Vireo, P.L.L.C. V. Cates

Case Number: 03-96-00303-CV 06/11/1999 Record returned to Court of Appeals 05/24/1999 Notice sent to Court of Appeals 05/20/1999 Case stored in record room 02/04/1999 Petition for Review disposed proceeding denied 04/17/1998 Petitioner's reply brief 04/07/1998 MET to file reply disposed of Granted 04/06/1998 Motion for extension of time to file brief. 04/02/1998 Brief filed. 03/25/1998 MET to file reply disposed of Granted 03/24/1998 Motion for extension of time to file brief. 03/02/1998 Brief filed. 01/29/1998 briefing on the merits requested 01/29/1998 Record Requested in Petition for Review 01/29/1998 Phone call from Clerk's Office 01/29/1998 Record Received (See Remarks) 12/23/1997 Case forwarded to Court 12/16/1997 Response to Petition for Review waived 12/12/1997 Petition for Review filed

Plaintiffs appeal from a trial-court order overruling their motion to compel arbitration of defendants' counterclaims.¹ We will affirm the order.

THE CONTROVERSY The plaintiffs own and operate medical centers. They entered into contracts ("Management Agreements") with Eagle Medical Management, Inc., in which Eagle undertook for compensation to administer and manage the non-medical operations of the centers. Defendant Danny Cates executed the Management Agreements for Eagle as its "chief executive officer," agreeing therein that its provisions would bind him as an Eagle officer. Defendant CD Testing, Inc., was not a party to the Management Agreements; plaintiffs alleged Cates was "president" of CD Testing, Inc.

In Paragraph Nine of the Management Agreements, the parties contracted that "no civil action concerning any disputeunder this Agreement shall be instituted before any court, and all such disputes shall be submitted to final and binding arbitration before a single arbitrator" who shall decide the dispute under the laws of the State of Texas and the Rules of the American Arbitration Association (emphasis added). The provision excluded from its scope applications to a court for equitable relief.²

A dispute arose between the parties. The plaintiffs canceled the Management Agreements unilaterally; the defendants contended the termination was wrongful. The parties attempted without success to resolve the dispute but neither initiated arbitration proceedings as required by Paragraph Nine of the Management Agreements. The plaintiffs sued the defendants in district court on causes of action for money damages; the defendants counterclaimed by causes of action for declaratory relief and money damages for wrongful termination of the Management Agreements.

The plaintiffs moved the trial court to abate defendants' counterclaims and compel their arbitration as required by Paragraph Nine. The trial judge overruled the plaintiffs' motion, finding from the record that plaintiffs had abandoned as a matter of law their right under Paragraph Nine to compel arbitration. The plaintiffs appeal to this Court on four points of error: (1) the plaintiffs, as a matter of law, did not abandon their right to compel arbitration of defendants' counterclaims; (2) the trial-court order is clearly erroneous; (3) the "evidence" is legally and factually insufficient to support a finding that plaintiffs waived or abandoned their right to compel arbitration;³ and (4) the trial judge abused his discretion in overruling the plaintiffs' motion to compel arbitration.⁴ We hold the trial judge did not abuse his discretion, the ultimate issue raised by the points of error. *Page 491 JUDICIAL ENFORCEMENT OF ARBITRATION AGREEMENTS The trial-court proceeding was a statutory proceeding governed by section 171.002(a) of the Texas Civil Practice and Remedies Code. The statute directs a trial judge to "order the parties to proceed with arbitration" when a party applies for such relief and shows "the opposing party's refusal to arbitrate." Tex.Civ.Prac. Rem. Code Ann. § 171.002(a) (West Supp. 1997). When "the opposing party denies the existence of the agreement to arbitrate, the court shall proceed summarily to the determination of the issue so raised and shall order arbitration if found for the moving party; otherwise the application shall be denied."Id. (emphasis added). In Jack B. Anglin Co. v.Tipps, 842 S.W.2d 266, 268-69 (Tex. 1992), the supreme court explained these statutory provisions. They contemplate "summary proceedings" akin to those applicable in deciding motions for summary judgment — the trial judgemust decide "whether to compel arbitration on the basis of affidavits, pleadings, discovery, and stipulations." Unlike summary judgment proceedings, however, "if the material facts necessary to determine the issue are controverted, by an opposing affidavit or otherwise admissible evidence, the trial court must conduct an evidentiaryhearing to determine the disputed material facts."Anglin, 842 S.W.2d at 268-69 (emphasis added).

