Oliver Street Dermatology, LLC v. Creger
Filing
39
MEMORANDUM OPINION AND ORDER. Signed by Judge Lee Yeakel. (td)
':'
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
i8'3O
AUSTIN DIVISION
OLIVER STREET DERMATOLOGY,
LLC, D/BIA US DERMATOLOGY
PARTNERS,
PLAINTIFF,
::
PH i:55
i
TrT
CAUSE NO. 1 :17-CV-528-LY
V.
DAN CREGER,
DEFENDANT
MEMORANDUM OPINION AND ORDER
Before the court are Defendant/Counter-Plaintiff Creger' s Motion to Compel Arbitration
and Motion to Dismiss filed October 26, 2017 (Clerk's Doc. No. 20), Plaintiffs Response to
Defendant's Motion to Compel Arbitration and Motion to Dismiss filed November 2, 2017
(Clerk's Doc. No. 22), Defendant/Counter-Plaintiff Creger's Reply to Oliver Street's Motion to
Compel Response filed November 16, 2017 (Clerk's Doc. No. 24), Defendant/Counter-Plaintiff
Creger's Motion for Protective order filed October 31, 2017 (Clerk's Doc. No. 21), Motion for
Leave to Serve Additional Discovery on Issues of Agency, Authority and Estoppel Raised by
Reply to Response to Motion to Compel and Motion for Leave to File Sur-Reply filed December
8, 2017 (Clerk's Doc. No. 31), Defendant/Counter-Plaintiff Creger's Response to Oliver Street's
Motion for Leave to File Supplemental Discovery Requests filed December 15, 2017 (Clerk's
Doc. No. 33), and Reply to Response to Motions for Leave to Serve Additional Discovery and
Motion for Leave to File Sur-Reply filed December 18, 2017 (Clerk's Doe. No. 36).
Having considered the motions, responses, replies, and applicable law, the court
concludes that the parties' Rule
court.
11
agreement is unenforceable because it was not filed with the
The arbitration clause in Oliver Street Dermatology's employee handbook is also
unenforceable, and Creger's motion to compel arbitration will be denied. For these reasons,
Oliver Street Dermatology's motion to serve additional discovery will be denied, because further
discovery on issues of agency, authority, and estoppel is unnecessary.
I. BACKGROUND
On April 14, 2017, Oliver Street Dermatology ("Oliver Street") filed a declaratory-
judgment suit in state court to resolve a contract dispute between it and Creger.
Creger' s
attorney informed Oliver Street on April 25, 2017, that he intended to remove the case to the
United States District Court for the Western District of Texas. On May 16, 2017, the attorney
told Oliver Street that he changed his mind and wished to remove the case to the Northern
District of Texas.
On May 25, 2017, the parties agreed that Oliver Street would nonsuit the state litigation
and refile in the Western District of Texas. Both parties now refer to this arrangement as a Rule
11
agreement under the Texas Rules of Civil Procedure. See TEx. R. Civ. P. 11. In accordance
with the agreement, Oliver Street filed this suit on June 2, 2017. Creger then filed a motion to
compel arbitration on October 26, 2017, arguing that the arbitration clause in Oliver Street's
employee handbook should be enforced. The relevant clause reads:
As a condition of employment, [Oliver Street] and its employees agree to submit
all disputes and claims arising from an employee's tenure with [Oliver Street] to
binding arbitration under the rules of the American Arbitration [Association].
Oliver Street argues that this clause is an unenforceable illusory promise, because the
employee handbook also states that Oliver Street "reserves the right to rescind, modify or deviate
from these and other policies, practices and guidelines at its sole discretion
.
. .
with or without
notice." Oliver Street additionally claims that it detrimentally relied on Creger's promise to
litigate in federal court.
Creger responds that the agreement to litigate in federal court is
unenforceable under Texas Rule of Civil Procedure 11, because the agreement was not filed with
2
a court, as required by the rule. See TEX. R. Civ. P.
