In Re Bashaw & Co. (Tex.App.- Houston [1st Dist.] Jul. 23, 2009)(Keyes)
(arbitration, securities business, direct benefits estoppel)
GRANT PETITION FOR WRIT OF MANDAMUS: Opinion by Justice Keyes
Before Justices Keyes, Hanks and Bland
01-08-00803-CV In re James E. Bashaw & Co.
Appeal from 133rd District Court of Harris County
Trial Court Judges: Lamar McCorkle | Jaclanel McFarland
O P I N I O N
Relator, James E. Bashaw & Co. ("JEBCO"), filed a petition for writ of mandamus challenging the trial court's
September 29, 2008 order denying its motion to compel arbitration in the underlying lawsuit between real
party in interest, A. Gary Kovacs, and JEBCO for breach of contract, tortious interference, and libel and
slander. (1) In its sole issue, JEBCO argues that the trial court abused its discretion and committed a clear
error of law by denying JEBCO's motion to compel Kovacs to arbitrate his claims against JEBCO.
We conditionally grant mandamus relief.
JEBCO is a sole proprietorship formed by James E. Bashaw for the purpose of conducting his activities as a
registered representative of Linsco Private Ledger Corporation, a/k/a LPL Financial Services ("LPL"), a
broker/dealer involved in the sale of securities and insurance products. On June 19, 2001, Bashaw filed an
"Outside Business Activity/DBA Notification Form" with LPL, as required by the National Association of
Securities Dealers ("NASD"), now the Financial Industry Regulatory Authority, Inc. ("FINRA"), and by LPL's
compliance department, before a registered representative can engage in the disclosed activity. The form
stated, "[FINRA] requires that Registered Representatives disclose all outside business activities to their
broker/dealer and on their Uniform Application for Securities Industry Registration (Form U-4)," including
insurance sales, financial planning, and conducting business or holding oneself out as a registered
investment adviser. It further stated, "A DBA name is a name used by a registered representative to identify
his/her LPL business activities to the public, and may be a corporation, partnership or sole proprietorship." In
this case, Bashaw's DBA Notification Form stated that he intended to conduct his activities as a branch
manager of LPL under the name James E. Bashaw & Co, a sole proprietorship. Bashaw checked the boxes
stating that he was not "currently involved in any business activities other than the activities performed as a
registered representative of LPL, that he had a financial interest in JEBCO, that his interest in JEBCO was
"100%," that the duties and authority of the position being disclosed were those of a "Branch Manager," and
that he was compensated by "commissions."
The DBA Notification Form instructs that "[a]fter notifying the Registered Representative of the approval of
an outside business activity, the Compliance department will forward this form to the LPL Registration
department which will assist in disclosing the activity on Form U-4." The instructions on the DBA Notification
Form clearly state, "This notification form must be received and approved in writing by the LPL Compliance
department prior to engaging in the disclosed activity," namely the activity of Bashaw's serving as a branch
manager for LPL under the business name of JEBCO. LPL approved Bashaw's DBA Notification Form on
October 23, 2001.
On November 9, 2001, Bashaw entered into a Representative Agreement and a Branch Office Manager
agreement with LPL. The Representative Agreement between Bashaw and LPL appointed Bashaw as a
"limited agent to solicit purchases of securities and investments offered through LPL" in its capacities as a
broker/dealer, an investment adviser, and an insurance agency. It also agreed to pay Bashaw, as the
representative, commissions and fees in accordance with various schedules attached to the agreement.
Bashaw was obligated to agree to various practices required to do business with LPL, including paying "any
balance owing to [LPL] within ten (10) business days of receipt of [LPL's] statement unless other
arrangements are made in writing" and paying "all expenses of [his] business and conduct[ing] such
business in accordance with the rules and regulations of the Securities and Exchange Commission (SEC),
the National Association of Securities Dealers (NASD), the National Futures Association (NFA)," and others.
Bashaw's Representative Agreement contained the following arbitration provision:
Representative hereby expressly agrees to submit to final and binding arbitration before the National
Association of Securities Dealers, Inc. any and all disputes, claims or controversies relating to
Representative's association with or termination from LPL. Representative expressly gives up the right to sue
in a court of law or equity, including the right to a trial by jury. Specific examples of disputes, claims or
controversies that are required to be arbitrated include, but are not limited to, allegations of unlawful
termination, sexual or racial harassment or discrimination on the job, gender discrimination, and claims of
age or handicap discrimination.
