Washing Equipment of Texas, Inc. v. TJ's Automotive Repair, Inc. and Richard Barraza

• Court: Court of Appeals of Texas
• Decided: August 11, 2022
• Docket: 01-21-00236-CV
• Status: Published

Opinion

Opinion issued August 11, 2022

In The

Court of Appeals For The

First District of Texas ———————————— NO. 01-21-00236-CV ——————————— WASHING EQUIPMENT OF TEXAS, INC., Appellant V. TJ’S AUTOMOTIVE REPAIR, INC. AND RICHARD BARRAZA, Appellee

On Appeal from the 412th Judicial District Court Brazoria County, Texas Trial Court Case No. 109310-CV

MEMORANDUM OPINION

TJ’s Automotive Repair, Inc. and Richard Barraza sued Washing Equipment

of Texas, Inc. for declaratory relief. WET, Barraza’s former employer, moved to

compel arbitration under the employment agreement, and the trial court denied the

motion. WET appeals that denial, arguing that the employment agreement includes an arbitration clause. Because the employment agreement’s arbitration clause

encompasses these claims, we affirm in part and reverse in part.

I. Background

Richard Barraza was previously employed by WET where he worked on

installation, maintenance, and repair of car wash systems. As part of his

employment, he signed an agreement that contained a noncompete clause and an

arbitration clause. Barraza left WET and began working at TJ’s Automotive where

he works mainly on maintenance and repair for automobiles. The next day, TJ’s

Automotive and Barraza sued WET for declaratory relief contending that the

noncompete clause was inapplicable because TJ’s Automotive and WET are not

business competitors; that Barraza did not violate the employment agreement; that

the geographical restriction in the employment agreement is overly broad and

unnecessary to protect WET’s interests; and that even if the employment agreement

is enforceable, it is subject to reformation. WET moved to compel arbitration, which

the trial court denied. WET appeals that denial.

II. Standard of Review and Applicable Law

We review a trial court’s denial of a motion to compel arbitration for an abuse

of discretion. Henry v. Cash Biz, LP, 551 S.W.3d 111, 115 (Tex. 2018). We defer

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

review its legal determinations de novo. Id.

2 Unless there is unmistakable evidence that the parties intended otherwise, the

courts rather than arbitrators decide gateway matters, such as whether there is a valid

arbitration agreement. In re Weekley Homes, L.P., 180 S.W.3d 127, 130 (Tex. 2005)

(citing Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444, 452 (2003)). “[W]hether the

parties have submitted a particular dispute to arbitration” is also a gateway matter.

Perry Homes v. Cull, 258 S.W.3d 580, 589 (Tex. 2008) (quoting Howsam v. Dean

Witter Reynolds, Inc., 537 U.S. 79, 83–84 (2002) (internal quotations omitted)).

“Whether an arbitration agreement is binding on a nonparty is [another] one of those

gateway matters.” Weekley Homes, 180 S.W.3d at 130.

A party moving to compel arbitration must establish (1) that there is a valid

arbitration agreement and (2) that the claims asserted fall under the agreement. In re

AdvancePCS Health L.P., 172 S.W.3d 603, 605 (Tex. 2005). A trial court’s

determination of whether there is a valid arbitration agreement is a question of law

that we review de novo. See J.M. Davidson, Inc. v. Webster, 128 S.W.3d 223, 227

(Tex. 2003). State and federal policies favor arbitration, so we “resolve any doubts

about an arbitration agreement’s scope in favor of arbitration.” In re FirstMerit

Bank, N.A., 52 S.W.3d 749, 753 (Tex. 2001).

III. Analysis

WET argues that the trial court erred in denying its motion to compel TJ’s

Automotive’s and Barraza’s claims to arbitration. There is no dispute about whether

3 the arbitration agreement is valid. But there is a dispute over whether the agreement

encompasses whether WET and TJ’s Automotive are competitors and whether TJ’s

Automotive, a non-signatory, can be compelled to arbitrate.

A. Choice of Law

As a preliminary matter, we address the choice-of-law provision within the

employment agreement because it does not specifically invoke the Federal

Arbitration Act or the Texas Arbitration Act. WET argues that both the FAA and

TAA apply except where the FAA preempts the TAA. TJ’s Automotive and Barraza

do not challenge that assertion.

Here, the choice-of-law provision states that the employment agreement will

be governed by “the laws of the State of Texas.” The law of Texas includes the

substantive principles that Texas courts would apply. See Mastrobuono v. Shearson

Lehman Hutton, Inc., 514 U.S. 52, 63–64 (1995). The FAA is part of the substantive

law of Texas. Capital Income Props. v. Blackmon, 843 S.W.2d 22, 23 (Tex.

