Case: 15-51002 Document: 00513698537 Page: 1 Date Filed: 09/29/2016
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
No. 15-51002 FILED
September 29, 2016
Lyle W. Cayce
JOHN T. HAYS, M.D., Clerk
Plaintiff - Appellant
v.
HCA HOLDINGS, INCORPORATED; HCA PHYSICIAN SERVICES,
INCORPORATED,
Defendants - Appellees
Appeal from the United States District Court
for the Western District of Texas
Before STEWART, Chief Judge, and CLEMENT and HAYNES, Circuit
Judges.
EDITH BROWN CLEMENT, Circuit Judge:
Plaintiff-Appellant Dr. John T. Hays suffers from epilepsy. After a series
of stress-related seizures, he was fired from his cardiology practice. He brought
several claims against Defendant-Appellees HCA Holdings, Inc. and HCA
Physician Services, Inc. (collectively “HCA”) arising out of his alleged wrongful
termination. The district court ordered arbitration of his claims based on
equitable estoppel. We AFFIRM.
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I.
Hays worked as a cardiologist and contends that HCA failed to
accommodate his requests for a limited workload, which caused him to suffer
an increased number of stress-related seizures and eventually led to his firing.
Initially, Hays sued HCA Holdings, Capital Area Cardiology (“CAC”), and
Austin Heart, PLLC, in Texas state court for negligence and for violation of the
Texas Commission on Human Rights Act (“TCHRA”). He also sought a
declaratory judgment that his Physician Employment Agreement (the
“Agreement”) was not a valid and enforceable contract. But the Agreement, to
which Austin Heart, CAC, and Hays were signatories, required that any
disputes relating to the Agreement be submitted to mandatory, binding
arbitration. Because of the arbitration clause, the state court granted Austin
Heart and CAC’s motion to dismiss and compel arbitration. Continuing to
litigate against HCA Holdings, Hays amended his state court petition to add
HCA Physician Services as a defendant. HCA removed the case to federal
court. Hays then amended his complaint to assert claims for wrongful
termination in violation of TCHRA, negligence, breach of contract, and tortious
interference with at-will employment.
HCA moved to dismiss and compel arbitration on all claims based on
equitable estoppel. The district court granted the motion. Applying Texas law,
the district court explained that a non-signatory to an agreement could enforce
an arbitration clause pursuant to equitable estoppel, and that Texas has
explicitly recognized direct benefits estoppel and has implicitly authorized
intertwined claims estoppel. Because HCA’s liability under the tortious
interference claim could not “be determined without reference to the Physician
Employment Agreement,” the district court applied direct benefits estoppel
and concluded that Hays must arbitrate that claim. As to Hays’s claims for
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wrongful termination, breach of contract, and negligence, the district court
determined that intertwined claims estoppel applied. Relying on JLM
Industries, Inc. v. Stolt-Nielsen, SA, 387 F.3d 163 (2d Cir. 2004), which the
Texas Supreme Court discussed in In re Merrill Lynch Trust Co. FSB, 235
S.W.3d 185, 193–94 (Tex. 2007), the district court found that Hays had treated
Austin Heart, CAC, and HAC “as a single unit in its pleadings” and had raised
“virtually indistinguishable factual allegations” against all defendants. The
district court concluded that Hays’s pleadings satisfied the “close relationship”
test for intertwined claims estoppel. Because all of Hays’s claims were subject
to arbitration on equitable estoppel grounds, the district court ordered
arbitration and dismissed the case with prejudice. Hays timely appealed.
II.
We review “an order compelling arbitration de novo.” Crawford Prof’l
Drugs, Inc. v. CVS Caremark Corp., 748 F.3d 249, 256 (5th Cir. 2014). We
review for an abuse of discretion the district court’s use of equitable estoppel
to compel arbitration. Id. “A district court abuses its discretion if it premises
its decision on an erroneous application of the law or a clearly erroneous
assessment of the evidence.” Gross v. GGNSC Southaven, LLC, 817 F.3d 169,
175 (5th Cir. 2016). We “may affirm the district court’s judgment on any basis
supported by the record.” In re Complaint of Settoon Towing, LLC, 720 F.3d
268, 280 (5th Cir. 2013).
III.