The Branch Office Manager Agreement authorized Bashaw to "enter into agreements with Representatives
in the branch office under which the Branch Office Manager shall receive a portion of payments due the
Representatives under the [LPL] Representative Agreement." The Branch Office Manager Agreement also
contained an arbitration provision identical to the one contained in the Representative Agreement.
On November 23, 2001, Bashaw signed a Uniform Application for Securities Industry Registration or Transfer
("Form U-4"), which is used to register securities professionals with various securities exchanges and
organizations, including FINRA. The Form U-4 was completed to relicense Bashaw through LPL, which was
designated as his broker/dealer firm on the form. The Form U-4 also contained an arbitration clause, which
I agree to arbitrate any dispute, claim or controversy that may arise between me and my firm, or a customer,
or any person, that is required to be arbitrated under the rules, constitutions, or by-laws of the SROs
indicated in Section 4 (SRO REGISTRATION) [in Bashaw's case, NASD, later FINRA] as may be amended
from time to time and that any arbitration award rendered against me may be entered as a judgment in any
court of competent jurisdiction.
This form also stated:
I authorize all my employers and any other person to furnish to any jurisdiction, SRO, designated entity,
employer, prospective employer, or any agent acting on its behalf, any information they have, including
without limitation my creditworthiness, character, ability, business activities, educational backgrounds,
general reputation, history of my employment and, in the case of former employers, complete reasons for my
termination. Moreover, I release each employer, former employer and each other person from any and all
liability, of whatever nature, by reason of furnishing any of the above information . . . . On April 28, 2004, in
his capacity as LPL branch manager under the Branch Office Manager Agreement, Bashaw sent a letter to
Kovacs on JEBCO letterhead setting out the terms of Kovacs' employment in Bashaw's LPL branch office
(the Compensation Letter). The Compensation Letter extended an offer to Kovacs to "join James E. Bashaw
& Co. as a Managing Director, The Kovacs Group," subject to his "license transferring with LPL." Provisions
in the Compensation Letter included:
You will be paid an amount equal to 70% of your "net" commissions as defined below. You may select two
months in which to be paid 80%.
. . . .
Lastly, because of your experience in the insurance field, we will pay you 80% of all insurance commissions.
Any overrides negotiated by you for non-Series 7 products will be retained by you in their entirety. E.g., a
110% contract, you would be paid the entire 10%.
. . . .
Net commissions are those paid to James E. Bashaw & Co. by LPL or any other financial services vendor
including but not limited to insurance or financial planning.
The Compensation Letter was signed by Bashaw as president and chief executive officer of JEBCO. The
parties agree that this letter does not contain an arbitration provision.
On May 3, 2004, in connection with his employment by JEBCO, Kovacs entered into a Representative
Agreement with LPL identical to the one between Bashaw and LPL. This Representative Agreement, like
Bashaw's, appointed Kovacs as a "limited agent to solicit purchases of securities and investments offered
through LPL" in its capacities as a broker/dealer, an investment adviser, and an insurance agency. LPL also
agreed to pay Kovacs, as a representative, commissions and fees in accordance with various schedules
attached to the agreement. Regarding these schedules, the agreement provided:
The schedules attached are subject to change on thirty (30) days written notice. Unless Representative
notifies [LPL] in writing that he/she is officially terminating his/her registration with [LPL], and that notification
is received at LPL prior to the effective date of the changed schedule(s), he/she will be bound by the terms
of the changed schedule(s).
The Representative Agreement also required Kovacs
to conform to the rules and regulations of the NASD [now FINRA], SEC, NFA, CFTC, MSRB and various
states, to the applicable federal and state laws, and conform to the established customs, standards and
procedures of the securities and [LPL]. In complying with such laws, rules and regulations, Representative
shall accept such supervision and control by his/her branch manager and officers of [LPL] as is necessary to
enforce such laws, regulations and rules.
Kovacs' Representative Agreement provided that it "may be terminated by either party at any time, without
cause, by giving thirty (30) days written notice to the other party" and that LPL "reserve[d] the right to
immediately terminate this Agreement in the event Representative's Branch Office Manager is terminated or
in the process of being terminated." This Representative Agreement contained an identical arbitration
provision to that in the Representative Agreement between Bashaw and LPL. This agreement was signed by
Kovacs and a representative for LPL.
