COURT OF APPEALS
EIGHTH DISTRICT OF TEXAS
EL PASO, TEXAS
§
DR. MARC ELLMAN, INDIVIDUALLY
AND D/B/A SOUTHWEST EYE §
INSTITUTE, VISTA SURGERY No. 08-12-00029-CV
CENTER, LLC, AND AURA §
DEVELOPMENT, LLC, Appeal from
§
Appellants, County Court at Law No. 6
§
v. of El Paso County, Texas
§
JC GENERAL CONTRACTORS, AND (TC # 2009-508)
JOSE M. CHAVEZ, §
Appellee. §
OPINION
Appellants, Dr. Marc Ellman, individually and d/b/a Southwest Eye Institute, Vista
Surgery Center, LLC, and Aura Development, LLC, appeal the trial court’s denial of their
motion to compel arbitration. For the reasons that follow, we affirm.
FACTUAL SUMMARY
On November 9, 2006, JC General Contractors1 entered into an agreement with Marc
Ellman, M.D.2 for the construction of a shell building along with the surrounding improvements
1
Jose M. Chavez is president of JC General Contractors, Inc. The opinion will refer to JC General Contractors and
Chavez collectively as JC.
2
Dr. Ellman is the manager of Aura Development.
for an ophthalmology clinic and surgical center in El Paso, Texas at a total price of $1,529,603
(the “Shell Contract”). A little over one week later, JC signed a Standard Form Agreement
between the owner and design builder and provided it to Dr. Ellman. The Standard Form
Agreement contains an arbitration clause requiring Aura Development and JC to arbitrate any
disputes according to the clause requirements. Construction began and disputes eventually arose
regarding payment and completion of construction.
On January 23, 2009, JC filed its original petition against Appellants alleging theft,
conversion, fraud, breach of contract, and defamation. A few days later, Appellants answered
the suit, raising special exceptions and affirmative defenses, and counterclaimed for breach of
contract, fraud, breach of warranty, and declaratory judgment. From the time the suit was filed
until February 2010, the parties engaged in substantial and extensive discovery and the court set
the case for trial on July 12, 2010. It is undisputed that both parties initiated discovery during
this period. On June 7, 2010, the parties filed a joint motion for continuance on the ground they
would not be ready for trial because they needed to conduct additional discovery, including
depositions and production of records from third parties, and because the trial court had ordered
the parties to attend mediation. The trial court granted the joint motion for continuance. For the
next eight months, the parties engaged in additional discovery. In February 2011, the trial court
entered an order setting the case for jury trial on January 23, 2012 and for pretrial conference on
December 14, 2011. The order required the parties to bring to the pretrial conference their list of
witnesses and designated experts, list of exhibits, stipulation of medical records if applicable, and
a proposed charge. On February 18, 2011, the trial court also ordered the parties to mediation.
The record reflects that the parties continued to engage in discovery from March 4, 2011 through
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November of 2011. On September 23, 2011, JC filed its lists of trial fact witnesses and expert
witnesses as required by the scheduling order.
On August 18, 2011, Appellants took the deposition of JC’s chief financial officer. They
deposed Jose Chavez, president of JC General Contractors, on September 16, 2011. On
October 11, 2011, thirty-five months after filing suit and approximately three and a half months
before the January 23, 2012 trial setting, Appellants sent JC a letter asserting their demand for
arbitration. JC refused because arbitration had not been requested within a reasonable time as
required by the arbitration agreement. Appellants deposed two of JC’s former employees on
November 2, 2011 and two of its current employees on November 3. Approximately one week
later, on November 9, Appellants filed a motion to compel discovery and a motion to compel
arbitration. They also filed a motion for continuance of the January 23, 2012 trial setting. In the
motion for continuance, Appellants stated: “Since this matter was previously continued, the
parties have conducted extensive discovery.” [Emphasis added]. JC opposed arbitration on the
ground that Appellants had waived their right to arbitrate by substantially invoking the judicial
process. Following a hearing conducted on December 16, 2011, the trial court denied the motion
to compel arbitration.
WAIVER OF ARBITRATION
In their sole issue, Appellants contend that the trial court erred by finding they waived
their right to arbitration.
Applicable Law
A party seeking to compel arbitration must (1) establish the existence of a valid
arbitration agreement; and (2) show that the claims asserted are within the scope of the
agreement. See In re AdvancePCS Health L.P., 172 S.W.3d 603, 605 (Tex. 2005); Inland Sea,
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Inc. v. Castro, --- S.W.3d ---, 2012 WL 1715242 at *2 (Tex.App.--El Paso 2012, pet. denied). If
these two showings are made, then the burden shifts to the party resisting arbitration to present a
valid defense to the agreement, and absent evidence supporting such a defense, the trial court
must compel arbitration. See In re AdvancePCS, 172 S.W.3d at 607.
