Tuesday, April 28, 2015

Timeliness of arbitration demand for the arbitrator to decide, not the court, Texas Supreme Court says


In G.T. Leach Builders LLC v Sapphire V.P., LP, No. 13-0497 (Tex. 2015), a complex construction-project-related dispute involving multiple parties and multiple contracts, the Texas Supreme Court recently addressed a number of important arbitration-related issues. Most notably, it reversed the intermediate court of appeals on the matter of whether the court or the arbitrator gets to decide whether the arbitration demand was timely asserted. 

G.T. Leach Builders, LLC v. Sapphire V.P., LP, No. 13-0497, 2015 WL 1288373 (Tex., Mar. 20, 2015)
G.T. Leach Builders, LLC v. Sapphire V.P., LP, No. 13-0497 (Tex. 2015)
The Supreme Court, in an opinion by Jeff Boyd, concluded that the question is not a gateway issue of arbitrability and therefore goes to the arbitrator. This seems logically unsatisfactory, because the matter of whether a litigant has waived the right to compel arbitration by litigation conduct is and remains a matter for the court. The failure to meet the deadline to invoke or initiate arbitration is likewise a matter of conduct (omission). So why should the former be a matter of arbitrability properly passed on by the Court, but the latter a matter to be arbitrated (rather than a threshold matter of whether an arbitration referral is (still) appropriate, or has been forfeited by undue delay?   
  
Moreover, a contractual provision setting a deadline will generally be more amenable to quick and efficient application and enforcement because it is likely unambiguous and the relevant facts are measured in days or months. Delay in quantifiable. No need for fact-intensive inquiry encompassing multiple dimensions of conduct, not to mention consideration of the amorphous “totality of the circumstances” to resolve whether the deadline has be missed. Resolution by the court would thus also conserve judicial and private resources.

Thirdly, if a party’s litigation conduct may arguably transform a “presently enforceable right to arbitrate” into its opposite, how does a failure to meet the deadline for arbitration not render the “presently enforceable right to arbitrate” into something that was presently enforceable before the deadline, but not after? Why should the court not resolve both types of scenarios involving the potential loss of the otherwise available right to compel arbitration in case pending before it? 

Finally, under the Supreme Court’s ruling, the case must be sent to arbitration for the arbitrator to determine that the case cannot be arbitrated because the right to arbitrate was lost by missing the deadline. But in reaching that conclusion, the arbitrator would in fact be arbitrating an issue that touches on the very basis of the arbitrator’s authority to act, i.e. did the party that sought arbitration still have a right to do so, and was it appropriate for the arbitrator to make any decision at all? There would appear to be an inherent contradiction of a arbitrator deciding that arbitration should not be taking place because the right to arbitrate no longer existed when the arbitration was compelled. 

The scenario might be analogized with the proposition that a court always has jurisdiction to determine whether it has jurisdiction. But limitations issues are not jurisdictional. And an arbitrator never has plenary jurisdiction because arbitration is always a creature of contract. Therefore, the jurisdiction analogy fails. 

Moreover, what happens if the arbitrator issues an “award” finding that relief is barred because the deadline to commence arbitration has been missed? Is it that binding on the court? Does it have res judicata effect? Or can the dispute then be resolved in court, assuming the claim itself is not time-barred, even though the resolution of that claim by arbitration was time-barred as determined by the arbitrator in the award? And even if the cause of action was time-barred, would the court then still have authority to so rule on the merits?

What if either party moves for confirmation of the arbitrator's award to transform it into a judgment?  What if arbitrator entered a zero (take-nothing) award, rather than a time-bar finding equivalent to a trial court's dismissal reciting the basis for dismissal in the order, or the equivalent to a dismissal order accompanied by findings of facts and conclusions of law doing so. What if the arbitrator issues an "award" that awards no relief but does not state a reason (i.e. does not say that relief was denied because the deadline to commence arbitration had been missed, the applicable statute of limitations had expired, or any other reason)? Would that still leave ground to argue that the court should decide the controversy in a later proceeding because the arbitrator was in no position to determine whether any relief should be granted on the merits? What would be the effect of an arbitrator's finding of absence of arbitrability in a case in which arbitration was compelled? Does that reverse the order to compel, and the judicial findings upon which it rests?   

All these concerns could be addressed, and the logical inconsistencies could be eliminated -- at least in case where the controversy originates in court -- had the Supreme Court held that timelines under the arbitration deadline is a gateway matter, specifically, a matter of whether the arbitration agreement is ‘presently’ enforceable. This is the same question that is implicated in the court’s role of determining whether the party seeking arbitration has waived the right to do so by its litigation conduct, thereby rendering the arbitration agreement not or no longer "presently enforceable". 

The Thirteenth Court of Appeals' resolution of this issue is logically and jurisprudentially much more persuasive, and would also serve the goal of efficiency by avoiding litigation of time-bar issues in two different fora: court and arbitral forum, not to mention trips to appellate courts. The court below should have been affirmed.
   
  
G.T. LEACH BUILDERS, LLC, ET AL., Petitioners,
v.
SAPPHIRE V.P., LP, Respondent.

No. 13-0497.
Supreme Court of Texas.

Argued November 5, 2014.
Opinion delivered: March 20, 2015. 

JUSTICE JEFFREY S. BOYD, delivered the opinion of the Court.

Texas law encourages parties to resolve disputes through arbitration,[1] but it will not force them to arbitrate unless they have agreed to that alternative.[2] If they have, or if they are equitably estopped from denying their assent to such an agreement, courts must honor the agreement by referring the disputes to arbitration unless the party demanding arbitration has waived that right by substantially participating in the litigation. We apply these principles in this case to determine whether a property developer must arbitrate its claims against several defendants involved in a construction project. The trial court denied all of the defendants' motions to compel arbitration, and the court of appeals affirmed. We hold that (1) the developer agreed to arbitrate its claims against the general contractor and the general contractor did not waive its right to demand arbitration; (2) the developer's argument that a contractual deadline bars the general contractor's demand for arbitration is itself a claim that must be arbitrated; (3) the developer did not agree in the general contract to arbitrate its claims against the other defendants; (4) the developer is not equitably estopped from denying any such agreement; and (5) the subcontracts do not contain an enforceable arbitration agreement. In short, we hold that the developer must arbitrate its claims against the general contractor but not its claims against the other defendants.

I.

Background

In July 2008, Hurricane Dolly caused extensive damage to a luxury condominium project that Sapphire V.P., L.P. was in the process of developing on South Padre Island. Sapphire filed suit against Adams Insurance Services, Inc., Arthur J. Gallagher Risk Management, and Tracy Williams (collectively, the Insurance Brokers), asserting claims for negligence and breach of contract. Sapphire alleged that, eight days before the hurricane hit, the Insurance Brokers allowed a builder's risk insurance policy to expire and be replaced by a permanent insurance policy even though construction of the project was not yet complete. Sapphire sought to recover millions of dollars for water damage, increased construction costs, delay costs, lost revenue, and other losses that the builder's risk policy allegedly covered or should have covered but the permanent policy did not.


Friday, March 13, 2015

Texas Supreme Court Denies Motion for Rehearing in case in which it found no waiver of right to arbitrate by litigation conduct and reversed Fort Worth Court of Appeals


Richmont Holdings, Inc. v. Superior Recharge System, L.L.C. No. 13-0907 (Tex. 2014) 

The Texas Supreme Court today (3/13/2015) denied a motion for rehearing by parties seeking to avoid arbitration in Richmont Holdings, Inc. v. Superior Recharge System. In that case, decided in a per curiam opinion last December, the Supremes again took a strong position in favor of arbitration with respect to litigation conduct sufficient to amount to a waiver of the right to compel arbitration. Concluding that the movants for arbitration had not substantially invoked the judicial process, the Court did not even reach the second prong of the Perry Homes v Cull test: prejudice to the party opposing arbitration. It reversed the Fort Worth Court of Appeals, which had found otherwise. 

Richmont Holdings, Inc. v. Superior Recharge System, L.L.C. No. 13-0907 (Tex. 2014)


RICHMONT HOLDINGS, INC., NUKOTE HOLDING, INC., NUKOTE INTERNATIONAL, INC., INKBRARY, L.L.C., SUPERIOR ACQUISITIONS L.L.C., JOHN P. ROCHON, SR., JOHN P. ROCHON, JR., KELLY KITTRELL, RUSSELL MACK, C & R SERVICES, INC. AND KENNETH R. SCHLAG, Petitioners,
v.
SUPERIOR RECHARGE SYSTEMS, L.L.C., AND JON BLAKE, Respondents.

No. 13-0907.

