Richmont Holdings, Inc., Nukote Holding, Inc., Nukote International, Inc., Inkbrary, LLC, Superior Acquisitions LLC, John P. Rochon, Sr., John P. Rochon, Jr., Kelly Kittrell, Russell MacK, C & R Services, Inc., and Kenneth R. Schlag v. Superior Recharge Systems, L.L.C. and Jon Blake

• Court: Court of Appeals of Texas
• Decided: August 22, 2013
• Docket: 02-10-00161-CV
• Status: Published

Opinion

COURT OF APPEALS SECOND DISTRICT OF TEXAS FORT WORTH

NO. 02-10-00161-CV

RICHMONT HOLDINGS, INC., APPELLANTS NUKOTE HOLDING, INC., NUKOTE INTERNATIONAL, INC., INKBRARY, LLC, SUPERIOR ACQUISITIONS LLC, JOHN P. ROCHON, SR., JOHN P. ROCHON, JR., KELLY KITTRELL, RUSSELL MACK, C & R SERVICES, INC., AND KENNETH R. SCHLAG

V.

SUPERIOR RECHARGE APPELLEES SYSTEMS, L.L.C. AND JON BLAKE

----------

FROM THE 211TH DISTRICT COURT OF DENTON COUNTY

MEMORANDUM OPINION ON REMAND 1

1 See Tex. R. App. P. 47.4. In this case on remand from the Supreme Court of Texas, Appellants

Richmont Holdings, Inc.; Nukote Holding, Inc.; Nukote International, Inc.;

Inkbrary, LLC; Superior Acquisitions LLC; John P. Rochon, Sr.; John P. Rochon,

Jr.; Kelly Kittrell; Russell Mack; C & R Services, Inc.; and Kenneth R. Schlag

(collectively the Richmont parties) appeal from the trial court’s order denying their

motion to compel arbitration of the claims brought against them by Appellees Jon

Blake and Superior Recharge Systems, L.L.C. (collectively the Blake parties). In

their sole issue on appeal, the Richmont parties argue that the Blake parties

failed to demonstrate a waiver of the arbitration provision. Because we hold that

the Richmont parties substantially invoked the judicial process to the prejudice of

the Blake parties, we affirm.

Background

The Blake parties file this lawsuit

In June 2008, the Blake parties filed suit in Denton County against

Richmont Holdings, Inc.; Nukote Holding, Inc.; Nukote International, Inc.;

Inkbrary, LLC; Superior Acquisitions LLC; John P. Rochon, Sr.; John P. Rochon,

Jr.; Kelly Kittrell; and Russell Mack. The Blake parties sought a declaratory

judgment that a covenant not to compete—signed by Jon Blake in an

employment agreement related to a transaction involving the sale of Superior

Recharge to Superior Acquisitions—was unenforceable. Blake also sought

injunctive relief.

2 The Richmont parties moved to transfer venue to Collin County. In an

amended motion, they sought to transfer venue to Dallas County based upon a

venue provision in Jon Blake’s employment agreement. They argued

alternatively that Collin County was the proper county for the suit. When the

Blake parties added C & R Services and Kenneth Schlag as defendants, those

defendants filed their own motion to transfer venue to Dallas, or, alternatively,

Collin County.

On October 20, 2008, Superior Acquisition sued Jon Blake in Dallas

County for breach of contract, breach of fiduciary duty, and civil theft. The suit

was based on “Blake’s failure to perform his duties under the terms of his

employment contract, and his misappropriation of company funds.” The Dallas

County trial court abated that case.

The Richmont parties file a motion for continuance

The Blake parties filed a motion seeking to compel discovery and

requesting discovery sanctions. The motion was set for a hearing on December

21, 2009. The Richmont parties filed a motion for continuance on December 18,

2009. The Richmont parties’ attorney stated that he had suffered a medical

emergency, had been ordered not to walk or put pressure on his foot, and was

under the influence of “strong pain medication.” No order on the motion appears

in the record, but on January 6, 2010, the trial court signed an order noting that it

had conducted the hearing on December 21. The order instructed the Richmont

parties to respond without objection to each of the Blake parties’ discovery

3 requests and to deliver any documents sought by the Blake parties in discovery

to their counsel by March 21, 2010. The trial court also ordered the Richmont

parties to pay $5,550.50 in sanctions by that date.

