In re Media Arts Group, Inc.

• Citation: 116 S.W.3d 900
• Decision Date: 23 September 2003
• Docket Number: No. 14-03-00180-CV.,14-03-00180-CV.
• Parties: In re MEDIA ARTS GROUP, INC., Relator.
• Court: Court of Appeals of Texas

116 S.W.3d 900

In re MEDIA ARTS GROUP, INC., Relator.

No. 14-03-00180-CV.

Court of Appeals of Texas, Houston (14th Dist.).

September 23, 2003.

Eric J. Mayer, Steven J. Mitby, Houston, Timothy A. Beeton, Galveston, for relator.

A. Craig Eiland, Galveston, Charles W. Peckham, Houston, Clayton A.L. Davis, Maurice L. Tynes, Lake Charles, LA, for respondent.

OPINION

HARVEY HUDSON, Justice.

Relator, Media Arts Group, Inc., seeks a writ of mandamus ordering respondent, the Honorable Susan E. Criss, to stay the underlying suit and compel arbitration. We conditionally grant the writ.

I. FACTUAL AND PROCEDURAL BACKGROUND

Media Arts is a California-based company that produces artwork based on Thomas Kinkade's paintings and sells it through gallery dealers throughout the United States. Real parties in interest, Bay Area Galleries, Inc., Rockbrook Galleries, Inc., and KY Arts, Inc. d/b/a/ Thomas Kinkade Signature Galleries of West Texas, and on behalf of all those similarly situated (collectively, the "Gallery Owners"),¹ contracted with Media Arts to sell Kinkade's artwork at their galleries in Texas and California. From 1998 to 2000, the Gallery Owners, through their officers, executed a total of seven "dealer agreements" for their various galleries. Alvin and Sandra Dahl executed two dealer agreements for Rockbrook Galleries, Inc. and four dealer agreements for Bay Area Galleries, Inc. Robert and Kathy Young executed one dealer agreement for KY Arts, Inc.

Each dealer agreement consists of three parts: (1) the basal dealer agreement; (2) Exhibit A (addressing the geographical district covered by the agreement); and (3) the Standard Terms and Conditions.² The dealer agreement and Exhibit A contain the parties-signatures. The Standard Terms and Conditions do not contain the parties-signatures (or any place for signatures), but they are attached to, and incorporated by reference into, the dealer agreement. Each Standard Terms and Conditions includes the following provision:

22. Arbitration

THE PARTIES AGREE THAT ALL DISPUTES BETWEEN THEM SHALL FIRST BE SUBMITTED FOR INFORMAL RESOLUTION TO THEIR CHIEF EXECUTIVE OFFICERS, OR IF NO CHIEF EXECUTIVE OFFICER, TO THE OWNERS. ANY REMAINING DISPUTE SHALL BE SUBMITTED TO A PANEL OF THREE (3) ARBITRATORS WITH EACH PARTY CHOOSING ONE (1) PANEL MEMBER, AND THE THIRD PANEL MEMBER BEING CHOSEN BY THE FIRST TWO (2) PANEL MEMBERS. THE PROCEEDING SHALL BE CONDUCTED IN ACCORDANCE WITH THE COMMERCIAL ARBITRATION RULES OF THE AMERICAN ARBITRATION ASSOCIATION. THE AWARD OF THE ARBITRATORS SHALL INCLUDE A WRITTEN EXPLANATION OF THEIR DECISION. THIS ARBITRATION PROCEEDING WILL BE BINDING UPON THE PARTIES.

The Gallery Owners filed the underlying suit against Media Arts, Lightpost Publishing, Inc., Thomas Kinkade, and two Media Arts employees, Charles Sebring and Leon Mendez, pleading breach of contract, tortious interference with business relations, business disparagement, breach of fiduciary duties, breach of express and implied warranties, violations of the Deceptive Trade Practices Act ("DTPA"), and civil conspiracy. In essence, the Gallery Owners allege the defendants eliminated the Gallery Owners from the market by selling artwork directly to consumers at discount stores while requiring the Gallery Owners to sell at inflated prices.

Media Arts filed a motion in the trial court to stay the suit and compel arbitration. Media Arts also initiated an arbitration proceeding with the American Arbitration Association to recover $1,046,000 in unpaid invoices. After a hearing on December 19, 2002, the trial court orally denied Media Arts' motion. On January 31, 2003, the trial court entered a written order denying Media Arts' motion for reconsideration—this mandamus proceeding followed.

II. STANDARD OF REVIEW

A party seeking to compel arbitration by mandamus must establish the existence of an arbitration agreement subject to the Federal Arbitration Act ("FAA") and that the claims at issue fall within the scope of the arbitration agreement. See In re J.D. Edwards World Solutions Co., 87 S.W.3d 546, 549 (Tex. 2002); In re FirstMerit Bank, N.A., 52 S.W.3d 749, 753 (Tex.2001). If the arbitration agreement encompasses the claims at issue and there are no defenses to its enforcement, the court has no discretion but to compel arbitration and stay its own proceedings. See J.D. Edwards, 87 S.W.3d at 549; FirstMerit, 52 S.W.3d at 753-54. When a trial court erroneously denies a motion to compel arbitration under the FAA, the movant has no adequate remedy at law and is entitled to mandamus relief. See J.D. Edwards, 87 S.W.3d at 551; FirstMerit, 52 S.W.3d at 753.

