Prejudice occurs when you gain an advantage over the other party during the litigation process such that removing the case to arbitration would cause the other party to suffer a disadvantage.
However, it is hard to demonstrate that someone has waived the right to arbitration since there is a strong presumption in favor of it when an arbitration clause is present in an agreement. Id. at 590. The court will usually order the case to arbitration when it is not clear if the opposing party has suffered prejudice. Id. at 593.
Under Texas law, a court will consider who is making the request for arbitration, how much time has passed since the litigation was initiated, the mental state of the party requesting arbitration, and what type of litigation has occurred. We will first discuss the Texas standard before reviewing federal considerations.
Who is Making the Request for Arbitration?
To determine whether the judicial process has been invoked to the point of prejudicing the opposing party, the court will consider many different factors. Id. at 590-91. One consideration is if the person requesting arbitration is a defendant or plaintiff. Id. at 591. If the plaintiff moved for arbitration, the court may be less likely to grant it since the plaintiff invoked the judicial process by filling the case with the court.
For example, there was a case where a family filed suit against Comerica Securities for allegedly selling the family’s stock without authorization. Grumhaus v. Comerica Sec., Inc., 223 F.3d 648, 649 (7th Cir. 2000). The family requested arbitration after the state court dismissed their complaint. Id. at 651. However, the Seventh Circuit United States Court of Appeals found the family had waived their right to arbitrate because they filed the case in court rather than initiating an arbitration proceeding. Id. at 653.
How Much Time Has Gone By?
Another consideration is the length of time the party requesting arbitration waited before making the request. Id. However, delay alone does not establish waiver. In re Vesta Ins. Group, Inc., 192 S.W.3d 759, 763-64 (Tex. 2006). For example, in one particular case, a two-year delay before requesting arbitration did not take away the parties’ right to arbitrate. Id.
What is the Mental State of the Party Requesting Arbitration?
Although not common, it is possible that one party to a case may not have been aware of an arbitration clause within their agreement. In such situations, the court will consider when the party making the request for arbitration became aware of the arbitration clause. Perry Homes, 258 S.W.3d at 591.
In one particular case, a company argued it had not waived its right to arbitrate by engaging in the litigation process since it was a successor to the original contractor containing the arbitration clause and, as a result, had not been aware of the option to arbitrate. Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 205 (4th Cir. 2004). The court granted it leniency due to this unique situation and held the company still could exercise its arbitration rights. Id. at 205-06.
Another consideration is if the party requesting arbitration opposed it earlier in the case. Perry Homes, 258 S.W.3d at 591. If the party opposed arbitration earlier in the case, the court may see its request as more evidence that the party invoked the judicial litigation system. Id. at 600. The reason for this is because switching positions part of the way through the litigation process can appear to be an attempt to gain the system and prejudice the opposing party.
Just How Much Litigation Has Occurred?
Another consideration is how much and what kind of litigation procedures have happened prior to requesting arbitration. For example, if the pretrial activity related to the actual claims made in the case or if it was expensive and took up a lot of time, the court may view this as evidence against the request for arbitration. Id. The court will also consider if the party opposing arbitration was the primary cause for incurring litigation expenses. In re Vesta Ins. Group, Inc., 192 S.W.3d at 763. If the party requesting arbitration was not the main reason for incurring costs, the court probably will not be concerned over the expenses.
Yet another consideration is whether the request for arbitration appears more like a “late-game tactical decision” than preserving the right to arbitrate. Tuscan Builders, LP v. 1437 SH6 L.L.C., 438 S.W.3d 717, 722 (Tex. App.—Houston [1st Dist.] 2014, pet. denied). This means that you should not proceed with litigation under the assumption that you can later switch to arbitration if it looks like it will provide a better outcome.
If the trial date is approaching, you should keep in mind that it may become harder to enforce arbitration. The judicial system does not look favorably on a request for arbitration on the eve of the trial after full discovery has occurred. In re Vesta Ins. Group, Inc., 192 S.W.3d at 764.
However, some litigation activity will not waive your right to arbitration. Small v. Specialty Contractors, Inc., 310 S.W.3d 639, 646 (Tex. App.—Dallas 2010, no pet.). For example, sending and responding to the first set of discoveries is usually acceptable. Id. In fact, one case states that even a substantial invocation of the judicial process does not rule out arbitration as long as the party opposing arbitration did not suffer prejudice. In re Bruce Terminix Co., 988 S.W.2d 702, 704 (Tex. 1998).
The Federal Arbitration Act states that the court should defer to arbitration if there is an agreement to do so and if the party requesting it is not “in default in proceeding with such arbitration.” 9 U.S.C. § 3. To determine if the moving party is in default, a federal court will typically consider the same factors listed above that a Texas court will examine.
Under federal law, there is also a strong presumption in favor of arbitration. For example, the Sixth Circuit described the high standard that must be met to waive arbitration by stating that a party “waives arbitration if it acts in a manner completely inconsistent with any reliance on an arbitration agreement or delays asserting arbitration to such an extent that the opposing party incurred actual prejudice.” Shy v. Navistar International Corp, 781 F. 3d 820 (6th Cir. 2015), 827-28.
Although the considered factors are the same, the Fifth Circuit and the Texas Supreme Court came to different conclusions in two similar cases. The cases dealt with class action lawsuits initiated against payday loan companies. The Fifth Circuit concluded that arbitration had been waived by the companies because the companies initiated criminal charges against the plaintiffs. Vine v. PLS Fin. Servs., Inc., 689 Fed. Appx. 800, 805-06 (5th Cir. 2017). On the other hand, the Texas Supreme Court held that a payday loan company did not waive the right to arbitrate by initiating criminal proceedings. Henry v. Cash Biz, LP, 551 S.W.3d 111, 118-19 (Tex. 2018). While the factors examined to determine if a party waived the right to arbitrate are the same, the final conclusions of the federal and state courts can vary.
The law surrounding when someone waives the right to arbitrate is complex. While the presumption is in favor of arbitration, a combination of certain factors can cause you to waive your right. It is clear however that the sooner you request arbitration, the better your chances will be of enforcing it. Please do not hesitate to contact us with questions you have about the arbitration process and how to enforce your rights.