Disputing

I picked the wrong week to go on vacation. While I was on an airplane coming back from France, the Texas Supreme Court issued its long-awaited opinion in the Perry Homes Case. The Texas legal blogosphere has already been all over it, and the Supreme Court of Texas Blog has posted a nice recap of the commentary.

At the risk of coming to the party late, we’ll still offer some comments on Friday’s opinion. Robert and Jane Cull bought a house from Perry Homes that was apparently a lemon. According to the majority opinion, the Culls filed lawsuits against Parry Homes and a couple third-party warranty providers who requested, but apparently did not insist on, arbitration. After discovery had been completed at the district court level, indeed some four days prior to the beginning of trial in the case, the Culls invoked the arbitration clause and successfully moved to have the trial abated in favor of arbitration. The defendants objected on the basis that the Culls had waived their right to arbitrate.

About a year later, the Culls won their arbitration. The Defendants in the case sought vacatur of the award on the basis that the Culls had waived their right to invoke the arbitration clause by waiting until the eve of trial to attempt to do so. The trial court and the Court of Appeals sided with the Culls, finding that no waiver had occurred. A majority of the Texas Supreme Court disagreed.

One cannot really fault the court of appeals and the trial court for finding no waiver. On numerous occasions in the past, we have blogged about the extremely onerous standard that Texas Courts, particularly the Supreme Court, have applied when considering whether or not a party has waived its right to arbitrate. In this case, however, after noting that it has never found waiver before so it was a bit unclear as to what factors might support such a finding, the Court lays out an admittedly fact-specific framework for arbitration waiver analysis in Texas.

In this case, the Culls had initially filed a 79-page objection to arbitration, complaining that the American Arbitration Association was “incompetent” and “biased”. Next, they conducted extensive discovery and filed five motions to compel. Finally, after 14 months of discovery, they moved to compel arbitration on the eve of trial. Even given the high burden set out by previous Texas Supreme Court opinions on this issue, these facts certainly seem to support waiver, if such a thing exists in Texas.

So, one would think this would have been a fairly ho-hum opinion, noteworthy only in that it is the first Texas Supreme Court opinion that does not come down in favor of arbitration since we’ve been following closely. However, the case has gotten a tremendous amount of press, and criticism from those who one would normally expect to applaud an opinion finding waiver in this context, because the winner, Perry Homes, is a big supporter of many of the justices on the Court. In other words, say the critics, the first time this Texas Supreme Court ever wrote a word opposing an arbitration, it did so to erase a large judgment against a major financial backer. Whether or not that is a valid political criticism is beyond the scope of this blog. However, we do note that the facts in this case support waiver, and that the case is a landmark one if only because it is an outlier. It is possible, in Texas, to waive one’s right to arbitrate, after all.

Perry Homes v. Cull, ___ S.W.3d ___ (Tex. 2008), Cause No. 05-0882.

PS: we will address issues raised by the dissents and by other bloggers when time allows. In the meantime, I need to wade through the piles of emails and mail that accumulated while I was out.

Technorati Tags:
arbitration, ADR, Texas Supreme Court, law

Karl and I just got the following email from sometime contributor Glen Wilkerson about Hall Street v. Mattel, a recent U.S. Supreme Court opinion that many, including us, have blogged about. Glen’s comments are copied below without edits (with permission, of course):

Dear Colleague:

The US Supreme Court handed down an arbitration opinion on March 25, 2008, in
Hall Street Associates, L.L.C. v. Mattel, Inc., 28 S. Ct. 1396 (U.S. March 25, 2008).

The case has, in my view, great implications - - certainly for practitioners
in Texas.

The reasons are:

(a) the Court holds that the scope of judicial review under the FAA is
exclusive – AND - - the parties may not modify the specific scope of the FAA judicial
review provisions by contract;

(b) we all know that the reach of the FAA in Texas through the Texas
Supreme Court decisions is vast;

(c) hence in any case implicated under the FAA even in Texas state court -
- a party who LOSES an arbitration and seeks review under a case governed by the FAA in
state court will face this opinion being cited by the prevailing party as limiting the
scope of “judicial review” EVEN IF the underlying contract granted a wider scope of
judicial review;

(d) the “exclusivity” arguments on arbitration under the FAA has a vague
scope - - i.e. what OTHER parts of the negotiated arbitration agreement that may
“deviate” from the FAA will be held to be barred by the FAA - - a conclusion that could
be outcome determinative and definitely contrary to the expectations of the parties.

