Corporate Counsel Daily, Employer denied motion to compel arbitration; substantially invoked litigative process, (Jun 25, 2025)

By Ronald Miller, J.D.

The appeals court considered the totality of the circumstances in determining whether a party has waived its right to arbitrate.

Because an employer substantially invoked the litigative process in a collective action brought a server at a restaurant, the Fifth Circuit found that it had waived its right to arbitrate. The appeals court considered the totality of the circumstances in determining whether a party has waived its right to arbitrate, evaluating the employer’s litigative acts alongside their statement that they were not considering arbitration. The employer did not assert an arbitration defense in its answer, expressly stated it would not seek arbitration, and subsequently engaged in typical litigative processes. These acts were intentionally taken, and, together, constituted abandonment of the right to arbitrate (Garcia v. Fuentes Restaurant Management Services Inc., No. 24-10699 (5th Cir. Jun. 24, 2025)).

The employee worked as a server for approximately seven months at the two restaurant locations operated by the employer. In July 2023, she filed this putative collective action against three entities involved in the ownership and operation of the restaurants, as well as one of the restaurant’s original co-founders.

Mediation. The employer’s answer to the complaint listed 31 affirmative defenses but did not mention arbitration. The court asked, “whether the parties are considering mediation or arbitration to resolve this litigation and a statement of when alternative dispute resolution would be most effective.” The parties responded that they were “not considering arbitration to resolve this litigation and Defendants are not aware of any arbitration agreements.” Instead, they had agreed to mediate the matter in November 2023.

Meanwhile, the parties engaged in formal discovery. As part of this discovery, the employer produced an unsigned arbitration agreement and a signed acknowledgement form. These documents received no immediate attention.

Motion to compel arbitration. Mediation occurred on December 6, 2023, at which time the employer first mentioned its desire to compel arbitration. Shortly following the mediation, which was unsuccessful, the employer moved to compel the employee to arbitration pursuant to the unsigned arbitration agreement.

The matter was referred to a magistrate judge who recommended that the motion be denied, reasoning that the employer engaged in several overt acts demonstrating a desire to resolve the arbitrable dispute through litigation. Because the magistrate found that the employer had waived its right to arbitrate, it did not consider whether a valid arbitration agreement existed.

The district court overruled the employer’s objections and accepted the magistrate’s findings and recommendations as its own. The employer timely appealed.

Waiver of right to arbitration. As an initial matter, the Fifth Circuit addressed changes in the law governing arbitration waiver following the Supreme Court’s decision in Morgan v. Sundance, Inc., 596 U.S. 411, 419 (2022), which held that the arbitration-favoring policy of the FAA “does not authorize federal courts to invent special, arbitration-preferring procedural rules.” Therefore, the relevant question is whether “an ordinary procedural rule... would counsel against enforcement of an arbitration contract.”

The appeals court next considered whether the employer waived its right to arbitrate. Accepting the Supreme Court’s sanctioned definition to determine whether the right to arbitrate was waived, the Fifth Circuit asked whether the party “knowingly relinquish[ed] the right to arbitrate by acting inconsistently with that right.”

Overt acts. On appeal, the employee argued that the employer engaged in several overt acts that evinced a desire to resolve the dispute through litigation. Specifically, by: (1) “filing an answer;” (2) “defending this litigation for almost five months;” (3) “participating in discovery;” (4) “attending mediation;” and (5) “expressly representing to the Court in the parties’ Joint Report that [the Restaurant Defendants] did not intend to pursue arbitration of Garcia’s claims.”

The Fifth Circuit applied a fact-intensive inquiry to the district court’s determination of the motion to compel arbitration. The appeals court considered the totality of the circumstances in determining whether a party has waived its right to arbitrate, evaluating the employer’s litigative acts alongside their statement that they were not considering arbitration and their failure to preserve the defense in their answer.

Here, the parties stated in their joint report that they were “not considering arbitration to resolve this litigation,” and the employer specifically noted that it was “not aware of any arbitration agreements.” This statement is an “overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration.” After stating that it was not considering arbitration, the employer took several steps confirming that intended course of action. It participated in discovery, mediation and remained in court for three months. Moreover, before this all, it filed an answer that failed to preserve an arbitration defense.

As an initial matter, the appeals court rejected the employer’s contention that the joint report should not weigh against it. Here, the parties stated that they were “not considering arbitration to resolve this litigation,” and the employer specifically noted that it was “not aware of any arbitration agreements.” This statement is an “overt act in court that evinces a desire to resolve the arbitrable dispute through litigation rather than arbitration.”

Discovery. Generally, participation in discovery does not weigh heavily in favor of waiver. Here, the parties exchanged one set each of interrogatories, requests for production, and responses, similar to “the minimal discovery” that the appeals court has previously considered insufficient to waive arbitration. But discovery took place after the employer informed the court of its intent not to arbitrate. Participation in litigative activity pursuant to a scheduling order after disclaiming arbitration certainly constitutes an overt act evincing a desire to litigate.

Mediation. The same can be said of mediation. While mediation may not typically indicate a willingness to litigate, some facts suggested that alternative dispute resolution was judicially motivated. Here, the parties elected to mediate because the judge was a proponent of early mediation. But the record also showed that statements by the parties supported mediation in lieu of arbitration.

While the mere act of mediating may not, by itself, suggest an inclination to litigate over arbitrate, when the act is taken: (1) in accordance with a judge’s wishes; and (2) instead of possible arbitration, the appeals court did not view the act as merely neutral. Especially so where, as here, the act was accompanied by an unambiguous statement that the parties are not seeking arbitration.

Answer. The appeals court found further support for waiver in the employer’s answer. Answering a complaint does not typically suggest that a party has substantially invoked the judicial process. But the employer’s failure to mention an arbitration agreement—and failure to preserve that defense among the 31 that they asserted—corroborated their later statement that they had no intent to arbitrate.

Delay in moving to compel arbitration. The employer moved to compel arbitration less than three weeks after discovering the agreement and five months after the start of litigation. But context controls, and the employer litigated for three months after declaring their intent not to arbitrate.

It did not assert an arbitration defense in its answer, expressly stated it would not seek arbitration, and subsequently engaged in typical litigative processes. These acts were intentionally taken, and, together, constituted abandonment of the right to arbitrate.

Accordingly, the Fifth Circuit affirmed the district court ruling that the employer had waived its right to arbitrate.

The case is No. 24-10699.

Judge: Douglas, D.

Attorneys: Drew Herrmann (Burnett Plaza) for Dayana Garcia. Alicia Voltmer (Greenberg Traurig) for Fuentes Restaurant Management Services Inc.

Companies: Fuentes Restaurant Management Services Inc.

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