Education Management Services, LLC v. Tracey

Filing 34

ORDER DENYING 23 Motion to Compel. Signed by Judge David A. Ezra. (aej)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF TEXAS
SAN ANTONIO DIVISION
EDUCATION MANAGEMENT
SERVICES, LLC,
Plaintiff,
vs.
MICHAEL J. TRACEY,
Defendant.

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No. SA:15–CV–075–DAE

ORDER DENYING PLAINTIFF’S MOTION TO STAY LITIGATION AND
COMPEL ARBITRATION
Before the Court is a Motion to Stay Litigation and Compel
Arbitration filed by Education Management Services, LLC (“Plaintiff”). (Dkt.
# 23.) On June 30, 2015, the Court heard oral argument on the Motion. Henry B.
Gonzalez, Esq., and Nathaniel C. Corbett, Esq., appeared at the hearing on behalf
of Plaintiff; Clint A. Corrie, Esq., appeared at the hearing on behalf of Defendant
Michael J. Tracey (“Defendant”). After reviewing the Motion and the opposing
memorandum, and considering the parties’ arguments at the hearing, for the
reasons that follow, the Court DENIES Plaintiff’s Motion to Stay Litigation and
Compel Arbitration. (Dkt. # 23.)

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BACKGROUND
Between 2010 and October 2014, Defendant provided various real
estate seminar sales and consulting services to Plaintiff. (Dkt. # 7 ¶ 11.) In
connection with this arrangement, Plaintiff and Defendant entered into four
separate Contractor Agreements. (Id. ¶¶ 14–16; Exs. B–E.) Specifically, the
parties entered into two agreements on February 21, 2010 (the “2010 Agreements,”
Dkt. # 7, Exs. B–C), a third agreement on December 28, 2012 (the “2012
Agreement,” Dkt. # 7, Ex. D), and a fourth agreement on February 14, 2014 (the
“2014 Agreement,” Dkt. # 7, Ex. E) (collectively, “the Agreements”). Each of the
Agreements contained the following provision:
4.1 Disputes Will be Arbitrated. Any controversy between [Defendant] and
[Plaintiff] and/or Affiliates, or any of its respective owners, employees,
contractors, officers, agents, clients, subsidiaries, affiliates, arising from or
in any way related to this Agreement, [Defendant’s] business relationship
with [Plaintiff] and/or Affiliates, shall be resolved exclusively by final and
binding arbitration administered by the American Arbitration Association
under its rules then applicable to the dispute. Any arbitration shall take
place only in San Antonio, Texas, or as otherwise mutually agreed by the
Parties.
(Dkt. # 7, Exs. B–E.) Both Plaintiff and Defendant signed each of the Agreements.
(Id.)
In October 2014, Defendant unilaterally terminated the 2014
Agreement. (Dkt. # 7 ¶ 29.) Plaintiff asserts that shortly thereafter, Defendant
violated the Agreements by working for a direct competitor of one of Plaintiff’s
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affiliates, and by disclosing and using Plaintiff’s and its affiliates’ trade secrets and
confidential information which Defendant obtained during his relationship with
Plaintiff. (Dkt. # 23 at 4.)
On January 16, 2015, Plaintiff filed its Original Petition and
application for a Temporary Restraining Order (“TRO”) in Bexar County District
Court. (Dkt. # 1–13.) Plaintiff’s Original Petition included four causes of action:
(1) breach of contract for the 2010 Agreements, (2) breach of contract for the 2012
Agreement, (3) breach of contract for the 2014 Agreement, and (4) statutory trade
secret misappropriation. (Dkt. # 1–4.) On January 29, 2015, Defendant filed its
Notice of Removal, invoking this Court’s diversity jurisdiction. (Dkt. # 1.) On
February 9, 2015, Defendant filed a Motion to Dismiss the Original Petition. (Dkt.
# 3.) Subsequently, Plaintiff amended its Complaint (Dkt. # 7) to include an
additional cause of action for common law fraud. (Dkt. # 7.) On March 9, 2015,
Defendant moved to dismiss the Amended Complaint. (Dkt # 12.) After holding a
hearing on the motion to dismiss, the Court dismissed Plaintiff’s statutory trade
secret misappropriation and common law fraud claims without prejudice. (Dkt.
# 20.) On May 20, 2015, Plaintiff filed the instant Motion asking the Court to stay
litigation and compel this case to arbitration. (Dkt. # 23.) On May 27, 2015,
Defendant filed a Response. (Dkt. # 28.)

