PRE-ARBITRATION DISCOVERY NIXED BY MANDAMUS | In re Houston Pipe Line Co. LP (Tex. 2009) (arbitration mandamus granted)

In Re Houston Pipe L ine Co., LP (Tex. 2009),
Also see --> Opinion on Motion for Rehearing in In Re Houston Pipe Line Co
No. 08-0800 (Tex. Jul. 3, 2009)(per curiam) (arbitration mandamus) (discovery orders and motion to
compel arbitration: interaction of FAA and Texas law) (trial court ordered to rule on motion to compel
arbitration, and to vacate pre-arbitration discovery orders found to be overbroad)(oil and gas law and
litigation)(arbitration under the FAA in commercial disputes)
THE GIST: At issue in this proceeding is whether the trial court abused its discretion
by permitting discovery on damage calculations and other potential defendants,
instead of deciding the motion to compel arbitration. For the reasons below, we
conclude the trial court should not have ordered pre-arbitration discovery, but rather
should have decided the motion to compel arbitration. ... [W]e conditionally grant the
writ and direct the trial court to vacate the discovery order and to rule on the motion
to compel arbitration.
IN RE HOUSTON PIPE LINE COMPANY, L.P., ET AL.; from Victoria County;
13th district (13-07-00299-CV & 13-07-00362-CV, [interlocutory appeal and mandamus petition]
269 SW3d 90, 08-26-08 Opinion of the Thirteenth Court of Appeals by Chief Justice Rogelio Valdez
denying mandamus relief)
stay order issued October 17, 2008, lifted
Pursuant to Texas Rule of Appellate Procedure 52.8(c), without hearing oral argument, the Texas
Supreme Court conditionally grants the petition for writ of mandamus.
Get this Per Curiam Opinion [4 pages in pdf]
E -Briefs in Tex. 2009 No. 08-0800 IN RE HOUSTON PIPE LINE CO., L.P. D/B/A HOUSTON PIPE LINE CO.
BLOG ENTRIES & WEB NEWS ITEMS ON THIS CASE:
Texas SC directs judge to rule on arbitration motion (Southeast Texas Record - S.E. Texas' Legal Journal)
Pre-Arbitration Discovery Quashed by Texas High Court: (ADR Law Texas blog)

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In Re Houston Pipe Line Company, L.P. (Tex. 2009)(per curiam)
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[Note: The opinion text below has been marked-up for easier digestion. Hyperlinks for terms and concepts
have been added. To see the opinion in its original form in pdf, click the case name above]

PER CURIAM

When deciding a motion to compel arbitration under the Federal Arbitration Act, a Texas trial
court applies Texas procedure, which permits discovery to be taken when it is needed before the
arbitration or to permit the arbitration to be conducted in an orderly manner. Tex. Civ. Prac. &
Rem. Code § 171.086 (a)(4),(6); see also Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 268 (Tex.
1992).

At issue in this proceeding is whether the trial court abused its discretion by permitting discovery
on damage calculations and other potential defendants, instead of deciding the motion to compel
arbitration. For the reasons below, we conclude the trial court should not have ordered pre-
arbitration discovery, but rather should have decided the motion to compel arbitration.

Houston Pipe Line Company, L.P., signed an agreement to purchase gas from O’Connor &
Hewitt, Ltd., based on the Houston Ship Channel Price Index. Fn1 Several years later, O’Connor
sued Houston Pipe Line, Energy Transfer Partners, L.P., Energy Transfer Equity, L.P., and La
Grange Acquisition, L.P., for manipulating the Index downward, which caused O’Connor to receive
lower payments for gas delivered pursuant to the contract.

As a signatory to the contract, Houston Pipe Line sought to enforce the arbitration provision. Fn2
Energy Transfer and La Grange were not parties to the agreement, but tried to compel arbitration
based on a direct benefits equitable estoppel theory. See Meyer v. WMCO-GP, LLC, 211 S.
W.3d 302, 305 (Tex. 2006); Sherer v. Green Tree Servicing LLC, 548 F.3d 379, 382 (5th Cir.
2008).

O’Connor resisted arbitration by attacking the scope of the arbitration provision and
contending that it would be impossible to identify all potential defendants and to complete
damages calculations within the sixty days allotted for discovery, as set out in the arbitration
provision.

Rather than rule on the motion to compel, the trial court ordered discovery to aid it in deciding the
motion. Specifically, the trial court ordered discovery to determine if additional defendants could
equitably invoke the arbitration clause, whether O’Connor’s claims fell within the scope of
the arbitration clause, and if the time limitations imposed by the clause were jurisdictional. In its
order, the trial court suggested that it would be virtually impossible Fn3 to conduct the necessary
discovery within the sixty-day time frame allotted to the arbitrator under the agreement and that O’
Connor:

lacks sufficient information [regarding the possible price manipulation]. . . and that discovery is
needed so that the scope of the Arbitration clause . . . may be properly applied to the actual party
responsible . . . Moreover, the documents sought by [O’Connor] from [Houston Pipe Line and
Energy Transfer ]: (1) Would be needed before any Arbitration proceedings begin; (2) Will permit
any Arbitration to be conducted in an orderly manner; (3) Will facilitate any Arbitration under
Section 171.086 of the Texas Civil Practice and Remedies Code; and (4) Will aid in determining
the issues of arbitrability. . .

