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Mandamus and Interlocutory Appeal Both Advisable to Overturn Order Denying Motion to Compel Arbitration

By Jonathan C. Scott 1
Lawfinders Associates, Inc.


Introduction

With arbitration provisions becoming commonplace, attorneys are often confronted by the question of whether an arbitration agreement is governed by federal or state law. While similar rules often apply under both federal and state law, deciding which law applies is not always obvious or certain. This issue is particularly significant when a Texas trial court denies a motion to compel arbitration. Indeed in such situations, a party's ability to seek appellate review of the trial court's order may hinge on which statutory scheme controls.

Consider the following scenario: Your client has a dispute with another party, and there is an agreement requiring that any disputes between them will be submitted to arbitration. The other party ignores the arbitration provision and files suit in state court. You want to enforce the arbitration provision, so you file a motion to compel arbitration, but the trial court denies the motion. What you do now depends on whether the arbitration agreement is governed by the Federal Arbitration Act, 9 U.S.C. § 1 et seq. (the "FAA"), or the Texas Arbitration Act, Tex. Civ. Prac. & Rem. Code § 171.001, et seq. (the "TAA"). If the FAA controls, you can seek relief by writ of mandamus, while if the TAA controls, you can file an interlocutory appeal. 2 But if it is unclear which act governs, which is often the case, the safest course under the present law is to do both. This odd situation results from the manner in which Texas courts have interpreted the two statutory schemes.

The Interaction Between the FAA and the TAA

It is often unclear whether an arbitration provision is subject to the FAA or the TAA. Sometimes, the parties' agreement spells out whether the FAA or the TAA controls, and courts will generally honor such a choice-of-law provision. For instance, when the parties agree that disputes will be submitted to arbitration pursuant to the FAA, a Texas court will apply the federal law. See In re Kellogg Brown & Root, 80 S.W.3d 611, 617 (Tex. App. – Houston [1st Dist.] 2002, orig. proceeding). When the FAA expressly applies by agreement, courts will not apply the TAA.

Because the FAA, but its terms, extends to any contract involving or affecting interstate commerce consistent with the Commerce Clause of the United States Constitution, parties often believe that simply because a dispute involves or affects commerce, the FAA will automatically control, to the exclusion of the TAA. That is not true. The Texas Supreme Court has rejected the proposition that the FAA and the TAA are mutually exclusive. Instead, when an arbitration agreement does not specify which statutory scheme controls, both statutes may apply unless the FAA actually preempts the TAA.

The Supreme Court has articulated a four-factor test for determining when the TAA is preempted by the FAA. Under this test, the TAA is only preempted if "1) the agreement is in writing, (2) it involves interstate commerce, (3) it can withstand scrutiny under traditional contract defenses [under state law], and (4) state law affects the enforceability of the agreement." In re Nexion Health at Humble, Inc., 173 S.W.3d 67, 69 (Tex. 2005). The fact that the parties' agreement affects interstate commerce is not, by itself, sufficient to preclude enforcement under the TAA. Instead, for the FAA to preempt the TAA, "state law must refuse to enforce an arbitration agreement that the FAA would enforce, either because (1) the TAA has expressly exempted the agreement from coverage, see Tex. Civ. Prac. & Rem. Code § 171.002(a) (detailing various claims the TAA "does not apply to"), or (2) the TAA has imposed an enforceability requirement not found in the FAA." In re D. Wilson Const. Co., 196 S.W.3d 774, 780 (Tex. 2006). For instance, section 171.002(a)(3) exempts most personal injury claims from arbitration, but such an agreement would be enforceable under the FAA, and the TAA is therefore preempted if the other factors are present. Similarly, the FAA preempts the TAA's requirement that an agreement to arbitrate in personal injury cases be signed by a party's counsel. Nexion, 173 S.W.3d at 69. In summary, unless applying the TAA would constitute an obstacle to enforcing an arbitration clause that would be enforceable under the FAA, a Texas court has jurisdiction under both statutes.

