Fifth Circuit Holds Prior Waiver of Right to Arbitrate State Law Claims Does Not Waive Right to Compel Arbitration of Newly Asserted Federal Claims

In protracted litigation springing from the sale of “free” credit reports that “were not really free,” the Fifth Circuit Court of Appeals held that a party’s waiver of its right to arbitrate state law claims did not result in a waiver of its right to compel arbitration of newly asserted federal law claims. In a purported class action, the plaintiff originally asserted several claims under Illinois law against One Technologies, L.P. One Tech removed to federal court and filed a motion to dismiss. After that motion was partially denied, One Tech moved to compel arbitration, which was granted by the district court but reversed on appeal, with the Fifth Circuit holding that filing of the motion to dismiss waived the right to arbitrate the state law claims.

On remand, the plaintiff filed an amended complaint asserting, for the first time, claims under the Credit Repair Organizations Act, a federal consumer protection statute that regulates the practices of such organizations. One Tech moved to compel arbitration, arguing in part that it “could not possibly have waived its right to arbitrate” the new claims because they were not raised until after the previous waiver occurred through the filing of the motion to dismiss. The district court denied the motion, but the Fifth Circuit reversed again on appeal.

In so holding, the Fifth Circuit stressed that waiver of arbitral rights is claim-specific. A party waives arbitration by “substantially invoking the judicial process to the detriment or prejudice of the other party.” For waiver purposes, “a party only invokes the judicial process to the extent it litigates a specific claim it subsequently seeks to arbitrate.” One Tech could not have waived its right to arbitrate the CROA claims at issue because they had not even been asserted by the plaintiff when One Tech previously moved to dismiss the state law claims. Because One Tech moved to compel arbitration of the newly asserted federal law claims without first waiving its right to do so, the Fifth Circuit reversed and remanded.

Forby v. One Technologies, L.P., No. 20-10088 (5th Cir. Sept. 14, 2021).