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LEGAL STANDARD
A motion to stay litigation under § 3 of the Federal Arbitration Act
(“FAA”) “requests the district court to refrain from further action in a suit pending
arbitration[.]” Midwest Mech. Contractors, Inc. v. Commonwealth Const. Co., 801
F.2d 748, 750 (5th Cir. 1986). To obtain a stay of litigation under § 3, a movant
must show (1) that an agreement between the parties to arbitrate exists, and (2) that
the issues raised are within the reach of that agreement. Complaint of Hornbeck
Offshore (1984) Corp., 981 F.2d 752, 754 (5th Cir. 1993); Ryan v. Thunder
Restorations, Inc., Civ. A. No. 09–3261, 2011 WL 2680482, at *1 (E.D. La. July 8,
2011).
In contrast, a motion to compel arbitration under § 4 of the FAA is a
request that the court compel specific performance of an agreement to arbitrate,
and may be made in any district court which has subject matter jurisdiction over
the underlying dispute. Midwest Mech. Contractors, Inc., 801 F.2d at 750. In
ruling on a motion to compel arbitration under § 4, a court must determine
(1) whether the parties agreed to arbitrate the dispute, and if so, (2) whether any
federal statue or policy renders the claims nonarbitrable. Will-Drill Res., Inc. v.
Samson Res. Co., 352 F.3d 211, 214 (5th Cir. 2003) (citing R.M Perez & Assocs.
v. Welch, 690 F.2d 534, 538 (5th Cir. 1992)). The first element, whether the
parties agreed to arbitrate, involves two considerations: (1) whether a valid
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agreement to arbitrate between the parties exists, and (2) whether the dispute in
question falls within the scope of the arbitration agreement. Dealer Comp. Servs.
v. Old Colony Motors, Inc., 588 F.3d 884, 886 (5th Cir. 2009).1 Beyond this
analysis, courts generally do not inquire further into the substance of the parties’
disputes. Id. at 886–87 (citing Will-Drill Res., Inc., 352 F.3d at 214).
The right to arbitrate, like all contractual rights, is subject to waiver.
Miller Brewing Co. v. Fort Worth Distrib. Co. Inc., 781 F.2d 494, 497 (5th Cir.
1986). A party waives its right to arbitrate when (1) that party has “substantially
invoked the judicial process” and (2) that party’s “steps towards litigation
prejudiced the party opposing arbitration.” Ryan, 2011 WL 2680482, at *2 (citing
Republic Ins. Co. v. Paico Receivables, LLC., 383 F.3d 341, 346–47 (5th Cir.
2004)). The legal standard for waiver is the same regardless of whether the
plaintiff or defendant is the party alleged to have waived arbitration. Nicholas v.
KBR, Inc., 565 F.3d 904, 908 (5th Cir. 2009). “Differences between the two sides
arise from the voluntariness and timing of their actions, not the legal standard.” Id.
“Waiver of arbitration is not a favored finding and there is a presumption against
it.” Hafer v. Vanderbilt Mortg. & Fin., Inc., 793 F. Supp. 2d 987, 1000 (S.D. Tex.
2011) (quoting Lawrence v. Comprehensive Bus. Servs. Co., 833 F.2d 1159, 1164
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The requirements under § 3 of the FAA are the same as the requirements to
establish the first element under § 4 of the FAA. Thus, if the requirements for the
first element under § 4 are met, the requirements to obtain a stay of litigation
pursuant to § 3 have also been met.
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(5th Cir. 1987)). Consequently, the party alleging waiver of arbitration carries a
heavy burden of proof. Ryan, 2011 WL 2680482, at *2.
DISCUSSION
Plaintiff argues that the Court should compel this case to arbitration
because (1) the parties agreed to arbitrate, and (2) no federal statute or policy
specifically renders Plaintiff’s claims nonarbitrable. (Dkt. # 23.) Defendant does
not dispute Plaintiff’s position, but argues that Plaintiff waived its right to
arbitration by substantially invoking the judicial process to Defendant’s prejudice.
(Dkt. # 28.)
As previously stated, parties agree to arbitrate when (1) a valid
agreement to arbitrate between the parties exists, and (2) the dispute in question
falls within the scope of an arbitration agreement. Dealer Comp. Servs., 588 F.3d
at 886 (citing Will-Drill Res., Inc., 352 F.3d at 214). However, a motion to compel
arbitration pursuant to § 4 should not be granted if the opposing party identifies a
federal statute or policy that would render the claims nonarbitrable. Anderson v.
Waffle House, Inc., 920 F. Supp. 2d 685, 695 (E.D. La. 2013). Additionally, a
party may waive its right to arbitration if that party (1) substantially invokes the
judicial process, and (2) that invocation results in prejudice to the opposing party.
Republic Ins. Co., 383 F.3d at 346–47.

