Phytel, Inc. v. Smiley, James Neil

REVERSE and RENDER; Opinion Filed April 5, 2013.

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No. 05-I 2-00607-CV

PHYTEL, INC., Appellant

V.

JAMES NEIL SMILEY, Appellee

On Appeal from the 192nd judicial District Court
Dallas County, Texas
Trial Court Cause No. 12-01010

MEMORANDUM OPINION
Beft)re Justices O’Neill, FitzGerald, and Lang-Miers
Opinion by Justice Lang-Miers
Phytel, Inc. filed this interlocutory appeal from the trial court’s order denying Phytel’ s

motion to compel arbitration. We conclude that the trial court erred by denying the motion. We

issue this memorandLirn opinion pursuant to Texas Rule of Appellate Procedure 47.4 because the

law to be applied in the case is well settled. We reverse the trial court’s order and render

judgment granting Phytel’s motion to compel arbitration.

Background

James Neil Smiley is the former CEO of Phytel. Smiley and Phytel executed an

Employment Agreement (Contract 1) that contained a noncompete restrictive covenant. About

17 months later. Smiley’s employment at Phytel was terminated, and the parties executed a

Separation Agreement and Release (Contract 2). Contract 2 referred to the noncompete covenant
in Contiact I and acknowledged the covenant’s continued enlorceabil ity. Contract 2 contame(l

an arbitration clause.

Over a year after Smiley lell Phytel. the parties executed another agreement (Contract 3)

br Ph tel’s repurchase of its common stock owned by Smiley. Contract 3 stated that Phylel

agreed to repurchase Smiley’s stock in exchange for Smiley’s reaffirmation of “his obligations

under [Contract 21 in accordance with the terms thereof as such obligations are modified by the

provisions of this Section 6.” Section 6 amended the noncompete covenant. Contract 3 did not

contain an arbitration clause.

About three years after the parties signed Contract 3, Smiley flied this declaratory

judgment action seeking a declaration that the noncompete covenant was unenforceable. Phytel

moved to compel arbitration. Smiley argued that his claims were not subject to an arbitration

agreement. The trial coUrt denied Phytel’s motion to compel arbitration, and this interlocutory

appeal followed.

Standard of Review

The parties do not state whether this interlocutory appeal is governed by the federal or

state arbitration act. Under both acts, we apply an abuse of discretion standard when reviewing

an interlocutory order denying a motion to compel arbitration. Sidley Austin Brown & Wood,

LLP v. J.A. Green Dev. Corp., 327 S.W.3d 859, 862—63 (Tex. App.—Dallas 2010, no pet.).

When the only dispute is one of law, we review the trial court’s legal determinations de novo. Id.

at 862 (quoting In re Lahatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009)).

We “treat arbitration agreements as other contracts in applying the legal rules to interpret

them.” In re Olsha,z Foundation Repair Co., LLC, 328 S.W.3d 883, 889 (Tex. 2010). If the

contract is not ambiguous, its meaning is a question of law for the court to decide. See J.M.

Davidson, Inc. v. Webster, 128 S.W.3d 223, 229 (Tex. 2003). We examine the entire contract in

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an attempt to harmonize its provisions, and we give effect to all its provisions so that none is

rendered meaningless. Id. We presume the parties intended every contractual provision to have

meaning. Id.

Applicable Law

A party seeking to compel arbitration under either the federal or state arbitration act must

establish the existence of a valid agreement to arbitrate under state law contract principles and

show that the dispute fails within the scope of the arbitration agreement. See Id. at 227—28. if the

party seeking to compel arbitration proves that a valid arbitration agreement exists, the burden

shifts to the party opposing arbitration to prove an affirmative defense to arbitration, Id. at 227;

see In re FirstMerit Bank, NA, 52 S.W.3d 749, 756 (Tex. 2001).

Discussion

Is there an agreement to arbitrate?

Phytel argues that Smiley’s claims must be arbitrated because Contract 2 has an

arbitration clause and Smiley reaffirmed in Contract 3 his obligations under Contract 2. Contract

3 states:

6.1 Seller reaffirms his obligations under [Contract 2] in accordance
with the terms thereof as such obligations are modified by the provisions of this
Section 6.

Phytel argues that the plain language of Section 6.1 means that the parties incorporated

into Contract 3 the obligations in Contract 2, including the obligation to arbitrate disputes arising

out of Contract 2. Smiley, on the other hand, contends that the only obligations he reaffirmed in

Section 6.1 are those in Section 3 of Contract 2 entitled “Continuing Obligations,” which does

not contain an arbitration clause. He also appears to contend that Contract 3 had to refer to the

specific number and title of the section in Contract 2 containing the arbitration clause in order to

incorporate it.

