IN RE HOUSTON PIPE LINE COMPANY, L.P., ET AL. (Denying Rehearing)

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State: Texas

Court: Supreme Court

Docket No: 08-0800

Case Date: 10/23/2009

Judge: to vacate the discovery order and to rule on the motion to compel arbitration. T

Preview:IN RE HOUSTON PIPE LINE COMPANY, L.P., ET
AL. (Denying Rehearing)
IN THE SUPREME COURT OF TEXAS
No. 08-0800
In re Houston Pipe Line Company, et al., Relator
On Petition for Writ of Mandamus
PER CURIAM
When deciding a motion to compel arbitration under the Federal Arbitration Act, a Texas trial court applies Texas
procedure, which permits discovery to be taken when it is needed before the arbitration or to permit the arbitration to
be conducted in an orderly manner. Tex. Civ. Prac. & Rem. Code 171.086 (a)(4),(6); see also Jack B. Anglin Co. v.
Tipps, 842 S.W.2d 266, 268 (Tex. 1992). At issue in this proceeding is whether the trial court abused its discretion by
permitting discovery on damage calculations and other potential defendants, instead of deciding the motion to compel
arbitration. For the reasons below, we conclude the trial court should not have ordered pre-arbitration discovery, but
rather should have decided the motion to compel arbitration.
Houston Pipe Line Company, L.P., signed an agreement to purchase gas from O Connor & Hewitt, Ltd., based on the
Houston Ship Channel Price Index.1 Several years later, O Connor sued Houston Pipe Line, Energy Transfer Partners,
L.P., Energy Transfer Equity, L.P., and La Grange Acquisition, L.P., for manipulating the Index downward, which
caused O Connor to receive lower payments for gas delivered pursuant to the contract. As a signatory to the contract,
Houston Pipe Line sought to enforce the arbitration provision.2 Energy Transfer and La Grange were not parties to the
agreement, but tried to compel arbitration based on a direct benefits equitable estoppel theory. See Meyer v. WMCO-
GP, LLC, 211 S.W.3d 302, 305 (Tex. 2006); Sherer v. Green Tree Servicing LLC, 548 F.3d 379, 382 (5th Cir. 2008).
O Connor resisted arbitration by attacking the scope of the arbitration provision and contending that it would be
impossible to identify all potential defendants and to complete damages calculations within the sixty days allotted for
discovery, as set out in the arbitration provision. Rather than rule on the motion to compel, the trial court ordered
discovery to aid it in deciding the motion. Specifically, the trial court ordered discovery to determine if additional
defendants could equitably invoke the arbitration clause, whether O Connor s claims fell within the scope of the
arbitration clause, and if the time limitations imposed by the clause were jurisdictional. In its order, the trial court
suggested that it would be virtually impossible3 to conduct the necessary discovery within the sixty-day time frame
allotted to the arbitrator under the agreement and that O Connor:
lacks sufficient information [regarding the possible price manipulation]. . . and that discovery is needed so that the
scope of the Arbitration clause . . . may be properly applied to the actual party responsible . . . Moreover, the
documents sought by [O Connor] from [Houston Pipe Line and Energy Transfer ]: (1) Would be needed before any
Arbitration proceedings begin; (2) Will permit any Arbitration to be conducted in an orderly manner; (3) Will facilitate
any Arbitration under Section 171.086 of the Texas Civil Practice and Remedies Code; and (4) Will aid in determining
the issues of arbitrability. . .
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Houston Pipe Line and Energy Transfer sought mandamus relief in the court of appeals, arguing that the trial court had
abused its discretion by not ruling on the motion to compel. The court of appeals refused to issue the writ, concluding
that the trial court had acted within its discretion. We disagree that the discovery ordered by the trial court was needed
for it to rule on the motion to compel.
When a party disputes the scope of an arbitration provision or raises a defense to the provision, the trial court, not the
arbitrator, must decide the issues. Buckeye Check Cashing, Inc. v. Cardegna, 546 U.S. 440, 444 (2006). And [w]hen
Texas courts are called on to decide if disputed claims fall within the scope of an arbitration clause under the Federal
Act, Texas procedure controls that determination. Tipps, 842 S.W.2d at 268. Pre-arbitration discovery is expressly
authorized under the Texas Arbitration Act when a trial court cannot fairly and properly make its decision on the
motion to compel because it lacks sufficient information regarding the scope of an arbitration provision or other issues
of arbitrability. See Tex. Civ. Prac. & Rem. Code 171.023(b), 171.086(a)(4),(6). This, however, is not an authorization
to order discovery as to the merits of the underlying controversy. Motions to compel arbitration and any reasonably
needed discovery should be resolved without delay. Tipps, 842 S.W.2d at 269.
The discovery authorized by the trial court seeks to determine the identity of all potential defendants and to what extent
each defendant is liable, including Houston Pipe Line. Such an inquiry is inappropriate because determinations of
ultimate liability ordinarily must be answered during the arbitration proceeding, while questions regarding the scope of
the arbitration clause should be decided by the trial court. See AT&T Techs., Inc. v. Commc ns Workers of Am., 475
U.S. 643, 649 (1986). The necessity of identifying other culpable parties could, under some circumstances, be related
to arbitrability. But, a party cannot avoid its agreement to arbitrate merely by alleging that there may be other potential
defendants; it must link the identity of the defendants to an issue of arbitrability, such as scope, or a defense to
arbitration. See 9 U.S.C. 4; Tex. Civ. Prac. & Rem. Code 171.021, 171.026; see also J.M. Davidson, Inc. v. Webster,
128 S.W.3d 223, 227 (Tex. 2003).
Because the discovery ordered here is overbroad and beyond the issues raised in the motion to compel, we conclude
that the trial court abused its discretion by ordering this discovery rather than ruling on the legal issues raised by the
motion to compel. Accordingly, without hearing oral argument, we conditionally grant the writ and direct the trial court
to vacate the discovery order and to rule on the motion to compel arbitration. Tex. R. App. P. 52.8(c). We are
confident the trial court will comply, and our writ will issue only if it does not.
OPINION DELIVERED: July 3, 2009
1 This index is published monthly in the natural gas industry trade journal Inside FERC.
2 The arbitration provision provided:
Except for matters within the jurisdiction of the Railroad Commission of Texas, any and all claims, demands, causes of
action, disputes, controversies, and other matters in question arising out of or relating to this Agreement, any of its
provisions, or the relationship between the Parties created by this Agreement . . . shall be resolved by binding
arbitration pursuant to the Federal Arbitration Act. . . .If a Party refuses to . . . arbitrate, the other Party may seek to
compel arbitration in either federal or state court. . . .The final hearing shall be conducted within 60 days of the
selection of the third arbitrator. . . [and] shall not exceed 10 business days.
3 Although not determinative here, ordinarily the arbitrator, rather than the trial court, will be better able to determine
the preclusive effects of discovery limitations in the arbitration agreement. See In re Poly-America, L.P., 262 S.W.3d
337, 358 (Tex. 2008).
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