Fifth Circuit Rules Plaintiff Waived Arbitration Right by Invoking the Judicial Process

The United States Court of Appeals for the Fifth Circuit has ruled a plaintiff waived his right to arbitration by substantially engaging in litigation.  In Sabatelli v. Baylor Scott & White Health, No. 19-50047 (5th Cir. Oct. 21, 2020), a Scott & White Clinic (“SWC”) employee, Sabatelli, filed a putative class action lawsuit in the Western District of Texas against the Baylor Scott & White Health System after he was asked to resign from his position as a radiologist following about two years of employment.  According to Sabatelli, SWC unlawfully discriminated against himself and similarly situated employees on the basis of age.

The terms of Sabatelli’s employment contract with SWC permitted the company to terminate him with 60 days’ notice if at least two-thirds of the board found him uncooperative or difficult to work with based on co-worker feedback.  The employment agreement also required that any disputes between the parties be resolved via arbitration.  Following numerous purported interpersonal conflicts and failed workplace counseling efforts, Sabatelli was asked to resign in lieu of termination.  Sabatelli resigned from SWC the following day.

Despite arguing Sabatelli’s claims were subject to arbitration, SWC did not file a motion to compel arbitral proceedings and instead engaged in significant discovery before pursuing a motion for summary judgment.  While SWC’s motion was pending and approximately 16 months after Sabatelli initially filed his lawsuit, the radiologist claimed for the first time that SWC breached the terms of the parties’ employment agreement.  After that, Sabatelli filed a motion to compel solely his breach of contract claim to arbitration.  In response, SWC asked the arbitrator to dismiss the proceeding because Sabatelli waived his right to arbitration by participating in the judicial process for more than one year.  Instead, the arbitrator stayed all proceedings until the company’s motion for summary judgment was decided by the federal court.

Next, the Western District of Texas granted SWC’s motion for summary judgment on Sabatelli’s discrimination claims.  SWC then argued Sabatelli waived arbitration with regard to his breach of contract claims due to the lengthy ongoing litigation in the case.  The federal court agreed and denied Sabatelli’s motion to compel arbitration.  According to the court, Sabatelli was not permitted to split his claims between litigation and arbitral proceedings.

On appeal, the Fifth Circuit first found the trial court did not commit error when it granted SWC’s motion for summary judgment on Sabatelli’s discrimination claims.  After that, the appellate court turned to what it called the “trickier part” of the lawsuit: “Having filed this lawsuit to pursue the discrimination claims, could Sabatelli later arbitrate his contract claims?”

After noting it is not unusual to have some claims litigated and others arbitrated in situations where not all claims are subject to arbitration, the Fifth Circuit stated that was not the situation in Sabatelli’s case.  The appellate court found all of Sabatelli’s claims were subject to arbitration and noted the radiologist did not contend otherwise.

The Fifth Circuit Court of Appeals then addressed SWC’s waiver argument.  The court said:

Waiver of arbitration by litigation conduct-as opposed to an express waiver-is not something we take lightly. Because the Federal Arbitration Act advances a “liberal federal policy” in favor of arbitration, there is a presumption against implied waiver. Moses H Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983); Miller Brewing Co. v. Ft. Worth Distrib. Co., 781 F.2d 494, 496-97 (5th Cir. 1986). The presumption, though, is not insurmountable. A party waives the right to arbitrate by “substantially invoke[ing] the judicial process” to the “detriment or prejudice” of the other side. Miller Brewing, 781 F.2d at 497.

Arbitration waiver is usually asserted against defendants who try out federal court before seeking to arbitrate. See) e.g.) Forby v. One Techs., 909 F.3d 780 (5th Cir. 2018); Mirant Corp., 613 F.3d at 584; Petroleum Pipe Americas Corp. v. Jindal Saw, Ltd., 575 F.3d 476 (5th Cir. 2009). That makes sense. It is unusual for the plaintiff who filed the court action to later want to pursue arbitration. Indeed, we appear to have only one case involving a waiver claim against a plaintiff who tried to arbitrate while the lawsuit she filed was still pending. Nicholas, 565 F.3d at 907. The impetus for the plaintiff’s change of heart in Nicholas was removal to federal court, so she was no longer in her desired forum. Id. at 906-07.

In this circumstance, when the plaintiff is the reason there is a lawsuit in the first place, the first requirement for implied waiver will generally be satisfied. “[S]hort of directly 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” than filing a lawsuit. Id. at 908 (citing Gulf Guar. Life Ins. Co. v. Connecticut General Life Ins. Co., 304 F.3d 476 484 (5th Cir. 2002)). As a general matter, then, Sabatelli substantially invoked the judicial process by filing this lawsuit (and then litigating it for 16 months before trying to arbitrate).

The twist is that Sabatelli did not pursue the breach-of-contract theory when he filed the suit. Waiver applies only if the litigated claim is the “specific” claim the party seeks to arbitrate. Republic Ins. Co. v. P AICO Receivables LLC, 383 F.3d 341, 344 (5th Cir. 2004) (citing Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324, 328 (5th Cir. 1999). So what is a claim in this context?

Next, the appellate court stated a “claim” is any allegation that stems from the “same nucleus of operative facts,” no matter the theory of recovery that is relied upon.  After that, the court found Sabatelli’s claims were all related to the same event and his request for arbitration resulted in prejudice to SWC by delaying resolution of the lawsuit.

Finally, the United States Court of Appeals for the Fifth Circuit held:

Just as we have held for defendants who test the waters of federal court litigation before trying to arbitrate, Sabatelli should not get a “second bite at the apple through arbitration” after he chose to litigate his termination in federal court. See Mirant, 613 F.3d at 590 (citations omitted).

Ultimately, the appellate court affirmed the judgment of the Western District of Texas.

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