On June 9, 2004, also in connection with his employment, Kovacs signed a Uniform Application for Securities
Industry Registration or Transfer ("Form U-4"), to relicense Kovacs through LPL, which was designated as
his broker/dealer firm on the Form U-4. The Form U-4 also contained an arbitration clause identical to
On June 18, 2004, Kovacs began working as a registered representative for LPL through Bashaw, as branch
manager, and JEBCO, the sole proprietorship through which Bashaw conducted his business activities as
During 2004 and 2005, the working relationship between Bashaw and Kovacs functioned well. Beginning in
2005, Bashaw and Kovacs began to experience conflict based on alleged changes by Bashaw to the
commission structure that determined Kovacs' pay. Because of these conflicts, Kovacs approached another
LPL branch office, Macha & Associates ("Macha"), about transferring his LPL securities and insurance
business. Kovacs negotiated a deal with Macha that included provisions paying Kovacs 80% of the net
commissions on securities products and between 85% and 90% of net commissions on insurance products,
and 100% of all production bonuses paid by LPL on securities and insurance business generated through
In May 2007, Kovacs sent Bashaw an email request to release him and approve his lateral transfer to
Macha's LPL branch office. Bashaw did not sign the release, which prevented Kovacs from transferring his
business. Bashaw then sent a letter to LPL on May 11, 2007 in which he stated: "Please accept this letter of
termination of Gary Kovacs without options. Gary has been a disruptive element to our firm for the last 6
months. I do not want him to be an LPL advisor and as a shareholder I feel that he will not represent us well."
In a letter also dated May 11, 2007, LPL notified Kovacs that it was terminating its representative relationship
with him in 30 days, under the terms of the Representative Agreement.
On September 27, 2007, Kovacs filed suit against Bashaw and JEBCO, alleging claims for breach of
contract, tortious interference with his contract with Macha, attorney's fees, and libel and slander. Kovacs
alleged that, at the beginning of his working relationship with JEBCO, Bashaw, individually and as a
representative of JEBCO, represented to him that he had an unrestricted right to transfer his business to
another LPL branch at any time for any reason. Kovacs alleged that, in 2005, Bashaw "unilaterally and
without notice changed the parties' commission agreement by reducing the 'net commissions' that were paid
on insurance sales from 80% to 70%, wrongfully claiming that annuity products were not insurance products"
and that, at the end of 2006, JEBCO "established a new security commission structure that only paid
[Kovacs] 70% of the 'net commissions' if [Kovacs] met certain monthly minimums." Kovacs also alleged that
JEBCO failed to pay him any production bonuses that LPL was paying on his production, and that he should
have received either 100% or between 70% and 80% under the April 18, 2004 letter. Kovacs alleged that
these changes breached the terms of the Compensation Letter between himself and Bashaw. Kovacs also
alleged that the May 11, 2007 letter sent by Bashaw to LPL contained libel and that Bashaw continued to
slander him to customers and to certain wholesalers after Kovacs left JEBCO.
Bashaw and JEBCO filed an answer and counterclaim on November 8, 2007, seeking the return of $45,000 it
had paid to Kovacs as excess compensation and for the fair market value of supplies and support services
Kovacs used while at JEBCO to operate an independent business. On March 31, 2008, counsel for Bashaw
and JEBCO sent an email to Kovacs demanding "that all matters in controversy asserted by or against Gary
Kovacs be submitted to arbitration" pursuant to the FINRA (2) Code of Arbitration Procedure.
Kovacs' Second Amended Petition, filed April 2, 2008, against James Bashaw and JEBCO, alleged causes of
action for breach of contract based on Bashaw's and JEBCO's failure to pay him 80% of the net commissions
generated on insurance, money had and received/breach of contract based on Bashaw and JEBCO's
nonpayment of production bonuses paid by LPL based on Kovacs' production, tortious interference with
contract based on Bashaw and JEBCO's refusal to sign the release allowing Kovacs' transfer of his LPL
business to Macha, attorney's fees, libel and slander based on the letter Bashaw, individually and as a
representative of JEBCO, sent to LPL that led to LPL's revoking Kovacs' status as an LPL representative
and Bashaw's comments made to customers and certain wholesalers regarding Kovacs' termination by LPL,
and punitive damages.
Kovacs filed a motion for non-suit of Bashaw on April 7, 2008 because Bashaw had requested that the
dispute be submitted to arbitration. The motion for non-suit did not apply to JEBCO because Kovacs argued
that his claims against JEBCO were not subject to mandatory arbitration.
