Texas Strictly Construes Application of Mandatory Arbitration Clause Despite Superseding Agreement With No Such Clause

We’ve written frequently about the long-standing practice in the corporate world of including mandatory arbitration clauses in employment contracts.  Specifically, we’ve pointed out that although the practice may make sense for the employer when it comes to deterring potentially costly lawsuits brought by employees, those equities can shift when it concerns upper-level executives who generally have more means and wherewithal to fight a prolonged legal battle, be it in court or in front of an arbitrator.

In those cases – what we here at Suits by Suits consider our bread-and-butter cases – the employer may want to think twice about binding arbitration due principally to the risks of being stuck with an almost entirely unappealable adverse ruling; we’ve previously discussed how this has turned out poorly for employers such as Merrill Lynch and BDO.

Today, we continue to beat the drums of caution for both sides in our examination of a recent Texas appellate decision that makes it clear that many courts are looking for any way to kick a case out of the legal system in favor of arbitration.

Last Thursday, November 21, 2013, the Court of Appeals for the First District of Texas – a state intermediate appellate court – ruled that a former employee must arbitrate his claim for unpaid stock options being withheld due to the operation of a noncompete clause.  Valerus Compression Svcs., L.P. v. William Austin, No. 01-13-00266-CV.

Valerus, a company that provides equipment and consulting for the compression, processing, and treatment of oil and natural gas, hired William Austin as CFO in 2009, the terms of which were governed by a Partnership Agreement executed between the parties.  A little more than a year later, in April of 2010, the two parted ways, pursuant to which the parties executed a voluntary Separation Agreement – a practice we have long recommended here at Suits by Suits.  That Separation Agreement had a complete merger and integration clause, which is to say that it superseded and replaced all prior agreements among the parties “with respect to the subject matter hereof,” i.e., Austin’s termination.

Stop us if you can see where this is headed.

Despite parting relatively amicably, Valerus and Austin soon got into a dispute concerning whether Austin’s next job as CFO of Exterran Energy Corp., another natural gas compression company, violated Austin’s noncompete.  The merits of that dispute are not important for purposes of this article; the method of resolution, however, is.

You see, Austin’s original 2009 Partnership Agreement contained a mandatory arbitration clause compelling him to arbitrate all disputed “arising out of or in connection with” the 2009 Partnership Agreement in binding arbitration before the American Arbitration Association (AAA).

The 2010 Separation Agreement, however, contained no such mandatory arbitration clause.  Instead, it contained a venue selection clause providing that:

Venue for any action that may be brought by any Party involving the enforcement of this Agreement or any rights, duties or obligations under this Agreement shall be brought exclusively in the state or federal courts (as applicable) sitting in Houston, Texas. Executive consents and waives any objection to personal jurisdiction and venue in those courts for any such action. The Parties acknowledge and agree that Sections 4.7(b) and 4.7(c) of the Employment Agreement are hereby incorporated in this Agreement by reference such that if Executive shall obtain any money judgment or otherwise prevail with respect to any arbitration or litigation brought by Executive or the Company to enforce or interpret any provision in this Agreement, the Company, to the fullest extent permitted by applicable law, shall reimburse Executive for all of Executive’s reasonable legal fees and expenses incurred in such arbitration or litigation.

That language, combined with the merger and integration clause, led Austin to believe – and a trial court to agree! – that the later 2010 Separation Agreement replaced the 2009 Partnership Agreement and that any disputes relating to Austin’s termination would be brought in court in Houston, Texas, and not subject to the prior mandatory arbitration clause.

The appeals court disagreed, holding that the strong presumption in favor of arbitration under Texas (and most analogous state) law means that, in the absence of a specific waiver or novation of an arbitration clause, if there is any way to read the arbitration clause consistently with the subsequent language, the arbitration clause remains in effect.  Id. at 12-15.  Thus, because the court concluded that the 2010 Separation Agreement’s venue provision “can be construed to fix venue in Houston courts in the event that arbitration is waived or for proceedings for enforce an arbitration award, id. at 15, the subsequent dispute between Valerus and Austin would be required to be arbitrated, not tried in court.

The lesson here is clear:  mandatory arbitration clauses are powerful things.  When drafting an executive’s employment contract, an employer should be careful to consider whether mandatory arbitration will truly benefit it in the event of a subsequent dispute.  And when an employer and former employee negotiate a separation agreement, both sides need to be explicit about how subsequent disputes are to be resolved, keeping in mind that courts are likely to look for any reason to send the parties to arbitration instead.

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