Hays contends that the district court abused its discretion in compelling
arbitration on his claims under equitable estoppel. 1
1Hays opens by arguing that the district court erred because there is no contract
between him and HCA that compels arbitration. But his argument is without merit. First,
although HCA is not a signatory to the Agreement, a contract to arbitrate may be enforceable
by a non-signatory if authorized by applicable state law. Crawford Prof’l Drugs, 748 F.3d at
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A. Direct Benefits Estoppel
Hays maintains that the district court erred in applying direct benefits
estoppel to his tortious interference claim.
Direct benefits estoppel applies when the claim depends on the contract’s
existence and would be “unable to ‘stand independently’ without the contract.”
G.T. Leach Builders, 458 S.W.3d at 528 (quoting In re Kellogg Brown & Root,
Inc., 166 S.W.3d 732, 739–40 (Tex. 2005)). “Whether a claim seeks a direct
benefit from a contract containing an arbitration clause turns on the substance
of the claim, not artful pleading.” Id. at 527. “[W]hen the substance of the claim
arises from general obligations imposed by state law, including statutes, torts
and other common law duties, or federal law,’ rather than from contract, ‘direct
benefits’ estoppel does not apply, even if the claim refers to or relates to the
contract.” Id. at 528 (quoting In re Morgan Stanley & Co., 293 S.W.3d 182, 184
n.2 (Tex. 2009)).
Here, Hays pled his tortious interference with at-will employment claim
in the alternative, stating that the claim applies only if HCA is not found to be
his employer. In so pleading, Hays essentially alleges that HCA tortiously
interfered with his at-will employment relationship with Austin Heart and
CAC. The viability of this claim, however, depends on reference to the
Agreement. Cf. In re Vesta Ins. Grp., Inc., 192 S.W.3d 759, 762 (Tex. 2006)
(“[T]ortious interference claims between a signatory to an arbitration
agreement and agents or affiliates of the other signatory arise more from the
257; accord Al Rushaid v. Nat’l Oilwell Varco, Inc., 814 F.3d 300, 305 (5th Cir. 2016). Texas
law governs here, and Texas courts have recognized that “a non-signatory can be bound to,
or permitted to enforce, an arbitration agreement” based on equitable estoppel grounds. G.T.
Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 524 (Tex. 2015). Second, insofar
as Hays attacks the validity of the Agreement as a whole, determinations of the validity of a
contract are left to the arbitrator. See Brown v. Pac. Life Ins. Co., 462 F.3d 384, 397 (5th Cir.
2006).
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contract than general law, and thus fall on the arbitration side of the scale.”).
As the district court correctly recognized, an at-will employment relationship
may exist even if the parties have entered into an employment contract, such
as the Agreement. C.S.C.S., Inc. v. Carter, 129 S.W.3d 584, 591 (Tex. App.–
Dallas 2003, no pet.) (“A contract of employment for a term may still be at-will
if the agreement allows termination for any reason.”). Because the Agreement
would define the employment relationship, even at-will employment, between
Hays and Austin Heart and CAC, any alleged liability for tortious interference
by HCA “must be determined by reference” to the Agreement. G.T. Leach
Builders, 458 S.W.3d at 528 (quoting In re Weekley Homes, LP, 180 S.W.3d 127,
132 (Tex. 2005)). 2 Thus, HCA’s liability depends on the Agreement and the
district court did not abuse its discretion in applying direct benefits estoppel to
Hays’s tortious interference claim.
B. Intertwined Claims Estoppel
Hays argues that the district court erred by applying intertwined claims
estoppel to his remaining claims. He contends that Texas does not recognize
that theory of estoppel, and even if it did, the theory is inapplicable here.
Intertwined claims estoppel involves “compel[ing] arbitration when a
nonsignatory defendant has a ‘close relationship’ with one of the signatories
and the claims are ‘intimately founded in and intertwined with the underlying
contract obligations.’” In re Merrill Lynch, 235 S.W.3d at 193–94 (quoting
Thomson–CSF, S.A. v. Am. Arbitration Ass’n, 64 F.3d 773, 779 (2d Cir. 1995));
see Denney v. BDO Seidman, LLP, 412 F.3d 58, 70–71 (2d Cir. 2005). It applies
when there is a “tight relatedness of the parties, contracts, and controversies.”
