Tuesday, May 1, 2012

Contract-formation and Arbitrability under Delaware law [in Texas Court]

The Federal Arbitration Act ("FAA") preempts state law that would otherwise render arbitration agreements unenforceable in a contract involving interstate commerce. 9 U.S.C. § 2 (West 2008); Southland Corp. v. Keating, 465 U.S. 1, 10-11, 104 S Ct. 852, 858, 79 L. Ed. 2d 1 (1984); In re Olshan Found. Repair Co., LLC, 328 S.W.3d 883, 888 (Tex. 2010).
The parties in this case do not dispute that the two Delaware LLC agreements involve interstate commerce.[9] Under the FAA, courts should apply ordinary state-law principles governing the formation of contracts when determining issues of substantive arbitrability. First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S. Ct. 1920, 1924, 131 L. Ed. 2d 985 (1995). As noted, the two Delaware LLC agreements provide that they should be "construed and enforced in accordance with and governed by the laws of the State of Delaware." The arbitration clauses contained in those agreements specify that any actual arbitration is to be conducted in accordance with the Commercial Arbitration Rules of the American Arbitration Association ("the AAA Rules"), but the arbitration agreements themselves are expressly governed by Delaware law.
The Delaware Supreme Court has confirmed that "arbitration is a matter of contract and a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit." James & Jackson, LLC v. Willie Gary, LLC, 906 A.2d 76, 78 (Del. 2006). A Delaware LLC is bound by the arbitration provisions of its own governance and operation agreement, even where the LLC did not itself execute the agreement. Elf Atochem N. Am., Inc. v. Jaffari, 727 A.2d 286, 287 (Del. 1999). Delaware arbitration law mirrors federal policy in presuming the validity of arbitration agreements and resolving doubts about the scope of arbitrable issues in favor of arbitration. See Moses H. Cone Mem'l Hosp. v. Mercury Const. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 941, 74 L. Ed. 2d 765 (1983) (explaining federal law and policy); Willie Gary 906 A.2d at 78 (explaining Delaware law).
The question of whether parties have agreed to arbitrate their disputes is to be decided by the court, unless there is clear and unmistakable evidence that the parties delegated that question to the arbitrator instead. First Options, 514 U.S. at 944-45, 115 S. Ct. at 1924. Federal law refers gateway matters such as (1) whether the parties are bound by a given arbitration clause and (2) whether a certain dispute is within the arbitration agreement to the court in order to "avoid the risk of forcing parties to arbitrate a matter they may well not have agreed to arbitrate." Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83-84, 123 S. Ct. 588, 591-92, 154 L. Ed. 2d 491 (2002).
The Delaware Supreme Court has adopted the majority federal view that a reference to the AAA Rules in an arbitration agreement serves as the type of clear and unmistakable evidence that the parties agreed to submit the question of the arbitrability of a particular dispute to the arbitrator. Willie Gary, 906 A.2d at 80. However, the court limited this interpretation to arbitration clauses that broadly refer all disputes to arbitration under the referenced rules. Id. Where an arbitration agreement specifically reserves carve-outs for judicial remedies, something more than reference to the AAA Rules is needed to establish that the parties intended to arbitrate the arbitrability of their dispute. Id. at 81.
Whether the court or the arbitrator decides the question of substantive arbitrability, Delaware law strongly favors arbitration. See Elf, 727 A.2d at 295. An arbitration clause, though, only covers claims that touch on the legal rights contained in the underlying contract or agreement within which the clause is found. See Parfi Holding AB v. Mirror Image Internet, Inc., 817 A.2d 149, 159-60 (Del. 2002) (holding that a fiduciary duty claim was not covered by an arbitration provision in a stock underwriting agreement). Where an arbitration clause is broad in scope, courts will defer to it where a claim touches on any issues of contract rights or contract performance. Id. at 155.


We review a trial court's grant of a motion to stay arbitration under an abuse-of-discretion standard. See McReynolds v. Elston, 222 S.W.3d 731, 739 (Tex. App.-Houston [14th Dist.] 2007, no pet.) (so holding on appeal of order denying motion to compel arbitration under TAA); see also Garcia v. Huerta, 340 S.W.3d 864, 868-69 (Tex. App.-San Antonio 2011, pet. filed) (so holding on appeal of order denying motion to compel arbitration under FAA); Sidley Austin Brown & Wood, LLP v. J.A. Green, 327 S.W.3d 859, 863 (Tex. App.-Dallas 2010, no pet.) (same); SEB, Inc. v. Campbell, No. 03-10-00375-CV, 2011 WL 749292, at *2 (Tex. App.-Austin Mar, 2, 2011, no pet.) (mem. op.) (same). Under this standard, we defer to the trial court's factual determinations if they are supported by evidence, but we review the trial court's legal determinations de novo. In re Labatt Food Service, L.P., 279 S.W.3d 640, 643 (Tex. 2009). Determining whether a claim falls within the scope of an arbitration agreement involves the trial court's legal interpretation of the agreement, and we review such interpretations de novo. McReynolds, 222 S.W.3d at 740.

SOURCE: HOUSTON COURT OF APPEALS -  14-11-00439-CV – 4/17/2012  

Arbitration is a creature of contract – No arbitration without prior agreement to arbitrate

State contract law governs arbitration agreements.

The Federal Arbitration Act (FAA)

