An ongoing legal battle between smartphone manufacturer HTC Corporation and networking and telecommunications company Ericsson offers a case study in the waiver of arbitration rights in the patent context. In subsequent motions to compel arbitration, the Eastern District of Texas first held that Ericsson did not waive its right to arbitrate certain claims filed against the company but later held HTC waived its right to arbitrate Ericsson’s counterclaims.
The dispute between the two companies arose from three agreements to license standard-essential patents owned by Ericsson that relate to wireless communication. All three of the licensing agreements contained arbitration provisions. HTC first sued Ericsson in April 2017 in the Western District of Washington, alleging that the terms of the licensing agreements were not fair, reasonable, and non-discriminatory (FRAND). HTC also filed a past royalty claim, arguing it was due the royalties it paid to Ericsson in violation of FRAND principles. The lawsuit was subsequently transferred to the Eastern District of Texas for lack of personal jurisdiction.
In HTC Corporation v. Telefonaktiebolaget LM Ericsson, No. 6:18-CV-00243-JRG (E.D. Tex., November 7, 2018), Ericsson moved to compel arbitration of HTC’s past royalty and antitrust claims and HTC contended that Ericsson waived its right to arbitrate the claims. In responding to Ericsson’s motion to compel arbitration, the court first outlined the strict requirements for finding that arbitration rights are waived:
“[A] party waives its right to arbitrate if it (1) substantially invokes the judicial process and (2) thereby causes detriment or prejudice to the other party.” Janvey v. Alguire, 847 F.3d 231, 243 (5th Cir. 2017) (internal citation omitted). This analysis is highly fact-dependent, in which any doubts should result in a finding of no waiver. Al-Rushaid v. Nat’l Oilwell Varco, Inc., 757 F.3d 416, 421–22 (5th Cir. 2014) (“[I]n light of the federal policy favoring arbitration, ‘[t]here is a strong presumption against finding a waiver of arbitration.’”) (internal citation omitted). As such, the party asserting waiver “bears a heavy burden of proof.” Petroleum Pipe Americas Corp. v. Jindal Saw, Ltd., 575 F.3d 476, 480 (5th Cir. 2009) (internal citation omitted).
The court then addressed whether Ericsson had substantially invoked the judicial process through its various interactions with the district court litigation prior to seeking arbitration:
[O]nce Ericsson realized that HTC was pursuing claims for past refunds in both arbitration and in court, it immediately filed the instant motion. Ericsson’s delay in seeking arbitration, therefore, was entirely reasonable given HTC’s conduct. HTC contends that it never told Ericsson that it would drop the past refund claims in court. However, the Court was not presented with any communications regarding the same. Even if HTC’s general statement that it planned to file for arbitration could be interpreted as having no effect on its intent to litigate its past refund claims here, this Court must resolve all doubts in favor of Ericsson in light of the strong presumption against waiver. Accordingly, the Court is not persuaded that Ericsson “substantially invoked the judicial process” with an intent to litigate, rather than arbitrate, HTC’s past refund claims.
Further, the Eastern District of Texas reasoned that HTC did not show it had been materially prejudiced:
Prejudice refers to the harm incurred to a party “when the party’s opponent forces it to litigate an issue and later seeks to arbitrate the same issue.” Petroleum Pipe, 575 F.3d at 480 (emphasis added). Such is not the case here. Once HTC added its past refund claims, Ericsson immediately moved for arbitration. It would be unfair to infer prejudice based on discovery conducted during the pendency of Ericsson’s motion to dismiss.
Thus, the district court concluded that Ericsson did not waive its right to arbitrate HTC’s back royalty and antitrust claims. Ultimately, the court granted Ericsson’s motion to compel arbitration of those claims.
In a subsequent order, No. 6:18-CV-00243-JRG (E.D. Tex., January 22, 2019), the Eastern District of Texas addressed HTC’s motion to compel arbitration on two of Ericsson’s counterclaims. Applying the same standards for determining when a party waives its right to arbitration, the district court held that HTC had committed waiver by substantially invoking the judicial process. The court reasoned:
There is no reasonable doubt that HTC has invoked the judicial process as to Ericsson’s counterclaims. At least as early as its June 2018 FRAND contentions, Ericsson clearly disclosed to HTC its claims that HTC acted in bad faith by suing Ericsson before the expiration of the 2014 GPLA’s standstill provision, thereby tying Ericsson’s hands until the term of that standstill expired. (Dkt. No. 414–2 ¶ 18.) The Fifth Circuit has made it clear that “[a] party waives arbitration by seeking a decision on the merits before attempting to arbitrate.” Forby v. One Techs., L.P., 909 F.3d 780, 784 (5th Cir. 2018); see also Republic, 383 F.3d at 345 (5th Cir. 2004) (waiver found where party “answered … counterclaims; conducted full-fledged discovery, including four depositions; amended its complaint; … filed the required pretrial materials with the district” as well as “two motions to compel discovery, a motion for summary judgment, and a motion in limine” all before its motion to compel arbitration). Here, the parties have completed fact and expert discovery on all claims that have not already been sent to arbitration, including discovery on Ericsson’s counterclaims. (Dkt. No. 226.) HTC has also affirmatively moved for dismissal of and summary judgment on Ericsson’s counterclaims. (Dkt. Nos. 105, 238.) At no point since the filing of its complaint through the course of discovery did HTC demand arbitration. Instead, HTC waited to move for arbitration until after the completion of all pretrial proceedings and only weeks before trial.
These two district court orders provide illustrative guidance regarding when a court will determine that a party’s right to arbitration has been waived. Although no bright-line rules emerge, both the delay and the amount of resources spent prior to filing a demand for arbitration are important factors to consider.