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Financial Services Law Insights and Observations

5th Circuit finds company delay unfairly prejudiced plaintiff, reverses decision to compel arbitration

Courts Fifth Circuit Appellate Arbitration

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On November 28, the U.S. Court of Appeals for the 5th Circuit reversed a lower court decision to grant a technology analytics company’s motion to compel arbitration, finding that the company substantially invoked the judicial system prior to moving to compel arbitration, and the individual plaintiff was prejudiced by such actions. According to the opinion, in 2015, the plaintiff filed a complaint against the company alleging various violations of Illinois law relating to deceptive practices and unjust enrichment. In response, the company filed a motion to dismiss for failure to state a claim and, in the alternative, moved to transfer the case for forum non conveniens arguing that the plaintiff’s claims were subject to arbitration in Texas. After the case was transferred to Texas, the company filed a subsequent motion to dismiss and reply brief, both of which did not mention arbitration. In 2017, after receiving the plaintiff’s requests for production, the company filed with the district court its motion to compel arbitration. The district court granted the motion to compel, holding that while the company substantially invoked the judicial process, the plaintiff had only “suffered some prejudice” in the form of delay and delay alone is insufficient to deny arbitration.

On appeal, the 5th Circuit agreed that the company substantially invoked the judicial system, but determined the lower court erred when it found the plaintiff had not been prejudiced unfairly. As a result, the company waived its right to arbitrate. The 5th Circuit noted that after the case was transferred from Illinois to Texas, the company waited 13 months before moving to compel arbitration, in order to first obtain a dismissal from the district court. Acknowledging the damage to the plaintiff’s legal position and additional litigation expenses incurred because of this tactic, the appellate court stated, “[a] party cannot keep its right to demand arbitration in reserve indefinitely while it pursues a decision on the merits before the district court.”

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