in Re Gerald W. Haddock

COURT OF APPEALS
SECOND DISTRICT OF TEXAS
FORT WORTH
NO. 2-06-472-CV
GERALD W. HADDOCK APPELLANT
V.
WILLIAM F. QUINN, PAUL E. ROWSEY, III, APPELLEES
JOHN GOFF, TERRY N. WORRELL,
CRESCENT REAL ESTATE EQUITIES
COMPANY, CRESCENT REAL ESTATE
LIMITED PARTNERSHIP AND CRESCENT
REAL ESTATE EQUITIES, LTD.
------------
FROM THE 67TH DISTRICT COURT OF TARRANT COUNTY
------------
AND
NO. 2-07-048-CV
IN RE GERALD W. HADDOCK RELATOR
------------
ORIGINAL PROCEEDING
------------
OPINION
I. Introduction
In this consolidated interlocutory appeal and mandamus proceeding,
Relator and Appellant Gerald W. Haddock seeks relief from the trial court’s
order staying arbitration proceedings that he initiated against Appellees and Real
Parties in Interest W illiam F. Quinn, Paul E. Rowsey, III, John Goff, Terry N.
Worrell, Crescent Real Estate Equities Company (“CEI”), Crescent Real Estate
Equities Limited Partnership (“CREELP”), and Crescent Real Estate Equities,
Limited (“CREE”).
Haddock raises three issues. In his first issue, Haddock argues that the
trial court improperly assumed jurisdiction because the parties contracted to
have all issues—including questions of arbitrability—decided by arbitration.
Second, Haddock contends that even if the trial court had jurisdiction to decide
some issues of arbitrability, the main issue in this case—whether he repudiated
or waived arbitration—should be decided by an arbitrator. Third, Haddock
argues that the trial court erred and abused its discretion by concluding that he
repudiated or waived arbitration by engaging in prior litigation that was
inconsistent with arbitration.
Real Parties in Interest contend that the issue of repudiation or waiver
was properly for the court to decide and that the trial court correctly determined
that Haddock repudiated, or in the alternative waived, arbitration of his claims
2
by substantially invoking the judicial process to their detriment. They argue
that the trial court correctly concluded that the remaining claims asserted by
Haddock, individually and derivatively on behalf of CEI stockholders and against
nonsignatories, are not within the scope of the arbitration agreement.
II. Factual and Procedural Background
A. The Parties
1. The Crescent Entities
CEI is a publicly held real estate investment trust (commonly referred to
as a “REIT”) organized under the laws of the state of Texas. CEI is structured
as an Umbrella Partnership Real Estate Investment Trust whereby CEI owns a
majority of the limited partnership interests in CREELP, a Delaware limited
partnership. This organizational structure (referred to as an “UPREIT”) allows
owners of investment real estate to sell their properties to CREELP in exchange
for CREELP units, which the seller may later convert into CEI common stock.
The real estate owners incur no income tax liability until they sell the stock.
CREE, a Delaware corporation, is a wholly owned subsidiary of CEI and serves
as CREELP’s general partner.
3
2. The Individuals
In 1994, Haddock and two cofounders created the Crescent Entities and
related companies. Prior to 1994, Haddock had served in various capacities in
companies formed by one of the cofounders, including serving as lead
transactional attorney and chief negotiator. Of the individual Real Parties in
Interest, John Goff currently serves as CEI’s CEO and Vice Chairman. William
Quinn, Paul Rowsey III, and Terry Worrell serve as members of CEI’s Board of
Trust Managers.
B. The CREELP Partnership Agreement and Arbitration Clause
In February 1994, Haddock, as CEI’s President, signed a limited
partnership agreement on behalf of CEI, CREE, and several limited partners to
form the CREELP limited partnership. CREE was CREELP’s general partner.
Haddock became a limited partner in CREELP as well as President of CEI, and
he became CEO of CEI in 1996. As an officer and senior management
employee, Haddock received options to purchase units in CREELP in 1995 and
1996, which were exchangeable for CEI common stock. The options for both
the CREELP units and CEI stock were created by incentive plans adopted by
those entities’ respective governance committees.
The original CREELP limited partnership agreement did not contain an
arbitration agreement. However, in May 1994, the limited partnership
4
agreement was amended to add an arbitration agreement that provides, in
pertinent part:1
Section 16.1 Arbitration
Notwithstanding anything to the contrary contained in this
Agreement, all claims, disputes and controversies between the
parties hereto (including, without limitation, any claims, disputes,
and controversies between the Partnership and any one or more of
the Partners and any claims, disputes and controversies among any
two or more Partners) arising out of or in connection with this
Agreement or the Partnership created hereby, relating to the
validity, construction, performance, breach, enforcement or
termination thereof, or otherwise, shall be resolved by binding
arbitration in the State of Texas, in accordance with this Article 16
and, to the extent not inconsistent herewith, the Expedited
Procedures and Commercial Arbitration Rules of the American
Arbitration Association.
The arbitration agreement contains additional paragraphs of detailed procedures
to be followed in any arbitration proceedings under the agreement, including an
expedited schedule for selection of an arbitration panel, for commencement and
completion of the arbitration proceeding within sixty days after selection, and
for rendition by the panel of its award within thirty days thereafter.
1
… Each of several amended partnership agreements contain the identical
arbitration provision.
5
C. The Severance Agreement
In June 1999, Haddock resigned from his executive positions and entered
into a confidential severance agreement with CEI and CREELP, which provided
for him to receive certain cash compensation and which, together with
simultaneously executed amended unit option and stock option agreements,
accelerated the vesting of certain of his CREELP unit options and CEI stock
options that he had previously received as part of his compensation. The
agreement called for Haddock to relinquish all of his remaining unvested unit
options and stock options. Paragraph 13 of the severance agreement (the
“unfavorable-comments clause”) restricted both Haddock and the Crescent
Entities from making unfavorable comments about the other or about Haddock’s
job performance. The severance agreement did not contain an arbitration
clause.
D. The Prior Lawsuit
In March 2005, Haddock filed a suit for a declaratory judgment and for
temporary and permanent injunctions against the Crescent Entities in the 17th
District Court of Tarrant County, Texas. Haddock pleaded his prior status as
CEO and President of CEI, CREE, and other related entities referred to in his
petition as “the Employer Group,” that he and the Employer Group had agreed
to terminate his employment relationship in June 1999, and that the parties had
6
entered into a confidential severance agreement that he would file under seal
with the court. Haddock stated that as consideration for his resignation from
all directorships and offices held in the Employer Group, the severance
agreement provided that, in addition to stock and units in CEI and CREELP that
he already owned, he was promised certain cash compensation as well as the
accelerated vesting of certain stock and partnership unit options and that he
thereby became immediately vested in a large number of stock and unit options
in both CEI and CREELP.
In his petition, Haddock further explained that he had become
“concerned” that the Crescent Entities were being managed and operated
adversely to interests of shareholders and unitholders by offering executives
excessive compensation packages and risky loans that seriously jeopardized the
financial health and stability of the entities. Haddock alleged that he desired to
discuss these concerns with fellow shareholders and unitholders and to further
investigate but feared that doing so might be construed by the Crescent entities
as a breach of the unfavorable comments clause in the severance agreement.
Haddock alleged that he had received threats that the Crescent Entities would
forfeit his options as a result of his conduct in discussing those matters and
exposing their “questionable practices.”
7
Haddock sought to clarify or reform the severance agreement by a
declaratory judgment that the unfavorable comments clause of the severance
agreement was void or limited to statements rising to the level of actionable
defamation. He also sought and obtained a temporary restraining order against
the Crescent Entities from “[t]hreatening or taking any action to declare
forfeited or interfere with” his rights in any shares of CREE or CREELP, already
owned by him or shares or units subject to an unexercised option held by him.
