Opinion

IN THE SUPREME COURT OF TEXAS

444444444444

NO . 12-0739

444444444444

AMERICO LIFE, INC., AMERICO FINANCIAL LIFE AND ANNUITY

INSURANCE COMPANY, GREAT SOUTHERN LIFE INSURANCE COMPANY,

THE OHIO STATE LIFE INSURANCE COMPANY, AND NATIONAL

FARMERS UNION LIFE INSURANCE COMPANY,

PETITIONERS,

v.

ROBERT L. MYER AND STRIDER MARKETING GROUP, INC.,

RESPONDENTS

4444444444444444444444444444444444444444444444444444

ON PETITION FOR REVIEW FROM THE

COURT OF APPEALS FOR THE FIFTH DISTRICT OF TEXAS

4444444444444444444444444444444444444444444444444444

Argued November 6, 2013

JUSTICE BROWN delivered the opinion of the Court, in which CHIEF JUSTICE HECHT , JUSTICE

GREEN , JUSTICE GUZMAN and JUSTICE DEVINE joined.

JUSTICE JOHNSON filed a dissenting opinion, in which JUSTICE WILLETT , JUSTICE LEHRMANN

and JUSTICE BOYD joined.

This is an arbitration case. The petitioners contend the court of appeals erroneously imposed

a requirement for the selection of arbitrators beyond those the parties agreed upon in their arbitration

agreement. For the reasons explained below, we reverse.

I

In 1998, Robert Myer and Strider Marketing Group, Inc. (collectively Myer) sold a collection

of insurance companies to the petitioners (collectively Americo). The parties agreed on an up-front

payment to Myer for the businesses and executed a “trailer agreement” to provide for additional

payments based on the businesses’ future performance. The trailer agreement included an arbitration

clause with six paragraphs of terms agreed upon by the parties, including:

3.3 Arbitration. In the event of any dispute arising after the date of this Agreement

among the parties hereto with reference to any transaction contemplated by this

Agreement the same shall be referred to three arbitrators. Americo shall appoint one

arbitrator and Myer shall appoint one arbitrator and such two arbitrators to select the

third . . . . Each arbitrator shall be a knowledgeable, independent businessperson or

professional.

...

The arbitration proceedings shall be conducted in accordance with the commercial

arbitration rules of the American Arbitration Association, except that Americo and

Myer each shall be entitled to take discovery as provided under Federal Rules of

Civil Procedure Nos. 28 through 36 during a period of 90 days after the final

arbitrator is appointed and the arbitrators shall have the power to issue subpoenas,

compel discovery, award sanctions and grant injunctive relief. The arbitrators shall

be entitled to retain a lawyer to advise them as to legal matters, but such lawyer shall

have none of the relationships to Americo or Myer (or any of their Affiliates) that are

proscribed above for arbitrators.

The agreement combines terms expressly chosen by the parties with the incorporation by reference

of American Arbitration Association rules to govern the arbitration proceeding. When the parties

executed their agreement, AAA rules did not require arbitrator-impartiality, but by the time Americo

invoked arbitration in 2005 after disputes arose concerning the additional payments to Myer, the

AAA rules by default required that “[a]ny arbitrator shall be impartial and independent . . . and shall

2

be subject to disqualification for . . . partiality or lack of independence . . . .” AAA Commercial

Arbitration Rules R-17(a)(I) (2003).

Myer alleged that Americo’s first-choice arbitrator, Ernest Figari, Jr., was partial toward

Americo, and successfully moved the AAA to disqualify him. Americo objected to Figari’s

disqualification but named another arbitrator, about whom Myer likewise complained, and whom

the AAA likewise struck. Myer did not object to Americo’s third appointee, who ultimately served

on the panel. The arbitration proceeding resulted in a unanimous award in Myer’s favor amounting

to just over $26 million in payments due, breach-of-contract damages, and attorneys’ fees.