On April 8, 2008, Bashaw submitted a claim to FINRA Dispute Resolution, listing Bashaw, JEBCO, and
Kovacs as the parties involved: James E. Bashaw and James E. Bashaw & Co. vs. Gary Kovacs, FINRA Case
No. 08-01055. Kovacs filed a motion to dismiss the arbitration proceeding along with an answer and a
counterclaim subject to the motion to dismiss. The counterclaim in that proceeding was essentially identical
to his petition in this suit. The arbitration is still pending.
On April 9, 2008, the trial court granted Kovacs' motion for non-suit of Bashaw in this case.
On April 16, 2008, JEBCO filed a motion to stay proceedings in the trial court pending the completion of the
binding arbitration of the claims between Bashaw, JEBCO, and Kovacs in FINRA arbitration No. 08-01055,
arguing that the matters in controversy have been submitted to binding arbitration pursuant to the rules of
the NASD (now FINRA) governing this matter. Both the Plaintiff and Counterclaimant are "Persons
associated with a Member" of the NASD. As such they are required to submit all matters arising out of their
business to binding arbitration . . . .
JEBCO also filed a motion to quash discovery because the matters in controversy had been submitted to
Kovacs responded to JEBCO's motion to stay proceedings by arguing that he non-suited Bashaw "so that he
could take this matter up with FINRA to establish that this suit, as pled, was not a violation of any FINRA rules
or regulations" and arguing that FINRA rules did not require him to arbitrate his claims against JEBCO. On
April 21, 2008, Kovacs sent a Demand for Arbitration and Statement of his claim against LPL to FINRA
Dispute Resolution. The arbitration initiated by Kovacs, FINRA Case No. 08-01287, styled A. Gary Kovacs
vs. LPL Financial Corp., is likewise still pending.
On August 6, 2008, the trial court denied JEBCO's motion to quash discovery in the instant litigation. On
September 19, 2008, JEBCO filed an amended motion to compel arbitration and to stay the litigation,
pointing out that the previous motion to stay had mentioned arbitration but had not included authority and
that the trial court had not ruled on the motion to stay. In its amended motion to compel arbitration, JEBCO
argued that the doctrine of equitable estoppel applied to Kovacs' claims and that JEBCO was an associated
person under FINRA, thereby requiring Kovacs to submit to arbitration of his claims against JEBCO. JEBCO
also argued that the trial court was required to stay the proceedings in state court pending the outcome of
the arbitration proceedings.
On September 29, 2008, the trial court signed an order denying JEBCO's motion to compel arbitration and to
stay the proceedings pending arbitration. JEBCO filed this petition for writ of mandamus on October 2, 2008.
In its petition for writ of mandamus, JEBCO argues that the trial court erred in denying its motion to compel
arbitration, or, alternatively, that the trial court erred in failing to grant a stay pending the completion of the
pending arbitration between Bashaw and Kovacs.
Motion to Compel Arbitration
We first address JEBCO's argument that the trial court erred in denying its motion to compel arbitration.
JEBCO argues that Kovacs is required to arbitrate his claims against it under the FINRA Code of Arbitration
Procedure and under its agreements with LPL due to the doctrine of equitable estoppel.
A. Standard of Review
Mandamus relief is appropriate only if a trial court abuses its discretion and no adequate appellate remedy
exists. Walker v. Packer, 827 S.W.2d 833, 839 (Tex. 1992) (orig. proceeding). A trial court commits a clear
abuse of discretion when its action is "so arbitrary and unreasonable as to amount to a clear and prejudicial
error of law." Id.
The parties do not dispute that the Federal Arbitration Act (the "FAA") governs this case. (3) Because there
is no right of interlocutory appeal under the FAA, review by petition of writ of mandamus is proper. Jack B.
Anglin Co. v. Tipps, 842 S.W.2d 266, 272 (Tex. 1992) (orig. proceeding). Under the FAA, "it is the courts
rather than arbitrators that must decide gateway matters, such as whether a valid arbitration agreement
exists," unless there is unmistakable evidence that the parties intended the contrary. In re Weekley Homes,
180 S.W.3d 127, 130 (Tex. 2005) (orig. proceeding).
"Generally under the FAA, state law governs whether a litigant agreed to arbitrate, and federal law governs
the scope of an arbitration clause." Id. Whether a nonparty may enforce an arbitration clause can involve
aspects of either or both. See id. at 130-31. As the Texas Supreme Court has already held in analyzing
whether a nonparty may be compelled to arbitrate, we will apply state law while endeavoring to keep it as
consistent as possible with federal law. See id. at 131 ("Pending an answer from the United States Supreme
Court, we apply state law while endeavoring to keep it as consistent as possible with federal law.").
