Opinion
NO. 01-15-01006-CV
05-05-2016
PROFESSIONAL ADVANTAGE SOFTWARE SOLUTIONS, INC., Appellant v. WEST GULF MARITIME ASSOCIATION INC., Appellee
On Appeal from the 151st District Court Harris County, Texas
Trial Court Case No. 2012-58827
MEMORANDUM OPINION
In this interlocutory appeal, we consider whether the trial court erred in denying appellant's motion to compel arbitration after concluding that appellant had waived its right to arbitrate by substantially invoking the judicial process, thereby prejudicing appellee. We affirm.
See TEX. CIV. PRAC. & REM. CODE ANN. § 51.016 (West 2015); see also TEX. CIV. PRAC. & REM. CODE ANN. § 171.098(a)(1) (West 2011); In re Santander Consumer USA, Inc., 445 S.W.3d 216, 217 (Tex. App.—Houston [1st Dist.] 2013, orig. proceeding) (providing that Texas appellate courts have jurisdiction over interlocutory orders denying motions to compel arbitration).
BACKGROUND
West Gulf Maritime Association ["WGMA"] is a non-profit corporation that negotiates and administers collective bargaining agreements on behalf of stevedores that employ International Longshoremen's Association labor in ports along the Texas and Louisiana Gulf Coast. Professional Advantage Software Solutions ["ProFad"] is a company that assists businesses in developing and utilizing technology in their workplaces.
In 2010, WGMA hired ProFad to replace and upgrade its payroll and benefits processing system. Specifically, ProFad was to install and implement Microsoft Dynamics Great Plains and Personnel Agency Managements software systems ["the PAM module"]. In furtherance of this agreement, WGMA signed ProFad's Functional Design Specifications ["FDS"] and Statement of Work [SOW"] on November 5, 2010; ProFad never signed either agreement. At some point, ProFad also sent WGMA a Software Licensing Agreement ["the Licensing Agreement"], which contained a clause requiring arbitration of "[a]ny dispute controversy, cause of action, or claim, of any kind or nature whatsoever . . . which arise out of or relate to (1) this Agreement, or the breach, termination or invalidity of this Agreement, (2) the sale, installation modification of use of [the PAM module], or (3) any services rendered in connection with the sale, installation, modification, or use of the [PAM module] . . . ." Neither party signed the Agreement, but installation of the software began nonetheless.
Unhappy with the performance of the software system, WGMA filed suit against ProFad in October 2012, alleging DTPA violations, breach of contract, negligent misrepresentation, negligence and gross negligence, and breach of express and implied warranties.
On November 9, 2012, ProFad filed its Original Answer, in which it asserted a general denial and several affirmative defenses. It also demanded a jury trial and paid its jury fee. Finally, it requested an abatement pending notice of WGMA's DTPA claims. In July 2012, WMGA provided such notice, and the parties agreed to an abatement until September 6, 2013.
Beginning in April 2014, the parties joined in several agreed motions such as an Agreed Protective Order to "facilitate discovery," an Agreed Motion to Extend the Deadline for Joinder of Parties, an Agreement for Alternative Dispute Resolution, and an Agreed Motion for Entry of Docket Control Order, seeking to extend discovery and other deadlines.
The case mediated on September 24, 2014, but the case did not settle.
In July 2014, ProFad sought and obtained leave to add several responsible third parties, including Sirius Solutions, Derek Hall, and Tatum, LLC.
Discovery began in earnest in July 2014. ProFad sent three notices of intent to take deposition by written questions of the custodian of records for IgniteMedia, LLC, Sirius Solutions, and Tatum, LLC. ProFad also sent discovery requests to WMGA that included 10 interrogatories and 23 requests for production, which WMGA answered: WGMA also responsed to ProFad's requests for disclosures. ProFad also served WGMA with additional discovery requests including 71 requests for admission, seven more interrogatories, and 15 requests for production. All in all, WMGA produced more than 77,000 pages of documents and ProFad produced more than 32,000 pages of documents.
In August 2014, ProFad designated its expert witnesses and amended its designation in March 2015.
In May 2015, ProFad filed a Motion to Compel WMGA to produce a settlement agreement that WMGA had entered into with other defendants who had been dismissed from the suit. In its motion to compel, ProFad asserted that "[t]he parties have exchanged extensive discovery . . . ."