The FAA provides, in relevant part:
A written provision in . . . a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
See 9 U.S.C. § 2 (West 2009); Rent-A-Center, West, Inc. v. Jackson, ___ U.S. ___, 130 S.Ct. 2772, 2776, 177 L.Ed.2d 403 (2010), quoting Moses H. Cone Memorial Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). The above provision has been described as reflecting both a "liberal federal policy favoring arbitration," and the "fundamental principle that arbitration is a matter of contract." See AT&T Mobility LLC v. Conception, ___ U.S. ___,131 S.Ct. 1740, 1745, 179 L.Ed.2d 742 (2011) citing Moses H. Cone Memorial Hospital, 460 U.S. at 24, 103 S.Ct. at 927 and Rent-A-Center, ___ U.S. at ___, 130 S.Ct. at 2776. "The FAA thereby places arbitration agreements on an equal footing with other contracts, and requires courts to enforce them according to their terms." Rent-A-Center, ___ U.S. ___, 130 S.Ct. 2776 (internal citations omitted); citing Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 443, 126 S.Ct. 1204, 163 L.Ed.2d 1038 (2006) and Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 478, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989).
An agreement to arbitrate is a contract, the relation of the parties is contractual, and the rights and liabilities of the parties are controlled by the law of contracts. As such, a party cannot be required to submit to arbitration any dispute which she has not agreed to submit. See AT&T Mobility LLC, 131 S.Ct. at 1740 ( (arbitration is a creature of contract; a person can be compelled to arbitrate a dispute only if, to the extent that, and in the manner which, he has agreed so to do). Because arbitration is based on a contractual relationship, a party who has not consented cannot not be forced to arbitrate a dispute. Since arbitration is generally a matter of contract, the FAA requires courts to honor parties' expectations.  9 U.S.C.A. § 1 et seq.; AT&T Mobility LLC, 131 S.Ct. at 1740.
Texas Law — Formation of Contracts
When determining the validity of arbitration agreements that are subject to the FAA, we apply ordinary state law contract principles that govern the formation of contracts. In re Palm Harbor Homes, Inc., 195 S.W.3d 672, 676 (Tex. 2006), citing First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995); In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 738 (Tex. 2005). The party attempting to compel arbitration must show that the arbitration agreement meets all requisite contract elements. J.M. Davidson, Inc., 128 S.W.3d at 228.
The following elements are required for the formation of a valid and binding contract: (1) an offer; (2) acceptance in strict compliance with the terms of the offer; (3) a meeting of the minds; (4) each party's consent to the term; and (5) execution and delivery of the contract with the intent that it be mutual and binding. Cessna Aircraft Co. v. Aircraft Network, L.L.C., 213 S.W.3d 455, 465 (Tex.App.-Dallas 2006, pet. denied). Like other contracts, an agreement to arbitrate must be supported by consideration. In re Palm Harbor Homes, Inc., 195 S.W.3d at 676; In re AdvancePCS Health L.P., 172 S.W.3d 603, 607 (Tex. 2005)(per curiam).
Mutual Promises and Consideration
Mutual, reciprocal promises which bind both parties may constitute consideration for a contract. Texas Custom Pools, Inc. v. Clayton, 293 S.W.3d 299, 309 (Tex.App.-El Paso 2009, no pet.). In the case of a stand-alone arbitration agreement, both sides are required to enter into binding promises to arbitrate. In re AdvancePCS, 172 S.W.3d at 607; see also In re 24R, Inc., 324 S.W.3d 564, 566 (Tex. 2010)(mutual promises to submit a dispute to arbitration are sufficient consideration to support an arbitration agreement); see also In re Halliburton Co., 80 S.W.3d at 569-70 and J.M. Davidson, Inc., 128 S.W.3d at 228 (cases noting that when mutual promises to submit employment disputes to arbitration bind both parties to their promises to arbitrate, sufficient consideration exists to support an arbitration agreement between the employer and the at-will employee.)
Illusory Promises
A promise which does not bind the promisor, as when the promisor retains the option to discontinue performance, is illusory. In re 24R, Inc., 324 S.W.3d 564, 567 (Tex. 2010), citing Mann Frankfort Stein & Lipp Advisors, Inc. v. Fielding, 289 S.W.3d 844, 849 (Tex. 2009); see also J.M. Davidson, Inc., 128 S.W.3d at 228; Light v. Centel Cellular Co., 883 S.W.2d 642, 645 (Tex. 1994)(employer's promises were illusory because they were dependent upon at-will employee's period of continued employment; thus, employer could avoid performance by terminating at-will employee's employment while the employee was bound to her promise whether or not she remained employed). Consequently, when a purported bilateral contract is supported only by illusory promises, there is no contract. In re 24R, Inc., 324 S.W.3d at 567, citing Vanegas v. American Energy Services, 302 S.W.3d 299, 302 (Tex. 2009), quoting Light, 883 S.W.2d at 644-45.
However, where an employer cannot avoid its promise to arbitrate by amending a termination provision or terminating it altogether, the dispute resolution plan is not illusory. See J.M. Davidson, Inc., 128 S.W.3d at 228; In re Polymerica, LLC, 296 S.W.3d 74, 76 (Tex. 2009); see also In re Halliburton Co., 80 S.W.3d at 569-70 (when mutual promises to submit employment disputes to arbitration bind both parties to their promises to arbitrate, sufficient consideration exists to support an arbitration agreement between the employer and the at-will employee.)

SOURCE: EL PASO COURT OF APPEALS - 08-11-00091-CV – 4/25/2012

Who decides the gateway issues? Judge or Arbitrator?

Generally the Court resolves the treshhold issue of arbitrability, but the underlying agreement may allocate that function to the arbitrator or panel of arbitrators, as demonstrated by the following caselaw snippet from a recent opinion by the El Paso Court of Appeals:   
Court Or Arbitrator?           
El Paso courthouse
When a dispute involving an agreement to arbitrate is brought to a court for resolution, it is the court's obligation to determine whether the parties agreed to submit a particular issue to arbitration. See United Steelworkers of America v. American Mfg. Co., 363 U.S. 564, 80 S.Ct. 1343, 4 L.Ed.2d 1403 (1960); Del E. Webb Const. v. Richardson Hosp. Authority, 823 F.2d 145 (5th Cir. 1987).
An arbitration provision may give the arbitrator the power to resolve gateway issues regarding validity and enforceability of the arbitration agreement. In that event, the entire matter of arbitrability is transferred from the courts to the arbitrator. Unless the agreement clearly demonstrates that the parties intended to confer on the arbitrator the power to determine what disputes are arbitrable, the court retains the duty to decide that issue. Arbitration agreements that clearly and unmistakably show intent to assign gateway issues to the arbitrator are fully enforceable. See Rent-A-Center, ___ U.S. ___, 130 S.Ct. at 2777; First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 943, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1985)(holding question of primary power to decide arbitrability "turns upon what the parties agreed about that matter"); AT&T Technologies, Inc. v. Communications. Workers, 475 U.S. 643, 649, 106 S.Ct. 1415, 1418, 89 L.Ed.2d 648 (1986)(holding parties may agree to arbitrate arbitrability). Accordingly, under First Options, gateway questions which are normally decided by a court will be submitted to an arbitrator where the agreement was clear and unmistakable. See First Options, 514 U.S. at 943; AT&T Technologies, Inc., 475 U.S. at 649, 106 S.Ct. at 1418.