Conclusion: Very huge trap for the unwary. One that DRAFTERS may not have considered.

THIS IS A BRIEF SUMMARY OF THE CASE (see entire case for details)

Parties had an arbitration clause. The clause states that “[t]he United States
District Court for the District of Oregon may enter judgment upon any award, either by
confirming the award or by vacating, modifying or correcting the award. The Court shall
vacate, modify or correct any award: (i) where the arbitrator’s findings of facts are
not supported by substantial evidence, or (ii) where the arbitrator’s conclusions of
law are erroneous.”

On appeal to the District Court, the trial court found that arbitrator had made
a legal error and sent it back. Ultimately the winner in arbitration contended that
“legal error” was not a proper ground under the FAA EVEN THOUGH the contract permitted
“legal error” review.

That is, the winner at arbitration said: you can only obtain vacatur on the
EXACT grounds of the FAA - - the main ground being “manifest disregard of law” - - not
the same as “legal error”.

The opinion was 7 to 3.

The holding was: the FAA “scope of judicial review” provisions were EXCLUSIVE.

THUS - - the parties contractual agreement is of no force and is essentially
VOID.

The majority claims that reading the FAA as “exclusive” substantiates “. . . .
. . . a national policy favoring arbitration with just the limited review needed to
maintain arbitration’s essential virtue of resolving disputes straightaway.”

Stevens, in dissent, put the issue succinctly.

“Today, however, the Court holds that the FAA does not merely authorize the vacation or
enforcement of awards on specified grounds, but also FORBIDS enforcement of perfectly
reasonable judicial review provisions in arbitration agreements fairly negotiated by
the parties and approved by the district court. Because this result conflicts with the
primary purpose of the FAA and ignores the historical context in which the Act was
passed, I respectfully dissent.” (Emphasis Added)

Glen M. Wilkerson
Davis & Wilkerson, P.C.
wilkerson@dwlaw.com
(512) 482 0614

Today, the Texas Supreme Court handed down nineteen (19) opinions. None of them, however, has anything to do with arbitration. One of them, though, resolved an issue which has divided the courts of appeals and with which we had to grapple not too long ago. Since we have not been blogging much lately (we’ve been working a lot), we thought we’d mention it.

As of today, Rule 202 no longer allows the pre-lawsuit deposition of a physician to investigate a potential health care liability claim. In 2003, the Texas Legislature re-codified the law governing medical malpractice litigation and added a number of new provisions intended to make such claims more difficult to pursue. One of them, Section 74.351 of the Civil Practice & Remedies Code, precludes depositions in these cases until after the Plaintiff has satisfied his or her expert report requirement. Since the expert report requirement is not triggered until the lawsuit is filed, and since the whole point of Rule 202 depositions is that they take place pre-suit, no Rule 202 deposition of a physician will take place, in the real world, after the expert report has been submitted. Health care providers, therefore, have argued since 2003 that Rule 202 depositions are not available in claims against them.

Of course, Chapter 74 applies to health care liability claims. Since there is no lawsuit when Rule 202 depositions are requested, some lawyers (us included) and some courts of appeals have argued that Chapter 74’s requirements simply do not apply in the Rule 202 context; they have not yet been triggered. Not so, according to the Supreme Court. Chapter 74 uses the term “cause of action” generally, writes Justice Brister. One’s cause of action arises before the lawsuit is filed, so no lawsuit need be filed for Chapter 74 to apply. All that is required is that the injury have taken place.

In re: Jack Jordan, M.D., ___ S.W.3d ___ (Tex. 2008) (Cause No. 06-0369).

Technorati Tags:
litigation, Texas Supreme Court, law

Almost three years ago, we started monitoring the rapidly developing law of arbitration by way of a CLE paper Karl presented to a State Bar seminar in Dallas. That paper was called Standards of Review as Applied to Arbitral Decisions, and at its conclusion we advised seminar attendees and other readers that even though arbitral awards were for most intents and purposes not appealable, nothing prevented parties, in the Fifth Circuit anyway, from crafting their own standards of review and grounds for appeal of arbitral awards. Since arbitration is a creature of contract, the argument went, parties should be able to contract for an appeal.