The restraining order granted by the trial court also provided that all parties
were to abide by the unfavorable-comments clause. The parties later agreed
to an order extending the temporary restraining order until the date of trial,
originally scheduled for August 29, 2005.
The Crescent Entities filed a counterclaim asserting that Haddock had
breached the terms of both the severance agreement and a subsequent 2001
settlement agreement, general release, and covenant not to sue for claims and
causes of action in any way connected with his prior employment or
termination.
In June 2005, Haddock filed a motion to clarify or modify the temporary
restraining order, alleging that he proposed to exercise his rights as a unitholder
in CREELP and the right to have the value of his options adjusted in accordance
with “relevant agreements and plans” under which the options were created.
8
Haddock alleged in that motion that he had reason to believe he had one or
more common law and statutory causes of action against the Crescent Entities
related to management and desired “to assert these claims in this suit, or in
another suit.” Haddock requested in his motion that the court remove all doubt
that filing those lawsuits would not violate the terms of the severance
agreement and that it either clarify or modify the temporary restraining order to
permit him to file the lawsuits.
Haddock subsequently filed two motions for summary judgment, one as
to the enforceability of the severance agreement and the other as to the
Crescent Entities’ counterclaim; the Crescent Entities likewise moved for
summary judgment. After a two-day hearing, the trial court signed a final
judgment on December 1, 2005, ordering that Haddock and the Crescent
Entities take nothing on their respective claims and counterclaims. Haddock
appealed to this court from the take-nothing summary judgment against him,
but he later moved to dismiss the appeal, and we dismissed it on April 6, 2006.
See Haddock v. Crescent Real Estate Equities Co., No. 02-06-00096-CV, 2006
WL 909470, at *1 (Tex. App.—Fort Worth Apr. 6, 2006, no pet.).
E. The Arbitration Demand
On December 6, 2005, six days after the trial court signed its final
judgment, Haddock wrote to the CEI Compensation Committee, requesting that
9
it adjust the exercise price for his options pursuant to the antidilution provisions
of the stock and unit option plans, which request was refused. Thereafter,
according to Haddock, CREELP and CEI continually refused to allow him to
exercise CREELP unit options and to exchange them for CEI stock.
On July 10, 2006, Haddock filed a forty-three page Statement of Claims
with the American Arbitration Association under the arbitration provision
contained in the CREELP limited partnership agreement. In his Statement of
Claims, Haddock asserted causes of action against all of the Crescent Entities
as well as the individual Real Parties in Interest for breach of contract, breach
of the duty of good faith and fair dealing, violation of securities laws, and
breach of fiduciary duty. As in his prior suit, Haddock set forth the events
regarding his resignation as director and officer from the Crescent Entities in
1999, and alleged that since that time, those entities’ operations had declined
and the entities had begun to liquidate their real estate properties, using the
proceeds to continue to award extraordinary dividends to stockholders, thereby
diluting the value of his CREELP unit options.
Haddock further alleged that the Entities’ Compensation Committee
refused to adjust the exercise price of his options as provided by anti-dilution
provisions in the option agreements, prevented him from converting his options
to CEI common stock, and refused to allow him to exercise his options with a
10
recourse promissory note as provided by the CREELP unit option agreement,
resulting in damages of over $8.2 million. Haddock also asserted a claim, in a
derivative capacity on behalf of CEI shareholders, asserting that loans to
company insiders violated the Sarbanes-Oxley Act, resulting in damages to the
shareholders of at least $39.7 million, including lost interest. He named Quinn,
Rowsey, and Worrell as parties based upon their service on a Special Litigation
Committee for the Crescent Entities that refused his demand regarding the
derivative claim.
F. The Underlying Proceeding
Real Parties in Interest filed this action in the 67th District Court of
Tarrant County seeking a stay of the arbitration proceedings and a declaratory
judgment that Haddock had repudiated the CREELP arbitration agreement by
filing his March 2005 suit and proceeding to a final judgment rather than
arbitrating the issues in that case and that the remaining claims were not within
the scope of the arbitration agreement. Haddock answered with a general
denial and a plea to the jurisdiction asserting that the trial court lacked
jurisdiction to decide any issues of arbitrability, including waiver or repudiation.
Alternatively, he asserted that even if the court had jurisdiction over some
arbitrability issues, its jurisdiction was limited in scope and did not allow it to
decide the waiver or repudiation issue.
11
After a hearing on the application to stay arbitration, the trial court—the
presiding judge being the same judge who had earlier entered the temporary
restraining order in the prior suit, sitting for the regular judge of the 17th
District Court—signed an order granting the stay and permanently enjoining
Haddock from pursuing his arbitration demand. After Haddock perfected his
appeal in this case, the trial court filed findings of fact and conclusions of law,
finding that Haddock had repudiated the CREELP arbitration agreement by
litigating the March 2005 suit to a final judgment, that he was estopped from
relying on the arbitration agreement, that Real Parties in Interest accepted that
repudiation by defending against Haddock’s claims and filing a counterclaim,
and that Real Parties in Interest suffered prejudice.
Haddock seeks review of the trial court’s order both by petition for writ
of mandamus and by interlocutory appeal. We have consolidated the two
proceedings for a decision disposing of both simultaneously. See In re Valero
Energy Corp., 968 S.W.2d 916, 916–17 (Tex. 1998) (orig. proceeding). The
trial court has stayed all proceedings in this case pending the outcome of the
mandamus proceeding and interlocutory appeal.
12
III. Discussion
A. Mandamus or Interlocutory Appeal?
The parties agree that the Federal Arbitration Act (“FAA”) applies to the
arbitration agreement in this case. See generally 9 U.S.C. §§ 1–16 (West
2009). A party seeking relief pursuant to the FAA from a denial or stay of
arbitration must pursue relief by way of petition for writ of mandamus. In re
D. Wilson Constr. Co., 196 S.W.3d 774, 780 (Tex. 2006) (orig. proceeding)
(“Mandamus is proper to correct a clear abuse of discretion when there is no
adequate remedy by appeal, . . . as when a party is denied its contracted-for
arbitration rights under the FAA.”); In re Valero Energy Corp., 968 S.W.2d at
917 (holding mandamus available for denial of arbitration because party has no
remedy by appeal under FAA); Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266,
272 (Tex. 1992) (orig. proceeding); see also W. Dow Ham III Corp. v.
Millennium Income Fund, L.L.C., 237 S.W.3d 745, 751 (Tex. App.—Houston
[1st Dist.] 2007, no pet.) (holding mandamus only means of reviewing order
granting stay of arbitration). Therefore, we will dismiss the interlocutory appeal
for want of jurisdiction and proceed to determine whether Haddock as Relator
is entitled to mandamus relief. See Tex. R. App. P. 42.3(a), 43.2(f).
13
B. Standard of Review
Mandamus will issue to correct a clear abuse of discretion for which the
remedy by appeal is inadequate. In re Prudential Ins. Co. of Am., 148 S.W.3d
124, 135–36 (Tex. 2004). A trial court has no discretion in determining what
the law is or in applying the law to the facts, and a clear failure to analyze or
apply the law correctly will constitute an abuse of discretion. Walker v. Packer,
827 S.W.2d 833, 840 (Tex. 1992). When a motion to compel arbitration under
the FAA has been erroneously denied or when a motion to stay arbitration is
erroneously granted, there is no adequate remedy by appeal, and mandamus
will issue. In re D. Wilson Constr. Co., 196 S.W.3d at 780; see also In re
Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005) (orig.
proceeding) (per curiam).