SOURCE: EL PASO COURT OF APPEALS - 08-11-00091-CV – 4/25/2012
CASE: HIS Acquisition No. 131 v. Iturralde (Tex.App.- El Paso [8th Dist.] April 25, 2012)

Here, the Agreement provided that "any and all claims challenging the validity or enforceability of this Agreement . . ." are subject to arbitration. It thus clearly and unmistakably provided for issues of validity and enforceability to go to the arbitrator. Iturralde argues that whether the contract is supported by adequate consideration is not an issue of validity or enforceability but rather an issue of formation for the court to decide. We disagree. The Agreement bears Iturralde's signature evidencing her assent to its terms and clearly provides for an arbitrator to decide all issues of arbitrability.
In Rent-A-Center, the Supreme Court clarified how courts must treat challenges to an arbitration agreement's delegation provision. See Rent-A-Center, ___ U.S. ___, 130 S.Ct. 2772.
The Arbitrator, and not any federal, state, or local court or agency, shall have exclusive authority to resolve any dispute relating to interpretation, applicability, enforceability or formation of this Agreement including, but not limited to any claim that all or any part of this Agreement is void or voidable.
Id. at 2775-76. According to the Supreme Court, the analysis in situations challenging a stand-alone arbitration agreement containing a delegation provision depends on the kind of challenge being made. Id. If the challenge relates to the arbitration agreement as a whole, and the agreement contains a provision delegating issues of arbitrability to the arbitrator, then the challenge must be directed to arbitration. Id. If the challenge is specific to the issue of delegation, however, then the court must resolve the challenge. Id.
The Agreement presented clearly and unmistakably provides that issues of validity and enforceability go to the arbitrator. Iturralde signed the Agreement, manifesting her intent that gateway issues be arbitrated. Additionally, Iturralde challenges the entire arbitration agreement based on the assertion that the term provision renders the Agreement illusory. Under Rent-A-Center, because there is a specific delegation provision, and Iturralde challenges the Agreement as a whole, rather than the specific delegation provision, the issue goes to the arbitrator. Therefore, the determination of whether the agreement is illusory is for the arbitrator and not the court.
SOURCE: EL PASO COURT OF APPEALS - 08-11-00091-CV – 4/25/2012

Tuesday, April 24, 2012

Hearing examiner did not exceed his powers in upholding indefinite suspension in firefighter's disciplinary appeal, San Antonio Court of Appeals rules

Mata v. City of San Antonio (Tex.App.- San Antonio [4th Dist.] April 18, 2012)

Appellant ["FIREFIGHTER" substituted for name] appealed the termination of his employment with the San Antonio Fire Department to a hearing examiner, who upheld the termination. FIREFIGHTER then appealed the hearing examiner's decision to district court, where the court denied his motion for summary judgment and granted summary judgment in favor of appellees City of San Antonio and San Antonio Firefighters' and Police Officers' Civil Service Commission (collectively the City). On appeal, FIREFIGHTER contends the trial court erred because the hearing examiner's decision was capricious and not supported by substantial evidence, or alternatively, that the hearing examiner exceeded his jurisdiction. We affirm the trial court's judgment.


On November 19, 2007, FIREFIGHTER, a San Antonio fire fighter, tested positive for cocaine use. The drug test was administered according to the terms of a collective bargaining agreement (CBA) between the City and the San Antonio fire fighters' bargaining agent, International Association of Firefighters, Local 624. The CBA allowed the City to randomly drug test each fire fighter once in a twelve-month period. Based on the positive results of FIREFIGHTER's drug test, San Antonio Fire Chief Charles Hood issued FIREFIGHTER a notice of proposed indefinite suspension. A meeting regarding FIREFIGHTER's discipline was scheduled for April 1, 2008. Local 624's Grievance Committee Chairperson Carlos Cordell accompanied FIREFIGHTER to the April 1st meeting in an effort to seek a lesser disciplinary penalty than employment termination. FIREFIGHTER, Chief Hood, and one witness signed the notice of indefinite suspension, Cordell did not. FIREFIGHTER's employment was thereby terminated,[1] and FIREFIGHTER did not appeal that decision.

However, after the suspension was signed, FIREFIGHTER, Cordell, Chief Hood, and several other attendees at the meeting discussed and reviewed the terms and conditions of a "Release and Settlement Agreement," or "last chance agreement," that would reinstate FIREFIGHTER as a fire fighter. This agreement permitted FIREFIGHTER to return to work conditioned on his execution of the agreement, his consent to submit to non-random drug testing, and his completion of a drug rehabilitation program. Cordell and FIREFIGHTER asked for a few changes in the terms of the agreement, which the City made. Notably, Cordell and FIREFIGHTER did not seek to change the non-random drug tests required by the last chance agreement. At the time, neither FIREFIGHTER nor Cordell questioned the legality of nor argued that the last chance agreement violated the terms of the CBA. FIREFIGHTER, Chief Hood, and one witness signed the last chance agreement, Cordell did not.

Later, following completion of a drug rehabilitation program, FIREFIGHTER again tested positive for cocaine use. The non-random drug test was conducted according to the terms of the last chance agreement. FIREFIGHTER was indefinitely suspended and his employment was terminated. FIREFIGHTER appealed the suspension to an independent third-party hearing examiner and contended the last chance agreement was unenforceable and void because the CBA did not permit non-random drug testing. FIREFIGHTER did not contest the accuracy of the drug test, nor did he assert that he did not use cocaine. The hearing examiner upheld FIREFIGHTER's termination.

