Arbitration under equitable estoppel / direct benefits estoppel doctrine
JEBCO argues that the equitable estoppel or direct benefit estoppel doctrine applies in this case and that
Kovacs must rely on the agreements with LPL containing an arbitration clause in asserting his claims against
JEBCO and that Kovacs is seeking a direct benefit from the LPL agreements containing the arbitration
provisions. JEBCO also argues that the claims against JEBCO are identical to the claims against Bashaw that
were required to be arbitrated under FINRA, that the claims against JEBCO concern the actions of Bashaw the
individual, and that the claims against JEBCO involve allegations of substantially interdependent and
concerted misconduct by Bashaw, JEBCO, and LPL.
"Under both Texas and federal law, whether a claim seeks a direct benefit from a contract containing an
arbitration clause turns on the substance of the claim, not artful pleading." In re Weekley Homes, 180 S.W.3d
at 131-32. If a party or nonparty seeks to derive a direct benefit from a contract containing an arbitration
clause, he may be compelled to arbitrate under the doctrine of "direct benefits estoppel." Id. at 131 (applying
doctrine to nonparty). Claims must be brought on a contract and arbitrated if liability arises solely from the
contract or must be determined by reference to it. Id. at 132. Claims can be brought in tort and in court,
however, if liability arises from general obligations imposed by law. Id. Therefore, the question in this case is
whether Kovacs is seeking by artful pleading on tort theories against JEBCO to avoid arbitration of claims that
must be determined by reference to his Representative Agreement or U-4, both of which contain arbitration
provisions, and, therefore, whether, as a non-signatory to those agreements, JEBCO may compel Kovacs to
arbitrate his claims.
Whether an arbitration agreement can be enforced by a non-signatory is a "gateway matter" that the courts,
rather than arbitrators, must decide. See id. at 130 ("Whether an arbitration agreement is binding on a
nonparty is one of those gateway matters."). The abuse of discretion standard constrains our review of the
trial court's decision not to apply equitable estoppel. See Grigson v. Creative Artists Agency, L.L.C., 210 F.3d
524, 528 (5th Cir. 2000); see also Hill v. G.E. Power Sys., Inc., 282 F.3d 343, 349 (5th Cir. 2002) (recognizing
that, when deciding whether to apply equitable estoppel, "the district court is better equipped to make the call
than this court, and we do not lightly override that discretion"); In re Weekley Homes, 180 S.W.3d at 134-35
(recognizing, in suit where signatory sought to compel arbitration of non-signatory's claims under direct
benefits estoppel, that "the equitable nature of the doctrine may render firm standards inappropriate,
requiring trial courts to exercise some discretion based on the facts of each case").
Generally, only signatories to an arbitration agreement are bound by the agreement. Brown v. Pac. Life Ins.
Co., 462 F.3d 384, 398 (5th Cir. 2006). However, "[a] person who has agreed to arbitrate disputes with one
party may in some cases be required to arbitrate related disputes with others." Meyer, 211 S.W.3d at 304
(citing In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 762 (Tex. 2006) (per curiam) (holding that party to
arbitration agreement must arbitrate tortious interference claims against other party's agents and affiliates)).
However, the Texas Supreme Court has observed, "Estoppel is one of five or six instances in which the
federal circuit courts require arbitration with nonsignatories." In re Merrill Lynch Trust Co., 235 S.W.3d 185,
191 (Tex. 2007); see also Grigson, 210 F.3d at 526 (holding that "in certain limited instances, pursuant to an
equitable estoppel doctrine, a non-signatory-to-an-arbitration-agreement-defendant can nevertheless compel
arbitration against a signatory-plaintiff.").
