Enterprise Field Services, LLC v. TOC-Rocky Mountain, Inc. , 2013 Tex. App. LEXIS 1900 ( 2013 )

Opinion issued February 28, 2013.
In The
Court of Appeals
For The
First District of Texas
————————————
NO. 01-12-00345-CV
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ENTERPRISE FIELD SERVICES, LLC, Appellant
V.
TOC-ROCKY MOUNTAIN, INC., Appellee
On Appeal from the 129th District Court
Harris County, Texas
Trial Court Case No. 2010-71221
OPINION
In this interlocutory appeal, we consider whether the trial court erred in
denying appellant’s motion to compel arbitration. 1 Specifically, we consider
whether appellant waived arbitration by substantially invoking the judicial process.
BACKGROUND
The San Juan Gas Gathering System
This suit involves the gathering of gas in the San Juan Basin in New Mexico.
Gathering is the collecting of natural gas at the wellhead and delivering it via a
collection of smaller pipelines to processing plants. Appellant, Enterprise Field
Services, LLC. [“Enterprise”], owns one of the major gathering systems in the San
Juan Basin.
There are two processing plants connected to the Enterprise gathering
system. The first is the Chaco plant, which Enterprise owns. The second is the
San Juan Gas Plant, which is jointly owned by appellee, TOC-Rocky Mountain,
Inc. [“TOC”], 2 and ConocoPhillips [“Conoco”]. Processing at these plants
involves separating natural gas liquids [“NGLs”] from residue gas, which are then
redistributed at the plant tailgate to pipelines for residue gas and NGLs,
respectively. Once separated, it is necessary to allocate the NGLs among the
1
See TEX. CIV. PRAC. & REM. CODE ANN. § 171.098(a)(1) (Vernon 2011)
(providing for interlocutory appeal of order denying arbitration under the Texas
Arbitration Act); TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (Vernon Supp.
2012) (providing for interlocutory appeal of order denying arbitration under the
Federal Arbitration Act).
2
TOC is a wholly-owned subsidiary of BP America Production Company [“BP”].
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various gas producers who sent gas to the plant for processing. This allocation can
be quite complicated because, even though two wells might product the same
volume of gas, the NGLs in the gas stream might be quite different, and once the
gas enters the gathering system the gas is mixed together and it is not possible to
determine whose gas went to which plant.
The Straddle Agreement
In 1984, Conoco, Tenneco (TOC’s predecessor-in-interest) and El Paso
(Enterprise’s predecessor-in-interest) entered into an agreement, which allowed
Conoco to build the San Juan Gas Plant in a location that “straddled” El Paso’s
gathering system. The Straddle Agreement, as it became known, contained a
“baseload obligation” that required Enterprise to deliver enough gas to fill the San
Juan Gas Plant to capacity for 20 years. During the 20 years after the Straddle
Agreement was executed, Enterprise delivered gas produced by Conoco, TOC, as
well as gas produced by third parties, to the San Juan plant. Conoco and TOC
were allowed to keep the NGLs allocated to their own wells. In addition, as a
processing fee, they were allowed to keep 39% of the NGL’s allocated to the third-
party gas. To calculate this 39% processing fee, Conoco and TOC first had to
determine the proportion of NGLs attributable to third parties. Therefore, the
Straddle Agreement contained the following provision for allocating NGLs.
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Allocation of Products Saved and Sold shall be made by Plant Owners
[Conoco and TOC] on a monthly basis and in accordance with the
procedures described in Exhibit B.
Exhibit B contains a complex mathematical formula for allocating NGLs.
The Straddle Agreement does not contain any arbitration provisions.
Performance Under the Straddle Agreement For the First 20 Years
For the first few years that the Straddle Agreement was in effect, Conoco
and TOC—the Plant Owners—performed the allocation required by the agreement.
However, in 1986, Enterprise began to perform the allocation, even though the
terms of the Straddle Agreement did not require it to do so. Enterprise claims that
it performed this task “as an accommodation” to Conoco and TOC. TOC,
however, contends that Enterprise’s action “effectively modif[ied] the Straddle
Agreement,” thereby requiring Enterprise to perform the allocation as described in
the agreement.
