Rick D. Baty v. Bowen, Miclette & Britt, Inc., Samuel F. Bowen, David G. Miclette, and Edward G. Britt, Jr.

Affirmed and Opinion filed May 23, 2013.
In The
Fourteenth Court of Appeals
NO. 14-11-00663-CV
RICK D. BATY, Appellant
V.
BOWEN, MICLETTE & BRITT, INC., SAMUEL F. BOWEN, DAVID G.
MICLETTE, AND EDWARD G. BRITT, JR., Appellees
On Appeal from the 333rd District Court
Harris County, Texas
Trial Court Cause No. 2007-38177
OPINION
A former employee and shareholder of a corporation appeals a judgment
confirming an arbitration award regarding claims between him, on one side, and
the corporation and three shareholders, on the other side. The trial court had
compelled the former employee and shareholder to arbitrate his claims pursuant to
an arbitration provision in a shareholders’ agreement. On appeal, the former
employee and shareholder asserts the trial court erred in compelling arbitration
over his objection that the opposing parties had waived arbitration by their
litigation conduct and over his objection that his claims against the opposing
parties are not within the scope of the arbitration provision. We affirm.
I. FACTUAL AND PROCEDURAL BACKGROUND
Appellant Rick D. Baty was a minority shareholder and employee of
appellee Bowen, Miclette & Britt, Inc., a corporation involved in the insurance-
brokerage business (the “Company”). Baty signed three agreements with the
Company: (1) a Shareholders’ Agreement, (2) an Employment Agreement, and (3)
a letter agreement between Baty and the Company in which the Company
promised to pay Baty part of its recovery, if any, in its lawsuit against Mark Ledger
(“Ledger Agreement”). Neither the Employment Agreement nor the Ledger
Agreement contains an arbitration provision. The Shareholders’ Agreement does.
The Company gave Baty written notice on June 21, 2007, that it was
terminating his employment for cause under section 4.01 of his Employment
Agreement. The termination was based upon Baty’s alleged (1) refusal to obey
reasonable orders in a manner that amounts to insubordination, (2) commission of
dishonest acts toward the Company or its customers, and (3) engaging in acts of
disruption.1 Baty contends this action was taken to eliminate him as a shareholder
and thereby prevent him from making objections to contemplated stock sales by
shareholders Samuel Bowen and David Miclette, and to force Baty to sell his
shares in the Company to the other shareholders for far less than the actual value of
these shares. Because Baty’s employment was terminated for a reason other than
1
The Company also relied upon section 4.01(G) of the Employment Agreement, under which the
parties agreed that the Company could terminate Baty based upon “[a]ny other reason which [the
Company] may, in its sole discretion, determine to be ‘good cause’ for termination of [Baty].”
2
death or total disability before Baty attained the age of 62 years, Baty was
contractually required to sell, and all of the other shareholders of the Company
were required to buy, all of Baty’s shares in the Company at a purchase price
determined under a formula set forth in section 6.1(c) of the Shareholders’
Agreement. Baty refused to accept the purchase price for his shares calculated
under this formula.
Separate Suits Filed by the Company and Baty
The Company filed suit in Harris County District Court, on June 22, 2007,
originally seeking only a declaratory judgment that Baty was terminated for good
cause under the Employment Agreement. A few months later, on August 7, 2007,
Baty filed a separate lawsuit in Harris County District Court against the Company,
Samuel F. Bowen, David G. Miclette, and Edward G. Britt, Jr. (collectively, the
“Bowen Parties”). In his original petition, Baty alleged that the Company had
breached the Employment Agreement by terminating his employment without
cause when cause was required. Baty also asserted claims against the individual
defendants for breach of fiduciary duty, minority-shareholder oppression, and
tortious interference with the Employment Agreement. These two cases were
ultimately consolidated in the 333rd District Court, and set for trial for December
1, 2008.
Events Before the Bowen Parties Moved to Compel Arbitration
In their original answer to Baty’s petition, filed September 10, 2007, the
Bowen Parties asserted that Baty’s claims were based upon the Shareholders’
Agreement and that this agreement required arbitration of Baty’s claims. In that
pleading, the Bowen Parties asked the trial court to compel Baty to submit his
claims to arbitration. Although the Bowen Parties made this request in their
original answer, they did not file a separate motion to compel arbitration of Baty’s
3
claims until eight months later. During this interval the Company amended its
pleadings to add claims against Baty for breach of the covenants in the
Employment Agreement and Shareholder Agreement that Baty would not solicit
customers of the Company. The Company also alleged that Baty breached the
Shareholders’ Agreement by soliciting the Company’s employees to work with
him. The Company added claims that Baty used and disclosed the Company’s
confidential information in violation of his obligations under the Employment
Agreement. In addition, the Company asserted common-law claims for
misappropriation of trade secrets, breach of fiduciary duty, and tortious
interference with contract. And, the Company requested a temporary restraining
order and a temporary injunction based upon Baty’s alleged violations of the
Employment Agreement and the Shareholders’ Agreement. The record does not
reflect that any court ever ruled on either request for injunctive relief. During the
eight months between answering Baty’s lawsuit and filing their motion to compel
arbitration, the Bowen Parties engaged in a significant amount of discovery.