11 ("[Nb
agreement between attorneys or
parties touching any suit pending will be enforced unless it be in writing, signed and filed with
the papers as part of the record, or unless it be made in open court and entered of record.")
Creger also claims that estoppel should apply to compel arbitration since he detrimentally relied
on Oliver Street's agreement to arbitrate employment disputes.
Neither the "Rule
11
agreement" nor the arbitration clause is enforceable. Promissory
favora
estoppel does not apply in either party's
contrary decision would allow one party to
renege on its own representations, thus creating injustice. The parties are will be left to litigate
their dispute unimpeded by their prior arrangements.
II. APPLICABLE LAW
In diversity cases such as this, "substantive law.
. .
is established by the usual principles
of conflict of laws, but procedural rules are the rules of the forum." Condit Chem. & Grain Co.
v.
Helena Chem. Corp., 789 F.2d 1101, 1102 (5th Cir. 1986); see Erie
R. Co. v. Tompkins, 304
U.S. 64, 78 (1938) (state law applies except when issue is governed by federal law). The court
must therefore determine whether Texas Rule of Civil Procedure
11
or a Federal Rule of Civil
Procedure applies to the parties' agreement to litigate in federal court. This analysis turns on
whether the Texas rule is substantive or procedural.
Texas Rule of Civil Procedure
11
states the following:
Unless otherwise provided in these rules, no agreement between attorneys or
parties touching any suit pending will be enforced unless it be in writing, signed
and filed with the papers as part of the record, or unless it be made in open court
and entered of record.
TEx. R. Civ. P. 11. The Fifth Circuit has likened the rule to the parol-evidence rule. Condit
Chem. & Grain Co., 789 F.2d at 1102.
The parol-evidence rule, though labeled a rule of
evidence, is a rule of substance. Id. (citing RESTATEMENT (SECOND)
OF CONFLICT OF LAWS §
140 (AM. LAW INST. 1971); 3 CORBIN, CONTRACTS § 573 (rev'd ed. 1960); 16 AMERICAN
JURISPRUDENCE, CONFLICT OF LAWS § 132 (2d ed. 2018)).
Likewise, the Texas rule is
substantive despite its label. Id. This court therefore looks to Texas law, not the Federal Rules
of Civil Procedure, to determine if the parties' agreement is enforceable. See 28 U.S.C.
§
1652
("State laws as rules of decision").
"[O]rdinary state-law principles that govern the formation of contracts" are used to
determine if an arbitration clause is enforceable. Nelson
190, 193 (5th Cir. 2016) (quoting Carey
Cir. 2012)).
v.
v.
Watch House Int'l, L.L. C., 815 F.3d
24 Hour Fitness, USA, Inc., 669 F.3d 202, 205 (5th
Under Texas law, an arbitration clause is illusory if one party can unilaterally
change the agreement. Id. at 193; see also In re 24R, Inc., 324 S.W.3d 564, 567 (Tex. 2010). An
exception to this general rule exists when a "saving clause" in the agreement restrains such
unilateral authority. See In re Halliburton Co., 80 S.W.3d 566, 569-70 (Tex. 2002) (reasoning
that Halliburton' s unilateral authority to amend arbitration clause was sufficiently restrained
when amendments could apply prospectively only and would not be effective until 10 days after
notice given to employees).
III. ANALYSIS
1.
The "Rule 11 agreement" is not enforceable because it is not part of the record.
Texas Rule of Civil Procedure
11
explains that "no agreement between attorneys or
parties touching any suit pending will be enforced unless it be in writing, signed and filed with
the papers as part of the record, or unless it be made in open court and entered of record." TEX.
R. CIV. P. 11. "Rule 11 is a minimum requirement for enforcement
pending suits
.
.
.
of all agreements concerning
." Kennedy v. Hyde, 682 S.W.2d 525, 528 (Tex. 1984). "The rule has been
held applicable to a wide variety of agreements concerning lawsuits, including stipulations as to
the testimony of absent witnesses
.
.
.
and agreements to limit the issues in dispute." Id.