Supreme Court of Texas.

Opinion issued: December 19, 2014.

PER CURIAM.

In holding that petitioner waived arbitration by substantially invoking the judicial process, the court of appeals, ___ S.W.3d ___ (Tex. App.-Fort Worth 2013), misapplied our decision in Perry Homes v. Cull, 258 S.W.3d 580 (Tex. 2008). Accordingly, we reverse the court of appeals' judgment and remand the case to the trial court. TEX. GOV'T CODE § 22.225(b)(3), (c).

"We have said on many occasions that a party waives an arbitration clause by substantially invoking the judicial process to the other party's detriment or prejudice," but "[d]ue to the strong presumption against waiver of arbitration, this hurdle is a high one." Perry Homes, 258 S.W.3d at 589-90 (footnotes omitted). We have often determined that arbitration was not waived.[1]

"We have often determined that arbitration was not waived." Footnote 1 Collecting  prior no-waiver decisions
Footnote 1 in Richmont Holdings, Inc. v. Superior Recharge System, L.L.C.
No. 13-0907 (Tex. 2014) (collecting no-waiver cases) 

Whether a party has substantially invoked the judicial process depends on the totality of the circumstances; key factors include the reason for delay in moving to enforce arbitration, the amount of discovery conducted by the movant, and whether the movant sought disposition on the merits. Perry Homes, 258 S.W.3d at 590-93.

Richmont Holdings, Inc., through an affiliate, bought the assets of Superior Recharge Systems, L.L.C. The parties' Asset Purchase Agreement contained an arbitration provision. Superior Recharge's part-owner, Jon Blake, agreed to continue as general manager of the business for two years. The employment contract contained a covenant not to compete but not an arbitration clause. After six months, Blake's employment was terminated, allegedly for cause.

Superior Recharge and Blake (collectively "Blake") sued Richmont and several of its affiliates and principals (collectively "Richmont") in Denton County for fraud, breach of contract, a declaration that the covenant not to compete was unenforceable, and an injunction. Richmont sued Blake individually in Dallas County to enforce the covenant not to compete, invoking a forum selection clause in that agreement, and moved to transfer venue of the Denton County suit to Dallas County or Collin County. The Dallas County suit was abated, and the motion to transfer was never decided.

In the Denton County suit, Richmont does not appear to have sought discovery other than a request for disclosure. See TEX. R. CIV. P. 194.1 and 194.2. Richmont failed to respond to Blake's discovery requests and was sanctioned $5,000. No trial date appears to have been set. Nineteen months after being sued, Richmont moved to compel arbitration, asserting that Blake's claims arose out of the Asset Purchase Agreement and were therefore subject to arbitration. Blake did not dispute that assertion but argued that Richmont had waived arbitration by engaging in litigation. The trial court denied the motion to compel.

The court of appeals affirmed, but not on waiver, the only ground Blake raised. Rather, it held that Blake's claims were not covered by the arbitration agreement. 392 S.W.3d 174, 182-83 (Tex. App.-Fort Worth 2011) (mem. op.). On Richmont's petition for review in this Court, Blake conceded that the court of appeals had erred. Accordingly, we reversed, stating:

The court of appeals' conclusion that the arbitration provision in the asset purchase agreement has no application to Blake's lawsuit is contrary to the parties' contentions and has no support in the record. Moreover, the court's failure to recognize the arbitration agreement here is contrary to our precedent, which mandates enforcement of such an agreement absent proof of a defense. 392 S.W.3d 633, 635 (Tex. 2013) (per curiam).

On remand, the court of appeals held that Richmont had waived arbitration by suing Blake in Dallas County, moving to transfer venue of the Denton County suit, failing to respond to discovery requests, and delaying in moving to compel arbitration. ___ S.W.3d ___, ___ (Tex. App.-Fort Worth 2013).

Merely filing suit does not waive arbitration, even when the movant, as in this case, files a second, separate suit in another county based in part on a contract at issue in the first action. See In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006). Nor, we think, does moving to transfer venue. The motion does not address the merits of the case. Moreover, objections to improper venue must be made at the outset of the case. TEX. R. CIV. P. 86. Richmont engaged in only minimal discovery. For the most part, it refused to respond to Blake's discovery requests. Richmont argues that it delayed in moving to compel arbitration because, while it drafted the Asset Purchase Agreement and knew full well of the arbitration clause, it was very slow in recognizing that the clause could apply to Blake's claims. We think this explanation implausible; certainly, it does not justify the delay. But mere delay in moving to compel arbitration is not enough for waiver. In re Fleetwood Homes of Tex., L.P., 257 S.W.3d 692, 694 (Tex. 2008) (per curiam) (eight-month delay); In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex. 2006) (per curiam) (two-year delay); see also Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898-99 (Tex. 1995) (per curiam) ("A party does not waive a right to arbitration merely by delay; instead, the party urging waiver must establish that any delay resulted in prejudice."). The circumstances here, considered as a whole, do not approach a substantial invocation of the judicial process.

Having reached this conclusion, we need not consider whether Blake was prejudiced by the delay. Accordingly, we grant the petition for review and, without hearing oral argument, reverse the court of appeals' judgment and remand the case to the trial court. TEX. R. APP. P. 59.1.

[1] See Kennedy Hodges, L.L.P. v. Gobellan, 433 S.W.3d 542, 544-45 (Tex. 2014) (per curiam) (law firm did not waive right to arbitrate a fee dispute with former clients by litigating with a former associate); In re Fleetwood Homes of Tex., L.P., 257 S.W.3d 692, 694 (Tex. 2008) (per curiam) (defendant did not waive by "failing to pursue its arbitration demand for eight months while discussing a trial setting and allowing limited discovery"); In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 625-26 (Tex. 2008) (per curiam) (defendant did not waive arbitration by removing case to federal court and acceding to remand seven months later before demanding arbitration); In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex. 2007) (per curiam) (defendant did not waive arbitration by moving to set aside a default judgment, requesting a new trial, and waiting eight months to move to compel arbitration); In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006) (contractors did not waive arbitration by suing to preserve evidence and cross-claiming for indemnity in a separate suit, absent a showing that their actions detrimentally affected the defendant); In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763 (Tex. 2006) (per curiam) (defendants did not waive arbitration by litigating for two years, especially when the plaintiff initiated more discovery requests than he received); In re Serv. Corp. Int'l, 85 S.W.3d 171, 174-75 (Tex. 2002) (per curiam) (defendants did not waive arbitration by supporting plaintiffs' inclusion in a federal class action whose members were not subject to arbitration, and moving, inter alia, to dismiss in that action); In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex. 1998) (per curiam) (defendant did not waive arbitration by its delay and discovery requests, when the responses were insufficient to show prejudice); EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89-90 (Tex. 1996) (per curiam) (in the absence of a showing of prejudice, defendants did not waive arbitration by, e.g., requesting discovery and waiting ten months to ask for arbitration); Prudential Sec. Inc. v. Marshall, 909 S.W.2d 896, 898-99 (Tex. 1995) (per curiam) (defendants did not waive arbitration by moving to strike an intervention, seeking and resisting discovery, and failing to timely seek mandamus review).

   
OPINION OF THE COURT BELOW
(REVERSED)

RICHMONT HOLDINGS, INC. v. SUPERIOR RECHARGE SYSTEMS, LLC, Tex: Court of Appeals, 2nd Dist. 2013
RICHMONT HOLDINGS, INC., NUKOTE HOLDING, INC., NUKOTE INTERNATIONAL, INC., INKBRARY, LLC, SUPERIOR ACQUISITIONS LLC, JOHN P. ROCHON, SR., JOHN P. ROCHON, JR., KELLY KITTRELL, RUSSELL MACK, C & R SERVICES, INC., AND KENNETH R. SCHLAG, Appellants,
v.
SUPERIOR RECHARGE SYSTEMS, L.L.C. AND JON BLAKE, Appellees.

No. 02-10-00161-CV.
Court of Appeals of Texas, Second District, Fort Worth.

Delivered: August 22, 2013.
PANEL: LIVINGSTON, C.J.; DAUPHINOT and McCOY, JJ.

LIVINGSTON, C.J., concurs without opinion.

MEMORANDUM OPINION ON REMAND[1]

LEE ANN DAUPHINOT, Justice.

