In a case that has been kicking around in the Texas court system since 2013, the Fort Worth Court of Appeals has for the second time allowed a class action to proceed against a roofing company that allegedly held itself out to be an unlicensed public adjuster. The case presented the court of appeals with hitherto unresolved issues in Texas law.
The facts in Lon Smith & Assdociates, Inc., and A-1 Systems, Inc. d/b/a Lon Smith Roofing and Construction v. Joe Key and Stacci Key (No. 02-21-00227-CV) are procedurally complex but can be boiled down as follows. In 2011 a major hailstorm damages the Keys’ home. They contracted with Smith to install a new roof for a total price of $33,769.50. In the contract, however, Smith obtained authorization to deal directly with the insurance company regarding the price of repairs in “the best interest” of the homeowners and agreed to accept the final price determined between the carrier and Smith as the final contract price. That price ended up being $18,926.69. In 2012 Smith sued Keys in justice court for the nearly $15,000 balance and received a default judgment. Prior to that, in 2013, Keys sued Smith for a declaratory judgment, alleging violations the public adjuster statute (§ 4102.051, Insurance Code), and asked the trial court to void the contract. Keys also asserted DTPA violations, fraud, and other theories. Keys obtained class certification of their declaratory judgment and DTPA claims. Smith appealed the class certification order (Smith 1). In 2018 the court of appeals affirmed the order with respect to the declaratory judgment claim and DTPA claim asserting a violation of Chapter 541, Insurance Code. The court reversed the portion of the order certifying the Keys’ DTPA unconscionability claim. SCOTX denied review, and the case went back to the trial court.
Smith 2 arose from a dispute at the trial court over the costs of notifying putative members of the class, which number nearly 37,000 homeowners who had roofing contracts with Smith. Early in 2020 Keys filed a motion to shift class notice costs to Smith, arguing that the court of appeals had already affirmed the class certification. In June the trial court signed an order directing Smith to bear the costs. Smith responded by filing a motion to amend the class definition to exclude from the class homeowners who had signed a contract with an arbitration clause (the Keys had one of those) and to compel arbitration under the FAA. This would shave about 22,000 homeowners off the list and save a substantial amount of Smith’s costs. The trial court denied Smith’s motion, and Smith took an interlocutory appeal.
In an opinion by Justice Wallach, the court of appeals held that it had no jurisdiction over an interlocutory appeal of an order declining to amend the class definition. No statute authorizes such an appeal, and SCOTX precedent has determined that in general modifications of certification orders are not appealable. Keys argued that the second issue in the appeal, the motion to compel arbitration, should likewise be overruled on the basis that it would a “disguised motion to decertify the class” and could not be reviewed by interlocutory appeal. The court of appeals rejected this argument on the basis that both the FAA and Texas Arbitration Act explicitly provide that a denial of a motion to compel arbitration is subject to an interlocutory appeal. The question then became whether the trial court abused its discretion in denying Smith’s motion to compel.
The court of appeals held that it did not. Finding that Keys’ claims fell within the arbitration provision, the court turned to whether Smith had expressly or impliedly waived its right to compel arbitration with Keys by its litigation conduct (SCOTX citations omitted). A party makes an express waiver “when it ‘affirmatively indicates that it wishes to resolve the case in a judicial forum’” (citations omitted). In this case, Smith stated in the 2015 hearing on Keys’ motion for class certification that it was not enforcing the arbitration provision in Keys’ contract and that Keys’ claims “are no longer subject to compelled arbitration.” Moreover, Smith sued Keys in justice court to collect the balance of the contract price, and when Keys succeeded in having a default judgment set aside, Smith appealed to county court. That suit has been stayed since then, so Smith continues to seek judicial relief against Key. Based on these facts, the court of appeals ruled that Smith had expressly waived its right to arbitrate.
Even so, the court went further to hold that Smith impliedly waived that right by its litigation conduct. To establish implied waiver by “substantial invocation of the judicial process,” a partymust show that (1) the party seeking to compel arbitration substantially invoked the judicial process in a manner inconsistent with their claimed right to compel arbitration, and (2) the party suffered actual precedent because of the inconsistent conduct” (citations omitted). This test must be applied on a case-by-case basis, and the court of appeals listed a number of factors that courts have applied in the analysis. Here the court found that Smith impliedly waived arbitration because (1) it knew about the arbitration provision in its own contract, (2) it chose to invoke the judicial process when it sued the Keys in justice court, (3) it pursued an appeal when Keys succeeded in setting aside the default judgment, (4) it did not seek to compel arbitration when Keys filed the dec action in 2013 and filed three summary judgment motions seeking to determine the merits before class certification, (5) it stated in open court that it was not enforcing the arbitration provision against Keys, (6) it appealed class certification to the court of appeals and SCOTX, and (7) it waited until the trial court denied its motion to exclude from the class the 22,000 or so homeowners who had arbitration clauses in their contracts.
As Justice Wallach put it, “Smith had clearly adopted a judicial forum strategy until they lost the appeal of the class certification. At that point, what had been a judicial forum strategy that had been clearly articulated to the court, reversed course, and became an arbitration strategy not only as to the Keys’ individual claims but also as to the class claims. . . . Smith’s strategy represents a classic situation of ‘inherent unfairness’ by way of a party attempting to ‘have it both ways by switching between litigation and arbitration to its own advantage’” (citations omitted).
With respect to Smith’s appeal of the trial court’s motion denying arbitration for the remainder of the class members, the court confronted an issue with no clear precedent in Texas caselaw. Justice Wallach thus referred to federal case law construing the Rule 23, FRCP (class actions), which Texas law deems as persuasive authority on our parallel Rule 42, TRCP. Based on this analysis, the court concluded that putative class members only become class-plaintiffs when the class has been certified and notification given to those members and only if the opt-out period has expired. Prior to certification, a lawsuit is treated as any other. Potential class members have no interest in the litigation, and no attorney-client relationship arises until certification, notice, and expiration of the opt-out period. Thus, there was “no justiciable controversy between Smith and the class members at the time the trial court denied Smith’s Motion to Compel Arbitration,” and the trial court had no jurisdiction to compel arbitration with the class members.
Consequently, the court of appeals did not reach the issue of whether Smith could eventually invoke the arbitration clauses in contracts with putative class members once the prerequisites to becoming a class-plaintiff were met. We could see this case once again before the court of appeals if, having lost this appeal, Smith decides to fight it out. In any event, this case is a fascinating study in a party painting itself into an expensive corner for lack of a comprehensive trial strategy. In an effort to collect $15,000 Smith has now paid who knows how much in attorney’s fees and costs in litigation that has now lasted nearly a decade, been twice to the court of appeals, and once to SCOTX. If it had simply invoked the arbitration clause at the get-go, the arbitrator would have decided Keys’ claim to void the contract as a gateway issue. Perhaps, though, Smith took the risk because its contract with Keys is quite possibly invalid and void under the public adjuster statute. But if so, why put yourself in front of a judge to begin with?