The Bowen Parties’ Motion to Compel Arbitration of Baty’s Claims
On May 14, 2008, the Bowen Parties moved the trial court to compel Baty to
arbitrate his claims against them based upon the arbitration provision in the
Shareholders’ Agreement. The Bowen Parties did not seek to compel arbitration as
to any of their claims against Baty. In opposing the motion to compel arbitration,
Baty argued that the Bowen Parties had waived arbitration by their litigation
conduct and that Baty’s claims are not within the scope of the arbitration provision.
On June 19, 2008, the Bowen Parties amended their petition to delete all claims for
breach of the Shareholders’ Agreement. On the same day, the Bowen Parties filed
a demand for arbitration in which they asserted a claim for breach of the
Shareholders’ Agreement and sought declaratory relief regarding the rights and
4
obligations of the parties to that agreement. The trial court heard argument from
the parties and the motion to compel arbitration was submitted to the trial court for
decision on June 20, 2008. During subsequent hearings, the parties informed the
court that the Bowen Parties had filed a demand for arbitration. At a hearing on
July 20, 2008, the trial judge noted that he agreed that at least some of Baty’s
claims should go to arbitration.
Meanwhile, the parties continued with discovery, and Baty amended his
petition to add the following claims: (1) a claim against the Company for breach of
the Ledger Agreement, (2) a claim against the Bowen Parties for their alleged
conversion of Baty’s shares in the Company, and (3) a claim against the Bowen
Parties under the Texas Theft Liability Act for damages caused by their alleged
unlawful appropriation of Baty’s shares in the Company. In his amended petition,
Baty sought, among other remedies, a “buy-out of his shares in [the Company] at
fair value.” After another hearing on the motion to compel arbitration, the trial
court granted the motion on March 10, 2009. The trial court ordered all of Baty’s
claims against the Bowen Parties to arbitration and stayed the Bowen Parties’
claims against Baty.
Arbitration Award
The arbitrator issued an award in March 2011 (the “Award”). In the Award,
the arbitrator declined to consider Baty’s claims for breach of the Employment
Agreement and for tortious interference with the Employment Agreement,
concluding that the trial court, rather than the arbitrator, should determine those
claims. The arbitrator ruled in Baty’s favor on his claim for breach of the Ledger
Agreement. The arbitrator denied Baty recovery on his claims for breach of
fiduciary duty, minority-shareholder oppression, violation of the Texas Theft
Liability Act, conversion, conspiracy, and restitution. The arbitrator ruled in the
5
Bowen Parties’ favor on their claims for declaratory relief and for breach of the
Shareholders’ Agreement. The arbitrator found that, under section 6.1(c) of the
Shareholders’ Agreement, Baty was required to sell his shares in the Company to
the remaining shareholders for $1,211,358.
Trial Court’s Confirmation of the Arbitration Award
Baty filed a motion in the trial court to confirm the Award regarding his
claim for breach of the Ledger Agreement and to vacate the remainder of the
Award. The Bowen Parties moved to vacate the Award as to Baty’s claim for
breach of the Ledger Agreement, to confirm the remainder of the Award, and to
grant a severance to make the judgment on the arbitrated claims final. The trial
court confirmed the Award in its entirety. To make the judgment final and
appealable, the trial court then severed and stayed the claims that were never
ordered to arbitration and the claims that the arbitrator declined to consider.
II. ISSUES AND ANALYSIS
On appeal, Baty asserts that the trial court erred in compelling arbitration
over his objection that the Bowen Parties had waived arbitration by their litigation
conduct and over his objection that his claims against the Bowen Parties are not
within the scope of the arbitration provision.
A. Did Baty preserve error as to his waiver argument regarding the Bowen
Parties’ affirmative claims for relief in the arbitration proceeding?
As a threshold matter, we consider whether Baty preserved error as to his
waiver-of-arbitration argument regarding the affirmative claims for relief that the
Bowen Parties asserted in the arbitration (claims for declaratory relief regarding
the Shareholders’ Agreement and for breach of the Shareholders’ Agreement).
Though the Company, but not the individual defendants, did assert a claim for
breach of the Shareholders’ Agreement from October 2007 through June 2008, the
6
Bowen Parties never moved to compel arbitration of this claim or any of the
Company’s claims for affirmative relief in the trial court. A month after moving to
compel arbitration, the Company amended its petition to drop the claims for breach
of the Shareholders’ Agreement, and it asserted these claims and other affirmative
claims in the demand for arbitration. In sum, the record reflects that the Bowen
Parties never moved to compel arbitration on any of their affirmative claims and
that Baty did not seek to enjoin arbitration of these affirmative claims on any
ground, including waiver of arbitration.
The Supreme Court of Texas has concluded that courts, not arbitrators,
decide whether parties have waived arbitration by their litigation conduct. See
Perry Homes v. Cull, 258 S.W.3d 580, 587–89 (Tex. 2008). Baty did move to
vacate the arbitration award as to these claims based upon waiver of arbitration,
but waiver of arbitration is not a valid basis for vacating an arbitration award,
under either the Federal Arbitration Act or the Texas Arbitration Act. See Ewing v.