In this case on remand from the Supreme Court of Texas, Appellants Richmont Holdings, Inc.; Nukote Holding, Inc.; Nukote International, Inc.; Inkbrary, LLC; Superior Acquisitions LLC; John P. Rochon, Sr.; John P. Rochon, Jr.; Kelly Kittrell; Russell Mack; C & R Services, Inc.; and Kenneth R. Schlag (collectively the Richmont parties) appeal from the trial court's order denying their motion to compel arbitration of the claims brought against them by Appellees Jon Blake and Superior Recharge Systems, L.L.C. (collectively the Blake parties). In their sole issue on appeal, the Richmont parties argue that the Blake parties failed to demonstrate a waiver of the arbitration provision. Because we hold that the Richmont parties substantially invoked the judicial process to the prejudice of the Blake parties, we affirm.

Background

The Blake parties file this lawsuit

In June 2008, the Blake parties filed suit in Denton County against Richmont Holdings, Inc.; Nukote Holding, Inc.; Nukote International, Inc.; Inkbrary, LLC; Superior Acquisitions LLC; John P. Rochon, Sr.; John P. Rochon, Jr.; Kelly Kittrell; and Russell Mack. The Blake parties sought a declaratory judgment that a covenant not to compete—signed by Jon Blake in an employment agreement related to a transaction involving the sale of Superior Recharge to Superior Acquisitions—was unenforceable. Blake also sought injunctive relief.

The Richmont parties moved to transfer venue to Collin County. In an amended motion, they sought to transfer venue to Dallas County based upon a venue provision in Jon Blake's employment agreement. They argued alternatively that Collin County was the proper county for the suit. When the Blake parties added C & R Services and Kenneth Schlag as defendants, those defendants filed their own motion to transfer venue to Dallas, or, alternatively, Collin County.

On October 20, 2008, Superior Acquisition sued Jon Blake in Dallas County for breach of contract, breach of fiduciary duty, and civil theft. The suit was based on "Blake's failure to perform his duties under the terms of his employment contract, and his misappropriation of company funds." The Dallas County trial court abated that case.

The Richmont parties file a motion for continuance

The Blake parties filed a motion seeking to compel discovery and requesting discovery sanctions. The motion was set for a hearing on December 21, 2009. The Richmont parties filed a motion for continuance on December 18, 2009. The Richmont parties' attorney stated that he had suffered a medical emergency, had been ordered not to walk or put pressure on his foot, and was under the influence of "strong pain medication." No order on the motion appears in the record, but on January 6, 2010, the trial court signed an order noting that it had conducted the hearing on December 21. The order instructed the Richmont parties to respond without objection to each of the Blake parties' discovery requests and to deliver any documents sought by the Blake parties in discovery to their counsel by March 21, 2010. The trial court also ordered the Richmont parties to pay $5,550.50 in sanctions by that date.

The Blake parties file a motion to consolidate

In January 2010, the Blake parties filed a motion to consolidate their suit with one that had been filed by Toner Solutions Corporation in Denton County against Richmont Holdings; Inkbrary; Rochon, Sr.; Rochon, Jr.; Kittrell; Schlag; and others not involved in this suit. The motion asserted that Richmont Holdings was the parent company of all the entities involved in both suits and that both actions evolved out of Richmont Holdings' actions "to perpetrate a scheme to monopolize the market for remanufacture and sale of . . . printer cartilages [sic]."

The Richmont parties move to compel arbitration and to stay discovery

On January 27, 2010, the Richmont parties filed a motion to compel arbitration. They alleged that the suit arose out of the purchase of Superior Recharge's assets and that the asset purchase agreement contained a clause mandating arbitration of any dispute regarding the agreement. On March 15, 2010, they filed a motion asking the trial court to stay discovery until after the trial court had ruled on their motion to compel arbitration.

On March 19, 2010, in an original proceeding filed by the Richmont parties, this court stayed the trial court's January 6, 2010 order compelling discovery and stayed all other proceedings in the trial court in the same cause until further notice except for any proceedings relating to the hearing of or ruling upon the motion to compel arbitration. On the same date, the Blake parties filed a response to the motion to compel arbitration asserting that the Richmont parties had waived arbitration.

The trial court held a hearing on the motion to compel arbitration, and, on May 18, signed an order denying the motion to compel arbitration. The Richmont parties appealed. This court held that the Blake parties' pleadings dealt with the employment and non-compete agreement, which did not contain an arbitration provision.[2] On review, the Supreme Court of Texas held that the parties did have a valid arbitration agreement and remanded the case back to this court to consider the Richmont parties' waiver defense.[3]

Standard of Review

When reviewing a denial of a motion to compel arbitration, if the court's factual findings are in dispute, we review the court's denial of the motion to compel under a legal sufficiency or "no evidence" standard of review.[4] We defer to the trial court's factual determinations that are supported by evidence, but we review the trial court's legal determinations de novo.[5] Whether a party has waived an arbitration clause is a question of law for the court to decide based on the totality of the circumstances.[6]

Applicable Law: Waiver of Arbitration

Once a party seeking to compel arbitration has established the existence of an enforceable arbitration agreement and that the dispute falls within its scope, the burden shifts to the party opposing arbitration to raise an affirmative defense to the agreement's enforcement, such as waiver.[7] A party's waiver of the right to compel arbitration may be express, or it may be implied from a party's unequivocal conduct.[8] Whether express or implied, the waiver must be intentional.[9] A party impliedly waives an arbitration clause when the party (1) substantially invokes the judicial process (2) to the other party's detriment or prejudice.[10] The Supreme Court of Texas has held that parties who "conduct full discovery, file motions going to the merits, and seek arbitration only on the eve of trial" waive any right to enforce a contractual arbitration provision.[11] Whether actions that do not rise to that level of participation in the judicial process constitute waiver is decided on a case-by-case basis.[12]

To determine whether a party has impliedly waived arbitration, courts should look to the totality of the circumstances. In conducting this analysis, the Supreme Court of Texas has considered factors such as:

• when the movant knew of the arbitration clause;
• how much discovery has been conducted;
• who initiated it;
• whether it related to the merits rather than arbitrability or standing;
• how much of it would be useful in arbitration; and
• whether the movant sought judgment on the merits[13]
Prejudice in the context of waiver of arbitration agreements refers to "inherent unfairness in terms of delay, expense, or damage to a party's legal position that occurs when the party's opponent forces it to litigate an issue and later seeks to arbitrate that same issue."[14] That is, "a party should not be allowed purposefully and unjustifiably to manipulate the exercise of its arbitral rights simply to gain an unfair tactical advantage over the opposing party."[15]

This court has held that three factors are particularly relevant in assessing prejudice. First, the court should consider the time and expense incurred due to the moving party's participation in judicial proceedings.[16] Second, the court should consider the failure to assert the right to arbitration. A demand for arbitration puts the other party on notice that arbitration is forthcoming and gives that party the opportunity to avoid compromising its position with regard to arbitrable and nonarbitrable claims.[17] Third, if discovery has been conducted, the court should consider whether that discovery related only to a party's nonarbitrable claims or all of the party's claims, including the arbitrable claims. Pretrial discovery activity relating to a party's arbitrable claims can result in prejudice from a party's use of judicial processes to gain access to information that would not have been discoverable in arbitration.[18] Providing discovery and getting discovery do not necessarily have the same prejudicial effect; "a party who requests lots of discovery is not prejudiced by getting it and taking it to arbitration in the same way that a party who produces lots of discovery outside the stricter discovery limits in arbitration."[19]

Analysis

Substantial Invocation of the Judicial Process

The Blake parties asserted the following acts of the Richmont parties to demonstrate that those parties waived their right to demand arbitration.

• The Richmont parties had filed suit in Dallas County on claims that involved the same transaction as the one which the Blake parties based their claims against them;
• The Richmont parties had not produced any documents in response to the Blake parties' requests for production;
• A hearing on Blake's motion for sanctions had originally been set for September 2009 but was rescheduled for a date in October;
• The Richmont parties counsel asked to reschedule the hearing due to illness, and the hearing was rescheduled for November 13, 2009;
• The attorney for the Richmont parties rescheduled due to illness a meeting at which the attorneys for both sides were to review discovery requests and to which the Richmont parties' attorney was supposed to bring production documents;
• Counsel for the parties met on November 9, 2009, and counsel for the Richmont parties agreed to withdraw most of his objections to the Blake parties' discovery requests and to execute a Rule 11 agreement to submit discovery, and, in return, the Blake parties' counsel agreed to cancel the hearing on the motion for sanctions;
• The Richmont parties' attorney did not sign the Rule 11 agreement, however, and therefore the Blake parties reset the motion for sanctions hearing for December 21;
• The Richmont parties' filed a motion for continuance on December 18 due to illness, but the trial court held the hearing and entered the order compelling discovery and granting sanctions against the Richmont parties; and
• The Richmont parties drafted the arbitration clause and were therefore aware of it from the onset of the litigation. 

