The Fifth Circuit Court of Appeals has held that, barring very limited exceptions, a plaintiff instituting suit substantially invokes the judicial process in a manner that waives the right to arbitrate his or her complaint upon the defendant’s showing of prejudice.

In Nicholas v. KBR Inc., No. 08-20140, 2009 WL 998974 (5th Cir. Apr 15, 2009), Nicholas’s husband was employed by KBR. After he developed mesothelioma, Nicholas’s husband entered into a severance agreement with KBR that granted full benefits for his lifetime. As part of the severance agreement, he also consented to arbitrate all claims in relation to his employment and its severance with KBR.

In January 2007, after her husband’s death, Nicholas brought suit against KBR, alleging that it failed to pay promised life insurance benefits. The complaint recounted the terms of the severance agreement, but did not mention the arbitration agreement or otherwise demand arbitration. The parties proceeded with ten months of litigation preparation, including amended filings, motions for removal and remand, discovery demands, and depositions. In November 2007, Nicholas finally raised the arbitration agreement and moved to compel arbitration of the dispute. KBR opposed, alleging waiver from prejudicial litigation conduct. The district court denied Nicholas’s motion.

The Court first noted that the defendant is the party that normally waives the right to arbitrate by belatedly demanding arbitration. While it declined to apply different standards based on which party allegedly waived the right to arbitrate, it did note that the timing and voluntariness of a plaintiff’s decision to file suit instead of seeking arbitration represented more of a repudiation of arbitration through that one act than if the defendant had merely answered a complaint without asserting the right to arbitrate. Therefore, 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."

The Court found no such exception in Nicholas’s case. The Court opined that a party seeking an injunction or declaratory relief in anticipation of ultimately arbitrating the dispute may fall within such an exception, but found that Nicholas’s only reason to file suit in the instant case was to litigate her entire dispute with KBR. Under those circumstances, the Court found substantial invocation of the judicial process.

The Court then turned to the second element of the waiver analysis, looking for prejudice to KBR from Nicholas’s litigation conduct. According to the Court, a delay of ten months in asserting the right to arbitrate may not always constitute per se prejudice to the non-moving party, but Nicholas provided no justification as to why she caused KBR to respond to filing and incur great expense in that ten month period. The Court also noted that Nicholas was able to obtain a third-party deposition that likely would not have been allowed in arbitration. Accordingly, the Court found substantial prejudice to KBR.

Finding both elements of waiver satisfied, the Court affirmed the district court’s denial of Nicholas’s motion to compel, and remanded the matter for further proceedings.

Nicholas clearly demonstrates the dangers to parties of engaging in litigation conduct for significant periods without asserting the right to arbitrate. It also announces a waiver rule for moving plaintiffs that recognizes an inherent indication of waiver in plaintiffs’ conduct without adopting a per se rule that the institution of suit by a plaintiff always constitutes substantial invocation of the judicial process. Cf. Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995) (electing litigation constitutes per se waiver of arbitration right).