1992) (per curiam). Because the choice-of-law provision does not specifically

exclude the application of federal law, the FAA and the TAA apply. In re Devon

Energy Corp., 332 S.W.3d 543, 547 (Tex. App.—Houston [1st Dist.] 2009, orig.

proceeding); see In re L&L Kempwood Assocs., L.P., 9 S.W.3d 125, 127–28 (Tex.

1999). Arbitrability is analyzed the same way under the FAA and the

4 TAA. Rodriguez v. Tex. Leaguer Brewing Co. L.L.C., 586 S.W.3d 423, 427 (Tex.

App.—Houston [14th Dist.] 2019, pet. denied)

B. Scope of the Arbitration Clause

Because the parties do not dispute the existence of a valid arbitration

agreement, we next determine whether the arbitration clause within the employment

agreement covers the issues in TJ’s Automotive and Barraza’s declaratory judgment

action. To do so “courts focus on the factual allegations and not on the legal causes

of action asserted.” Henry, 551 S.W.3d at 115.

Texas and federal law recognize a strong presumption in favor of arbitration.

See G.T. Leach Builders, LLC v. Sapphire V.P., LP, 458 S.W.3d 502, 521 (Tex.

2015). We “resolve any doubts about an arbitration agreement’s scope in favor of

arbitration.” FirstMerit Bank, 52 S.W.3d at 753. This presumption “is so compelling

that a court should not deny arbitration ‘unless it can be said with positive

assurance that an arbitration clause is not susceptible of an interpretation which

would cover the dispute at issue.’ ” Prudential Secs. Inc. v. Marshall, 909 S.W.2d

896, 899 (Tex. 1995) (quoting Neal v. Hardee’s Food Sys., Inc., 918 F.2d 34, 37 (5th

Cir. 1990)).

Here, the arbitration clause states that “any controversy or claim arising out

of this Employment Agreement, or the breach thereof, shall be settled by binding

arbitration.” TJ’s Automotive and Barraza sought declaratory relief that TJ’s

5 Automotive is not a competitor of WET; that Barraza did not violate the employment

agreement by working for TJ’s Automotive; that the geographic exclusion in the

noncompete clause is overly broad and unnecessary to protect WET’s interests; and

that even if the employment agreement is enforceable, it is subject to reformation.

TJ’s Automotive and Barraza assert that TJ’s Automotive is not a competitor of

WET because TJ’s Automotive repairs and maintains consumers’ automobiles while

WET sells and services commercial car wash equipment and products. Additionally,

TJ’s Automotive and Barraza argue that Barraza’s job duties would mainly be

general maintenance in and around TJ’s Automotive. They also assert that the

geographic exclusion is too broad because it covers about 30,000 square miles and

would require Barraza to travel hundreds of miles to find work.

Considering the employment agreement’s language, the factual allegations

about the businesses’ status as competitors and impact of the geographic restrictions,

and the presumption favoring arbitration and resolving any doubts about scope in

favor of arbitration, it follows that the disputes raised by TJ’s and Barraza fall within

the scope of the arbitration clause. Put differently, the scope of the noncompete

clause “arises out of” the employment agreement.

C. Compelling a Non-Signatory to Arbitration

On that basis, WET seeks to compel both TJ’s Automotive and Barraza to

arbitrate the declaratory judgment claims. But while WET and Barraza are

6 signatories to the employment agreement, TJ’s Automotive is not. Even so, WET

argues that non-signatories can be compelled to arbitrate when they file suit based

on a contract including an applicable arbitration clause. However, TJ’s Automotive

argues that it cannot be compelled to arbitrate because it is not seeking a direct

benefit from the contract and it is not a business competitor of WET.

First, arbitration is a matter of contract law and can normally only be required

of parties that have agreed to it. AT&T Techs., Inc. v. Commc’ns Workers of

Am., 475 U.S. 643, 648 (1986). Arbitration “is a matter of consent, not coercion.” In

re Merrill Lynch Trust Co. FSB, 235 S.W.3d 185, 192 (Tex. 2007) (quoting Volt

Info. Scis., Inc. v. Bd. of Trs. of Leland Stanford Jr. Univ., 489 U.S. 468, 479 (1989)).

Generally, an arbitration agreement will not bind non-signatories. GM Oil Props.,

Inc. v. Wade, No. 01–08–00757–CV, 2012 WL 246041, at *6 (Tex. App—Houston

[1st Dist.] Jan. 26, 2012, no pet.) (mem. op.). That said, there are certain

circumstances that a non-signatory can be bound to, or allowed to enforce, an

arbitration agreement. See In re Kellogg Brown & Root, Inc., 166 S.W.3d 732, 739

(Tex. 2005) (listing six circumstances in which non-signatories may be bound).

