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In In re Citigroup Global Markets, Inc., No. 05-05-01430-CV, 2006 WL 2876989 (Tex. App. Sept. 26, 2006), the Court of Appeals of Texas held that there was no basis for applying the Texas Arbitration Act (TAA) to an agreement electing New York’s substantive law, and that Defendant had waived the right to arbitrate by repeatedly signaling an intent to litigate.
The Nickells invested large amounts of money in WorldCom, Inc. under the advice of Citigroup Global Markets, Inc. (CGM). When WorldCom went bankrupt, the Nickells filed suit against CGM for breach of fiduciary duty and other claims. CGM proceeded to remove the case to federal court and prepare for discovery for several months, never attempting to invoke arbitration pursuant to the parties’ agreement.
The Court first assessed CGM’s right to arbitrate the claims under the TAA. While the Federal Arbitration Act (FAA) governs disputes concerning a contract “evidencing a transaction involving interstate commerce,” the FAA will not always preempt state law. See In re D. Wilson Const. Co., 196 S.W.3d 774, 779 (Tex. 2006). Nonetheless, the parties here had named New York law in a choice-of-law provision. Without deciding whether the FAA preempted state arbitration law in this instance, the Court found no legal or contractual basis for applying the TAA in place of New York arbitration law. See In re J.D. Edwards World Solutions Co., 87 S.W.3d 546, 551 (Tex. 2002).
Next, the Court found that CGM had waived its right to arbitrate by preparing for litigation and communicating this intent to the Nickells. While a mere delay in filing a motion to compel arbitration without more does not ordinarily result in waiver of the right to arbitrate, parties are not free to use pre-trial discovery procedures associated with litigation, and later resort to their chosen alternative dispute resolution mechanism. Miller Brewing Co. v. Fort Worth Distributing Co., 781 F.2d 494, 499 (5th Cir. 1986).
Here, CGM focused on litigation in all of its correspondence with the opposing parties. As such, the Court refused to allow CGM to use pre-trial procedures to its financial or strategic advantage in pursuing arbitration.
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