In re Service Corporation Intern.

• Decision Date: 29 August 2002
• Docket Number: No. 01-0650.,01-0650.
• Citation: 85 S.W.3d 171
• Parties: In re SERVICE CORPORATION INTERNATIONAL, Robert L. Waltrip, L. William Heiligbrodt, and George R. Champagne, Relators.
• Court: Texas Supreme Court

85 S.W.3d 171

In re SERVICE CORPORATION INTERNATIONAL, Robert L. Waltrip, L. William Heiligbrodt, and George R. Champagne, Relators.

No. 01-0650.

Supreme Court of Texas.

August 29, 2002.

Michael D. Hopkins, Bracewell & Patterson, Houston, Herman E. Bate, Fenley & Bate, Lufkin, Michael J. Truncale, Orgain Bell & Tucker, Beaumont, C. Thomas Kruse, J. Clifford Gunter, III, Bracewell & Patterson, Houston, Martha R. Campbell, Orgain Bell & Tucker, Beaumont, Tracy C. Temple, Bracewell & Patterson, Houston, Justice Greg Abbott, Bracewell & Patterson, Austin, Warren W. Harris, Bracewell & Patterson, Houston, for Relators.

Mark L.D. Wawro, Susman Godfrey, Houston, Gregory S. Coleman, Weil, Gotshal & Manges, Austin, Harry Paul Susman, Susman Godfrey, Houston, George Chandler, Chandler Law Offices, Lufkin, for Respondent.

PER CURIAM.

Relators in this original mandamus proceeding are the four defendants in both a federal court class action involving only federal law claims and a state court action involving only state law claims. Both actions raise similar but not identical factual allegations of securities fraud in a merger transaction. The two plaintiffs in the state court action are members of the class in federal court. At least one of the plaintiffs in state court is bound by an arbitration agreement covering all his claims, state and federal, but almost all of the other members of the class in federal court are not. Relators moved the state to compel arbitration of the state law claims, and the plaintiffs responded that relators had waived any right to arbitration by delay and because of their willingness to litigate the federal law claims in federal court. The trial court denied relators' motion. We conclude that this was an abuse of discretion remediable by mandamus.

Service Corporation International and Equity Corporation International, two large, publicly traded corporations engaged in the death care business, merged in a stock-for-stock transaction in January 1999. One week later, SCI announced that its earnings for the prior quarter were lower than expected, and its stock fell. Within days, more than twenty identical class actions were filed in federal courts against SCI and three of its officers at the time of the merger¹ alleging securities fraud. The actions were consolidated,² and in August 1999 a class was certified that included all SCI shareholders other than its officers at the time of the merger. The four defendants, relators in the proceeding now before us, moved to dismiss the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure and the Private Securities Litigation Reform Act of 1995.³ The parties here tell us that this motion remains pending and has the effect of staying proceedings in federal court.

James P. Hunter, III, ECI's chairman and chief executive officer, and the James P. Hunter, III Family Trust (collectively, "the Hunters") were major shareholders in ECI and received SCI stock in the merger. The Hunter Family Trust was thus a member of the class in federal court, but Hunter himself was excluded because he had become an officer of SCI as part of the merger. In November 1999, a little over two months after the class was certified, the Hunters filed suit in state court against SCI and the three individual defendants in the federal action, along with three other SCI officers and its accountant, PricewaterhouseCoopers. The Hunters' factual allegations are much like those made in federal court, but there are differences. For example, an allegation made only in federal court is that SCI failed to disclose that its pre-need funeral business was a drain on profits. Also, the Hunters argue that they complain only of misrepresentations made near the time of the merger while class members who obtained SCI stock independent of the merger may not be able to recover absent proof of misrepresentations made long before the merger closed. And just as the federal action does not involve any state law claims, the state action does not involve any federal law claims.

Relators moved the federal court in December 1999 to stay all discovery in the state action under the Securities Litigation Uniform Standards Act of 1998,⁴ and the court heard the motion in May 2000. At that hearing, in response to questions from the court, SCI suggested that Hunter be made a member of the class. The court issued two orders, one amending the class definition to include Hunter, and the other staying discovery in the state action as relators had requested and also ordering on its own initiative that the Hunters litigate all of their claims in the federal action. The Fifth Circuit vacated the second order in September 2000, holding that the district court was not authorized to prohibit the Hunters from opting out of the class and pursuing their claims elsewhere.⁵ Relators immediately renewed their motion to stay discovery in state court, and the federal court granted the motion a few days later.

Since the federal court had not stayed all proceedings in state court, the Hunters moved the state court for a preferential trial setting. In February 2001, the same day that motion was heard, relators and the other defendants in state court filed a motion to compel arbitration of the Hunters' state law claims, based on the following provision in the merger agreement between SCI and ECI:

upon the request of any party (defined for the purpose of this provision to include affiliates, principles [sic] and agents of any such party), any dispute, controversy or claim arising out of, relating to, or in connection with this Agreement or any agreement executed in connection herewith or contemplated hereby, ... shall be finally resolved by mandatory and binding arbitration in accordance with the terms hereof.

In a written response, the Hunters urged that relators had waived any right to arbitrate by delaying their request for arbitration, opposing a trial setting, and proceeding in federal court. The Hunters agreed to nonsuit the four defendants other than relators. At the hearing on relators' motion the Hunter Family Trust also argued that it was not covered by the arbitration agreement, an argument it had not made in the written response to relators' motion. The trial court denied the motion, and the court of appeals denied mandamus relief.⁶

The parties agree that the arbitration provision is governed by the Federal Arbitration Act.⁷ In the words of the United States Supreme Court, "The Arbitration Act establishes that, as a matter of federal law, any 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."⁸ We have held that under the federal statute, "Courts will not find that a party has waived its right to enforce an arbitration clause by merely taking part in litigation unless it has substantially invoked the judicial process to its opponent's detriment."⁹ There is a strong presumption against waiver.¹⁰ We have also held that "[w]hether a party's conduct waives its arbitration rights under the Federal Arbitration Act is a question of law."¹¹

Relators' delay in moving to compel arbitration and their opposition to the Hunters' request for a trial setting do not amount to a waiver of arbitration. Neither involved a substantial invocation of the state judicial process. During the delay relators sought no relief from the state court, and their objection to a trial setting reflects an intent to avoid the state judicial process, not invoke it. Moreover, we have held that "[a] party does not waive a right to arbitration merely by delay; instead, the party urging waiver must establish that any delay resulted in prejudice."¹² To show prejudice from delay, the Hunters argue only that they would not have had to appeal the federal court order requiring them to try all their claims in federal court had relators earlier asked for arbitration of the state law claims. But relators did not invoke the federal court issuance of that portion of its order; the federal court issued that part of the order on its own initiative, and it is far from clear that the court would have ruled differently had arbitration already been requested. The Hunters complain that relators defended the federal court's order on appeal, and to some extent they did, although the Fifth Circuit noted that relators argued that the federal district court "did not intend [the] effect" its language had. In any event, the detriment to the Hunters was caused by the federal court's ruling, not by relators' defense of it.

The Hunters' principal argument is that relators have waived arbitration of the state law claims by invoking the federal judicial process — specifically, by moving to dismiss the complaint, moving for a stay of state court discovery, supporting Hunter's inclusion in the class, and otherwise indicating a willingness to litigate in federal court...