4
(citations omitted). The Texas Supreme Court further states that Rule
li's filing requirement is
met if an agreement is entered into the record before a party seeks to enforce it. Padilla
v.
LaFrance, 907 S.W.2d 454, 461 (Tex. 1995).
The parties in the current case agreed that Oliver Street would nonsuit its state litigation
and refile in federal court. Creger claims that this agreement is unenforceable because it was
never filed with the state court in which Oliver Street filed its first declaratory-judgment suit.
Oliver Street does not directly respond to Creger's Rule
11
argument but explains that it
detrimentally relied on the agreement.
Rule
11
applies to "all agreements concerning pending suits" and is applied in a wide
variety of agreements. Kennedy, 682 S.W.2d at 528.
This court concludes that the parties'
agreement to have this suit filed in a particular jurisdiction and venue "touches" the lawsuit.
il's requirements.
The parties do not dispute that
the agreement was not entered into the record of any court.
The agreement is therefore
Accordingly, the agreement is subject to Rule
unenforceable according to the rule's text.
2.
The arbitration clause is an illusory promise because Oliver Street retains the right to
unilaterally alter all polices in its employee handbook.
"A promise is illusory if it does not bind the promisor, such as when the promisor retains
the option to discontinue performance." In re 24R, 324 S.W.3d at 567 (citing Mann Frankfort
Stein & Lipp Advisors, Inc.
v.
Fielding, 289 S.W.3d 844, 849 (Tex. 2009)). The option to
discontinue performance exists when "one party can avoid its promise to arbitrate by amending
the provision or terminating it altogether."
Id. (citing In re Odyssey Healthcare, Inc., 310
S.W.3d 419, 424 (Tex. 2010)).
Oliver Street's employee
handbookin which the arbitration clause
is
locatedstates
that Oliver Street "reserves the right to rescind, modify or deviate from [its] policies, practices
5
and guidelines at its sole discretion
. . .
with or without notice." Oliver Street therefore retains
the option to discontinue performance of its promise to arbitrate.
The Fifth Circuit recently affirmed a district court's denial of a motion to compel
arbitration when a company retained the right to unilaterally alter an employee handbook in
which the arbitration clause at issue was located:
We hold that the district court did not err in denying the motion to compel
because the arbitration provision is not a separate, stand-alone contract. Instead, it
is contained in the handbook in which Radio One reserved the right to unilaterally
supersede, modify or eliminate existing policies. Under these circumstances,
Radio One's promise to arbitrate was illusory and unenforceable.
Scudiero v. Radio One of Tex. II, L.L.C., 547 F. App'x 429, 432 (5th Cir. 2013).'
Creger nonetheless argues that the arbitration clause is enforceable because he performed
under his employment agreement and Oliver Street did not alter its arbitration clause during
Creger's employment. But the "critical inquiry" is whether Oliver Street could "retroactively
eliminat[e] its arbitration policy." Carey, 669 F.3d at 207 (applying Texas law).
Oliver Street retains the right to modify policies in its employee
include the arbitration
clauseat its "sole discretion
.
.
.
handbookwhich
with or without notice." This provision
grants Oliver Street broad authority and does not foreclose its ability to retroactively eliminate its
arbitration policy. Further, the handbook does not contain a Halliburton-type saving clause
requiring that changes apply prospectively only and not until 10 days after employees have been
given notice of the changes.
For these reasons, Oliver Street's arbitration clause is an
unenforceable illusory promise.
The court recognizes that, "[a]lthough unpublished opinions are not precedential, they are
persuasive." United States v. Olivares, 833 F.3d 450, 453 n.1 (5th Cir. 2016) (citing Ballard v.
Burton, 444 F.3d 391, 401 n.7 (5th Cir. 2006) (recognizing that unpublished decisions issued
after January 1, 1996, are not controlling precedent but may be considered persuasive authority).
This court does not rely on Scudiero as binding precedent but finds the reasoning persuasive as
applied to the similar facts in this case.
1
3.
Promissory estoppel does not apply to enforce either the Rule 11 agreement or the
arbitration clause.
