Kennedy Hodges, L.L.P. v. Ventura Gobellan, Jr. and Paula Gobellan

IN THE SUPREME COURT OF TEXAS
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NO. 13-0321
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KENNEDY HODGES, L.L.P., PETITIONER,
v.
VENTURA GOBELLAN, JR. AND PAULA GOBELLAN, RESPONDENTS
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ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE THIRTEENTH DISTRICT OF TEXAS
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PER CURIAM
A party waives its right to arbitration by substantially invoking the judicial process to the
other party’s detriment or prejudice. Proving waiver is a high hurdle due to the strong presumption
against waiver of arbitration. This appeal concerns whether a law firm waived its right to arbitrate
a fee dispute with former clients by litigating with a former associate. After the associate left the
firm and took several clients with him, the firm sued the former associate—with whom it had no
arbitration agreement—over client contingency fees. The firm also sued the former clients and
moved to compel that dispute to arbitration pursuant to an arbitration clause in the contingency fee
agreement between the firm and the clients. The trial court and the court of appeals both concluded
that because the firm had litigated the fee issue with the former associate, it waived its right to
arbitrate any claims stemming from its fee agreement with the former clients. Importantly, the firm
could not arbitrate its dispute with the former associate because it had no arbitration agreement with
him. Because the firm’s litigation with the former associate neither prejudiced the former clients
nor substantially invoked the litigation process with them, we reverse the court of appeals’ judgment
and remand to the trial court.
Ventura Gobellan was driving an armored car for his employer when the vehicle became
unstable and rolled over, killing a passenger and injuring Gobellan. Gobellan and his wife retained
Kennedy Hodges, L.L.P. to defend against a wrongful death suit and to bring suit against Gobellan’s
employer and other defendants (the Gobellan Suit). The Gobellans agreed to pay Kennedy Hodges
forty percent of the gross recovery obtained after suit was filed but before trial. Their fee agreement
provided that the Gobellans would be liable for the entire contingency fee if they terminated
Kennedy Hodges without cause and required the Gobellans and Kennedy Hodges to arbitrate any
fee dispute. Kennedy Hodges assigned associate attorney Canonero Brown to the case.
Brown subsequently left Kennedy Hodges and assured Gobellan “he would work out a fee
splitting arrangement with Kennedy Hodges and that [they] would not be affected.” The Gobellans
retained Brown to represent them. Kennedy Hodges sued Brown to recover contingency fees for
former clients he took with him (the Brown Suit). The Gobellans were not a party to that suit.
Kennedy Hodges later settled with Brown for a portion of all contingency fees collected from former
firm clients who retained Brown, including the Gobellans.
In the Gobellan Suit, Gobellan’s employer and the Gobellans submitted their dispute to
arbitration. The Gobellans obtained an award that was confirmed in a final judgment, which
Gobellan’s employer satisfied by paying $470,000. Kennedy Hodges sued the Gobellans in a
separate proceeding, and moved for a no-answer default judgment. But after conferring with the
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Gobellans, Kennedy Hodges pursued its claim in the Gobellan Suit by intervening and moving to
compel arbitration. The trial court denied the motion, and the court of appeals affirmed, concluding
that Kennedy Hodges substantially invoked the litigation process as to the Gobellan fee based on
the discovery it conducted in the Brown Suit. __ S.W.3d __, __. The court also found the Gobellans
established prejudice because Kennedy Hodges attempted to “have it both ways” by switching
between litigation and arbitration. Id. at __. As we explain below, the court of appeals’ decision
conflicts with our decision in Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008), on a question of
law material to the disposition of the case, which confers jurisdiction on this Court over this
interlocutory appeal, TEX. CIV. PRAC. & REM. CODE § 171.098(a)(1); TEX. GOV’T CODE
§§ 22.001(a)(2), 22.225(c).
The Gobellans argue Kennedy Hodges’s litigation in the Brown Suit substantially invoked
the litigation process against them. Kennedy Hodges counters that the Brown Suit contained tort
and contract claims not involving the Gobellans as parties. We agree with Kennedy Hodges.