The 2006 Gathering Agreement
In April 2006, Enterprise and TOC’s parent corporation, BP, agreed to a
long-term gathering agreement called the Gas Dedication, Gas Gathering and
Production Area Services Agreement [“Gathering Agreement”]. The Gathering
Agreement does not specifically address how NGLs will be allocated. Instead,
section 9.6 of the Gathering Agreement provides in part:
Gatherer [Enterprise] and Shipper [BP] acknowledge and agree that it
is the desire of both Parties that Gatherer settle all liquids entrained in
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the Natural Gas, gathered through Gatherer’s System and obtain by
extraction at the products extraction service located at either the
Chaco Plant of the San Juan Plant, as though the Chaco Plant and the
San Juan Plant were operated as a single system . . . . [A]s of the date
of execution of the Agreement, Gatherer does not have the contractual
right or obligation to perform a settlement of liquids and residue
Natural Gas as described in the foregoing sentences. Notwithstanding
the foregoing, Gatherer agrees to enter into good faith negotiations
with the owners of the San Juan Plant, and Shipper agrees to cause its
affiliate which owns an interest in the San Juan Plant to enter into
good faith negotiations with Gatherer, toward an agreement to allow
Gatherer to perform a settlement of such liquids and residue Natural
Gas on the basis set forth in Paragraph 9.6(a)(i), (ii) and (iii) below.
Thus, the Gathering Agreement provides that Enterprise and BP’s affiliate, TOC,
will enter good faith negotiations to reach an agreement on how NGLs should be
allocated. The parties then agreed to negotiate toward an allocation method based
on totaling all the NGLs produced in the region and dividing them on a pro rata
basis.
The Gathering Agreement contains an arbitration provision, in which the
parties agree to arbitrate “dispute[s] related to the interpretation or performance of
this agreement[.]”
Conduct of the Parties after the 2006 Gathering Agreement
In 2007, Enterprise changed the method that it had been using to produce the
NGL allocation. Enterprise claimed that this was done because its “baseload
obligation” under the Straddle Agreement had expired in 2006 and it was no longer
delivering “third-party” gas to the San Juan Gas Plant for processing, and instead
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delivered all “third-party” gas to its own Chaco Plant. Thus, Enterprise’s position
was that the only NGLs at the San Juan Gas Plant belonged to either Chevron or
TOC and there was no 39% processing fee on “third-party gas” to calculate.
While Enterprise and BP were able to come to agreement as to the terms
under which Enterprise would be obligated to deliver BP’s gas to the San Juan Gas
Plant under the 2006 Gathering Agreement—with the exception of an agreement as
to NGL allocation—Enterprise and Conoco were not able to reach such an
agreement. Thus, they agreed to extend portions of the Straddle Agreement on a
month-to-month basis. In 2009, Conoco instituted a regulatory complaint against
Enterprise before the New Mexico Public Regulation Commission alleging that
Enterprise was refusing to offer Conoco competitive terms for gathering gas.
In 2010, Enterprise responded by terminating Conoco’s month-to-month
gathering agreement. Enterprise also terminated the Straddle Agreement because
Conoco claimed that it, too, contained an obligation for Enterprise to gather
Conoco’s gas and deliver it to the San Juan Plant.
Enterprise files the Present Lawsuit
In October 2010, Enterprise filed the present declaratory judgment action
against Conoco seeking a declaratory judgment that (1) Enterprise has no
obligation to gather gas owned by Conoco in the San Juan Basin, (2) Enterprise has
no obligation to deliver gas owned or controlled by Conoco in the San Juan Basin
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to the San Juan Gas Plant, and (3) the Straddle Agreement has expired or
terminated by its terms. Although these claims did not directly involve TOC at the
time, Enterprise joined it as a defendant because TOC is a party to the Straddle
Agreement and it anticipated that Conoco would claim that TOC was a necessary
party.
TOC files its Original Counterclaim
TOC filed its First Original Counterclaim, seeking damages from Enterprise
for breaching the Straddle Agreement’s provisions regarding the allocations of
NGLs. TOC also sought a declaratory judgment from the Court “interpreting the
validity of the Straddle Agreement [&] the Gas Gathering Agreement . . . and all
related amendments for purposes of setting forth the rights, status, and other legal
relations of the parties and damages thereunder, if any.”