2 Indeed, Hays “acknowledges that his alternatively pled tortious interference claim
is dependent on a determination of whether the Agreement is enforceable.”
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JLM Indus., 387 F.3d at 177. 3 Courts have employed this exception to dismiss
“strategic pleading” that seeks to avoid arbitration. In re Merrill Lynch, 235
S.W.3d at 194.
As Hays correctly notes, the Texas Supreme Court has not expressly
adopted intertwined claims estoppel as a valid theory of estoppel. The Texas
Supreme Court acknowledged in Merrill Lynch that “other federal circuits
have estopped signatory plaintiffs from avoiding arbitration with
nonsignatories using an ‘intertwined-claims’ test.” 235 S.W.3d at 193. But the
court referenced it for the purpose of comparing that theory with concerted
misconduct estoppel, which the court went on to reject. Id. at 193–95.
Distinguishing the two, the Texas Supreme Court explained that concerted
misconduct estoppel lacks the limiting “close relationship” component of
intertwined claims estoppel. Id. at 194; see In re Banc One Inv. Advisors Corp.,
No. 01-07-01021-CV, 2008 WL 340507, at *2 (Tex. App.–Houston Feb. 7, 2008,
no pet.) (indicating that the “close relationship” test is “distinct from concerted
misconduct”).
Texas courts of appeals, after Merrill Lynch, have split on whether the
Texas Supreme Court has recognized intertwined claims estoppel. Compare
Cotton Commercial USA, Inc. v. Clear Creek Indep. Sch. Dist., 387 S.W.3d 99,
105–06 (Tex. App.–Houston [14th Dist.] 2012, no pet.) (stating that the Texas
Supreme Court in Merrill Lynch recognized intertwined claims estoppel), and
FD Frontier Drilling (Cyprus), Ltd. v. Didmon, 438 S.W.3d 688, 695 (Tex. App.–
Houston [1st Dist.] 2014), reh’g overruled (July 29, 2014), review denied (Nov.
3 “Our cases have recognized that under principles of estoppel, a non-signatory to an
arbitration agreement may compel a signatory to that agreement to arbitrate a dispute where
a careful review of ‘the relationship among the parties, the contracts they signed . . . and the
issues that had arisen’ among them discloses that ‘the issues the nonsignatory is seeking to
resolve in arbitration are intertwined with the agreement that the estopped party has
signed.’” JLM Indus., 387 F.3d at 177.
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7, 2014) (“If the facts alleged ‘touch matters,’ have a ‘significant relationship’
to, are ‘inextricably enmeshed’ with, or are ‘factually intertwined’ with the
contract containing the arbitration agreement, the claim is arbitrable.”
(quoting Cotton Commercial USA, 387 S.W.3d at 108)), and Zars v. Brownlow,
No. 07–07–00303–CV, 2013 WL 3355660, at *4 (Tex. App.–Amarillo June 28,
2013, no pet.) (same), with Glassell Producing Co. v. Jared Res., Ltd., 422
S.W.3d 68, 82 (Tex. App.–Texarkana 2014, no pet.) (describing direct benefits
estoppel as “the only form of equitable estoppel recognized in Texas”).
And this court has never directly addressed the issue. 4 Although Hays
makes much of Al Rushaid v. National Oilwell Varco, Inc., No. 11-CV-3390,
2015 WL 1602125, at *5 (S.D. Tex. Apr. 7, 2015)—a district court decision that
criticized Cotton Commercial and rejected intertwined claims estoppel—this
court did not decide the validity of intertwined claims estoppel on appeal, see
Al Rushaid, 814 F.3d at 305. Instead, the Al Rushaid panel explained that the
appellants had advanced concerted misconduct and direct benefits estoppel,
and cited the language from Glassell that “the only form of equitable estoppel
recognized in Texas” is direct benefits. Id. (quoting Glassell Producing Co., 422
S.W.3d at 82). Conversely, a prior panel of this court relied on Cotton
Commercial to analyze the applicability of intertwined claims estoppel.
Zinante v. Drive Elec., LLC, 582 F. App’x 368, 370–71 (5th Cir. 2014). The
Zinante panel held that the theory was inapt, but did not question its
legitimacy.
