Decisions Raise Bar on Waiver of Arbitration Agreements Under Texas Law

by Ogletree, Deakins, Nash, Smoak & Stewart, P.C.

While employers may enter into arbitration agreements with employees relatively easily, ensuring the enforcement of arbitration agreements can be a different matter. For this reason, employers are rightfully cautious to avoid taking any steps in litigation that a trial court might consider to be a waiver of their right to enforce an arbitration agreement with a current or former employee. Two recent decisions from the Fifth Circuit Court of Appeals and the Supreme Court of Texas serve as a reminder that under Texas law it is difficult for employers to waive arbitration agreements, even when an employer may have waited more than a year to compel arbitration.

In Richmont Holdings, Inc., et al. v. Superior Recharge Systems, L.L.C., No. 13-0907 (December 19, 2014), the Supreme Court of Texas evaluated whether a party to an arbitration agreement that had initiated a lawsuit had waived the right to enforce that arbitration agreement. Richmont Holdings had entered into an agreement to purchase assets from Superior Recharge Systems and Jon Blake. The asset purchase agreement contained a covenant not to compete and an arbitration clause. Superior and Blake subsequently sued Richmont in the district court in Denton County, Texas for fraud, breach of contract and a declaration, that the covenant not to compete contained in the asset purchase agreement was unenforceable. Richmont subsequently initiated a separate suit to enforce the covenant not to compete and to transfer venue from Denton County. In the first suit, Richmont Holdings had served requests for disclosures upon Superior Recharge Systems and Blake, had failed to respond to the discovery from Superior and Blake, and had been sanctioned $5,000 for that failure. No trial date had been set in either lawsuit, and none of these proceedings made any reference to the arbitration clause. Nineteen months after being sued, Richmont Holdings moved to compel arbitration. 

The state Court of Appeals found that Richmont Holdings had waived the arbitration agreement. The Supreme Court of Texas noted that a party waives an arbitration clause by substantially invoking the judicial process to the other party’s detriment or prejudice, but further observed that due to the strong presumption against waiver of arbitration, the burden to establish such waiver is a high one. In determining whether a waiver has occurred, and whether a party has substantially invoked the judicial process, a court must evaluate the totality of circumstances; key factors include (1) the reason for delay in moving to enforce an arbitration agreement, (2) the amount of discovery conducted by the movant, and (3) whether the movant sought disposition on the merits. The Supreme Court of Texas observed that merely filing a suit does not waive arbitration.  The court also observed that seeking a transfer of venue does not waive arbitration. Richmont Holdings had only engaged in minimal discovery and, in fact, had refused to answer discovery. While Richmont Holdings’s argument as to why it had waited 19 months to seek arbitration was not plausible, the Supreme Court of Texas noted that mere delay was not enough for waiver. The court concluded that the circumstances of the case as a whole did not constitute a substantial invocation of the judicial process.

In a case with similar issues, Pacheco v. PCM Construction Services, L.L.C., the Fifth Circuit Court of Appeals evaluated whether an employer’s delay in seeking arbitration and otherwise engaging in legal proceedings constituted a waiver of arbitration. On October 12, 2012, former employees of PCM Construction Services filed suit against PCM under the Fair Labor Standards Act (FLSA) seeking unpaid overtime compensation and other relief. PCM answered the complaint on November 2, 2012, but in the answer did not mention the existence of an arbitration provision applicable to the employees. On March 7, 2013, PCM filed a motion to dismiss claims against the individual defendants in the case. The plaintiffs amended their complaint on March 20, 2013, adding additional plaintiffs. On March 27, 2013, PCM filed an amended answer and also filed a second motion to dismiss on the same grounds as the first. On March 28, 2013, the plaintiffs moved for conditional class certification. On April 11, 2013, the parties filed a joint status report, but still did not raise the arbitration issue. On November 14, 2013, PCM filed a motion to compel arbitration. 

The trial court granted the motion to compel arbitration, noting that the previous motions filed by PCM had not been lengthy and were mostly defensive. The trial court also observed that the plaintiffs had not incurred fees that they would have otherwise not incurred in arbitration proceedings. 

On appeal, the Fifth Circuit observed that a party waives its right to arbitration by substantially invoking the judicial process to the detriment or prejudice of the other party. The Fifth Circuit recognized the strong presumption under Texas law against finding a waiver of arbitration and that the party claiming waiver has a heavy burden. The Fifth Circuit noted that the facts of the case did not reflect that PCM had substantially invoked the judicial process. In order to do so, the court reasoned, the party seeking arbitration must have taken acts in the lawsuit sufficient to demonstrate a desire to resolve the dispute through litigation rather than arbitration. The court held that a waiver had not occurred because PCM’s actions had been relatively limited. The only motions filed by PCM had been brief in length and confined to a single issue—whether two individual employees qualified as employers under the FLSA. Further, while the plaintiffs had served discovery, PCM had not responded and, importantly, had not propounded its own discovery requests prior to moving to compel arbitration—a fact the Fifth Circuit had considered relevant to the waiver issue in prior cases. The court concluded by noting that the limited scope of PCM’s actions were insufficient to overcome the strong presumption against finding a waiver of arbitration and held that PCM did not substantially invoke the judicial process.

Key Takeaways

These decisions remind employers that Texas law makes it difficult to waive the right to arbitrate and that employees will have a difficult time overcoming the strong presumption against waiver. As illustrated by these cases, even delays of a year, filing motions, and filing a lawsuit will not necessarily constitute a waiver. However, employers should not take the waiver issue lightly and should ensure that the right to have a lawsuit compelled to arbitration is asserted as soon as possible in a lawsuit. Having implemented an arbitration system with their employees, it would be a shame for employers to inadvertently take steps waiving arbitration.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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