ACT Catastrophe-Texas L.C., 375 S.W.3d 545, 552–53 (Tex. App.—Houston
[14th Dist.] 2012, pet. denied). A respondent defending against claims in
arbitration can preserve error as to an argument that the claimant waived
arbitration of its claim through its litigation conduct by asking a court to enjoin the
arbitration based upon this alleged waiver. See Grigsby & Assocs., Inc. v. M
Securities Investment, 664 F.3d 1350, 1351–54 (11th Cir. 2011). Baty did not seek
to enjoin arbitration of the claims asserted against him by the Bowen Parties.
Therefore, we conclude that Baty failed to preserve error in the trial court as to his
argument on appeal that the Bowen Parties waived arbitration as to the claims they
asserted against Baty in the arbitration. See Perry Homes, 258 S.W.3d at 587–89;
Ewing, 375 S.W.3d at 55; Grigsby & Assocs., Inc., 664 F.3d at 1351–54.
After excluding these claims from consideration, as well as Baty’s claim for
7
breach of the Ledger Agreement (which Baty is not challenging on appeal) and the
claims that were severed from this case to make the judgment final, the following
claims remain for consideration under Baty’s first issue as to whether the trial court
erred in compelling arbitration over his objection of waiver: Baty’s claims for
breach of fiduciary duty, minority-shareholder oppression, violation of the Texas
Theft Liability Act, conversion, conspiracy, and restitution (“Remaining Claims”).2
B. Did the Bowen Parties waive their right to arbitrate the Remaining
Claims by substantially invoking the judicial process?
In his first issue, Baty asserts that the Bowen Parties waived their right to
arbitrate the Remaining Claims by substantially invoking the judicial process to
Baty’s prejudice. A party waives a right to arbitration by substantially invoking
the judicial process to the other party’s detriment or prejudice. Perry Homes, 258
S.W.3d at 589–90. Baty has the burden of proving that the Bowen Parties waived
their right to arbitration and, due to the strong presumption against waiver of
arbitration, this is a difficult burden to satisfy. See id. at 590. Whether a party has
waived arbitration must be decided on a case-by-case basis, based upon an
examination of the totality of the circumstances. See id. at 591. In making this
determination, courts consider a wide variety of factors including the following:
whether the party who pursued arbitration was the plaintiff or the
defendant;
how long the party who pursued arbitration delayed before seeking
arbitration;
when the party who pursued arbitration learned of the arbitration
clause’s existence;
how much the pretrial activity related to the merits rather than
arbitrability or jurisdiction;
2
We presume, without deciding, that Baty alleged claims for conspiracy and restitution against
the Bowen Parties in his First Amended Petition.
8
how much time and expense has been incurred in litigation;
whether the party who pursued arbitration sought or opposed
arbitration earlier in the case;
whether the party who pursued arbitration filed affirmative claims or
dispositive motions;
how much discovery has been conducted and who initiated the
discovery;
whether the discovery sought would be useful in arbitration;
what discovery would be unavailable in arbitration;
whether activity in court would be duplicated in arbitration;
when the case was to be tried; and
whether the party who pursued arbitration sought judgment on the
merits.
See id. at 591–92.
The quantum of litigation conduct that will be deemed “substantial” depends
very much on the context. See id. at 593. A party who enjoys significant direct
benefits by gaining an advantage in the pretrial litigation process should be barred
from turning around and seeking arbitration with the spoils. See id. Like any other
contract right, arbitration can be waived if the parties agree instead to resolve a
dispute in court. See id. This type of waiver can be implied from a party’s
conduct, when that conduct is unequivocal. See id. In close cases, the “strong
presumption against waiver” should govern. See id.
In the context of waiver of an arbitration right, “prejudice” relates to the
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. See id. at 597. Whether a party’s conduct
constitutes a waiver of an arbitration right is a question of law that this court
reviews de novo. See id. at 598. If the trial court resolves factual disputes as to the
conduct in which the party in question engaged, then this court defers to the trial
court’s fact findings if they are supported by sufficient evidence. See id.
9
As to the Remaining Claims, the Bowen Parties were the defendants. The
Company did file suit first as plaintiff, but it asserted claims that no party has
asserted were arbitrable. Baty then filed suit as plaintiff against the Bowen Parties,
asserting potentially arbitrable claims. In their original answer in response to these
claims, the Bowen Parties asserted that Baty’s claims were based upon the
Shareholders’ Agreement and that this agreement required arbitration of Baty’s
claims. In their answer, the Bowen Parties asked the trial court to compel Baty to
submit his claims to arbitration. The already heavy burden of demonstrating
waiver of arbitration “falls even more heavily” upon the party asserting waiver
when the party seeking arbitration included a demand for arbitration in its original
answer. See In re H&R Block Financial Advisors, Inc., 262 S.W.3d 896, 901 (Tex.
