Steve Gray and Happy Accidents, Inc. v. Bryan Ward

REVERSE and RENDER; and Opinion Filed August 9, 2019.
In The
Court of Appeals
Fifth District of Texas at Dallas
No. 05-18-00266-CV
STEVE GRAY AND HAPPY ACCIDENTS, INC., Appellants
V.
BRYAN WARD, Appellee
On Appeal from the 366th Judicial District Court
Collin County, Texas
Trial Court Cause No. 366-05277-2017
MEMORANDUM OPINION
Before Justices Whitehill, Molberg, and Reichek
Opinion by Justice Whitehill
This case concerns the scope of a “relating to” arbitration clause in a partnership agreement
where the underlying dispute is laser-focused on the parties’ partnership duties. Steve Gray and
Happy Accidents, Inc. (together, Accidents unless context shows otherwise) appeal the trial court’s
interlocutory order partially denying their motion to compel arbitration under the Federal
Arbitration Act.1 In a single issue, Accidents argues that the trial court erroneously concluded that
some of Bryan Ward’s claims fall outside the scope of the parties’ arbitration agreement.
The linchpin here is the correlation between the partnership buy-out dispute and Ward’s
claims that he was wrongfully terminated because of the dispute and defamed concerning the
conditions upon which his partnership employment terminated.
1
9 U.S.C. §1 et. seq. The parties agree that the FAA applies to this dispute.
We conclude the trial court erred because Ward’s claims have a significant relationship to
and are inextricably enmeshed and factually intertwined with the limited partnership agreement
(the LP Agreement) containing the broad arbitration clause. We thus reverse the trial court’s order
and render judgment that all of Ward’s claims are compelled to arbitration.
I. BACKGROUND
In 2012, Gray, Ward, and Ken Burge started Primal Health LP (the Partnership), which
sells herbal and vitamin supplements online. Burge later departed, and the Partnership purchased
his interest leaving Gray and Ward as the only remaining limited partners and Happy Accidents as
the general partner.
Gray is the Partnership’s majority owner and Happy Accidents’ CEO.
Neither Gray nor Ward have an employment agreement with Primal. But the parties signed
the LP Agreement which provides in Section 13.2 that:
All disputes and claims relating to this Agreement, the rights and obligations of the
parties hereto, or any claims or causes of action relating to the performance of either
party that have not been settled through mediation will be settled by arbitration by
the American Arbitration Association in either Boca Raton, Florida or Arizona in
accordance with the Federal Arbitration Act and the Commercial Arbitration Rules
of the American Arbitration Association. The costs of the arbitration proceedings
will be borne by the losing party if such party is found to have been in material
breach of its obligations hereunder. . . .
At some point, Ward approached Gray and Accidents about his desire to leave the
Partnership and asked Gray to buy out his interest. A dispute arose concerning the valuation of
Ward’s partnership interest.
Consequently, Ward filed this suit asserting breach of contract, breach of fiduciary duty,
wrongful discharge, and defamation claims. Ward’s ten-page, fifty-eight paragraph, and four
count petition describes in detail that Ward and Gray initiated discussions for Gray to buy out
Ward’s partnership interest and how Gray (i) allegedly manipulated the partnership interest
appraisal process to drive down the price of Ward’s interest, (ii) forced Ward to involuntarily
resign, (iii) used the forced resignation “as a tactic to preclude the Partnership’s obligation to
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repurchase Ward’s interest under the Partnership Agreement . . . ,” (iv) refused to complete the
buy-out, and (v) refused to make partnership distributions to Ward.
Each count in Ward’s petition begins by stating that, “Plaintiff [Ward] incorporates the
preceding paragraphs as if fully reproduced herein.” Ward’s first two counts are his fiduciary
breach and partnership claims. Thus, his succeeding wrongful termination and defamation counts
incorporate as if fully reproduced therein all of the preceding (i) factual allegations regarding
partnership agreement disputes, valuation manipulations, and forced resignations and (ii) the
resulting fiduciary breach obligations.
