enforcement of arbitration clauses tcba and appellate section brown bag january 30, 2009 steven k....

Enforcement of Arbitration Clauses

TCBA and Appellate Section Brown Bag

January 30, 2009Steven K. Hayes: shayes @ stevehayeslaw.com

Copyright © 20091


Sections in this PowerPoint (with slide #s):1) Resources (3-5)

2) Trends (6-11)

3) Law Governing (12-19)

4) Some Issues In Pre-Arbitration Disputes (20-43)

5) Pre-Arb. Disputes: Forms, Forums, Appeal

(44-52)

6) Alternatives to Arbitration (53-64)

7) The Future of Arbitration (65-75)2


Sections in this PowerPoint:

1) Resources2) Trends

3) Law Governing

4) Some Issues in Pre-Arbitration Disputes


6) Alternatives to Arbitration

7) The Future of Arbitration

3

1) Resources

Many Thanks to:

Mark Trachtenberg and Christina Crozier of Haynes and Boone, for generously allowing the use of their paper:

Arbitration-Related Litigation in Texas

BUT: If I don’t cite them, don’t blame them.4

1) Resources• Richard R. Orsinger, Judicial Review of Arbitration Rulings: Problems and

Possible Alternatives, SBOT 22nd Annual Advanced Civil Appellate Practice Course, Chapter 10 (9/4-5/08).

• Christopher D. Kratovil and Jared L. Hubbard, Judicial Review of Arbitration Awards, U.T. School of Law 18th Annual Conference on State and Federal Appeals, 5/29-30/08.

• Tom Leatherbury and Jeanne Sourgens, Enforcement of Arbitration Clauses, SBOT Practice Before the Supreme Court of Texas, 4/27/07.

• K. B. Battaglini , Arbitration in Texas: The Drift From Permissive to Compulsory, 2007 Fall Magazine of the Texas Association of Defense Counsel, page 16.

• William G. “Bud” Arnot and Karl W. Seelbach, Erroneously Compelled to Arbitration? Interlocutory and Mandamus Review Post-Palacios, 20 The Appellate Advocate 5 (Fall 2007).

• David F. Johnson, Arbitration, Forum-Selection, and the Contractual Jury Trial Waiver Clauses: Why Differing Standards for Enforceability?, TCBA Bulletin , 12/08, page 9.

5


Sections in this PowerPoint:

1) Resources

2) Trends3) Law Governing





6

2) Trends5th Cir. Cases Involving Arbitraton

Arbitration w/s compel or award or enforce!

020406080100120140

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2) TrendsTexas Cases Involving Arbitraton

Arbitration w/s compel or award or enforce!

050100150200250300350400450500

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2) Trends % Cases Involving Arbitraton from Tex. Cts.Arbitration w/s compel or award or enforce!

0.00%20.00%40.00%60.00%80.00%100.00%

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2) Trends

Has Received and Will Receive Attention:

5 Pending Supreme Court Cases:• In re Morgan Stanley & Co. Inc., No. 07-0665 (5/16/08)

• In Re Labatt Food Service L.P., No. 07-0419 (3/28/08)

• East Texas Salt Water Disposal Co. Inc. v. Richard Leon Werline, No. 07-0135 (11/02/07)

• In re Gulf Exploration LLC, et al, No. 07-0055 (11/02/07)

• Bison Building Materials Ltd. v. Lloyd K. Aldridge, No. 06-1084 (11/02/07)

See Hatchell Report January 24, 2009 (www.hatchellreport.com)10

2) Trends

Has Received and Will Receive Attention:

Agreements Using Arbitration Clauses:• Lending agreements (which consumers probably never

read or understand. See “Seldom-read home loan docs must change: experts”, www. reuters . com, Sunday, February 24, 2008);

• Brokerage account/ 401K account agreements;

• Nursing home contracts (Wall Street Journal Law Blog April 11, 2008)

11


Sections in this PowerPoint:1) Resources

2) Trends

3) Law Governing4) Some Issues in Pre-Arbitration Disputes




12

3) Law Governing

Law Governing Arbitration Agreements:

• Statutes (Federal & State, General & Special)

• Common Law.

