The Texas Supreme Court held that a trial court did not abuse its discretion by declining to submit to the arbitrator the question of whether a party to an arbitration agreement lacks the mental capacity to assent. Justice Medina delivered the opinion of the court, in which Chief Justice Jefferson and Justices Wainwright, Green, Johnson, and Willett joined. Justice Brister filed a concurring opinion, Justice Willett filed a concurring opinion, Justice Hecht filed a dissenting opinion, and Justice O’Neill did not participate. In In re Morgan Stanley & Co., Inc., __ S.W.3d __ (Texas 2009) (No. 07-0665), Helen Taylor was worth several million dollars in 1999. Having been diagnosed with dementia that year, Taylor transferred several accounts to Morgan Stanley & Co. Each account agreement contained an arbitration clause. In 2005, Nathan Griffin, guardian of Taylor’s Estate, sued Taylor’s granddaughters and others for violation of of the Texas Uniform Fraudulent Transfer Act, civil theft, conversion and for imposition of a constructive trust. About a year later, Griffin added Morgan Stanley & Co. as a defendant, claiming breach of fiduciary duty, negligence and malpractice, unsuitability of investments, violations of the Texas Security Act, and breach of contract. When Morgan Stanley moved to compel arbitration, Griffin argued that Taylor lacked capacity to contract when she signed the account agreements containing the arbitration clause. Therefore, according to Griffin, the appropriate forum to resolve the dispute was the court, not arbitration. The trial court agreed with Griffin and denied the order to compel arbitration. The court of appeals also declined to order arbitration. The Texas Supreme Court now considers whether a court or an arbitrator should determine the issue of mental capacity to contract. The court began by highlighting section 2 of the Federal Arbitration Act (“FAA”), “an agreement to arbitrate is valid except on grounds as exist at law or in equity to revoke the contract.” The court continued to say that “[s]ection 2 of the FAA provides that courts shall compel arbitration on issues subject to an arbitration agreement.” However, the court noted that “[s]ection 4 of the FAA provides that a court may consider only issues relating to the making and performance of the agreement to arbitrate.” Next, the court explained that the U.S. Supreme Court rejected the reasoning that “any defense that would render the entire contract unenforceable or void was for the court to decide because if the underlying contract was invalid so too was the agreement to arbitrate.” Prima Paint Corp. v. Flood & Conklin Manufacturing Co., 388 U.S. 395 (1967). The court noted that in Prima Paint, the U.S. Supreme Court created the “separability” doctrine, in which “an arbitration provision was separable from the rest of the contract under section 4 and the issue of the contract’s validity was to be determined by the arbitrator unless the challenge was to the agreement to arbitrate itself.” The court then turned to the question of whether the defense of mental capacity is an attack on the validity of the contract as a whole (therefore a matter for the arbitrator to decide) or specifically aimed to the agreement to arbitrate (a matter for the court to decide). The court pointed out that the Fifth Circuit decided in Primerica Life Insurance Co. v. Brown, 304 F.3d 469 (5th Cir. 2002), that “the arbitrator should decide a defense of mental incapacity because it is not a specific challenge to the arbitration clause but rather goes to the entire agreement.” But the court also noted that the Tenth Circuit reached the opposite result in Spahr v. Secco, 330 F.3d 1266 (10th Cir. 2003), concluding that the “mental incapacity defense naturally goes to both the entire contract and the specific agreement to arbitrate in the contract.” Explaining that the U.S. Supreme Court has not decided the present issue, the court cited Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440 (2006). It then stated that in Buckeye, “the [U.S. Supreme] Court noted that an illegality defense, raising the issue of the contract’s validity, was different from a formation defense, raising the issue of whether a contract was ever concluded.” Finally, citing Alan Scott Rau’s article Everything You Really Need to Know About “Separability” in Seventeen Simple Propositions, 14 Am. Rev. Int’l Arb. 1, 17 (2003), the court concluded that Primerica misapplies Prima Paint’s separability doctrine: Despite casual assumptions to the contrary, Prima Paint does not merely preserve for the courts challenges that are “restricted” or “limited” to “just” the arbitration clause alone—this would be senseless; it preserves for the courts any claim at all that necessarily calls an agreement to arbitrate into question. To send a dispute to arbitration where “not only” the arbitration clause itself, but “also,” in addition, the “entire” agreement is subject to challenge, is to lose sight of the only important question—which is the existence of a legally enforceable assent to submit to arbitration. Someone lacking the requisite mental capacity to contract cannot, I dare say, assent to arbitrate anything at all. Accordingly, the court denied the petition for writ of mandamus. This opinion is noteworthy for several reasons. First, the U.S. Supreme Court has not ruled on whether the issue of capacity to contract should be decided by a court or by the arbitrator. Second, the Fifth and Tenth Circuits have reached opposite outcomes on this issue. Third, the Texas Supreme Court declined to follow the precedent set by Fifth Circuit case law. Finally, the Texas Supreme Court’s majority opinion agreed with the analysis by Alan Scott Rau, professor at The University of Texas School of Law and contributor to this blog. [Ed note: find professor Alan Scott Rau’s comments about this case here.] Technorati Tags: arbitration, ADR, law, Texas Supreme Court