In April 2015, ProFad deposed WMGA's president, and in April and May 2015, ProFad presented two of its own employees for deposition.
ProFad also filed three separate motions for summary judgment. In September 2014, ProFad filed a Traditional and No-Evidence Motion for Summary Judgment that attacked the merits of WMGA's breach of contract, negligent misrepresentation, and express and implied warranty claims. Finding that there were fact issues as to each of these claims, the trial court denied ProFad's first motion for summary judgment.
In October 2014, ProFad filed a second motion for summary judgment entitled Motion for Partial Summary Judgment Limiting Liability and Dismissing Warranty Claims. In this motion, ProFad claimed that the Licensing Agreement, which it attached as evidence to the motion, was valid and enforceable, limited WMGA's damages, and disclaimed any warranties. The trial court denied this motion on September 25, 2015.
In May 2015, ProFad filed its third motion for summary judgment entitled Traditional and No-Evidence Motion for Summary Judgment. This motion also attacked the merits of WGMA's claims, and, once again, referenced the License Agreement. On September 25, 2015, the trial court also denied this motion.
In November 2014, ProFad sought leave to file an amended answer and counterclaim, which the trial court granted. Accordingly, on November 25, 2014, ProFad filed an amended answer and asserted counterclaims against WGMA for breach of contract and seeking a declaratory judgment. Again, ProFad attached the License Agreement to both its motion for leave and its answer and counterclaim.
The case was originally set for trial on December 2, 2013, but was reset, several times by agreement of the parties, at least 5 times—September 15, 2014, January 19, 2015, July 6, 2015, October 19, 2015, and finally, January 18, 2016. Sometime in October 2015, near the time of the October 19 trial setting, ProFad hired new counsel and sought and obtained a continuance to the January 2016 trial setting so that "new counsel could get up to speed on the case." In its motion for continuance, ProFad requested time to "conduct additional discovery with its new legal counsel" that was "critical to its claims and defenses." For the very first time, ProFad argued that, based on the Licensing Agreement, the "dispute should be in arbitration in North Dakota." Although the Licensing Agreement had been filed in the trial court three separate times and served as the basis for ProFad's second motion for summary judgment, ProFad argued that it had just "discovered that there is an agreement entitled 'License Agreement' that includes an arbitration provision."
ProFad's counsel was originally Katherine Sunstrom. In September 2015, addititional counsel, Jamey Voge, was added to ProFad's legal team. In October 2015, Sunstrom filed a motion to withdraw, in which she asserted that she and ProFad "have developed substantial inherent conflicts and irreconcilable differences that have made further representation untenable." ProFad, in fact, indicated to the trial court that it was considering legal action against Sunstrom. The trial court permitted Sunstrom to withdraw on October 19, 2015. --------
On October 19, 2015, three years after WGMA filed suit, just before the fifth trial setting and one month after ProFad obtained new counsel, ProFad filed a Motion to Compel Arbitration and Stay Proceedings based on the arbitration clause in the Licensing Agreement. On November 18, 2015, the trial court denied ProFad's motion "on the basis of waiver by Defendant Professional Advantage Software Solutions, Inc." This interlocutory appeal followed.
WAIVER OF ARBITRATION
In its second issue on appeal, ProFad contends the trial court "err[ed] in denying [ProFad's] Motion to Compel Arbitration and Stay Proceedings when [ProFad] proved that the case is subject to arbitration and that it did not waive its right to arbitrate[.]"
Standard of Review
We review a denial of a motion to compel arbitration under the abuse of discretion standard. Okorafor v. Uncle Sam & Assocs., Inc., 295 S.W.3d 27, 38 (Tex. App.—Houston [1st Dist.] 2009, pet. denied). However, the trial court's ultimate conclusion concerning waiver is a legal question that we review de novo. Id. When the trial court must first resolve underlying facts, we defer to the trial court's factual resolutions and any credibility determinations that may have affected those resolutions, and we may not substitute our judgment on these matters. Id.
Applicable Law
A party may waive its right to compel arbitration by substantially invoking the litigation process to its opponent's detriment. In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex. 2007) (orig. proceeding). There is a strong presumption against finding that a party has waived its right to arbitration; the burden to prove waiver is thus a heavy one. See id.; In re D. Wilson Constr. Co., 196 S.W.3d 774, 783 (Tex. 2006). Any doubts regarding waiver are resolved in favor of arbitration. In re Bruce Terminix Co., 988 S.W.2d 702, 705 (Tex. 1998).