A party seeking to enforce an arbitration agreement must establish the
existence of a valid arbitration agreement and show that the claims in dispute
fall within the scope of that agreement. In re Bank One, N.A., 216 S.W.3d
825, 826 (Tex. 2007) (orig. proceeding) (per curiam); In re Kellogg Brown &
Root, Inc., 166 S.W.3d 732, 737 (Tex. 2005) (orig. proceeding); see BWI Cos.,
Inc. v. Beck, 910 S.W.2d 620, 621 (Tex. App.—Austin 1995, orig.
proceeding). In determining the validity of arbitration agreements under the
14
FAA, we generally apply state-law principles governing the formation of
contracts. In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 676 (Tex. 2006)
(citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S. Ct.
1920, 1924 (1995)).
Once the moving party establishes the existence of a valid arbitration
agreement, the trial court then determines whether the nonmovant’s claims fall
within the scope of the arbitration clause. In re FirstMerit Bank, N.A., 52
S.W.3d 749, 753 (Tex. 2001) (orig. proceeding). If the trial court determines
that a valid arbitration agreement exists, the burden shifts to the party opposing
arbitration to prove its defenses. J.M. Davidson, Inc. v. Webster, 128 S.W.3d
223, 227 (Tex. 2003). Whether a valid arbitration agreement exists is a legal
question subject to de novo review. In re D. Wilson Constr. Co., 196 S.W.3d
at 781.
C. The Arbitration Agreement
Haddock contends by his first issue that repudiation and waiver are
matters of substantive arbitrability and that the parties clearly and unmistakably
agreed to have all issues, including questions of arbitrability, decided by an
arbitrator. Therefore, he asserts, the trial court lacked jurisdiction to decide the
issues of repudiation and waiver. Real Parties in Interest contend that no valid
15
arbitration agreement continued to exist because Haddock “repudiated” it by
filing the prior lawsuit. They argue that when Haddock commenced the prior
lawsuit, the Crescent Entities were put to an “election” to either terminate or
insist on performance of the arbitration agreement and that, by filing a
counterclaim and allowing the prior lawsuit to go to final judgment, the
Crescent Entities and Haddock mutually terminated the arbitration agreement.
1. The issue is waiver, not repudiation by election.
In findings of fact 2 and conclusions of law that it entered after the parties
filed their briefs in this court and that have not been challenged by either party,
the trial court found in favor of Real Parties in Interest that Haddock
2
… When an abuse of discretion standard of review applies to a trial
court’s ruling, findings of fact and conclusions of law aid us in reviewing the
propriety of the ruling by providing us with an explanation for the ruling.
Chrysler Corp. v. Blackmon, 841 S.W.2d 844, 852 (Tex. 1992); Samuelson v.
United Healthcare of Tex., Inc., 79 S.W.3d 706, 710 (Tex. App.—Fort Worth
2002, no pet.). But while findings of fact and conclusions of law can be helpful
in applying the abuse of discretion standard, they are not required. Samuelson,
79 S.W.3d at 710. To determine whether a trial court abused its discretion, we
must decide whether it acted without reference to any guiding rules or
principles; in other words, whether the act was arbitrary or unreasonable. See
Downer v. Aquamarine Operators, Inc., 701 S.W.2d 238, 241–42 (Tex. 1985),
cert. denied, 476 U.S. 1159 (1986). Any factual issues decided by the court
in reaching the decision under review are not reviewed by legal- and
factual-sufficiency standards, although when the decision under review is based
on facts determined by the court, those facts must have some support in the
evidence. Crouch v. Tenneco, Inc., 853 S.W.2d 643, 649 & n.2 (Tex.
App.—Waco 1993, writ denied) (op. on reh’g). However, neither party has
challenged the trial court’s findings of fact in this case.
16
repudiated the Arbitration Agreement by filing and prosecuting the
Prior Lawsuit to a final judgment. The Crescent Entities accepted
that repudiation by defending against Haddock’s claims . . . and by
prosecuting a counterclaim. The Arbitration Agreement ceased to
exist as between these parties on or before April 6, 2006, the date
Haddock dismissed his appeal of the Prior Lawsuit.3
To support their argument that Haddock repudiated the arbitration
agreement, Real Parties in Interest rely on Vireo, P.L.L.C. v. Cates, 953 S.W.2d
489, 491 (Tex. App.—Austin 1997, pet. denied). In Vireo, the Austin court
held that when a plaintiff filed suit on an arbitrable claim, the defendant had an
election to insist or not on arbitration; when the defendant elected not to
arbitrate, the parties therefore mutually repudiated the arbitration agreement.
Id.
Although the Supreme Court of Texas has not spoken on this issue,
Vireo’s approach, that of “mutual repudiation and waiver based on election”
when a plaintiff files suit and then seeks arbitration, has been rejected by this
court on two occasions as well as by other Texas courts of appeals. See Grand
Homes, 96, LP v. Loudermilk, 208 S.W.3d 696, 704 (Tex. App.—Fort Worth
2006, pet. denied) (noting that Vireo holding would undermine policy promoting
arbitration and observing that TGAA was enacted to abrogate common law
3
… The facts in this case are undisputed. Relator’s position is that the
trial court misapplied the law to the facts and abused its discretion. See In re
Dillard Dep’t Stores, Inc., 198 S.W.3d 778, 780 (Tex. 2006).
17
“right of election” doctrine in arbitration context); see also Wee Tots Pediatrics
v. Morohunfola, 268 S.W.3d 784, 792 n.4 (Tex. App.—Fort Worth 2008, no
pet.) (again declining to follow Vireo); Practicehwy.com, Inc. v. Albany IVF
Fertility and Gynecology, PLLC, No. 05-06-00222-CV, 2006 WL 2960838, at
*3 (Tex. App.—Dallas Oct. 18, 2006, no pet.) (mem. op.) (rejecting Vireo as
conflating repudiation and waiver). We decline to revisit this issue. We hold
that the trial court abused its discretion by basing its order staying arbitration
on mutual repudiation of the arbitration agreement. However, this is but the
beginning of our inquiry.
In addition to asserting repudiation, Real Parties in Interest contend that
Haddock waived the arbitration agreement by inconsistent conduct in the prior
lawsuit that resulted in prejudice to them. The trial court made additional
findings that Haddock’s conduct in filing and prosecuting the prior lawsuit to
final judgment substantially invoked the litigation process and prejudiced the
Crescent Entities. In Perry Homes v. Cull, handed down after briefs were filed
and after submission in this court, the Supreme Court of Texas extensively
addressed the defense of waiver of arbitration by substantially invoking the
judicial process to the other party’s detriment or prejudice. 258 S.W.3d 580,
589–90 (Tex. 2008), cert. denied, 129 S. Ct. 952 (2009). By postsubmission
supplemental briefs, the parties have joined issue on whether Haddock waived
18
his right to arbitration by inconsistent litigation conduct, although Real Parties
in Interest still say this is an issue of both waiver and repudiation.4
2. The trial court has jurisdiction to decide waiver.
As a threshold issue, Haddock argues that the trial court lacked subject
matter jurisdiction to decide the issue of waiver. Federal and state courts have
concurrent jurisdiction to enforce the FAA. In re Palacios, 221 S.W.3d 564,
565 (Tex. 2006) (orig. proceeding); In re Kellogg Brown & Root, Inc., 166
S.W.3d at 739 (citing Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp.,
460 U.S. 1, 26 n.32, 103 S. Ct. 927, 942 n.32 (1983)). Waiver in the context
of this case is a question of arbitrability, and who decides arbitrability is a
matter of contract interpretation regarding the division of labor or responsibility
between the court and the arbitrator, not jurisdiction. See Howsam v. Dean
Witter Reynolds, Inc., 537 U.S. 79, 83, 123 S. Ct. 588, 592 (2002)
(characterizing presumption that questions of arbitrability are to be presented
to court unless parties have clearly and unmistakably agreed otherwise as
“interpretive rule”); Marie v. Allied Home Mtg. Corp., 402 F.3d 1, 3 (1st Cir.
