Supreme Court of Texas Holds Company Did Not Waive Right to Arbitration

The Supreme Court of Texas has ruled that a company did not waive its right to arbitration by engaging in the litigation process with a third party. In RSL Funding, LLC v. Pippins, No. 14-0457 (Tex., July 1, 2016), a company, RSL Funding, agreed to purchase certain annuity contracts issued by MetLife from three individuals on behalf of the company or its assigns. As part of this agreement, RSL funding and the individuals signed an arbitration agreement. Despite this, neither RSL nor the individuals entered into an agreement to arbitrate with MetLife.

After MetLife refused to honor the sale of the annuities to the company, RSL Funding filed a lawsuit seeking a declaratory judgment against MetLife and the individuals in a Harris County Court at Law. Later, RSL Funding sought to stay the case and compel the individuals to arbitration. The County Court at Law (“CCL”) denied the company’s motion for arbitration and RSL funding filed an interlocutory appeal with the Court of Appeals for the Fourteenth District of Texas.

A divided appeals court affirmed the CCL’s decision. According to the appellate court, RSL Funding waived its right to pursue arbitration because the company substantially invoked the litigation process against both MetLife and the individuals. In addition, the Fourteenth District stated in a footnote “it would have affirmed the trial court’s rulings on the alternative basis that RSL did not challenge one ground on which the CCL could have ruled in denying RSL’s motion to stay the litigation–RSL failed to join its assignees in the arbitration.” In response to the Court of Appeals’ decision, RSL Funding filed a petition for review with the Supreme Court of Texas.

In its opinion, the Texas high court first stated RSL Funding had standing to pursue its interlocutory appeal. Next, the court examined whether the company waived its right to arbitrate its claims against the individuals. According to the court:

A party’s right to arbitrate may be waived by its substantially invoking the judicial process to the other party’s detriment. Perry Homes, 258 S.W.3d at 589–90. To effect such an implied waiver, however, the conduct that substantially invoked the judicial process must have prejudiced the other party to the arbitration agreement. See In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex.2006). When courts consider allegations of such a waiver, “[t]here is a strong presumption” against it under the FAA. Id. The presumption governs in close cases. Perry Homes, 258 S.W.3d at 593. And, to reiterate what we said in Kennedy Hodges, “a party who litigate[s] one claim with an opponent d[oes] not substantially invoke the litigation process for a related yet distinct claim against another party with whom it ha[s] an arbitration agreement.” 433 S.W.3d at 545.

Where facts are undisputed, whether the right to arbitrate has been waived is a matter of law subject to de novo review on appeal. G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 511 (Tex.2015). The party asserting waiver bears a heavy burden of proof to show the party seeking arbitration has waived its arbitration right. In re Bruce Terminix Co., 988 S.W.2d at 705 (citing Walker v. J.C. Bradford & Co., 938 F.2d 575, 577 (5th Cir.1991)). Whether waiver has occurred depends on the totality of the circumstances. Perry Homes, 258 S.W.3d at 591. The analysis involves numerous factors, including whether the party asserting the right to arbitrate was plaintiff or defendant in the lawsuit, how long the party waited before seeking arbitration, the reasons for any delay in seeking to arbitrate, how much discovery and other pretrial activity the party seeking to arbitrate conducted before seeking arbitration, whether the party seeking to arbitrate requested the court to dispose of claims on the merits, whether the party seeking to arbitrate asserted affirmative claims for relief in court, the amount of time and expense the parties have expended in litigation, and whether the discovery conducted would be unavailable or useful in arbitration. See G.T. Leach, 458 S.W.3d at 512; Perry Homes, 258 S.W.3d at 590–92.

The Texas Supreme Court next stated no single factor in the analysis was dispositive before discussing the facts of the case before it:

RSL sued MetLife and the Individuals only after MetLife refused to honor the Individuals’ assignments of their annuity contracts. The suit was for a judgment declaring the parties’ rights under the assignments and contracts, but RSL did not allege any dispute with the Individuals. Rather, RSL asserted only that MetLife breached its annuity contracts by refusing to honor the assignments, sought a declaratory judgment that the assignment agreements were enforceable, and sought a judgment against MetLife for damages, interest, costs, and attorney’s fees. RSL did not seek recovery from the Individuals. To the contrary, its actions were supported by the Individuals as evidenced by their affidavits that, in part, waived citation because they fully “underst [ood] and support[ed] the nature of this action for declaratory relief.”