In the present case, neither party introduced evidence at the hearing. No affidavits, discovery documents, or stipulations were in the record; the record before the court contained only the parties' respective pleadings.⁵ The pleadings established the following agreed facts: the parties were in dispute concerning defendants' performance under the Management Agreements; neither initiated the arbitration proceedings expressly required by Paragraph Nine before resorting to causes of action seeking a judicial remedy in money damages, although each claimed to be an aggrieved party in the dispute; and in bringing their respective claims in district court, neither requested specific performance of the arbitration provision forbidding any "civil action concerning any dispute under this Agreement," as stated in Paragraph Nine. Assuming for the moment that plaintiffs' claims against defendants concerned⁶ a "dispute under" the Management Agreements (which plaintiffs deny) what consequences does the law assign to those undisputed facts?

A plaintiff who sues on an arbitrable claim unconditionally, without having initiated arbitration of the claim or demanding specific performance of the arbitration agreement, creates in the defendant a right of election — the defendant may insist or not upon arbitration, as he chooses. If the defendant does not insist upon arbitration, the contracting parties have mutually repudiated the arbitration covenantas a matter of law and waived any right thereunder. 6 C.J.S. Arbitration § 37 at 226 (1975); 4 Am.Jur.2d Alternate Dispute Resolution § 130 at 170 (1995); R.P. Davis, Waiver of Arbitration Provision inContract, 161 A.L.R. 1426, 1428-34 (1946).⁷ See,e.g., Mendoza v. Canizales, *Page 492 695 S.W.2d 266, 271 (Tex.App. — San Antonio 1985, no writ); Premier Petroleum Co. v. Box, 255 S.W.2d 298, 301 (Tex.Civ.App. — Eastland), writ ref'dn.r.e., 152 Tex. 321, 257 S.W.2d 105 (1953).

It is undisputed here that defendants have elected not to arbitrate. They possessed a right of election, however, only if the plaintiffs' claims against them concerned a "dispute under" the Management Agreements or were so "factually intertwined" with those agreements as to invoke the judicial policy favoring a joint resolution of multiple claims and the avoidance of multiple determinations of the same matters.See Anglin, 842 S.W.2d at 271. We turn then to that question of law, determinable from the parties' respective pleadings.

CONSTRUCTION OF THE PLEADINGS We believe it desirable to set out verbatim the material parts of the plaintiffs' petition. These allege as follows:

6. On or about May 1995, Defendant Cates began acting as agent for the medical centers for certain matters. On or about July, 1995, that agency relationship was formalized by the signing of three Management Service Agreements between Eagle and the respective medical centers ("Management Agreements"). . . .

7. Prior to entering into the Management Agreements, Cates represented to the physicians that he had the expertise to manage the medical centers.

8. In addition to assuming management responsibilities, Eagle, its officers, directors and shareholders agree not to compete with the medical centers in Travis, Hays and Williamson Counties during the term of the Management Agreements and for a period of twelve months after the Management Agreement [sic] was terminated for any reason.

9. While acting as the agent for the medical centers, Cates entered into agreements with Southwestern Bell telephone . . . to provide telephone services to Vireo and Chaetura. . . . Rather than entering into the SWBT Agreements under the principles' names, Cates entered into the SWBT Agreements under the name of Dan Cates d/b/a CD Testing, Inc. The phone numbers for the SWBT Agreements are listed in the SWBT directory under Southwest Medical Center for the use of the medical centers' patients.

10. On or about November 1995, the medical centers terminated the Management Agreements with Eagle.

11. After the Management Agreements were terminated, on information and belief, the medical centers became aware that Cates had continued to operate CD Testing during the term of the Management Agreements in direct competition with the medical centers and that after the contract was terminated, Cates actively recruited business from the clients of the medical centers and has represented to the medical centers' clients that the medical centers have or are about to go out of business.

12. After the Management Agreements were terminated, Cates claimed that the Management Agreements were wrongfully terminated. The Management Agreements provide for arbitration

*Page 493

of disputes. The parties attempted informal settlement, but on or about February 8, 1996, the Plaintiffs notified Cates and Eagle that settlement was unrealistic and that the parties would need to arbitrate the matter.

13. On or about February 8, 1996, without any warning, Cates had the telephone company disconnect the telephone services to Vireo and Chaetura for the numbers listed in Exhibit B attached hereto.

14. In addition to the huge volume of telephone calls that the medical centers receive from their patients for routine and emergency matters, this is asthma season and many of the medical centers' patients suffer from asthma and need to contact the medical centers for emergencies.

Upon the foregoing factual allegations, plaintiffs founded two causes of action described as follows:

Tortious Interference with Contracts and Business Relationships.