4
… Indeed, Haddock has argued from the outset that “repudiation” and
“waiver” in the context of a party’s litigation conduct that is inconsistent with
arbitration have no substantive difference.
19
2005) (noting question of who decides waiver is one of “division of labor”
between courts and arbitrators).
We recently decided this very issue against Haddock’s position in another
case. Nw. Constr. Co. v. Oak Partners, L.P., 248 S.W.3d 837, 847 (Tex.
App.—Fort Worth 2008, pet. denied) (holding question of who decides issue of
waiver of arbitration not one of subject matter jurisdiction). We hold that the
trial court had jurisdiction to decide the issue of waiver. 5
3. Who decides the question of waiver by inconsistent conduct?
Haddock next argues that who decides the question of waiver is a matter
of contract and that the parties to this arbitration agreement clearly and
unmistakably referred all questions of arbitrability to an arbitration panel.6 We
agree that “arbitration is a matter of contract.” Howsam, 537 U.S. at 83, 123
S. Ct. at 591. The question of “‘who has the primary power to decide
5
… Although the trial court did not make an explicit finding or conclusion
as to whether it possessed the power to determine the issue of waiver, it
implicitly so concluded because it proceeded to determine the essential
elements of waiver against Haddock.
6
… The limited partnership agreement requires that Delaware law be used
when construing the agreement, specifically including the arbitration agreement.
The parties agree that, to the extent that any state substantive law applies,
Delaware law “mirrors federal law.” When applying the FAA, Texas courts also
look to federal law to decide substantive issues. Jack B. Anglin Co., 842
S.W.2d at 271–72. We thus look to federal law to determine this issue.
20
arbitrability’ turns upon what the parties agreed about that matter.” First
Options, 514 U.S. at 944, 115 S. Ct. at 1923.
There is a “qualification” to that general rule, which is also an exception
to the liberal policy favoring arbitration agreements. Howsam, 537 U.S. at 83,
123 S. Ct. at 591. “The question whether the parties have submitted a
particular dispute to arbitration, i.e., the question of arbitrability, is ‘an issue for
judicial determination [u]nless the parties clearly and unmistakably provide
otherwise.’” Id. (quoting AT & T Techs., Inc. v. Commc’ns Workers, 475 U.S.
643, 649, 106 S. Ct. 1415, 1418 (1986)); see also First Options, 514 U.S. at
944, 115 S. Ct. at 1924; In re Weekley Homes, L.P., 180 S.W.3d 127, 130
(Tex. 2005) (“[A]bsent unmistakable evidence that the parties intended the
contrary, it is the courts rather than the arbitrators that must decide ‘gateway
matters,’ such as whether a valid arbitration agreement exists.”).
In First Options, the Supreme Court noted, in discussing the “clear and
unmistakable evidence” requirement, that “the law treats silence or ambiguity
about the question ‘who (primarily) should decide arbitrability’ differently from
the way it treats silence or ambiguity about the question whether a particular
merits-related dispute is arbitrable because it is within the scope of a valid
arbitration agreement,’” so as to not “force unwilling parties to arbitrate a
21
matter they reasonably would have thought a judge, not an arbitrator, would
decide.” 514 U.S. at 944–45, 115 S. Ct. at 1924–25.
a. No “clear and unmistakable” evidence of agreement to
delegate questions of arbitrability to arbitrator
Haddock argues that the arbitration agreement of the limited partnership
agreement “clearly and unmistakably” delegates arbitrability issues, including
waiver, to an arbitration panel by expressly incorporating the Commercial
Arbitration Rules of the American Arbitration Association (“AAA”). Specifically,
Haddock relies upon Rule 7(a) of those rules, which provides that the arbitrator
“shall have the power to rule on his or her own jurisdiction, including any
objections with respect to the existence, scope, or validity of the arbitration
agreement.” American Arbitration Association, Commercial Arbitration Rules
and Mediation Procedures, R7, http://www.adr.org/sp.asp?id=22440#R7 (last
accessed February 25, 2009).
Real Parties in Interest respond that the supreme court in Perry Homes
has now decided, contrary to Haddock’s position, that the issue of waiver in a
case governed by the FAA is for the court, not an arbitrator. 258 S.W.3d at
587. Although we agree that this was the holding in Perry Homes, the
arbitration agreement at issue in that case contained no reference to the AAA
rules. And the supreme court in that case noted, albeit in another section of its
22
opinion, that there was no indication in that contract that the parties had
“clearly and unmistakably agreed” that the arbitrator should decide arbitrability.
Id. at 587, n.15 (citing First Options, 514 U.S. at 947–48, 115 S. Ct. at
1924). Therefore, we do not read Perry Homes as abandoning the “clear and
unmistakable” qualification to the presumption that the court is to decide issues
of arbitrability.
The majority of courts have concluded that express incorporation of rules
empowering the arbitrator to decide arbitrability (including ruling upon his or her
own jurisdiction) clearly and unmistakably evidences the parties’ intent to
delegate issues of arbitrability to the arbitrator. See, e.g., Qualcomm Inc. v.
Nokia Corp., 466 F.3d 1366, 1372–73 (Fed. Cir. 2006) (holding incorporation
of AAA rules, including Rule 7(a), clearly and unmistakably showed parties’
intent to delegate issue of arbitrability to arbitrator); Contec Corp. v. Remote
Solution Co., 398 F.3d 205, 208 (2nd Cir. 2005) (holding that incorporation of
AAA Rules, including Rule 7(a), clearly and unmistakably evinced intent for
arbitrator to decide whether nonsignatory party bound by arbitration
agreement); Terminix Int’l Co., L.P. v. Palmer Ranch Ltd. P’ship, 432 F.3d
1327, 1332–33 (11th Cir. 2005) (holding by incorporating AAA Rules into
agreement, parties clearly and unmistakably agreed arbitrator should decide
whether arbitration clause was valid); Citifinancial, Inc. v. Newton, 359
23
F. Supp. 2d 545, 549–52 (S.D. Miss. 2005) (same); see also Burlington Res. Oil
& Gas Co. L.P. v. San Juan Basin Royalty Trust, 249 S.W.3d 34, 40 (Tex.
App.—Houston [1st Dist.] 2007, pet. denied) (collecting cases).
But the majority view does not “mandate that arbitrators decide
arbitrability in all cases where an arbitration clause incorporates the AAA rules.”
San Juan Basin, 249 S.W.3d at 42 (quoting James & Jackson, LLC v. Willie
Gary, LLC, 906 A.2d 76, 78, 80 (Del. 2006)). Haddock points out that, in
James & Jackson, the Delaware Supreme Court adopted the majority federal
rule that incorporation of AAA rules requires submission of issues of arbitrability
to the arbitrator rather than the court. 906 A.2d at 80–81. However, the
court in that case also held that this rule would only apply in cases where (1)
an arbitration clause generally provides for arbitration of all disputes and also
(2) incorporates a set of arbitration rules that empowers arbitrators to decide
arbitrability. Id. Because the arbitration agreement there did not generally
provide for arbitration of all disputes but expressly allowed the parties to seek
injunctive relief and specific performance in the courts, the court held that
something other than mere incorporation of AAA rules would be needed in order
to establish clear and unmistakable intent to delegate issues of arbitrability to
the arbitrator. Id. at 81.