B. Arbitration under FINRA
JEBCO contends that, given the relationships among the parties, the dispute between Kovacs and Bashaw
falls squarely within the scope of FINRA Rule 13200, which states,
13200. Required Arbitration
Except as otherwise provided in the [FINRA] Code [of Arbitration], a dispute must be arbitrated under the
Code if the dispute arises out of the business activities of a member or an associated person and is between
* Members and Associated Persons; or
* Associated Persons.
FINRA Code Arb. Proc. Indus. Disputes R. 13200(a). (4) The FINRA Code of Arbitration defines an
"associated person" or "person associated with a member" as
(1) A natural person registered under the Rules of FINRA; or
(2) A sole proprietor, partner, officer, director, or branch manager of a member, or a natural person
occupying a similar status or performing similar functions, or a natural person engaged in the investment
banking or securities business who is directly or indirectly controlled by a FINRA member, whether or not
such a person is registered or exempt from registration with FINRA . . . .
FINRA Code Arb. Proc. Indus. Disputes R. 13100(a), (r). Under this definition, and under Rule 13200, all
disputes between or among associated persons, including Bashaw and Kovacs, and member firms, such as
LPL, and arising out of their business activities must be arbitrated.
JEBCO contends that Kovacs' removal of Bashaw from this suit by non-suit was "clearly an attempt by
Kovacs to avoid the industry standard of arbitrating all disputes between brokers, since Bashaw is
indisputably a FINRA 'associated person' with whom Kovacs is obligated to arbitrate all of his disputes."
JEBCO further contends that all of Kovacs' allegations in the suit are claims against Bashaw recast as claims
against JEBCO in an attempt to avoid arbitration. JEBCO argues that all of Kovacs' claims arise from Kovacs'
employment as a registered representative and that Kovacs' central allegation is that Bashaw and JEBCO
caused LPL to terminate its Representative Agreement with Kovacs. JEBCO points out that Kovacs and
Bashaw are both securities brokers and "associated persons" subject to the jurisdiction of FINRA and that
the arbitration provisions contained in Bashaw's Branch Manager Agreement and in Bashaw's and Kovacs'
Representative Agreements and Form U-4s require that all disputes arising from Kovacs' employment be
arbitrated. JEBCO further argues: that JEBCO is merely the entity through which Bashaw conducts his
securities business; that Bashaw reported his use of an assumed name to LPL, which LPL approved; and
that JEBCO has no operations independent of Bashaw's activities as a Branch Manager of LPL.
Kovacs responds that JEBCO, as a corporation, does not qualify as an associated person under Rule 13200
and that his claims against JEBCO, therefore, are not subject to arbitration.
We find it unnecessary to decide whether JEBCO is an associated person under FINRA to resolve this case.
Rather, we conclude that the gateway question is whether Kovacs, a FINRA associated person, is attempting
by artful pleading to avoid FINRA arbitration by non-suiting his claims against Bashaw, also an associated
person, and by alleging breach of contract and tort claims arising out of the business activities of Bashaw as
branch manager for LPL only against JEBCO, thereby seeking a direct benefit under his U-4 or his
Representative Agreement with LPL, a FINRA member.
C. Arbitration under equitable estoppel / direct benefits estoppel doctrine
JEBCO argues that the equitable estoppel or direct benefit estoppel doctrine applies in this case and that
Kovacs must rely on the agreements with LPL containing an arbitration clause in asserting his claims against
JEBCO and that Kovacs is seeking a direct benefit from the LPL agreements containing the arbitration
provisions. JEBCO also argues that the claims against JEBCO are identical to the claims against Bashaw that
were required to be arbitrated under FINRA, that the claims against JEBCO concern the actions of Bashaw
the individual, and that the claims against JEBCO involve allegations of substantially interdependent and
concerted misconduct by Bashaw, JEBCO, and LPL.