This raises troubling questions when seeking review of a trial court's decision to deny a request for arbitration because there is a significant difference in how review can be sought under the two statutory schemes. The Texas Supreme Court has indicated that when a party is erroneously denied its contracted-for right to arbitrate under the FAA, there is no adequate remedy by appeal. In re D. Wilson Construction Co., 196 S.W.3d 774, 780 (Tex. 2006). Accordingly, a party seeking relief from a trial court's order must file a petition for writ of mandamus with the court of appeals. But if arbitration is denied under the TAA, the trial court's order may be challenged through an interlocutory appeal. Tex. Civ. Prac. & Rem. Code Ann. § 171.098(a). If a party files an interlocutory appeal and it turns out that the FAA does control, the appeal will be dismissed for lack of jurisdiction. Similarly, a writ of mandamus will only issue to correct a clear abuse of discretion when there is no adequate remedy by appeal. If the TAA actually controls, a petition for writ of mandamus would be denied because an adequate remedy – interlocutory appeal – exists.

To be Safe, File an Interlocutory Appeal and a Petition for Mandamus

So what should a party do when it is unclear whether the TAA or the FAA governs the situation. In In re D. Wilson Construction Co., 196 S.W.3d 774 (Tex. 2006), the Supreme Court confronted this situation. D. Wilson arose out of a dispute between contractors and a school district regarding construction of two school buildings. The parties' agreement included an arbitration clause providing that any disputes would be settled by arbitration under the Construction Industry Arbitration Rules of the American Arbitration Association. The trial court denied the contractors' motion to compel arbitration, ruling that the contract in question was ambiguous. The contract did not reference either the FAA or the TAA. The contractors filed a petition for writ of mandamus and an interlocutory appeal, and the court of appeals consolidated the two proceedings. The court of appeals then dismissed the interlocutory appeal for lack of jurisdiction, ruling that the TAA was inapplicable because the dispute concerned interstate commerce. The court of appeals also denied the petition for writ of mandamus, holding that a clause in the agreement created an ambiguity.

The Supreme Court reversed the court of appeals' dismissal of the interlocutory appeal. The contract included a provision stating that it was to be "governed by the law of the place where the Project is located." The court held that such language invoked both federal and state law and specifically rejected the court of appeals' holding that because interstate commerce was involved, the FAA, and not the TAA, governed. Instead, the court reiterated its prior holding that the FAA only preempts state arbitration statutes that are inconsistent with the FAA. In this case, there was nothing in the TAA or other Texas state law that would have prevented enforcement of the arbitration agreements. The court concluded that because both the FAA and the TAA applied, the court of appeals had jurisdiction under both laws and could consider both the interlocutory appeal under the TAA and the petition for writ of mandamus under the FAA. The court therefore gave its tacit blessing to parties filing both an interlocutory appeal and a mandamus petition when it was unclear that the FAA or the TAA applied exclusively.

The Supreme Court did recognize the absurdity of requiring parties to initiate two separate appellate proceedings, with the resulting duplication of filing fees, printing, and service. In D. Wilson, the court stated it could "see no benefit in requiring parties to pursue parallel proceedings that are ‘unnecessarily expensive and cumbersome' . . .." D. Wilson, 196 S.W.3d at 780 n.4, quoting Jack B. Anglin Co. v. Tipps, 842 S.W.2d 266, 272 (Tex. 1992). The situation is particularly unreasonable given that the legal standards under both statutory schemes are often identical. For instance, the standard for determining whether a party has waived its right to arbitrate is the same under both the TAA and the FAA. Southwing Group, Inc. v. Landwehr, 188 S.W.3d 730, 735 (Tex. App. – Eastland 2006, no pet.) Nevertheless, the Supreme Court made it plain that it was powerless to fix the problem. The Legislature, as of now, has only provided for an interlocutory appeal from cases governed by the TAA. The Supreme Court does not have the authority to enlarge appellate jurisdiction absent action by the Legislature. In D. Wilson, the court suggested that the Legislature amend the TAA to also permit interlocutory appeals of orders issued under the FAA.

Conclusion

In the meantime, to protect its rights, when a party is uncertain as to whether the FAA or the TAA governs, a party seeking to overturn a trial court's denial of a motion to compel arbitration should file both a mandamus petition and an interlocutory appeal. Appellate courts will generally consolidate the two proceedings either sua sponte or at the request of a party. By making use of both procedural mechanisms, a party will safeguard its rights should the appellate court conclude that either the FAA or the TAA was not applicable.




As co-founder of Lawfinders Associates, Inc., Jonathan C. Scott has provided high-level strategic advice, research, and brief writing services since 1984. Mr. Scott may be reached at jcscott@lawfinders.com.

1. The author thanks Lawrence R. Lassiter, senior staff attorney with Lawfinders Associates, Inc., for his valuable assistance in the preparation of this article.

2. Tex. Civ. Prac. & Rem. Code § 171.098(a)(1)




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