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]