articles authored by Professor Mullenix are available for download (without charge) from the Social Science Research Network.

Texas lawmakers are currently considering a bill that would not allow a binding arbitration clause to be included in contracts between Texas homebuilders and new home buyers. HB 3736, “Relating to the sale of newly constructed homes and requiring the Texas Real Estate Commission to adopt contract forms to be used in the sale of a newly constructed home,” was filed by Representative Lon Burnum of Fort Worth. The proposed law would reportedly remove a binding arbitration clause from a currently approved Texas Real Estate Commission contract form. The bill was referred to the House Business and Industry Committee on March 21st. According to one report, Bexar County Commissioners recently voted to back the initiative and the City of San Antonio is currently reviewing the proposed measure. Scott Norman, Executive Director of the Texas Association of Builders, has stated the organization plans to strongly oppose the measure. Other groups, such as the Greater San Antonio Builders Association, will reportedly work to discourage cities and other localities from supporting the legislation. What do you think about the proposal? Stay tuned to Disputing for more information about this and other bills that relate to arbitration in Texas.

S.I. Strong, Associate Professor of Law and Senior Fellow at the University of Missouri School of Law‘s Center for the Study of Dispute Resolution, recently published a thoughtful book review entitled Constitutional Conundrums in Arbitration, 15 Cardozo Journal of Conflict Resolution __ (forthcoming 2013). Here is the abstract: Professor Peter Rutledge’s new book, Arbitration and the Constitution (Cambridge University Press, 2013), offers the first comprehensive study of the constitutionality of arbitration. The discussion draws together arguments and evidence from a diverse range of constitutional and arbitral authorities and introduces examples and issues from many different sub-disciplines within the world of arbitration. This review essay considers whether Rutledge succeeds in his bold experiment of blending together two such seemingly diverse areas of law by taking a critical look at the strengths and weaknesses of Rutledge’s analysis while simultaneously setting the book within the context of existing and future forms of constitutional and arbitral scholarship. This and other scholarly papers authored by Professor Strong are available for download (without charge) from the Social Sciences Research Network.