Accidents moved to compel arbitration according to the LP Agreement’s arbitration clause.
The court initially ordered that all of Ward’s claims would be arbitrated. But following Ward’s
motion for reconsideration, the trial court ordered that Ward’s breach of fiduciary duty and breach
of contract claims were subject to arbitration while the wrongful discharge and defamation claims
were not. This appeal followed.
II. ANALYSIS
A. Standard of Review
We review a trial court’s ruling on a motion to compel arbitration under an abuse of
discretion standard. See Henry v. Cash Biz, L.P., 551 S.W.3d 111, 115 (Tex. 2018). Under that
standard, we defer to the trial court’s factual determinations when they are supported by evidence,
but review de novo the trial court’s legal determinations. VSR Fin. Servs., Inc. v. McLendon, 409
S.W.3d 817, 827 (Tex. App.—Dallas 2013, no pet.). Whether disputed claims fall within the scope
of a valid arbitration agreement is a question of law that we review de novo. Henry, 551 S.W.3d
at 115.
Generally, a party seeking to compel arbitration under the FAA must establish that (i) there
is a valid agreement to arbitrate and (ii) the claims raised fall within the agreement’s scope. See
id.
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Although there is a strong presumption favoring arbitration, the presumption arises only
after the party seeking to compel establishes the existence of a valid arbitration agreement. JM
Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003). Any doubts concerning the scope
of arbitrable issues should be resolved in favor of arbitration. See In re Serv. Corp. Int”l., 85
S.W.3d 171, 174 (Tex. 2002) (citing Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460
U.S. 1, 24–25 (1983)).
Nonetheless, “[e]ven the exceptionally strong policy favoring arbitration cannot justify
requiring litigants to forego a judicial remedy when they have not agreed to do so.” Carr v. Main
Carr Dev., LLC, 337 S.W.3d 489, 496 (Tex. App.—Dallas 2011, pet. denied).
Here, the parties agree that there is a valid agreement to arbitrate, and the issue is whether
Ward’s claims all fall within its scope. Because the arbitration agreement’s validity is undisputed,
we begin with a strong presumption favoring arbitration. See JM Davidson, 128 S.W.3d at 227.
B. Who Decides Arbitrability?
The threshold question we must consider is whether the scope of the arbitration clause was
to be determined by the court or the arbitrator. In this instance, we conclude that the trial court
properly decided the arbitrability issue because Accidents urged the trial court to compel
arbitration without arguing that the parties agreed to refer the arbitrability issue to arbitration.
Generally, the question of arbitrability is a gateway issue decided by a court rather than an
arbitrator. AT & T Techs., Inc. v. Commc’n Workers of Am., 475 U.S. 643, 649 (1986). Gateway
matters include whether the parties agreed to arbitrate and whether a claim or dispute is
encompassed in that arbitration agreement. In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643
(Tex. 2009) (orig. proceeding). The parties, however, may agree to submit matters of substantive
arbitrability to arbitration. Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). But,
“[c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is ‘clear
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and unmistakable’ evidence that they did so.” First Options of Chicago, Inc. v. Kaplan, 514 U.S.
938, 944 (1995).
Accidents argues that the arbitration provision’s reference to the AAA Rules constitutes
clear and unmistakable evidence that the parties intended that an arbitrator decide issues of
arbitrability because those rules grant an arbitrator the power to rule on his own jurisdiction,
including the scope of an arbitration agreement.2 This issue, however, was not preserved for our
review. See TEX. R. APP. P. 38.1.
In the court below, Accidents argued only that all of the claims were within the scope of
the arbitration clause and urged the court to compel arbitration on all claims. Because the
arbitrability of the scope issue was first raised on appeal, we do not consider whether the parties
agreed to arbitrate arbitrability and instead limit our review to whether the excluded claims fall
within the clause’s scope. See TEX. R. APP. P. 38.1
C. Are Ward’s defamation and wrongful termination claims within the arbitration
clause’s scope?