Trachtenberg and Crozier, pp. 1-3.

13

3) Law Governing

• Statutes—General

• Federal: Federal Arbitration Act, 9 U.S.C. § 1, et seq (FAA)

• State: Texas Arbitration Act, Tex. Civ. Prac. & Rem. Code Chap. 171. (TAA)


14

3) Law Governing

• Statutes—Generally cover all suits concerning:

• FAA: “contract evidencing a transaction involving [i.e., “relating to” interstate] commerce.” 9 U.S.C. § 1. In re First Merit Bank, 52 S.W.3d 749, 754 (Tex. 2001).

• TAA: agreements to arbitrate controversies existing at the time or arising thereafter. TCPRC §171.001.

Trachtenberg and Crozier, pp. 1-3.15

3) Law Governing

• Statutes—Carve out, and do not apply to:

• FAA: contracts of employment of seamen, RR employees & other workers in foreign or interstate commerce. 9 U.S.C. § 1.

• TAA: collective bargaining, workers’ comp benefit claims, pre-1/1/66 agreements. TCPRC §171.002(a).


16

3) Law Governing

• Statutes—Carve out, BUT:

• Special Texas Arbitration Statutes:

• collective bargaining & workers’ comp benefit disputes. Tex. Labor Code Chap. 102 & Chap. 410.

• Tex. Fam. Code, §§ 6.601, 153.0071.

• Residential Construction, Tex. Property Code Chap. 436.

Trachtenberg and Crozier, pp. 1-3.17

3) Law Governing

FAA Pre-Emption:

• FAA “only preempts contrary state law, not consonant state law.” In re D. Wilson Constr. Co., 196 S.W.3d 774, 779 (Tex. 2006).

• FAA preempts TAA only if: (1) written agreement; (2) involves interstate commerce; (3) withstands traditional state law contract defenses; and (4) state law refuses to enforce an agreement FAA would. Wilson at 780.

Trachtenberg and Crozier, pp. 1-3. 18

3) Law Governing

• Common Law

• not supplanted by statute. Monday v. Cox, 881 S.W.2d 381, 385 (Tex. App.—San Antonio 1994, writ denied).

• only invoked on agreements outside FAA/TAA (e.g., parties opt out of same; or oral agreement to arbitrate. L. H. Lacy Co. v. Lubbock, 559 S.W.2d 348 (Tex. 1977)).

Trachtenberg and Crozier, p. 3.

19

Enforcement of Arbitration ClausesSections in this PowerPoint:

1) Resources

2) Trends

3) Law Governing

4) Some Issues in Pre-Arbitration Disputes5) Pre-Arb. Disputes: Forms, Forums, Appeal



20


Pre-Arbitration Disputes Focus on Two Questions:

A) Enforceability of the clause; and

B) Whether the parties’ disputes fall within the scope of the clause

Trachtenberg and Crozier, page 421


A) The enforceability of the clause.

Decided by:• the court, if the validity of the agreement to arbitrate is challenged;

• 5th Cir. and Texas, this includes challenges to the existence of the contract;

• BUT, by “clear and unmistakable evidence” Parties can submit “questions of arbitrability”

to the arbitrator.

• the arbitrator, if the validity of the contract as a whole is challenged.




Depends on:

• the existence of a valid agreement to arbitrate.

• Determined by a court (see above);

• Even for FAA arbitration, decided under state law general contract principles ( In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 676 (Tex. 2006));

Trachtenberg and Crozier, page 5.

23



Depends on:

• valid agreement to arbitrate. Held to exist:

• through an oral agreement, under common law;

• through parties’ incorporation by reference;

• through series of lawyer letters.

• statutes requiring that parties expressly agree to be bound:

• Family Code

• Residential Construction Commission Act, Tex. Civ. Prac. & Rem. Code §154.027.