4 Some imprecision exists when distinguishing between intertwined claims and
concerted misconduct estoppel. This court used the phrase “intertwined claims” in Grigson v.
Creative Artists Agency LLC, 210 F.3d 524 (5th Cir. 2000), but did so in reference to concerted
misconduct estoppel. Conversely, the Texas Supreme Court, in Merrill Lynch, differentiated
between Grigson’s concerted misconduct test (which it went on to reject) and the theory of
intertwined claims estoppel. 235 S.W.3d at 192–93.
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Because no decision of the Texas Supreme Court precisely recognizes
intertwined claims estoppel, we “must make an Erie guess and determine as
best we can what the Supreme Court of Texas would decide.” Harris Cty. v.
MERSCORP Inc., 791 F.3d 545, 551 (5th Cir. 2015) (internal quotation marks
and citation omitted). In making an Erie guess, we use “the sources of law that
the state’s highest court would look to,” Symetra Life Ins. Co. v. Rapid
Settlements, Ltd., 775 F.3d 242, 248 (5th Cir. 2014), including intermediate
state appellate court decisions, “the general rule on the issue, decisions from
other jurisdictions, and general policy concerns.” Chaney v. Dreyfus Serv.
Corp., 595 F.3d 219, 229 (5th Cir. 2010).
In Merrill Lynch, the Texas Supreme Court strongly implied the validity
of this form of estoppel, particularly to counter the problem of strategic
pleading: “[A]llowing litigation to proceed that is in substance against a
signatory though in form against a nonsignatory would allow indirectly what
cannot be done directly.” 235 S.W.3d at 193–94. The court observed that
intertwined claims estoppel works to prevent signatories to an arbitration
agreement from avoiding arbitration simply by suing “nonsignatory principals
or agents for pulling the strings.” Id. at 194. To illustrate, the court explained
that the Second Circuit has “compelled arbitration when a nonsignatory
defendant has a ‘close relationship’ with one of the signatories and the claims
are ‘intimately founded in and intertwined with the underlying contract
obligations.’” Id. at 193–94, 194 n.39 (quoting Thomson-CSF, S.A., 64 F.3d at
779, and collecting Second Circuit cases that apply intertwined claims
estoppel, including Denney, 412 F.3d at 70 and JLM Industries, 387 F.3d at
177). And the court approvingly noted that the “close relationship”
requirement guards against “sweep[ing] independent entities and even
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complete strangers into arbitration agreements,” limiting the exception to
instances of strategic pleading. 5 Id. at 194.
Looking to intermediate state court decisions, Texas courts of appeals
have compelled arbitration pursuant to intertwined claims estoppel. See e.g.,
Cotton Commercial USA, 387 S.W.3d at 102; FD Frontier Drilling (Cyprus),
438 S.W.3d at 695; Zars, 2013 WL 3355660, at *4. 6 In Cotton Commercial, after
a school district sued a property restoration services company, the company
moved to arbitrate. 387 S.W.3d at 101. Prior to the suit, the contractor and
subcontractor, who had worked on the school, had merged to form the surviving
property restoration company. Although the school had entered into a
restoration agreement with the contractor, which contained an arbitration
clause, the school district argued that it could not be compelled to arbitrate
because its claims for fraudulent billings were against only the subcontractor.
Id. at 102–04. In assessing whether arbitration was appropriate, the court of
appeals noted that a corporate relationship between the parties, standing
alone, is insufficient to compel arbitration. Id. at 105.
But the appeals court, relying on Merrill Lynch, recognized the
applicability of the intertwined claims test “where a nonsignatory has a “close
relationship” with one of the signatories and the claims are “intimately
founded in and intertwined with the underlying contract obligations.” Id.
(quoting In re Merrill Lynch, 235 S.W.3d at 191). The court ordered arbitration
5 It was this possibility of overinclusiveness that led the Texas Supreme Court, in
Merrill Lynch, to reject concerted misconduct estoppel. Id. In making an Erie guess, it is
noteworthy that in Merrill Lynch the Texas Supreme Court distinguished concerted
misconduct and intertwined claims estoppel, explicitly disallowing the former while noting
the relevancy and value of the latter. Id.