Yes, they are because (i) this is a broad, “relates to” clause and (ii) those claims relate to
the agreement which is the focal point of the parties’ disputes. A fair reading of Ward’s factual
allegations shows that the wrongful termination and defamation claims are at least related to his
breach of fiduciary duty and contract claims.
To determine whether claims are within an arbitration agreement’s scope, we examine the
agreement’s terms and the claim’s factual allegations. Skidmore Energy, Inc. v. Maxus (U.S.) Expl.
Co., 345 S.W.3d 672, 687 (Tex. App.—Dallas 2011, pet. denied). “If the facts alleged ‘touch
matters,’ have a ‘significant relationship’ to, are ‘inextricably enmeshed’ with, or are ‘factually
intertwined’ with the contract containing the arbitration agreement, the claim is arbitrable.” Cotton
2
This court has held that an arbitration provision providing for arbitration “in accordance with the Federal Arbitration Act and the Commercial
Arbitration Rules of the American Arbitration Association” evidenced a “clear and unmistakable intention that the arbitrators have the authority to
determine the scope of [the arbitration].” Kyani, Inc. v. HD Walz II Enter., No. 05-17-00486-CV, 2018 WL 354072, at *3, 7 (Tex. App.—Dallas
July 24, 2018, no pet.) (mem. op.); but see PER Group, L.P. v. Dava Oncology, L.P., 294 S.W.3d 378, 386 (Tex. App.—Dallas 2009, no pet.)
(concluding arbitrability issue not preserved because AAA rules were not admitted into evidence).
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Commercial USA, Inc. v. Clear Creek ISD, 387 S.W.3d 99, 108 (Tex. App.—Houston [14th Dist.]
2012, no pet.); see also Alliance Family of Cos. v. Nevarez, No. 05-18-00622-CV, 2019 WL
1486911, at *2 (Tex. App.—Dallas Apr. 4, 2019, no pet.) (mem.op.).
Doubts regarding an agreement’s scope are resolved in favor of arbitration. See In re
Kellog Brown Root, Inc., 166 S.W.3d 732, 737 (Tex. 2005). This is particularly true when the
arbitration clause is broad. BDO Seidman, LLP v. J.A. Green Dev. Corp., 327 S.W.3d 852, 857
(Tex. App.—Dallas 2010, no pet.). In such cases, when there is no express provision excluding a
particular grievance from arbitration, “only the most forceful evidence of a purpose to exclude the
claim from arbitration can prevail.” Id.
Broad arbitration clauses embrace “all disputes between the parties having a significant
relationship to the contract, regardless of the label attached to the dispute.” FD Frontier Drilling
(Cyprus), Ltd. v. Didmon, 438 S.W.3d 688, 695 (Tex. App.—Houston [1st Dist.] 2014, pet.
denied); see also Saxa Inc. v. DFD Architect. Inc., 312 S.W.3d 224, 229 (Tex. App.—Dallas 2010,
pet. denied) (discussing broad arbitration clause covering all claims, disputes and other matters
arising out of the contract). In fact, broad language has been construed to extend not only to claims
that literally arise under the contract, but to all disputes arising out of the parties’ relationship.
Didmon, 438 S.W.3d at 695.
The phrase “relates to” in an arbitration agreement is a very broad term. Schwarz v. Pully,
No. 05-14-00615-CV, 2015 WL 4607423, at *3 (Tex. App.—Dallas Aug. 3, 2015, no pet.) (mem.
op.). A claim relates to a contract if it has a significant relationship with or touches matters covered
by the contract. Id.
Here, the arbitration clause applies to “all disputes and claims relating to” (i) “this
Agreement,” (ii) “the rights and obligations of the parties hereto,” and (iii) “any claims or causes
of action relating to the performance of either party.”