The Blake parties file a motion to consolidate

In January 2010, the Blake parties filed a motion to consolidate their suit

with one that had been filed by Toner Solutions Corporation in Denton County

against Richmont Holdings; Inkbrary; Rochon, Sr.; Rochon, Jr.; Kittrell; Schlag;

and others not involved in this suit. The motion asserted that Richmont Holdings

was the parent company of all the entities involved in both suits and that both

actions evolved out of Richmont Holdings’ actions “to perpetrate a scheme to

monopolize the market for remanufacture and sale of . . . printer cartilages [sic].”

The Richmont parties move to compel arbitration and to stay discovery

On January 27, 2010, the Richmont parties filed a motion to compel

arbitration. They alleged that the suit arose out of the purchase of Superior

Recharge’s assets and that the asset purchase agreement contained a clause

mandating arbitration of any dispute regarding the agreement. On March 15,

2010, they filed a motion asking the trial court to stay discovery until after the trial

court had ruled on their motion to compel arbitration.

On March 19, 2010, in an original proceeding filed by the Richmont parties,

this court stayed the trial court’s January 6, 2010 order compelling discovery and

stayed all other proceedings in the trial court in the same cause until further

notice except for any proceedings relating to the hearing of or ruling upon the

4 motion to compel arbitration. On the same date, the Blake parties filed a

response to the motion to compel arbitration asserting that the Richmont parties

had waived arbitration.

The trial court held a hearing on the motion to compel arbitration, and, on

May 18, signed an order denying the motion to compel arbitration. The Richmont

parties appealed. This court held that the Blake parties’ pleadings dealt with the

employment and non-compete agreement, which did not contain an arbitration

provision. 2 On review, the Supreme Court of Texas held that the parties did have

a valid arbitration agreement and remanded the case back to this court to

consider the Richmont parties’ waiver defense. 3

Standard of Review

When reviewing a denial of a motion to compel arbitration, if the court’s

factual findings are in dispute, we review the court’s denial of the motion to

compel under a legal sufficiency or “no evidence” standard of review. 4 We defer

to the trial court’s factual determinations that are supported by evidence, but we

review the trial court’s legal determinations de novo. 5 Whether a party has

2 Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C., 392 S.W.3d 174, 183 (Tex. App.—Fort Worth 2011). 3 Richmont Holdings, Inc. v. Superior Recharge Sys., L.L.C., 392 S.W.3d 633, 633–34 (Tex. 2013). 4 J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 233 (Tex. 2003). 5 Rachal v. Reitz, No. 11-0708, 2013 WL 1859249, at *2 (Tex. May 3, 2013); In re Labatt Food Serv., L.P., 279 S.W.3d 640, 643 (Tex. 2009).

5 waived an arbitration clause is a question of law for the court to decide based on

the totality of the circumstances. 6

Applicable Law: Waiver of Arbitration

Once a party seeking to compel arbitration has established the existence

of an enforceable arbitration agreement and that the dispute falls within its scope,

the burden shifts to the party opposing arbitration to raise an affirmative defense

to the agreement’s enforcement, such as waiver. 7 A party’s waiver of the right to

compel arbitration may be express, or it may be implied from a party’s

unequivocal conduct. 8 Whether express or implied, the waiver must be

intentional. 9 A party impliedly waives an arbitration clause when the party (1)

substantially invokes the judicial process (2) to the other party’s detriment or

prejudice. 10 The Supreme Court of Texas has held that parties who “conduct full

discovery, file motions going to the merits, and seek arbitration only on the eve of

6 Perry Homes v. Cull, 258 S.W.3d 580, 601 (Tex. 2008); In re Citigroup Global Mkts., Inc., 258 S.W.3d 623, 625 (Tex. 2008) (orig. proceeding). 7 Ellis v. Schlimmer, 337 S.W.3d 860, 862 (Tex. 2011); In re Fleetwood Homes of Tex., L.P., 257 S.W.3d 692, 695 (Tex. 2008) (orig. proceeding) (directing the trial court to compel arbitration when the party resisting arbitration failed to show waiver). 8 Perry Homes, 258 S.W.3d at 593. 9 In re Bank One, N.A., 216 S.W.3d 825, 827 (Tex. 2007) (orig. proceeding). 10 Perry Homes, 258 S.W.3d at 589–90.