"Under both Texas and federal law, whether a claim seeks a direct benefit from a contract containing an
arbitration clause turns on the substance of the claim, not artful pleading." In re Weekley Homes, 180 S.W.3d
at 131-32. If a party or nonparty seeks to derive a direct benefit from a contract containing an arbitration
clause, he may be compelled to arbitrate under the doctrine of "direct benefits estoppel." Id. at 131 (applying
doctrine to nonparty). Claims must be brought on a contract and arbitrated if liability arises solely from the
contract or must be determined by reference to it. Id. at 132. Claims can be brought in tort and in court,
however, if liability arises from general obligations imposed by law. Id. Therefore, the question in this case is
whether Kovacs is seeking by artful pleading on tort theories against JEBCO to avoid arbitration of claims
that must be determined by reference to his Representative Agreement or U-4, both of which contain
arbitration provisions, and, therefore, whether, as a non-signatory to those agreements, JEBCO may compel
Kovacs to arbitrate his claims.
Whether an arbitration agreement can be enforced by a non-signatory is a "gateway matter" that the courts,
rather than arbitrators, must decide. See id. at 130 ("Whether an arbitration agreement is binding on a
nonparty is one of those gateway matters."). The abuse of discretion standard constrains our review of the
trial court's decision not to apply equitable estoppel. See Grigson v. Creative Artists Agency, L.L.C., 210
F.3d 524, 528 (5th Cir. 2000); see also Hill v. G.E. Power Sys., Inc., 282 F.3d 343, 349 (5th Cir. 2002)
(recognizing that, when deciding whether to apply equitable estoppel, "the district court is better equipped to
make the call than this court, and we do not lightly override that discretion"); In re Weekley Homes, 180
S.W.3d at 134-35 (recognizing, in suit where signatory sought to compel arbitration of non-signatory's claims
under direct benefits estoppel, that "the equitable nature of the doctrine may render firm standards
inappropriate, requiring trial courts to exercise some discretion based on the facts of each case").
Generally, only signatories to an arbitration agreement are bound by the agreement. Brown v. Pac. Life Ins.
Co., 462 F.3d 384, 398 (5th Cir. 2006). However, "[a] person who has agreed to arbitrate disputes with one
party may in some cases be required to arbitrate related disputes with others." Meyer, 211 S.W.3d at 304
(citing In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 762 (Tex. 2006) (per curiam) (holding that party to
arbitration agreement must arbitrate tortious interference claims against other party's agents and affiliates)).
However, the Texas Supreme Court has observed, "Estoppel is one of five or six instances in which the
federal circuit courts require arbitration with nonsignatories." In re Merrill Lynch Trust Co., 235 S.W.3d 185,
191 (Tex. 2007); see also Grigson, 210 F.3d at 526 (holding that "in certain limited instances, pursuant to an
equitable estoppel doctrine, a non-signatory-to-an-arbitration-agreement-defendant can nevertheless
compel arbitration against a signatory-plaintiff.").
In Grigson, the Fifth Circuit adopted the two-prong approach to the intertwined claims doctrine used by the
Eleventh Circuit. Id. at 527. The Grigson court recognized two circumstances in which equitable estoppel
allows a non-signatory to compel arbitration with a signatory:
First, equitable estoppel applies when the signatory to a written agreement containing an arbitration clause
must rely on the terms of the written agreement in asserting its claims against the nonsignatory. . . . Second,
application of equitable estoppel is warranted when the signatory to the contract containing an arbitration
clause raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory
and one or more of the signatories to the contract. Id. (quoting MS Dealer Serv. Corp. v. Franklin, 177 F.3d
942, 947 (11th Cir. 1999)). The Grigson court noted that each case turns on its own facts and that equitable
estoppel is "much more readily available when the case presents both independent bases . . . for applying
the intertwined claims doctrine." Id. at 527-28. The Grigson court went on to state:
[A]lthough arbitration is a matter of contract and cannot, in general, be required for a matter involving an
arbitration agreement non-signatory, a signatory to that agreement cannot, in those instances described in
MS Dealer Serv. Corp., "have it both ways": it cannot, on the one hand, seek to hold the non-signatory liable
pursuant to duties imposed by the agreement, which contains an arbitration provision, but, on the other
hand, deny arbitration's applicability because the defendant is a non-signatory. Id. at 528.