App.—Houston [14th Dist.] 2008, orig. proceeding); Tenneco Resins, Inc. v. Davy
Int’l, AG, 770 F.2d 416, 420–21 (5th Cir. 1985); General Guaranty Ins. Co. v.
New Orleans General Agency, Inc., 427 F.2d 924, 929 n.5 (5th Cir. 1970).
Weighing in favor of waiver is the Company’s conduct from October 2007
through June 2008 of asserting claims against Baty for breach of Baty’s non-
solicitation covenants in the Employment Agreement and Shareholders’
Agreement. The Company alone was the plaintiff in these claims, which, as to the
Employment Agreement, no party has asserted were arbitrable, but, as to the
Shareholders’ Agreement, were indisputably arbitrable. The Company alleged that
Baty had breached provisions of the Shareholders’ Agreement and of the
Employment Agreement under which Baty agreed that he would not solicit
business from the Company’s customers during the two-year period following
termination of his employment. In June of 2008, the Company dropped the
arbitrable claims that they were asserting in litigation and asserted these claims in
their demand for arbitration. The Bowen Parties delayed eight months from the
filing of their original answer to the filing of their motion to compel arbitration.
10
This is not a case in which the Bowen Parties did not learn of the arbitration
provision of the Shareholders’ Agreement until after significant litigation activity
had occurred. They were aware of the arbitration provision at the beginning of the
litigation, at least by September 10, 2007, when they filed their original answer.
The overwhelming majority of the Bowen Parties’ pretrial activity related to the
merits rather than arbitrability or jurisdiction, although some of the pending claims
were not subject to arbitration.
At times, Baty indicates that the appropriate time frame for the waiver-of-
arbitration analysis is from June 2007, when the Company filed suit, through
March 2009, when the trial court compelled arbitration of Baty’s claims against the
Bowen Parties. Though the Bowen Parties continued their pretrial activities after
they filed their motion to compel arbitration, at a March 3, 2009 hearing on this
motion, the trial court indicated that the delay in ruling on the motion to compel
arbitration was “my fault, by the way, not yours.” This stance is consistent with
the approach taken by federal courts to this issue. See, e.g., Tenneco Resins, Inc.,
770 F.2d at 418, 420–21 (noting that trial court said it would not give significant
consideration in the waiver-of-arbitration analysis to litigation conduct that
occurred after the party moved to stay the litigation pending arbitration and
adopting a similar approach on appeal). Though we consider all the facts and
circumstances reflected by the record, we conclude that the most important time
frame for purposes of the waiver analysis is the eight months between September
10, 2007, when the Bowen Parties first made an appearance in litigation involving
potentially arbitrable claims, and May 14, 2008, when the Bowen Parties moved to
compel arbitration (the “Period”).
Baty asserts that he had incurred $350,000 in attorney’s fees by the time the
Bowen Parties moved to compel arbitration and $700,000 in attorney’s fees by the
time the trial court granted this motion. In support of these assertions, Baty cites
11
only documents attached to his motion to vacate, in part, the Award. But, waiver
of arbitration is not a valid basis for vacating an arbitration award, either under the
Federal Arbitration Act or the Texas Arbitration Act. See Ewing, 375 S.W.3d at
552–53. Thus, in Baty’s first issue, this court is reviewing the trial court’s ruling
on the Bowen Parties’ motion to compel arbitration, and we may not consider these
documents cited by Baty regarding his attorney’s fees because they were not
before the trial court when it granted the motion to compel arbitration. See Univ.
of Tex. v. Morris, 344 S.W.2d 426, 429 (Tex. 1961) (holding that appellate court,
in determining correctness of a trial court ruling, does not consider events that
occurred subsequent to the ruling unless they deprive the appellate court of
jurisdiction); Stephens County v. J.N. McCammon, Inc., 52 S.W.2d 53, 55 (Tex.
1932) (stating that “[w]hen an appellate court is called upon to revise the ruling of
a trial court, it must do so upon the record before that court when such ruling was
made”).
The record before the trial court when it granted the motion to compel
arbitration included an affidavit of one of Baty’s lawyers, who testified that Baty
was invoiced for his lawyers’ services in July, August, and September 2007, at an
hourly rate. The total of the three invoices was $54,363.50 in fees and $1,682.31
in expenses. The lawyer did not address whether Baty paid any part of these three
invoices. After the issuance of these invoices, Baty and his law firm agreed to
switch to a contingency-fee agreement. Thus, in September 2007, the month in
which the Bowen Parties filed their answer, Baty shifted to an unspecified
contingency-fee arrangement. Baty produced no evidence that he actually paid (1)
any attorney’s fees for services rendered by his attorneys, or (2) any litigation costs
or expenses. Baty’s contingency-fee contract is not in the record, and there is no
evidence that the amount of the contingency fee increased because the Bowen
Parties did not file their motion to compel arbitration until May 14, 2008. The
12
Bowen Parties did not oppose arbitration earlier in the case, and they actually
requested arbitration of Baty’s claims in their original answer.
