If You Might Be Violating Public Policy, Make Sure to Include an Arbitration Clause

Jenner & Block took on the representation of Parallel Networks in patent infringement litigation. Their contingency fee agreement provided that Parallel was responsible for the payment of expenses, but Parallel ran up a $500,000 deficit before expenses were finally paid out of proceeds from settlement in another lawsuit. Jenner withdrew from the case, citing a termination clause that allowed it to withdraw if continuing was not in its economic interest. After the patent cases settled under successor counsel, Jenner invoked arbitration and sought to recover $10 million in fees. The arbitrator ruled that Jenner’s withdrawal was justified and awarded $3 million as an “appropriate and fair” portion of the contingent fee recovery, as provided in the parties’ contract. The trial court confirmed the award, and the Dallas Court of Appeals affirmed. The Court declined Parallel’s invitation to declare that the fee agreement was against public policy, holding that the statutory grounds for vacating an award under the FAA are exclusive, and that public policy therefore could not serve to vacate the award.

Parallel Networks, LLC v. Jenner & Block LLP, No. 05-13-00748-CV

FINRA v. AAA

A group of plaintiffs collectively named as Nemaha Water Services moved to compel arbitration before FINRA. In a cross-motion, Esposito Securities moved to compel arbitration before the AAA. The trial court denied Nemaha’s motion and granted Esposito’s, sending the case to AAA arbitration. In a hybrid interlocutory appeal and mandamus proceeding, the Dallas Court of Appeals reversed and sent the case to FINRA. Nemaha had signed a letter agreement in which it had agreed to pay Esposito 5% of the total consideration received in a qualifying investment or merger. The contract included a AAA arbitration provision, but the Court of Appeals held that clause was trumped by the FINRA rules, at least in this instance. The case turned on the question of whether Nemaha was a “customer” of Esposito, which would entitle it to invoke arbitration under the FINRA rules. Applying the ordinary meaning of “customer,” the Court held that Nemaha qualified even though it had not paid Esposito the contractual commission. Because Nemaha had contracted with Esposito — a member of FINRA — to purchase financial services for a fee, the Court concluded that Nemaha was entitled to invoke FINRA arbitration. The Court noted, however, that there is authority for the proposition that FINRA arbitration can be superseded by contract, although that was not the case this time.

Morford v. Esposito Sec., LLC, No. 05-14-01223-CV

Arbitration Affirmed; “Related To” Defined

The Dallas Court of Appeals has affirmed the order confirming an arbitration award in favor of our firm’s client, Steven Pully. As explained in the Court’s opinion, Mr. Pully sued his former employer, Newcastle Capital Management, alleging that the company owed him substantial amounts of unpaid compensation. But some of his claims were also subject to arbitration, and the arbitrator ruled in favor of Mr. Pully. The district court affirmed the arbitration award, and that portion of the case was eventually severed from the remaining claims in the lawsuit. On appeal, Newcastle challenged the scope of the arbitration clause, which covered “[a]ny dispute, controversy or claim arising out of or relating to” the parties’ agreements. The Court noted that the phrase “relates to” is very broad, and that a claim relates to a contract “if it has a significant relationship with or touches matters covered by the contract.” Under that standard, Mr. Pully’s claims did indeed relate to the parties’ contracts, making the dispute arbitrable. The Court also rejected Newcastle’s argument that the parties’ oral agreement was against public policy, and therefore affirmed the arbitration award in its entirety.

Schwarz v. Pully, No. 05-14-00615-CV

Arbitration Ordered Based on Poorly-Drafted Arbitration Clause

The Dallas Court of Appeals has reversed a trial court order denying a motion to compel arbitration. The arbitration clause was contained in a contract between a temporary employee and his employment agency, which gave both parties the right to “elect mandatory, binding arbitration for any claim, dispute, or controversy between you, and our clients or us” [sic]. The plaintiff claimed that the arbitration agreement was unenforceable due to substantive unconscionability, lack of consideration, and lack of essential terms. The Court held that nothing in the arbitration agreement demonstrated that the specific manner of arbitration was a material consideration to the parties, noting that the FAA specifically contemplates circumstances in which the parties have not provided for a method of appointment for an arbitrator. The Court also held that the consideration for the overall contract was sufficient to support the arbitration clause as well. Finally, the Court held that the provision was not substantively unconscionable despite its inclusion of a waiver of the right “to take any legal action” because it was not clear that potentially-unconscionable waiver was actually aimed at waiving substantive claims instead of just waiving the right to do so in court instead of arbitration.

Stride Staffing v. Holloway, No. 05-14-00811-CV

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Arbitration Provision Trumps Subsequent Rule 11 Agreement

The parties in a workplace injury lawsuit entered into a Rule 11 agreement to abate the suit while they conducted limited discovery and mediation. A second Rule 11 agreement continued the abatement until one of the parties would file a motion to re-open the case. Notwithstanding those Rule 11 agreements, the parties were also subject to a binding arbitration clause contained in the employer’s injury benefit plan. The parties disputed whether they had each complied with their discovery obligations under the Rule 11 agreements, which led the employer to move to re-open and to compel arbitration. The trial court denied the motion and ordered that the case remain abated until the Rule 11 discovery was completed.

The Dallas Court of Appeals reversed. The Court first held that the case was subject to interlocutory appeal because the trial court’s order “affirmatively denies Baylor’s motion to compel arbitration over at least a portion of the proceeding . . . .” (The opinion noted that this holding conflicts with a pair of decisions out of the El Paso Court of Appeals, possibly setting up the case for further review by the Texas Supreme Court.) As to the discovery, the Court agreed with the defendant that the Rule 11 had expired by its own terms when the employer moved to re-open the lawsuit, mooting the completion of the agreed-upon discovery as an ongoing issue. But because the trial court had not actually ruled on the employer’s motion to compel arbitration, the Court of Appeals remanded for formal consideration of the case’s arbitrability.