Trachtenberg and Crozier, pages 5-6, and Texas cases cited there.24



Non-signatories bound by arbitration clause under 6 theories:1) incorporation by reference;

2) assumption;

3) agency;

4) alter ego;

5) estoppel (direct benefits and equitable);

6) third-party beneficiary;

Trachtenberg and Crozier, pages 5-8, and Fed./Texas cases cited.25



Non-signatories bound by arbitration clause under estoppel:5) estoppel

a) direct benefits –used by Texas Courts and Fifth Cir. to bind a non-signatories who seek the benefits of a contract with arbitration clause—some Texas federal district courts have used the concept outside this context.

Trachtenberg and Crozier, pages 7-8, and Fed./Texas cases cited.26



Against non-signatories critiqued by:

K. B. Battaglini , Arbitration in Texas: The Drift From Permissive to Compulsory, 2007 Fall Magazine of the Texas Association of Defense Counsel, page 16.

K.B. Battaglini, Partner, Greenberg Traurig in Houston

Vice President of the Texas Association of Defense Counsel.27


Some Common Defenses to Enforceability (BUT some are decided by arbitrator):1) Conditions precedent

2) Fraud

3) Unconscionability and duress

4) Waiver

5) Lack of consideration/mutuality/illusory

6) Lack of mental capacity

7) Statutory pre-emption

8) Illegality

Trachtenberg and Crozier, pages 9-13 28


Contract Defenses to Enforceability:1) Conditions precedent

• issue decided by arbitrator. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002).

• BUT a few cases have said a court could refuse to compel arbitration if “no rational mind” could

question that the parties intended a procedural provision (e.g., mediation) to preclude

arbitration. General Warehousemen v. Albertson’s, 331 F.3d 485, 488 (5th Cir. 2003) and In re Pisces Food, LLC, 228 S.W.3d 349, 353 (Tex. App. –Austin 2007,orig. proceeding).


29


Contract Defenses to Enforceability:2) Fraud

• decided by:-arbitrator, if fraud claimed as to entire

agreement; -court, if fraud claimed just to arbitration clause. Prima Paint Corp v. Flood & Conklin Mfg. Co., 388 U.S. 395, 403-4 (1967).

• defense barred by a waiver of fraudulent inducement/ waiver of reliance clause. Forest Oil Corp v. McAllen, 268 S.W. 51, 56 (Tex. 2008).



Contract Defenses to Enforceability:3) Unconscionability and Duress

• must specifically relate to arbitration clause itself, not just contract as a whole. In re FirstMerit Bank, N.A., 52 S.W.3d 749, 756 (Tex. 2001).

• if defense extend to contract as a whole, arbitrator decides same. In re RLS Legal Solutions, LLC, 221 S.W.3d 629, 632 (Tex. 2007).


31


Contract Defenses to Enforceability:3) Unconscionability Can Be Procedural:

• E.g., in the adoption or execution of arbitration clause (i.e., one party must have

been incapable of understanding same). In re FirstMerit

Bank, N.A., 52 S.W.3d 749, 756 (Tex. 2001).

Trachtenberg and Crozier, page 9-10.

32


Contract Defenses to Enforceability:3) Unconscionability can be Substantive:

• unfairness of arbitration clause (i.e., all things considered, clause is so one-sided it is unconscionable). In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 678 (Tex. 2006).

• arbitration clause attempts to limit key remedies under the Workers Comp statute. In re

Poly- America, L.P., 262 S.W.3d 337, 349-53(Tex. 2008); or • clause involves excessive costs. FirstMerit, 152 S.W.3d

at 756.

Trachtenberg and Crozier, page 9-10.33


Contract Defenses to Enforceability:4) Waiver (same for TAA and FAA):

• an issue for the court to decide. Perry Homes v. Cull, 258 S.W.3d 7580, 587 (Tex. 2008);

• requires: (1) substantial invocation of judicial process, causing (2) substantial prejudice to

party seeking to avoid arbitration. In re BankOne, 216 S.W.3d 825, 827 (Tex. 2007).

• strong presumption against same (Perry Homes, 258

S.W.3d at 590).



Contract Defenses to Enforceability:5) Lack of consideration/mutuality, Illusory:

• consideration/mutuality common issue in employment cases. In re Palm Harbor Homes, 195 S.W.3d

at 676.