To show that they had been prejudiced by the Richmont parties' failure to invoke their right to arbitration, the Blake parties pointed to the following:

• The Richmont parties tendered a request for disclosure, and responding to the request took the Blake parties four hours;
• The Blake parties incurred in excess of $50,000 in attorney's fees; although the Blake parties did not segregate all of the fees to show which fees were due to the Richmont parties' invocation of the judicial process and which were self-inflicted,[20] they did allege that at least $5,000 of the fees were incurred in defending the Dallas litigation; and
• The Richmont parties sought to delay discovery, forcing the Blake parties to file motions, attend hearings, and seek sanctions to obtain the discovery.
The Richmont parties filed a response stating, among other things, that the Dallas County suit "dealt with employment issues, such as civil theft, which is not a part of this lawsuit," and that the suit did not involve all of the same parties. They asserted that they had not conducted discovery related to the merits and therefore had not gained any information that they would not have been entitled to in arbitration, and the Blake parties would not be prejudiced by arbitration. They also stated that they moved for arbitration after the Blake parties amended their petition to add additional claims and parties and broadened the depth and scope of the lawsuit and then moved to consolidate the suit with a completely different case with different parties and claims and concerning a different contract.

The Richmont parties also asserted that the Blake parties contributed to the delay because at the October 2, 2008 hearing on the motion to transfer venue, the trial court stated that it would reset the hearing so that the Blake parties could replead, but the Blake parties did not replead until June 18, 2009. They stated that the Blake parties took over two and a half months to file a response to the motion to compel arbitration and another month and half to file its supplemental brief on the response.

The Blake parties demonstrated that the Richmont parties' delay in demanding arbitration led them to incur attorney's fees in making discovery requests, filing motions to compel discovery, and setting hearings on the motions, and attending hearings. We hold that the Blake parties met their burden to demonstrate that they suffered prejudice by the Richmont parties' substantial invocation of the judicial process.[21]

Schlag and C & R Services argue in the alternative that even if the other Richmont parties waived arbitration, they did not. They assert that they were not brought into the lawsuit until August 7, 2009 and did not file their motion to transfer venue until August 28, 2009. But most of the allegations made against the other Richmont parties applied equally to Schlag and C & R Services. They also filed a motion to transfer venue, and they also resisted participating in discovery, thereby forcing the Blake parties to file motions and set hearings and incur attorney's fees. Accordingly, we overrule the Richmont parties' issue.

Conclusion

Having overruled the Richmont parties' sole issue, we affirm the trial court's order denying the motion to compel arbitration. S.W.2d 746, 748 (Tex. Civ. App.-Houston [14th Dist.] 1979, no writ) (holding that the appellee's long delay in demanding arbitration, in conjunction with the use of pre-trial discovery not available in arbitration, manifested an intent on the part of the appellee to waive its right to arbitration).

[1] See Tex. R. App. P. 47.4.

[2] Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C., 392 S.W.3d 174, 183 (Tex. App.-Fort Worth 2011).

[3] Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C., 392 S.W.3d 633, 633-34 (Tex. 2013).

[4] J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 233 (Tex. 2003).

[5] Rachal v. Reitz, No. 11-0708, 2013 WL 1859249, at *2 (Tex. May 3, 2013); In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009).

[6] Perry Homes v. Cull, 258 S.W.3d 580, 601 (Tex. 2008); In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 625 (Tex. 2008) (orig. proceeding).

[7] Ellis v. Schlimmer, 337 S.W.3d 860, 862 (Tex. 2011); In re Fleetwood Homes of Tex., L.P., 257 S.W.3d 692, 695 (Tex. 2008) (orig. proceeding) (directing the trial court to compel arbitration when the party resisting arbitration failed to show waiver).

[8] Perry Homes, 258 S.W.3d at 593.

[9] In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex. 2007) (orig. proceeding).

[10] Perry Homes, 258 S.W.3d at 589-90.

[11] In re Citigroup Global Mkts., 258 S.W.3d at 625 (quoting In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 764 (Tex. 2006) (orig. proceeding)).

[12] Perry Homes, 258 S.W.3d at 591.

[13] Id. at 591-92.

[14] Id. at 597 (quoting Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir. 2004)).

[15] Id. (quoting In re Tyco Int'l Ltd. Sec. Litig., 422 F.3d 41, 46 n.5 (1st Cir. 2005)).

[16] Haddock v. Quinn, 287 S.W.3d 158, 181 (Tex. App.-Fort Worth 2009, pet. denied).

[17] Id.

[18] In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex. 1998) (orig. proceeding); Haddock, 287 S.W.3d at 181.

[19] Perry Homes, 258 S.W.3d at 600 (emphasis omitted).

[20] See In re Vesta Ins. Group, 192 S.W.3d at 763 (stating that the opposing party's high costs and attorney's fees did not show prejudice because the pre-trial costs were "largely self-inflicted" from his sending discovery requests and amending his petition).

[21] CropMark Direct, LLC v. Urbanczyk, 377 S.W.3d 761, 764-66 (Tex. App.-Amarillo 2012, pet. denied) (holding that CropMark had waived its right to arbitration when it requested a jury trial, delayed seeking arbitration, participated in discovery that went to the merits rather than to assist in the determination of whether the claims were subject to arbitration, and used discovery mechanisms not available through the arbitration process); Spain v. Houston Oilers, Inc., 593




Friday, March 6, 2015

FAA preemption & MFA reverse preemption: Is CPRC §74.451, which requires attorney signature and waiver warning in arbitration agreement with health care provider, preempted by the Federal Arbitration Act? -- Texas Supreme Court answers: The Fredericksburg Care Company LP v Perez (Tex Mar. 6, 2015)


ARBITRABILITY OF HEALTH CARE LIABILITY CLAIMS IN TEXAS: FAA PREEMPTION AND MFA REVERSE PREEMPTION IN THE MED-MAL CONTEXT 

In an opinion released today, the Texas Supreme Court holds that the federal law that accords states the right to regulate the business of insurance (McCarran-Ferguson Act) does not furnish an exception to the general principle that the FAA (Federal Arbitration Act) preempts the TAA (Texas Arbitration Act) and other state arbitration laws when the two conflict, where the conflict between the federal and state arbitration laws involved the latter’s attorney-signature and conspicuous-waiver-language requirement for an arbitration agreement between a health care provider and a patient. The FAA has no comparable requirement. 

THE FREDERICKSBURG CARE COMPANY, L.P. v. JUANITA PEREZ, VIRGINIA GARCIA, PAUL ZAPATA, AND SYLVIA SANCHEZ, INDIVIDUALLY AND AS ALL HEIRS OF ELISA ZAPATA, DECEASED, No. 13-0573 (Tex. March 6, 2015); from Bexar County; 4th Court of Appeals District (04-13-00110-CV, 406 S.W.3d 711, 06-26-13).

The Texas high court for civil matters concludes that the Texas law at issue (Section 74.451 of the Texas Civil Practice and Remedies Code), does not squarely fall within the scope of a state law enacted to regulate the business of insurance. The Court accordingly also concludes that the trial court should have compelled arbitration, rather than denying the motion to compel arbitration based on noncompliance with Section 74.451, which – based on the Supreme Court’s resolution of the interlocutory appeal – is preempted by the FAA and could therefore not be invoked to good effect by the party resisting arbitration to keep the dispute in court. 


Unsurprisingly, in light of the extensive history of disputes over arbitration ultimately resolved by the Texas Supreme Court, its decision in this case vindicates the health care provider's preference for arbitration over litigation.

The bottom line: The wrongful death plaintiffs cannot get a jury trial even though the arbitration agreement upon which the defendant relies to remove the case from court to arbitration was defective and unenforceable under Texas law. What's interesting here is that the interests of the health care provider, a nursing home in this case, are being vindicated based on federal law (the Federal Arbitration Act, which has less exacting requirements for agreements to arbitrate, and does not even require a signature), rather than home-made tort reform laws. Indeed, the Texas law at issue in this case provides greater protection for the patients and their families against loss of the constitutional right to trial by jury than federal law. 

The plaintiff's attorney argued -- unsuccessfully - that the required warnings against waiver of jury trial by agreeing to arbitrate and the requirement for the signature of an attorney for the patient on the arbitration agreement were an integral part of tort reform, and were a means to protect patients in exchange for the protections providers of health care received from the Texas Legislature through tort reform. The nexus to insurance (to bring the issue within the MFA's exception to federal preemption) was, in the plaintiffs' view, the express intent and purpose of tort reform to curb costs of and consequences of med-mal litigation and bring down malpractice insurance rates. 