Weighing against waiver, the Bowen Parties did not file any dispositive
motions on the merits of any claims that they sought to arbitrate. On the other
hand, the Company (but not the individual defendants) filed affirmative claims for
breach of the Shareholders’ Agreement. In June of 2008, the Company dropped
the arbitrable claims that it was asserting in litigation and asserted these claims in a
demand for arbitration. These claims were not the subject of the Bowen Parties’
motion to compel arbitration.
The Bowen Parties engaged in considerable discovery and also resisted
discovery during the Period. They filed seven motions to quash depositions. They
opposed two motions to compel and filed a motion to compel and a motion for
protective order. They requested disclosures, served four sets of requests for
production and four sets of interrogatories, and subpoenaed four third-party
witnesses seeking documents. They took the deposition of Baty and six other
witnesses, for a total amount of deposition time of approximately 10.75 hours. The
limit on the Bowen Parties’ total deposition time was 50 hours. See Tex. R. Civ. P.
190.3(b)(2). Baty initiated some of the discovery, but the Bowen Parties initiated
most of it. Based upon the record, it appears that nearly all of the discovery related
to both Baty’s claims that the trial court later ordered to arbitration and to the
Company’s claims that nobody argues were subject to arbitration. We presume for
the sake of argument that the discovery sought would be useful in arbitration.
Requests for production, interrogatories, requests for disclosure, and depositions
were available in the arbitration. The arbitrator placed a 15-hour aggregate limit
on deposition time for each side and provided that this limit could not be exceeded
absent agreement of the parties or leave of the arbitrator. Some activity in the trial
court would be duplicated in arbitration.
13
When the Bowen Parties filed their motion to compel arbitration, there were
five-and-a-half months remaining before trial. The Bowen Parties did not seek
judgment on the merits by means of a dispositive motion, but the Company did
assert affirmative claims for relief before dropping these claims and pursuing them
in arbitration.
Filing suit, by itself, does not constitute a waiver of arbitration rights. In re
D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006) (orig. proceeding). Nor
does delay in seeking arbitration, alone, establish waiver. See In re Vesta Ins.
Group, Inc., 192 S.W.3d 759, 763–64 (Tex. 2006) (finding no waiver of arbitration
despite parties’ engaging in litigation for two years before seeking to arbitrate).
Baty asserts that the Bowen Parties applied for relief on the merits of the
non-compete provisions of the Shareholders’ Agreement to test the court’s reaction
and then decided to switch forums. This assertion is not supported by the record.
Baty asserts that the Bowen Parties requested a temporary restraining order and
temporary injunction based upon Baty’s alleged breach of the Shareholders’
Agreement. The record reflects that this claim was added to the Bowen Parties’
petition on October 2, 2007. Baty, citing a notice reflecting that a hearing on the
Bowen Parties’ application for temporary injunction was set for October 15, 2007,
asserts that, after the ancillary judge refused to grant a temporary restraining order,
the Bowen Parties amended their petition to delete their request for injunctive
relief. Our appellate record does not contain a reporter’s record from any hearing
before the ancillary judge in October 2007 regarding the Bowen Parties’
application for a temporary restraining order. At a subsequent hearing, the lawyers
for both sides refer to this hearing but they disagree over what transpired. On this
record, we cannot determine whether the Bowen Parties were testing the reaction
of the ancillary judge. Given the short duration of temporary restraining orders
14
and the fact that the judge of the trial court (not the ancillary judge) rules on
applications for temporary injunctions, any effort to test the reaction of a judge
more likely would have been directed to the presiding judge of the trial court at the
temporary-injunction hearing. The record reflects that the Bowen Parties did not
go forward with the hearing on their application for temporary injunction in
October 2007. Instead, they deleted the requests for injunctive relief from their
petition at that time.
Baty also suggests that the Bowen Parties engaged in manipulation of the
judicial process and forum shopping in July and August of 2008, when the
Company added back claims for injunctive relief based upon Baty’s alleged breach
of the Employment Agreement. Baty asserts that the trial court expressed grave
concerns about granting this relief and declined to grant a temporary injunction.
Significantly, at this juncture, the Bowen Parties were seeking in arbitration
declaratory relief and damages based upon Baty’s alleged breach of the
Shareholders’ Agreement. No claims by the Bowen Parties regarding the
Shareholders’ Agreement were pending in the trial court, and the Bowen Parties
had moved to compel arbitration as to Baty’s claims. In this context, the Bowen
Parties’ attempts to obtain a temporary injunction based upon the Employment
Agreement do not show manipulative conduct or forum shopping. When the
Company was unsuccessful in obtaining a temporary injunction in the trial court, it
did not seek injunctive relief regarding the Employment Agreement in the
arbitration, and it never sought injunctive relief regarding the Shareholders’
Agreement in arbitration. Thus, Baty’s assertion that the Bowen Parties tested the
trial court’s reaction and then moved the claims to the arbitration proceeding is not
supported by the record.
