law-FAA-arbitration | contract formation | contract avoidance | void contracts | unconscionable |
unenforceable contractual provisions | arbitration cases | arbitration mandamus | challenging
arbitration agreements |
The Federal Arbitration Act (“FAA”) generally governs arbitration provisions in
contracts involving interstate commerce. See 9 U.S.C. § 2; see also In re L & L
Kempwood Assocs., L.P., 9 S.W.3d 125, 127 (Tex. 1999). Where the FAA ostensibly
controls, as it does here, an agreement to arbitrate is valid except on grounds as exist at
law or in equity to revoke the contract. 9 U.S.C. § 2. Section 2 of the FAA provides that
courts shall compel arbitration on issues subject to an arbitration agreement. Id. Section
4 of the FAA provides that a court may consider only issues relating to the making and
performance of the agreement to arbitrate. 9 U.S.C. § 4. Thus, once a party seeking
to compel arbitration has established that there is a valid agreement to arbitrate and that
the plaintiff’s claims are within the agreement’s scope, the trial court must compel
arbitration. Id.; In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex. 1999) (per
curiam).
In re Morgan Stanley & Co, Inc. No. 07-0665 (Tex. Jul. 3, 2009)(Medina) (arbitration vs. litigation:
legal capacity of party to arbitration agreement, does the court or the arbitrator decide the
issue?)
GATEWAY ISSUE: DETERMINING WHETHER AGREEMENT TO ARBITRATE
EXISTS
Under the FAA, whether an arbitration agreement binds a nonsignatory is a gateway matter to be
determined by courts rather than arbitrators unless the parties clearly and unmistakably provide
otherwise. In re Weekley Homes, L.P., 180 S.W.3d 127, 130 (Tex. 2005); see Howsam v. Dean
Witter Reynolds, Inc., 537 U.S. 79, 83-84 (2002). As this arbitration agreement is silent about
who is to determine whether particular persons are bound by the agreement, courts, rather than
the arbitrator, should determine the issue. See First Options of Chic., Inc. v. Kaplan, 514 U.S.
938, 944-45 (1995). In re Labatt Food Service, LP, No. 07-0419 (Tex. 2009)(Johnson)
(arbitration mandamus, arbitration of wrongful death claim by nonsignatories compelled)
We apply Texas procedural rules in determining whether nonsignatories are bound by an
arbitration agreement. In re Weekley Homes, 180 S.W.3d at 130. It is not entirely clear, however,
if state or federal substantive law governs whether nonsignatories are bound to arbitrate under
an agreement subject to the FAA. Id.; see Wash. Mut. Fin. Group, LLC v. Bailey, 364 F.3d 260,
267 n.6 (5th Cir. 2004). Under the FAA, state law generally governs whether a litigant agreed to
arbitrate, and federal law governs the scope of the arbitration clause. In re Weekley Homes, 180
S.W.3d at 130. But whether nonsignatories are bound by an arbitration agreement is a distinct
issue that may involve either or both of these matters. Id. at 130-31; see also In re Kellogg Brown
& Root, Inc., 166 S.W.3d 732, 738 (Tex. 2005) (noting whether nonsignatory plaintiffs should be
compelled to arbitrate their claims is related to validity but is also a distinct issue). The FAA does
not specify whether state or federal law governs, and the United States Supreme Court has not
directly addressed the issue. In re Weekley Homes, 180 S.W.3d at 130. Pending an answer from
the United States Supreme Court, we have determined to apply state substantive law and
endeavor to keep it consistent with federal law. Id. We keep in mind that a purpose of the FAA is
“to make arbitration agreements as enforceable as other contracts, but not more so.” Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967); see Fleetwood Enter., Inc. v.
Gaskamp, 280 F.3d 1069, 1074 n.5 (5th Cir. 2002).
Mindful of the foregoing, we move to the issue before us—whether an arbitration agreement
governed by the FAA binds the nonsignatory wrongful death beneficiaries of a party to the
agreement.