In In re Vesta Insurance Group, the Texas Supreme Court addressed tortious interference claims in a suit
brought by a former insurance agent against the insurer's parent corporation, its officers, and its agents
when the defendants sought to compel arbitration even though they were not signatories to the former
agent's arbitration agreement with the insurer. In re Vesta Ins. Group, Inc., 192 S.W.3d at 760-61. It stated:
Tortious interference claims do not fall comfortably in either category. The obligation not to interfere with
existing contracts is a general obligation imposed by law. But it is not imposed on the parties to that contract,
as "a party cannot tortiously interfere with its own contract." Nor is it imposed on corporate agents, except for
actions completely contrary to corporate interests. In other words, "a person must be a stranger to a contract
to tortiously interfere with it." Thus, while liability for tortious interference arises from the general law,
nonliability arises from connections with the contract.
Id. at 761-62 (internal citations omitted). The Vesta court went on to hold that "tortious interference claims
between a signatory to an arbitration agreement and agents or affiliates of the other signatory arise more
from the contract than general law, and thus fall on the arbitration side of the scale." Id. at 762. It reasoned
that "corporations must act through human agents," and, therefore, "every contract claim against a
corporation could be recast as a tortious interference claim against its agents." Id.; see also In re Merrill
Lynch Trust Co., 235 S.W.3d at 188-89 ("Corporations can act only through human agents, and many
business-related torts can be brought against either a corporation or its employees. If a plaintiff's choice
between suing the corporation or suing the employees determines whether an arbitration agreement is
binding, then such agreement have been rendered illusory on one side.").
Here, we conclude that Kovacs is seeking a direct benefit from the contracts with LPL that contain the
arbitration provisions. It would be inequitable to allow Kovacs to seek to enforce rights that depend on his
entitlement to receive commissions or to transfer his business that flow from his agreement with LPL and at
the same time avoid the arbitration provision contained in that agreement. See In re Weekley Homes, 180
S.W.3d at 130; see also Grigson, 210 F.3d at 527-28. Furthermore, all of JEBCO's alleged misdeeds were
alleged to have been committed by Bashaw, the sole shareholder and officer of JEBCO; and JEBCO's
alleged misdeeds, including the libel and slander claims, were committed by Bashaw pursuant to his authority
as a Branch Office Manager for LPL.
Kovacs, however, argues that his breach of contract claims against JEBCO rely only on his agreement with
JEBCO as embodied in the Compensation Letter outlining the terms of his employment with JEBCO, and,
therefore, they stand independently of the contracts with LPL. However, the Compensation Letter from
JEBCO to Kovacs can only be understood and implemented in the context of the business relationships and
party rights established in the LPL agreements. Kovacs must rely on his Representative Agreement with LPL
to be entitled to receive any commissions at all under his subsequent agreement with JEBCO, and JEBCO's
authority to extend the terms in the Compensation Letter and to employ Kovacs depended on its own
representative and branch office agreements with LPL. Therefore, determination of JEBCO's liability on
Kovacs' claims for breach of the terms of the Compensation Letter must necessarily "be determined by
reference to" the agreements setting out the working relationships among JEBCO, Bashaw, and LPL. See In
re Weekley Homes, 180 S.W.3d at131-32. Furthermore, Kovacs' tortious interference claims against JEBCO
must also be arbitrated because resolving that claim will require the parties to refer to JEBCO's role as LPL's
designated supervisor over Kovacs. See In re Vesta, 192 S.W.3d at 761-62.
Finally, we observe that the U-4 Kovacs signed specifically authorizes "all my employers . . . to furnish to any
. . . prospective employer, or any agent acting on its behalf, any information they have, including without
limitation my creditworthiness, character, ability, business activities, educational backgrounds, general
reputation, history of my employment and, in the case of former employers, complete reasons for my
termination." The U-4 also releases "each employer, former employer and each other person from any and
all liability, of whatever nature, by reason of furnishing any of the above information." Although it is correct to
say, as Kovacs argues, that JEBCO's agreement with LPL did not give JEBCO authority to commit libel or
slander, Bashaw, as Kovacs' branch manager for LPL, and JEBCO, as Kovacs' direct employer, were
authorized by Kovacs' form U-4 to report to any prospective employer or its agent in connection with
termination of Kovacs' employment as a registered representative for LPL "any information they have,"
including information about Kovacs' general reputation and employment history, and the reasons for his
termination. It is this information which Kovacs claims was libelous. Any claims arising out of the supply of this
information are directly referable to Kovacs' employment relationship and his Representative Agreement and
form U-4, both of which contained arbitration clauses. Kovacs' claims for libel and slander are not an
independent claims because JEBCO had an authorized supervisory role. Pursuant to the Representative
Agreement, Kovacs' claims are claims that "relate to the Representative's association with or termination
from LPL." Pursuant to the U-4, they are claims involving JEBCO's passing of information for which indemnity
is provided. Thus, it will be for an arbitrator to determine whether Kovacs' libel and slander claims have merit
and are or are not subject to the release in his U-4.