A party waives a right to arbitration by substantially invoking the judicial process to the
other party’s detriment or prejudice. Perry Homes v. Cull, 258 S.W.3d 580, 589-90 (Tex. 2008).
Prejudice within the context of waiver relates to the inherent unfairness resulting from a party’s
attempt to have it both ways by switching between litigation and arbitration to their own
advantage. Perry Homes, 258 S.W.3d at 597. Thus, prejudice refers to the inherent unfairness in
terms of delay, expense, or damage to a party’s legal position that occurs when the party’s
opponent forces it to litigate an issue and later seeks to arbitrate that same issue. Id., citing
Republic Insurance Company v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir. 2004).
JC had the burden to establish that Appellants substantially invoked the judicial process to JC’s
prejudice. Due to the strong presumption against waiver of arbitration, this hurdle is a high one.
Id., at 590.
Whether a party has waived arbitration must be decided on a case-by-case basis, based
upon an examination of the totality of the circumstances. See id., at 591; Baty v. Bowen, ---
S.W.3d ---, 2013 WL 2253584 at *4 (Tex.App.--Houston [14th Dist.] 2013, no pet.h.). In
making this determination, courts consider a wide variety of factors including:
• whether the party who pursued arbitration was the plaintiff or the defendant;
• how long the party who pursued arbitration delayed before seeking arbitration;
• when the party who pursued arbitration learned of the arbitration clause’s existence;
• how much the pretrial activity related to the merits rather than arbitrability or
jurisdiction;
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• how much time and expense has been incurred in litigation;
• whether the party who pursued arbitration sought or opposed arbitration earlier in the
case;
• whether the party who pursued arbitration filed affirmative claims or dispositive
motions;
• how much discovery has been conducted and who initiated the discovery;
• whether the discovery sought would be useful in arbitration;
• what discovery would be unavailable in arbitration;
• whether activity in court would be duplicated in arbitration;
• when the case was to be tried; and
• whether the party who pursued arbitration sought judgment on the merits.
Baty, --- S.W.3d ---, 2013 WL 2253584 at *4-5, citing Perry Homes, 258 S.W.3d at 591-92.
Standard of Review
We review a ruling denying a motion to compel arbitration for an abuse of discretion.
Perry Homes, 258 S.W.3d at 602. Under this standard, we defer to the trial court’s factual
determinations if they are supported by the evidence and review its legal determinations de novo.
Brainard v. State, 12 S.W.3d 6, 30 (Tex.1999), disapproved on other grounds by Martin v.
Amerman, 133 S.W.3d 262 (Tex. 2004). Whether a party has waived arbitration by litigation
conduct is a question of law, which we review de novo. See Perry Homes, 258 S.W.3d at 598; In
re ReadyOne Industries, Inc., 294 S.W.3d 764, 772 (Tex.App.--El Paso 2009, orig. proceeding).
Did Appellants Substantially Invoke the Judicial Process?
The parties do not dispute the validity and existence of the arbitration clause within the
Standard Form Agreement or that the issues disputed are within the scope of the agreement as
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initially required in order to compel arbitration. The issue is whether JC established its waiver
defense.
An examination of the Perry Homes factors demonstrates that Appellants substantially
invoked the judicial process. Appellants are the defendants in the trial court, but they have also
raised affirmative claims for relief by virtue of their counterclaim. Perhaps the most striking of
these factors is that Appellants waited almost three years after the suit was filed and two and a
half months before the trial date to demand arbitration. Appellants do not dispute they had
knowledge of the arbitration clause. As signatories to the Standard Form Agreement, knowledge
of the terms of the contractual agreement, including the arbitration clause, is imputed to Dr.
Ellman and Aura Development. See In re ReadyOne Industries, 294 S.W.3d at 769. The record
also reflects that discovery went to the merits of the case, rather than arbitrability or standing. In
a motion for continuance filed a few days after they filed their motion to compel arbitration,
Appellants asserted the following: “Since this matter was previously continued, the parties have
conducted extensive discovery.” [Emphasis added]. They also concede in their brief on appeal
that Appellants and JC were initiators of the discovery but assert that JC conducted the bulk of it.
The record certainly supports Appellants’ assertion that JC initiated more discovery than
Appellants, but it also shows that Appellants initiated more than a minimal amount of discovery.
Appellants do not dispute that they have made 155 requests for production, multiple requests for
disclosure, and thirty interrogatories. The record also reveals that Appellants took at least six
depositions, including four which were taken only one week before Appellants filed their motion
to compel and a mere two and one-half months before the trial date. Appellants suggest in their
brief that they did not move for arbitration on the eve of trial, but the Supreme Court has
emphasized that “the eve of trial” is not limited to the evening before trial. Perry Homes, 258
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S.W.3d at 596; see Com-Tech Associates v. Computer Associates International, Inc., 938 F.2d
1574, 1576-77 (2d Cir. 1991)(citing Perry Homes and finding waiver where the movant
requested arbitration four months before the trial date). Finally, the record shows that Appellants
filed a motion for partial summary judgment on several of JC’s claims, but Appellants argue this
should not be considered as evidence of waiver because it occurred after Appellants filed their
motion to compel arbitration. See In re ReadyOne Industries, Inc., 294 S.W.3d 764, 772
(Tex.App.--El Paso 2009, orig. proceeding)(refusing to find waiver by engaging in discovery
after the demand for arbitration had been made).