Yesterday, in Hall Street v. Mattel (link is to .pdf file), the United States Supreme Court slammed the door on that option, rendering our prior paper dangerously wrong in the event anyone finds a copy on the internet or at a law library and refers to it. As of today, the Federal Arbitration Act provides the exclusive standards a court may employ when deciding whether to confirm an arbitral award or vacate it. Our paper, in the non-dangerously wrong sections, explains those standards.

Interestingly, the Court does not on the face of the opinion preclude the continued use of the manifest disregard standard for reviewing arbitral awards that federal courts have employed under the FAA. This standard, of course, is not found in the FAA, so Hall Street’s logic probably ought to eviscerate it as well, but the Court specifically does not do so. Instead, the opinion muses that manifest disregard may simply be a shorthand method of referring to explicit statutory grounds for vacatur in the aggregate. In any event, it is a question of trees falling in an abandoned forest (to abuse a metaphor), since manifest disregard is almost never actually found, in the Fifth Circuit anyway.

Finally, the other interesting point about the Hall Street opinion is its exclusive applicability to FAA cases. The Court makes a point to note that its rule does not apply to state laws governing the review of arbitral awards. That being the case, in a pure Texas Arbitration Act case one can argue that Hall Street does not apply. This may well become another entry on the short list of important reasons a lawyer needs to consider whether she wants the TAA or the FAA to apply to the consideration of an arbitral award.

Hall Street Associates v. Mattel, Inc., ___ U.S. ___ (2008) (Cause No. 06-989)

Technorati Tags:
arbitration, ADR, law, Supreme Court

Today was a busy day at the U.S. Supreme Court; five opinions were handed down. Others have commented about them all. One of the opinions, however, discusses Federal Arbitration Act (”FAA”) preemption of state administrative proceedings and as such is something we need to mention.

The case, Preston vs. Ferrer (link is to .pdf file), involves a dispute between noted television jurist Judge Alex and an attorney who may or may not have been his “talent agent”. Indeed, the substantive question underlying the entire dispute was whether or not Mr. Preston was a talent agent, as that term is used by California’s Talent Agencies Act (which we decline to refer to as TAA, since around here that acronym means Texas Arbitration Act). In short, Preston performed certain services for Judge Alex pursuant to a contract, which contained an arbitration clause. Preston claimed Judge Alex owed him fees under the contract and initiated an arbitration proceeding seeking the fees.

In response, Judge Alex argued that Preston had served as a talent agent pursuant to the CTAA, but that he was not licensed as such as required by The Act. That being the case, Judge Alex argued that the contract, including the arbitration clause, was void. Furthermore, he argued that since the CTAA gives the California Labor Commissioner exclusive jurisdiction to determine whether or not someone is a talent agent, the arbitration ought to be stayed pending that determination.

In the meantime, the Supreme Court handed down its Buckeye Check Cashing opinion, which more or less eviscerated Judge Alex’s contention that a contract’s voidness allows him to avoid arbitration. Judge Alex, undeterred by this development, argues that a mandatory state administrative proceeding is not addressed by Buckeye. According to Judge Alex, since California has an administrative proceeding which must be followed prior to Judge Alex’s ability to proceed with litigation, that administrative remedy must be exhausted before arbitration can commence.

The Supreme Court disagrees. According to this morning’s opinion, the parties’ agreement to arbitrate triggers the FAA, which in turn preempts the CTAA. It is up to the arbitrator, not the Labor Commissioner or the courts, to determine whether or not Mr. Preston was a talent agent, and therefore whether or not his contract with Judge Alex is void.

Justice Thomas, as usual, dissented, writing again that he does not feel the FAA ought to pre-empt state-court proceedings.

All of this, of course, is made more interesting by the fact that these TV judge shows are all just arbitrations. I wonder if any litigation has arisen out of Judge Alex’s arbitration clause? Perhaps the folks at the Florida Arbitration Blog know.

Preston v. Ferrer, 552 U.S. ___ (2008) (Cause No. 06-1463)

Technorati Tags:
arbitration, law, Supreme Court

About a week ago, the Fifth Circuit handed down an opinion in an Amway distributorship dispute (link is to .pdf file) which rejects, after a decade of arbitration and arbitrability litigation, a claim by Amway that certain disputes had to be arbitrated. As followers of this area are aware, a Fifth Circuit opinion rejecting arbitrability is noteworthy in and of itself.