Under the doctrine of equitable estoppel, a party seeking the direct benefits of

a contract cannot also avoid the burdens of a contract, including an arbitration

agreement. Id. “[W]hether a claim seeks a direct benefit from a contract containing

an arbitration clause turns on the substance of the claim, not artful

7 pleading.” Weekley Homes, 180 S.W.3d at 131–32. To be considered a direct

benefit, that benefit must flow directly from the contract and not just relate to the

contract. Kellogg Brown & Root, 166 S.W.3d at 741. It is not enough for equitable

estoppel to apply if the benefits are insubstantial or indirect. Weekley Homes, 180

S.W.3d at 134.

WET argues that when a party sues based on a contract that party is subjected

to the contract’s terms. But “although a non-signatory’s claim may relate to a

contract containing an arbitration provision, that relationship does not, in itself, bind

the non-signatory to the arbitration provision.” Kellogg Brown & Root, 166 S.W.3d

at 741. In Weekley Homes and Kellogg Brown & Root, the Court expounded on what

it means to sue “based on a contract,” stating that the non-signatory can be compelled

to arbitrate if it is seeking a direct benefit from the contract that has an arbitration

clause. Weekley Homes, 180 S.W.3d at 131; Kellogg Brown & Root, 166 S.W.3d at

741. Here, TJ’s Automotive is not seeking to enforce a provision of the employment

agreement; instead, it seeks a finding that the contract does not apply to it. Cf.

FirstMerit Bank, 52 S.W.3d at 752–53, 755–56 (a non-signatory sued a signatory

for breach of contract, revocation of acceptance, and breach of warranty thereby

subjective itself to the arbitration clause).

WET relies on Weekley Homes to argue that TJ’s Automotive’s claims are

brought on the contract and must be arbitrated because at least some of TJ’s

8 Automotive’s claims can only be determined by referring to the employment

agreement. 180 S.W.3d at 132. In Weekley Homes, the non-signatory sought

“substantial and direct benefits” when she demanded extensive repairs to the home

she lived in, and when she requested and received reimbursement for expenses

incurred while repairs were made. Id. at 133. The non-signatory obtained “these

substantial actions from Weekley by demanding compliance with provisions of the

contact,” so the non-signatory could not avoid the contract’s arbitration clause. Id.

By contrast, TJ’s Automotive has not sought to enforce any aspect of the

employment agreement and is not trying to hold WET liable under it. Instead, TJ’s

Automotive seeks to prevent the employment agreement from being applied here at

all. Because TJ’s Automotive is a non-signatory not seeking a direct benefit from

the employment agreement, it cannot be compelled to arbitrate under the

employment agreement. See Kellogg Brown & Root, 166 S.W.3d at 739–40.

D. Compelling a Signatory to Arbitration

At any rate, WET argues that the trial court erred by denying WET’s motion

to compel Barraza to arbitration because he has signed the employment agreement.

Barraza does not argue that he cannot be compelled to arbitration. The party seeking

to compel arbitration must establish that a valid arbitration agreement exists and that

the claims at issue fall under the agreement. Venture Cotton Coop. v. Freeman, 435

S.W.3d 222, 227 (Tex. 2014).

9 There is a valid arbitration agreement here. WET and Barraza signed an

agreement with an arbitration clause requiring that “any controversy or claim arising

out of this Employment Agreement, or the breach thereof shall be settled by binding

arbitration.” Once the party seeking to compel arbitration meets this burden, that

burden shifts, and the opposing party must prove an affirmative defense to the

provision’s enforcement. Id. “[A]ny doubts concerning the scope of arbitrable issues

should be resolved in favor of arbitration, whether the problem at hand is the

construction of the contract language itself or an allegation of waiver, delay, or a

like defense to arbitrability.” In re Serv. Corp. Int’l, 85 S.W.3d 171, 174 (Tex.

2002). Barraza asks the courts to decide whether a violation of the employment

agreement occurred, but those claims raised by TJ’s Automotive and Barraza fall

within the scope of the arbitration agreement, so they are for an arbitrator to decide.

Barraza raises no affirmative defenses to prevent the enforcement of the arbitration

clause. The trial court therefore erred by denying WET’s motion to compel Barraza

to arbitrate.1

IV. Conclusion

We conclude that the employment agreement’s arbitration clause

encompasses these claims and that parties to that agreement must be compelled to

1 See Merrill Lynch Trust Co. FSB, 235 S.W.3d at 190–92 (allowing arbitration to proceed regarding some parties but not others). 10 arbitration, but that the non-signatory here may not.2 Thus, we affirm in part and

reverse in part. We affirm the trial court’s order denying WET’s motion to

compel arbitration with TJ’s Automotive, and we reverse the trial court’s order

denying WET’s motion to compel arbitration with Barraza. We remand this case to

the trial court for further proceedings consistent with this opinion.

Sarah Beth Landau Justice

Panel consists of Justices Goodman, Landau, and Countiss.

2 The FAA and TAA require that the litigation of issues subject to arbitration should be stayed and the arbitration should be given priority. See Merrill Lynch Trust Co. FSB, 235 S.W.3d at 195–96. 11