Because the parties do not dispute the facts, whether Kennedy Hodges’s conduct waived its
right to arbitrate is a question of law we review de novo. Cull, 258 S.W.3d at 598 & n.102. A party
waives the right to arbitrate “by substantially invoking the judicial process to the other party’s
detriment or prejudice.” Id. at 589–90. The strong presumption against waiver of arbitration renders
this hurdle a high bar. Id. at 590. We decide waiver on a case-by-case basis by assessing the totality
of the circumstances. Id. We have considered such factors as (1) when the movant knew of the
arbitration clause; (2) how much discovery was conducted; (3) who initiated the discovery;
(4) whether the discovery related to the merits rather than arbitrability or standing; (5) how much
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of the discovery would be useful in arbitration; and (6) whether the movant sought judgment on the
merits. Id. at 591–92. Further, the substantial invocation of the litigation process must also have
prejudiced the opposing party. Id. at 593. In this context, prejudice is “inherent unfairness in terms
of delay, expense, or damage to a party’s legal position that occurs when the party’s opponent forces
it to litigate an issue and later seeks to arbitrate that same issue.” Id. at 597.
Two cases in particular illuminate how we apply this standard. First, in Cull, the Culls
substantially invoked the litigation process by initially resisting the opposing party’s motion to
compel arbitration, filing motions to compel discovery, conducting extensive discovery about every
aspect of the merits, and waiting until shortly before trial to request arbitration. Id. at 595-97.
There, we specifically emphasized the extreme delay the Culls caused, which we noted undercuts
one of the prime benefits of arbitration: an expedient and cost-effective dispute resolution process.
Id. at 596. Additionally, our statement that waiver occurs when a party substantially invokes
litigation with “the other party[]” indicates the party claiming waiver was the other party in the
litigation. Id. at 590.
More relevant to our inquiry here, we held in In re Service Corp. International that a party
who litigated one claim with an opponent did not substantially invoke the litigation process for a
related yet distinct claim against another party with whom it had an arbitration agreement. 85
S.W.3d 171, 175 (Tex. 2002).
Here, Kennedy Hodges’s litigation with Brown in the Brown Suit did not substantially
invoke the litigation process with the Gobellans, who were not parties to the Brown Suit. The
Brown Suit involved alleged breaches of Brown’s employment agreement with Kennedy Hodges
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as well as tort claims. And there was no arbitration agreement between Kennedy Hodges and
Brown. By contrast, the Gobellan Suit involved an alleged breach of the Gobellans’ contingency
fee agreement with Kennedy Hodges, which contains an arbitration clause. By litigating with
Brown, Kennedy Hodges did not litigate with the Gobellans. Our holding in Service Corp.
International, compels this conclusion. Id. Additionally, Kennedy Hodges’s litigation with Brown
did not prejudice the Gobellans as it did not cause delay, expense, or damage to the Gobellans’ legal
position. See Cull, 258 S.W.3d at 597.
Likewise, we cannot agree that Kennedy Hodges substantially invoked the litigation process
with its pleadings against the Gobellans. Kennedy Hodges filed pleadings against the Gobellans in
two suits. First, Kennedy Hodges initiated litigation against the Gobellans in a separate proceeding
in Harris County and filed a motion for a no-answer default judgment. But these pleadings alone
do not rise to the level required to show waiver. See, e.g., id. at 592 (assessing whether a party
moved for judgment on the merits); In re Vesta Ins. Grp., Inc., 192 S.W.3d 759, 763–64 (Tex. 2006)
(holding that seeking initial discovery, taking four depositions, and moving for dismissal did not
substantially invoke the litigation process). Second, after conferring with the Gobellans, Kennedy
Hodges intervened in the existing Gobellan Suit and moved to compel their dispute to arbitration.
The firm conducted no discovery. In sum, we conclude Kennedy Hodges did not substantially
invoke the litigation process with the Gobellans by intervening and moving to compel arbitration.
See Vesta, 192 S.W.3d at 763–64.
To conclude, Kennedy Hodges’s litigation conduct involved suing a third party with whom
it had no arbitration agreement and filing limited pleadings against the Gobellans. Such activity did
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not substantially invoke the litigation process against the Gobellans or prejudice them. Thus,
Kennedy Hodges did not waive its right to arbitrate its dispute with the Gobellans. Accordingly,
without hearing oral argument, TEX. R. APP. P. 59.1, we grant the petition for review, reverse the
court of appeals’ judgment, and remand to the trial court to grant Kennedy Hodges’s motion to
compel arbitration.
OPINION DELIVERED: May 16, 2014
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