Waiver may be express or implied, but it must be intentional. EZ Pawn Corp. v. Mancias, 934 S.W.2d 87, 89 (Tex. 1996). Waiver is a question of law based on the totality of the circumstances. The test for waiver is whether the party moving for arbitration "has substantially invoked the judicial process to an opponent's detriment, the latter term meaning inherent unfairness caused by 'a party's attempt to have it both ways by switching between litigation and arbitration to its own advantage.'" In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 625 (Tex. 2008) (orig. proceeding) (quoting Perry Homes v. Cull, 258 S.W.3d 580, 597 (Tex. 2008)).
Substantially Invoked Judicial Process?
In determining whether a party waived the right to arbitrate, courts may consider, among other factors: (1) whether the movant for arbitration was the plaintiff (who chose to file in court) or the defendant (who merely responded), (2) when the movant learned of the arbitration clause and how long the movant delayed before seeking arbitration, (3) the amount of pretrial activity related to the merits rather than arbitrability or jurisdiction, (4) the amount of discovery conducted and by whom, (5) whether the discovery went to the merits rather than arbitrability or jurisdiction, (6) whether the movant sought judgment on the merits, and (7) what discovery is available in arbitration. See Perry Homes, 258 S.W.3d at 590-92; In re Hawthorne Townhomes, L.P., 282 S.W.3d 131, 141 (Tex. App.—Dallas 2009, no pet.).
Here, WGMA chose to file in court, not ProFad. ProFad did, however, file affirmative defenses and a counterclaim, and it added responsible third parties well after the lawsuit was initiated.
ProFad claimed, in its amended Motion for Continuance of the October 19, 2015 trial setting, that the trial court "should not even have been burdened by this case to begin with[,] because ProFad has "discovered that there is an agreement entitled 'License Agreement' that includes [an] arbitration provision." However, the arbitration agreement was in the Licensing Agreement that ProFad drafted, and ProFad had relied on different provisions of that same Licensing Agreement in previous filings, including its second motion for summary judgment. While ProFad's newly hired counsel may have just "discovered" the arbitration clause, ProFad's claim that it did not know of the clause is untenable. Just as a party is presumed to know the contents of an agreement that it signs, see Emerald Tex., Inc. v. Peel, 920 S.W.2d 398, 402 (Tex. App.—Houston [1st Dist.] 1996, no pet.), we also presume that a party knows the contents of an agreement that it drafts and seeks to enforce. Thus, ProFad knew of the arbitration agreement from at least the time the lawsuit was filed, but it did not seek to compel arbitration until almost three years later, just before the fifth trial setting.
There was no pretrial activity related to arbitrability until ProFad raised the issue in October 2015, approximately three years after the lawsuit was filed. All of the pretrial activity related to abatement, mediation, discovery, and motions for summary judgment on the merits. Arbitration was never an issue at all until ProFad obtained new counsel and the fifth trial setting approached.
Significant discovery was conducted by both parties. WGMA produced over 77,000 pages of documents, and ProFad produced over 32,000 pages of documents. Indeed, in a motion to compel, ProFad represented to the trial court that "[t]he parties have exchanged extensive written discovery as well as depositions of two key witnesses." ProFad presented two of its employees for deposition, and it took the deposition of WGMA's president. In its amended motion to continue the October 2015 trial setting, ProFad requested additional time to conduct further depositions of the expert witnesses.
In addition to the amount of discovery conducted, it is important to note that all of the discovery went to the merits of the case, and none of the discovery related to arbitrability or jurisdiction.
Finally, and perhaps most importantly in this case, ProFad moved for summary judgment on the merits and lost three separate times before obtaining new counsel, who then moved to compel arbitration. Rather than seeking to avoid litigation, ProFad chose to litigate the merits of the case in the trial court on multiple occasions. Unsuccessfully attempting to obtain a favorable result in court before requesting a referral to arbitration is the type of litigation behavior that supports the trial court's waiver finding. See Nw. Constr. Co. v. Oak Partners, L.P., 248 S.W.3d 837, 848 (Tex. App.—Fort Worth 2008, pet. denied); Williams Indus., Inc. v. Earth Dev. Sys. Corp., 110 S.W .3d 131, 135 (Tex. App.—Houston [1st Dist.] 2003, no pet.); see also Haddock v. Quinn, 287 S.W.3d 158, 180 (Tex. App.—Fort Worth 2009, pet. denied) (stating that failure to seek arbitration until after proceeding to adverse result in litigation "is the clearest form of inconsistent litigation conduct and is inevitably found to constitute substantial invocation of the litigation process resulting in waiver").
