Supreme Court of Texas Reverses Appellate Court’s Holding in Arbitration Waiver Case

The Supreme Court of Texas has reversed an appellate court’s holding that a company waived its right to arbitration by substantially invoking the judicial process.  In Richmont Holdings, Inc. v. Superior Recharge Systems, L.L.C., No. 13-0907 (Tex., December 19, 2014), Richmont Holdings purchased the assets of another company, Superior Recharge Systems, through an affiliate.  The parties’ purchase agreement stated they would resolve any future disputes through binding arbitration.

At the time of the asset purchase, one of Richmont Holdings’ affiliates, Superior Acquisition, agreed to employ Superior Recharge Systems’ co-owner and manager Jon Blake as general manager for a period of two years.  The related employment agreement included a non-compete clause but it did not include an arbitration provision.  After six months of employment, however, Blake was allegedly terminated for cause.

After that, Blake and Superior Recharge Systems (collectively “Blake”) filed a lawsuit against Richmont Holdings, Superior Acquisition, and others (collectively “Richmont”) in Denton County, Texas.  In his complaint, Blake sought damages related to his employment agreement and argued the covenant not to compete was unenforceable.  In response,

Richmont sued Blake individually in Dallas County to enforce the covenant not to compete, invoking a forum selection clause in that agreement, and moved to transfer venue of the Denton County suit to Dallas County or Collin County.  The Dallas County suit was abated, and the motion to transfer was never decided.

Eventually, Richmont filed a motion to compel arbitration more than 18 months after Blake’s original complaint was filed. As part of the company’s motion, Richmont argued that the dispute should be arbitrated because it arose out of the parties’ asset purchase agreement.  Blake responded by claiming Richmont waived its right to arbitration when it substantially invoked the judicial process. The trial court agreed with Blake and Richmont filed an interlocutory appeal with the Fort Worth Appeals Court.

On appeal, Texas’ Second District affirmed the trial court on different grounds.  Rather than addressing Blake’s waiver allegation, the appellate court held that the case was not subject to arbitration because the employment agreement dispute arose separately from the asset purchase agreement.  As discussed in a previous blog post, the Supreme Court of Texas reversed the Fort Worth court’s decision and remanded the case for consideration of Blake’s waiver defense.

Next, the Fort Worth Court of Appeals found that Richmont waived its right to arbitrate when the company sued “Blake in Dallas County, moving to transfer venue of the Denton County suit, failing to respond to discovery requests, and delaying in moving to compel arbitration.”  The Texas high court disagreed by stating,

Merely filing suit does not waive arbitration, even when the movant, as in this case, files a second, separate suit in another county based in part on a contract at issue in the first action.  See In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006).  Nor, we think, does moving to transfer venue.   The motion does not address the merits of the case.  Moreover, objections to improper venue must be made at the outset of the case. Tex. R. Civ. P. 86.  Richmont engaged in only minimal discovery.  For the most part, it refused to respond to Blake’s discovery requests.  Richmont argues that it delayed in moving to compel arbitration because, while it drafted the Asset Purchase Agreement and knew full well of the arbitration clause, it was very slow in recognizing that the clause could apply to Blake’s claims.  We think this explanation implausible; certainly, it does not justify the delay. But mere delay in moving to compel arbitration is not enough for waiver. In re Fleetwood Homes of Tex., L.P., 257 S.W.3d 692, 694 (Tex. 2008) (per curiam) (eight-month delay); In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex. 2006) (per curiam) (two-year delay); see also Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898–99 (Tex. 1995) (per curiam) (“A party does not waive a right to arbitration merely by delay; instead, the party urging waiver must establish that any delay resulted in prejudice.”).  The circumstances here, considered as a whole, do not approach a substantial invocation of the judicial process.

Because Texas’ Second District Court of Appeals misapplied the Supreme Court of Texas’ holding in Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008), the state’s high court reversed the Court of Appeals’ judgment and remanded the case back to the trial court without oral argument.

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