:: Fifth Circuit Holds That ERISA Plaintiff Waived Arbitration Option

Geraldine Nicholas appeals the district court’s denial of her motion to compel arbitration of her contract dispute with KBR, Inc., the successor corporation of her deceased husband’s former employer, M.W. Kellogg Co. Nicholas contends that the district court improperly ruled that she waived her right to arbitrate her dispute with KBR. For the reasons set forth below, we conclude that the district court did not err when it found that Nicholas substantially invoked the judicial process to the prejudice of KBR.

Nicholas v. KBR, Inc., 565 F.3d 904 (5th Cir. Tex. Apr. 15, 2009)

This is an interesting case out of the Fifth Circuit showing how arbitration rights may be forfeited by invocation of the judicial process. The plaintiff began her suit in state court, but the case was removed.

Mr. Nicholas’s wife, Geraldine Nicholas, filed this lawsuit in Texas state court on January 17, 2007, alleging that KBR breached the Agreement with her husband by failing to pay his life insurance benefits. Although Nicholas did not attach the Agreement to her original petition, she described in her petition a severance agreement executed by Kellogg and her husband in “December of 1998.” She also alleged that the agreement she described contained Kellogg’s guarantees of additional “benefits,” “salary,” and “payments,” and Mr. Nicholas’s release of Kellogg from any potential liability. . . .

KBR removed the case to federal court on February 23, 2007. Thereafter, Nicholas filed a motion to remand, or, in the alternative, to amend the pleadings. On April 18, 2007, the district court denied Nicholas’s motion to remand, but granted her motion for leave to amend. In denying the motion to remand, the district court found that section 502(a)(1)(B) of ERISA, 29 U.S.C. § 1132(a)(1)(B) (2006), completely preempted Nicholas’s state law claims because they sought to recover benefits allegedly due her deceased husband under KBR’s benefits plan.

Importantly,

Nicholas’s petition . . . neither mentioned the Agreement’s arbitration clause nor gave any other indication that she wanted to arbitrate her claims.

The plaintiff filed an amended complaint. The amended complaint reiterated the allegations concerning KBR’s breach of the Agreement. Again, however, the complaint failed to mention the Agreement’s arbitration clause or otherwise indicate that she wanted to arbitrate her claims.

When the plaintiff later sought to compel arbitration, some 10 months after the state court action was filed, the defendaant argued that she waived her right to arbitration by substantially invoking the judicial process to its prejudice.

The defendant prevailed on this objection and the Fifth Circuit affirmed.

Essential Issues

The dispute boiled down to two questions:

(1) did the plaintiff substantially invoke the judicial process, and if, so

(2) was the defendant prejudiced thereby?

The Court held for the defendant on both issues.

# 1 Invocation of Judicial Process

In the words of the Court:

We conclude that the act of a plaintiff filing suit without asserting an arbitration clause constitutes substantial invocation of the judicial process, unless an exception applies.

The Court noted rhetorically that “other than 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.”

# 2 Prejudice To Defendant

Though delay in asserting the right to arbitrate will not alone result in waiver, such delay “does bear on the question of prejudice, and may, along with other considerations, require a court to conclude that waiver has occurred.” Thus, the Court stated:

We have recognized that, “‘where a party fails to demand arbitration . . ., and, in the meantime engages in pretrial activity inconsistent with an intent to arbitrate, the party later opposing a motion to compel arbitration may more easily show that its position has been compromised, i.e., prejudiced.’” Id. at 347 (quoting Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1161 (5th Cir. 1986)).

Nicholas’s delay in asserting her right to arbitrate was substantial and wholly unexplained in the district court. She judicially pursued her claims for over ten months without mentioning the Agreement’s arbitration clause or her desire for arbitration. In this relatively straightforward case, that delay virtually guaranteed that the district court would not rule on Nicholas’s motion to compel until the parties had completed discovery and KBR had begun preparing its motion for summary judgment.

Note: ERISA being the unfavorable forum that it can be for plaintiffs, arbitration possibilities may offer advantages for claimants. Thus any options along these lines may be worth evaluating before filing suit. Yet:

The right to arbitrate a dispute, like all contract rights, is subject to waiver. Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986). Although waiver of arbitration is a disfavored finding, “[w]aiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party.” Id. at 496-97. A party generally invokes the judicial process by initially pursuing litigation of claims then reversing course and attempting to arbitrate those claims. See Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d 476, 484 (5th Cir. 2002). But “waiver can also result from some overt act in Court that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration.” Id. (internal quotations omitted). One of the primary goals of arbitration is to avoid the expense of litigation. Price v. Drexel Burnham Lambert, Inc., 791 F.2d 1156, 1158 (5th Cir. 1986).

Exceptions – This observation is worth noting:

That is not to say there can be no exceptions. There are lawsuits that can be filed that would not be inconsistent with seeking arbitration. For example, a plaintiff might file suit solely to obtain a threshold declaration as to whether a valid arbitration agreement existed. See Republic Ins. Co. v. Paico Receivables LLC, 383 F.3d 341, 345 (5th Cir. 2004) (determining that party’s decision to file suit to determine whether a valid arbitration clause existed did not indicate a disinclination to arbitrate because filing suit for this purpose is not inconsistent with the right to arbitrate). A plaintiff might also have to file suit to obtain injunctive relief pending arbitration. See Joseph, 249 Fed. Appx. at 991 (refusing to conclude that filing suit in that case indicated a disinclination to arbitrate because plaintiff filed suit solely to obtain injunctive relief pending arbitration and both state law and the parties’ contract permitted filing suit for this limited purpose). Other situations may arise justifying an exception; the list here should not be seen as exhaustive.

Seventh Circuit Distinguished – The waiver problem is more acute in the 7th:

We have not, however, gone as far as the Seventh Circuit on this issue, and we do not do so here, as we continue to require a showing of prejudice, even if there is a substantial invocation of the process. See Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995) (holding that a party’s “election to [*9] proceed before a nonarbitral tribunal for the resolution of a contractual dispute is a presumptive waiver of the right to arbitrate.”).

Counterclaims Distinguished – The plaintiff argued that that a plaintiff who files suit without mentioning an arbitration clause is the same as a defendant who files a counterclaim without mentioning an arbitration clause. Not so, said the Court:

However, the two are not necessarily the same. A plaintiff chooses the judicial forum, a defendant is then compelled to respond. Under Federal Rule of Civil Procedure 13(a)(1)(A), a counterclaim is compulsory if it, among other things, “arises out of the transaction or occurrence that is the subject matter of the opposing party’s claim.” A defendant, then, is subject to the potential risk of losing his claim if he fails to assert it as a counterclaim in response to a plaintiff’s lawsuit. Thus, the two situations are not analogous.