For the first time, the Texas Supreme Court has vacated an arbitration award on the basis that a plaintiff substantially invoked the litigation process and thereby waived the right to arbitration.

Texas law has permitted parties to a dispute to choose arbitration rather than litigation since 1846. As made clear in Cull, however, a party that abuses that choice by substantial invocation of the litigation process resulting in prejudice to the other party will waive its right to arbitrate. Texas law continues to recognize a strong presumption against waiver of arbitration; however, the presumption is not irrebuttable.

It is becoming a disturbing trend -- plaintiffs are trying to use internal policies and procedures against a company defendant. This is disturbing for several reasons. First, the policies and procedures benefit both plaintiffs and the company itself. If companies become reluctant to implement policies and procedures, plaintiffs, whether it be employees and/or customers, may get worse customer service and/or company performance if companies do not try to have policies and procedures to encourage their employees to do better.

Second, policies and procedures should not be the gauge by which companies are judged as to whether or not they have violated the law. Indeed, one of the reasons companies have policies and procedures is to use them as a tool to stay in compliance with various laws. If a law calls for a certain compliance level and a policy and procedure requires a much higher compliance level, companies would want to implement policies and procedures to try to keep an employee from violating a specific law. However, more and more, plaintiffs are trying to raise the standard of care by arguing that policies and procedures mandate the appropriate standard of care.

The manifest disregard of the law standard for vacating an arbitration award has evolved over the last 50 years since Wilko v. Swan, 346 U.S. 427 (1953). Although there has been a split among the circuits, the Fifth Circuit has authorized vacatur if an arbitrator manifestly disregards clearly applicable law. The new decision of the Supreme Court in Hall St. Assocs. v. Mattel, Inc., 128 S.Ct. 1396, 1400 (2008) raises the question of whether manifest disregard will continue to be a viable ground for vacatur. In Hall Street after the parties failed to settle a pending case in federal court through mediation, the parties agreed, with the court's permission, to submit the claims to binding arbitration. The parties crafted an arbitration agreement that provided for expanded judicial review ". . .where the arbitrator's findings of facts are not supported by substantial evidence, or where the arbitrator's conclusions of law are erroneous." At the conclusion of the arbitration proceeding, the arbitrator decided for Mattel. Hall Street filed a motion to vacate the order, claiming legal error. The District Court, reviewing the award under the expanded review provisions in the arbitration agreement, vacated the award and remanded the case to arbitration. Upon remand, the arbitrator decided for Hall Street. Each party sought to have the award modified. The District Court made a minor modification to the award. The case was appealed to the Ninth Circuit and ultimately the Supreme Court granted certiorari to determine if the grounds for vacatur in the Federal Arbitration Act could be supplemented by private agreement. Writing for the six-justice majority, Justice Souter held that the vacatur grounds listed in the Federal Arbitration Act are exclusive and cannot be expanded by private contract.