FIREFIGHTER appealed the decision to the trial court and filed a motion for summary judgment claiming the hearing examiner acted arbitrarily and capriciously or exceeded his jurisdiction in upholding FIREFIGHTER's termination. The City responded with a motion for summary judgment contending (1) FIREFIGHTER is estopped from denying enforcement of the last chance agreement, (2) the hearing examiner neither exceeded his authority nor acted capriciously in upholding FIREFIGHTER's termination, and the examiner's decision should be confirmed as a matter of law, and (3) alternatively, if the court determined the random drug testing provision of the last chance agreement void, the agreement should be rescinded in its entirety and FIREFIGHTER's original termination upheld. The City also sought (1) a declaration that the last chance agreement was valid and enforceable, (2) a judgment confirming the hearing examiner's award, and (3) attorney's fees. The trial court granted summary judgment in favor of the City without stating the grounds upon which it was granted. FIREFIGHTER appeals the trial court's summary judgment.


We review a summary judgment de novo. Valence Operating Co. v. Dorsett, 164 S.W.3d 656, 661 (Tex. 2005). "When both parties move for partial summary judgment on the same issues and the trial court grants one motion and denies the other, as here, the reviewing court considers the summary judgment evidence presented by both sides, determines all questions presented, and if the reviewing court determines that the trial court erred, renders the judgment the trial court should have rendered." Id.

In this case the parties agree on the underlying facts. They disagree on the enforceability of the last chance agreement and the interpretation of the CBA. Specifically, they disagree on the standard to employ in reviewing the hearing examiner's decision.


The threshold issue on appeal is the determination of the applicable standard of review of the hearing examiner's decision. FIREFIGHTER contends the trial court should have reviewed the hearing examiner's decision under either a "substantial evidence or capricious" standard. The City argues review is severely restricted to whether the hearing examiner had jurisdiction to make his decision or exceeded his jurisdiction in making his decision.

A. Standard of Review of a Hearing Examiner's Decision

The statutory framework of the Fire Fighters and Police Officers Civil Service Act (the Act) establishes a process for fire fighters challenging disciplinary suspensions. See TEX. LOC. GOV'T CODE ANN. §§ 143.001-.363 (West 2008 & Supp. 2012); City of Houston v. Williams, 99 S.W.3d 709, 713 (Tex. App.-Houston [14th Dist.] 2003, no pet.). Under this scheme, a fire fighter can elect to have his suspension reviewed by a hearing examiner or the Civil Service Commission. See TEX. LOC. GOV'T CODE ANN. §§ 143.010, 143.053, 143.057; City of DeSoto v. White, 288 S.W.3d 389, 392 (Tex. 2009). A hearing examiner's decision is ordinarily reviewable "only on the grounds that the arbitration panel was without jurisdiction or exceeded its jurisdiction or that the order was procured by fraud, collusion, or other unlawful means." See TEX. LOC. GOV'T CODE ANN. § 143.057(j); City of Pasadena v. Smith, 292 S.W.3d 14, 17 (Tex. 2009). However, the Act provides that a "collective bargaining contract [that] specifically provides otherwise" prevails over a "civil service provision." See TEX. LOC. GOV'T CODE ANN. § 174.006(a); City of San Antonio v. Scott, 16 S.W.3d 372, 376 (Tex. App.-San Antonio 1999, pet. denied).

B. The Standard Provided in Section 143.057 Governs this Dispute

FIREFIGHTER argues the CBA specifically provides for a substantial evidence or capricious standard of review and therefore this standard prevails over the standard set forth in section 143.057(j) of the Local Government Code. The City responds that the substantial evidence or capricious review is limited to the grievance process outlined in the CBA, and that disciplinary proceedings are specifically excluded from that process. To determine the proper standard of review of the hearing examiner's decision we must review the CBA. "The construction of an unambiguous contract is a question of law for the court, which we may consider under a de novo standard of review." Tawes v. Barnes, 340 S.W.3d 419, 425 (Tex. 2011); accord Coker v. Coker, 650 S.W.2d 391, 393-94 (Tex. 1983).

Article 30 (Grievance Procedure) of the CBA prescribes a grievance procedure for disputes between the City and Local 624 or one of its fire fighters. Section (1)(D) of Article 30 contains an exception from the grievance procedure for certain disciplinary matters that are subject to the Local Government Code:

Disciplinary matters subject to the appeals procedure provided by Texas Local Government Code Chapter 143 shall not be subject to the grievance/arbitration procedure; provided that such matters, at the employee's election, will be subject to the Civil Service Commission or grievance/arbitration procedure under a just-cause standard, if Texas Local Government Code Section 143.057 is repealed or amended to eliminate the optional appeal of disciplinary matters to a Hearing Examiner. If the provisions of Chapter 143 are not repealed, and should the employee elect to proceed to the optional appeal of disciplinary matters to a Hearing Examiner, the examiner shall be one of the six (6) pre-selected, qualified neutrals as called for in Section 5(A) hereof. The powers, duties, and/or obligations of said arbitrator/hearing examiner shall likewise be as provided for in this Agreement and applicable provisions of the Texas Local Government Code, Chapter 143.

FIREFIGHTER argues that the terms "arbitrator" and "hearing examiner" are used interchangeably and that Article 31 of the CBA provides the standard of review for the hearing examiner's award:

If, at any time after a decision and/or award of the Civil Service Commission and/or an arbitrator, any affected party contests or challenges the decision or award in any other legal proceeding, the following shall apply:

. . . The decision and award of the arbitrator and/or the Commission must be upheld, unless the contesting party can establish the award was not supported in whole or in part by substantial evidence and/or that the award of the arbitrator and/or the Commission was capricious.

We do not agree with FIREFIGHTER's interpretation of the CBA and its interaction with the Local Government Code. The CBA is unambiguous. See Coker, 650 S.W.2d at 393 (holding language that can be given certain or definite legal meaning is unambiguous). By its very terms Article 31 provides the standard of review for the decision and award solely for arbitrators and the Civil Service Commission. It is silent as to hearing examiners. If the employee elects to appeal a suspension to a hearing examiner, Article 30(1)(D) of the CBA specifically subjects such disciplinary procedures to the provisions of Local Government Code section 143.057. Contrary to FIREFIGHTER's interpretation, Article 30(1)(D) of the CBA clearly distinguishes between a hearing examiner and an arbitrator under the grievance procedures. Article 30 contains a number of sections setting forth the procedures to be followed in a grievance proceeding including the submission of unresolved grievances to arbitration before an arbitrator. Article 30 section 5 clearly recognizes the difference between a "grievance . . . submitted to arbitration" and an "employee appeal to a Hearing Examiner." We presume these distinctions were intentional. See Ogden v. Dickinson State Bank, 662 S.W.2d 330, 332 (Tex. 1983) ("Generally, the parties to a contract intend every clause to have some effect. . . ."); accord Birnbaum v. Swepi LP, 48 S.W.3d 254, 257 (Tex. App.-San Antonio 2001, pet. denied). It is undisputed that (1) FIREFIGHTER's termination was subject to a disciplinary procedure, and (2) FIREFIGHTER elected to have his suspension reviewed by a hearing examiner. Therefore, FIREFIGHTER is subject to the standard of review set forth in Local Government Code section 143.057(j).