Baylor Univ. Med. Ctr. v. Greeson, No. 05-14-01342-CV

A Dispatch From the Surprisingly Litigious World of Movie Poster Collecting

Heritage Auctions held a number of items owned by Movie Poster House, Inc. and one of its owners, William Hughes. Hughes owed Kenneth Mauer over $600,000 that was secured by Hughes’ collectibles, and Mauer filed an application for writ of garnishment against Heritage. While that case was pending, Movie Poster House intervened, seeking an accounting to determine which items were owned by Hughes personally and which were owned by MPH. Because MPH’s consignment agreement contained an arbitration provision, the matter was compelled to arbitration. MPH later sought to amend its statement of claims to add additional causes of action for damages, but the arbitrator denied leave to file on the basis that the filing was untimely. The arbitrator ruled in favor of MPH on the original claims, and the trial court subsequently granted summary judgment for Heritage when MPH sought to re-file its additional claims in court. The Court of Appeals affirmed. Because MPH failed to appeal the arbitration award directly, it could not complain about the arbitrator’s decision to deny leave to amend. And because those additional claims arose out of the same set of facts as the claims that were addressed in arbitration, they were barred by res judicata.

Movie Poster House, Inc. v. Heritage Austions, Inc., No. 05-14-01260-CV

Discovery Available to Challenge Arbitration Award

Is a party seeking to set aside an arbitration award entitled to take discovery from her opponent’s attorneys and the arbitrator in order to establish a claim of evident partiality? The answer from the Dallas Court of Appeals is a partially qualified yes. Dolores Rodas sued her employer, La Madeleine, for personal injuries sustained during her employment. The case was compelled into arbitration, and the arbitrator issued a take-nothing award in favor of La Madeleine. Rodas moved to set aside the result on the basis of the arbitrator’s evident partiality, claiming that he had failed to disclose two subsequent times he had been appointed as arbitrator in cases involving La Madeleine’s law firm. The trial court confirmed the arbitration award, but the Court of Appeals reversed and remanded. Assuming, without deciding, that Texas law requires a party to make some evidentiary showing of grounds to challenge the arbitration result before discovery is permitted, the Court of Appeals held that Rodas had met that threshold and was therefore entitled to take depositions in support of her claim of evident partiality.

Rodas v. La Madeleine of Tex., Inc., No. 05-14-00054-CV

Lack of Privity Allows Receiver to Avoid Arbitration Provision

After Kevin White defrauded investors in a foreign currency trading scheme, a federal court appointed Kelly Crawford as receiver over the estates and assets of White and his companies.  One such entity was a fund operating as a limited partnership called the Revelation Forex Fund.  Crawford determined that investors in Revelation had claims against Forex, the company with which Revelation had maintained foreign currency trading accounts.  Consequently, the investors assigned their claims to Crawford and he then filed suit against Forex in Colin County District Court.

Forex sought to dismiss the lawsuit based on an arbitration provision in its contract with Revelation.  When the trial court denied its motion, Forex appealed.  The Dallas Court of Appeals affirmed based on the crucial distinction that Crawford’s claims were brought as an assignee of the investors’ claims, not in his role as trustee.  Because only Revelation (and not the individual investors) had agreed to arbitrate claims against Forex, venue in Colin County was proper.

Forex Capital Markets, LLC v. Crawford

Still Partial to Arbitration Awards

In the wake of the Texas Supreme Court’s decision vacating a $125 million arbitration award that had been reinstated by the Dallas Court of Appeals, the latter court has rejected another claim that an arbitration award should be vacated on grounds of evident partiality. A group of homeowners sought to recover against Meritage Homes after discovering that their houses were smaller than had been represented. At the start of the final hearing, the arbitrator disclosed his participation in “one or two” arbitrations with the claimants’ attorneys since the case had begun, but Meritage had no objection to proceeding with the hearing. That changed after the arbitrator found in favor of the homeowners and awarded damages and attorney fees.

In seeking to set aside the arbitration award, Meritage claimed that the arbitrator had failed to disclose that he had really held three arbitrations with the claimants’ attorneys, plus one additional mediation. The trial court confirmed the award over Meritage’s objections, and the Court of Appeals affirmed. Although the Court noted that the arbitrator’s disclosure was “vague, at best” as to the number of arbitrations he had conducted with the homeowners’ attorneys, the comment was still “clear as to substance” — namely, that he had arbitrated cases with the attorneys while the case was pending. Because the arbitrator had disclosed that substance, and because Meritage had failed to follow up on the disclosure until after it had already lost the arbitration, the failure to disclose one more arbitration and one mediation would not yield a reasonable impression of the arbitrator’s partiality to an objective observer.

Meritage Homes of Texas LLC v. Ruan, No 05-13-00831-CV

Whether to Arbitrate, Part II

In this interlocutory appeal of a motion to compel arbitration, the Court held that the broad arbitration provision at issue (“[a]ny dispute, claim or controversy arising out of or relating to [the agreement] or breach, termination, enforcement, interpretation or validity thereof” must be arbitrated) required the trial court to grant the defendants’ motion to compel arbitration.  Moreover, because the provision itself stated that “the determination of the scope or applicability of this Agreement to arbitrate” must be determined by an arbitrator, the Court found that the responsibility for establishing whether the provision even applies rests with the arbitration proceeding.

Seven Hills Commercial LLC v. Mirabal Custom Homes, Inc.