Promissory estoppel has four elements under Texas law: (1) A promise; (2) foreseeability
of reliance thereon by the promisor; (3) substantial reliance by the promisee to its detriment; and
(4) a finding that injustice can be avoided only by enforcing the promise. Clardy Mfg. Co.
v.
Marine Midland Bus. Loans, Inc., 88 F.3d 347, 360 (5th Cir. 1996). Promissory estoppel does
not compel enforcement of either the "Rule
11
agreement" or the arbitration clause, because
enforcement would create injustice.
The court may consider notions of justice when determining if promissory estoppel is
applicable. "When a promisor induces substantial action or forbearance by another, promissory
estoppel prevents any denial of that promise if injustice can be avoided only by enforcement." In
re Weekley Homes, L.P., 180 S.W.3d 127, 133 (Tex. 2005).
Further, "[p]romissory estoppel
does not create liability where none otherwise exists, but 'prevents a party from insisting upon
his strict legal rights when it would be unjust to allow him to enforce them." Id. (citations
omitted) (quoting Wheeler
v.
White, 398 S.W.2d 93, 96 (Tex. 1965)).
In Wheeler, the Texas
Supreme Court quoted the United States Supreme Court to describe promissory estoppel's
underlying purpose as "promot[ing] the ends of justice":
The vital principle is that he who by his language or conduct leads another to do
what he would not otherwise have done, shall not subject such person to loss or
injury by disappointing the expectations upon which he acted. Such a change of
position is sternly forbidden []. This remedy is always so applied as to promote
the ends of justice.
Wheeler, 398 S.W.2d at 96 (quoting Dickerson
v.
Coigrove, 100 U.S. 578, 580 (1879)).
In the current case, both parties have spent time and money in reliance on the other's
representations. Oliver Street argues that Creger contractually agreed on May 25, 2017, to have
his claims litigated in federal court. Oliver Street further claims that it detrimentally relied on
7
this agreement by allowing for a delay in litigation, agreeing to pursue its claims in a forum
different than the one it originally chose, modifying its legal position, and incurring significant
legal fees. Creger argues that he detrimentally relied upon the arbitration clause in the Oliver
Street's employee handbook. Specifically, he paid $300 when he filed a demand for arbitration
with the American Arbitration Association on October 24, 2017. Both parties have detrimentally
relied on the other's promises.
Accordingly, neither Oliver Street nor Creger has satisfied promissory estoppel's last
element because both parties have reneged on their previous promises. Creger agreed to have
this suit filed in federal court and now wishes to arbitratei 95 days after Oliver Street first filed
for declaratory judgment in state court. On the other hand, Oliver Street's employee handbook
says that employment disputes will be resolved through arbitration. Oliver Street now wishes to
take advantage of Texas law and argue that its own clause is unenforceable. Injustice would be
created, not avoided, by applying promissory estoppel in either party's favor.
IV. CONCLUSION
The court concludes that the "Rule 11 agreement" and arbitration clause are
unenforceable under Texas law. Estoppel does not apply in either party's favor because doing so
would allow the other to renege on its own representations, thus creating injustice. As a result,
further discovery on issues of agency, authority, and estoppel is unnecessary.
IT IS THEREFORE ORDERED that Defendant/Counter-Plaintiff Creger's Motion to
Compel Arbitration and Motion to Dismiss filed October 26, 2017 (Clerk's Doc. No. 20) is
DENIED.
IT IS FURTHER ORDERED that Defendant/Counter-Plaintiff Creger's Motion for
Protective Order filed October 31, 2017 (Clerk's Doc. No. 21) is DENIED.
8
IT IS FURTHER ORDERED that Oliver Street Dermatology's Motion for Leave to
Serve Additional Discovery on Issues of Agency, Authority and Estoppel Raised by Reply to
Response to Motion to Compel and Motion for Leave to File Sur-Reply filed December 8, 2017
(Clerk's Doc. No. 31) is DENIED.
SIGNED thi
day of May, 2018.
L'
TED STAT
DISTRICT JUDGE
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