Pre-Arbitration Discovery Quashed by Texas High Court: In Re Houston Pipe Line Co., LP (Tex. 2009)

10/22 UPDATE: Supreme Court Issues Supplemental Opinion on Pre-Arbitration Discovery Finding abuse of discretion, Texas Supreme Court orders trial court judge to vacate preliminary order governing discovery in commercial dispute and rule on pending motion to compel arbitration instead. Corpus Christi Court of Appeals had found temporary orders appropriate prior to deciding whether the parties should be sent to arbitration under the circumstances of the case. In Re Houston Pipe Line Co., L.P. (Tex. July 3, 2009), No. 08-0800 (Tex. Jul. 3, 2009) (per curiam) (mandamus granted: trial judge directed to rule on motion to compel arbitration, and to vacate pre-arbitration discovery orders found to be overbroad). FROM THE PER CURIAM OPINION: At issue in this proceeding is whether the trial court abused its discretion by permitting discovery on damage calculations and other potential defendants, instead of deciding the motion to compel arbitration. For the reasons below, we conclude the trial court should not have ordered pre-arbitration discovery, but rather should have decided the motion to compel arbitration. Houston Pipe Line Company, L.P., signed an agreement to purchase gas from O’Connor & Hewitt, Ltd., based on the Houston Ship Channel Price Index. Several years later, O’Connor sued Houston Pipe Line, Energy Transfer Partners, L.P., Energy Transfer Equity, L.P., and La Grange Acquisition, L.P., for manipulating the Index downward, which caused O’Connor to receive lower payments for gas delivered pursuant to the contract. As a signatory to the contract, Houston Pipe Line sought to enforce the arbitration provision. Energy Transfer and La Grange were not parties to the agreement, but tried to compel arbitration based on a direct benefits equitable estoppel theory. See Meyer v. WMCO-GP, LLC, 211 S.W.3d 302, 305 (Tex. 2006); Sherer v. Green Tree Servicing LLC, 548 F.3d 379, 382 (5th Cir. 2008). O’Connor resisted arbitration by attacking the scope of the arbitration provision and contending that it would be impossible to identify all potential defendants and to complete damages calculations within the sixty days allotted for discovery, as set out in the arbitration provision. Rather than rule on the motion to compel, the trial court ordered discovery to aid it in deciding the motion. Specifically, the trial court ordered discovery to determine if additional defendants could equitably invoke the arbitration clause, whether O’Connor’s claims fell within the scope of the arbitration clause, and if the time limitations imposed by the clause were jurisdictional. In its order, the trial court suggested that it would be virtually impossible to conduct the necessary discovery within the sixty-day time frame allotted to the arbitrator under the agreement * * * Houston Pipe Line and Energy Transfer sought mandamus relief in the court of appeals, arguing that the trial court had abused its discretion by not ruling on the motion to compel. The court of appeals refused to issue the writ, concluding that the trial court had acted within its discretion. We disagree that the discovery ordered by the trial court was needed for it to rule on the motion to compel. When a party disputes the scope of an arbitration provision or raises a defense to the provision, the trial court, not the arbitrator, must decide the issues. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006). And “[w]hen Texas courts are called on to decide if disputed claims fall within the scope of an arbitration clause under the Federal Act, Texas procedure controls that determination.” Tipps, 842 S.W.2d at 268. Pre-arbitration discovery is expressly authorized under the Texas Arbitration Act when a trial court cannot fairly and properly make its decision on the motion to compel because it lacks sufficient information regarding the scope of an arbitration provision or other issues of arbitrability. See Tex. Civ. Prac. & Rem. Code §§ 171.023(b), 171.086(a)(4),(6). This, however, is not an authorization to order discovery as to the merits of the underlying controversy. Motions to compel arbitration and any reasonably needed discovery should be resolved without delay. Tipps, 842 S.W.2d at 269. The discovery authorized by the trial court seeks to determine the identity of all potential defendants and to what extent each defendant is liable, including Houston Pipe Line. Such an inquiry is inappropriate because determinations of ultimate liability ordinarily must be answered during the arbitration proceeding, while questions regarding the scope of the arbitration clause should be decided by the trial court. See AT&T Techs., Inc. v. Commc’ns Workers of Am., 475 U.S. 643, 649 (1986). The