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I.

Valid Agreement to Arbitrate
Plaintiff contends a valid agreement to arbitrate exists because it is

undisputed that the Agreements each contained an arbitration clause. (Dkt # 23 at
6.) “[A] written arbitration agreement is prima facie valid and must be enforced
unless the opposing party . . . alleges and proves . . . such grounds as exist at law or
in equity for the revocation of the contract.” Hafer, 793 F. Supp. 2d at 994
(quoting Freudensprung v. Offshore Technical Servs., Inc., 379 F.3d 327, 341 (5th
Cir.2004) (editorial marks omitted); 9 U.S.C. § 2. Here, Defendant does not
dispute the existence of a valid arbitration agreement. Having reviewed the
Agreements, the Court finds that Plaintiff has met its burden of showing that a
valid agreement to arbitrate exists.
II.

Scope of the Arbitration Agreement
With respect to the second step of the analysis, Plaintiff contends that

the arbitration agreement extends to Plaintiff’s causes of action against Defendant
because the arbitration clause is broad. (Dkt. # 23 at 6.) To determine whether a
dispute falls within the scope of an arbitration agreement, courts look the language
of the agreement and decide whether the clause is “narrow” or “broad”. See
Pennzoil Exploration and Prod. Co. v. Ramco Energy Ltd., 139 F.3d 1061, 1067
(5th Cir. 1998) (beginning the analysis of scope of an arbitration clause by
distinguishing “narrow” arbitration clauses from “broad” arbitration clauses). A
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“narrow” arbitration clause contains language such as “arising out of the contract,”
whereas a “broad” arbitration clause contains language such as “relate[d] to” or
“connected with” the contract. See id. If the language is “narrow,” arbitration
must not be compelled unless the dispute “arises from the contract.” E.g.,
Complaint of Hornbeck, 981 F.2d at 754. Conversely, if the clause is “broad,” it
embraces all disputes between the parties regardless of the label attached to the
dispute. See Pennzoil Exploration, 139 F.3d at 1067.
Here, the relevant language of the dispute resolution clause states:
Any controversy between [Plaintiff] and/or Affiliates…arising from
or in any way related to this Agreement, [Defendant’s] business
relationship with [Plaintiff] and/or Affiliates, or the termination of
[Defendant’s] business relationship with [Plaintiff] and/or Affiliates
shall be resolved exclusively by final and binding arbitration
administered by the American Arbitration Association under its rules
then applicable to the dispute.
(Dkt. #7, Exs. B–E) (emphasis added). This provision contains both narrow
(“[a]ny controversy between [Plaintiff] and/or Affiliates . . . arising from . . . this
Agreement) and broad (“[a]ny controversy between [Plaintiff] and/or
Affiliates . . . in any way related to this Agreement) language. (Id.) (emphasis
added).
The Supreme Court and the Fifth Circuit have described arbitration
provisions with similar language as “broad” arbitration clauses. See Prima Paint
Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 397–98 (1967) (labeling as
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“broad” a clause requiring arbitration of “[a]ny controversy or claim arising out of
or relating to this Agreement”); Pennzoil Exploration, 139 F.3d at 1067
(characterizing a provision that stated “[a]ny dispute, controversy or claim arising
out of or in relation to or in connection with this Agreement” as broad and capable
of embracing “all disputes between the parties having a significant relationship to
the contract regardless of the label attached to the dispute”); Nauru Phosphate
Royalties, Inc. v. Drago Daic Interests, Inc., 138 F.3d 160, 164–65 (5th Cir. 1998)
(holding that when parties agree to an arbitration clause governing “[a]ny dispute
arising out of or in connection with or relating to this Agreement,” they “intend the
clause to reach all aspects of the relationship.”).
Accordingly, the arbitration clause in the instant case is broad,
embracing all disputes related to the parties’ contractual relationship and
encompassing all of Plaintiff’s claims. Because a valid arbitration agreement
exists, and the arbitration clause encompasses all of Plaintiff’s causes of action
against Defendant, this Court finds that the requirements to stay litigation under
§ 3 of the FAA, and the requirements for the first element to compel arbitration
under § 4 of the FAA (whether parties agreed to arbitrate), are satisfied.
III.