The section providing for conspicuous warning language in arbitration agreements with health care providers is actually located within Chapter 74 of the Civil Practice and Remedies Code, which is titled "Medical Liability" and forms part of  TITLE 4. LIABILITY IN TORT, rather than having been embedded in the General Arbitration Act. (Chapter 171)(TAA or TGAA, short for Texas General Arbitration Act). 
   
But that did not help plaintiff's counsel's efforts to preserve his clients' right to a jury trial either, as the justices focused narrowly on regulation of the business of insurance as involving the relationship between policyholder and insurer, rather than patient and health care provider, insured or otherwise, or the insurance dimension of the health care sector generally that figures so prominently in tort reform. By finding that Section 74.451 didn't involve regulation of the business of insurance, the Court neutralized the reverse-preemption effect of the MFA that would otherwise have saved the Texas-specific requirements for arbitration agreements in the medical services context.   


 PICS FROM ORAL ARGUMENT  

Chief Justice Hecht calling the case for oral argument 
Justice Green at oral argument in health care liability arbitration case (video capture)
Justice Green listening skeptically to the arguments of the plaintiffs' lawyer;
he later wrote the opinion in favor of the nursing home, and arbitration
THE STATUTORY PROVISION GOVERNING ARBITRATION AGREEMENTS 
IN MEDICAL CONTRACTS 

Citation: TEX. CIV. PRAC. & REM. CODE §74.451 (“Section 74.451”) (prohibiting healthcare providers from entering into agreements with patients to arbitrate health care liability claims unless the agreement contains the appropriate notice in 10-point boldface type and requires that the agreement be signed by an attorney).   

The Texas law at issue requires warning language regarding waiver of rights and attorney signature
for arbitration agreements between patient and health care provider to be valid and enforceable.

Justice Green wrote the opinion sending the med-mal plaintiffs to arbitration

THE OPINION REVERSING THE SAN ANTONIO COURT OF APPEALS
WAS AUTHORED BY JUSTICE GREEN 


THE FREDERICKSBURG CARE COMPANY, L.P. v. Perez ; from Bexar County; 4th Court of Appeals District (04-13-00111-CV, 406 SW3d 313, 06-26-13)
First two pages of Tex. Sup. Ct. Opinion (click image to enlarge)
Link to full opinion here.

THE TEXAS SUPREME COURT'S CONCLUSION

Section 74.451 of the Texas Civil Practice and Remedies Code was not a law enacted by the
Texas Legislature for the purpose of regulating the business of insurance. It simply applies to
agreements to arbitrate health care liability claims between patients and health care providers.
Accordingly, the MFA does not exempt section 74.451 from preemption by the FAA, and the trial
court should have granted Fredericksburg’s motion to compel arbitration. We reverse the court of
appeals’ judgment and remand this case to the trial court to proceed in a manner consistent with this opinion.


The Fredericksburg Care Company LP v. Perez No. 13-0573 (Tex. Mar. 6, 2015)

THE COMPANION CASES IN THE SUPREME COURT
(resolved with per curiam opinions issued the same day) 

THE WILLIAMSBURG CARE COMPANY, L.P. v. JESUSA ACOSTA et al, No. 13-0576; from Bexar County; 4th Court of Appeals District (04-13-00110-CV, 406 SW3d 711, 06-26-13); stay order issued August 9, 2013, lifted

THE FREDERICKSBURG CARE COMPANY, L.P. v. BRENDA LIRA, AS REPRESENTATIVE OF THE ESTATE OF GUADALUPE QUESADA, DECEASED; 13-0577, from Bexar County; 4th Court of Appeals District (04-13-00112-CV, 407 SW3d 810, 06-26-13) stay order issued August 9, 2013, lifted.
Pursuant to Texas Rule of Appellate Procedure 59.1, after granting the petition for review and without hearing oral argument, the Court reverses the court of appeals' judgment and remands the case to the trial court.

TEXAS SUPREME COURT PER CURIM OPINION IN COMPANION CASE

IN THE SUPREME COURT OF TEXAS
------------
NO. 13-0576
------------
THE WILLIAMSBURG CARE COMPANY, L.P., PETITIONER,
v.
JESUSA ACOSTA, ET AL., RESPONDENTS
----------------------------------------------------
ON PETITION FOR REVIEW FROM THE
COURT OF APPEALS FOR THE FOURTH DISTRICT OF TEXAS

----------------------------------------------------
PER CURIAM

The outcome of this case is controlled by our opinion in Fredericksburg Care Co. v. Perez,
__ S.W.3d. __ (Tex. 2015). Both cases, along with a third case styled Fredericksburg Care Co. v.
Lira, __ S.W.3d. __ (Tex. 2015) (per curiam), involve the question of whether a federal law, the
McCarran-Ferguson Act (MFA), 15 U.S.C. §§ 1011–1015, exempts Texas Civil Practice and
Remedies Code section 74.451 from being preempted by the Federal Arbitration Act, 9 U.S.C.
§§ 1–16.

The court of appeals consolidated this case with Perez and Lira for oral argument, and
issued identical opinions (except for changing the identities of the parties) holding that the MFA
exemption from preemption applied to section 74.451. 406 S.W.3d 711, 723 (Tex. App.—San
Antonio 2013). We hold today in Perez that section 74.451 was not a law enacted for the purpose
of regulating the business of insurance and thus does not qualify for the MFA exemption from
preemption. Perez, __ S.W.3d at __. The trial court should have granted the motion to compel
arbitration. Id.

Accordingly, we grant the petition for review in this case, and without hearing oral argument,
TEX. R. APP. P. 59.1, we reverse the court of appeals’ judgment and remand this case to the trial
court to proceed in a manner consistent with our opinion in Perez, __ S.W.3d __.

OPINION DELIVERED: March 6, 2015

THE ISSUE BEFORE THE SUPREME COURT 
ATTRACTED TWO AMICUS CURIAE BRIEFS

Image of Docket Sheet in The Fredericksburg Care Company LP v Perez No. 13-0573 (Texas Supreme Court case on arbitration of med-mal claims)
Docket Sheet: The Fredericksburg Care Company LP v Perez No. 13-0573 

TEXT OF THE TEXAS STATUTE FOUND PREEMPTED BY THE FAA

SUBCHAPTER J. ARBITRATION AGREEMENTS  [warning language shown in red color]

Sec. 74.451.  ARBITRATION AGREEMENTS.  

(a)  No physician, professional association of physicians, or other health care provider shall request or require a patient or prospective patient to execute an agreement to arbitrate a health care liability claim unless the form of agreement delivered to the patient contains a written notice in 10-point boldface type clearly and conspicuously stating:
UNDER TEXAS LAW, THIS AGREEMENT IS INVALID AND OF NO LEGAL EFFECT UNLESS IT IS ALSO SIGNED BY AN ATTORNEY OF YOUR OWN CHOOSING. THIS AGREEMENT CONTAINS A WAIVER OF IMPORTANT LEGAL RIGHTS, INCLUDING YOUR RIGHT TO A JURY. YOU SHOULD NOT SIGN THIS AGREEMENT WITHOUT FIRST CONSULTING WITH AN ATTORNEY.
(b)  A violation of this section by a physician or professional association of physicians constitutes a violation of Subtitle B, Title 3, Occupations Code, and shall be subject to the enforcement provisions and sanctions contained in that subtitle.
(c)  A violation of this section by a health care provider other than a physician shall constitute a false, misleading, or deceptive act or practice in the conduct of trade or commerce within the meaning of Section 17.46 of the Deceptive Trade Practices-Consumer Protection Act (Subchapter E, Chapter 17, Business & Commerce Code), and shall be subject to an enforcement action by the consumer protection division under that act and subject to the penalties and remedies contained in Section 17.47, Business & Commerce Code, notwithstanding Section 74.004 or any other law.
(d)  Notwithstanding any other provision of this section, a person who is found to be in violation of this section for the first time shall be subject only to injunctive relief or other appropriate order requiring the person to cease and desist from such violation, and not to any other penalty or sanction.

Added by Acts 2003, 78th Leg., ch. 204, Sec. 10.01, eff. Sept. 1, 2003.

THE CASES IN THE SAN ANTONIO COURT OF APPEALS 

The opinion of the court below was written by Justice Rebeca C. Martinez, who was elected to the Fourth Court of Appeals in 2012. Also on the panel were Chief Justice Stone, a fellow Democrat who has since returned to private practice, and Karen Angelini, a Republican first appointed to the Fourth Court of Appeals in 1997 and a former president of the San Antonio Bar Association.

