Kennedy Hodges, L.L.P. v. Gobellan NO. 13-0321

Per Curiam.

Facts: Ventura Gobellan was driving an armored car for his employer when the vehicle was involved in an accident, which killed a passenger and injured Gobellan. Gobellan and his wife retained Kennedy Hodges, L.L.P. to defend them against a wrongful death suit and to also file suit against Gobellan’s employer (the Gobellan Suit). The Gobellans agreed to pay forty percent of the gross recovery to Kennedy Hodges. The fee agreement provided that the Gobellans would be liable to Kennedy Hodges for the entire contingency fee if they terminated the firm without cause, and the agreement contained an arbitration clause for any potential fee dispute.

Kennedy Hodges originally assigned associate attorney Canonero Brown to the case, but Brown subsequently left the firm bur assured the Gobellans that a fee-splitting agreement would be reached between Brown and Kennedy Hodges, which would not affect the Gobellan’s case. The Gobellans proceeded to retain Brown to represent them. Kennedy Hodges then filed suit against Brown to recovery contingency fees for Brown taking several former clients with him (the Brown Suit). The Brown Suit was later settled between the parties, including a portion of the fees from the Gobellan Suit.

In the Gobellan Suit, the parties submitted their dispute to arbitration. The Gobellans obtained an award that was confirmed by a final judgment. Kennedy Hodges then sued the Gobellans in a separate proceeding and moved for a no-answer default judgment. After conferring with the Gobellans, however, Kennedy Hodges pursued its claim by intervening in the Gobellan Suit and moving to compel arbitration. The trial court denied the motion, and the court of appeals affirmed, concluding that Kennedy Hodges substantially invoked the litigation process as to the Gobellan fee based on the discovery it conducted in the Brown Suit. The court also found the Gobellans established prejudice because Kennedy Hodges attempted to “have it both ways” by switching between litigation and arbitration.

Issue: whether a law firm waived its right to arbitrate a fee dispute with former clients by litigating with a former associate.

The Court agreed with Kennedy Hodges that the Brown Suit did not affect the firm’s right to arbitrate with the Gobellans because the Brown Suit contained tort and contract claims that did not involve the Gobellans as parties. Additionally, the lower courts’ decisions conflict with the case of Perry Homes v. Cull, 258 S.W.3d 580, 589 (Tex. 2008).

In Cull, the Court held that a party might waive the right to arbitrate “by substantially invoking the judicial process to the other party’s detriment or prejudice.” Whether the judicial process is “substantially invoked” is evaluated on a case-by-case basis and the totality of the circumstances. Factors that should be considered are: (1) when the movant knew of the arbitration clause; (2) how much discovery was conducted; (3) who initiated the discovery; (4) whether the discovery related to the merits rather than arbitrability or standing; (5) how much of the discovery would be useful in arbitration; and (6) whether the movant sought judgment on the merits.

The Court was guided by Cull, where prejudice was found because one party resisted motions to compel arbitration until shortly before trial, when they then requested arbitration after extreme delay; and In re Service Corp. International, 85 S.W.3d 171, 175 (Tex. 2002), where one party litigated a claim with one opponent did not substantially invoke the litigation process against another party for a related yet distinct claim with whom it had an arbitration agreement. The Court concluded that the situation between Kennedy Hodges and the Gobellans was most similar to In re Service Corp. International, because the Gobellans were not parties to the Brown suit; Kennedy Hodges’ suit with Brown did not cause the Gobellans undue delay, expense, or damage; the pleadings filed by Kennedy Hodges against the Gobellans did not rise to the level required to show a waiver of the arbitration clause; and Kennedy Hodges conducted no discovery in the Gobellan Suit. Ultimately, these factors and the similarity of the Gobellan Suit to the precedent of In reService Corp. International, led the Court to hold that Kennedy Hodges did not waive its right to arbitrate its dispute with the Gobellans.