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Ward insists that two independent relationships are at issue: (i) his employment
relationship as the Partnership’s Director of Advertising and (ii) his relationship with and interest
in the Partnership. According to Ward, only the latter relationship pertains to the LP Agreement
containing the arbitration provision, and thus the claims that do not relate to the Agreement itself
(the employment relationship claims) are not subject to arbitration. We disagree.
The LP Agreement concerning the parties’ relationship informs our analysis. The
agreement provides that no general partner or interest holder will receive any salary for services
rendered on the Partnership’s behalf except as provided in the agreement. It further provides that
if a limited partner serves as an employee or agent of the Partnership, the agent or employee will
not be deemed to be participating in the control of the business for liability purposes. Thus, at a
minimum, the LP Agreement relates to Ward’s employment by the Partnership.
Significantly, Ward did not sue the Partnership for wrongful termination. Instead, he sued
Accidents (its general partner) and Gray (the Partnership’s CEO). Ward’s petition alleges that
Gray forced Ward’s resignation to preclude the Partnership’s obligation to purchase Ward’s
interest. According to Ward, Accidents wrongfully discharged him and he has lost income and
not received any severance from his forced resignation. In addition, Ward alleges that Accidents
made defamatory statements about his employment status when Partnership employees were told
that Ward resigned.
These allegations demonstrate that Ward’s claims pertain to: (i) his employment by the
Partnership; (ii) his right to receive a salary from the Partnership; and (iii) Gray’s authority, as
CEO of the Partnership, to terminate Ward’s employment.
Additionally, the LP Agreement provides that if a party resigns while he owns a limited
partnership interest, the Partnership is obligated to purchase that party’s interest within ninety days.
But the parties disagree about this provision’s applicability when the limited partner’s employment
status is terminated. The disagreement concerning the Partnership buy-out terms is the linchpin
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of the parties’ dispute. According to Ward, he was forcibly terminated following the parties’
disagreement about the buy-out terms. Thus, there can be no question that Ward’s employment
status “relates to” the LP Agreement. See, e.g., Capitol Income Props. LXXX v. Blackmon, 843
S.W.3d 22, 23 (Tex. 1992) (orig. proceeding) (tort claims arose out of and related to limited
partnership agreement); Schwarz, 2015 WL 4607423, at *3 (claim relates to a contract if it has a
significant relationship to or touches matters covered by the contract).
Similarly, the wrongful termination and defamation claims also relate to the breach of
fiduciary duty and contract claims that Ward does not dispute are arbitrable. See In re Kaplan
Higher Educ. Corp., 235 S.W.3d 206 at 208–09 & n.2 (Tex. 2007) (orig. proceeding) (per curiam)
(negligence based claims were based on same facts as fraudulent inducement claim and were
alternative forms of the same arbitrable claim); see also Hou-Scape, Inc. v. Lloyd, 945 S.W.2d
202, 206 (Tex. App.—Houston [1st Dist.] 1997, no writ) (defamation claim is generally arbitrable
if the alleged statements arose directly out of a dispute about or are integrally linked to the
contractual relationship).
Indeed, according to his petition, Ward’s wrongful termination and defamation claims
expressly incorporate and rely on the same factual allegations as do his contract and fiduciary
breach claims. In fact, Ward actually incorporated those claims into his wrongful termination and
defamation claims. Under that petition, Ward’s wrongful termination and defamation claims are
intertwined with, let alone related to, his partnership agreement and fiduciary breach claims.