Amway, of course, is a company that sells products through distributors who in turn are expected to recruit other distributors to sell products. Commissions are paid not only on products an individual distributor sells, but also on products distributors recruited by that individual sells. In other words, the real money is made when a distributor creates a network of sub-distributors, who in turn, ideally, then recruit sub-sub distributors.

As of 1998, Amway included in its distributorship agreements a specific agreement to arbitrate any disputes between Amway and its distributors, including disputes over the calculation of commissions. Prior to that time, however, Amway’s distributorship agreement did not contain an arbitration clause. Instead, it contained language that required distributors to comply with Amway’s Rules of Conduct, which Amway retained the right to amend at will.

In 1997, Amway did in fact amend its Rules to include an arbitration requirement. That same year, in June, a group of Amway distributors had complained to Amway about a variety of issues, including the manner in which their commissions were calculated. Later that year, Amway added the arbitration requirement to its Rules, and in January 1998 the Distributors sued. Amway sought and achieved a litigation stay in favor of arbitration, and Amway ultimately prevailed at arbitration.

The distributors, at every step of this process, challenged the case’s arbitrability, arguing that since Amway retained the right to unilaterally amend its Rules, and the Rules contained the arbitration agreement, the agreement was illusory and unenforceable. Last week, the Fifth Circuit, applying Texas law under the FAA, agreed.

According to the Fifth Circuit, all of the disputes subject to the arbitration arose prior to the 1997 arbitration Rule. That being the case, since Amway could unilaterally add arbitration to its Rules, it could also unilaterally remove it or change the policy. This distinguishes Amway’s rule from the policy approved of in the Texas Supreme Court’s Halliburton opinion. In that case, once Halliburton’s arbitration policy took effect, Halliburton could not revoke it without providing written notice. Furthermore, that policy did not apply to disputes of which Halliburton had notice prior to the inception of the policy.

No such restrictions bound the Amway Plan, at least as of 1997. That being the case, the Fifth Circuit, after ten years of arbitration and related litigation, ruled that the dispute was not in fact arbitrable. An purported agreement to arbitrate is not enforceable in Texas if the party seeking to impose it can amend, modify or revoke it at will. Such an “agreement” would be illusory. It is important to remember, of course, that this analysis must apply specifically to the arbitration agreement, not to the contract between the parties as a whole.

All of this, of course, is probably not as exciting as it at first seems. While the very fact that the Fifth Circuit has rejected an arbitrability argument is newsworthy (or at least blogworthy), the precedent is probably not all that helpful for most practitioners. It would be quite easy for a company, like Amway, to avoid the issue that torpedoed Amway by simply copying the approved-of language from Halliburton’s policy which the Amway court distinguished. The opinion does not, in other words, stand for the proposition that companies like Amway and Halliburton cannot impose arbitration on their employees and contractors at will. Instead, it simply seems to say that the imposition cannot be willy-nilly. Which is a distinction that ought to be easily avoided by reasonably careful drafting. Nonetheless, the opinion does perhaps reflect a blossoming trend of greater scrutiny being applied to arbitration, generally, particularly in situations marked by stark disparity of bargaining power between the parties.

Morrison, et al. v. Amway, et al., ___ F3d ___ (5th Cir. 2008), Cause No. 06-20138.

Technorati Tags:
arbitration, ADR, Fifth Circuit, law

In the context of a slightly complicated procedural situation, the Texas Supreme Court made the following ruling earlier today: in a case where a court compels arbitration, the party resisting arbitration files a petition for mandamus challenging arbitration, the petition is denied, the party loses the arbitration, and the party resists confirmation of the award without success, in that case, the party is still able to challenge arbitrability in the final appeal of the judgment confirming the arbitral award. Assuming, of course, that the party did not waive its challenge to arbitrability (which it most certainly did not in this case). In other words, the fact that a court had already denied the petition for mandamus on the arbitrability issue did not deprive the Court of Appeals of jurisdiction over the subsequent appeal of the same issue.

The case, by the way, is but the latest installment of the John O’Quinn arbitration against a group of his former clients.

Chambers v. O’Quinn, ___ S.W.3d ___ (Tex. 2007) (Cause No. 06-1073).

Technorati Tags:
arbitration, Texas Supreme Court, law

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