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Discovery: A 2-1 Texas Appeals Court Reverses, Staying a Nonparty's Litigation (Web)

A Texas state appellate court ordered a nonsignatory to an arbitration agreement to stay its litigation in its opinion in a mandamus suit against a trial court. Two defendants had asked the court to stay the case pending the arbitration, with the nonsignatory’s two fellow plaintiffs.

Reversing a lower court that it found had abused its discretion in In re Fadi Ghanem, et al., No 09-06-205-CV, 2006 WL 2707437 (Tex. Ct. App. 9th Dist. Beaumont Sept. 21, 2006)(available at ), the appeals court stayed the parallel litigation during the arbitration.

The 2-1 panel opinion found that the litigation “pursuant to claims identical to those involved in the arbitration process could jeopardize [the defendants’] right to have those claims resolved by binding arbitration. . . .”

The four signatory parties were ordered to arbitration by a trial court after a suit by two of the signatory parties, and the third party, a nonsignatory. All five of the individual parties in the suit are medical doctors.

But the trial court did not order plaintiff Harlan Borcherding to arbitrate because he was not a signatory to a letter agreement between the parties containing the arbitration provision. The agreement covered a brief business partnership, according to the opinion.

In addition to refusing to stay Borcherding’s case while arbitration proceedings between the defendants and the parties aligned with Borcherding were pending, the appeals court also denied a defense motion for protection from further discovery related to the causes of action referred to arbitration.

After determining the Federal Arbitration Act’s applicability to the matter, Ninth District Texas Court of Appeals Justice Charles Kreger wrote that the original petition before the trial court did not specifically segregate any of Borcherding's causes of action from those of the remaining plaintiffs.

Kreger noted that the Fifth U.S. Circuit Court of Appeals had applied the FAA's mandatory stay provision to arbitration agreement nonsignatories “because the issues presented in the nonsignatory/signatory litigation, if litigated, would have rendered the arbitration redundant and thwarted the federal policy favoring arbitration.”

In two decisions, Harvey v. Joyce, 199 F.3d 790,796 (5th Cir.2000) and Subway Equipment Leasing Corp. v. Forte, 169 F.3d 324, 329 (5th Cir.1999), the Fifth Circuit held that because the issues to be litigated by the nonsignatories were identical to the issues to be arbitrated by the signatories, allowing the litigation to proceed would harm the signatories' arbitration rights.

In a more recent case reaffirming the concept, the same court had said that “[t]he question is not ultimately one of weighing potential harm to the interests of the non-signatory, but of determining whether proceeding with litigation will destroy the signatories' right to a meaningful arbitration.” Waste Mgmt. Inc. v. Residuos Industriales Multiquim, S.A. de C.V., 372 F.3d 339, 343 (5th Cir.2004).

In the present case, the Texas Court of Appeals found that any attempt to judicially determine the defendants’ liability, if any, to Borcherding under the causes of action pleaded in the petition could adversely affect their right to arbitrate, and certainly to arbitrate meaningfully.

The opinion indicates that the case meets the three-part standard in Waste Management for invoking the FAA Section 3 mandatory stay: “(1) similarity of operative facts; (2) inseparability of claims; and (3) effect of the litigation on the arbitration.” Id. at 344-45.

Relying on the rule that mandamus relief is available only when a trial court clearly abuses its discretion, and when there is no adequate remedy on appeal, the Kreger opinion held that the trial court judge had abused her discretion in refusing to stay all parallel judicial proceedings in the underlying litigation pending the results of the arbitration process.

The opinion states, “Failing to stay the parallel litigation after ordering arbitration, under the facts and circumstances presented, could only have the effect of ‘frustrating the statutory policy of rapid and unobstructed enforcement of arbitration agreements.’” (Citation omitted.)

The panel conditionally granted the writ of mandamus and directed the trial court to issue a stay of all further judicial proceedings, including discovery and temporary injunctive relief.

Justice Hollis Horton dissented, saying that he didn’t believe “that the defendants carried their burden to demonstrate the trial judge abused her discretion. . . .”

Horton points out that the defendants didn’t ask the trial to send Borcherding to arbitration–they only asked for a discovery stay pending arbitration. Horton vehemently disagreed with the majority conclusion that Borcherding’s claims are identical to the other plaintiffs’ claims.

He analyzed the pleadings in detail in concluding that he would deny the defendants’ petition and let the litigation discovery proceed.

--Victoria Brassart, CPR Intern