Click hyperlinked case style below to see opinion on Google Scholar 
Three cases involving the same issue were decided by the Fourth Court of Appeals on June 26, 2013. Fredericksburg Care Co. L.P. v. Perez, 406 S.W.3d 313 (Tex. App.—San Antonio 2013); Williamsburg Care Co. L.P. v. Acosta, 406 S.W.3d 711 (Tex.App.—San Antonio 2013); and Fredericksburg Care Co. L.P. v. Lira, 407 S.W.3d 810 (Tex. App.—San Antonio 2013).

San Antonio CoA
(Justice Center) 

Justice Angelini subsequently issued an abatement order in a fourth case, pending the Supreme Court's resolution of the preemption/reverse-preemption issue. See WILLIAMSBURG CARE COMPANY L.P. d/b/a Princeton Place Rehabilitation and Healthcare, Appellant v. Sylvia SOTO, Individually and as Representative of the Estate of Narcisa Dimas, Deceased, Ruby Buentello, Individually and as Representative of the Estate of Manuel Riojas Munoz, Deceased, and Adela Barboza, Individually, Appellees. No. 04-13-00822-CV (Tex.App. - San Antonio, Mar. 4, 2014).




THE TEXARKANA COURT OF APPEALS “PREEMPTED” THE SUPREME COURT, THOUGH NOT WITH PRECEDENT-SETTING EFFECT FOR ALL OF TEXAS

While the Texas Supreme Court was still mulling over the issue of FAA preemption and MFA reverse preemption, the Sixth Court of Appeals in Texarkana did so likewise, in a factually similar case. Although it was asked to abate that pending appeal, pending the Supreme Court’s forthcoming resolution of the matter (as the Fourth Court of Appeals had done in subsequent appeal involving the same issue), the Sixth CoA  overruled the emergency motion for a stay, and beat the Supreme Court in handing down a decision on the merits on the last day of 2014.  

See Villas of Mount Pleasant LLC v King, No. 06-14-00045-CV (Tex.App. - Texarkana Dec. 31, 2014)(text of opinion by Justice Jack Carter pasted below) 
   No petition for review was filed. Nor would it have been ready to be resolved within less than three month, together with the multiple petitions for review from the San Antonio Court of Appeals, which had been pending much longer.   
  

THE VILLAS OF MOUNT PLEASANT, LLC, D/B/A GREENHILL VILLAS, F/D/B/A VILLAS OF MOUNT PLEASANT, MT. PLEASANT OPERATORS, LLC, AND LLOYD DOUGLAS, Appellants,
v.
KYLE KING, INDIVIDUALLY, AS ADMINISTRATOR OF THE ESTATE OF MARILOU WHATLEY KING, DECEASED, AND ON BEHALF OF THE WRONGFUL DEATH BENEFICIARIES OF MARILOU WHATLEY KING, Appellee.

No. 06-14-00045-CV.
Court of Appeals of Texas, Sixth District, Texarkana.
Submitted: September 24, 2014.
Decided: December 31, 2014. 

Before Morriss, C.J., Carter and Moseley, JJ.

OPINION

Opinion by Justice JACK CARTER.

Kyle King admitted his mother, Marilou Whatley King (Whatley), to The Villas of Mount Pleasant, LLC, d/b/a Greenhill Villas (the Villas) nursing facility in Mount Pleasant, Texas. Acting as Whatley's agent, King signed an admission agreement containing an arbitration clause that purported to require the parties to arbitrate any controversy arising from the services provided by the Villas to Whatley. Whatley died, and King sued the Villas alleging that her death was caused by its failure to render proper nursing home care and to protect his mother from abuse. Under Section 74.451 of the Texas Civil Practice and Remedies Code, the arbitration agreement, to be enforceable, must contain a conspicuously placed, written notice stating that the agreement is invalidunless it is also signed by an attorney chosen by and representing the patient. TEX. CIVIL PRAC. & REM. CODE ANN. § 74.451 (West 2011). The agreement signed by King on Whatley's behalf contained no such notice, and it was not signed by an attorney acting on Whatley's behalf. The trial court found that the arbitration agreement was not enforceable.
The first issue we must resolve is whether the Federal Arbitration Act (the FAA) preempts Section 74.451, thereby rendering it inapplicable to this case. If the FAA does preempt Section 74.451, then we must decide whether the McCarran-Ferguson Act (the MFA) reverse preempts the FAA, thereby negating the FAA's preemptive effect and restoring Section 74.451's applicability to Whatley's agreement with the Villas.

I. Texas Law on Arbitration Agreements Between Patients and Health Care Providers

Section 74.451 of the Texas Civil Practice and Remedies Code prohibits health care providers from requiring or even requesting that a patient execute an agreement to arbitrate a health care liability claim unless such agreement includes a clear, conspicuous, written notice printed in ten-point, boldface type and stating,
UNDER TEXAS LAW, THIS AGREEMENT IS INVALID AND OF NO LEGAL EFFECT UNLESS IT IS ALSO SIGNED BY AN ATTORNEY OF YOUR OWN CHOOSING. THIS AGREEMENT CONTAINS A WAIVER OF IMPORTANT LEGAL RIGHTS, INCLUDING YOUR RIGHT TO A JURY. YOU SHOULD NOT SIGN THIS AGREEMENT WITHOUT FIRST CONSULTING WITH AN ATTORNEY.
TEX. CIV. PRAC. & REM. CODE ANN. § 74.451(a). No such provision was included in the agreement at issue in this case.

II. Preemption of Texas Law by the FAA

The Villas contends that the FAA preempts Section 74.451 and that, consequently, the FAA governs the enforceability of the arbitration agreement signed by King on Whatley's behalf. The United States Supreme Court has held that the FAA "extends to any contract affecting commerce, as far as the Commerce Clause of the United States Constitution will reach." In re L & L Kempwood Assocs., 9 S.W.3d 125, 127 (Tex. 1999)(citing Allied-Bruce Terminix Co. v. Dobson, 513 U.S. 265, 268 (1995)). Stated differently, if an arbitration agreement relates to a transaction involving interstate commerce, then the FAA preempts state law and governs the enforceability of that arbitration agreement. If, on the other hand, the arbitration agreement does not relate to a transaction involving interstate commerce, then state law governs enforceability. The Texas Supreme Court has held that the payment of federal Medicare or Medicaid funds to a Texas health care provider as reimbursement for health care services involves interstate commerce to a sufficient degree to render the transaction between the Texas health care provider and its patient a transaction affecting commerce. In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005). Consequently, an arbitration agreement between a Texas health care provider and its patient under the above scenario relates to a transaction affecting interstate commerce, and the enforceability of that arbitration agreement is governed by the FAA. Id. Here, the Villas participates in the Medicare and Medicaid programs and is obligated to meet certain minimum health and safety standards established by the Department of Health and Human Services. Further, Whatley received monthly Medicare benefits that were used to partially defray the expenses arising from her stay at the Villas. Following the precedent of the Texas Supreme Court and under the facts and circumstances of this case, we hold that the FAA preempts Section 74.451 of the Texas Civil Practice and Remedies Code. See id.The remaining question, then, is whether the reverse preemption mechanism contained in the MFA applies under the facts and circumstances of this case.

III. The MFA and Reverse Preemption

The MFA states, in pertinent part, "No Act of Congress shall be construed to invalidate, impair, or supersede any law enacted by any State for the purpose of regulating the business of insurance . . . unless such Act specifically relates to the business of insurance." 15 U.S.C. § 1012(b). "The McCarran-Ferguson Act (MFA) provides an exception to . . . preemption if the conflicting state law was enacted `for the purpose of regulating the business of insurance.'" Fredericksburg Care Co., L.P. v. Perez, 406 S.W.3d 313, 318 (Tex. App.-San Antonio 2013, pet. granted) (quoting 15 U.S.C. § 1012(b)). Three conditions must be satisfied to invoke the MFA's preemption exception: (1) the federal statute at issue—here, the FAA—must not "specifically relate[] to the business of insurance," (2) the state statute at issue—here Section 74.451 of the Texas Civil Practice and Remedies Code—must have been "enacted . . . for the purpose of regulating the business of insurance," and (3) application of the federal statute must "invalidate, impair, or supersede" the state statute. 15 U.S.C. § 1012(b); Perez, 406 S.W.3d at 318 (citing United States Dep't of Treasury v. Fabe, 508 U.S. 491, 500-01 (1993)Munich Am. Reinsurance Co. v. Crawford, 141 F.3d 585, 590 (5th Cir. 1998)). The first and third conditions are unquestionably met in the case; the issue we must decide is whether Section 74.451 was enacted for the purpose of regulating the business of insurance.

