The El Paso Court of Appeals has upheld a trial court order denying a defense motion to compel arbitration in a dispute over a noncompete clause because the defendants substantially invoked the litigation process to plaintiffs’ detriment.
In a substituted memorandum opinion, the El Paso Court of Appeals denied the motion for rehearsing and affirmed the judgment of the trial court in a suit involving appellants.
TAC Total Automation Controls, INC., TAC Insumos Industriales, S. De R.L. De C.V., Carlos Pablo Lara Elias, and Luis Ernesto Martinez Ontiveros v. MSC Industrial Supply, S. De R.L. De C.V. and MSC Import Export LLC (No. 08-24-00150-CV; October 14, 2025) arose from a dispute over a noncompete clause. The parties, TAC Inc., a Texas-based industrial products distributor, and MSC, a Delaware corporation based in New York, both had Mexican affiliates, TAC Insumos and MSC Import Export. In 2018, the Mexican entities entered into a written contract in which MSC Mexico bought certain assets from TAC Insumos, including customer lists and outstanding purchase orders, with an option to buy additional assets in the future. The total purchase price came to $13,564,000. MSC Mexico executed a promissory note for $4.75 million, payable to TAC Insumos. Lara, a TAC Insumos principal, purchased a 25% interest in MSC for $2.8 million and became a board member of MSC Mexico.
The contract contained a non-compete clause concerning the “Covered Business” as defined in the agreement, barring the seller, TAC Insumos, from selling or marketing products or services “anywhere in Mexico, or any other country.” Additionally, the agreement contained an arbitration clause stipulating that all disputes would be settled by the Centro de Arbitraje de Mexico (CAM) in accordance with its rules. In 2019 the parties signed an amended agreement that altered the closing date and the customer lists, but not the purchase price or other terms and conditions. It also applied the arbitration provision specifically to all parts of the agreement. Lara and Martinez signed the agreement as members of TAC Insumos. Lara and Martinez likewise signed separate noncompete agreements prohibiting them from directly or indirectly engaging in actions that competed with MSC Mexico’s business for a specified period of time, subject to a $3.1 million liquidated damages clause. These agreements contained a forum selection clause allowing for disputes to be resolved in any Texas state or federal court or any federal court sitting in Chihuahua, Mexico. A second amended agreement in 2019 provided for the sale of additional fixed assets from TAC Insumos, including hiring rights to most of its work force, for the price of $6,718,987. This agreement was accompanied by another set of noncompete agreements and a similar forum selection clause. Lara and Martinez likewise signed additional noncompete agreements subject to another liquidated damages provision and the same forum selection clause.
Things must have gone south, because in 2023 MSC Mexico and MSC Import filed suit and an application for injunctive relief in an El Paso district court, alleging that the TAC defendants breached the noncompete agreements, tortiously interfered with MSC’s customer relationships, breached their fiduciary duties, and engaged in civil conspiracy. Two amended petitions followed, further asserting the above claims and citing the forum selection clause which allowed for filing in a Texas court. MSC sought $2.2 million in damages, a temporary restraining order, a temporary injunction, and a permanent injunction. TAC replied and asserted affirmative defenses, including laches, estoppel, unclean hands, accord and satisfaction, and waiver. Additionally, it filed a counterclaim including causes of action for false representation, unjust enrichment, conspiracy to commit fraudulent inducement, fraud and fraudulent inducement against the MSC entities. Attached to its response was a third party complaint against Sid Tool Company (Sid Tool) as an agent conducting their business in Texas. It pursued damages for $20 million, as well as exemplary damages and attorney fees. TAC also sought a declaration that the noncompete agreements were unenforceable, or in the alternative, a clarifactory declaration of duties and obligations under the agreement.