6 trial” waive any right to enforce a contractual arbitration provision. 11 Whether

actions that do not rise to that level of participation in the judicial process

constitute waiver is decided on a case-by-case basis. 12

To determine whether a party has impliedly waived arbitration, courts

should look to the totality of the circumstances. In conducting this analysis, the

Supreme Court of Texas has considered factors such as:

• when the movant knew of the arbitration clause;

• how much discovery has been conducted;

• who initiated it;

• whether it related to the merits rather than arbitrability or standing;

• how much of it would be useful in arbitration; and

• whether the movant sought judgment on the merits 13

Prejudice in the context of waiver of arbitration agreements refers to

“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.” 14 That is, “a party should not be

11 In re Citigroup Global Mkts., 258 S.W.3d at 625 (quoting In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 764 (Tex. 2006) (orig. proceeding)). 12 Perry Homes, 258 S.W.3d at 591. 13 Id. at 591–92. 14 Id. at 597 (quoting Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir. 2004)).

7 allowed purposefully and unjustifiably to manipulate the exercise of its arbitral

rights simply to gain an unfair tactical advantage over the opposing party.” 15

This court has held that three factors are particularly relevant in assessing

prejudice. First, the court should consider the time and expense incurred due to

the moving party’s participation in judicial proceedings. 16 Second, the court

should consider the failure to assert the right to arbitration. A demand for

arbitration puts the other party on notice that arbitration is forthcoming and gives

that party the opportunity to avoid compromising its position with regard to

arbitrable and nonarbitrable claims. 17 Third, if discovery has been conducted,

the court should consider whether that discovery related only to a party’s

nonarbitrable claims or all of the party’s claims, including the arbitrable claims.

Pretrial discovery activity relating to a party’s arbitrable claims can result in

prejudice from a party’s use of judicial processes to gain access to information

that would not have been discoverable in arbitration. 18 Providing discovery and

getting discovery do not necessarily have the same prejudicial effect; “a party

who requests lots of discovery is not prejudiced by getting it and taking it to

15 Id. (quoting In re Tyco Int’l Ltd. Sec. Litig., 422 F.3d 41, 46 n.5 (1st Cir. 2005)). 16 Haddock v. Quinn, 287 S.W.3d 158, 181 (Tex. App.—Fort Worth 2009, pet. denied). 17 Id. 18 In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex. 1998) (orig. proceeding); Haddock, 287 S.W.3d at 181.

8 arbitration in the same way that a party who produces lots of discovery outside

the stricter discovery limits in arbitration.” 19

Analysis

Substantial Invocation of the Judicial Process

The Blake parties asserted the following acts of the Richmont parties to

demonstrate that those parties waived their right to demand arbitration.

• The Richmont parties had filed suit in Dallas County on claims that involved the same transaction as the one which the Blake parties based their claims against them;

• The Richmont parties had not produced any documents in response to the Blake parties’ requests for production;

• A hearing on Blake’s motion for sanctions had originally been set for September 2009 but was rescheduled for a date in October;

• The Richmont parties counsel asked to reschedule the hearing due to illness, and the hearing was rescheduled for November 13, 2009;

• The attorney for the Richmont parties rescheduled due to illness a meeting at which the attorneys for both sides were to review discovery requests and to which the Richmont parties’ attorney was supposed to bring production documents;

• Counsel for the parties met on November 9, 2009, and counsel for the Richmont parties agreed to withdraw most of his objections to the Blake parties’ discovery requests and to execute a Rule 11 agreement to submit discovery, and, in return, the Blake parties’ counsel agreed to cancel the hearing on the motion for sanctions;

• The Richmont parties’ attorney did not sign the Rule 11 agreement, however, and therefore the Blake parties reset the motion for sanctions hearing for December 21;

19 Perry Homes, 258 S.W.3d at 600 (emphasis omitted).

9 • The Richmont parties’ filed a motion for continuance on December 18 due to illness, but the trial court held the hearing and entered the order compelling discovery and granting sanctions against the Richmont parties; and

• The Richmont parties drafted the arbitration clause and were therefore aware of it from the onset of the litigation.