• requires employee received notice of arbitration policy and accepted same; Id.

• “acceptance” = received policy and kept working. (In re Dillard Dep’t. Stores, Inc., 198 S.W.3d 778, 782

(Tex. 2006) (per curiam).



Contract Defenses to Enforceability:6) Lack of mental capacity:

• 5th Circuit has said this issue must be decided by arbitrator, because it affects entire contract.

Primerica Life Ins. Co. v. Brown, 304 F.3d 469, 472 (5th Cir. 2002).

• Texas Supreme Court may decide issue. In re

Morgan Stanley & Co., No. 07-0665 in the Supreme Court).


36


Contract Defenses to Enforceability:7) Statutory preemption.

• if FAA applies and conflicts with :-state statute, it pre-empts the argument that

state statute governs. Jack B. Anglin Co. v. Tipps , 842 S.W.2d 266, 268 (Tex. 1992).

-federal statute, it pre-empts such statute absent clear congressional mandate to override FAA. Shearson/American Express v. McMahon, 482 U.S. 220, 227 (1987).

Trachtenberg and Crozier, page 12-13.

37


Contract Defenses to Enforceability:

8) Illegality.• arbitrator will determine claim that contract is

void ab initio. Buckeye Check Cashing, Inc. v. Cardegna , 546 U.S. 440, 446 (2006).


38


Pre-Arbitration Disputes Focus on Two Questions:

A) Enforceability of the clause; and

B) Whether the parties’ disputes fall within the scope of the clause


39


B) Do the disputes fall within the clause’s scope?

• Contract interpretation by the court.

• Presumption favoring arbitration under TAA and FAA resolves doubt as to scope

of agreement in favor of coverage of claim.

• Eight corners test—the agreement and the petition determine scope issue.

Trachtenberg and Crozier, page 13, and cases therein cited.

40



Court should not deny motion to compel arbitration “unless it can be said with positive assurance that an arbitration clause is not susceptible to an interpretation which would cover the dispute at issue.” Prudential Sec., Inc. v. Marshall, 909

S.W.2d 896, 899 (Tex. 1995).

Trachtenberg and Crozier, page 13, and cases therein cited.

41



• Related Claims are subject to arbitration if facts in petition “touch matters” or have a “significant relationship to” the issue which is the subject of the arbitration agreement. In re

Medallion ,Ltd., 70 S.W.3d 284 (Tex. App.—San Antonio 2002, orig. proceeding).

Trachtenberg and Crozier, page 13.42



• Pending Supreme Court case involving scope of arbitration clause: In re Gulf Exploration LLC, et al, No. 07-0055

• Petition Granted: Friday, November 02, 2007.

From Hatchell Report, January 8,2009, www.hatchellreport.com

43

Enforcement of Arbitration ClausesSections in this PowerPoint:

1) Resources

2) Trends

3) Law Governing


5) Pre-Arbitration Disputes: Forms, Forums, Appeal6) Alternatives to Arbitration


44

5) Pre-Arb. Disputes: Forms, Forums, Appeals

Pre-Arbitration Litigation--

Charts, Next Two Pages.

Trachtenberg and Crozier, pages 14-17.

45


46


47


Pre-Arbitration Litigation—

Note that the party seeking arbitration has to show only two things:

• an agreement to arbitrate;

• the other party’s refusal to arbitrate.

Then the burden shifts to the party opposing arbitration BUT…


48


Pre-Arbitration Litigation—… the Courts actually use a three step summary judgment-type

process:

1) Party seeking arbitration proves existence of agreement and dispute within its scope;

2) Party opposing arbitration raises defenses to arbitration; and

3) A hearing is necessary if a material fact issue exists.


49


Pre-Arbitration Litigation—In pre-printed documents, was there an agreement? See

• Mikey’s Houses, 232 S.W.3d 145, 147 (Tex. App.—Fort Worth 2007) , now on mandamus to Supreme Court (infra)

• Recognition that few people read or absorb the meaning of legal documents—esp. in home buying or investment situation. See “Seldom-read home loan docs must change: experts”, www. reuters . com, Sunday, February 24, 2008.

