The Fifth Circuit did yesterday something it does seldom — it affirmed rejection of a motion to compel arbitration. Nicholas v. KBR Inc., No. 08-20140 (5th Cir. Apr. 15, 2009).
The decision turned on whether the party seeking arbitration waived the right to get it. The Fifth Circuit agreed with the district court that she did.
The court noted the unusual circumstance that the plaintiff wanted arbitration:
In the vast majority of cases involving the question of waiver, it is the party being sued that belatedly seeks arbitration. Here, in contrast, it is the plaintiff, who, despite filing suit and pursuing her claims in court for more than ten months, now seeks to compel arbitration.
Id., slip op. at 5. The court concluded "that the act of a plaintiff filing suit without asserting an arbitration clause constitutes substantial invocation of the judicial process, unless an exception applies. Indeed, short of directly saying so in open court, it is difficult to see how a party could more clearly 'evince[ ] a desire to resolve [a] . . . dispute through litigation rather than arbitration,' Gulf Guar. [Life Ins. Co. v. Conn. Gen. Life Ins. Co.], 304 F.3d [476,] 484 [(5th Cir. 2002)], than by filing a lawsuit going to the merits of an otherwise arbitrable dispute." Id. at 6.
"[T]he legal standard for waiver is the same regardless of which party is the party alleged to have waived arbitration. Differences between the two sides arise from the voluntariness and timing of their actions, not the legal standard." Id.
As for the requirement that the party opposing arbitration must demonstrate "prejudice", the court cited evidence that KBR's "litigation activities were significant in the context of this dispute", which involved "limited . . . and relatively straightforward . . . denial-of-benefits claims." Id. at 10. The court also pointed to the plaintiff's unsuccessful litigation of a legal issue (whether the Employee Income Retirement Security Act applied) and deposition of a third part witness (whose deposition an arbitrator might not have allowed or had the authority to require).
Blawgletter agrees that the difference in the roles of plaintiffs and defendants in litigation justifies the asymmetrical result that plaintiffs more easily satisfy the "substantial invocation of the judicial process" prong of the waiver test. We feel less confident about the prejudice piece.
Courts say that litigation expense, by itself, can't qualify as "legal" prejudice. But that principle neutralizes the one advantage plaintiffs generally have in a prejudice analysis — their relative inability to afford litigation costs.
And, by making the prejudice question pivot on whether the arbitration-opposing party would lose a "legal" right or advantage by having to go to arbitration, the analysis again tends to favor defendants. Courts seem to view plaintiffs' rights as boiling down to the right to ultimate affirmative relief, but they also think that defendants would "lose" rights simply by virtue of foregoing the benefit of a court's pre-trial rulings that went their way. Because plaintiffs still may have a shot at winning in arbitration, their losses (from having to arbitrate after defendants engaged in merely tactical invocation of the judicial process) appear to weigh less. But they don't.