Houston Pipe Line and Energy Transfer sought mandamus relief in the court of appeals, arguing
that the trial court had abused its discretion by not ruling on the motion to compel. The court of
appeals refused to issue the writ, concluding that the trial court had acted within its discretion. We
disagree that the discovery ordered by the trial court was needed for it to rule on the motion to
compel.

When a party disputes the scope of an arbitration provision or raises a defense to the provision,
the trial court, not the arbitrator, must decide the issues. Buckeye Check Cashing, Inc. v.
Cardegna, 546 U.S. 440, 444 (2006). And “[w]hen Texas courts are called on to decide if
disputed claims fall within the scope of an arbitration clause under the Federal Act, Texas
procedure controls that determination.” Tipps, 842 S.W.2d at 268. Pre-arbitration discovery is
expressly authorized under the Texas Arbitration Act when a trial court cannot fairly and properly
make its decision on the motion to compel because it lacks sufficient information regarding the
scope of an arbitration provision or other issues of arbitrability. See Tex. Civ. Prac. & Rem. Code
§§ 171.023(b), 171.086(a)(4),(6). This, however, is not an authorization to order discovery as to
the merits of the underlying controversy. Motions to compel arbitration and any reasonably needed
discovery should be resolved without delay. Tipps, 842 S.W.2d at 269.

The discovery authorized by the trial court seeks to determine the identity of all potential
defendants and to what extent each defendant is liable, including Houston Pipe Line. Such an
inquiry is inappropriate because determinations of ultimate liability ordinarily must be answered
during the arbitration proceeding, while questions regarding the scope of the arbitration clause
should be decided by the trial court. See AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.
S. 643, 649 (1986). The necessity of identifying other culpable parties could, under some
circumstances, be related to arbitrability.

But, a party cannot avoid its agreement to arbitrate merely by alleging that there may be other
potential defendants; it must link the identity of the defendants to an issue of arbitrability, such as
scope, or a defense to arbitration. See 9 U.S.C. § 4; Tex. Civ. Prac. & Rem. Code §§ 171.021,
171.026; see also J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003).

Because the discovery ordered here is overbroad and beyond the issues raised in the motion
to compel, we conclude that the trial court abused its discretion by ordering this discovery rather
than ruling on the legal issues raised by the motion to compel. Accordingly, without hearing oral
argument, we conditionally grant the writ and direct the trial court to vacate the discovery order and
to rule on the motion to compel arbitration. Tex. R. App. P. 52.8(c). We are confident the trial court
will comply, and our writ will issue only if it does not.

OPINION DELIVERED: July 3, 2009

1 This index is published monthly in the natural gas industry trade journal Inside FERC.

2 The arbitration provision provided:

Except for matters within the jurisdiction of the Railroad Commission of Texas, any and all claims,
demands, causes of action, disputes, controversies, and other matters in question arising out of
or relating to this Agreement, any of its provisions, or the relationship between the Parties created
by this Agreement . . . shall be resolved by binding arbitration pursuant to the Federal Arbitration
Act . . . .If a Party refuses to . . . arbitrate, the other Party may seek to compel arbitration in either
federal or state court. . . .The final hearing shall be conducted within 60 days of the selection of the
third arbitrator. . . [and] shall not exceed 10 business days.

3 Although not determinative here, ordinarily the arbitrator, rather than the trial court, will be better
able to determine the preclusive effects of discovery limitations in the arbitration agreement. See
In re Poly-America, L.P., 262 S.W.3d 337, 358 (Tex. 2008).

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RELEVANT PART OF CONTRARY OPINION OF THE COURT BELOW
Clikck this link to the read the full opinion by Chief Justice of the Thirteenth Court of Appeals Rogelio
Valdez denying mandamus relief) 269 S.W.3d 90 (Tex.App. - Corpus Christi, Aug. 26, 2008)
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IV. Petition for Writ of Mandamus

In its petition for writ of mandamus, Houston Pipe Line raises two issues. It contends that the trial court
erred by (1) refusing to rule on and failing to summarily grant its motion to compel arbitration and its
request to stay trial court proceedings, and (2) granting O'Connor's motion to compel discovery. Houston
Pipe Line asks that we direct the trial court to vacate its orders declining to rule on their motion to compel
arbitration, refusing to grant a stay, and compelling production of documents. Houston Pipe Line further
requests that this Court enter an order compelling arbitration, or alternatively, staying discovery and
compelling the trial court to summarily rule on the motion to compel arbitration.

The Texas Supreme Court has delineated the procedure to be followed when a motion to compel
arbitration has been filed:

The trial court may summarily decide whether to compel arbitration on the basis of affidavits, pleadings,
discovery, and stipulations. However, if the material facts necessary to determine the issue are
controverted, by an opposing affidavit or otherwise admissible evidence, the trial court must conduct an
evidentiary hearing to determine the disputed material facts.