After a year of litigation, TAC decided the time was right to file a motion to compel arbitration. MSC opposed, arguing that the dispute resolution provisions in the noncompete agreements superseded the original arbitration clause in the 2018 Purchase Agreement, and that even if the provision did apply, TAC impliedly waived arbitration by substantially invoking the judicial process to the MSC entities’ detriment. TAC responded, arguing that MSC’s application for a temporary restraining order and a temporary injunction, both of which were granted by the trial court, had comprised the bulk of the litigation up to this point. However, TAC had also requested a temporary injunction, and attended status meetings and hearings on the matter. Furthermore, extensive discovery had taken place, including the depositions of Lara and Martinez, thousands of pages of document production, and back-and-forth discovery requests. TAC had filed an emergency motion to compel discovery to support their unclean hands cause of action against MSC, as well as a motion to dissolve the existing injunction, the latter of which was denied. Both parties entered into a Rule 11 agreement after concluding fact discovery in May, 2024. The trial court also set an August 19, 2024 trial date.
After filing its motion to compel arbitration, TAC moved to continue the trial date because they did not have adequate time to conduct merits based discovery. TAC maintained that it delayed discovery until the arbitration motion was resolved, so as to not waive their right to arbitration. MSC objected to continuing the trial date, and the trial court agreed, but extended the discovery deadline and dispositive motion deadline to August 2, 2024 nevertheless. The parties entered into another Rule 11 agreement, further extending the deadline. MSC contended that this behavior amounted to waiver of the right to arbitration, and after receiving adverse rulings, TAC was attempting “a second bite at the apple.” In addition to the 4,337 pages of documents produced by MSC during discovery, MSC asserted that it had incurred roughly a million dollars in attorney’s fees during the litigation. TAC argued these fees were “largely self inflicted” during TAC’s quest for a temporary injunction, and that the exhibits offered by MSC were not authenticated and should not be considered. It also maintained that TAC impliedly waived their right to arbitration by their litigation conduct. A hearing on TAC’s motion was held May 31, 2024. MSC belatedly filed an opposition to the motion, containing new exhibits authenticating its injuries and a litany of other documents establishing the litigation timeline. MSC brushed off its late filing, claiming that it was in response to TAC’s arguments. After a hearing, the trial court overruled TAC’s objections to the admission of the late filing, sustained TAC’s objection that MSC entities waived their right to claim that TAC had substantially invoked the judicial process and denied TAC’s motion to compel arbitration. TAC sought interlocutory relief.
In a decision by Justice Soto, the court of appeals affirmed. TAC argued that (1) the arbitration provision in the Purchase Agreement governed the dispute, and (2) TAC did not substantially invoke the judicial process to MSC’s detriment. TAC also contended that the exhibits in MSC’s late opposition to the motion to compel arbitration should not be considered because of MSC’s failure to timely file. The court disagreed, holding that the TRCP give the trial court “‘broad discretion’ to admit late-filed evidence upon ‘leave of court.’” Wright v. Hernandez, 469 S.W.3d 744, 755 (Tex. App.—El Paso 2015, no pet.). According to Rule 166a, a formal motion for leave is not required for the adverse party to file a late response to summary judgment. An oral ruling will suffice. Wright, 469 S.W.3d at 755. Additionally, because the trial court expressly overruled TAC’s motion to strike the late objection as untimely filed, as well as in the trial court denial of TAC’s motion to compel arbitration, the trial court stated its consideration of the evidence and pleadings on file as well as the plaintiffs’ responses in opposition. The court construed this as an affirmative showing that the trial court’s intent was to impliedly grant MSC’s leave of court to file their supplemental exhibits.
TAC then argued that MSC had waived its right to argue that the judicial process was substantially invoked by TAC. They relied on TRCP 94, which provides that any avoidance or affirmative defense should be posed affirmatively in a pleading to a prior pleading. TAC’s argument characterized MSC’s objection to the motion to compel as an affirmative defense under the rule. However, a motion to compel arbitration is “not the functional equivalent of a pleading.” Albertson’s Holdings, LLC v. Kay, 514 S.W.3d 878, 885 (Tex. App.—Tyler 2017, no pet.). In any event, MSC’s opposition to the motion was sufficient to preserve its waiver argument.
