August 16, 2016 Practice Points

Supreme Court of Texas Denies Motion to Compel Arbitration on Alternate Ground

By Karl Bayer

The Supreme Court of Texas has ruled that a company did not waive its right to arbitration by bringing a “friendly” declaratory judgment action.  

Facts and Procedural History
In RSL Funding, LLC v. Pippins, No. 14-0457 (Tex., July 1, 2016), RSL agreed to purchase certain annuity contracts issued by MetLife from three individuals. As part of this arrangement, RSL and the individuals signed an arbitration agreement. Neither RSL nor the individuals had an agreement to arbitrate with MetLife. 

When MetLife refused to honor RSL’s purchase of the annuities, RSL filed a declaratory judgment action against MetLife and the Individuals. Later, when disagreements arose between RSL and the Individuals, RSL sought to stay the case and compel the individuals to arbitrate the disagreements. The Texas court denied RSL’s motion for arbitration, ruling that it had waived its right to arbitrate by invoking the judicial process. RSL filed an interlocutory appeal.  

A divided Texas appellate court affirmed the lower court’s decision, holding that RSL waived its right to pursue arbitration because it substantially invoked the litigation process against both MetLife and the individuals. RSL then filed a petition for review with the Texas Supreme Court.  

Supreme Court Decision
In its opinion, the Texas Supreme Court noted that a party may waive its right to arbitration by substantially invoking the judicial process but that “there is a strong presumption” against such a waiver and that “a party who litigate[s] one claim with an opponent d[oes] not substantially invoke the litigation process for a related yet distinct claim against another party with whom it ha[s] an arbitration agreement.” 433 S.W.3d at 545. Stating the matter succinctly, the court said that RSL’s litigation conduct with respect to MetLife “is not relevant to . . . whether RSL waived its arbitration rights with the Individuals.” What was relevant was RSL’s conduct toward the individuals with whom it had an arbitration agreement.  

The Texas court stated that waiver depends on the “totality” of circumstances and involves consideration of numerous factors including:  

whether the party asserting the right to arbitrate was plaintiff or defendant in the lawsuit, how long the party waited before seeking arbitration, the reasons for any delay in seeking to arbitrate, how much discovery and other pretrial activity the party seeking to arbitrate conducted before seeking arbitration, whether the party seeking to arbitrate requested the court to dispose of claims on the merits, whether the party seeking to arbitrate asserted affirmative claims for relief in court, the amount of time and expense the parties have expended in litigation, and whether the discovery conducted would be unavailable or useful in arbitration.

Here, the court held that RSL did not waive its right to arbitrate disputes with the individuals:  

RSL asserted only that MetLife breached its annuity contracts by refusing to honor the assignments, sought a declaratory judgment that the assignment agreements were enforceable, and sought a judgment against MetLife for damages, interest, costs, and attorney’s fees. RSL did not seek recovery from the Individuals. To the contrary, its actions were supported by the Individuals as evidenced by their affidavits that, in part, waived citation because they fully “underst[ood] and support[ed] the nature of this action for declaratory relief.”

The court noted that the individuals were named as defendants not because RSL had a genuine dispute with them, but because Texas law required all interested persons to be named in declaratory judgment actions. It stated that a “friendly” declaratory judgment action such as this did not show that RSL had chosen to litigate rather than arbitrate its disputes with the individuals. As a result, RSL did not waive its right to arbitrate when disputes arose between it and the individuals after the declaration judgment action was filed.  

Despite this holding, however, the Texas Supreme Court affirmed the decision to deny RSL’s motion to compel arbitration on an alternate ground: RSL had failed to join its assignees in the arbitration.  

Keywords: alternative dispute resolution, litigation, friendly, declaratory judgment, stay, waiver, assignees  

Karl Bayer is with Karl Bayer Dispute Resolution in Austin, Texas.

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