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 General principles of Texas contract law allow provisions from other documents to be

incorporated into a contract, See PER Group. LP. v. Dava Oncology, L,P., 294 SW.3d 378, 385

(Tex. App—Dallas 2009, no peL). The incorporated provision then becomes a part of the

contract into which it was incorporated. Id. (citing In re Bank One, NA., 216 S.W.3d 825, 826

(Tex. 2007) (orig. proceeding) (per curiam)). The language used to incorporate another

document is not important as long as the contract clearly refers to the incorporated document.

See Tribble & Stephens Co. v. RGM Constructors, LP., 154 S.W.3d 639, 663 (Tex. App.—

Houston 114th Dist,1 2004, pet. denied). When a document is incorporated into another by

reference, both documents must be read and construed together. Id.

Section 6.1 does not refer to “Section 3” or “Continuing Obligations.” And Contract 2

contains more obligations than those stated in the “Continuing Obligations” section. It includes

obligations concerning Phytel’s severance payments to Smiley, Smiley’s insurance benefits,

consulting services, release of claims, confidentiality, non-disparagement, and arbitration. Based

on the plain language of Section 6.1, we conclude that Smiley reaffirmed all obligations under

Contract 2, not just those listed in the “Continuing Obligations” section. And by referring to and

reaffirming the obligations in Contract 2, the parties incorporated those obligations into Contract

3. See Dava Oncology, 294 S.W.3d at 385—86; Tribbie & Stephens, 154 S.W.3d at 663. One of

those obligations is to arbitrate disputes arising out of or relating to Contract 2. Construing the

two documents together, we conclude that Contract 3 incorporated Smiley’s obligation to

arbitrate disputes arising out of or relating to Contract 2.

Do the claims fall within the scope of the arbitration agreement?

Phytel argues that Smiley’s claims arise out of or relate to Contract 2 because Contract 2

contained the noncompete covenant, as amended by Contract 3, and Smiley’s claims concern the

enforceability of the noncompete covenant. Smiley argues that the arbitration clause does not
apply here because his claims do not arise from Contract 2. He contends that his claims arise

solely from Contract 3 because that is the only agreement in which the amended noncompete

covenant appears in full. He contends that the amended noncompete covenant is “new,” appears

“for the first time” in Contract 3, and has “no relation” to Contract 2, We agree with PhyteL

The noncompete covenant originated in Contract 1. It was later incorporated into

Contract 2 when the parties referred to the noncompete section of Contract I and agreed that it

“shall continue in full force and effect” and “acknowledge[dj the continued enforceability” of

that section. Then when the parties signed Contract 3, they amended the terms of the noncompete

covenant as expressed in Contract 1 and as incorporated into Contract 2. We previously

concluded that the parties incorporated the obligations from Contract 2 into Contract 3. We also

conclude that Contract 3 amended the noncompete covenant in Contract 2. See Tribbie &

Stephens, 154 SW.3d at 663 (contracts must be construed together). Consequently, the

noncompete covenant relates to all three agreements, and Smiley’s argument that his claims arise

solely from Contract 3 is not supported by the evidence.

We conclude that Phytel established the existence of a valid agreement to arbitrate and

that Smiley’s claims fall within the scope of the arbitration agreement. We next consider whether

Smiley proved a defense to the arbitration agreement.

Is there a defense to arbitration?

Smiley argued below that the merger clause in Contract 3 stated it “constitutes the entire

agreement between the parties.” He argues that Contract 3 does not contain an arbitration clause

and the merger clause does not specifically incorporate an arbitration clause from a prior

agreement. Phytel argues that the merger clause includes the obligations from Contract 2,

including the arbitration clause, because those obligations were incorporated by reference into

Contract 3.

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 The merger clause in Contract 3 states, in relevant part:

7.4 This Agreement constitutes the entire agreement between the
parties with respect to the subject matter hereof and supersedes any and all
previous and/or contemporaneous oral agreements, negotiations, commitments
and writings of the parties with respect to such matter..

When the parties reaffirmed in Contract 3 the “obligations under” Contract 2, those

obligations, including the arbitration clause, became part of “[tihis Agreement” referred to in the

merger clause of Contract 3. See Tribble & Stephens, 154 S.W.3d at 663. And nothing in the

language of the merger clause of Contract 3 shows it was intended to terminate or revoke the

arbitration clause in Contract 2, See Valero Energy corp. v. Teco Pipeline Co., 2 S.W.3d 576,

586—87 (Tex. App.—Houston [14th Dist.] 1999, no pet.). To construe the merger clause to

exclude the incorporated provisions from Contract 2 would render Section 6.1 meaningless.

Smiley also argued below that Phytel substantially invoked the judicial process and

waived its right to compel arbitration by filing an answer, pursuing discovery, moving for a

continuance, and failing to request arbitration in a timely manner, and that he was prejudiced.

