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Xie Law Offices, LLC v. Nguyen & Chen, L.L.P.

United States District Court, S.D. Texas, Houston Division

April 5, 2019

NGUYEN & CHEN, L.L.P., and FAN CHEN, Defendants.


          Nancy K. Johnson, United States Magistrate Judge

         Pending before the court[1] is Defendants' Motion to Compel Arbitration and Plea in Abatement (Doc. 20) . The court has considered the motion, the response, and the applicable law. For the reasons set forth below, the court RECOMMENDS that the motion be DENIED.

         I. Case Background

         Plaintiffs filed this diversity action on November 20, 2017, alleging that Defendants engaged in a civil conspiracy "to steal Plaintiffs' employees, clients, and business associates and the corresponding legal fees due Plaintiffs therefrom."[2] On December 14, 2017, Plaintiffs filed an amended complaint.[3] Therein, Plaintiffs sued Hou Min Luo ("Luo"), former employee of Xie Law Offices, LLC, ("Plaintiff Xie"); the law firm Nguyen & Chen, L.L.P., ("Defendant N&C"); and the principal partner of Defendant N&C, Fan Chen ("Defendant Chen").[4]

         Plaintiff Xie and Luo entered an employment agreement in October 2011.[5] Among the terms of the agreement were nondisclosure, non-competition, and non-solicitation provisions.[6] The agreement also contained an arbitration provision that stated: "All disputes, differences and controversies arising out of, under, or in connection with this Agreement shall be settled and finally determined by Arbitration in Georgia under the then existing Rules of the American Arbitration Association."[7] The agreement did not include a choice of law provision.[8]

         Plaintiffs alleged that Defendant Chen, on behalf of Defendant N&C, recruited Luo while he was still in Plaintiff Xie's employment.[9] Plaintiffs also alleged that Luo began working for Defendant N&C while still on Plaintiff Xie's payroll, during which time he diverted fees due to Plaintiffs, enticed eight other of Plaintiffs' employees to leave their jobs to work for Defendant N&C, and poached Plaintiffs' clients.[10]

         Plaintiffs raised the following causes of action: (1) breach of contract against Luo, alleging breaches of the non-disclosure, non-compete, and non-solicitation provisions of his employment agreement; (2) common-law fraud against Luo for concealing information about Defendants N&C and Chen's offer and about Luo's efforts to poach clients and divert funds; (3) tortious interference with contract against Luo and Defendants N&C and Chen for inducing clients to transfer cases to Defendant N&C; (4) common-law misappropriation against Luo and Defendants N&C and Chen for using Plaintiffs' work product, commercial contacts, and confidential information in poaching clients; (5) conspiracy against Luo and Defendants N&C and Chen for working together to engage in unfair competition; (6) conversion against Luo and Defendants N&C and Chen for diverting legal fees; and (7) unjust enrichment against Luo and Defendants N&C and Chen for diverting legal fees.[11] Plaintiffs also asserted liability based on the doctrines of agency and respondeat superior.[12]

         On February 7, 2018, Plaintiffs voluntarily dismissed Luo based on a provision in his employment agreement mandating arbitration in the State of Georgia.[13] Plaintiffs explained that the employment agreement "contained an arbitration provision in the event of a dispute thereunder."[14]

         On February 12, 2018, Defendants N&C and Chen filed a motion for partial dismissal, targeting only the conversion and conspiracy claims.[15] Defendants sought dismissal of the conversion claim for failure to state a claim and dismissal of the conspiracy claim for failure to join a required party.[16] Concerning the conspiracy claim, "Defendants argue[d] that, without Luo, Plaintiffs [could not] meet any of the elements of a conspiracy claim because all of the actions on which Plaintiffs based their conspiracy claim were taken by Luo.[17]" Plaintiffs responded that Luo was not a required party, as Defendants argued, or, if the court found him to be a required party, it was not feasible to join him.[18]

         On June 28, 2018, the court issued a Memorandum and Recommendation ("M&R") recommending dismissal of the conversion claim but not the conspiracy claim.[19] With regard to the conspiracy claim, the court found that Luo was not a required party and that the action should proceed among the existing parties.[20] In its discussion, the court stated, "The pragmatic approach is to recognize that Luo cannot be a party here and Defendants cannot be [parties] to the arbitration. No forum would allow the claims against all three persons with interest in the subject matter of this action generally and in the conspiracy claim specifically."[21]The court further "determine[d] that the action . . . should proceed among the existing parties in equity and good conscience."[22]The M&R cautioned the parties, "Failure to file written objections within the time period mentioned shall bar an aggrieved party from attacking the factual findings and legal conclusions on appeal."[23]

         No party filed objections to the M&R, and the district court adopted the M&R in full.[24] On August 16, 2018, Defendants filed an answer to the amended complaint.[25] Five months after the court issued the M&R, Defendants filed the pending motion to compel arbitration.[26]

         II. Arbitration Standards

         The Federal Arbitration Act ("FAA") provides that a "written provision in ... a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. The FAA allows a party that has entered an arbitration agreement to request an order compelling the parties to proceed with arbitration. 9 U.S.C. § 4.

         For non-signatories, the right to compel parties to arbitration is more complicated. Cf. Arthur Andersen LLP v. Carlisle, 556 U.S. 624, 630-31 (2009). A non-signatory may enforce an arbitration clause against a signatory pursuant to the FAA if the state law that applies to the contract formation allows it to do so. See id. at 631. The decision whether a non-signatory can compel arbitration under an arbitration provision belongs to the court. See Opro Inc. v. RTD Quality Servs. USA, Inc., 761 F.Supp.2d 492, 497 (S.D. Tex. 2011) (citing Carlisle, 556 U.S. at 631) .

         Arbitration, like all contract rights, may be waived. Nicholas v. KBR, Inc., 565 F.3d 904, 907 (5th Cir. 2009). "Although waiver of arbitration is a disfavored finding, waiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party." Id. (quoting Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986)) (internal quotation and alteration marks omitted) . In Nicholas, the Fifth Circuit explained that "[a] party generally invokes the judicial process by initially pursuing litigation of claims then reversing course and attempting to arbitrate those claims" but that "waiver can also result from some overt act in [c]ourt that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration." Id. (quoting Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 484 (5th Cir. 2002)). The Fifth Circuit has cautioned that "[o]ne of the primary goals of arbitration is to avoid the expense of litigation." Id.

         III. Analysis

         Defendants filed this motion to compel arbitration, arguing that they, as non-signatories to Luo's employment agreement, should be allowed pursuant to Texas law to compel arbitration as to Plaintiffs' claims against them under the doctrine of equitable estoppel. Defendants point. out that Plaintiffs do not distinguish between claims brought by Plaintiff Xie, a signatory to the employment agreement, and Plaintiff Georgia Regional, a non-signatory, and conclude, "Thus, by suing Defendants on the Employment Agreement, Plaintiffs subjected themselves to the Employment Agreement's terms."[27] Plaintiffs' brief in response argues that the court already determined that Defendants' claims are not subject to arbitration, and, therefore, the court should deny Defendants' motion as moot.[28] In reply, Defendants do not dispute that the M&R ...

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