Nonetheless, Ward insists that his defamation and wrongful termination claims are “stand
alone” claims that arise out of a separate oral employment agreement. See In re Sigmor, No. 05-
16-00703-CV, 2017 WL 1046770, at *4 (Tex. App.—Dallas Mar. 20, 2017, orig. proceeding)
(mem. op.) (“If the facts alleged in support of the claim stand alone, are completely independent
of the contract containing the arbitration provision, and the claim could be maintained without
reference to the contract, the claim is not subject to arbitration.”). To this end, he notes that the
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LP Agreement does not expressly reference his employment and Gray confirmed, on multiple
occasions, that Ward’s employment would be terminated regardless of the buy-out.
Although Ward’s petition states that “Ward and Defendants entered into an enforceable
employment contract,” there are no details concerning this alleged agreement, nor any explanation
as to why such a contract was made between Ward and the general partner and CEO, as opposed
to between Ward and the Partnership. But even if there is a separate oral employment agreement
that exists apart from the LP Agreement, our analysis does not change. The LP Agreement
expressly relates to such employment. And an arbitrable claim can relate to two agreements at the
same time. See Schwarz, 2015 WL 4607423, at *4.
In Schwarz, the appellant argued that his performance fee claims were not arbitrable
because the claims arose out of an oral employment contract rather than the limited partnership
agreement containing the arbitration clause. Id. Concluding that the claims were arbitrable, we
stated:
[T]he crux of the matter is whether the claims fit within the partnership agreements’
arbitration clauses . . . The arbitration agreements apply to any dispute, controversy,
or claim arising out of or relating to the limited partnership agreements . . . . A
claim can relate to more than one agreement.
Id. (Emphasis in original); see also Tantrum Street, LLC v. Carson, No. 05-16-01096-CV, 2017
WL 3275901, at *5 (Tex. App.—Dallas Jul. 25, 2017, no pet.) (mem. op.) (claims involving
redemption of promissory note were not completely independent of appellant’s employment and
were therefore within the scope of the employment agreement’s arbitration clause); Kirby
Highlands Surgery Ctr. L.L.P. v. Kirby, 183 S.W.3d 891, 902 (Tex. App.—Austin 2006, no pet.)
(construing separate purchase and sale agreement that did not have an arbitration clause with a
partnership agreement containing an arbitration clause).
As Ward’s petition demonstrates, the factual allegations supporting his contract and
fiduciary duty breach claims are intertwined with the LP Agreement and Ward’s wrongful
termination and defamation claims. Indeed, the only way the statement about Ward’s resignation
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could be defamatory is in the context of the limited partnership’s operation. The LP Agreement
controls the terms of the buy-out from which the entire dispute arises.
Under these circumstances, we cannot conclude that Ward’s wrongful termination and
defamation claims are completely independent of and can be maintained without reference to the
LP Agreement. Applying the strong presumption favoring arbitration in this context, we conclude
the trial court erred in its determination that the employment and defamation claims were not
encompassed in the broad arbitration clause. We sustain Accidents’ sole issue.
III. CONCLUSION
Having sustained appellants’ sole issue, we reverse the trial court’s order denying
arbitration on the wrongful termination and defamation claims and order that all disputes between
the parties proceed to arbitration.
/Bill Whitehill/
BILL WHITEHILL
JUSTICE
Molberg, J., dissenting
180266F.P05
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Court of Appeals
Fifth District of Texas at Dallas
JUDGMENT
STEVE GRAY AND HAPPY On Appeal from the 366th Judicial District
ACCIDENTS, INC., Appellants Court, Collin County, Texas
Trial Court Cause No. 366-05277-2017.
No. 05-18-00266-CV V. Opinion delivered by Justice Whitehill.
Justices Molberg and Reichek participating.
BRYAN WARD, Appellee
In accordance with this Court’s opinion of this date, the trial court’s order is
REVERSED and judgment is RENDERED that: all of Bryan Ward's claims against Steve Gray
and Happy Accidents are compelled to arbitration.
It is ORDERED that appellants STEVE GRAY AND HAPPY ACCIDENTS, INC.
recover their costs of this appeal from appellee BRYAN WARD.
Judgment entered this 9th day of August, 2019.
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