Fort Worth COA Orders Employment Dispute to Arbitration

Texas’ Second District Court of Appeals in Fort Worth has overturned a trial court’s order denying arbitration in an employment dispute. In Brand FX, LLC v. Rhine, No. 02-14-00249-CV (Tex. App. – Fort Worth, February 26, 2015), a publicly traded Delaware company that manufactures trucking industry parts hired a Texas man, Rhine, to serve as its Chief Financial Officer in November 2013. Prior to his employment, Rhine signed an agreement that outlined Brand FX’s expectations and stated Rhine would receive severance wages so long as he was not terminated for cause. The contract included an arbitration provision which required all disputes related to Rhine’s “employment, performance, or compensation” to be resolved through arbitral proceedings held in New York in accordance with the rules of the American Arbitration Association. The provision also provided that the loser would be required to pay all costs associated with arbitration proceedings.

In February 2014, Rhine’s supervisor informed him by letter that his performance at Brand FX was unacceptable. The letter also provided Rhine with 30 days to improve his performance or face termination in accordance with the terms of his employment agreement. In March 2014, Rhine was terminated for cause.

After he was fired, Rhine filed a lawsuit against Brand FX in a Texas court. According to Rhine’s complaint, the company committed “statutory libel per se” and breached his employment contract by failing to provide him with severance pay. Brand FX failed to timely file an answer and the trial court issued a default judgment against the company. Next, the court set a hearing regarding the man’s damages.

Two days before the hearing was set to take place, Brand FX filed a motion to compel arbitration based on the arbitral provision include in Rhine’s employment agreement. The company also asked the court to set aside the default judgment that was entered against it. Rhine countered by stating the arbitration provision was substantively unconscionable and unenforceable as a result of Brand FX’s waiver. Although Rhine’s response was mailed to Brand FX, it was not received by the company until after a non-evidentiary hearing was held.

At the non-evidentiary hearing, Rhine claimed for the first time that the arbitration agreement was governed by the Texas Arbitration Act (“TAA”). In addition, Rhine again argued the arbitral provision was unconscionable and unenforceable. In contrast, Brand FX asserted that the agreement to arbitrate was governed by the Federal Arbitration Act (“FAA”) since it involved interstate commerce. The company also stated it did not waive its right to engage in arbitration by substantially invoking the judicial process. Following the hearing, the court set aside the default judgment but denied Brand FX’s motion to compel arbitration.

Next, Brand FX filed a motion for reconsideration and more fully responded to Rhine’s claims. Rhine then filed a motion to strike the additional evidence that was offered by the company. Following another non-evidentiary hearing, the trial court denied Brand FX’s motion for reconsideration but did not rule on Rhine’s motion to strike. After that, Brand FX filed an interlocutory appeal with Texas’ Second District Court of Appeals in Fort Worth arguing the trial court committed an abuse of discretion when it refused to compel the parties’ dispute to arbitration.

The appellate court first dismissed Rhine’s motion to strike documents that were related to Brand FX’s motion for reconsideration from the record. The court stated “striking properly filed trial court documents from the clerk’s record would be inappropriate.” The court then turned to the question of whether the evidence Brand FX “submitted to the trial court in support of its motion to reconsider should be considered in our review of the trial court’s denial of arbitration.”

After stating a statute which authorizes an interlocutory appeal must be strictly construed, the court said “the denial of a motion to compel arbitration is immediately appealable, but the denial of a motion to reconsider the denial of a motion to compel arbitration is not immediately appealable” under either the TAA or the FAA. Because of this, the Fort Worth court held:

We conclude that we may not consider any new evidence submitted in support of Brand FX’s motion to reconsider. Although we have jurisdiction over this appeal because Brand FX filed its notice of appeal within twenty days after the trial court denied its motion to compel, we may not review the denial of the motion to reconsider. Our statutory authorization does not extend to such orders under either the FAA or the TAA. See 9 U.S.C.A. § 16; Tex. Civ. Prac. & Rem. Code Ann. §§51.016, 171.098.

The Second District next addressed whether the FAA or the TAA applied to the case at hand. The court said the “FAA applies to any contract that contains a written agreement to arbitrate, covers a dispute at issue, and involves interstate commerce.” Next, the Court of Appeals said interstate commerce is construed broadly and “need not be substantial.” Because Brand FX was incorporated in Delaware, the company’s principal place of business was in New York, Rhine was hired to work out of a Texas office, and Brand FX manufactured trucking industry parts that were used in interstate commerce, the Fort Worth court held that the arbitration agreement was governed by the FAA.

The appellate court then discussed whether a valid and enforceable arbitration agreement existed. With regard to Rhine’s claim that Brand FX waived its right to arbitration, the court said:

A party waives an arbitration provision when it substantially invokes the judicial process to the other party’s detriment. In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex. 2007)(orig. proceeding). “[T]here is a strong presumption against waiver,” and even if present, it must be intentional. EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex. 1996)(writ of error & orig. proceeding). The Texas Supreme Court has explicitly held that a party does not substantially invoke the judicial process by moving to set aside a default judgment and requesting a new trial. Bank One, 934 S.W.2d at 827; see also Paul Jacobs, P.C. v. Encore Bank, N.A., No. 01-12-00699-CV, 2013 WL 3467197, at *4 (Tex. App. — Houston [1st Dist.] July 9, 2013, no pet.) (mem. op.)(collecting cases regarding what actions are not considered substantial invocation). We can hold no differently here and therefore conclude that Brand FX did not substantially invoke the judicial process such that it waived its right to compel arbitration. Rhine failed to meet his burden to establish waiver.

The court next dismissed Rhine’s claim that the arbitration agreement was unconscionable as a result of the cost-shifting provision, the forum selection clause, and because the agreement limited the arbitrator’s authority to amend or modify its terms. According to the Second District:

We conclude that Rhine failed to meet his burden to prove his defenses to enforcement of the arbitration agreement; thus, the trial court’s contrary conclusion on these issues of law was an abuse of discretion.

Since the trial court abused its discretion when it refused to compel the employment dispute to arbitration, Texas’ Second District Court of Appeals in Fort Worth reversed the lower court’s decision and remanded the case with an order to compel arbitration.

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