24
In Marie v. Allied Home Mortgage Corp., the arbitration clause referred to
binding arbitration “any and all disputes, claims (whether in tort, contract,
statutory, or otherwise), and disagreements concerning the interpretation or
application of this Agreement . . . including the arbitrability of any such
controversy or claim.” 402 F.3d at 14-15. The First Circuit in that case
acknowledged that, while the issue of waiver by litigation conduct is
presumptively for the court, the parties may by agreement shift the waiver
issue to an arbitrator by clear and unmistakable expression of intent in the
agreement. Id. at 14 (citing First Options, 514 U.S. at 945, 115 S. Ct. at
1925). But the court held in that case that express delegation of “arbitrability”
issues to the arbitrator in the arbitration agreement at issue there did not evince
“clear and unmistakable” intent for the arbitrator to decide the issue of waiver
by litigation conduct. Id. at 15. The court in Marie noted that the arbitration
agreement at issue there also incorporated the AAA rules but that it was silent
regarding whether the issue of waiver or any similar issue was intended to be
referred to an arbitrator. Id.
The court in Marie did not expressly decide the effect of the incorporation
of the AAA rules but broadly held as follows:
We cannot say that the use of the term [arbitrability] here
evinces a clear and unmistakable intent to have waiver issues
decided by the arbitrator. There are no references to waiver or
25
similar terms anywhere in the arbitration agreement. Neither party
should be forced to arbitrate the issue of waiver by conduct
without a clearer indication in the agreement that they have agreed
to do so. The issue of who would decide such a question is an
‘arcane’ one that employees are unlikely to have considered unless
clearly spelled out by the employer.
Id.
The Third Circuit has followed Marie in Ehleiter v. Grapetree Shores, Inc.,
holding that waiver by litigation conduct inconsistent with arbitration is
presumptively an issue for the court. 482 F.3d 207, 222 (3rd Cir. 2007). It
additionally held that, even though the arbitration agreement there expressly
stated that all claims or matters arising out of or relating in any fashion to the
agreement “shall be considered arbitrable” including “the issue of arbitrability
of any claim or dispute,” the agreement did not manifest a clear and
unmistakable intent to have an arbitrator decide the issue of waiver based on
litigation conduct. Id. at 221. The court reasoned:
[W]e do not believe that this provision . . . evidences a clear
and unmistakable intent to have an arbitrator decide procedural
questions of arbitrability that arise only after the parties have
bypassed a gateway determination of substantive arbitrability by
the arbitrator and actively litigated the underlying dispute in court.
Id. at 222. The court in Ehleiter also noted that there was no reference to
waiver of arbitration in the agreement. Id. That court refused to interpret the
agreement’s “silence regarding who decides the waiver issue” as giving
26
arbitrators that power “‘for doing so . . . [would] force [an] unwilling part[y] to
arbitrate a matter [he] reasonably would have thought a judge, not an arbitrator,
would decide.’” Id. (quoting First Options, 514 U.S. at 945, 115 S. Ct. 1920);
see also San Juan Basin, 249 S.W.3d at 41–42 (reasoning that, although
reference to AAA rules might otherwise be construed as “clear and
unmistakable intent” to refer arbitrability issues to arbitrator, language of
agreement was silent as to referral of “arbitrability” issues to arbitrator and
limiting language of agreement negated such intent); In re Ford Motor Co., 220
S.W.3d 21, 23 (Tex. App.—San Antonio 2006, orig. proceeding) (holding,
despite reference to AAA rules, that agreement did not clearly and unmistakably
evidence intent that issue of whether a nonparty was bound by arbitration
agreement be decided by arbitrator).
Haddock seeks to distinguish Marie on the basis that the conduct
constituting waiver arose in the same litigation in that case, as contrasted with
the prior litigation instituted by Haddock in a different court.7 We disagree.
The conduct found to constitute waiver in Marie was in a separate proceeding
in a different litigation forum, the EEOC. Marie, 402 F.3d at 14.
7
… Haddock does not discuss the differences between or attempt to
distinguish Ehleiter or James & Jackson from this case.
27
Haddock also argues that the First Circuit held that sending the waiver
issue to the arbitrator in Marie would be “exceptionally inefficient” given that
the case started in court, whereas Haddock claims this matter began with a
demand for arbitration so that the issue of waiver could more easily be resolved
in that forum. To the contrary, the conduct complained of by Real Parties in
Interest started when Haddock instituted and pursued his prior litigation to an
adverse decision in court. As the court in Marie recognized, “[i]f the arbitrator
were to find that the defendant had waived its right to arbitrat[ion], then the
case would inevitably end up back in court.” Id. at 13. The same would be
true here.
Finally, Haddock argues that Marie did not address the incorporation of
the AAA rules into the arbitration agreement. But the court clearly considered
that language, because it specifically pointed out that the agreement so stated;
yet the court found no clear and unmistakable evidence of intent in the
agreement to shift the issue of waiver to the arbitrator. Id. at 14.
Additionally, as in the San Juan Basin and James & Jackson cases, the
arbitration agreement here is not unequivocal but contains limiting language
with regard to the incorporation of the AAA rules, incorporating those rules “to
the extent not inconsistent” with the remainder of the detailed provisions of the
28
arbitration agreement, which contains five sections and ten paragraphs of
information prescribing the procedure and scope of any arbitration.
We also note that there is no designation in the arbitration agreement
here as to which version of the AAA rules is to apply, the version in existence
when the agreement was made or that in existence at the time of the dispute.
Haddock acknowledges that the rule now designated as Rule 7(a), upon which
he relies, did not exist when the arbitration agreement was added to the limited
partnership agreement in 1994. Although, as Haddock points out, the
partnership agreement has been amended several times since its inception
without change to the arbitration agreement language, we cannot assume from
silence in the agreement as to the issue of arbitrability or as to which version
of the AAA rules is to apply, that the parties intended to incorporate Rule 7(a),
which did not exist when the arbitration agreement was added. See Marie, 402
F.3d at 15; see also Ehleiter, 482 F.3d at 222.
Silence is not “clear and unmistakable evidence” of intent. The
agreement is silent as to whether the parties intended to incorporate the current
rules, silent as to whether the arbitrator is to decide issues of “arbitrability,”
and silent specifically regarding who is to decide waiver, repudiation, or similar
matters. We hold that the general reference in the arbitration agreement to the
29
AAA rules, without more, does not clearly and unmistakably manifest these
parties’ intent to refer the issue of waiver by litigation conduct to the arbitrator.
b. Substantial invocation of the litigation process still an
issue for the court after Howsam
By part of his second issue, Haddock argues that, even if this court
concludes that the trial court had power to consider some arbitrability issues,
the trial court lacked power specifically to decide the waiver issue, based upon
language contained in the United States Supreme Court’s decision in Howsam
v. Dean W itter Reynolds Inc., which stated that the “presumption is that the
arbitrator should decide ‘allegation[s] of waiver, delay, or a like defense to
arbitrability.’” 537 U.S. at 84, 123 S. Ct. at 592 (quoting Moses H. Cone
Mem’l Hosp., 460 U.S. at 24–25, 103 S. Ct. at 941). In Perry Homes, the
Culls made the identical argument made here by Haddock, asserting that
whether a party has waived the right to arbitrate by litigation conduct is an
issue to be decided by the arbitrator, rather than the court, based upon the
same language from Howsam. 258 S.W.3d at 588–90. The supreme court in
Perry Homes rejected that argument, flatly stating,
Every federal court that has addressed this issue since Howsam has
continued to hold that substantial invocation of the litigation
process is a question for the court rather than the
arbitrator—including the First, Third, Fifth, and Eighth Circuit. Legal
commentators appear to agree. So do we.
