Texas Supreme Court protects arbitration agreement from parallel litigation

By natalie • Jul 30th, 2010 • Category: Arbitration, Arbitration Cases, Arbitration News • Print This Post Print This Post
Gardere Wynne Sewell LLP

USA
July 6 2010

In In re Merrill Lynch & Co., Inc. and Merrill, Lynch, Pierce, Fenner & Smith Incorporated, __ S.W.3d __ (June 25, 2010 slip op.), the Texas Supreme Court conditionally granted mandamus relief in favor of Merrill Lynch, staying litigation against it by a non-signatory company when that company’s sister company that was a signatory to an arbitration agreement was also asserting identical claims that were potentially subject to a class action carve out from its arbitration agreement with Merrill Lynch, the defendant in both cases.
The signatory company had been a party to a class action suit that was dismissed. The possibility remained, however, that the class action could be revived. Until that issue was resolved, it would not be possible to determine whether the signatory’s claims would be required to be arbitrated. If the signatory’s claims were to be arbitrated (i.e., there was no class action), the non-signatory’s suit could not proceed until after the arbitration. (Conversely, if the signatory’s claims were to proceed in a class action, the carve out would apply and the non-signatory could proceed with its litigation proceeding.)

In so holding, the Texas Supreme Court relied on its prior decision in In re Merrill Lynch Trust Co., 235 S.W.3d 185, 195 (Tex. 2007) in which it held that where “the same issues must be decided in both arbitration … and in court … the latter must be stayed until the former is completed.” In so holding, the Supreme Court further held that

when an issue is pending in both arbitration and litigation, the Federal Arbitration Act generally requires the arbitration to go forward first; arbitration ’should be given priority to the extent it is likely to resolve issues material to this lawsuit.’ This has been the practice in all the federal courts. (footnotes omitted).

In the present case, the court observed that the only factual difference from its prior decision was the class action carve out provision and the fact that whether the signatory would participate in a class action suit remained an undecided issue. Nonetheless, the Supreme Court based its mandamus relief on the fact that the class action issue necessarily would be resolved in the future and that protecting Merrill Lynch’s bargained for arbitration right took priority over the non-signatory’s desire to proceed with its litigation claim.

Both cases reflect the trend among the majority of U.S. courts to enforce arbitration agreements based on traditional contract law principles.

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