Prejudice Necessary for Waiver of Arbitration in Texas Court?

Recently the United States Supreme Court held a party does not have to show prejudice to establish that an opposing party has waived its right to arbitrate. Morgan v Sundance, Inc. No. 21-328 (May 23, 2022). (See blog post dated May 31, 2022). While this holding is applicable to cases in federal court, the question remains whether state courts will follow the lead of the United States Supreme Court when faced with the same issue under state law.

In 2008 the Texas Supreme Court held that prejudice is a necessary requirement of arbitration waiver by engaging in litigation in court. Perry Homes v Cull, 258, S.W.3d 580, 594 (Tex. 2008). The court observed at that time ten of the twelve federal circuit courts required a showing of prejudice continuing, “We have noted before the importance of keeping federal and state arbitration law consistent.”

On March 24, 2022, two months before the United States Supreme Court decision in Morgan, the Dallas Court of Appeals cited Perry Homes as precedent and stated, “… federal law and Texas law are the same with respect to determining whether a party has waived the right to arbitration” Kamalakannan Sivanadam v Themesoft, Inc., No DC-18-02970, Tex. App. (Dallas), March 24, 2022.

Of course, if Texas law were to conform with federal law on this issue, then a showing of prejudice would no longer be necessary to establish a waiver of the right to arbitration when litigation is initiated.

It should be noted however that Texas waiver of arbitration law has two elements. Perry and Themesoft hold a party waives the right to compel arbitration if (1) the party substantially invokes the judicial process and (2) the opposing party suffers detriment of prejudice as a result. Assuming the prejudice prong no longer exists, the substantial invocation prong nevertheless requires the court to determine whether there has been substantial invocation of the litigation process considering the totality of the circumstances including:

Whether the party seeking to compel arbitration is a plaintiff or a defendant in the lawsuit

When the party knew of the arbitration clause

How long the party waited before seeking arbitration and any reasons for the delay

How much discovery has been conducted, who initiated it, whether it related to the merits rather than arbitration or standing and how much of it would be unavailable or useful in arbitration

Whether the party sought judgment on the merits

Whether the party asserted affirmative claims for relief in court

The amount of time and expense the parties have expended on litigation

Whether the discovery conducted would be unavailable or useful in arbitration

Whether judicial activity would be duplicated in arbitration, and

When the case was to be tried.