6 In Glassell Producing Co., a Texas court of appeals stated that direct benefits
estoppel is the only form of equitable estoppel recognized in Texas. 422 S.W.3d at 82. But the
court acknowledged that the Texas Supreme Court had only explicitly rejected the concerted
misconduct test. Id.
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because of the parties’ close relationship and because the subcontractor’s
billings were intertwined with the restoration agreement. Id. at 105–06.
Finally, as a policy matter, “both federal and state jurisprudence dictate
that any doubt as to whether a controversy is arbitrable should be resolved in
favor of arbitration.” McKee v. Home Buyers Warranty Corp., 45 F.3d 981, 985
(5th Cir. 1995). Texas “strongly favor[s]” arbitration. Star Sys. Int’l Ltd. v. 3M
Co., No. 05-15-00669, 2016 WL 2970272, at *2 (Tex. App. May 19, 2016) (citing
Royston, Rayzor, Vickery, & Williams, LLP v. Lopez, 467 S.W.3d 494, 499 (Tex.
2015)). And “questions of arbitrability must [also] be addressed with a healthy
regard for the federal policy favoring arbitration.” Moses H. Cone Mem’l Hosp.
v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983).
Because Merrill Lynch intimated at the validity of intertwined claims
estoppel, because lower courts in Texas have applied the theory, and because
arbitration of disputes is strongly favored under federal and state policy, we
hold that the Texas Supreme Court, if faced with the question, would adopt
intertwined claims estoppel. Accordingly, we hold that Hays must arbitrate
his TCHRA, negligence, and breach of contract claims pursuant to intertwined
claims estoppel.
Hays treats Austin Heart, CAC, and HAC as a single unit in his
pleadings, raising virtually indistinguishable factual allegations against CAC
and Austin Heart in arbitration and against HCA here. See JLM Indus., 387
F.3d at 177; Smith/Enron Cogeneration Ltd. P’ship v. Smith Cogeneration Int’l
Inc., 198 F.3d 88, 98 (2d Cir. 1999) (affirming arbitration order where the
plaintiff treated nonsignatory companies and their signatory assignees as a
“single unit in its complaint”). His complaint in this action and his counter-
demand in arbitration use almost identical language, substituting only the
names of the defendants. As the district court correctly recognized, Hays
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treated Austin Heart, CAC, and HAC—affiliates of his former cardiology
practice—as if they were interchangeable. See Smith/Enron, 198 F.3d at 97–
98. It is undeniable that Hays regarded the parties as closely related by failing
to differentiate his factual allegations. Moreover, Hays’s claims both here and
in arbitration relate to his alleged wrongful termination, intertwined with the
underlying contractual obligations of the Agreement. There is a “tight
relatedness of the parties, contracts and controversies.” JLM Indus., 387 F.3d
at 177. Hays’s current efforts to distinguish amongst defendants and claims
are the archetype of strategic pleading intended to avoid the arbitral forum,
precisely what intertwined claims estoppel is designed to prevent. We hold that
the district court did not abuse its discretion in applying intertwined claims
estoppel to compel Hays to arbitrate his remaining claims.
IV.
We hold that the district court did not abuse its discretion in ordering
arbitration of Hays’s claims against HCA. Specifically, we hold that the district
court properly applied direct benefits estoppel to Hays’s tortious interference
claim. And in making an Erie guess, we hold that the Texas Supreme Court
would recognize intertwined claims estoppel and that Hays’s remaining claims
are subject to arbitration under that theory.
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HAYNES, Circuit Judge, concurring:
I concur in the judgment of the court. However, I do not join in all of the
underlying reasoning. Specifically, I would not reach the issue of intertwined
claims estoppel addressed in Section III.B. (and part of IV) because it is
unnecessary to do so. I conclude that all of Hays’s claims either clearly meet
the test for direct benefits estoppel or constitute the kind of “artful pleading”
designed to avoid direct benefits estoppel that the Texas Supreme Court found
ineffectual to do so in In re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 188-
90 (Tex. 2007). Put another way, the Texas Supreme Court made clear that a
party cannot avoid the effects of direct benefits estoppel by “artful pleading.”
Id. That is what Hays endeavored to do here. Existing law, without the need
for an “Erie guess,” thus supports the district court’s order sending all of these
claims to arbitration. Thus, I concur in the judgment affirming the district
court but do not join the discussion of intertwined claims estoppel.
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