To follow up on our post of last week. We are pleased to recommend another excellent law review article, “Disappearing Juries and Jury Verdicts,” 39 Tex. Tech L. Rev. 289, written by the Honorable Sam Sparks, U.S. District Judge for the Western District of Texas and DLA Piper attorney George B. Butts. The article traces the history of jury trials, presents statistics reflecting the decline in the number of cases tried, and discusses Fifth Circuit and Texas Supreme Court cases relevant to the issue of the constitutional authority of the jury. As it relates to arbitration, the authors make the following remarks: IX. Compelling Arbitration One form of alternative dispute resolution that frequently supplants jury trials is compulsory arbitration. The Texas Supreme Court has recently decided two cases that evidence the court’s strong preference for arbitration over litigation. In re Weekley Homes, L.P. was a case of first impression in which the Texas Supreme Court conditionally granted an application for writ of mandamus to require a trial judge to compel arbitration. The unusual aspect of the case was that the person resisting arbitration was not a party to the contract containing the arbitration clause that was sought to be enforced. Rather, she was the adult daughter of the owner of the house which was the subject of litigation. She did not assert any claim under the contract between her father and the homebuilder or sue as either trustee or beneficiary. The court, however, justified its conclusion to compel arbitration under the direct-benefits estoppel theory because the plaintiff had taken advantage of the benefits of the contract and was in fact the equitable owner of the house. In re Dillard Department Stores, Inc. is another example of the Texas Supreme Court’s strong policy favoring arbitration. In Dillard, Garcia was discharged from her job as a sales associate at a Dillard’s store. She subsequently filed a retaliatory discharge suit. In response, Dillard’s filed an original mandamus proceeding in the Texas Supreme Court seeking to enforce an arbitration policy adopted by the company that it claimed covered most employment disputes, including Garcia’s. She claimed she had never agreed to an arbitration policy and had specifically refused to sign a form that required arbitration. Dillard’s was unable to produce any writing whereby Garcia acknowledged receipt of the arbitration policy. Despite that fact, the court concluded Garcia attended a meeting at which she received an acknowledgment form advising employees of Dillard’s arbitration policy. Ultimately, the supreme court concluded that both the trial court and the court of appeals abused their discretion by not granting Dillard’s motion to compel arbitration. The effect of the supreme court’s holding was that Garcia lost her Seventh Amendment right to a jury trial when she elected to continue her employment with Dillard’s after she received the arbitration acknowledgment. We would like to hear your comments about this article. Technorati Tags: arbitration, ADR, law

On April 1, 2009, the U.S. Supreme Court decided the landmark case 14 Penn Plaza v. Pyett (find our case summary here and additional comments here). Then, in May, a U.S. District Court in Colorado decided the first case post-Pyett (blogged here). Recently, we came across yet another Pyett progeny. This time, it was the U.S. District Court for the Eastern District of New York‘s turn in Shipkevich v. Staten Island Univ. Hosp. & Aramark, 2009 U.S. Dist. LEXIS 51011 (E.D.N.Y. June 16, 2009) to decide the “clearly and unmistakable” requirement. Check out New York attorney Philip J. Loree, Jr. excellent analysis of this opinion in: Shipkevich v. Staten Island Univ. Hosp., 14 Penn Plaza LLC v. Pyett, and the “Clear and Unmistakable” Rule. Also, following are Professor Mitchell H. Rubinstein’s comments: Shipkevich v. Staten Island Univ. Hosp. & Aramark, 2009 U.S. Dist. LEXIS 51011 (E.D.N.Y. June 16, 2009), is an interesting case. A lower court held that a CBA did not mandate arbitration of the plaintiff’s statutory anti-discrimination claims because the language of the CBA did not “clearly and unmistakably” require arbitration. The plaintiff alleged discrimination in violation of Title VII and related New York state laws. On its motion to dismiss, the defendant argued that the following arbitration provision in the CBA, which also prohibited discrimination, required arbitration of the plaintiff’s claims: “A grievance…which has not been resolved [under the grievance procedure] may…be referred for arbitration by the Employer or the Union[.]” The court reasoned that the CBA at issue was more like the CBA in Gardner-Denver than the one in Pyett: “Nowhere in the CBA is there an explicit statement that such claims are subject to mandatory arbitration.” Technorati Tags: arbitration, ADR, law, U.S. Supreme Court, ADE waiver, Age Discrimination in Employment Act of 1967, National Labor Relations Act of 1935, 14 Penn Plaza LLC v. Pyett

Looks like the U.S. Supreme Court can’t have enough of arbitration this term. As posted at the Adjunct Law Prof, the Court vacated and remanded Kimberlin v Renasant Bank (Dkt No 08-816). The issue decided by the U.S. Court of Appeals for the Sixth Circuit was whether non-parties to an arbitration agreement can invoke Section 3 of the Federal Arbitration Act and compel arbitration. The U.S. Supreme Court decided this issue recently in Arthur Andersen LLP v. Carlisle, No. 08–146 (May 4, 2009) (find our case summary here). Because the Sixth Circuit’s decision was not in accord with Arthur Andersen LLP v. Carlisle, the Court remanded the case for further proceedings. Technorati Tags: arbitration, ADR, law, U.S. Supreme Court, Arthur Andersen v. Carlisle