Dallas Appeals Court Compels Arbitration in Interlocutory Appeal

The Fifth District Court of Appeals in Dallas has ruled in an interlocutory appeal that a lower court committed error when it denied a company’s motion to compel arbitration.  In Phytel, Inc. v. Smiley, No. 05-12-00607-CV, (Tex. App.–Dallas Apr. 5, 2013, no. pet. h.), James Smiley was a former Chief Executive Officer at Phytel, Inc.  As part of his employment agreement, Smiley signed a contract that contained a restrictive covenant which prevented him from engaging in business that competed with Phytel.  When Smiley was terminated, he signed a separation agreement that referred to the restrictive covenant and contained an arbitration clause.  Later, Smiley entered into a stock repurchase contract with Phytel that amended the covenant not to compete, reaffirmed Smiley’s obligations under the second contract, and did not contain an agreement to arbitrate.

Approximately three years later, Smiley sought a declaratory judgment in district court stating the restrictive covenant not to compete was unenforceable.  Phytel responded by filing a motion to compel arbitration.  After the lower court denied Phytel’s motion, the company filed an interlocutory appeal with the Fifth District Court of Appeals in Dallas.

First, the Appeals Court addressed whether a valid agreement to arbitrate existed between the parties.  After examining the parties’ separation and stock repurchase agreements, the court stated, “Construing the two documents together, we conclude that Contract 3 incorporated Smiley’s obligation to arbitrate disputes arising out of or relating to Contract 2.”

Next, the court examined whether the claims at issue fell within the scope of the parties’ agreement to arbitrate.  According to the court,

The noncompete covenant originated in Contract 1. It was later incorporated into Contract 2 when the parties referred to the noncompete section of Contract I and agreed that it “shall continue in full force and effect” and “acknowledge[d] the continued enforceability” of that section. Then when the parties signed Contract 3, they amended the terms of the noncompete covenant as expressed in Contract 1 and as incorporated into Contract 2. We previously concluded that the parties incorporated the obligations from Contract 2 into Contract 3. We also conclude that Contract 3 amended the noncompete covenant in Contract 2. See Tribble & Stephens, 154 SW.3d at 663 (contracts must be construed together). Consequently, the noncompete covenant relates to all three agreements, and Smiley’s argument that his claims arise solely from Contract 3 is not supported by the evidence.

We conclude that Phytel established the existence of a valid agreement to arbitrate and that Smiley’s claims fall within the scope of the arbitration agreement.

Finally, the Fifth Court of Appeals found that Phytel did not waive arbitration by substantially invoking the judicial process and Smiley did not satisfy his burden of proving prejudice because he failed to present any evidence related to the alleged prejudice.  The court also refused to consider whether the contracts were unconscionable or lacked mutuality of obligation because Smiley failed to raise the defenses at the trial court level.

Because a valid agreement to arbitrate existed, the Dallas court reversed the lower court’s order and granted Phytel’s motion to compel arbitration.