15
Baty relies upon the Perry Homes case. See Perry Homes, 258 S.W.3d at
589–97. In Perry Homes, the plaintiff filed a lawsuit, vigorously opposed the
defendants’ request for arbitration at the beginning of the litigation, conducted
“full discovery,” and then moved to compel arbitration only on the eve of trial. See
id. at 585, 590. In the case under review, the Bowen Parties are defendants in the
Remaining Claims. The Bowen Parties never opposed arbitration; rather, they
requested it in their original answer and in their motion to compel arbitration filed
eight months later. Though the Bowen Parties conducted considerable discovery,
they had not conducted “full discovery” when they moved to compel arbitration,
and they did not wait until the eve of trial to file the motion to compel arbitration.
Baty cites Nicolas v. KNR, Inc., 565 F.3d 904, 908–09 (5th Cir. 2009), for
the proposition that the Company substantially invoked the judicial process by
asserting as plaintiff arbitrable claims for breach of the Shareholders’ Agreement
without asserting the arbitration clause and without an exception that would justify
this conduct. Significantly, the Nicolas court states that “Nicolas’s decision to file
suit on her otherwise arbitrable claims constitutes substantial invocation of the
judicial process as to those claims.” Id. at 909 (emphasis added). Presuming,
without deciding, that this court would follow the rule in Nicolas, that rule would
apply only to the Company’s claims for breach of the Shareholders’ Agreement.
See id. But, as discussed above, the only claims at issue under the first issue are
the Remaining Claims, which were filed by Baty, not the Bowen Parties. Thus, the
Nicolas case is not on point.3 See id.
3
Likewise, other cases upon which Baty relies have materially different facts. See, e.g., In re
Mirant, 613 F.3d 584, 589–90 (5th Cir. 2010) (waiving party filed three motions to dismiss
plaintiff’s claims, the last of which sought dismissal with prejudice and was partially granted),
Republic Ins. Co. v. Paico Receivables, LLC, 383 F.3d 341, 345–46 (5th Cir. 2004) (waiving
party filed motion for summary judgment, a motion in limine seeking to limit evidence that
opposing party could introduce at trial, argued that all of the issues in the case were properly
16
The facts and circumstances of this case are quite complicated and involve
factors weighing in favor of a finding that the Bowen Parties substantially invoked
the judicial process and factors weighing against such a finding. We conclude that
this is a close case, and therefore, the “strong presumption against waiver” should
govern. See Perry Homes, 258 S.W.3d at 593. Under the applicable legal
standard, we conclude that the Bowen Parties did not substantially invoke the
judicial process. See In re Automated Collection Technologies, Inc., 156 S.W.3d
557, 559 (Tex. 2004) (holding, under analogous analysis, that party did not waive
forum-selection clause by substantially invoking the judicial process to opposing
party’s prejudice, in case in which party participated in litigation for four months
before seeking arbitration, served requests for disclosure, requests for production,
requests for admissions, and interrogatories, and filed a motion to compel
discovery) (orig. proceeding) (per curiam); EZ Pawn Corp. v. Mancias, 934
S.W.2d 87, 89–90 (Tex. 1996) (holding that party did not waive arbitration right
by answering the suit, participating in docket control conference, propounding
requests for production and interrogatories, noticing plaintiff’s deposition, and
entering into an agreed order to reset the original trial date) (per curiam); Walker v.
J.C. Bradford & Co., 938 F.2d 575, 576–78 (5th Cir. 1991) (holding that party did
not waive arbitration right by propounding interrogatories and requests for
production, attending initial pretrial conference, and delaying thirteen months
before filing motion to compel arbitration); Tenneco Resins, Inc., 770 F.2d at
420–21 (holding that party did not waive arbitration right despite serving opponent
before the trial court, and waited until days before trial to assert a motion to compel arbitration);
Adams v. Staxxring, Inc., 344 S.W.3d 641, 647–49 (Tex. App.—Dallas 2011, pet. denied)
(waiving party obtained temporary restraining order and did not move to compel arbitration until
13 months after filing answer); PRSI Trading Co. v. Astra Oil Trading NV, No. 01-10-00517-
CV, 2011 WL 3820817, at *2–3 (Tex. App.—Houston [1st Dist.] Aug. 25, 2011, pet. denied)
(waiving party conditioned trial court’s consideration of motion to compel arbtitration on party’s
lack of success on motion for summary judgment).
17
with interrogatories and requests for production, seeking discovery protective
order, and agreeing to a joint motion for extension of the discovery period, during
eight months before moving to compel arbitration). The trial court did not err in
concluding that the Bowen Parties did not waive their right to arbitrate the
Remaining Claims when the court granted the Bowen Parties’ motion to compel.
Accordingly, we overrule Baty’s first issue.4
C. Are the Remaining Claims within the scope of the arbitration
provision?