We conclude that Bashaw's and JEBCO's liability for libel and slander and tortious interference arising out of
the information furnished by Bashaw to Kovacs' employer, LPL, and his prospective employer can only be
determined by reference to the provisions in is U-4 and Representative Agreement, from which he is seeking
a direct benefit. See In re Weekley Homes, 180 S.W.3d at 132.
We conclude that Kovacs' removal of Bashaw from this litigation was an attempt to avoid arbitration since
both Bashaw and Kovacs are associated persons whose disputes arising out of the business activities at
issue in this litigation are referable to arbitration under their Representative Agreements and U-4's, and
Kovacs is seeking a direct benefit from contracts with an arbitration clause. Therefore, we hold that JEBCO
was clearly entitled to arbitration under the direct-benefits estoppel doctrine and that the trial court erred in
denying JEBCO's motion to compel arbitration. (5)
We sustain JEBCO's sole issue.
Stay of Litigation
In the alternative, JEBCO argues that it is entitled to a stay of the litigation pending the outcome of the two
arbitration proceedings. Because we have determined that the trial court erred in denying JEBCO's motion to
compel arbitration, we hold that trial court must compel arbitration and stay any further proceedings in the
trial court. See 9 U.S.C. §3 (2007) (requiring stay of proceedings in trial court "upon any issue referable to
We conditionally grant the petition for writ of mandamus, direct the trial court to vacate its order denying
JEBCO's motion to compel arbitration and to stay, and direct the trial court to enter an order compelling
arbitration of Kovacs' claims. The writ will issue only if the trial court fails to comply.
Evelyn V. Keyes
Panel consists of Justices Keyes, Hanks, and Bland.
1. The underlying lawsuit is A. Gary Kovacs v. James E. Bashaw & Co., No. 2007-60100 in the 133rd District
Court of Harris County, Texas, the Honorable Lamar McCorkle presiding. Judge McCorkle has since been
replaced by the Hon. Jaclanel McFarland, who held a hearing to reconsider JEBCO's motion to compel
arbitration and signed an order denying the motion to compel arbitration on March 4, 2009. In addition to this
lawsuit, there are currently two FINRA arbitration proceedings pending involving the parties and underlying
occurrences in this case. The first was filed by Bashaw and JEBCO against Kovacs: FINRA Case No.
08-01055, styled James E. Bashaw and James E. Bashaw & Co. v. A. Gary Kovacs, filed April 8, 2008. The
second was filed by Kovacs against LPL: FINRA Case No. 08-01287, styled A. Gary Kovacs v. LPL Financial
Corporation, filed April 21, 2008.
2. The NASD was consolidated into what is now known as the Financial Industry Regulatory Authority
("FINRA") in 2007. In re Stanford Group Co., 273 S.W.3d 807, 810 n.1 (Tex. App. Houston [14th Dist.]
2008) (orig. proceeding). "Courts continue to enforce NASD arbitration clauses through FINRA arbitration
and interpret and enforce NASD's rules as applicable to FINRA." Id. We use the acronym FINRA to include
NASD. See id.
3. See 9 U.S.C. §§ 1-16 (2007).
4. The FINRA Rules are available online at www.finra.org/ArbitrationMediation/ Rules/index.htm. The FINRA
Code of Arbitration is available at
5.JEBCO also argues that Kovacs should be compelled to arbitrate his claims against it because his petition
alleged concerted misconduct among JEBCO, Bashaw, and LPL. As Kovacs argued, the Texas Supreme
Court has stated that "we have never compelled arbitration based solely on substantially interdependent and
concerted misconduct." See In re Merrill Lynch, 235 S.W.3d at 191. However, we have already held that
Kovacs should be compelled to arbitrate his claims against JEBCO because he is seeking a direct benefit
from contracts containing an arbitration clause. Therefore, we do not need to address JEBCO's arguments
regarding concerted misconduct. See id. ("We too have applied estoppel when nonsignatories seek a direct
benefit from a contract with an arbitration clause.") (citing In re Weekley Homes, 180 S.W.3d 127, 131-32
(Tex. 2005) (orig. proceeding)).