Federal Statute or Public Policy Precluding Arbitration; Waiver
As to the second element of § 4, Plaintiff contends that there is no

discernable federal statute or policy that specifically precludes arbitration or
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renders Plaintiff’s claims nonarbitrable. A motion to compel arbitration pursuant
to § 4 should not be granted if the opposing party identifies a federal statute or
policy that would render the claims nonarbitrable. Waffle House, Inc., 920 F.
Supp. 2d at 695. Defendant has not pointed to any federal statute or policy that
renders Plaintiff’s claims nonarbitrable. Instead, Defendant argues that Plaintiff’s
motion should be denied because Plaintiff waived its right to arbitration by
substantially invoking the judicial process to Defendant’s prejudice. (Dkt. # 28.)
A.

“Substantial Invocation” of the Judicial Process
Defendant argues that Plaintiff substantially invoked the judicial

process when Plaintiff filed suit without asserting its right to arbitration. (Id. at 4.)
In order to substantially invoke the judicial process, a party must have litigated the
claim that the party now proposes to arbitrate by engaging in some overt act in
court that demonstrates a desire to resolve the arbitrable dispute through litigation
rather than arbitration. Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 328–
29 (5th Cir. 1999). The Fifth Circuit has explicitly held that a plaintiff’s decision
to file suit on otherwise arbitrable claims constitutes substantial invocation of the
judicial process for those specific claims, unless a relevant exception applies.
Nicholas, 565 F.3d at 908.
Cumulatively, Plaintiff’s Original Petition and application for a TRO
in Bexar County District Court on January 16, 2015 and its First Amended
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Complaint on February 23, 2015 included the same claims that it now seeks to
arbitrate. (Dkts. ##1, 7.) By filing suit for these claims and not asserting its right
to arbitrate until approximately four months after it filed its Original Petition and
application for a TRO, Plaintiff engaged in an overt act that demonstrated its intent
to adjudicate these claims through litigation rather than arbitration. See Nicholas,
565 F.3d at 908.
Plaintiff states that it filed suit and application for a TRO in Bexar
County District Court in order to gain immediate relief from Defendant’s ongoing
breach. (Dkt. # 23 at 4.) The Fifth Circuit has recognized that the application for a
TRO may constitute an exception to the general rule that filing suit is a substantial
invocation of the judicial process where the parties contract for the right to be able
to file suit to preserve the status quo with an injunction without waiving the right to
arbitrate. Nicholas, 565 F.3d at 908–09 (citing Joseph Chris Personnel Servs. v.
Rossi, 249 F. App’x 988, 991 (5th Cir. 2007) (acknowledging that filing suit solely
to obtain injunctive relief pending arbitration where both the state law and the
party’s contract permitted filing suit for this limited purpose was not a substantial
invocation of the judicial process). The parties in this case did not contract for this
right; therefore, this exception does not apply. Because Plaintiff’s decision to file
suit for the same claims that it seeks to arbitrate without asserting its right to
arbitrate is an overt act that demonstrates a desire to resolve the arbitrable dispute
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through litigation rather than through arbitration, the Court finds that Plaintiff has
substantially invoked the judicial process.
B.

Prejudice as Result of Invocation
Defendant also argues that he suffered prejudice by Plaintiff’s

substantial invocation of the judicial process for two reasons. (Dkt. # 28 at 7.)
First, Defendant has already incurred expenses defending against Plaintiff’s claims.
(Id.) Second, Defendant will be required to re-litigate issues already decided by
this Court.2 (Id.) “For purposes of a waiver of an arbitration agreement, prejudice
refers to the inherent unfairness in terms of delay, expense, or damage to a party’s
legal position that occurs when the party’s opponent forces it to litigate an issue
and later seeks to arbitrate that same issue.” Subway, 169 F.3d at 327 (internal
quotations and citations omitted). In assessing prejudice, the Fifth Circuit looks to
a variety of factors including: (1) the amount of pretrial activity related to
arbitrable claims; (2) time and expense incurred by the party opposing arbitration
in defending against litigation efforts of the party moving for arbitration; and
(3) the moving party’s failure to timely assert its right to arbitration. See Republic,
383 F.3d at 346.