30
Id. at 589; see JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388, 393–94
(6th Cir. 2008) (holding Howsam limited to contractually based waiver, not
waiver by litigation conduct inconsistent with arbitration); Ehleiter, 482 F.3d at
217; Marie, 402 F.3d at 13–14; Republic Ins. Co. v. PAICO Receivables, LLC,
383 F.3d 341, 344–47 (5th Cir. 2004); Tristar Fin. Ins. Agency, Inc. v.
Equicredit Corp. of Am., 97 Fed. Appx. 462, 464 (5th Cir. 2004). We overrule
that portion of Haddock’s second issue.
c. The “No-Waiver” Rule
Haddock also argues that Rule 48-(a) of the AAA rules incorporated into
the arbitration agreement is a factor to be taken into consideration in
determining whether he waived the agreement. That rule provides, “No judicial
proceeding by a party relating to the subject matter of the arbitration shall be
deemed a waiver of a party’s right to arbitrate.” American Arbitration
Association, Commercial Arbitration Rules and Mediation Procedures, R48,
http://www.adr.org/sp.asp?id=22440#R48 (last accessed February 25, 2009).
Haddock acknowledges that this rule does not preclude a finding of waiver but
argues that this rule, as incorporated into the agreement, is further indication
of the parties’ intent to favor arbitration, specifically with regard to waiver.
The presence of such a “no waiver” clause in an arbitration agreement
does not alter the ordinary analysis undertaken to determine if a party has
31
waived its right to arbitration by litigation conduct. PAICO, 383 F.3d at 348.
The Fifth Circuit in that case agreed with those courts that have interpreted
such a “no waiver” clause as intended to permit parties to seek provisional
remedies or other judicial proceedings that would not function to displace
arbitration on the underlying dispute. Id. Specifically, the court in PAICO
stated, “‘[T]he fact that an arbitration agreement incorporates such a provision
would not prevent a court from finding that a party waived arbitration by
protracted litigation of an arbitrable dispute.’” Id. (quoting S & R Co. v. Latona
Trucking, Inc., 159 F.3d 80, 85 (2nd Cir. 1998), cert. dism’d, 528 U.S. 1058
(1999)); see also Home Gas Corp. v. Walter’s of Hadley, Inc., 403 Mass. 772,
532 N.E.2d 681, 684–85 (1989) (holding “no waiver” clause did not prevent
finding of waiver by litigation conduct); Seidman & Seidman v. Wolfson, 50
Cal. App. 3d 826, 835, 123 Cal. Rptr. 873 (Cal. Ct. App. 1975) (stating
purpose behind “no waiver” rule is not to allow a party to seek judicial relief
of a controversy “and later to switch course and demand arbitration”).
We hold that the trial court properly determined that it, rather than an
arbitrator, should decide whether Haddock waived the arbitration agreement by
filing and prosecuting the prior lawsuit. We overrule Haddock’s first issue.8
8
… We also overrule the second part of Haddock’s second issue, in which
he argues that whether the arbitration agreement forbids his Sarbanes-Oxley
32
D. Waiver by Prior Litigation Conduct Inconsistent with Arbitration
Having dealt with the preliminary arguments that consumed the vast bulk
of the briefing by both sides, we now address the main issue. Haddock
contends that the trial court abused its discretion and misapplied the law to the
facts by concluding that he waived arbitration by his conduct in initiating and
prosecuting the prior lawsuit. Haddock maintains that his prior lawsuit did not
assert the same issues raised by his demand for arbitration and that the issue
in the prior lawsuit did not “aris[e] out of or in connection with th[e]
[Partnership] Agreement or the Partnership” but, instead, arose from an entirely
separate contract—the severance agreement—which was not subject to
arbitration.
Real Parties in Interest do not contest the validity of the arbitration
agreement in the limited partnership agreement. Their position is that the
severance agreement is subject to the arbitration agreement contained in the
derivative claim is for the arbitrator to decide, not the court, similar to a like
issue regarding class arbitration under Green Tree Financial Corp. v. Bazzle, 539
U.S. 444, 449, 123 S. Ct. 2402, 2405 (2003) (holding question of whether an
arbitration agreement forbade class arbitration was for the arbitrator, not the
court, because it involved contract interpretation and arbitration procedures).
The trial court did not determine that the derivative claim was forbidden by the
arbitration agreement; rather, it determined that the claim was outside the
scope of the arbitration agreement because most CEI stockholders were not
parties to the partnership agreement. Haddock has not challenged that ruling
or the findings of the court to that effect.
33
limited partnership agreement that Haddock raised and litigated in the prior
litigation, that his conduct in the prior litigation was inconsistent with an intent
to arbitrate that claim, and that they suffered prejudice; thus, they argue,
Haddock waived his right to arbitrate his current claims.
Whether a party has waived its arbitration rights under the FAA by
inconsistent litigation conduct is a question of law that we review de novo.
Perry Homes, 258 S.W.3d at 598 & n.102; see also In re Citigroup Global
Mkts, Inc., 258 S.W.3d 623, 625 (Tex. 2008) (orig. proceeding) (per curiam);
In re Serv. Corp. Int’l, 85 S.W.3d 171, 174 (Tex. 2002) (orig. proceeding) (per
curiam). Because public policy favors arbitration, there is a strong presumption
against waiver of arbitration. Moses H. Cone Mem’l Hosp., 460 U.S. at 24–25,
103 S. Ct. at 941; In re D. Wilson Constr. Co., 196 S.W.3d at 783.
The party asserting waiver bears a heavy burden of proof, and the court
must resolve all doubts in favor of arbitration. In re Bruce Terminix Co., 988
S.W.2d 702, 704 (Tex. 1998). Waiver must be intentional. In re Bank One,
N.A., 216 S.W.3d at 827. Waiver may be express or implied from a party’s
conduct, but that conduct must be unequivocal. Id. Additionally, waiver in the
context of arbitration agreements subject to the FAA requires more than is
required for general waiver—it requires proof that the party asserting waiver as
34
a defense to arbitration has suffered prejudice. Perry Homes, 258 S.W.3d at
594–95 & n.80 (reaffirming requirement of prejudice and collecting cases).
Under the FAA, “[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 at 625 (quoting Perry Homes, 258 S.W.3d at
594).
To demonstrate waiver, the party opposing arbitration must establish both
that (1) the party seeking arbitration substantially invoked the judicial process
and (2) the party opposing arbitration suffered prejudice thereby. In re Bruce
Terminix, 988 S.W.2d at 704. To invoke the judicial process, a party “must,
at the very least, engage in some overt act in court that evinces a desire to
resolve the arbitrable dispute through litigation rather than arbitration.” PAICO,
383 F.3d at 344 (quoting Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324,
326 (5th Cir. 1999)).
1. The prior suit substantially invoked the judicial process
Haddock contends that waiver could not have occurred because the prior
suit concerned only the unfavorable-comments clause in the severance
agreement, which had no arbitration agreement, and that his current arbitration
demand asserts entirely different claims that arise only out of a separate
contract, i.e., the partnership agreement. Therefore, we first determine
35
whether—as Real Parties in Interest contend—the prior suit invoked the judicial
process regarding the same claims that Haddock now seeks to arbitrate. See
id. at 344–47 (holding waiver applies only where the same claim sought to be
arbitrated was previously litigated but upholding finding of waiver where
jurisdiction of court was previously invoked on all issues). We agree with Real
Parties in Interest on this key issue.