When Myer moved to confirm the award in the trial court, Americo renewed its objection

to Figari’s disqualification. Americo argued that in disqualifying Figari for partiality, the AAA failed

to follow the arbitrator-selection process specified in the parties’ agreement, which provided only

that “each arbitrator shall be a knowledgeable, independent businessperson or professional.” The trial

court determined the arbitration agreement was ambiguous but ultimately agreed with Americo’s

reading and vacated the award. Myer appealed, and the court of appeals reversed on the ground that

Americo had waived its objection to Figari’s removal. We reversed that decision. Americo Life, Inc.

v. Myer, 356 S.W.3d 496 (Tex. 2011) (per curiam). On remand, the court of appeals again reversed,

this time on the merits, holding the arbitration agreement was unambiguous and the arbitration panel

was properly appointed under both the terms of the agreement and the AAA rules. Nearly ten years

after arbitration proceedings commenced between the parties, their case again comes before this

Court.

3

II

Arbitrators derive their power from the parties’ agreement to submit to arbitration. City of

Pasadena v. Smith, 292 S.W.3d 14, 20 (Tex. 2009). They have no independent source of jurisdiction

apart from the parties’ consent. I.S. Joseph Co. v. Mich. Sugar Co., 803 F.2d 396, 399 (8th Cir.

1986). Accordingly, arbitrators must be selected pursuant to the method specified in the parties’

agreement. Brook v. Peak Int’l, Ltd., 294 F.3d 668, 672–73 (5th Cir. 2002). An arbitration panel

selected contrary to the contract-specified method lacks jurisdiction over the dispute. Accordingly,

courts “do not hesitate to vacate an award when an arbitrator is not selected according to the

contract-specified method.” Bulko v. Morgan Stanley DW, Inc., 450 F.3d 622, 625 (5th Cir. 2006).

So we look to the arbitration agreement to determine what the parties specified concerning the

arbitrator-selection process.

A written contract must be construed to give effect to the parties’ intent expressed in the text

as understood in light of the facts and circumstances surrounding the contract’s execution, subject

to the limitations of the parol-evidence rule. Houston Exploration Co. v. Wellington Underwriting

Agencies, Ltd., 352 S.W.3d 462, 469 (Tex. 2011). Facts and circumstances that may be considered

include the commercial or other setting in which the contract was negotiated and other objectively

determinable factors that give context to the parties’ transaction. See id. (citing 11 RICHARD A.

LORD , WILLISTON ON CONTRACTS § 32.7 (4th ed. 1999)). When interpreting an integrated writing,

the parol-evidence rule precludes considering evidence that would render a contract ambiguous when

the document, on its face, is capable of a definite legal meaning. Sun Oil Co. (Del.) v. Madeley, 626

S.W.2d 726, 731–32 (Tex. 1981). The rule does not, however, prohibit considering surrounding facts

4

and circumstances that inform the contract text and render it capable of only one meaning. See id.;

Wellington, 352 S.W.3d at 469.

III

A

To determine the parties’ intent, we examine the express language of their agreement. Italian

Cowboy Partners, Ltd. v. Prudential Ins. Co. of Am., 341 S.W.3d 323, 333 (Tex. 2011). In their

agreement, the parties directly addressed the issue of arbitrator qualifications and agreed on a short

list of requirements, namely that each arbitrator must be a “knowledgeable, independent

businessperson or professional.” Americo argues the court of appeals improperly added “impartial”

to the parties’ list of qualifications. Myer counters that because “independent” and “impartial” are

essentially synonymous, Americo was always obligated to name an impartial arbitrator.

We disagree that “independent” may be read interchangeably with “impartial.” Various

dictionary definitions might support some overlap between the two words, but when applied in the

arbitration context, they carry distinct meanings. The parties in this case agreed to “tripartite

arbitration,” through which each party would directly appoint an arbitrator, and the two party-

appointed arbitrators would agree on a third panelist. This method was commonplace when the

parties executed their agreement in 1998. See Burlington N. R.R. Co. v. TUCO Inc., 960 S.W.2d 629,

630 & n.2 (Tex. 1997) (describing the method as “often-used”). In a tripartite arbitration, each party-

appointed arbitrator ordinarily advocates for the appointing party, and only the third arbitrator is

considered neutral. See, e.g., Winfrey v. Simmons Food, Inc., 495 F.3d 549, 552 (8th Cir. 2007)

(noting the “industry custom that party arbitrators are frequently not required or expected to be

5

neutral for ruling on disputes”); Lozano v. Md. Cas. Co., 850 F.2d 1470, 1472 (11th Cir. 1988) (per

curiam) (“An arbitrator appointed by a party is a partisan only one step removed from the

controversy and need not be impartial.”); Metro. Prop. and Cas. Ins. Co. v. J.C. Penney Cas. Ins.

