In a per curium opinion last week styled RSL Funding, LLC v. Pippins, the Texas Supreme Court refined Texas law on when a party waives the right to arbitrate by substantially invoking the judicial process. Three individuals assigned future annuity payments to RSL. The assignment contracts between RSL and these assignees contained an arbitration clause. The annuity contracts with MetLife, however, did not. MetLife declined to honor the assignment. RSL initiated suit against MetLife seeking a declaratory judgment that the assignments were valid. The assignees initially cooperated with RSL in the suit, providing affidavits in support of RSL’s petition. The cooperative relationship quickly broke down, however, and the assignees pursued claims against RSL and MetLife aggressively.
Just two months after RSL initiated suit and three months after conflict appeared in the assignor/assignee relationship, RSL began initiating arbitration against the assignees. When the trial court refused to compel arbitration, RSL asserted its statutory right to interlocutory appeal. A divided court of appeals affirmed on the grounds that RSL had waived its right to arbitrate by substantially invoking the judicial process. In a footnote, the court of appeals stated it would have independently affirmed the case on a separate, non-arbitration waiver issue. The Texas Supreme Court granted certiorari and affirmed on the separate, non-arbitration issue. It disagreed, however, that RSL had substantially invoked the judicial process.
Precedent defining what it means to substantially invoke the judicial process has always been fact-intensive—a reality this most recent opinion only confirms in providing a non-comprehensive list of some factors courts may consider in analyzing the issue. Notably, the facts that the court appears to have found decisive in this case are that RSL: (1) had no existing conflict with the assignee individuals when the suit was filed, (2) never directly engaged in active discovery, (3) pursued arbitration once a dispute existed after a reasonably brief delay, and (4) filed no pre-trial motions that directly implicated the assignee after the conflict developed.
Two takeaways from RSL Funding: First, the Court’s heavy emphasis on point one above—the lack of an existing conflict between RSL and the assignees—suggests it was the most important factor in deciding the case. Interestingly, the Court found no conflict despite both RSL’s joinder of the assignees in its suit and the reality that any judgment against MetLife would inevitably affect the assignees rights. Rather, the Court highlighted that joining the assignees was necessary under the Declaratory Judgment Act. Reliance on that procedural requirement reaffirmed the Court’s previous holding in G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 511 (Tex. 2015), which the Court interpreted to mean that taking “procedurally necessary” actions “in order to preserve certain rights” does not waive arbitration. The “certain right” to be preserved in RSL Funding was the right to seek a procedurally adequate declaratory judgment against a third party, but the case gives little insight into what other rights might qualify.
Second, no Fifth Circuit case presents a direct parallel to RSL Funding, and so whether a federal court would approach RSL Funding the same way as the state’s highest court is unclear. Perhaps the closest federal case is Rushaid v. Nat’l Oilwell Varco, Inc., 757 F.3d 416, 422. (5th Cir. 2014). That case addressed whether the litigation-oriented conduct of a co-defendant and related company could waive arbitration for an otherwise passive co-defendant. In finding no waiver, the Fifth Circuit said “attributing the actions of an arbitration proponent's co[-]defendants to it simply because it benefitted from those actions would cast an unduly wide net.”
In conclusion, RSL Funding cautions careful representation when a co-party may be subject to arbitrable cross-claims. One should consider whether arbitration of those arbitrable claims is important to your client, how eminent a dispute with the co-party is, and whether actions taken with regard to that co-party are procedurally necessary.
Contact:
Garrett Martin
817.420.8243
gmartin@winstead.com
Disclaimer: Content contained within this publication provides information on general legal issues and is not intended to provide advice on any specific legal matter or factual situation. This information is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Readers should not act upon this information without seeking professional counsel.