To show that they had been prejudiced by the Richmont parties’ failure to

invoke their right to arbitration, the Blake parties pointed to the following:

• The Richmont parties tendered a request for disclosure, and responding to the request took the Blake parties four hours;

• The Blake parties incurred in excess of $50,000 in attorney’s fees; although the Blake parties did not segregate all of the fees to show which fees were due to the Richmont parties’ invocation of the judicial process and which were self- inflicted, 20 they did allege that at least $5,000 of the fees were incurred in defending the Dallas litigation; and

• The Richmont parties sought to delay discovery, forcing the Blake parties to file motions, attend hearings, and seek sanctions to obtain the discovery.

The Richmont parties filed a response stating, among other things, that the

Dallas County suit “dealt with employment issues, such as civil theft, which is not

a part of this lawsuit,” and that the suit did not involve all of the same parties.

They asserted that they had not conducted discovery related to the merits and

therefore had not gained any information that they would not have been entitled

to in arbitration, and the Blake parties would not be prejudiced by arbitration.

20 See In re Vesta Ins. Group, 192 S.W.3d at 763 (stating that the opposing party’s high costs and attorney’s fees did not show prejudice because the pre- trial costs were “largely self-inflicted” from his sending discovery requests and amending his petition).

10 They also stated that they moved for arbitration after the Blake parties amended

their petition to add additional claims and parties and broadened the depth and

scope of the lawsuit and then moved to consolidate the suit with a completely

different case with different parties and claims and concerning a different

contract.

The Richmont parties also asserted that the Blake parties contributed to

the delay because at the October 2, 2008 hearing on the motion to transfer

venue, the trial court stated that it would reset the hearing so that the Blake

parties could replead, but the Blake parties did not replead until June 18, 2009.

They stated that the Blake parties took over two and a half months to file a

response to the motion to compel arbitration and another month and half to file its

supplemental brief on the response.

The Blake parties demonstrated that the Richmont parties’ delay in

demanding arbitration led them to incur attorney’s fees in making discovery

requests, filing motions to compel discovery, and setting hearings on the

motions, and attending hearings. We hold that the Blake parties met their burden

to demonstrate that they suffered prejudice by the Richmont parties’ substantial

invocation of the judicial process. 21

21 CropMark Direct, LLC v. Urbanczyk, 377 S.W.3d 761, 764–66 (Tex. App.—Amarillo 2012, pet. denied) (holding that CropMark had waived its right to arbitration when it requested a jury trial, delayed seeking arbitration, participated in discovery that went to the merits rather than to assist in the determination of whether the claims were subject to arbitration, and used discovery mechanisms not available through the arbitration process); Spain v. Houston Oilers, Inc., 593

11 Schlag and C & R Services argue in the alternative that even if the other

Richmont parties waived arbitration, they did not. They assert that they were not

brought into the lawsuit until August 7, 2009 and did not file their motion to

transfer venue until August 28, 2009. But most of the allegations made against

the other Richmont parties applied equally to Schlag and C & R Services. They

also filed a motion to transfer venue, and they also resisted participating in

discovery, thereby forcing the Blake parties to file motions and set hearings and

incur attorney’s fees. Accordingly, we overrule the Richmont parties’ issue.

Conclusion

Having overruled the Richmont parties’ sole issue, we affirm the trial

court’s order denying the motion to compel arbitration.

LEE ANN DAUPHINOT JUSTICE

PANEL: LIVINGSTON, C.J.; DAUPHINOT and MCCOY, JJ.

LIVINGSTON, C.J., concurs without opinion.

DELIVERED: August 22, 2013

S.W.2d 746, 748 (Tex. Civ. App.—Houston [14th Dist.] 1979, no writ) (holding that the appellee’s long delay in demanding arbitration, in conjunction with the use of pre-trial discovery not available in arbitration, manifested an intent on the part of the appellee to waive its right to arbitration).