• Informal survey of Ralph Jacobs of Pa. re: online software purchases, mentioned p. 55, Proceedings on Law of Software Contracts, American Law Institute Annual Meeting, May 2007, San Francisco, Ca.

50


Appellate Review of Arbitration Decisions

• Depends on:

• State Court v. Federal Court

• TAA or FAA

• Order Favorable to or Hostile to Arbitration


51


52



2) Trends

3) Law Governing



6) Alternatives to Arbitration7) The Future of Arbitration

53


Is it Really Worth Fighting to Elect/Stay in Arbitration?

• Waiver of Jury Trial (Clauses)

• Trial by Special Judge:

Tex. Civ. Prac. & R. Code Chapter 151.

54



• See Mikey’s Houses, L.L.C. v. Bank of America, N.A. 232 S.W.3d 145, 147 (Tex. App.—Fort Worth 2007) court held that seller of house did not show the buyer “knowingly and voluntarily made the prelitigation contractual waiver of their constitutional right to trial by a jury.”

• Drew an extensive dissenting opinion

• Now on briefing on the merits before Supreme Court in In re Bank of America, Case No. 07-0901.

55



Compare and Contrast:

• Mikey’s Houses, L.L.C. v. Bank of America, N.A. 232 S.W.3d 145, 147 (Tex. App.—Fort Worth 2007)

• In re Columbia Medical Center of Lewisville, 2009 Tex. App. LEXIS 146 (Fort Worth, January 8, 2009)

56



• Mikey’s Houses and In re Columbia Medical Center:

• Provide document drafters some cautionary guidance.

• Mikey’s Houses brings front and center the question (raised by Supreme Court Briefs):

Why does the waiver of a jury trial implicit in an arbitration agreement fall victim to the presumption in favor of arbitration, while the presumption against waiver protects the right to jury trial in a pure jury trial waiver?

57



Others have previously raised the question about differing standards:

David F. Johnson, Arbitration, Forum-Selection, and the Contractual Jury Trial Waiver Clauses: Why Differing Standards for Enforceability, TCBA Bulletin December 2008, page 9.

K. B. Battaglini Arbitration in Texas: The Drift From Permissive to Compulsory, 2007 Fall Magazine of the Texas Association of Defense Counsel, page 16.

58


• Trial by Special Judge. Consider if the parties:

• fear runaway juries;

• Is the fear reasonable? See Toben, Lyon, Underwood, and Wren, Trial Judges Pronounce Their Verdict on Texas Juries and Cases, 70 Tex. Bar Jrnl. 958 (Dec. 2007) (larger article at 59 Baylor L. Rev. 419). or

• fear the anecdotal tendency of arbitrators to just split the baby; or

• want a judge qualified in a certain area; or

• want to preserve the right to appeal.59


• Trial by Special Judge.

• Allowed by Tex. Civ. Prac. & R. Code Chapter 151.

• Available since September 1, 1987.

• Only cited in one reported case: Ncf, Inc. v. Harless, 846 S.W.2d 79 (Tex. App.—Dallas 1992), which addressed differences between contempt powers held by judges appointed under Chapter 151 and Gov’t. Code 74.051.

60


• Trial by Special Judge-Chapter 151.

• On agreement of parties. § 151.001.

• Requires motion, waiver of jury trial, i.d. of issues to be referred, statement of time and place for trial and i.d.s the special judge, his or her agreement to serve, and his or her fee as agreed to by parties. § 151.002.

• Rules/statutes re: procedure/evidence for referring judge bind special judge. § 151.005

61



• Requires former judge/justice. § 151.003.

• Special judge tries case just like non-jury trial, w/powers of referring judge, but limited contempt powers. § 151.006.

• Parties split judge’s fee and admin. costs. § 151.007.

• Verdict must be like nonjury verdict, stands as verdict of referring judge’s court. § 151.008

62



• The Right to Appeal is Preserved. § 151.013.

