The Texas Supreme Court issued a per curiam mandamus opinion compelling an arbitration this morning in a class action suit which alleges that a home builder built a bunch of houses without shower pans. The opinion is not long, but it quickly dispenses with a number of the common contractual arguments parties raise when seeking to avoid arbitration. In other words, it is a handy primer for this type of arbitrability challenge, offering a sort of cliff notes version of why these challenges are exceedingly difficult in Texas. Contracts of Adhesion: the Court first overrules the trial court decision that the arbitration contract, as a contract of adhesion, is unconscionable. In Texas, proving that a party will not contract with someone unless the contract contains an arbitration clause, in and of itself, is not an obstacle to arbitration. Procured By Fraud: printing the arbitration clause on the back of a form contract is not evidence that the arbitration clause was procured by fraud. In Texas, a party to a contract has some obligation to read all of it. Failure to read the back of a form is not evidence of fraud. Mutuality of Obligation: the Supreme Court re-states the now well-settled rule that a mutual obligation to arbitrate is its own consideration for an agreement to arbitrate. Cost as a Basis for Unconscionability: while evidence of high costs of arbitration remains a theoretical basis for challenging an arbitration clause, evidence of the AAA fee schedule, in and of itself, does not meet the burden. Mediation as condition precedent: this is a more interesting argument, given that many arbitration clauses contain this type of language, and the Third Court of Appeals’ recent opinion in the Pisces Foods case. Today, however, the Court was unpersuaded, given that mediation had since taken place. Since the argument, if accepted, would be a basis for postponing, rather than avoiding, the obligation to arbitrate, and since the mediation had already happened while the case was pending, the Court rejected the conditions precedent argument here. The Court did not address the point in great detail, however. In RE: U.S. Home Corp., ___ S.W.3d ___ (Tex. 2007) (Cause No. 03-1080). Technorati Tags: arbitration, ADR, Texas Supreme Court, law

We’ve blogged before, on numerous occasions, about McCarran-Ferguson Reverse Preemption of the Federal Arbitration Act. Specifically, we’ve blogged about the Kepka case out of Houston, whereby the Court held that Texas medical malpractice legislation, which holds that an agreement to arbitrate a med-mal case must be signed by both the plaintiff and the plaintiff’s attorney, was legislation to regulate the insurance industry, and as such the McCarran-Ferguson Act reverse-preempts the FAA, which would normally say that no such requirement is enforceable in an FAA case. The Texas Supreme Court, having requested briefing on the merits, had seemed like it was going to rule on a petition for mandamus which sought to over-rule Kepka. Given that Court’s recent history, we feared for the ongoing viability of McCarran-Ferguson preemption in the Texas medical malpractice arbitration context (we actually do fear for these things). Today, however, the Court granted a motion to dismiss the petition for writ of mandamus. We know nothing of the details of this, but we can say that Kepka lives to fight another day. Technorati Tags: arbitration, ADR, Texas Supreme Court, law

As the Texas Appellate Law blog has noted, the Texas Supreme Court was busy today, releasing “a slew of 13 opinions.” Many of them, on first blush, look interesting. None of them, however, talks about arbitration. Well, that’s not exactly true. One of the opinions came from a case “almost identical” to last week’s Merrill Lynch arbitration case. The quite short opinion simply states that this week’s Merrill Lynch case is decided just like last week’s was. Except, though, that this week’s Merrill Lynch case is slightly different from last week’s. In this case, the plaintiff initiated an arbitration proceeding against Merrill Lynch and the broker in his capacity as agent for Merrill Lynch. The plaintiff filed a separate lawsuit against the Merrill Lynch trust company, the entity with whom no arbitration clause existed, and the broker, this time in his capacity as agent for that company. The Court reaches the same result, but it seems to us that this slight variation in the facts highlights the point Justice Hecht made in his dissent in last week’s opinion. In Re: Merrill Lynch Trust Company, ___ S.W.3d ___ (Tex. 2007) (Cause No. 03-1059) Technorati Tags: arbitration, litigation, ADR, Texas Supreme Court, law

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” […]