Co., 780 F. Supp. 885, 892 (D. Conn. 1991) (In tripartite arbitration, “each party’s arbitrator ‘is not

individually expected to be neutral.’”) (quoting Soc’y for Good Will to Retarded Children v. Carey,

466 F.Supp. 702, 708 (S.D.N.Y. 1979)); Matter of Astoria Med. Grp. (Health Ins. Plan of Greater

N.Y.), 182 N.E.2d 85, 87 (N.Y. 1962) (“[T]here has grown a common acceptance of the fact that the

party-designated arbitrators are not and cannot be ‘neutral,’ at least in the sense that the third

arbitrator or a judge is.”).

In fact, the arbitration agreement in Burlington, like the agreement in this case, “did not

specify whether the two arbitrators that the parties unilaterally selected . . . would be neutral or

would represent the interests of the party appointing them.” Burlington, 960 S.W.2d at 630. But in

Burlington, unlike this case, there was “no dispute . . . that the parties intended and understood that

the party arbitrators would be aligned with, act as advocates for, and ultimately side with the

appointing party.” Id.

The AAA rules in place when the agreement was executed likewise reflect the prevalence

of this practice. At that time, the rules provided that “[u]nless the parties agree otherwise, an

arbitrator selected unilaterally by one party is a party-appointed arbitrator and not subject to

disqualification pursuant to Section 19.” AAA Commercial Arbitration § 12 (1996). Section 19

contained procedures to challenge arbitrators for partiality. See id., § 19. Accordingly, the AAA rules

6

presumed party-appointed arbitrators were non-neutral, and the parties would have to “agree

otherwise” to rebut this presumption.

The only indication the parties sought to “agree otherwise” is their requirement that party-

appointed arbitrators be “independent.” Americo argues that the parties chose the word

“independent” not to require impartiality, but to proscribe arbitrators employed by or otherwise under

the control of one of the parties. Americo’s argument is certainly plausible; the practice of appointing

arbitrators who are somehow formally associated with the party appointing them is not unheard of.

See, e.g., Astoria, 182 N.E.2d at 86 (party appointed “one of the incorporators of [the company] and

its president from 1950 to 1957” who was at the time “a member of its board of directors and one

of its paid consultants”); Hooters of Am., Inc. v. Phillips, 173 F.3d 933, 939 (4th Cir. 1999) (“Under

the [terms of the arbitration agreement], Hooters is free to devise lists of partial arbitrators who have

existing relationships, financial or familial, with Hooters and its management.”). Indeed, to prevent

this practice, some arbitration agreements expressly prohibit it. See, e.g., Burlington, 960 S.W.2d

at 630 (“While [the arbitration agreements] prohibit the parties from selecting their own employees

as arbitrators, [they] do not specify whether the two arbitrators that the parties unilaterally selected

. . . would be neutral or would represent the interests of the party appointing them.”).

Additional agreement terms lend support to Americo’s interpretation. The agreement

provides that arbitrators “shall be entitled to retain a lawyer to advise them as to legal matters, but

such lawyer shall have none of the relationships to Americo or Myer (or any of their Affiliates) that

are proscribed above for arbitrators.” The only term that can be fairly read as a proscription of a

“relationship” between a party and its chosen arbitrator is the requirement that all arbitrators be

7

“independent” of the party appointing them. But it does not follow that an “independent” arbitrator

must also be impartial; indeed, an independent arbitrator could be partial or impartial. However, if

we follow Myer’s suggestion that “independent” is synonymous with “impartial,” it becomes unclear

what “relationship” the agreement is attempting to proscribe. Impartiality is a state of mind, but

“independent” necessarily refers to a relationship—the subject is free from someone or something.

