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Litigation News

Litigation News | 2021

Arbitration Clause in Your Agreement? Use It or Lose it!

Susan Dent


  • State appellate court upholds ruling that a defendant’s right to arbitrate can be waived years into litigation for several reasons, including delay in exercising the right.
  • While seemingly harsh, the court explained the three factors that led to waiver: (1) the defendant’s knowledge of an arbitration agreement, (2) active participation in litigation, and (3) the timing in which to employ the arbitration clause.
Arbitration Clause in Your Agreement? Use It or Lose it!
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A right to arbitration can be waived when brought almost two years into litigation, according to one state appellate court. While seemingly harsh, the court explained that three significant factors led to waiver of the defendant’s right to arbitrate: (1) the defendant’s knowledge of an arbitration agreement between the parties from the outset of the case, (2) active participation in litigation, and (3) a decision to employ the arbitration clause only in the face of a post-mediation motion to compel discovery and a request for attorney fees by the plaintiff. ABA Litigation Section leaders agree that this case serves as an important reminder to litigators to use, or lose, their right to arbitration.

Two Years In: Litigation as Usual?

The conflict in Garcia v. Haralambos Beverage Company began when the plaintiff filed a complaint in November 2016 alleging a myriad of wage and hour claims against his former employer, Haralambos Beverage Company. In January 2017, Garcia and another plaintiff filed an amended class action complaint. The defendant asserted several defenses in its answer, including one that plaintiffs signed arbitration agreements. The trial court stayed the action in June 2017 to “facilitate case management,” which prevented the defendant from filing motions regarding jurisdiction or discovery. Nevertheless, all parties proceeded as if litigation was advancing, including by engaging in class-wide mediation and discovery.

Multiple Factors Lead to Denial of Motion to Compel Arbitration

In November 2018, almost two years after the class action suit was filed, the defendant moved to compel arbitration and requested a stay. To support its admittedly dilatory request, the defendant primarily argued that it did not find copies of the plaintiffs’ signed agreements until June 2018. During a hearing on the motion, however, the defendant admitted that when the suit was filed, it possessed documents “confirming its policy of requiring employees to sign arbitration agreements and ‘the checklist[s] that showed what each employee had received, including the arbitration agreement.’”

Subsequently, the trial court denied the defendant’s motion, concluding that the defendant knew about its arbitration policy when litigation began, yet the defendant “continued to act in a manner that was inconsistent with the right to arbitrate” and that the plaintiffs were prejudiced by the defendant’s delay after litigating their class action suit.

The appellate court affirmed the trial court’s decision, explaining that a court could consider several factors when examining waiver. The court stated that the three factors most relevant to this matter were that the “defendant’s actions [were] inconsistent with the right to arbitrate, its delay before seeking a stay, and the prejudice to plaintiffs.”

Focusing first on delay, the appellate court rejected the defendant’s argument that it was reasonable for it to locate the plaintiffs’ arbitration agreements before filing its motion because, at the beginning of the lawsuit, the defendant was aware of its arbitration policy and had documents showing that the plaintiffs had received a copy of the arbitration agreement.

Second, the appellate court noted that the defendant engaged in conduct inconsistent with an intent to arbitrate, including conducting class-wide mediation and discovery for two years before moving to compel arbitration. The court concluded that “[s]uch acts support an inference that. . . defendant here raised arbitration as a belated strategy, if not as a strategy of last resort.”

Finally, the appeals court stated that substantial evidence supported the trial court’s conclusion that the defendant’s two-year delay “impaired plaintiffs’ ability to realize the benefits and efficiencies of arbitration”, and affirmed the trial court’s denial of the motion to compel arbitration.

Practitioners Should Become Familiar with Waiver Rules         

Litigation Section leaders agree that if arbitration is a contractually-based option in litigation, a moving party must move to compel as soon as possible to preserve that option. “This case serves as a cautionary reminder that employers must not delay in asserting the right to arbitration and cannot substantially engage in the litigation process without waiving that right,” counsels Janell Ahnert, Birmingham, AL, member of the Section’s The Woman Advocate Committee. “Here, although it seems the delay by defendant should be excused because it had not previously located the executed arbitration agreements, several other factors led the court to determine that the delay prejudiced the plaintiffs,” Ahnert adds.

Importantly, mere acknowledgment or reservation of such an option cannot serve as a last resort in response to unfavorable discovery or other outcomes which may arise during litigation. “Litigators should familiarize themselves with the rules governing waivers in their specific jurisdiction, and ensure that they, as well as their clients, are governing themselves accordingly,” cautions David Gevertz, Atlanta, GA, cochair of the Section’s Employment & Labor Relations Law Committee. “If an executed arbitration agreement cannot be located, litigators should tread carefully as to their conduct to ensure it does not tip the scales in favor of a waiver argument,” Gevertz advises.