Enterprise Settles with Conoco and Seeks to Compel Arbitration with TOC
Soon thereafter, Enterprise settled all of its issues with Conoco. Thus, the
only remaining claim for affirmative relief by Enterprise was its request for a
judgment declaring that the Straddle Agreement had expired or terminated.
Enterprise also moved to compel arbitration of TOC’s counterclaim.
Specifically, Enterprise claimed that arbitration was appropriate because, among
other relief, TOC was seeking a declaration of its rights under the 2006 Gas
Gathering Agreement, which has an arbitration provision. Based on this, the trial
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court was initially inclined to grant Enterprise’s motion to compel arbitration.
However, it first permitted TOC to amend its counterclaim.
TOC Files its First Amended Original Counterclaim
TOC then filed its First Amended Original Counterclaim, in which it omitted
its request for a declaration of its rights under the 2006 Gathering Agreement.
Instead, TOC’s amended counterclaim claimed only a breach of the Straddle
Agreement and request for declaratory judgment as to the rights and duties of the
parties under the Straddle Agreement, including a request for a declaration that the
Straddle Agreement “remains in full force and effect for the purpose of allocating
natural gas liquids[.]”
The Trial Court Denies Enterprise’s Motion to Compel Arbitration
Enterprise then filed a second “Motion to Compel Arbitration of the First
Amended Original Counterclaim of Defendant TOC-Rocky Mountain, Inc. and to
Stay Proceedings in This Court.” In this motion, Enterprise sought to compel
arbitration of TOC’s counterclaim for breach of the Straddle Agreement and
declaratory judgment, but to stay the trial court’s resolution of Enterprise’s own
request for declaratory judgment that the Straddle Agreement had expired.
Essentially, Enterprise argues that TOC’s claim for breach of the Straddle
Agreement “touches on” the terms of the 2006 Gathering Agreement; thus, the
Gathering Agreement requires arbitration.
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On March 15, 2012, the trial court denied Enterprise’s Motion to Compel
Arbitration of the First Amended Original Counterclaim and to Stay Proceedings.
This appeal followed.
PROPRIETY OF TRIAL COURT’S DENIAL OF ARBITRATION
In a single issue on appeal, Enterprise contends the trial court erred in
concluding that TOC’s Amended Counterclaim is not subject to arbitration under
the Gathering Agreement.
Standard of Review
The arbitration clause in the 2006 Gathering Agreement references the
Texas Arbitration Act, but, as both parties agree, the suit involves interstate
commerce, which implicates the Federal Arbitration Act. The trial court did not
specify which Act it applied. However, because the substantive principles
applicable to the analysis in this appeal are the same under both the Federal Act
and the Texas Act, we cite in this opinion cases under the Federal Act and Texas
Act.
A party seeking to compel arbitration must establish (1) the existence of a
valid, enforceable arbitration agreement and (2) that the claims at issue fall within
that agreement’s scope. In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 737
(Tex. 2005) (orig. proceeding); In re Provine, 312 S.W.3d 824, 828 (Tex. App.—
Houston [1st Dist.] 2009, orig. prodeeding). If the movant establishes that an
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arbitration agreement governs the dispute, the burden shifts to the party opposing
arbitration to establish a defense to the arbitration agreement. In re Provine, 312
S.W.3d at 829 (citing In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573
(Tex. 1999) (orig. proceeding)). Once the arbitration movant establishes a valid
arbitration agreement that encompasses the claims at issue, a trial court has no
discretion to deny the motion to compel arbitration unless the opposing party
proves a defense to arbitration. Id. (quoting In re First Merit Bank, N.A., 52
S.W.3d 749, 753–54 (Tex. 2001) (orig. proceeding)). Because state and federal
policies favor arbitration, courts must resolve any doubts about an arbitration
agreement’s scope in favor of arbitration. In re FirstMerit Bank, N.A., 52 S.W.3d
at 753. To be subject to arbitration, the “allegations need only be factually
intertwined with arbitrable claims or otherwise touch on the subject matter of the
agreement containing the arbitration provision.” In re B.P. America Prod. Co., 97
S.W.3d 366, 371 (Tex. App.—Houston [14th Dist.] 2003, orig. proceeding).
