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” […]

In a per curiam arbitrability opinion released today, the Texas Supreme Court held that a fraudulent inducement claim must be arbitrated, if the contract which was allegedly fraudulently induced contained an arbitration clause, even if the party seeking to compel arbitration is not a signatory to that contract. The case involves fraudulent inducement claims by a group of student electricians against a vocational College; they allege that the College induced them to enroll by making false promises that they would be eligible for journeyman or master electrician licenses upon graduation. The College, with whom the students had entered into the arbitration agreements, was wholly owned by Kaplan Higher Education Corporation. When the students sued the College, the College moved to compel arbitration, and the students dropped their claims against the College, choosing instead to proceed against Kaplan. Kaplan was not a signatory to the enrollment agreement with the arbitration clause, and neither the trial court nor the Court of Appeals would compel arbitration. The Supreme Court, however, did, holding that “when an agreement between two parties clearly provides for the substance of a dispute to be arbitrated, one cannot avoid it by simply pleading that a nonsignatory agent or affiliate was pulling the strings.” In Re: Kaplan, ___ S.W.3d ___ (Tex. 2007) (Cause No. 06-0072). Technorati Tags: arbitration, ADR, Texas Supreme Court, law

Yesterday, we posted about a Third Court of Appeals opinion where a party seeking to compel arbitration was found to have not established the existence of an agreement to arbitrate. Today, the Texas Supreme Court addresses the same issue but comes up with the opposite result. The case involved claims by investors against their stock broker based on Enron stock losses. In this case, the plaintiffs, who sought to avoid arbitration, signed contracts with a company called Olde Discount Corporation. The contracts contained arbitration clauses. Later, Olde changed its name to H&R Block, but the plaintiffs continued to use the same broker. In October 2002, the plaintiffs sued H&R Block, and H&R Block moved to compel arbitration. The trial court denied the motion, and the Corpus Christi Court of Appeals denied the petition for mandamus (in 2003 – the opinion never explains the delay between these events and today’s opinion). The Supreme Court, however, disagreed with the other courts that looked at these facts and ordered the claims to arbitration. According to the Court, H&R Block made an evidentiary record that demonstrated that the plaintiffs signed an agreement to arbitrate with Olde, and that H&R Block was simply the new name for Olde. Since the change in name would not have invalidated the contracts as a whole, it did not invalidate the arbitration clause, and H&R Block could enforce the arbitration clause in the Olde contract. Like yesterday’s Third Court of Appeals opinion, the case does not make any new law, but read in concert together, the two opinions provide a good discussion of the burden of proof a party seeking to establish the existence of an agreement to arbitrate must meet. In re: H&R Block, ___ S.W.3d ___ (Tex. 2007) (Cause No. 04-0061). Technorati Tags: arbitration, ADR, Texas Supreme Court, law

Well, the Texas Appellate Law Blog scooped us on a Third Court of Appeals opinion handed down today in which the Court refuses to compel arbitration under either the TAA or the FAA. We will not simply recap what Mr. Smith has already posted on the subject, but we wanted to make a couple additional points about the interesting opinion. Really, the case is more about motion practice and Texas appellate practice than arbitrability issues. Judge Yelenosky presided over a hearing on a motion to compel arbitration. The movant had attached a copy of a contract between the parties which contained an arbitration clause, but: a) it was for a year after the period in which the facts occurred which gave rise to the claim; and b) the non-movant had specifically written a refusal to accept the arbitration clause into the contract. The movant, apparently, could not locate the earlier contract which allegedly contained a properly-signed arbitration clause. Adding fuel to the eventual fire, the parties entered into a Rule 11 agreement whereby the non-movant agreed to not ask for a continuance of the hearing on the Motion to Compel arbitration and the movant agreed to not try to supplement the record at the hearing, unless the specific 1987 contract could be located. On the record before him, Judge Yelenosky refused to compel arbitration, finding that the movant had not met its threshhold burden of establishing the existence of an agreement to arbitrate. The movant then filed a motion to reconsider, attaching earlier, signed agreements with arbitration clauses. The trial court denied the Motion to Reconsider. The movant then filed both an interlocutory appeal (under the TAA) and a petition for writ of mandamus (under the FAA) (why both? More on this procedural quirk here). This is where the appellate law excitement started. First of all, the Court refused to exercise jurisdiction over the interlocutory appeal. While one can, in Texas, take an interlocutory appeal of an order refusing to compel arbitration under the TAA, one cannot, apparently, take an interlocutory appeal of an order denying a motion to reconsider a refusal of an order to compel arbitration under the TAA. That being the case, the 20 day deadline is not tolled by the filing of a motion to reconsider. This, as the Texas Appellate Law Blog noted before we did, is an important practice tip. The jurisdictional technicality did not affect the mandamus petition under the FAA, however, and the Court fully considered that petition. The Court ruled, however, that based on the record before him, especially considering the Rule 11 agreement, Judge Yelenosky did not abuse his discretion when he found that an agreement to arbitrate between the parties had not been proven. With respect to the Motion to Reconsider, the Court found that since that Motion added no new argument to the Motion to Compel, but instead simply added to the record, denying it was appropriate. Again, the opinion does not add any new wrinkles to the law that governs arbitrability, but it certainly highlights the often over-looked burden of establishing the existence of an agreement to arbitrate. None of the myriad cases about arbitration’s favorable treatment under Texas law applies if a movant has not made a record which establishes the existence of an agreement to arbitrate. AXA Financial vs. Roberts, Cause No. 03-07-00079 (Tex. App. – Austin 2007) (mem. opinion). Technorati Tags: arbitration, ADR, Third Court of Appeals, law