III. Discussion

In three issues, Media Arts contends it is entitled to mandamus relief because (1) it established the existence of an arbitration agreement subject to the FAA; (2) the Gallery Owners-claims fall within the scope of the arbitration agreement;³ and (3) the Gallery Owners are required to arbitrate their claims against all defendants.⁴ In response, the Gallery Owners challenge the existence of an arbitration agreement. They also assert several defenses to enforcement of the arbitration agreement, if any, including waiver, fraudulent inducement, and unconscionability.

A. What Law Applies?

Preliminarily, we will address the disagreement among the parties regarding what law applies to this dispute. Media Arts contends the FAA applies because the dealer agreements involve interstate commerce, and the FAA preempts application of state law. The Gallery Owners contend California law applies because state contract law governs the arbitrability of disputes, and the dealer agreements contain California choice of law provisions.⁵

Media Arts is correct that the FAA makes enforceable arbitration agreements in contracts involving interstate commerce. See 9 U.S.C. § 2 (1999);⁶ Allied-Bruce Terminix Cos., Inc. v. Dobson, 513 U.S. 265, 273-74, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995); In re Halliburton Co., 80 S.W.3d 566, 568 (Tex.2002). However, the Gallery Owners dispute that they agreed to arbitrate in the first place.⁷ By its own terms, the FAA applies only where the parties have agreed to arbitrate. See 9 U.S.C. § 2. It was designed to overrule the judiciary's longstanding refusal to enforce arbitration agreements and place them upon the same footing as other contracts. See Volt Info. Sci., Inc. v. Bd. of Trustees of Leland Stanford Junior Univ., 489 U.S. 468, 474, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989); Shearson/Am. Express Inc. v. McMahon, 482 U.S. 220, 225-26, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987). The FAA simply requires courts to enforce privately negotiated agreements to arbitrate, like other contracts, in accordance with their terms. See Volt, 489 U.S. at 478, 109 S.Ct. 1248. It does not require parties to arbitrate when they have not agreed to do so. See id.

Generally, when deciding whether the parties agreed to arbitrate a certain matter, courts should apply ordinary state law principles governing the formation of contracts. See First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995); Halliburton, 80 S.W.3d at 568. Therefore, while the FAA preempts application of state law that would render an existing arbitration agreement unenforceable, it does not preempt application of state law to determine the existence of an arbitration agreement. See Halliburton, 80 S.W.3d at 568-73 (applying FAA to compel arbitration after determining arbitration agreement existed under substantive Texas law); Jack B. Anglin v. Tipps, 842 S.W.2d 266, 271 (Tex.1992) (citing Volt, 489 U.S. at 478-79, 109 S.Ct. 1248, and stating FAA requires courts to compel arbitration when the parties have so provided in their contract, despite any state legislative attempts to limit the enforceability of arbitration agreements). Further, the FAA provides that arbitration agreements in contracts involving interstate commerce are enforceable "save upon such grounds as exist at law or in equity for the revocation of any contract." See 9 U.S.C. § 2. Therefore, generally applicable state contractual defenses may invalidate an arbitration agreement without contravening the FAA. See Doctor's Assoc., Inc. v. Casarotto, 517 U.S. 681, 686-87, 116 S.Ct. 1652, 134 L.Ed.2d 902 (1996); In re AutoNation USA Corp., 105 S.W.3d 190, 198 (Tex.App.-Houston [14th Dist.] 2003, orig. proceeding).

Accordingly, to determine whether the FAA requires arbitration in this case, we must first determine, under state law, whether an arbitration agreement exists and whether the Gallery Owners proved any defenses to its enforcement. See In re Oakwood Mobile Homes, Inc., 987 S.W.2d 571, 573 (Tex.1999) (stating once party seeking arbitration presents evidence of an arbitration agreement, burden shifts to opposing party to present evidence the agreement was unconscionable, induced or procured by fraud or duress, or that the other party waived its right to arbitrate). However, the Gallery Owners' contention that the parties chose California law to govern these issues presents a more difficult question.⁸ Nevertheless, we need not resolve the choice of law issue because we find the existence of an arbitration agreement, and no defenses to its enforcement, under both California and Texas law. See Fraud-Tech, Inc. v. Choicepoint, Inc., 102 S.W.3d 366, 377-78 (Tex.App.-Fort Worth 2003, no pet. h.) (citing Duncan v. Cessna Aircraft Co., 665 S.W.2d 414, 419 (Tex. 1984) and holding court need not decide which state's law applies if no conflict exists on the issues); Chesapeake Operating, Inc. v. Nabors Drilling USA, Inc., 94 S.W.3d 163, 168-69 (Tex.App.Houston [14th Dist.] 2002, no pet.) (reviewing Texas and Louisiana law on issue before conducting choice of law analysis because "we need not decide which law applies if it makes no difference.").

B. Existence of An Arbitration Agreement

To challenge the existence of an arbitration agreement, the Gallery Owners contend...