Generally, we review a trial court’s decision to grant or deny a motion to
compel arbitration under an abuse of discretion standard. Okorafor v. Uncle Sam &
Assocs., Inc., 295 S.W.3d 27, 38 (Tex. App.—Houston [1st Dist.] 2009, pet.
denied). Under this standard, we defer to a trial court’s factual determinations if
they are supported by evidence, but we review a trial court’s legal determinations
de novo. In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009) (orig.
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proceeding); see also In re D. Wilson Constr. Co., 196 S.W.3d 774, 781 (Tex.
2006) (orig. proceeding). Whether a valid arbitration agreement exists and whether
the arbitration agreement is ambiguous are questions of law that we review de
novo. In re D. Wilson Constr., 196 S.W.3d at 781.
Did the Trial Court Err in Concluding that TOC’s Claims Were Not Arbitrable?
The Gathering Agreement contains an arbitration provision, in which the
parties agree to arbitrate “dispute[s] related to the interpretation or performance of
this agreement[.]” Enterprise contends that the trial court erred in concluding that
TOC’s counterclaims did not fall within the scope of this provision. Specifically,
Enterprise argues that TOC’s counterclaims, even though primarily based on the
Straddle Agreement, may not be decided without reference to the interpretation of
the Gathering Agreement. See In re B.P. America Prod. Co., 97 S.W.3d at 370
(holding that to be subject to arbitration, “allegations need only be factually
intertwined with arbitrable claims or otherwise touch on the subject matter of the
agreement containing the arbitration provision”).
Enterprise argues, and we agree, that the 2006 Gathering Agreement is part
of the parties’ course of dealing and its terms would necessarily be considered in
any litigation involving construction of, and performance under, the Straddle
Agreement. TOC’s counterclaim is based on the argument that Enterprise was
obligated to continue allocating NGLs in accordance with the provisions of Exhibit
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B of the Straddle Agreement, while the Gathering Agreement contains terms
indicating that the parties desired to adopt a new, different method of calculating
NGLs, although they had not done so at the time the Gathering Agreement was
signed.
Enterprise also points out that several provisions of the Gathering
Agreement support their argument that, as of 2006, when the Gathering Agreement
was signed, they had no duty under the Straddle Agreement to perform any NGL
allocations. Specifically, section 9.6 of the Gathering Agreement provides that “as
of the date of the execution of the [Gathering] Agreement, [Enterprise] does not
have the contractual right or obligation to perform a settlement of liquids and
residue Natural Gas as described in the foregoing sentences.”
We express no opinion as to the merit of Enterprise’s positions regarding
construction, and possible modifications of the Straddle Agreement by the later
Gathering Agreement, but agree that claims for a breach of performance under the
Straddle Agreement will necessarily involve the interpretation of provisions of the
Gathering Agreement, and specifically, the interpretation of section 9.6 of the
Agreement.
As such, the trial court erred in concluding that TOC’s counterclaims did not
fall within the scope of the arbitration agreement in the 2006 Gathering
Agreement.
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Can TOC, a Non-signatory to the Gathering Agreement, Be Required to
Arbitrate?
TOC claims that the trial court properly denied Enterprise’s Motion to
Compel Arbitration because its parent company, BP America Production
Company, actually signed the Gathering Agreement. However, in its Amended
Counterclaim, TOC judicially admitted the following:
“BP 3 and [Conoco] each have separate gas gathering agreements with
ENTERPRISE to transport their own gas production from their wells
to the [San Juan Gas Basin Gas Plant]. In BP’s case this agreement is
the December 1, 2006 Gas Dedication, Gas Gathering and Production
Area Services Agreement by and between Enterprise Field Services,
LLC and BP America Production Company (the Gas Gathering
Agreement).”
Thus, TOC has pleaded that it “has a separate gas gathering agreement”—the 2006
Gas Gathering Agreement involved in this suit. In its First Amended Original
Counterclaim, TOC refers to itself at “BP.” It has never complained, either in its
pleadings or elsewhere, that it is not bound by the terms of the Gathering
Agreement. Thus, it may not now do so before this Court
Waiver of Arbitration by Substantially Invoking the Judicial Process?
TOC argued to the trial court, and again argued before this Court on appeal,
that Enterprise waived its right to enforce the arbitration provision by seeking to
arbitrate TOC’s counterclaims under the Straddle Agreement, while maintaining its
3
In its First Amended Original Counterclaim, TOC refers to itself as “BP.”