In Grigson, the Fifth Circuit adopted the two-prong approach to the intertwined claims doctrine used by the
Eleventh Circuit. Id. at 527. The Grigson court recognized two circumstances in which equitable estoppel
allows a non-signatory to compel arbitration with a signatory:
First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause
must rely on the terms of the written agreement in asserting its claims against the nonsignatory. . . . Second,
application of equitable estoppel is warranted when the signatory to the contract containing an arbitration
clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory
and one or more of the signatories to the contract. Id. (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d
942, 947 (11th Cir. 1999)). The Grigson court noted that each case turns on its own facts and that equitable
estoppel is "much more readily available when the case presents both independent bases . . . for applying the
intertwined claims doctrine." Id. at 527-28. The Grigson court went on to state:
[A]lthough arbitration is a matter of contract and cannot, in general, be required for a matter involving an
arbitration agreement non-signatory, a signatory to that agreement cannot, in those instances described in
MS Dealer Serv. Corp., "have it both ways": it cannot, on the one hand, seek to hold the non-signatory liable
pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other hand,
deny arbitration's applicability because the defendant is a non-signatory. Id. at 528.
In In re Vesta Insurance Group, the Texas Supreme Court addressed tortious interference claims in a suit
brought by a former insurance agent against the insurer's parent corporation, its officers, and its agents when
the defendants sought to compel arbitration even though they were not signatories to the former agent's
arbitration agreement with the insurer. In re Vesta Ins. Group, Inc., 192 S.W.3d at 760-61. It stated:
Tortious interference claims do not fall comfortably in either category. The obligation not to interfere with
existing contracts is a general obligation imposed by law. But it is not imposed on the parties to that contract,
as "a party cannot tortiously interfere with its own contract." Nor is it imposed on corporate agents, except for
actions completely contrary to corporate interests. In other words, "a person must be a stranger to a contract
to tortiously interfere with it." Thus, while liability for tortious interference arises from the general law,
nonliability arises from connections with the contract.
Id. at 761-62 (internal citations omitted). The Vesta court went on to hold that "tortious interference claims
between a signatory to an arbitration agreement and agents or affiliates of the other signatory arise more
from the contract than general law, and thus fall on the arbitration side of the scale." Id. at 762. It reasoned
that "corporations must act through human agents," and, therefore, "every contract claim against a
corporation could be recast as a tortious interference claim against its agents." Id.; see also In re Merrill Lynch
Trust Co., 235 S.W.3d at 188-89 ("Corporations can act only through human agents, and many
business-related torts can be brought against either a corporation or its employees. If a plaintiff's choice
between suing the corporation or suing the employees determines whether an arbitration agreement is
binding, then such agreement have been rendered illusory on one side.").
Here, we conclude that Kovacs is seeking a direct benefit from the contracts with LPL that contain the
arbitration provisions. It would be inequitable to allow Kovacs to seek to enforce rights that depend on his
entitlement to receive commissions or to transfer his business that flow from his agreement with LPL and at
the same time avoid the arbitration provision contained in that agreement. See In re Weekley Homes, 180
S.W.3d at 130; see also Grigson, 210 F.3d at 527-28. Furthermore, all of JEBCO's alleged misdeeds were
alleged to have been committed by Bashaw, the sole shareholder and officer of JEBCO; and JEBCO's alleged
misdeeds, including the libel and slander claims, were committed by Bashaw pursuant to his authority as a
Branch Office Manager for LPL.
In Re Bashaw & Co. (Tex.App.- Houston [1st Dist.] Jul. 23, 2009)(Keyes)(arbitration, direct benefits estoppel)
GRANT PETITION FOR WRIT OF MANDAMUS: Opinion by Justice Keyes
Before Justices Keyes, Hanks and Bland
01-08-00803-CV In re James E. Bashaw & Co.
Appeal from 133rd District Court of Harris County
Trial Court Judges: Lamar McCorkle | Jaclanel McFarland
Kovacs is seeking a direct benefit from contracts with an arbitration clause. Therefore, we hold that JEBCO
was clearly entitled to arbitration under the direct-benefits estoppel doctrine and that the trial court erred in
denying JEBCO's motion to compel arbitration. (5)