Although the severance agreement contains no arbitration clause, the
CREELP unit option plan—as amended and attached to the severance
agreement—does. Both the prior suit and the arbitration demand concern
claims that “aris[e] out of or in connection with” the limited partnership or the
limited partnership agreement by virtue of the CREELP unit option plan, which
is subject to all terms of the limited partnership agreement. Section 6.26 of the
1996 CREELP Unit Option Incentive Plan, attached as an appendix to Haddock’s
severance agreement, expressly provides that “the rights granted thereunder are
governed by and subject to each of the terms and conditions of the partnership
agreement.” That option plan further provides that upon exercising an option
thereunder, each participant is “deemed to have accepted and agreed to be
bound by each of the terms and conditions of the Partnership Agreement for all
purposes.” [Emphasis added.] As amended in 1994 and thereafter, the
partnership agreement, in turn, contains the arbitration agreement under which
36
Haddock seeks to arbitrate his CREELP unit option and his CEI stock option
claims.9
While Haddock claims that he initially sought only to reform the
unfavorable-comments clause of the severance agreement in the prior lawsuit,
he had a stated purpose for doing so—so that he could plead and litigate his
claims of risky loans and mismanagement of the Crescent Entities, which
allegedly resulted in devaluing his CREELP and CEI options, without fear of
violating that clause. Moreover, he also sought and obtained affirmative
injunctive relief against the Crescent Entities, preventing them from threatening
or taking action to forfeit his rights in the CREELP unit options vested in him by
the severance agreement. Haddock expressly stated his intent to file an
additional suit to assert his claims against the Crescent Entities or, alternatively,
to assert those claims in that same suit, and he sought the protection of the
9
… The trial court found, and Haddock has not challenged that finding,
that he raised some of the same issues in the prior suit that he now seeks to
arbitrate, alleging in his petition in that suit that the Crescent Entities “may be
acting adversely to the interests of stockholders and unitholders” and that
“Haddock further believes the management of the Employer Group is not acting
in the best interests of the shareholders and unitholders by providing risky loans
to executives which seriously jeopardize the financial health and stability of the
Employer Group.”
37
court through a ruling that he would not risk interference or forfeiture of his
options by proceeding with his proposed litigation.
Only after ultimately suffering an adverse result in his suit did Haddock
turn to arbitration. Haddock alleged in his arbitration demand that the option
claims he now asserts in that demand are “covered by the arbitration provision
in the Limited Partnership Agreement.” 10 The fact is that both his prior suit and
his arbitration demand assert the same conduct of Real Parties in Interest,
namely, allegedly refusing to honor and reducing in value his CREELP unit
options and CEI stock options.
Haddock cannot have it both ways. If, as he says, his claims regarding
option rights asserted in his arbitration demand are covered by the arbitration
agreement, then so were the claims regarding the option rights that he sought
to protect in the previous lawsuit and planned to litigate once he obtained a
declaration that the unfavorable-comments clause of his severance agreement
did not preclude such a suit. By his prior lawsuit, Haddock invoked the judicial
process with respect to the same claims specifically regarding his options in
CREELP that he now seeks to arbitrate.
10
… Although Haddock points out that he had and retains to this day a
limited partnership interest in CREELP, he has never explained how the
arbitration demand involves that limited partnership interest, other than through
the identical options that were involved in the prior suit.
38
Was his invocation of the judicial process in the prior litigation
“substantial”? Waiver by litigation conduct must be decided under a totality-of-
the-circumstances test on a case-by-case basis. Perry Homes, 258 S.W.3d at
591. Factors listed in that case in considering the totality of the circumstances
include whether the party seeking arbitration chose to file in court as plaintiff,
how long the party seeking arbitration delayed before seeking that process,
whether that party knew of the arbitration clause from the outset, how much
discovery was conducted, how much pretrial activity went to the merits, how
much time and expense was incurred in litigation, whether the party seeking
arbitration filed dispositive motions or sought judgment on the merits, and when
the case was to be tried. Id. at 591–92.
Real Parties in Interest assert that Haddock “substantially” invoked the
judicial process with respect to his claim regarding his rights in the CREELP unit
options because
(1) Haddock chose to file the prior lawsuit in court rather than
arbitrate (“whether the movant was the plaintiff (who chose to file
in court) or the defendant (who merely responded)”);
(2) Haddock filed the prior lawsuit in March 2005, pursued it
through final judgment, appealed it to this court, and waited until
July of 2006 to file his demand for arbitration (“how long the
movant delayed before seeking arbitration”);
(3) Haddock was “the primary signatory on the First Amended
Limited Partnership Agreement” and “intended for the arbitration
39
agreement to be broad and encompass all claims and disputes
(“whether the movant knew of the arbitration clause all along”);
(4) Haddock knew of the arbitration agreement in 1994 when he
signed the First Amended Limited Partnership Agreement (“when
the movant knew of the arbitration clause”);
(5) Haddock was the plaintiff in the prior lawsuit and filed two
motions for summary judgment (“whether the movant filed
affirmative claims and dispositive motions”); and
(6) Haddock pursued the prior lawsuit to a final judgment (“whether
the movant sought judgment on the merits”).
Haddock does not dispute these facts. Haddock chose to file his prior
suit rather than to arbitrate, sought and obtained affirmative relief, and
expressed his intent to pursue his claims in that lawsuit or in another suit as to
mismanagement and refusal of the Crescent Entities to allow him to exercise
his options. Throughout the prior litigation, Haddock never mentioned the
arbitration agreement under which he now seeks to arbitrate his option claims.
Yet he was clearly aware of it because he admits in his brief in this court that
he desired that it be included in the limited partnership agreement in 1994.
Further, waiver may be found where a party has tried and failed to
achieve a satisfactory result before turning to arbitration. See, e.g., Oak
Partners, 248 S.W.3d at 848; Loudermilk, 208 S.W.3d at 704; Williams Indus.,
Inc. v. Earth Dev. Sys. Corp., 110 S.W.3d 131, 135 (Tex. App.—Houston [1st
Dist.] 2003, no pet.); In re Winter Park Constr. Inc., 30 S.W.3d 576, 579 (Tex.
40
App.—Texarkana 2000, orig. proceeding); compare In re Bruce Terminix Co.,
988 S.W.2d at 704 (finding no waiver where defendant did not ask court for
any judicial decision such as by requesting summary judgment).
Indeed, failing to seek arbitration until after proceeding in litigation to an
adverse result is the clearest form of inconsistent litigation conduct and is
inevitably found to constitute substantial invocation of the litigation process
resulting in waiver. See, e.g., Jones v. Citibank (S.D.), N.A., 235 S.W.3d 333,
340–41 (Tex. App.—Fort Worth 2007, no pet.) (holding defendant waived
arbitration of counterclaim by litigating over two years and after summary
judgment was rendered against her); see also Frye v. Paine, Weber, Jackson &
Curtis, Inc., 877 F.2d 396, 398 (5th Cir. 1989) (holding party waived
arbitration by participating in litigation that ended in mistrial), cert. denied, 494
U.S. 1016 (1990); Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494,
497–98 (5th Cir. 1986) (finding waiver by filing state court lawsuit and
permitting it to be dismissed for want of prosecution); see also Carbajal v.
Household Bank F.S.D., No. 00 C 0626, 2003 WL 22159473, at *10 (N.D. Ill.
Sept. 18, 2003) (noting “[p]articipation in litigation raises concerns of forum-
shopping. If a party first demands arbitration only after it receives an adverse
ruling in the lawsuit, courts inevitably will find waiver” and collecting cases),
aff’d, 372 F.3d 903 (7th Cir. 2004); Oak Partners, 248 S.W.3d at 849 (holding
41
trial court’s waiver finding based on totality of circumstances including
engaging in extensive discovery over nineteen-month period, filing of
counterclaim, cross-claims, and motion for partial summary judgment, and
seeking arbitration only after failure of mediation).
Haddock filed his arbitration demand after filing suit, obtaining injunctive
relief, litigating for some nine months, filing two motions for summary
judgment, and finally suffering an adverse result in the prior lawsuit. All of
these facts support the trial court’s finding that he substantially invoked the
litigation process and thereby waived his right to arbitration.