The court of appeals disagreed that a “friendly” declaratory judgment action as between the Individuals and RSL did not give rise to arbitrable disputes, referencing the transfer to RSL of annuity payments that would result from such a declaratory judgment. 424 S.W.3d at 683–84. But when RSL filed suit, the Individuals supported such a judgment and transfer. RSL’s filing of a declaratory judgment action and making the Individuals parties to it when the Individuals agreed with RSL’s position did not evidence an existing dispute between them subject to arbitration. Further, like the builder in G.T. Leach, RSL asserted claims against the Individuals because it was procedurally necessary in order to preserve certain rights. See TEX. CIV. PRAC. & REM. CODE §37.006(a) (“When declaratory relief is sought, all persons who have or claim any interest that would be affected by the declaration must be made parties. A declaration does not prejudice the rights of a person not a party to the proceeding.”). MetLife and Morris argue RSL’s inclusion of the Individuals proves RSL knew it was seeking to terminate some of the Individuals’ rights. To the contrary, what RSL sought was a declaratory judgment affirming what the Individuals had done and were at that time ratifying by their affidavits: the assignment of their rights under the MetLife policies. MetLife and Morris also argue RSL and the Individuals could have joined as plaintiffs, and the fact the Individuals were made defendants proves RSL anticipated an adversarial relationship. But the existence of possible future disputes among parties to agreements where there is no current dispute among them–such as was the situation here between RSL and the Individuals when RSL filed suit–does not weigh in favor of a party having waived its right to arbitrate possible future disputes by filing suit when there are no disputes.

The Texas high court ultimately held that RSL Funding did not waive its right to arbitration:

To summarize, RSL’s initial inclusion of the Individuals as defendants in the CCL action underlying this appeal did not indicate intent to waive its right to arbitrate disputes that might arise between it and the Individuals in the future. Resolution of the dispute created by MetLife’s refusal to honor the agreements between RSL and the Individuals was the cause of the suit by RSL, and RSL made the Individuals parties in order to protect its procedural rights. RSL’s participation in discovery in the CCL suit was in response to MetLife’s actions, and RSL’s requests for affirmative relief related to MetLife’s non-arbitrable counterclaims. The delay between the appearance of an arbitrable dispute with the Individuals and RSL’s initiation of arbitration was not so long as to establish RSL intended to waive its right to arbitrate with the Individuals, especially in light of its other efforts to avoid litigation disputes with the Individuals. The heavy burden to prove RSL invoked the judicial process sufficiently to waive its contractual arbitration rights with the Individuals was not met, and the court of appeals erred in so holding. See In re Bruce Terminix, 988 S.W.2d at 705. The failure of the first prong of implied waiver by invocation of the judicial process renders analysis of the second prong–prejudice or detriment of the opponent–unnecessary. See id. at 704 (“Courts will not find that a party has waived its right to enforce an arbitration clause by merely taking part in litigation unless it has substantially invoked the judicial process to its opponent’s detriment.”).

Despite its waiver holding, the Supreme Court of Texas affirmed the lower court’s decision denying RSL Funding’s motion to compel arbitration by stating:

Although the court of appeals erred by holding RSL waived its right to arbitrate by litigation conduct, in a footnote it said it would have affirmed the trial court’s rulings on the alternative basis that RSL did not challenge one ground on which the CCL could have ruled in denying RSL’s motion to stay the litigation–RSL failed to join its assignees in the arbitration. RSL urges that as to that part of its decision, the court of appeals was in error. But after reviewing RSL’s briefs in the court of appeals, we agree with the appeals court and will affirm.

Last week, RSL Funding filed a motion for rehearing with the Supreme Court of Texas.

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