C. Did the Hearing Examiner Exceed His Jurisdiction?

If a fire fighter appeals his termination to a hearing examiner, "his ability to seek further review in a district court is severely limited." See City of DeSoto v. White, 288 S.W.3d 389, 391 (Tex. 2009). It is undisputed that the hearing examiner had jurisdiction to hear FIREFIGHTER's appeal; moreover, FIREFIGHTER makes no allegation that the hearing examiner's decision was procured by fraud, collusion, or other unlawful means. See TEX. LOC. GOV'T CODE ANN. § 143.057(j). Thus, the issue in this case is whether the hearing examiner exceeded his authority by enforcing the last chance agreement. See id. The supreme court has provided the following test to guide our inquiry: "[A] hearing examiner exceeds his jurisdiction when his acts are not authorized by the Act or are contrary to it, or when they invade the policy-setting realm protected by the nondelegation doctrine." City of Waco v. Kelley, 309 S.W.3d 536, 542 (Tex. 2010) (quoting City of Pasadena v. Smith, 292 S.W.3d 14, 21 (Tex. 2009)). FIREFIGHTER makes no argument that the hearing examiner's acts violated the nondelegation doctrine; therefore, we will address whether the hearing examiner's acts were not authorized by the Act or whether they were contrary to the Act. See Kelley, 309 S.W.3d at 542.

1. The Hearing Examiner's Decision Was Authorized by the Act

The hearing examiner's decision to uphold the indefinite suspension of FIREFIGHTER's employment was authorized by section 143.052 of the Act, which provides that the head of a fire department "may suspend a fire fighter . . . for the violation of a civil service rule." See TEX. LOC. GOV'T CODE ANN. § 143.052(b). A commission rule allowing for removal or suspension is valid if the ground for removal is a "violation of an applicable fire or police department rule." Id. § 143.051(12). The applicable rule in this case is San Antonio Fire Fighters' and Police Officers' Civil Service Commission Rule XIII(C)(12)(4.09) which states, "The use, possession, sale or acceptance of illegal drugs or narcotics by Members of the San Antonio Fire Department either on or off duty is prohibited."

FIREFIGHTER has not contested his cocaine use, nor has he challenged the reliability or accuracy of the drug tests that indicated his cocaine use. Thus, FIREFIGHTER violated the Fire Department's rules and the hearing examiner did not exceed his authority under the Act to uphold the suspension. See TEX. LOC. GOV'T CODE ANN. § 143.051(12), 143.052(b).

2. The Hearing Examiner's Decision Was Not Contrary to the Act

FIREFIGHTER contends that because the last chance agreement altered the CBA, the hearing examiner's decision violated the Act's "exclusive bargaining" requirement that only the Union could bargain on FIREFIGHTER's behalf. The Act provides, "fire fighters . . . are entitled to organize and bargain collectively with their public employer," id. § 174.023, and "[a] public employer shall recognize an association selected by a majority of the fire fighters of the fire department of a political subdivision as the exclusive bargaining agent for the fire fighters of that department unless a majority of the fire fighters withdraw the recognition," id. § 174.101.

Article 9 of the CBA, entitled "Maintenance of Standards," states that "[a]ll standards, privileges, and working conditions enjoyed by the City of San Antonio Fire Fighters at the effective date of this Agreement, which are not included in this Agreement shall remain unchanged for the duration of this Agreement." The hearing examiner found that "[t]he record indicates there is a history of settlement agreements in the San Antonio Fire Department." FIREFIGHTER does not dispute this history. Based on the examiner's findings and the plain language of the CBA, fire fighters had the privilege or work condition of entering into last chance agreements prior to the effective date of the CBA. Accordingly, the record shows that the execution of a last chance agreement was not contrary to the CBA. Thus, the hearing examiner's decision to uphold the suspension was not contrary to the "exclusive bargaining" provisions in the Code. See generally TEX. LOC. GOV'T CODE ANN. § 174.023-.109 (West 2008 & Supp. 2012).

In addition, the hearing examiner noted FIREFIGHTER's failure to challenge his first indefinite suspension:

Had Mr. FIREFIGHTER believed that the indefinite suspension issued to him for his first offense (April 1, 2008) was improper, the appropriate means of challenging the discipline was to file an appeal. The appeal of a subsequent disciplinary action (November 2008), is not the proper step, means, or forum for questioning the prior disciplinary action.

There is no evidence in the record that FIREFIGHTER appealed his first indefinite suspension. See TEX. LOC. GOV'T CODE ANN. § 143.052(d) (requiring a suspended fire fighter to appeal his suspension within ten days). See generally TEX. LOC. GOV'T CODE ANN. §§ 143.001-.363 (West 2008) (providing procedures to fire fighters for appealing disciplinary actions); City of Houston v. Williams, 99 S.W.3d 709, 713 (Tex. App.-Houston [14th Dist.] 2003, no pet.). After his first indefinite suspension, FIREFIGHTER was reinstated contingent upon his execution of the last chance agreement. In his appeal of his second indefinite suspension, FIREFIGHTER asked the hearing examiner for reinstatement because the last chance agreement was void. If the last chance agreement is void, then FIREFIGHTER's first indefinite suspension remains in place.[2] Thus, under the facts available to the hearing examiner, he could not have reinstated FIREFIGHTER. Cf. City of Pasadena v. Smith, 292 S.W.3d 14, 20 (Tex. 2009) ("[T]he Act does not empower a hearing examiner to make rules."). The Act's ten-day period to appeal a suspension would bar FIREFIGHTER's untimely appeal from the original indefinite suspension. See TEX. LOC. GOV'T CODE ANN. § 143.052(d); see also City of Temple Firemen's & Policemen's Civil Serv. Comm'n v. Bender, 787 S.W.2d 951, 951 (Tex. 1990) (per curium) ("We hold that a civil service commission's jurisdiction is not invoked unless a fire fighter or police officer files a notice of appeal with the commission within ten days after the occurrence of the action being appealed. . . ."); Downs v. City of Fort Worth, 692 S.W.2d 209, 212 (Tex. App.-Fort Worth 1985, writ ref'd n.r.e.) (citing the precursor statutes to sections 143.052, 143.053, and 143.057, and holding that compliance with the ten-day timeframe is mandatory).


