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Fifth Circuit Holds That the Company in Class Action Waived Its Right to Arbitrate Because of Litigation Conduct 

From JDSupraJohn Lewis  discusses how a party may waive its right to compel arbitration if it substantially invokes the judicial process or acts in a way that causes prejudice to the other party. John writes:

The Appellate Analysis

Not unexpectedly, the appellate court found two requirements for waiver in its circuit – first, that a party “substantially invokes the judicial process,” and second, that the party causes “detriment or prejudice” to its opponent. Al Rushaid v. Nat’l Oilwell Varco, Inc., 757 F.3d 416, 421 (5th Cir. 2014).

Like the district court, the Fifth Circuit found One Technologies had substantially invoked the judicial process. It cited detailed evidence in support of its conclusion. The company “was fully aware of its right to compel arbitration when it filed its 12(b)(6) motion . . . .”  Indeed, the right to arbitrate was cited as the basis for transferring the case from Illinois to Texas. But once the case was in Texas, One Technologies did not seek to compel arbitration but “pursued and partially obtained a dismissal with prejudice of Forby’s claims.” Slip Op. at 4. So the panel, led by District Judge Alfred H. Bennett, concluded that the company’s “action of moving to dismiss . . . with no mention of compelling arbitration demonstrated a desire to resolve the dispute in litigation rather than arbitration.” Id.

The appellate panel parted company with the district court in its prejudice analysis. One area of disagreement involved the impact of delay in establishing prejudice. While delay in asserting arbitral rights alone may not result in waiver, “delay does bear on the question of prejudice, and may, along with other considerations, require a court to conclude waiver has occurred.” Nicholas v. KBR, Inc., 565 F.3d 904, 910 (5th Cir. 2009). Prejudice can be more easily established, according to the panel, if a party does not seek to arbitrate and “engages in activity inconsistent with the intent to arbitrate.” Citing Republic Ins. Co. v. PAICO Receivables, L.L.C., 383 F.3d 341, 346 (5th Cir. 2004).

The panel found that prejudice exists when a party “will have to re-litigate in the arbitration forum an issue already decided by the district court in its favor . . .” (emphasis added). Slip Op. at 7. Indeed, “[a] party does not get to learn that a district court is not receptive to its arguments and then be allowed ‘a second bite at the apple through arbitration.’” Citing Petroleum Pipe Ams. Corp. v. Jindal Saw, Ltd., 575 F.3d 476, 480 (5th Cir. 2009).

The company’s conduct allowed it “to check the district court’s temperature on the disclosure issue,” and it should not be allowed to move the case to another – perhaps more favorable – forum. Thus, the court found that “Forby’s legal position was damaged by . . . [the] delay in moving to compel arbitration.”

The opinion illustrates that judges can differ in applying the prejudice analysis used by the Fifth Circuit. Not all circuits use the same analysis to determine waiver as that circuit did. And while a showing of prejudice can be a useful benchmark in determining whether waiver has occurred, it does not eliminate all uncertainty.

Bottom Line

The Forby opinion contributes to our understanding of waiver in several respects. First, the passage of time in litigation – or delay in seeking arbitration – can matter, even where prejudice is the standard. Second, raising the right to arbitrate early on can help preserve that right, but a party must then act consistently with it. Third, filing motions that go to the merits of an opponent’s claim rather than a “technical pleading deficiency” can be evidence of prejudice. According to the Fifth Circuit panel, a party should not have to re-litigate before an arbitrator issues already won in court.

Source: Fifth Circuit Holds That the Company in Class Action Waived Its Right to Arbitrate Because of Litigation Conduct | BakerHostetler – JDSupra

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