Although the trial court orally stated it would not deny arbitration based on the waiver argument,

the written order denying arbitration did not state a basis for the ruling. Phytel argues that the

record does not support an “unequivocal intent by Phytel to waive arbitration.”

A party may waive an arbitration clause by substantially invoking the judicial process to

the detriment of the other party. Perr Homes v. Cull, 258 S.W.3d 580, 589 (Tex. 2008). We

review de novo the question whether a party has waived an arbitration clause. Small v. Specially

Contractors, Inc., 310 S.W.3d 639, 644 (Tex. App.—Dallas 2010, no pet.). Texas has a strong

presumption against waiver. Perry Homes, 258 S.W.3d 589—90. The standard for determining

waiver is the same under federal and state law. See Small, 310 S.W.3d at 645. As the party

claiming waiver, Smiley had the heavy burden of establishing that Phytel substantially invoked

the judicial process and that he was prejudiced. Perry Homes, 258 S.W.3d at 595.

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 In determining whether a party waived arbitration, we look at the totality of the

circumstances. Id. at 590. Factors we consider in determining whether the movant waived

arbitration include when the movant knew about the arbitration clause, the extent of discovery

and who initiated it, whether the discovery would be useful in arbitration, filing motions on the

merits, and seeking arbitration on the eve of trial. See id. at 590—93; In re Vesta Ins. Group, Inc.,

192 S.W.3d 759, 764 (Tex. 2006), Because arbitration is a matter of contract and can be waived

if the parties agree, the conduct must be unequivocal that waiver was intended, Perry Homes,

258 S.W.3d at 593.

The record does not show whether Phytel was aware of the arbitration clause when the

lawsuit was filed. The record does show, however, that Phytel moved to compel arbitration just

over two months after the lawsuit was filed and nine months before the date set for a nonjury

trial. It also shows that the parties exchanged one set of discovery and the standard disclosures,

that Phytel did not file a motion on the merits, that Phytel participated in a oneday mediation

early in the litigation process, that Phytel responded to Smiley’s application for temporary

restraining order and permanent injunction, and that Phytel did not respond to Smiley’s motion

for partial summary judgment and instead asked the court to postpone a hearing on the motion

because of the pending motion to compel arbitration. To summarize, the record shows that the

parties did not engage in extensive discovery, Phytel did not file any meritsbased motions, and

Phytel filed its motion to compel arbitration early in the litigation process. See Ascendant

Anesthesia PLLC v. Abazi, 348 S.W.3d 454, 464—65 (Tex. App.—Dallas 2011, no pet.); Small,

310 S.W.3d at 645—47. Based on the record, we conclude that Smiley did not establish that

Phytel substantially invoked the judicial process.

Additionally, Smiley did not present evidence that he suffered prejudice. Prejudice means

“the inherent unfairness in terms of delay, expense, or damage to a party’s legal position that

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occurs when the party’s opponent forces it to litigate an issue and later seeks to arbitrate that

same issue” Perry homes, 258 SW3d at 597. Smiley’s only argument was that he “has already

incurred thousands of dollars in legal fees landi [ilf arbitration is compelled, then he will incur

some of these legal fees all over again in the arbitration proceeding plus additional legal fees and

costs” Smiley did not offer evidence of the amount of his legal fees and stated only that the fees

were related to the mediation. See Sinai!, 310 SW3d at 648. He also did not offer any evidence

that the discovery or work product prepared for the mediation could not be used in arbitration.

See Id, We conclude that Smiley did not satisfy his burden to show prejudice.

Smiley also raises the defenses of unconscionability and lack of mutuality of obligations

in his appellate brief. Because Smiley did not raise these defenses below, we do not consider

them. See TEx, R, App. P. 33± We resolve appellant’s sole issue in its favor.

Conclusion

We reverse the trial court’s order denying Phytel, Inc.’s motion to compel arbitration,

render judgment granting the motion, and remand to the trial court for further proceedings

consistent with this opinion.

EJJ/BETH LAWG-MIERS
UST,1CE

1 20607 F.P05

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JUDGMENT

PHYTEL. INC.. Appellant On Appeal from the 192nd Judicial District
Court, Dallas County. Texas
No. 05 1 2M0607CV V. Trial Court Cause No. 1 2M 1010.
Opinion delivered by Justice Lang-Miers,
JAMES NElL SMILEY, Appellee Justices O’Neill and FitzGerald
participating.

In accordance with this Court’s opinion of this date, the judgment of the trial court is
REVERSED and judgment is RENDERED that Phytel, Inc.’s motion to compel arbitration is
(;RANTED. We remand the cause to the trial court for further proceedings consistent with this
opinion.
It is ORI)ERED that appellant Phytel. Inc. recover its costs of this appeal from appellee
James Neil Smiley.

Judgment entered this 5th day of April, 2013.

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C G // C/’Q—
ELIZiBETH LANGMERS
JUST1E /