• Appeal is from order of referring judge’s court as provided by Tex. R. Civ. P. and Tex. R. Civ. App. § 151.013.

63



• Other commentaries about private judges:

Newton & Swenson, Adjudication by Privately Compensated Judges in Texas, 36 Baylor L. Rev. 813, 820-821 (1984).

64



2) Trends

3) Law Governing





65


• FAA—

• Arbitration Fairness Act of 2007, draft approved by subcommittee in U.S. House.

• Proposes to amend Sec. 2 of FAA in two respects:

1) invalidates pre-dispute arbitration agreement re: employment, consumer, franchise disputes, civil rights statutes, or between parties of unequal bargaining power; and

2) enforceability of arbitration clause determined by the court, not the arbitrator.

Thanks to Karen Precella for this catch.66


• TAA—commentators have critiqued cases of the last 15 years:

However, the TAA…does not promote the notion of a strong state policy favoring compulsory arbitration. Nor does the Texas Constitution….Given that the people of Texas, through their constitution and statutes, have established a public policy providing for permissive arbitration and protecting and favoring the jury trial, it subjects to challenge these recent Texas Supreme Court opinions declaring a contrary public policy and compelling parties to arbitration in the absence of an agreement.

67


• TAA—commentators have critiqued cases of the last 15 years:

The firebrand author of the foregoing comment:

K. B. Battaglini of Greenberg Traurig in Houston, Vice President of the Texas Association of Defense Counsel.

From Arbitration in Texas: The Drift From Permissive to Compulsory, 2007 Fall Magazine of the Texas Association of Defense Counsel, page 16.

68


• TAA—the SBOT has announced it will support a proposed new Section 51.016 to the Tex. Civ. Prac. & R. Code relating to appellate jurisdiction for interlocutory appeals for cases arising under the Federal Arbitration Act.

See 2009 SBOT Legislative Program, http://www.texasbar.com/Template.cfm?Section=Home&CONTENTID=22586&TEMPLATE=/ContentManagement/ContentDisplay.cfm.

69


• TAA—the SBOT Court Administration Task Force suggested changes along those and other lines:

• Oct. 2008 Report of the SBOT CATF recommends amending TAA:

-to protect against inadequate disclosure and unfair negotiating of arbitration clauses

-to provide more procedural protections

-to provide additional, limited judicial review

70


• TAA—the SBOT Court Administration Task Force suggested changes along those and other lines BUT:

• Oct. 2008 Report of the SBOT CATF:

• does “not necessarily represent the opinions of the State Bar”. Preface to Report.

• drew objections from two Minority Reports:

• from one transactional lawyer

• from one founder of Texans for Lawsuit Reform

71


• TAA—new legislation suggests changes along some of the same lines:

• S.B. No. 222 by Sen. Royce West in the 81st/2009 Leg. • Section 1. (b):

A series of Texas Supreme Court decisions have changed the intention and meaning of the Act so that it now extends to nonsignatories and disputes among parties of disparate bargaining power, such as consumer and employment disputes. As a result, Texas consumers and employees may be compelled to submit their claims to binding arbitration even in the absence of agreement.

72



• S.B. No. 222 by Sen. Royce West in the 81st/2009 Leg. • invalidates arbitration agreements involving :

-employment disputes;

-individual consumer claims;

-franchisees;

-civil rights claims or claims between “parties of unequal bargaining power.”

• Says trial court determines viability and enforceability of arbitration agreement. 73



• S.B. No. 222 by Sen. Royce West in the 81st/2009 Leg. • An order compelling arbitration may not violate

a constitutional right absent a knowing waiver of that right.

• Court shall vacate an award which “clearly violates fundamental public policy or is the result of manifest disregard of the law.”

• Provides for appeal of an order granting (in addition to denying) an application for

arbitration. 74


Stay Tuned

75

Thanks.

Steven K. Hayes

Law Office of Steven K. Hayes

201 Main Street

Suite 600

Fort Worth, Texas 76102

817/886-2355

[email protected]

76

enforcement of arbitration clauses tcba and appellate section brown bag january 30, 2009 steven k....

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