In his second issue, Baty asserts that the trial court erred in compelling
arbitration of the Remaining Claims over his objection that these claims are not
within the scope of the arbitration provision in the Shareholders’ Agreement. Baty
does not dispute that this arbitration provision is valid. In determining the scope of
the arbitration provision, we begin by briefly reviewing various other provisions of
the Shareholders’ Agreement, a contract signed by the Company, Baty, and the
individual defendants, as well as the other shareholders of the Company. The
parties agree that the Shareholders’ Agreement “shall cover any stock now owned
or hereafter acquired by the Shareholders while [the Shareholders’ Agreement]
remains in effect.” Section 1.3 of the Shareholders’ Agreement provides as
follows:
Effect of Attempted Disposition of Shares in Violation of Shareholder
Agreement. It is expressly understood and agreed that no sale,
conveyance, transfer, or disposition of any of the Shares owned by a
Shareholder may be made without compliance with the terms,
conditions and provisions hereof. Any disposition in contravention of
the foregoing and not made in strict compliance with the provisions
hereof shall be null and void and of no force and effect ab initio.
4
Even if Baty had preserved error as to the claims the Bowen Parties asserted against him in the
arbitration, we still would conclude that the Bowen Parties did not substantially invoke the
judicial process.
18
As used in the agreement, the term “Disposition” is defined to include “any inter
vivos or other transfer, pledge or other encumbrance, or any other sale,
conveyance, assignment of rights, hypothecation or disposition of any of the
Shares whatsoever, whether voluntary or involuntary.” 5
Under the Shareholders’ Agreement, a shareholder whose employment by
the Company is terminated voluntarily or involuntarily for any reason other than
death or total disability before attaining the age of 62 years shall be required to
sell, and all of the other shareholders of the Company shall be required to buy, all
of the shares of this terminated shareholder at the purchase price determined under
a formula set forth in section 6.1(c) of the Shareholders’ Agreement. Under
section 3.6, closings of purchases and sales of shares pursuant to the foregoing
requirements, unless otherwise agreed in writing by the parties, shall be held at the
Company’s principal offices on the tenth day following the date that the
shareholder whose shares are to be purchased ceases to be an employee of the
Company, unless such date is a Saturday, Sunday, or legal holiday, in which case
the closing shall be held on the next business day which is not a Saturday, Sunday,
or legal holiday.
The parties to the Shareholders’ Agreement agree that “[a]ny controversy or
claim arising pursuant to this Agreement shall be submitted to and resolved by a
single arbitrator. . . .” Any doubts as to whether the claims in question fall within
5
The Shareholders’ Agreement provides that, notwithstanding this definition, the Shareholders’
Agreement does not prohibit the following transfers of Shares: (1) “a transfer of ownership of
Stock to any party who is a Shareholder immediately prior to such transfer,” (2) “a transfer of
Stock by any Shareholder to any employee of the [Company] with the prior written consent of
the majority of the members of the [Company’s] Board of Directors and of Shareholders owning
a simple majority of the [Company’s] issued and outstanding Shares immediately prior to the
time of such transfer,” and (3) “the issuance by the [Company] of Stock to any party with the
prior written consent of the majority of the members of the [Company’s] Board of Directors and
of Shareholders owning a simple majority of the [Company’s] issued and outstanding Shares
immediately prior to the time of such transfer.”
19
the scope of the arbitration clause must be resolved in favor of arbitration. See
Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 899 (Tex. 1995). A court
should not deny arbitration unless the court can say with positive assurance that an
arbitration clause is not susceptible of an interpretation that would cover the claims
at issue. Id. In determining whether a claim falls within the scope of an arbitration
agreement, the court must focus on the factual allegations, rather than the legal
claims asserted. Id. at 900. The presumption of arbitrability is particularly
applicable when the clause is broad; that is, it provides for arbitration of “any
dispute arising between the parties,” or “any controversy or claim arising out of or
relating to the contract thereof,” or “any controversy concerning the interpretation,
performance or application of the contract.” See Babcock & Wilcox Co. v. PMAC,
Ltd., 863 S.W.2d 225, 230 (Tex. App.—Houston [14th Dist.] 1993, writ denied).
If the arbitration clause is broad, absent any express provision excluding a
particular grievance from arbitration, only the most forceful evidence of purpose to
exclude the claim from arbitration can prevail. See Marshall, 909 S.W.2d at 900;
Osornia v. Amerimex Motors & Controls, Inc., 367 S.W.3d 707, 712 (Tex. App.—
Houston [14th Dist.] 2012, no pet.). Nonetheless, the strong policy in favor of
arbitration cannot serve to stretch a contractual clause beyond the scope intended
by the parties or to allow modification of the unambiguous meaning of the
arbitration clause. See Osornia, Inc., 367 S.W.3d at 712.
Baty asserts that the arbitration provision is narrow, and the Bowen Parties
assert that the provision is broad. We presume for the purposes of our analysis that
the provision is a narrow clause. Under precedent from the Supreme Court of
Texas, “pursuant to” means “in carrying out” and thus the parties agreed to
arbitrate any controversy or claim arising “in carrying out” the Shareholders’
Agreement. See Syntax, Inc. v. Hall, 899 S.W.2d 189, 191–92 (Tex. 1995).