For the reasons given above, we hold that the hearing examiner did not exceed his jurisdiction by upholding FIREFIGHTER's employment termination. Therefore, we affirm the trial court's summary judgment.

[1] "An indefinite suspension is equivalent to dismissal from the department." TEX. LOC. GOV'T CODE ANN. § 143.052(b) (West 2008).
[2] Cf. Summers v. Keebler Co., 133 Fed. App'x 249, 252 (6th Cir. 2005) ("For even if the last chance agreement were construed to violate the collective bargaining agreement, such a violation did not cause the Plaintiff's injury. The Plaintiff alleges she was injured by being discharged from her job. Without signing the last chance agreement in the first place after she had passed out on the job due to intoxication, she would have been justifiably terminated. Her signing of the last chance agreement saved her from being terminated.").

Wednesday, April 18, 2012

Thwarted demand to arbitrate employment dispute did not extend the statute of limitations for lawsuit

Time employee’s claim against former employer spent in arbitration (which did not go forward because of employer’s refusal to pay the required fees) not added to limitations period under equitable tolling theory. Fifth Circuit affirms district court’s summary judgment based on four-year statute of limitations in opinion that is not precedent, but nevertheless instructive.

Fonseca v. USG Insurance Services, Inc. No 11-11063 (5th Cir., Apr. 13, 2012) (per curiam)
From July 2001 until August 2006, Plaintiff-Appellant Victoria Fonseca worked for USG Insurance Services, Inc. ("USG") as the branch manager of USG's Arlington, Texas branch. Throughout Fonseca's employment, Gerald W. Horton served as USG's President. In November 2005, Horton offered Fonseca the opportunity to enter into a deferred compensation agreement ("DCA"). Subsequently, on August 29, 2006, USG fired Fonseca. Shortly thereafter, on September 8, 2006, Fonseca learned that USG did not intend to pay her under the DCA because USG had never received a signed acceptance.
On May 7, [2006], Fonseca filed an arbitration demand with the American Arbitration Association ("AAA"). On July 16, 2006, the AAA declined to serve as a arbitrator because USG failed to pay the required arbitration fees for this type of dispute. Fonseca then filed a suit on October 13, 2010 in Texas state court alleging fraud and breach of contract against Defendant-Appellees USG and Universal Specialty Underwriters, Inc. (collectively "the Defendants"). Defendants removed to district court on the basis of diversity. On summary judgment, the district court held that Fonseca's suit was time-barred based on Texas's four-year statute of limitations for these claims. Tex. Civ. Prac. & Rem. Code § 16.004 (fraud); id. at § 16.051 (breach of contract).
We review a district court's decision refusing to exercise its equitable tolling powers for abuse of discretion. Granger v. Aaron's, Inc., 636 F.3d 708, 712 (5th Cir. 2011). The doctrine of equitable tolling "preserves a plaintiff's claim when strict application of the statue of limitations would be inequitable." United States v. Patterson, 211 F.3d 927, 930 (5th Cir. 2000). It principally applies when the "plaintiff is actively misled by the defendant . . . or is prevented in some extraordinary way from exerting his rights." Id. Fonseca admits that under Texas's four-year statute of limitations, her claims expired on September 8, 2010 but contends that the statute of limitations should have been tolled during the period that the AAA considered her arbitration demand.
We have previously stated, albeit in dicta, that a "demand for arbitration does not toll the statute of limitations." United States ex rel. Portland Const. Co. v. Weiss Pollution Control Corp., 532 F.2d 1009, 1013 (5th Cir. 1976). In Portland Construction, we held that a claimant who demanded arbitration is not required to wait until the outcome of the arbitration to file a lawsuit. Id. In this case, Fonseca could have (and should have) filed her suit within the statute of limitations and, thereafter, sought a stay of the action pending arbitration. See id. Such a course would have guaranteed that the lawsuit was brought within the limitations period without waiving any right to arbitration which may have existed. Moreover, Fonseca has shown no evidence that she was misled by defendants or that she was prevented from pursuing her cause in any way. In fact, the record reveals that Fonseca had ample time both before and after the AAA's refusal to arbitrate her case in which to file her lawsuit, yet she took none of the steps "recognized as important by the statute before the end of the limitations period." Granger, 636 F.3d at 712. Therefore, in light of our decision in Portland Construction and the facts of this case, we cannot say that the district court abused its discretion when it declined to equitably toll the statute of limitations.
[*] Pursuant to 5TH CIR. R. 47.5, the court has determined that this opinion should not be published and is not precedent except under the limited circumstances set forth in 5TH CIR. R. 47.5.4.

Monday, April 16, 2012

"Gross mistake" challenge to arbitration award under TAA rejected in appeal from confirmation order

A few years ago the U.S. Supreme Court held that the statutory grounds provided in sections 10 and 11 of the Federal Arbitration Act (FAA) for vacating, modifying, or correcting an arbitration award are the exclusive grounds for vacature of an arbitration award. Hall St. Assocs., L.L.C. v. Mattel, Inc., 552 U.S. 576, 584, 128 S. Ct. 1396, 1403 (2008). The Texas Supreme Court, by contrast, has yet to decide whether common law grounds for attacking an arbitration award under the Texas Arbitration Act (TAA) are viable. See E. Tex. Salt Water Disposal Co. v. Werline, 307 S.W.3d 267, 270 n.7 (Tex. 2010) ("We express no opinion on this issue [of whether an arbitration under the TAA can be set aside on common law grounds.]." In a case decided last week, the First Court of Appeals in Houston entertained a challenge on the basis of “gross mistake”, and rejected it on the merits. The appellate panel, which upon rehearing had shrunk from three to two, also rejected other common-law grounds for vacature in an opinion written by Chief Justice Radack. Justice Elsa Alcala, a member of the original panel, was no longer on the Houston Court to revisit the issues on motion for re-hearing due to her elevation to the Texas Court of Criminal Appeals by gubernatorial appointment.  