15. The [defendants'] conduct constitutes a wrongful or malicious interference with the [plaintiffs'] performance or the formation of the contracts or the right to pursue a lawful business calling, trade, or occupation for which damages may be recovered.

Breach of Fiduciary Duty.

16. Cates' conduct prior to execution of the Management Agreements constitutes breach of fiduciary duty in that Cates failed to exercise reasonable care and diligence in to [sic] the medical centers in the performance of his duties, he breached his duty to obey, he breached his duty to give information, and he breached his duty of loyalty.

(emphasis added).

Plaintiffs attached to their petition and incorporated therein copies of the Management Agreements. Their allegations may be summarized as follows: (1) before making the Management Agreements Cates obtained telephone service for the medical centers in his own name and represented he had the expertise to manage the medical centers; (2) plaintiffs terminated the Management Agreements in November 1995 and learned thereafter that Cates, while the agreements were in force, had operated CD Testing, Inc., in direct competition with the medical centers;⁸ (3) Cates continued to do so, after plaintiffs terminated the Management Agreements, by recruiting medical-center clients and representing that the centers had or were about to go out of business; and (4) Cates caused termination of telephone service to the medical centers without warning. These allegations are the entire sum and substance of what plaintiffs mean by their causes of action for "tortious interference" and "breach of fiduciary duty."

As might be expected, defendants' counterclaims against plaintiffs — claims the plaintiffs moved to assign to binding arbitration — alleged a different view of the material transactions. In their first amended original answer, defendants requested compensatory damages, punitive damages, and declaratory and injunctive relief on allegations that may be summarized as follows: (1) plaintiffs terminated the Management Agreements November 9, 1995, assertedly for cause but in truth to deprive Eagle and Cates of certain financial benefits they were entitled to receive under the Management Agreements if they were terminated without cause; (2) Eagle and Cates substantially performed their obligations under the Management Agreements, *Page 494 precluding their termination for cause; (3) even assuming plaintiffs had a right to terminate for cause, however, they failed to give Eagle and Cates thirty-days previous notice and an opportunity to cure any deficient performance as expressly required by the Management Agreements; (4) plaintiffs' conduct constituted a prior breach of the Management Agreements and their fiduciary duties, entitling defendants to compensatory damages; (5) the noncompetition provision in the Management Agreements prohibited Eagle and Cates from providing management services to others whom plaintiffs reasonably believed were in competition with plaintiffs' medical centers, but the noncompetition provision did not prohibit the drug-testing services actually provided by CD Testing, Inc., and defendants requested declaratory relief accordingly; (6) defendants were entitled to money damages for sums expended in reliance upon false representations made by plaintiffs in inducing defendants to enter into the Management Agreements; and (7) defendants were entitled to recover from plaintiffs compensatory and punitive damages for their defamatory statement to third persons that plaintiffs had terminated the Management Agreements because they discovered that Cates had embezzled money from the medical centers.

Plaintiffs' petition avers no basis, apart from the non-competition agreement or another duty expressed or implied in the Management Agreements, for imposing upon the defendants a duty not to compete with the medial centers for patients and a duty to maintain the telephone service that Cates had taken out in his own name before execution of those agreements. One defendant — CD Testing, Inc. — was not a party to the Management Agreements and its corporate autonomy is unassailed in the record. No basis appears in the plaintiffs' allegations for a contention that CD was prohibited to compete for patients or that CD is otherwise liable for the damages claimed by plaintiffs.

Nor does the petition allege that any of Cates' representations were false and no basis is apparent for a theory that any of them were actionable per se. Thesole factual allegation pertaining to the period of time "prior to execution of the Management Agreements" was the plaintiffs' allegation that "Cates represented to the" plaintiffs before entering into the Management Agreements "that he had the expertise to manage the medical centers." This representation was expressly repeated in the Management Agreements. The petition, moreover, suggests no basis for holding CD Testing, Inc., liable for Cates' alleged breaches of fiduciary duty, which would appear to be personal to him especially "prior to the execution of the Management Agreements."

We believe plaintiffs' causes of action either concern (relate to) a dispute under the Management Agreements or those causes of action are "factually intertwined" with those agreements sufficiently to invoke the judicial policy favoring a joint resolution of claims and the avoidance of multiple determinations of the same matters. Anglin, 842 S.W.2d at 271. Suppose, for example, that an arbitrator construes the noncompetition provision as defendants contend it should be construed, resulting in a determination that the provision did not prohibit CD's drug-testing services; and a district court construes the provision to the contrary. Or suppose the arbitrator determines plaintiffs first breached the Management Agreements by terminating them without the requisite notice, thereby entitling defendants to damages and cancelling the noncompetition provision, among other contract obligations; but the district court finds to the contrary. See CustomDrapery Co. v. Hardwick, 531 S.W.2d 160, 165-66 (Tex.Civ.App. — Houston [1st Dist.] 1975, no writ) (former employer precluded from enforcing noncompetition covenant where he, not employee, caused breach of contract). The possibility of contradictory determinations in the two forums is obvious. The relation of plaintiffs' causes of action to the Management Agreements is obvious. We hold accordingly and affirm the trial-court order.