necessity of identifying other culpable parties could, under some circumstances, be related to arbitrability. But, a party cannot avoid its agreement to arbitrate merely by alleging that there may be other potential defendants; it must link the identity of the defendants to an issue of arbitrability, such as scope, or a defense to arbitration. See 9 U.S.C. § 4; Tex. Civ. Prac. & Rem. Code §§ 171.021, 171.026; see also J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227 (Tex. 2003). Because the discovery ordered here is overbroad and beyond the issues raised in the motion to compel, we conclude that the trial court abused its discretion by ordering this discovery rather than ruling on the legal issues raised by the motion to compel. Accordingly, without hearing oral argument, we conditionally grant the writ and direct the trial court to vacate the discovery order and to rule on the motion to compel arbitration. FROM THE CONTRARY OPINION OF THE APPEALS COURT BELOW: The trial court cannot delay ruling on a motion to compel arbitration until discovery has been completed because this would defy the purpose of arbitration and the application of a summary procedure. See e.g., In re Great W. Drilling, Ltd., 211 S.W.3d at 835. However, there is no rule mandating a strict deadline for the court to rule on a motion to compel arbitration. Moreover, as discussed previously, it is clear that the trial court can allow discovery in some circumstances pending its ruling on a motion to compel arbitration. The Texas Supreme Court in Anglin specifically stated that the trial court may "summarily decide whether to compel arbitration on the basis of affidavits, pleadings, discovery, and stipulations." See Anglin, 842 S.W.2d at 269 (emphasis added). Moreover, an evidentiary hearing is required if there are disputed material facts. See id. Furthermore, the Texas Act allows the court to issue, "in its discretion an order for a deposition for discovery, perpetuation of testimony, or evidence needed before the arbitration proceedings begin," or to grant "other relief . . . in its discretion, needed to permit the arbitration to be conducted in an orderly manner and to prevent improper interference or delay of the Arbitration." Tex. Civ. Prac. & Rem. Code Ann. § 171.086(4), (6); see Universal Computer Sys., 183 S.W.3d at 750 (contrasting trial court's authority to resolve an existing discovery dispute with authority to facilitate an arbitration). Under the present circumstances, the trial court did not abuse its discretion in allowing the instant discovery before ruling on Houston Pipe Line's motion to compel arbitration and request to stay trial court proceedings. The trial court is not deferring its ruling until the completion of discovery, but rather, in its discretion, is allowing circumscribed discovery needed to determine the merits of the motion to compel arbitration and if necessary, to permit the arbitration to be conducted in an orderly manner and to prevent improper interference or delay of the arbitration. We note that, in considering the issues herein, we do not reach the merits of the motion to compel arbitration or the arbitrability of the instant dispute. The trial court has not ruled on the merits of this matter and has expressly deferred its ruling pending the continuation of the hearing. Therefore, the merits of the arbitration motion and any contest to it are not ripe for our consideration. In re The Shredder Co., 225 S.W.3d 676, 680 f.5 (Tex. App.-El Paso 2006, orig. proceeding); In re MHI P'ship, Ltd., 7 S.W.3d at 921 f.6; Hou-Scape, Inc. v. Lloyd, 945 S.W.2d 202, 205 (Tex. App.-Houston [1st Dist.] 1997, orig. proceeding); see In re Perritt, 992 S.W.2d 444, 446 (Tex. 1999). Whether the motion to compel arbitration should be granted or denied is a matter that remains within the trial court's discretion. (6) We note that mandamus may issue if a court does not issue a ruling on a motion to compel arbitration within a reasonable period of time. See In re The Shredder Co., 225 S.W.3d at 680; see also In re Landmark Org., L.P., No. 13-04-00527-CV, 2004 Tex. App. LEXIS 9754, at *3-4 (Tex. App.-Corpus Christi Nov. 1, 2004, orig. proceeding) (per curiam) (mem. op). However, such is not the case presently before this Court. 269 SW3d 90, (Aug. 26, 2008 opinion of the Thirteenth Court of Appeals by Chief Justice Rogelio Valdez denying mandamus relief) RELATED TERMS AND CONCEPTS: Arbitration mandamus, arbitration and discovery, motion to compel arbitration, issues for and role of the court vs. role of and questions to be decided by the arbitrator, scope of the arbitration agreement, prearbitration discovery, direct benefits equitable estoppel, application of federal FAA in state court, interaction of FAA with Texas procedural law and TAA