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own claim for declaratory judgment under the Straddle Agreement in district court.
There is a strong presumption against finding that a party has waived its right to
arbitration; the burden to prove waiver is thus a heavy one. In re Bank One, N.A.,
216 S.W.3d 825, 827 (Tex. 2007); In re D. Wilson Const. Co., 196 S.W.3d at 782.
Any doubts regarding waiver are resolved in favor of arbitration. In re Bruce
Terminix Co., 988 S.W.2d 702, 705 (Tex. 1998).
Waiver may be express or implied, but it must be intentional. EZ Pawn
Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex. 1996). “A party waives an arbitration
clause by substantially invoking the judicial process to the other party’s
detriment.” In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 625 (Tex. 2008)
(orig. proceeding) (quoting Perry Homes v. Cull, 258 S.W.3d 580, 589–90 (Tex.
2008). Waiver is a question of law based on the totality of the circumstances. In re
Citigroup Global Mkts., Inc., 258 S.W.3d at 625 (quoting Perry Homes, 258
S.W.3d at 597). The test for waiver is whether the party moving for arbitration
“has substantially invoked the judicial process to an opponent’s detriment, the
latter term meaning inherent unfairness caused by ‘a party’s attempt to have it both
ways by switching between litigation and arbitration.’” Id.
In determining whether a party waived an arbitration clause, the courts can
consider, among other factors: (1) whether the movant for arbitration was the
plaintiff (who chose to file in court) or the defendant (who merely responded), (2)
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when the movant learned of the arbitration clause and how long the movant
delayed before seeking arbitration, (3) the amount of pretrial activity related to the
merits rather than arbitrability or jurisdiction, (4) the amount of discovery
conducted, and (5) whether the movant sought judgment on the merits. See Perry
Homes, 258 S.W.3d at 591-92; In re Hawthorne Townhomes, L.P., 282 S.W.3d
131, 141 (Tex. App.—Dallas 2009, no pet.).
The Texas Supreme Court has found waiver of arbitration in only one case,
Perry Homes v. Cull. 258 S.W.3d at 591–92; see Hawthorne Townhomes, L.P., 282
S.W.3d at 142. In that case, the plaintiffs “vigorously opposed” the defendants’
motion for arbitration, the parties conducted nearly complete discovery, and the
case was set for trial. See Perry Homes, 258 S.W.3d at 585. Then, after fourteen
months of litigation, the plaintiffs changed their minds and moved for arbitration.
The trial court granted the motion four days before the date the case was set for
trial. Id. The Texas Supreme Court held the arbitration was waived, set aside the
arbitration award, and remanded the case for trial. Id. at 601.
This case is different from Perry. When Enterprise filed the present suit, its
initial claims were against Conoco and did not involve TOC’s 2006 Gathering
Agreement at all. Once Enterprise added TOC to the suit, and TOC filed its
counterclaims, Enterprise promptly moved to compel arbitration under the 2006
Gathering Agreement. Discovery in this case has been minimal and the case has
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been stayed for most of its duration. Enterprise has not sought judgment on the
merits.
Nevertheless, TOC contends that Enterprise has waived arbitration by
moving to compel arbitration of TOC’s claims, while seeking a stay of its own
claims in state court. TOC argues that if its claims—particularly its request for a
declaration that the Straddle Agreement remains in effect—are arbitrable, as
Enterprise claims, then Enterprise’s own request for a declaration that the Straddle
Agreement has terminated is similarly arbitrable. But no party has asked the trial
court to compel Enterprise’s claim for declaratory relief; without affirmative
conduct in opposition to arbitration, there is an absence of affirmative conduct that
indicates an intention to waive the right to demand it.
Under these circumstances, we hold that the trial court erred by concluding
that Enterprise has waived its right to arbitration.
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CONCLUSION
Because TOC’s counterclaims are within the scope of the arbitration
agreement and Enterprise did not waive arbitration, we hold that the trial court
erred by denying Enterprise’s Motion to Compel Arbitration. Accordingly, we
reverse the trial court’s order and remand for further proceedings compelling
arbitration.
Sherry Radack
Chief Justice
Panel consists of Chief Justice Radack and Justices Bland and Huddle.
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