Texas Supreme Court Resists Effort to Avoid Arbitration

March 14, 2008

Arbitration is intended to provide a manner of resolving disputes that is less expensive and more expeditious than trial, with limited rights of appeal. Nevertheless, arbitration cases continue to find their way to the Texas courts.

The Texas Supreme Court recently decided a case involving an attempt to evade an arbitration clause. In In re Merrill Lynch Trust Co., 285 S.W.3d 185 (Tex. 2007), the principal issue was whether nonsignatories to an arbitration agreement may enforce the agreement against signatories. In this case, investment account holders had an arbitration agreement with Merrill Lynch. In a suit alleging self-dealing, breach of fiduciary duty, fraud and numerous other claims, the account holders sued their broker (a Merrill Lynch employee), the Merrill Lynch Trust Bank, and the Merrill Lynch Life Insurance Company, but they did not sue Merrill Lynch.

The employee, the bank and the life insurance company were not signatories to the arbitration agreement. Nevertheless, those parties moved to compel arbitration based on the account holders' agreement with Merrill Lynch. The trial court denied the motion.

A divided Texas Supreme Court reversed in part. The majority held that the arbitration motion should be granted for claims against the employee, but not for claims against the bank or insurance company. With respect to the claims against the employee, the Supreme Court reasoned that the substance of the allegations were against Merrill Lynch, even though it was not named as a party to the lawsuit. There was no question that the employee was acting in the course and scope of his employment. The Court emphasized that arbitration may not be avoided by suing an employee in his individual capacity, rather than suing the company.

With respect to the bank and the insurance company, however, the Court held the parties to the strict terms of the arbitration agreement. The Court noted that there were no allegations that the affiliates were the "alter egos" of Merrill Lynch and held that arbitration agreements generally do not apply to all corporate affiliates. The Court also rejected the theory that arbitration should be required because of the parties' "interdependent and concerted misconduct." The Court held that arbitration is not required merely because two claims arise from the same transaction. Considerations of efficiency and convenience do not override the nonsignatories' right to a jury trial.

The Supreme Court succinctly issued the overarching rules: "If the parties have not agreed to arbitration, no trial court has discretion to make them go; if they have agreed to arbitration, no trial court has discretion to let one wriggle out."

For more information, please contact Kate Alsina.