ROLE OF STATE LAW CONTRACT FORMATION PRINCIPLES
Section 2 of the FAA provides that arbitration agreements “shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation of any
contract.” 9 U.S.C. § 2 (emphasis added). Thus, an agreement to arbitrate is valid under the FAA
if it meets the requirements of the general contract law of the applicable state. In re AdvancePCS
Health L.P., 172 S.W.3d 603, 606 (Tex. 2005) (citing First Options of Chicago, Inc. v. Kaplan,
514 U.S. 938, 944 (1995)). In determining the validity of an agreement to arbitrate under the
FAA, courts must first apply state law governing contract formation. See 9 U.S.C. § 2; First
Options, 514 U.S. at 944. The United States Supreme Court has repeatedly emphasized that
“state law, whether of legislative or judicial origin, is applicable [to the determination of the validity
of an agreement to arbitrate] if that law arose to govern issues concerning the validity,
revocability, and enforceability of contracts generally.” Perry v. Thomas, 482 U.S. 483, 493 n.9
(1987). Thus, courts “may not . . . invalidate arbitration agreements under state laws applicable
only to arbitration provisions.” Doctor’s Assocs., Inc. v. Casarotto, 517 U.S. 681, 687 (1996); see
also Perry, 482 U.S. at 493 n.9 (“A state-law principle that takes its meaning precisely from the
fact that a contract to arbitrate is at issue does not comport with [section 2].”).
However, the purpose and language of the FAA require only that agreements to arbitrate be
placed “upon the same footing as other contracts.” Doctor’s Assocs., 517 U.S. at 687 (quoting
Scherk v. Alberto-Culver Co., 417 U.S. 506, 511 (1974)) (emphasis added); see also H.R. Rep.
No. 68-96, at 1 (1924) (noting that by enacting section 2, Congress sought to place agreements
to arbitrate “upon the same footing as other contracts, where [they] belong[]”). Perry makes clear
that state courts may not fashion special rules regarding the enforceability of arbitration
contracts per se. See Perry, 482 U.S. at 492 n.9. Furthermore, once an enforceable contract to
arbitrate is found, there is a strong federal presumption in favor of arbitration such that myriad
doubts — as to waiver, scope, and other issues not relating to enforceability — must be resolved
in favor of arbitration. See, e.g., In re FirstMerit Bank, 52 S.W.3d 749, 752 (Tex. 2001);
Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898–99 (Tex. 1995). However, a state court
must initially determine — through the neutral application of its own contract law — whether an
enforceable agreement exists in the first instance, and whether “generally applicable contract
defenses . . . may be applied to invalidate arbitration agreements without contravening” the
policies of the FAA. Doctor’s Assocs., 517 U.S. at 687. Thus, in this case, if a contract limiting
damages or restricting other remedies under the Workers’ Compensation Act is generally
unenforceable under Texas law, an arbitration contract with these same limitations will also be
unenforceable.
Nevertheless, under Texas law, as with any other contract, agreements to arbitrate are valid
unless grounds exist at law or in equity for revocation of the agreement. The burden of proving
such a ground — such as fraud, unconscionability or voidness under public policy — falls on the
party opposing the contract. See FirstMerit Bank, 52 S.W.3d at 756. Thus, while we reject Poly-
America’s assertions that we must apply a presumption favoring arbitration in assessing whether
the parties entered into an enforceable agreement under Texas law and that the FAA preempts
Texas public policies that may make certain contractual provisions generally unenforceable,
Luna nevertheless bears the burden to establish that the challenged provisions are
unenforceable.
In re Poly-America, LP, 262 S.W.3d 337 (Tex. 2008) (arbitration in employment context, FAA,
retaliatory discharge, employment law, limitation of remedies, unconscionability argument
challenge sustained, offending provision stricken, but remainder of arbitration agreement given
effect)
ARBITRATION AGREEMENT MUST BE IN WRITING,
BUT SIGNATURE NOT NECESSARILY REQUIRED TO FORM VALID ARB AGREEMENT
The FAA contains no requirements for the form or specificity of arbitration agreements except
that they be in writing; it does not even require that they be signed. See 9 U.S.C. § 2; Seawright
v. Am. Gen. Fin. Servs., Inc., 507 F.3d 967,978 (6th Cir. 2007) (citing cases from the 2nd, 5th,
7th, and 10th Circuits). But in this case the
defendant’s affidavit establishes that the Acknowledgment was signed “For the Company” by an
assistant manager at the Macy’s store where Tomsic worked. In Re Macy's Texas, Inc., No. 08-
0584 (Tex. Jun. 26, 2009)(per curiam)(arbitration under FAA compelled by mandamus in dispute
over injuries sustained at the work place)(correct identification of employer was an issue, but did
not defeat duty to arbitrate)(employee must arbitrate on-the-job injuries claim against company)
IN RE MACY'S TEXAS, INC.; from Bexar County; 4th district (04-08-00469-CV, ___ SW3d ___,
[per curiam opinion of the San Antonio Court of Appeals denying mandamus relief] 07-23-08)
stay order issued October 10, 2008, lifted
Pursuant to Texas Rule of Appellate Procedure 52.8(c), without hearing oral argument, the Court
conditionally grants the petition for writ of mandamus.
Per Curiam Opinion [pdf]