Turning to the waiver question itself, MSC had to prove that, in the totality of the circumstances, TAC substantially invoked the judicial process and that this conduct was injurious to MSC. The mere fact of TAC’s one-year delay was insufficient to demonstrate waiver. There was also no dispute that TAC and Lara and Martinez knew about the arbitration provisions. However, when a party has unequivocal knowledge of an arbitration clause and neglects to use it, periods as short as 6 months have been determined as prejudicing the adverse party. Menger v. Menger, No. 01-19-00921-CV, 2021 WL 2654137, at *5 (Tex. App.—Houston [1st Dist.] June 29, 2021, no pet.) (mem. op.). TAC argued further that it needed a ruling on MSC’s motions for injunctive relief before it could move to compel arbitration, invoking § 171.086(a)(6), CPRC. But as the court pointed out, the statute only applied “to situations in which arbitration proceedings have not begun, allowing the parties to seek court orders necessary to preserve their rights until the arbitration begins, including orders to preserve evidence and any other orders needed to ‘permit the arbitration to be conducted in an orderly manner and to prevent improper interference or delay of the arbitration.’” Nothing in the statute required TAC to wait to move to compel arbitration until the trial court decided on MSC’s temporary injunction. The court thus concluded that TAC’s one-year delay weighed in favor of waiver.
TAC next argued that its status as the defendant weighed against waiver. But, as the court noted, TAC in its first responsive pleading filed a counterclaim against MSC and a third-party complaint against Sid Tool. Since these claims sought affirmative relief, the court could consider it to be a significant factor in finding that the party substantially invoked the judicial process. TAC also sought declaratory relief, which courts have held “is a significant factor in determining that a party has invoked the judicial process because a declaratory judgment is ‘designed’ to ‘put the rest the question of [the] rights between the parties’ in a judicial proceeding.’” TAC likewise requested a jury trial on their affirmative claims for relief and paid the jury fee, another “significant factor … in determining whether TAC acted in a manner that was inconsistent with their right to arbitrate.” And just because TAC didn’t file any dispositive motions did not bar the court from finding substantial invocation of the judicial process.
As to TAC’s participation in discovery and other pretrial proceedings, the court determined that TAC’s litigation proceedings addressed the merits, including discovery requested and produced for the temporary injunction hearing, not arbitrability or jurisdiction. More to the point, “[t]he MSC entities sought both monetary and permanent injunctive relief in their pleadings on their various causes of action; therefore, any discovery directed at their ‘probable right to the relief sought’ would necessarily relate to the merits of the parties’ dispute.” (citations omitted). Moreover, TAC sought discovery on its damages claim, including expert witness reports detailing MSC’s alleged financial losses. And it didn’t help that TAC stated in open court that it sought discovery “directly relating to the parties’ dispute, including information to support their counterclaim that the MSC entities were improperly using TAC Insumos’s trademark to their financial detriment,” nor that TAC requested that MSC produce thousands of pages of documents, interrogatories, several depositions, and expert witnesses. It also participated in several status hearings, signed to two Rule 11 agreements, and deposited funds in the court registry.
Finally, the court agreed with MSC that TAC’s delay in moving to compel arbitration until they lost the temporary injunction issue “were more consistent with a ‘late game tactical decision’ than a true intent to preserve the right to compel arbitration.’” Consequently, the court ruled that TAC “was in effect seeking a way to press the reset button to avoid the consequences of their choice to litigate.” The court went on to find that TAC’s delay prejudiced MSC by forcing to incur more than $800,000 in attorney’s fees seeking a temporary injunction, all of which could have been avoided by a prompt motion to compel. The court, moreover, could not determine whether the discovery produced would be useful in arbitration since the arbitration agreement did not specify “the type or nature of discovery allowed in the arbitration proceedings.” Besides that, the arbitration would be conducted in Mexico, so the court had no way of knowing whether discovery produced in a Texas proceedings would be useful in that forum, much less whether the CAM arbitrators would have allowed MSC’s temporary injunction to remain in place during the arbitration. In any event, the court didn’t think it was fair to pull the plug on litigation three months before the scheduled trial datel when discovery had been virtually completed.
TCJL Intern Satchel Williams researched and prepared the first draft of this article.