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At the hearing, Plaintiff’s counsel represented that should the Court compel
arbitration, Plaintiff would not seek to arbitrate the dismissed claims. The Court
thus does not agree that Defendant’s legal position would be damaged by
compelling this case to arbitration.
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Defendant’s argument that he suffered financial prejudice as a result
of unnecessary litigation speaks to the first and second factors considered by the
Fifth Circuit: the amount of pretrial activity related to arbitrable claims, and time
and expense incurred by the party opposing arbitration in defending against
litigation efforts of the moving party. In support of this argument, Defendant
asserts that he has incurred significant expenses of:
•
•
•
•
•

Removing this case to federal court,
Briefing its Motion to Dismiss Plaintiff’s Original Petition,
Briefing its Motion to Dismiss Plaintiff’s Amended Complaint,
Arguing its Motion to Dismiss Plaintiff’s Amended Complaint, and
Secondary and administrative tasks attendant to any lawsuit.

(Dkt # 28 at 7.)
“When one party reveals disinclination to resort to arbitration on any
phase of suit involving all parties, those parties are prejudiced by being forced to
bear the expenses of a trial [because] [a]rbiration is designed to avoid this very
expense.” Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1159 (5th Cir.
1986). When Plaintiff decided to file suit without asserting its right to arbitrate,
Plaintiff revealed a disinclination to resort to arbitration. See Miller Brewing Co.,
781 F.2d at 497 (recognizing that plaintiff’s decision to file suit without
mentioning its desire to arbitrate was an indication of disinclination to arbitrate).
Relying on this disinclination, Defendant engaged in pretrial activities, thereby
incurring costs necessary to defend itself against Plaintiff’s substantial invocation
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of the judicial process. Had Plaintiff asserted its right to arbitrate at the onset of
the case, Defendant would have had the opportunity to avoid the costs associated
with removing the case to this Court and briefing and arguing its motion to dismiss
and the instant motion. See e.g., Price, 791 F.2d at 1160 (recognizing that costs
incurred in responding to a motion to dismiss would not have been incurred in
preparation for arbitration).
With respect to the third factor, the moving party’s failure to timely
assert its right to arbitrate, the Fifth Circuit has not provided a precise rule as to
how long a party may wait before asserting its right to arbitration. Indus. & Mech.
Contractors, Inc. v. Polk Const. Corp., No. Civ. A. 14-513, 2014 WL 4983486, at
*3 (E.D. La. Oct. 6, 2014). However, the Fifth Circuit has stated that “[t]he
decision to arbitrate is one best made at the onset of the case.” Walker v. J.C.
Bradford & Co., 938 F.2d 575, 577 (5th Cir. 1991). “While delay in asserting the
right to arbitrate will not alone result in waiver, such delay does bear on the
question of prejudice, and may, along with other considerations, require a court to
conclude that waiver has occurred.” Price, 791 F.2d at 1161 (internal quotation
marks omitted).
Here, Plaintiff pursued its claims in this Court for four months. Then,
upon receipt of an adverse ruling by this Court (Dkt # 20), Plaintiff asserted its
right to arbitrate for the first time. (Dkt # 23.) It is not disputed that Plaintiff was
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aware of its right to compel arbitration at the beginning of this litigation as
evidenced by his signature on the fully executed copies of the Agreements and
initials provided at the bottom of each page of the 2012 and 2014 Agreements.
(Dkt. #7; Exs. B–E.) In light of the financial prejudice that Defendant suffered
from engaging in pretrial activity necessary to defend itself against Plaintiff’s
claims, combined with Plaintiff’s delay in asserting its right to arbitrate when it
was aware of its right to compel arbitration at the onset of this case, this Court
agrees that Defendant has been prejudiced by Plaintiff’s substantial invocation of
the judicial process.
In sum, while the Court agrees that the requirements to stay litigation
and compel arbitration pursuant to §§ 3–4 of the FAA have been met, the Court
finds that Plaintiff has waived its right to arbitration through substantial invocation
of the judicial process to Defendant’s prejudice.
CONCLUSION
For the reasons stated above, the Court hereby DENIES Plaintiff’s
Motion to Stay Litigation and Compel Arbitration. (Dkt. # 23.)
IT IS SO ORDERED.
DATED: San Antonio, Texas, July 1, 2015.

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David Alan Ezra
Senior United States Distict Judge