The San Antonio Court of Appeals recently addressed this issue in Perez, where several former patients sued a nursing home alleging negligence and gross negligence. After carefully analyzing the issues related to reverse preemption and the MFA, the San Antonio Court found that "section 74.451 is a law `enacted for the purpose of regulating the business of insurance' within the meaning of the first clause of section 1012(b) of the MFA and is, thus, exempted from preemption by the FAA."Perez, 406 S.W.3d at 325-26 (quoting 15 U.S.C. § 1012(b)).[1] In reaching this decision, the San Antonio Court relied heavily on In re Kepka, 178 S.W.3d 279 (Tex. App.-Houston [1st Dist.] 2005, orig. proceeding), overruled in part on other grounds byLabatt Food Serv., L.P., 279 S.W.3d 640 (Tex. 2009).[2] Kepka was the first case to address the interplay of Section 74.451, the FAA, and the MFA, albeit in the context of Section 74.451's predecessor, Article 4590i, Section 15.01 of the Texas Medical Liability Insurance Improvement Act.[3]

In analyzing Article 4590i, the Kepka court took note of the findings and purposes underlying its enactment and found,
It is clear . . . that the purpose of the entire statute — even those substantive provisions that do not expressly mention insurance — was to decrease the costs of health-care liability claims through modifications of the insurance, tort, and medical-practice systems, in order to make insurance reasonably affordable so that health-care providers could have protection against potential liability and so that citizens could have more affordable and accessible health care.
Kepka, 178 S.W.3d at 291. The Kepka court concluded that Article 4590i, including Section 15.01, was enacted to regulate the business of insurance. Id. at 289. Consequently, the Kepka court held that the MFA's exception was triggered, reversing the FAA's preemptive effect on Texas' arbitration notice requirements. Id.

A. Review of Entire Statutory Scheme or Individual Parts?

The Villas criticizes the reasoning of Kepka and Perez, labeling it an "all or nothing approach." Indeed, the Kepka and Perez opinions considered the purpose of the TMLA—or its predecessor in Kepka—in its entirety and found that the purpose behind the legislation, as a whole, was to address issues of medical malpractice and the perception that professional liability insurance was either too expensive or entirely unavailable. The Villas contends that the better approach is to analyze Section 74.451, which limits the creation of arbitration agreements between health care providers and patients, in isolation.
The TMLA was unquestionably enacted as a part of the tort reform movement in Texas, and it was clearly intended to affect liability insurance rates paid by health care providers. However, it is also true that the particular subsection with which we are confronted does not specifically address the business of insurance; rather, Section 74.451 is a significant encumbrance on the rights of certain parties—health care providers and their patients—to enter into arbitration agreements. In fact, it is reasonable to conclude that Section 74.451 favors litigation—generally thought to increase insurance premiums—over arbitration. The conundrum, obviously, is determining whether we should look specifically at Section 74.451 or to the larger body of legislation of which it is a subpart in determining whether the statute was enacted for the purpose of regulating the business of insurance.

In Labor Life Insurance Co. v. Pireno, 458 U.S. 119 (1982), a chiropractor sued an insurance company alleging that the company was using a peer review committee to examine whether his treatment was reasonable and necessary. The allegation was that the peer review system violated the Sherman Act and was a conspiracy to eliminate competitive pricing. Id. The issue confronting the Pireno court was whether the MFA exempted the practice of using peer review committees from antitrust scrutiny. If the MFA's exception was to apply, then the peer review practice would have to be deemed a part of the "business of insurance." The United States Supreme Court found that the use of peer review committees was not part of the business of insurance and that the MFA's exception did not apply. Pireno discussed three criteria, first applied in Group Life & Health Insurance Co. v. Royal Drug Co., 440 U.S. 205, 211-12 (1979), relevant in determining whether a particular practice by an insurance company is part of the business of insurance: "(1) the practice has the effect of transferring or spreading a policyholder's risk, (2) the practice is an integral part of the policy relationship between the insurer and the insured; and (3) the practice is limited to entities within the insurance industry." Pireno, 458 U.S. at 129 (citing Royal Drug Co., 440 U.S. 205, 211-12 (1979)).

In United States Department of Treasury v. Fabe, 508 U.S. 491 (1993), an insurance company in Ohio was declared insolvent. A liquidator was appointed, and the United States filed claims in excess of $10,700,000.00. Under federal law, the United States' claims were entitled to first priority, but under an Ohio statute, the insurance company's policyholders were given first priority over the United States. The liquidator argued that the Ohio law was an act regulating the business of insurance and that the MFA's exception applied, meaning Ohio law governed the issue of priorities. Id. at 497. The United States Department of the Treasury argued that the liquidation of an insolvent insurance company was not part of the business of insurance and that, as a result, the MFA had no effect on the Sherman Act's preemption of Ohio state law.

The United States Supreme Court applied the Pireno test to the facts of Fabe and concluded,
There can be no doubt that the actual performance of an insurance contract falls within the "business of insurance," as we understood that phrase in Pireno and Royal Drug. To hold otherwise would be mere formalism. The Court's statement in Pireno that the "transfer of risk from insured to insurer is effected by means of the contract between the parties . . . and . . . is complete at the time that the contract is entered" presumes that the insurance contract in fact will be enforced. Without performance of the terms of the insurance policy, there is no risk transfer at all. Moreover, performance of an insurance contract also satisfies the remaining prongs of the Pireno test: It is central to the policy relationship between insurer and insured and is confined entirely to entities within the insurance industry. The Ohio priority statute is designed to carry out the enforcement of insurance contracts by ensuring the payment of policyholders' claims despite the insurance company's intervening bankruptcy. Because it is integrally related to the performance of insurance contracts after bankruptcy, Ohio's law is one "enacted by any State for the purpose of regulating the business of insurance."
Fabe, 508 U.S. at 503-04 (quoting Pireno, 458 U.S. at 130; 15 U.S.C. § 1012(b)). However, the Fabe court limited its finding on the applicability of the MFA to the Ohio priority statute's regulation of policyholders when it stated, "The Ohio statute is enacted `for the purpose of regulating the business of insurance' to the extent that it serves to ensure that, if possible, policyholders ultimately will receive payment on their claims." Id.at 506. The court drew a sharp distinction between the interests of policyholders, on the one hand, and those of general creditors who were not policyholders, on the other. The Court stated, "To the extent that it is designated to further the interests of other creditors, however, it is not a law enacted for the purpose of regulating the business of insurance." Id. at 508. It is this language from Fabe concerning the interests of non-policyholder creditors that we find critical to the case at hand.

According to the Villas, Fabe requires that we analyze individual sections or subsections that are clearly part of a larger statutory framework in a vacuum. In other words, the Villas posits that, under Fabe, we must examine Section 74.451 in isolation, without reference to or consideration of the legislative intent behind the TMLA, the larger statutory framework of which Section 74.451 is a part. The Villas points to Fabe's limited holding—"to the extent [the Ohio statute at issue] . . . regulates policyholders, [it] is a law enacted for the purpose of regulating the business of insurance." Id. at 508. However, "[t]o the extent [the statute] is designed to further the interests of other creditors . . . it is not a law enacted for the purpose of regulating the business of insurance." Id. By analogy, the Villas argues that, even if the overall purpose of the TMLA was to affect policyholders and rates, the purpose of this particular statute had no effect on the business of insurance.