¹ The plaintiffs, appellants here, are Vireo, P.L.L.C., and Chaetura, P.L.L.C., each a professional limited-liability company organized and existing under the laws of the State of Texas to practice medicine, together with William Franklin, M.D., and Don Connell, M.D.

² In the present cause, the parties applied for injunctive relief each against the other. No controversy in that respect is presented in the appeal.

³ We overrule point of error three because it is based upon an erroneous assumption. No evidence was received at the hearing on plaintiffs' motion to compel arbitration.

⁴ Defendants moved that we dismiss the appeal for want of subject-matter jurisdiction because of the interlocutory nature of the trial-court order. Section 171.017 of the Arbitration Act provides that "[a]n appeal may be taken from . . . an order denying an application to compel arbitration made under Section 171.002(a)," and that such appeals "shall be taken in the manner and to the same extent as from orders and judgments in a civil action." Tex.Civ.Prac. Rem. Code Ann. § 171.017(a)(1), (b) (West Supp. 1997). Defendants reason that this statute does not specifically authorize an interlocutory appeal but only an appeal after final judgment as in the case of most interlocutory orders. We disagree. See Jack B.Anglin Co. v. Tipps, 842 S.W.2d 266, 271-72 (Tex. 1992). We overrule defendants' motion to dismiss the appeal.

⁵ Plaintiffs apparently contend in their appellate briefs that they were entitled to relief on their motion to compel arbitration of defendants' counterclaims, as a matter of law, because defendants did not file a response to the plaintiffs' motion. We reject the argument. Defendants' failure to file a response did not entitle plaintiffs to relief by default; it remained plaintiffs' burden to persuade the trial court that a proper construction and application of Paragraph Nine to the pleadings required the requested relief as a matter of law.Cf. City of Houston v. Clear Creek Basin Auth., 589 S.W.2d 671, 678 (Tex. 1979) (summary judgment may not be granted by default for want of response by nonmovant, but only when summary judgment record shows right to judgment as a matter of law).

⁶ In ordinary usage, the word "concern" means "a connecting relation" in the present context. Webster's ThirdInternational Dictionary 470 (Philip B. Gove ed., 1986). This appears less restrictive than the term "arise under" sometimes found in the arbitration provision of contracts.

⁷ The annotation does not mention "prejudice" to either party as a factor to be considered in determining the issue of waiver in the circumstances indicated. Prejudice is a relevant factor, however, when the plaintiff claims thedefendant has waived his right to arbitrate by his participation in the action — unless the plaintiff is prejudiced thereby, he cannot avoid arbitration merely on the ground of the defendant's participation in the judicial proceeding. See, e.g., Prudential Sec., Inc. v.Marshall, 909 S.W.2d 896, 898-99 (Tex. 1995); seealso Joel E. Smith, Annotation, Defendant'sParticipation In Action As Waiver of Right to Arbitration ofDispute Involved Therein, 98 A.L.R.3d 767 (1980).

When a plaintiff sues in violation of the arbitration agreement, however, the resulting issue pertains to the right of election thereby created in the defendant by operation of law. Will the defendant join issue in court or will he insist upon his contract right of arbitration? If he is denied the right of election, the prejudice is self-evident. It is particularly apparent if the defendant should be required to arbitrate his claims against the plaintiff but defend in court the plaintiff's claims against himself, when each party's claims against the other come within the scope of the arbitration agreement and arise from the same general dispute. It is unreasonable to suppose that the law validates such a confusion of forums and proceedings, the possibility of conflicting determinations, and the resulting prejudice.

⁸ The "Noncompetition" provision in the Management Agreements stated as follows:

Eagle, its officers, directors and shareholders covenant and agree that during the term of this Agreement and for a period of twelve (12) months after this Agreement is terminated for any reason, Eagle, its officers, directors, and shareholders shall not provide the same or similar services described in this Agreement to any other person, individual or otherwise, who [plaintiffs] reasonably believes to be in competition with [plaintiffs] in Travis, Williamson and/or Hays County, Texas. Eagle agrees to provide [plaintiffs] with ten (10) days prior written notice of Eagle's intent to enter into a management services agreement with any third parties.