Denying a motion to compel arbitration of a breach of contract claim, a Texas federal court held that a party waived its right to arbitrate by substantially invoking the judicial process, which prejudiced the opposing party.

In Nicholas v. M.W. Kellogg Co., No. H-07-0657, 2008 WL 379660 (S.D. Tex. Feb. 12, 2008), Nicholas worked for M.W. Kellogg. He developed a terminal form of lung cancer resulting from asbestos exposure. In 1998, Nicholas and M.W. Kellogg signed a severance agreement whereby Nicholas agreed to release M.W. Kellogg from any claims provided the company continued to provide him with health, disability, and other insurance benefits.

Nicholas died in 2006. Later, Mrs. Nicholas, his wife, sued M.W. Kellogg in state court for breach of contract alleging it did not provide the life insurance benefits to which her husband was entitled. M.W. Kellogg removed the case to federal court. After the Court rejected Mrs. Nicholas' attempt to remand the case to state court, it granted leave to amend her complaint to assert causes of action under ERISA. Mrs. Nicholas later moved to compel arbitration under the agreement between her deceased husband and M.W. Kellogg. M.W. Kellogg opposed the motion, arguing Mrs. Nicholas waived her right to arbitrate by substantially invoking the judicial process.

The Court held that Mrs. Nicholas waived her right to arbitrate by substantially invoking the judicial process, which ultimately prejudiced M.W. Kellogg. Although federal arbitration law imposes a high bar before a court may conclude that a party waived its right to arbitrate, a party meets that threshold when it acts inconsistently with its right to arbitrate and the conduct prejudices the opposing party.

The Court found Mrs. Nicholas substantially invoked the judicial process because she filed suit with no mention of her intent to arbitrate. Further, she litigated the issue of whether the claim should be resolved in state or federal court and what claims she would assert in federal court. Finally, she participated in discovery for ten months and even went so far to depose a third party witness after moving to compel arbitration.

Additionally, the Court concluded that M.W. Kellogg suffered prejudice from Mrs. Nicholas' actions because it had to expend money litigating the question of federal removal jurisdiction and responding to discovery initiated by Mrs. Nicholas. Moreover, the discovery Mrs. Nicholas requested would not have been available in arbitration. Finally, ten months elapsed from when Mrs. Nicholas filed suit until she moved to compel arbitration. Based on the time expended and costs incurred by M.W. Kellogg, the Court concluded it suffered prejudice.