20
As to Baty’s claims against the Bowen Parties for breach of fiduciary duty,
minority-shareholder oppression, violation of the Texas Theft Liability Act,
conversion, conspiracy, and restitution, the factual allegations for these claims are
overlapping. Baty alleges that the three individual defendants conspired to oppress
and “eliminate” him because he was trying to exercise his shareholder rights to
stop the planned sale of stock by two of the shareholders to shareholder Britt. Baty
alleges wrongful conduct based upon his alleged wrongful discharge. But, Baty
also bases these claims on the conduct in paragraph 18 of his First Amended
Petition, in which he alleged that, despite the termination of his employment more
than a year earlier, he still owned his shares in the Company and had not consented
to the sale of these shares. Baty asserted that the individual defendants breached
their respective fiduciary duties by engaging in “oppressive and wrongful conduct”
that Baty alleged in the “factual background” section of his petition. In his
minority-shareholder-oppression claim, Baty alleged that the conduct of the
individual defendants was “calculated to frustrate and deny [Baty’s] legitimate
expectations and ability to enjoy the benefits of his ownership interest in [the
Company].” Baty held this ownership interest subject to the terms and restrictions
of the Shareholders’ Agreement.
Baty alleged that the Bowen Parties were wrongfully denying him his rights
as owner of these shares in the Company. In the conversion claim and claim for
violation of the Texas Theft Liability Act, Baty alleged wrongful exercise of
dominion and control and unlawful appropriation of these shares. These
allegations conflict with the unambiguous language of Article III of the
Shareholders’ Agreement, under which Baty had to sell his shares to the other
shareholders within ten days of the termination of his employment, whether or not
the termination was for cause. In carrying out the Shareholders’ Agreement, Baty
was required to sell all of his shares in the Company to the remaining shareholders
21
in early July 2007, at the purchase price determined under the formula set forth in
section 6.1(c). But Baty refused to sell his shares at the purchase price set by the
Shareholders’ Agreement. Instead, he argued that he was entitled to a substantially
higher purchase price based upon fair market value. Baty sought to recover this
higher fair market value price through the forced buy-out remedy that he sought
based upon his Remaining Claims. In effect, Baty alleged that the Bowen Parties’
insistence that the provisions of the Shareholders’ Agreement be carried out
constituted oppressive or wrongful conduct by which the Bowen Parties sought to
deprive him of the benefits of his ownership of shares in the Company. Given the
relationship of the Remaining Claims to the subject matter of the Shareholders’
Agreement, we conclude that the Remaining Claims are controversies or claims
arising “in carrying out” or “pursuant to” the Shareholders’ Agreement. See
Syntax, Inc., 899 S.W.2d at 191–92.
Baty relies upon Tracer Research Corp. v. National Environmental Services
Company, 42 F.3d 1292, 1294–95 (9th Cir. 1994), a case that involved a clause
requiring arbitration of “any controversy or claim arising out of this Agreement,”
language different from the arbitration provision in the Shareholders’ Agreement.
Id. at 1295. In addition, the Tracer Research Corp. court held the clause in that
case required arbitration of “those disputes ‘relating to the interpretation and
performance of the contract itself.’” Id. Even if this case were on point, the
Remaining Claims relate to the interpretation and performance of the
Shareholders’ Agreement. For support, Baty cites this court’s opinion in Osornia.
See Osornia, Inc., 367 S.W.3d at 711–15. The clause at issue in Osornia required
arbitration of all claims “arising out of” a settlement agreement, and the claims at
issue were based upon conduct that allegedly occurred before the settlement
agreement was even signed. See id. at 712–13. Thus, Osornia is not on point.
Baty also cites Weber v. Hall. See 929 S.W.2d 138, 142–42 (Tex. App.—Houston
22
[14th Dist.] 1996, orig. proceeding). In Weber, the clause required arbitration of
all disputes “as to all or any part of” various employment agreements, and the
claims at issue were based upon the payment of sales commissions which the
Weber court held were the subject of separate agreements and not the subject of the
employment agreements. See id. The Weber case is not on point.
Even presuming that the arbitration provision is a narrow one, the
Remaining Claims still fall within the scope of the clause. See Syntax, Inc., 899
S.W.2d at 191–92. Therefore, the trial court did not err in compelling arbitration
of the Remaining Claims over Baty’s objection that these claims do not fall within
the scope of the arbitration provision. Accordingly, we overrule Baty’s second
issue.
III. CONCLUSION
Considering all the many facts and circumstances of this complicated case
under the applicable legal standard, we find factors weighing in favor of a finding
that the Bowen Parties substantially invoked the judicial process and factors
weighing against such a finding. Applicable cases stress the strong presumption
against waiver, especially when the parties seeking arbitration requested arbitration
in their original answer. The Supreme Court of Texas has instructed that in a close
case we should conclude that the heavy burden of showing waiver of arbitration
has not been satisfied. Therefore, in this close case, we conclude that the trial
court did not err by impliedly finding that the Bowen Parties did not waive their
rights to arbitration. We also conclude that, because the Remaining Claims are
within the scope of the arbitration provision in the Shareholders’ Agreement, the
trial court did not err in compelling arbitration of the Remaining Claims over
Baty’s objection that these claims do not fall within the scope of this provision.
23
The judgment of the trial court is affirmed.
/s/ Kem Thompson Frost
Justice
Panel consist of Justices Frost, Brown, and Christopher.
24