Moreover, participation in litigation to gain an advantage in future
litigation can result in waiver. See In re Christus Spohn Health Sys. Corp., 231
S.W.3d 475, 481 (Tex. App.—Corpus Christi 2007, orig. proceeding) (holding
hospital’s prior litigation conduct in criminal case constituted waiver of right to
arbitrate where prior litigation involved developing evidence as part of strategic
plan for defense of civil suit for damages). Haddock made clear in his pleadings
in his prior suit that his strategy and plan was to obtain an interpretation of the
severance agreement that would permit him to assert his claims in a lawsuit
without violating the unfavorable-comments clause while preventing Real
Parties in Interest from taking any action to interfere with the option rights he
sought to protect by injunctive relief and which he now seeks to arbitrate.
42
Haddock filed his arbitration demand for his option claims over a year and
a half after filing suit, prosecuting that suit, suffering an adverse summary
judgment in the trial court, and after dismissing his appeal to this court.
Considering the totality of the circumstances as articulated in Perry Homes, we
hold that Haddock substantially invoked the judicial process.
2. Prejudice
Substantially invoking the judicial process does not waive a party’s
arbitration rights unless the opposing party also proves that it suffered prejudice
as a result. Perry Homes, 258 S.W.3d at 593–94 (citing In re Bruce Terminix
Co., 988 S.W.2d at 704). “Courts will not find that a party has waived its right
to enforce an arbitration clause by merely taking part in litigation unless it has
substantially invoked the judicial process to its opponent’s detriment.” In re
Service Corp. Int’l, 85 S.W.3d at 174. “When one party reveals a disinclination
to resort to arbitration on any phase of suit involving all parties, those parties
are prejudiced by being forced to bear the expense of a trial. . . . Substantially
invoking the litigation machinery qualifies as the kind of prejudice that is the
essence of waiver.” E.C. Ernst, Inc. v. Manhattan Constr. Co., 559 F.2d 268,
269 (5th Cir. 1977) (holding extensive postsuit actions in all phases of complex
litigation served as waiver of right to arbitrate when opposing parties were
43
prejudiced by being forced to bear expenses of a quite lengthy trial, which is
the kind of prejudice arbitration is designed to avoid).
“Prejudice” has many meanings. Perry Homes, 258 S.W.3d at 597.
However, prejudice or “detriment” in the context of litigation conduct
inconsistent with arbitration relates to “inherent unfairness” caused by “a
party’s attempt to have it both ways by switching between litigation and
arbitration to its own advantage.” Id.; see also Subway, 169 F.3d at 327
(referring to “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”). “[A] party
should not be allowed purposefully and unjustifiably to manipulate the exercise
of its arbitral rights simply to gain an unfair tactical advantage over the
opposing party.” Id. (citing In re Tyco Int’l Ltd. Securities Litigation, 422 F.3d
41, 46 n.5 (1st Cir. 2005)).
Ultimately, what constitutes waiver of the right to arbitrate depends on
the facts of each case. PAICO, 383 F.3d at 346 (citing Tenneco Resins, Inc.
v. Davy Int’l, AG, 770 F.2d 416, 420 (5th Cir 1985)). Three factors are
particularly relevant in determining prejudice. Id. First, pretrial activity related
to all claims including those that are arbitrable may result in prejudice. Id.
(citing Price v. Drexel Burnham Lambert, Inc. 791 F.2d 1156, 1161–62 (5th
44
Cir. 1986)). Second, time and expense incurred in defending against a motion
for summary judgment could prejudice the party opposing arbitration. Price,
791 F.2d at 1162. Thus, both delay and the extent of the moving party’s
participation in judicial proceedings are material factors in assessing prejudice.
Frye, 877 F.2d at 398. Third, failure to assert the right to demand arbitration
is a factor bearing on the question of prejudice along with other considerations.
Price, 791 F.2d at 1161–62. A demand for arbitration puts the other party on
notice that arbitration is forthcoming and affords that party the opportunity to
avoid compromising its position with regard to arbitrable and nonarbitrable
claims. PAICO, 383 F.3d at 347.
If a party has asserted the right to arbitrate at or before commencement
of litigation, the party opposing arbitration will necessarily carry a heavy burden
to show waiver. Id. Conversely, when a party fails to demand arbitration and
also engages in pretrial activity inconsistent with the intent to arbitrate, the
opposing party seeking to show waiver “may more easily show that its position
has been compromised, i.e., prejudiced.” Id.; see Oak Partners, 248 S.W.3d
at 851 (concluding that plaintiff showed prejudice when defendant delayed
nineteen months before moving to compel arbitration, during which time it
actively pursued litigation in the trial court, sought discovery from plaintiff, and
actively sought relief from the trial court, which forced plaintiff to respond and
45
to incur attorney’s fees); Jones, 235 S.W.3d at 340–41 (holding appellant
waived her right to arbitrate when she waited for over two years after card
issuer’s first petition was filed before requesting arbitration, and by that time
had filed numerous motions including a motion to dismiss, a counterclaim, and
opposition to summary judgment); see also Fraser v. Merrill Lynch Pierce,
Fenner & Smith, Inc., 817 F.2d 250, 253 (4th Cir. 1987) (finding sufficient
prejudice to support waiver where brokerage firm delayed four-and-one-half
years before seeking arbitration, two trial dates passed, and opposing party was
required to respond to two motions for partial summary judgment and three
motions to dismiss); Miller Brewing, 781 F.2d at 497—98 (finding waiver where
plaintiff unconditionally filed suit, waited eight months to assert right to
arbitrate, and did not pursue arbitration until after its suit was dismissed three
years later for want of prosecution). Likewise, in Price, the Fifth Circuit Court
of Appeals held that prejudice resulted in waiver when the party opposing
arbitration had been put to the expense and time of defending a motion to
dismiss and for summary judgment because unlike a perfunctory motion to
dismiss before answering, a federal rule 12(b) motion to dismiss and for
summary judgment “could not have caused anything but substantial prejudice
to the Prices.” 791 F.2d at 1162.
46
Haddock failed to seek arbitration before initiating the prior litigation.
Then he waited over fourteen months before requesting arbitration, from March
2005, when he filed the prior lawsuit, until July 2006, when he filed his
statement of claims with the AAA. During that time, among other things, he
obtained a temporary injunction, filed two motions for summary judgment,
litigated his claims to an adverse judgment, and filed and dismissed an appeal
from that judgment. The trial court specifically found that the “Crescent
Entities were prejudiced by Haddock’s invocation of the judicial system in the
Prior Lawsuit. In reliance on Haddock’s actions, the Crescent Entities spent
substantial sums defending Haddock’s claims in the Prior Lawsuit and
prosecuting a counterclaim.” Haddock has not challenged that finding.
We hold that the trial court did not abuse its discretion by staying the
arbitration because Haddock made his choice: he substantially invoked the
judicial process as to his option claims to the prejudice of Real Parties in Interest
in the prior litigation and thereby waived his right to arbitrate those claims. We
overrule Haddock’s third issue.
IV. Conclusion
Haddock does not challenge the trial court’s ruling that his claims based
on his stock options in CEI or his Sarbanes-Oxley claim are beyond the scope
of the arbitration agreement. Nor has he raised an issue on appeal as to the trial
47
court’s ruling that his claims against Quinn, Rowsey, and Worrell are beyond
the scope of the arbitration agreement. Therefore, we need not reach the
propriety of the trial court’s order as to those claims. Having overruled
Haddock’s three issues, we deny the petition for writ of mandamus, and we
dismiss the interlocutory appeal for want of jurisdiction.
ANNE GARDNER
JUSTICE
PANEL: GARDNER and W ALKER, JJ.; and DIXON W. HOLMAN, J. (Senior
Justice, Retired, Sitting by Assignment).
WALKER, J. concurs without opinion.
DELIVERED: February 26, 2009
48