The industry norm for tripartite arbitrators when the parties executed their agreement was that

party-appointed arbitrators were advocates, and the AAA rules in place at that time presumed such

arbitrators would not be impartial unless the parties specifically agreed otherwise. Given the

pervasiveness of the practice, and the clear AAA presumption the parties had to rebut, we believe

the parties would have done more than require its arbitrators to be “independent” if they wished them

to be impartial. “Independent” and “impartial” are not interchangeable in this context, and therefore

we conclude the parties did not intend to require impartiality of party-appointed arbitrators.

B

Having concluded the terms of the agreement do not require impartial party-appointed

arbitrators, we turn to the effect of the incorporated-by-reference AAA rules on arbitrator

qualifications. There is no dispute the AAA rules would govern matters on which the agreement is

silent. The question is whether AAA rules on arbitrator qualifications can, as the court of appeals

concluded, supplement terms agreed on by the parties that specifically speak to the same point.

The court of appeals reasoned that the rules and the agreement “can be read together and

harmonized to avoid any irreconcilable conflict.” Myer v. Americo Life, Inc., 371 S.W.3d 537, 543

(Tex. App.—Dallas 2012). In other words, because “impartial” could be added without negating any

8

expressly chosen qualifications, it was proper to do so to effectuate all the agreement’s provisions.

But this cannot be the end of our inquiry, or the specifically chosen terms of any agreement would

be hopelessly open-ended whenever outside rules are incorporated by reference.

When an arbitration agreement incorporates by reference outside rules, “the specific

provisions in the arbitration agreement take precedence and the arbitration rules are incorporated

only to the extent that they do not conflict with the express provisions of the arbitration agreement.”

Szuts v. Dean Witter Reynolds, Inc., 931 F.2d 830, 832 (11th Cir. 1991). The Federal Arbitration Act,

which the parties agree governs their agreement, requires that if an agreement provides “a method

of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed.”

9 U.S.C. § 5. Similarly, the AAA rules in effect when the parties executed their agreement, as well

as when arbitration was invoked, both provide that “[i]f the agreement of the parties names an

arbitrator or specifies a method of appointing an arbitrator, that designation or method shall be

followed.” AAA Commercial Arbitration Rules § 14 (1996), R-12 (2003).

Any attempt to harmonize the AAA impartiality rule with the parties’ expressly chosen

arbitrator qualifications misses the point. We do not construe “conflict” between an agreement and

incorporated rules so narrowly as to find it exists only if the rule contradicts the agreement. A

conflict can exist when an agreement and incorporated rules speak to the same point. Even if both

can be followed without contradiction, they conflict because the parties have already addressed the

matter and are not in need of gap-filling from the AAA rules. When the agreement and incorporated

rules speak to the same point, the agreement’s voice is the only to be heard.

9

Here, the parties chose a short list of arbitrator qualifications, and in doing so we must

assume they spoke comprehensively. The parties chose “knowledgeable” and “independent” but not

“impartial,” and we think they meant not only what they said but also what they did not say. See CKB

& Assocs. v. Moore McCormack Petroleum, Inc., 734 S.W.2d 653, 655 (Tex. 1987) (expressio unius

est exclusio alterius—the naming of one thing excludes another). And though we can concede the

parties embraced some uncertainty by adopting AAA rules that were subject to change, we cannot

conceive that they agreed to be bound by rules that would alter the express terms of their agreement.

Nor can we imagine they took the trouble to expressly agree on some terms if their decision to

incorporate AAA rules would leave those terms open to alteration. The AAA impartiality rule

conflicts with the parties’ agreement because the parties spoke on the matter and did not choose

impartiality. When such a conflict arises, the agreement controls. Szuts, 931 F.2d at 832.

***

Because the AAA disqualified Americo’s first-choice arbitrator for partiality, the arbitration

panel was formed contrary to the express terms of the arbitration agreement. The panel, therefore,

exceeded its authority when it resolved the parties’ dispute. See City of Pasadena, 292 S.W.3d at 20;

I.S. Joseph Co., 803 F.2d at 399. Because the arbitrators exceeded their authority, the arbitration

award must be vacated. See 9 U.S.C. § 10(a); Bulko, 450 F.3d at 625. Accordingly, we reverse the

court of appeals’ judgment and reinstate the trial court’s order vacating the arbitration award.

___________________________________

Jeffrey V. Brown

Justice

OPINION DELIVERED: June 20, 2014

10