In support of its narrow interpretation of Fabe, the Villas directs us to footnote eight, where the majority answered some of the dissent's criticisms:
The dissent assails our holding at both ends, contending that it at once goes too far and not quite far enough. On the one hand, the dissent suggests that our holding is too "broad" in the sense that "any law which redounds to the benefit of policyholders is, ipso facto, a law enacted to regulate the business of insurance." Post, at 511. But this is precisely the argument we reject in the text, as evidenced by the narrowness of our actual holding. Uncomfortable with our distinction between the priority given to policyholders and the priority afforded other creditors, the dissent complains, on the other hand, that this is evidence of a "serious flaw." Post, at 517. But the dissent itself concedes that a state statute regulating the liquidation of insolvent insurance companies need not be treated as a package which stands or falls in its entirety. Post, at 518. Given this concession, it is the dissent's insistence upon an all-or-nothing approach to this particular statute that is flawed. The dissent adduces no support for its assertion that we must deal with the various priority provisions of the Ohio law as if they were all designed to further a single end. That was not the approach taken by this Court in National Securities,[4] which carefully parsed a state statute with dual goals and held that it regulated the business of insurance only to the extent that it protected policyholders.Supra, at 502. And the dissent misinterprets our pronouncement on the clash of priorities as a "compromise holding," Post, at 517, forgetting that the severability of the various priority provisions is a question of state law.[5]
In holding that the result in Fabe was based on the dual goals of the Ohio statute,Perez rejected the argument that Fabe mandates a particularized parsing approach in determining whether a particular statute is governed by the MFA:
[Appellant nursing facility] cites to Fabe as support for this "parsing" type of statutory construction. However, Fabe clarified in a footnote that the basis for its "parsing" analysis of the Ohio statute was the statute's dual goals in giving priority to policyholders as well as other creditors. Fabe, 508 U.S. at 508, 509 n.8. Section 74.451 has no such dual goal.
Perez, 406 S.W.3d at 325. We reject this reading of Fabe. Fabe teaches that the entirety of a statute need not be treated in such a way as to overlook the particularized goals of discrete statutory provisions. Here, for example, the overarching goal of the TMLA is undoubtedly to reduce medical malpractice liability insurance premiums. It is apparent, however, that not every section of the Act explicitly advances that goal. Indeed, the particularized goal of Section 74.451—ensuring that patients are explicitly notified of their rights before signing an arbitration agreement—has nothing to do with regulating the business of insurance. Taking our guidance from Fabe, we do not believe the entirety of the TMLA must be treated as advancing a single, unitary purpose. Other cases have taken this approach. For example, the Austin Court of Appeals in Everest Reinsurance Co. v. Howard, 950 S.W.2d 800 (Tex. App.-Austin 1997, writ denied), relied on Fabe in holding that the now repealed Article 21.28, Section 4(h) of the Texas Insurance Code was "not a law enacted `for the purpose of regulating insurance. . . ." Id. at 803; see Act of June 1, 1987, 70th Leg., R.S., ch. 1073, § 33, sec. 4(h), 1987 Tex. Gen. Laws 3610, 3649, repealed by Act of May 24, 2005, 79th Leg., R.S., ch. 727, § 18(a)(6), 2005 Tex. Gen. Laws 1752, 2187. Under Section 4(h), the filing of a delinquency proceeding against an insurer or a receiver in a Texas receivership court made that specific court the exclusive venue for all actions or proceedings filed thereafter relating to that insurer or receiver. Act of June 1, 1987, 70th Leg., R.S., ch. 1073, § 33, sec. 4(h), 1987 Tex. Gen. Laws 3610, 3649 (repealed 2005). In Howard, a delinquency proceeding was filed against an insolvent reinsurance company (Company 1), and a receiver was appointed to conduct Company 1's affairs. The receiver filed a complaint against another reinsurance company (Company 2) for monies allegedly due to Company 1. Company 2 removed the case to federal court, and the receiver fought removal by arguing that Section 4(h) was enacted for the purpose of regulating the business of insurance and that, consequently, under the MFA, Section 4(h) was excepted from preemption by the federal removal statute. In rejecting this argument, the Austin Court stated,
The exclusive venue provision of section 4(h) does not affect the relationship between insurance companies and their policyholders; it merely designates a forum in which disputes concerning insolvent insurers can be heard. The substantive rights and responsibilities of insurers and their policyholders can be protected in either state or federal court. Accordingly, because section 4(h) of the Receivership Statute is not a law enacted "for the purpose of regulating insurance," the McCarran-Ferguson Act does not apply and cannot preempt the federal removal statute.
Id. at 803; see also Langdeau v. United States, 363 S.W.2d 327 (Tex. Civ. App.-Austin 1962, no writ) (holding that provision of Texas Insurance Code did not regulate business of insurance but established priority for class of creditors of insurance company). While the Insurance Code, when considered collectively and in broad, general terms, was obviously intended to regulate the business of insurance, the Austin Court of Appeals twice looked beyond the collective intent to the actual intent and effect of specific subsections of the Insurance Code to determine that those specific subsections were not enacted for the purpose of regulating insurance. We agree with the approach and reasoning employed by our sister court in Austin.

In Fabe, the statute in question was a part of the Ohio Insurance Code. In determining whether the MFA's exception was triggered, the Supreme Court specifically examined the priority of claims statute, not the entirety of the Ohio Insurance Code. In analyzing that particular statute, the Supreme Court noted the differing goals for different sections of the same statute; one section was designed for the regulation of the business of insurance, and another section was not.

In the face of a "medical malpractice insurance crisis," the Legislature broadened the scope of Article 4590i and recodified it as Chapter 74 of the Texas Civil Practice and Remedies Code. Tex. West Oaks Hosp., LP v. Williams, 371 S.W.3d 171, 176-77 (Tex. 2012) (citing Act of June 2, 2003, 78th Leg., R.S., ch. 204, § 10.11(a)(5), 2003 Tex. Gen. Laws 847, 884). Even so, Section 74.451 does not specifically address the regulation of the business of insurance. This section has nothing to do with the relationship between insurers and insureds and is not integral to that relationship. Cf.Fabe, 508 U.S. at 504. Laws which would fall within the MFA's ambit include those
enacted "for the purpose of regulating the business of insurance" . . . [which] possess the "end, intention, or aim" of adjusting, managing, or controlling the business of insurance. BLACK'S LAW DICTIONARY 1236, 1286 (6th ed. 1990). This category necessarily encompasses more than just the "business of insurance." . . . [W]e believe that the actual performance of an insurance contract is an essential part of the "business of insurance." Because the Ohio statute is "aimed at protecting or regulating" the performance of an insurance contract, National Securities,393 U.S. at 460, it follows that it is a law "enacted for the purpose of regulating the business of insurance," within the meaning of the first clause of § 2(b).
Fabe, 508 U.S. at 505. Section 74.451 does not fit the definition adopted in Fabe.
Finally, even if Section 74.451 has a tangential effect on insurance contracts, any such indirect effect is insufficient to trigger the MFA's preemption exception. The United States Supreme Court's rejection of this argument in Fabe is instructive:
Of course, every preference accorded to the creditors of an insolvent insurer ultimately may redound to the benefit of policyholders by enhancing the reliability of the insurance company. This argument, however, goes too far: "But in that sense, every business decision made by an insurance company has some impact on its reliability . . . and its status as a reliable insurer." Royal Drug, 440 U.S. at 216-17Royal Drugrejected the notion that such indirect effects are sufficient for a state law to avoid pre-emption under the McCarran-Ferguson Act. Id. at 217.

In light of the foregoing, we reverse the trial court's judgment and remand this case for further proceedings consistent with this opinion.

[2] The Dallas Court of Appeals applied the reasoning of Kepka in reaching the same result in In re Sthran, 327 S.W.3d 839 (Tex. App.-Dallas 2010, orig. proceeding), as did the Federal District Court for the Eastern District of Texas in Patterson v. Nexion Health, Inc., No. 2-06-CV-443, 2007 WL 2021326 (E.D. Tex. July 9, 2007).

[3] See Act of May 25, 1993, 73d Leg., R.S., ch. 625, § 4, 1993 Tex. Gen. Laws 2347, 2349-50, repealed by Act of June 2, 2003, 78th Leg., R.S., ch. 204, § 10.09, 2003 Tex. Gen. Laws 847, 884.

[4] SEC v. Nat'l Secs., Inc., 393 U.S. 453 (1969). Two Arizona insurance companies had merged with approval of the Arizona Director of Insurance as required by state law; the SEC sued to rescind the merger for alleged material misrepresentations, and the insurance companies invoked the MFA in arguing that federal securities law did not apply because the relevant Arizona law concerned the business of insurance. The United States Supreme Court found that the MFA's preemption exception did not apply. In the words of the Court, "[The] core of the `business of insurance'" under the MFA is "[t]he relationship between insurer and insured, the type of policy which could be issued, its reliability, interpretation, and enforcement." Id. at 460. Without elaborating, the Court also recognized that, "[u]ndoubtedly, other activities of insurance companies relate so closely to their status as reliable insurers that they too must be placed in the same class." Id. Finally, the Court stated that, "whatever the exact scope of the statutory term, it is clear where the focus was—it was on the relationship between the insurance company and the policyholder." Id.

[5] In a concurring opinion, Chief Justice Roberts explicitly recognized the precedential value of footnotes by stating that "footnotes are part of an opinion, too." United States v. Denedo, 556 U.S. 904, 921(2009). The precedential value of footnotes has been implicitly recognized in dissenting opinions based solely on footnotes.See, e.g., Fry v. Pliler, 551 U.S. 112 (2007) (Breyer, J., joining the majority except as to footnote 1 and Part II-B); William A. Ramsey, Taking Note of Footnotes: The Precedential Value of Footnotes in Judicial Opinions, RES GESTAE, Sept. 2010, at 10.