Ouzenne v. HaynesNo. 01-10-00112-CV (Tex.App.- Houston [1st Dist] April 12, 2012)(substituted opinion following motion for rehearing, which was denied)


SHERRY RADACK, Chief Justice.

We deny appellant's motion for rehearing; however, we withdraw this Court's opinion of May 12, 2001, and issue this opinion in its stead. Our judgment of May 12, 2011 remains unchanged.

This is an appeal from an order confirming an arbitration award in favor of appellee, Carnell Haynes, on his claims against appellant, Paul Ouzenne, arising out of a construction contract. In seven issues on appeal, Ouzenne contends the trial court erred in confirming the award because the arbitrator (1) made a "gross mistake," (2) exceeded his powers, and (3) violated public policy and the law. We affirm.


According to his petition, Haynes approached Ouzenne about the possibility of Ouzenne building a four-plex apartment structure on Haynes's property. In December 2006, Haynes and Ouzenne signed a construction contract for the proposed four-plex. Unable to obtain financing for the project himself, Haynes alleged that Ouzenne told him that he would obtain the financing for Haynes. Thereafter, Haynes alleged that Ouzenne had him sign a contract of sale for the property from Haynes to Ouzenne. Haynes did so because he believed that it was necessary to obtain financing for the building project, but he did not realize that he would be transferring title to the property to Ouzenne. Thereafter, Ouzenne gave Haynes notice that he intended to evict Haynes from the property.

In response, Haynes sued Ouzenne in 2007, asserting common-law fraud, statutory fraud, breach of fiduciary duty, promissory estoppel, and violations of the Texas Deceptive Trade Practices Act. Ouzenne filed a motion to compel arbitration, which the trial court granted.

After an arbitration before C. Johnson at the Dispute Resolution Center of Harris County, the arbitrator issued an award in Haynes's favor for $136,410.60, plus pre and post-judgment interest. Haynes moved to enter judgment based on the arbitrator's award, and Ouzenne moved to vacate the arbitrator's award. On December 15, 2009, the trial court granted Haynes's motion, denied Ouzenne's motion, and entered a judgment confirming the arbitrator's award. After the trial court denied Ouzenne's motion for new trial, this appeal followed.


Standard of Review

Review of a trial court's decision as to vacatur or confirmation of an arbitration award is de novo and an appellate court reviews the entire record. In re Chestnut Energy Partners, Inc., 300 S.W.3d 386, 397 (Tex. App.-Dallas 2009, pet. denied); see also Statewide Remodeling, Inc. v. Williams, 244 S.W.3d 564, 567-68 (Tex. App.-Dallas 2008, no pet.) (discussing standard of review for confirmation of award). Because Texas law favors arbitration, however, our review is "extremely narrow." See Hisaw & Assocs. Gen. Contractors, Inc. v. Cornerstone Concrete Sys., Inc., 115 S.W.3d 16, 18 (Tex. App.-Fort Worth 2003, pet. denied); IPCO-G. & C. Joint Venture v. A.B. Chance Co., 65 S.W.3d 252, 256 (Tex. App.-Houston [1st Dist.] 2001, pet. denied). An arbitration award has the same effect as a judgment of a court of last resort; accordingly, all reasonable presumptions are indulged in favor of the award and the award is conclusive on the parties as to all matters of fact and law. CVN Group, Inc. v. Delgado, 95 S.W.3d 234, 238 (Tex. 2002). Review of an arbitration award is so limited that even a mistake of fact or law by the arbitrator in the application of substantive law is not a proper ground for vacating an award. Crossmark, Inc. v. Hazar, 124 S.W.3d 422, 429 (Tex. App.-Dallas 2004, pet. denied). Here, the parties agree that the Texas Arbitration Act governs their case. See TEX. CIV. PRAC. & REM. CODE ANN. §§ 171.001-.098 (Vernon 2001).

Gross Mistake

In issues one, two, four, and seven, appellant contends the trial court erred in failing to vacate the arbitration award because the arbitrator committed a "gross mistake"[1] by (1) entering an award that relied on tax appraisals for determining fair market value (issues one and two), (2) failing to consider evidence that Haynes was aware and fully intended to sell his property to Ouzenne (issue four), and (3) failing to properly apply the parol evidence rule (issue seven).

Gross mistake is a Texas state common law standard that has been used to attack arbitration awards. Callahan & Assocs. v. Orangefield Indep. Sch. Dist., 92 S.W.3d 841, 844 (Tex. 2002). A "gross mistake" is a mistake by the arbitrator that implies bad faith or failure to exercise honest judgment. Anzilotti v. Gene D. Liggin, Inc., 899 S.W.2d 264, 266 (Tex. App.-Houston [14th Dist.] 1995, no writ) (quoting Carpenter v. N. River Ins. Co., 436 S.W.2d 549, 551 (Tex. App.-Houston [14th Dist.] 1968, writ ref'd n.r.e.)). Ouzenne argues that relying on the tax rolls to determine value was a gross mistake because tax rolls are no evidence of actual value. In support, Ouzenne relies on Housing Auth. of Dallas v. Brown, 256 S.W.2d 656, 659 (Tex. Civ. App.-Dallas 1953, no writ), which held that error, if any, in refusing to admit evidence of tax value was harmless because "tax rolls do not reflect actual value," but an "approximate percentage of actual value." Id. Brown, however, does not state that the value as reflected on the tax rolls is of no probative value.

Ouzenne also relies on In re Marriage of Scott, 117, S.W.3d 580, 585 (Tex. App.-Amarillo 2003, no pet.), which we also find distinguishable. In Scott, the wife in a divorce case presented evidence that the marital home was valued at $35,610. Id. at 583. She reached this value by relying on the tax appraisal from Hutchison County Appraisal District. Id. at 585. The court of appeals held this evidence of value was factually insufficient because the tax appraisal was over three years old on the date of trial and two experts, including the wife's own expert, valued the property at much more. Id. Scott, however, does not stand for the proposition that tax appraisals are no evidence, i.e., legally insufficient evidence, of fair market value.[2]

Thus, we conclude that the arbitrator's reliance on tax rolls to determine value does not rise to a level that implies the bad faith or failure to exercise honest judgment required to show gross mistake.