Appellants cite three cases in support of the argument they did not substantially invoke
the judicial process. Each of these cases is factually distinguishable. The Fifth Circuit found no
waiver in Walker v. J.C. Bradford & Company, 938 F.2d 575, 578 (5th Cir. 1991) where the
defendant engaged in minimal discovery, attended a pretrial conference, and moved to transfer
the case during the thirteen-month period before filing a motion to compel arbitration.
Appellants, in contrast, waited almost three years to invoke their right to compel arbitration after
engaging in extensive discovery that went to the merits of the case.
In Tenneco Resins, Inc. v. Davy International, 770 F.2d 416, 420-21 (5th Cir. 1985) the
court found no waiver where the defendant had filed an answer, interrogatories, and a request for
document production, moved for a protective order, and agreed to a joint motion for a
continuance requesting an extension of the discovery period. The defendant waited eight months
before moving to compel arbitration. Unlike the facts in the instant case, the defendant there
filed a demand for arbitration in its answer, continuously asserted its desire for arbitration
throughout the discovery process, and only engaged in a minimal amount of discovery. Tenneco
Resins, 770 F.2d at 420-21.
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Finally, in General Guaranty Insurance Company v. New Orleans General Agency, Inc.,
427 F.2d 924, 928-29 (5th Cir. 1970), the court found no waiver of the right to arbitrate where
the moving party filed an answer and counterclaims, attempted to implead third parties, and
allowed the taking of two depositions over a ten-month period before demanding arbitration. In
this case, Appellants had knowledge of the arbitration provision before suit was instituted and
they engaged in extensive discovery for almost three years before asserting their right to
arbitrate.
We conclude that Appellants substantially invoked the judicial process. The only
remaining question is whether JC showed that Appellants’ tardy invocation of the right to
arbitrate operated to its detriment.
Prejudice
Substantially invoking the judicial process does not waive a party’s arbitration rights
unless the opposing party proves that it suffered prejudice as a result. Perry Homes, 258 S.W.3d
at 593. A demand for arbitration puts a party on notice that arbitration may be forthcoming, and
therefore, affords that party the opportunity to avoid compromising its position with respect to
arbitrable and nonarbitrable claims. Perry Homes, 258 S.W.3d at 600, citing Republic Insurance
Company v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir.2004). In contrast, where a
party fails to demand arbitration and in the meantime engages in pretrial activity inconsistent
with an intent to arbitrate, the party later opposing a motion to compel arbitration may more
easily show that its position has been compromised or prejudiced. Id.
The discovery initiated by JC does not provide a basis for finding prejudice. As the
Supreme Court explained in Perry Homes, a party who requests lots of discovery is not
prejudiced by getting it and taking it to arbitration in the same way as a party who is required to
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produce lots of discovery outside the stricter discovery limits in arbitration. Perry Homes, 258
S.W.3d at 600. Here, Appellants did not just respond to discovery. They actively initiated
discovery on the merits and continued to do so until they filed their motion to compel arbitration
in November 2011. In fact, Appellants took four depositions after they sent the letter to JC
demanding arbitration and just days before they filed their motion to compel arbitration in the
trial court. Appellants concede that substantial discovery on the merits has occurred, but they
assert prejudice is not shown because there is no evidence of how much the discovery cost. A
party opposing arbitration is not always required to prove the cost of the extensive discovery in
order to prove prejudice. See Perry Homes, 258 S.W.3d at 599-600 (rejecting dissent’s view that
prejudice was not proven due to absence of evidence regarding how much the extensive
discovery cost). Appellants also waited to make their demand for arbitration until after JC
revealed its trial strategy through the filing of its trial fact and expert witness lists. This case
presents prejudice in the form of considerable delay, expense, and damage to JC’s legal position.
Based on the totality of the circumstances, we conclude that Appellants waived the right to
arbitrate by substantially invoking the judicial process to the detriment of JC. It is unnecessary
to address JC’s alternative argument that the trial court properly overruled the motion to compel
arbitration because Appellants failed to file the request for arbitration within a reasonable time as
required by the arbitration provision. We therefore overrule Appellants’ sole issue and affirm
the trial court’s order denying the motion to compel arbitration.
October 23, 2013
ANN CRAWFORD McCLURE, Chief Justice
Before McClure, C.J., Rodriguez, and Larsen, JJ.
Larsen, J. (Senior Judge), sitting by assignment
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