Jack B. Anglin Co., 842 S.W.2d at 268-69; see In re Bunzl USA, Inc., 155 S.W.3d 202, 208 (Tex. App.-El
Paso 2004, orig. proceeding). The procedure that courts should follow when faced with a motion to compel
arbitration is "essentially a motion for summary judgment, subject to the same evidentiary standards." In re
Jebbia, 26 S.W.3d 753, 756-57 (Tex. App.-Houston [14th Dist.] 2000, orig. proceeding). With regard to
discovery, the trial court has no discretion to defer ruling on arbitration until after the completion of
discovery. In re Great W. Drilling, Ltd., 211 S.W.3d 828, 835 (Tex. App.-Eastland 2006, orig. proceeding)
("Delaying a decision on a motion to compel arbitration until after discovery is completed, we found,
defeated the goal of resolving arbitration issues promptly."); In re Champion Techs., Inc., 173 S.W.3d 595,
598-99 (Tex. App.-Eastland 2005, orig. proceeding); In re MHI P'shp., 7 S.W.3d at 923. (4) Moreover, once
the parties have shown a valid agreement to arbitrate and the arbitration has been instituted, further
discovery is governed by the arbiters. See, e.g., Universal Computer Sys. v. Dealer Solutions, L.L.C., 183
S.W.3d 741, 750 (Tex. App.-Houston [1st Dist.] 2005, pet. denied). (5) Furthermore, in deciding whether
the parties have agreed to submit a particular grievance to arbitration, a court is not to rule on the
potential merits of the underlying claims. See id.

The trial court cannot delay ruling on a motion to compel arbitration until discovery has been completed
because this would defy the purpose of arbitration and the application of a summary procedure. See e.g.,
In re Great W. Drilling, Ltd., 211 S.W.3d at 835. However, there is no rule mandating a strict deadline for
the court to rule on a motion to compel arbitration. Moreover, as discussed previously, it is clear that the
trial court can allow discovery in some circumstances pending its ruling on a motion to compel arbitration.
The Texas Supreme Court in Anglin specifically stated that the trial court may "summarily decide whether
to compel arbitration on the basis of affidavits, pleadings, discovery, and stipulations." See Anglin, 842 S.
W.2d at 269 (emphasis added). Moreover, an evidentiary hearing is required if there are disputed material
facts. See id. Furthermore, the Texas Act allows the court to issue, "in its discretion an order for a
deposition for discovery, perpetuation of testimony, or evidence needed before the arbitration proceedings
begin," or to grant "other relief . . . in its discretion, needed to permit the arbitration to be conducted in an
orderly manner and to prevent improper interference or delay of the Arbitration." Tex. Civ. Prac. & Rem.
Code Ann. § 171.086(4), (6); see Universal Computer Sys., 183 S.W.3d at 750 (contrasting trial court's
authority to resolve an existing discovery dispute with authority to facilitate an arbitration).

Under the present circumstances, the trial court did not abuse its discretion in allowing the instant
discovery before ruling on Houston Pipe Line's motion to compel arbitration and request to stay trial court
proceedings. The trial court is not deferring its ruling until the completion of discovery, but rather, in its
discretion, is allowing circumscribed discovery needed to determine the merits of the motion to compel
arbitration and if necessary, to permit the arbitration to be conducted in an orderly manner and to prevent
improper interference or delay of the arbitration.

We note that, in considering the issues herein, we do not reach the merits of the motion to compel
arbitration or the arbitrability of the instant dispute. The trial court has not ruled on the merits of this matter
and has expressly deferred its ruling pending the continuation of the hearing. Therefore, the merits of the
arbitration motion and any contest to it are not ripe for our consideration. In re The Shredder Co., 225 S.W.
3d 676, 680 f.5 (Tex. App.-El Paso 2006, orig. proceeding); In re MHI P'ship, Ltd., 7 S.W.3d at 921 f.6; Hou-
Scape, Inc. v. Lloyd, 945 S.W.2d 202, 205 (Tex. App.-Houston [1st Dist.] 1997, orig. proceeding); see In re
Perritt, 992 S.W.2d 444, 446 (Tex. 1999). Whether the motion to compel arbitration should be granted or
denied is a matter that remains within the trial court's discretion. (6) We note that mandamus may issue if a
court does not issue a ruling on a motion to compel arbitration within a reasonable period of time. See In re
The Shredder Co., 225 S.W.3d at 680; see also In re Landmark Org., L.P., No. 13-04-00527-CV, 2004
Tex. App. LEXIS 9754, at *3-4 (Tex. App.-Corpus Christi Nov. 1, 2004, orig. proceeding) (per curiam)
(mem. op). However, such is not the case presently before this Court.

V. Conclusion

We affirm the trial court's order. We deny the petition for writ of mandamus.

_______________________

ROGELIO VALDEZ

Chief Justice

Opinion delivered and filed

this the 26th day of August, 2008.