ProFad relies on a series of cases, each of which holds that certain conduct is not sufficient to substantially invoke the judicial process. See EZ Pawn, 934 S.W.2d at 89-90 (holding that arbitration not waived by answering suit, participating in docket control conference, propounding discovery, noticing deposition, and agreeing to reset trial date); G.T. Leach Builders, LLC. v. Sapphire V.P., LP, 458 S.W.3d 502, 512 (Tex. 2015) (holding that filing defensive counterclaim not a waiver of arbitration); Baty v. Bowen, Miclette & Britt, Inc., 423 S.W.3d 427, 437 (Tex. App.—Houston [14th Dist.] 2013, pet. denied) (holding that conducting "considerable," but not "full discovery" was not waiver of arbitration); GT Leach Builders, LLC, 458 S.W.3d at 514 (holding that designating experts and responsible third parties not sufficient to waive arbitration).
However, we cannot view ProFad's actions in isolation, but must, instead, consider the totality of the circumstances. See Perry Homes, 258 S.W.3d at 59. As discussed above in more detail, ProFad waited three years until just before the fifth trial setting to seek enforcement of an arbitration clause that it drafted and knew existed, and it did so only after conducting significant discovery and filing multiple case-dispositive motions related to the merits of the case. After considering the totality of these circumstances, as we must, see Perry Homes, 258 S.W.3d at 591, we conclude that ProFab substantially invoked the judicial process.
Prejudice
Waiver of arbitration also requires a showing of prejudice by the nonmoving party. Id. at 595. The nonmovant must show the fact of prejudice, but not the extent of prejudice. Id. at 599. Prejudice refers to the inherent unfairness caused by "a party's attempt to have it both ways by switching between litigation and arbitration to its own advantage." Citigroup Global Mkts., 258 S.W.3d at 625 (quoting Perry Homes, 258 S.W.3d at 597). Such inherent unfairness may be manifested "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." Perry Homes, 258 S.W.3d at 597 (quoting Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir. 2004) (punctuation omitted)).
Here, there was a three year delay in seeking arbitration, and, when ProFad finally sought to compel arbitration, it was approximately one week before the fifth trial setting in the case, i.e., on the "eve of trial." See Perry Homes, 258 S.W.3d at 596 ("The rule that one cannot wait until 'the eve of trial' to request arbitration is not limited to the evening before trial; it is a rule of proportion that is implicated here."). During that three year period, the parties had exchanged significant, merits-based discovery. See id. at 599 (stating that extensive discovery was evidence of prejudice even absent proof of how much discovery cost). But, most importantly in this case, WGMA responded to three separate summary judgment motions on the merits and prevailed on each one. As such, it was required to prematurely marshal its evidence on the substantive issues in the case. If arbitration were allowed at this point, ProFad would have the benefit of having forced a "preview" of WGMA's case on the merits. See Adams v. StaxxRing, Inc., 344 S.W.3d 641, 652 (Tex. App.—Dallas 2011, pet. denied) (holding that requiring nonmovant to "marshal their evidence, thought process, and legal analysis" was evidence of compromise to nonmovant's legal position and relevant to showing prejudice).
Again, after considering the totality of the circumstances, as we must, see Perry Homes, 258 S.W.3d at 591, we conclude that ProFad's conduct in "attempt[ing] to have it both ways by switching between litigation and arbitration to its own advantage" shows the kind of "inherent unfairness" sufficient to establish prejudice. Id. at 597.
Having found that ProFad substantially invoked the judicial process to WGMA's prejudice, we overrule ProFad's second issue on appeal. In light of our holding that the trial court properly found that ProFad waived arbitration, we need not address its first issue, in which it argues that the arbitration agreement is valid and enforceable, and we decline to do so. See TEX. R. APP. P. 47.1
CONCLUSION
We affirm the trial court's judgment.
Sherry Radack
Chief Justice Panel consists of Chief Justice Radack and Justices Keyes and Higley.