Texas Court of Appeals Finds Arbitration Waiver and Refuses to Compel Arbitration

By Brett Goodman

The Court of Appeals of Texas in Dallas has denied an appeal seeking to overturn a trial court’s decision not to compel arbitration.

In Adams v. StaxxRing, Inc., No. 05-10-01142 (Tex. App.–Dallas July 7, 2011, no. pet. ) William B. Adams was appealing the decision in favor of Molly Langford and StaxxRing, Inc., a jewelry business equally owned by Adams and Langford. The first strike in any sort of litigation came when Langford sued Adams, claiming that Adams had usurped power from Langford in this equal partnership setting. Through the rest of 2009 and 2010, the litigation went back and forth between the two parties, starting with an answer and assertion of affirmative defenses, to discovery and motions. In mid-2010, the court heard Adams’ motion to compel arbitration and denied it on the bases that (1) there was no agreement to arbitrate the dispute before the court, (2) Adams waived any right he may have had to arbitrate the claims in this case by substantially invoking the judicial process ‘to the clear detriment and prejudice of the plaintiffs,’ and (3) the arbitration demanded by Adams would not provide StaxxRing and Langford with “an accessible and equivalent forum for them to redress their grievances.”

In this appeal, Adams asserted that the right to arbitration had not been waived on the two prongs that Adams had not “substantially invoked the judicial process and Langford and StaxxRing [had] not proven they [had] suffered prejudice.” To determine a substantial invoking of the judicial process had been undertaken, the court would have to consider a number of factors in concert. First, Adams did not deny that he had knowledge of the arbitration clause in StaxxRing’s bylaws. Adams had initiated discovery, and it seemed discovery had been completed because Adams moved to compel arbitration only after the discovery deadline had come and gone. Adams also sought temporary injunction relief and a temporary restraining order on the merits, brought third parties into litigation, filed a rule 12 motion, and initiated other independent proceedings. Taking all of these factors into consideration, the court determined the judicial process had substantially been invoked in the case.

Concerning prejudice, the court stated, “prejudice refers to the inherent unfairness in terms of delay, expense, or damage to a party’s legal position that occurs when the party’s opponent forces it to litigate an issue and later seeks to arbitrate the same issue.” Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 346 (5th Cir.2004). Unfairness did occur, the court ruled, in the trouble Langford and Staxxring were forced to undertake in the production of documents. This led to increased expense, unnecessary effort on their part, and a negative effect on their legal position in litigation.

The court concluded that the invocation of the judicial process combined with the evidence of prejudice demonstrated that Adams had waived the right to compel arbitration. Thus, the trial court’s decision to deny a compelling of arbitration was affirmed in the Court of Appeals.

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Brett Goodman is a summer intern at Karl Bayer, Dispute Resolution Expert. Brett is a J.D. candidate at The University of Texas School of Law. He holds degrees in Finance, Mathematics, and Spanish from Southern Methodist University.