Ouzenne also argues that the arbitrator committed gross mistake by disregarding testimony indicating that Haynes knew that he was selling the property to Ouzenne. However, contentions that an arbitrator disregarded even uncontroverted testimony may show a mistake of fact or law, but do not rise to the level of gross mistake. See Graham-Rutledge & Co. v. Nadia Corp., 281 S.W.3d 683, 689 (Tex. App.-Dallas 2009, no pet.). Furthermore, as fact-finder, the arbitrator could judge the credibility of the witnesses and choose who to believe or disbelieve. See Xtria L.L.C. v. Intern. Ins. Alliance, Inc., 286 S.W.3d 583, 597 (Tex. App.-Texarkana 2009, pet. denied).

Thus, we conclude that the arbitrator's decision to believe Haynes's evidence over Ouzenne's, even if erroneous, does not rise to a level that implies the bad faith or failure to exercise honest judgment required to show gross mistake.

Finally, Ouzenne contends that the arbitrator committed a "gross mistake" by failing to properly apply the parol evidence rule. The arbitrator's evidentiary ruling, even if erroneous, does not rise to a level that implies the bad faith or failure to exercise honest judgment required to show gross mistake. See Anzilotti., 899 S.W.2d at 266 (holding that mistake of law is insufficient to set aside arbitration award).

To the extent that points of error one, two, four, and seven claim that the arbitrator failed to give an honest consideration resulting in a gross mistake, they are overruled.

Exceeds Powers

In issue three, Ouzenne contends the arbitrator exceeded his powers, which is a statutory ground for vacating an arbitration award under section 171.088(a)(3)(A) of the Civil Practices and Remedies Code. TEX. CIV. PRAC. & REM. CODE ANN. § 171.088(a)(3)(A). The authority of arbitrators is derived from the arbitration agreement and is limited to a decision of the matters submitted therein either expressly or by necessary implication. Gulf Oil Corp. v. Guidry, 160 Tex. 139, 327 S.W.2d 406, 408 (1959); see also Allstyle Coil Co., L.P., v. Carreon, 295 S.W.3d 42, 44 (Tex. App.-Houston [1st Dist.] 2009, no pet.) (stating scope of authority depends on the agreement). Arbitrators exceed their powers when they decide matters not properly before them. Ancor Holdings, LLC v. Peterson, Goldman & Villani, Inc., 294 S.W.3d 818, 829 (Tex. App.-Dallas 2009, no pet.); Barsness v. Scott, 126 S.W.3d 232, 241 (Tex. App.-San Antonio 2003, pet. denied).

Ouzenne argues that the arbitrator exceeded his powers because the arbitration agreement requires that all disputes "be resolved by binding arbitration in accordance with the rules of the American Arbitration Association ["AAA"]," and the arbitrator was not selected in accordance with those rules. Instead, Ouzenne complains that the "parties were ordered to binding arbitration at the Harris County Dispute Resolution Center," which "unilaterally selected the Arbitrator, without providing a selection process."

However, the record shows that Ouzenne did not object to the method of appointing the arbitrator until after the arbitration was completed. In fact, Ouzenne did not complain about the method for appointing the arbitrator until he filed his motion for new trial after the trial court confirmed the award.

The AAA rules upon which Ouzenne rely provide that a party must object to the jurisdiction of the arbitrator in a timely manner. See Thomas Petroleum, Inc. v. Morris, No. 01-09-01065-CV, 2011 WL 742651, at *3, (Tex. App.-Houston [1st Dist.] Mar. 3, 2011, no pet.) (citing EMPLOYMENT ARBITRATION RULES AND MEDIATION PROCEDURES, Rule 6(c) (formerly known as NATIONAL RULES FOR RESOLUTION OF EMPLOYMENT DISPUTES)). The same is true under Texas common law. Id. (citing L.H. Lacy Co. v. City of Lubbock, 559 S.W.2d 348, 352-53 (Tex. 1977) (holding that, when both parties participate in arbitration proceedings, neither unequivocally withdraws its consent to arbitrate, and arbitration proceedings result in award, award is valid and enforceable)).

Thus, Ouzenne's right to complain about the method by which the arbitrator was selected is waived. See Slaughter v. Crisman & Nesbit, 152 S.W. 205, 207-08 (Tex. Civ. App-San Antonio 1912, no writ) (holding that when party to arbitration appeared and offered testimony before and after appointment of third arbitrator, he waived any irregularity in procedure occurring before the appointment of third arbitrator as required by agreement).

Because Ouzenne participated in the arbitration without complaining about the method by which the arbitrator was selected until after the arbitration was concluded and a judgment thereon was confirmed, the trial court did not err by concluding that the arbitrator did not exceed his authority by deciding matters not properly before him.

We overrule issue three.

Violates Public Policy and the Law

In issues five and six, Ouzenne contends the trial court erred in failing to vacate the arbitration award because it "violates public policy and the law." Specifically, Ouzenne complains that (1) the arbitration award did not specify a "laundry list" DTPA violation, and (2) was not based on a good or service as defined by the DTPA.

Ouzenne's claim, however, is not that the award should be vacated because it is unlawful,[3] but that the trial court committed an error of law. And, although Ouzenne claims that the award violates public policy, he cites no way in which the award violates "carefully articulated, fundamental policy." CVN Group, 95 S.W.3d at 239.

"[A]lleged errors in the application of substantive law by the arbitrators during the proceedings in arbitration are not reviewable by the court on a motion to vacate an award." Jamison & Harris v. Nat'l Loan Investors, 939 S.W.2d 735, 737 (Tex. App.-Houston [14 Dist.] 1997, writ denied). A mistake of fact or law is insufficient to set aside an arbitration award. Anzilotti, 899 S.W.2d at 266.

We overrule issues five and six.


We affirm the judgment of the trial court.[4]

For footnotes, click below: