Court Makes It Easier to Waive Arbitration

Until recently, California courts did not find that a party had waived arbitration by participating in litigation unless that participation harmed the opposing party. However, in Quach v. California Commerce Club, Inc., the California Supreme Court held that parties will no longer need to demonstrate prejudice to claim an adversary waived its contractual right to compel arbitration. ABA Litigation Section leaders agree with this decision. They also provide insight on how practitioners can mitigate the increased risk of waiver.

Lower Courts Split on Whether Plaintiff Waived Arbitration

In Quach, the plaintiff filed suit against his employer after being terminated, alleging age discrimination, retaliation, and harassment. The defendant provided the plaintiff with a copy of his signature page from the form arbitration agreement before the suit was filed. Still, the defendant did not file a motion to compel arbitration. Instead, they participated in the litigation by answering the complaint, making a jury demand, engaging in discovery, and taking a full-day deposition of the plaintiff. When they moved to compel arbitration 13 months later, the trial court denied the motion, finding their conduct waived arbitration. The California Court of Appeal reversed the decision, reasoning that the defendant’s conduct had not prejudiced the plaintiff.

High Court Holds Prejudice Not Necessary

The California Supreme Court reversed again. It overturned a two-decade old state precedent that required prejudice to find a party waived arbitration by litigating a claim. It reasoned that the state’s precedent relied on federal law. And it noted that federal law had recently changed since the U.S. Supreme Court held in Morgan v. Sundance that federal law does not require prejudice to establish waiver of the right to arbitrate. As a result of the change in federal law, it decided reconsideration of the state law precedent was warranted.

Further, the court recognized the prejudice requirement is unique to arbitration. Courts deciding waiver claims in other contexts typically focus on the conduct of the party that held the right, not the effects of the conduct on another party. The court stated that this special rule for arbitration derived from “a policy favoring arbitration.” The policy “emerged from decades of hostility to arbitration” where arbitration was placed at a “disadvantage” to litigation, explains Harout J. Samra, Miami, FL, Co-Chair of the Litigation Section’s Trial Evidence & Practice Committee.

The Morgan Court rejected this special rule, clarifying that the policy is meant to place arbitration agreements on equal footing with other contracts, not promote arbitration over litigation. The Quach court agreed with this approach, finding other instances where California law treated arbitration agreements the same as other contracts. By adopting the Morgan approach, the Quach court recognized it was bringing California law concerning waiver determinations “in line with [California] law related to other questions of arbitrability.” Additionally, since the California Arbitration Act provides no additional authority for the prejudice requirement, the court reasoned that applying “the same principles” to the state law and the Federal Arbitration Act allows California courts to avoid “tricky choice of law and preemption questions involved in determining which statute governs proceedings to enforce an arbitration agreement.”

Accordingly, the California court held that a party opposing arbitration need only submit “clear and convincing evidence” that the waiving party “knew of its contractual right to compel arbitration and intentionally relinquished or abandoned that right.” It limited the relevant inquiry to the waiving party’s words and conduct, including whether the conduct was inconsistent with an intent to arbitrate, and will no longer account for the effect on the other party. And it found that the defendant’s words and conduct were “markedly inconsistent with an intent to arbitrate.”

Leaders Recommend Pursuing Arbitration Earlier

Section leaders advise caution in the early stages of a dispute as decisions like Quach increase the risk of waiver. By removing the prejudice requirement, defendants “should re-think their strategy” of waiting to seek to compel arbitration as the “waiver elements will be easier to prove the longer a defendant waits to compel arbitration,” suggests Mark A. Romance, Miami, FL, Co-Chair of the Section’s Pretrial Practice & Discovery Committee. And this decision means “companies must now make tough strategy decisions at the outset of a lawsuit” as “the factual question of what amount of activity in court constitutes waiver is unsettled,” observes Julia K. Whitelock, Washington, DC, Co-Chair of the Section’s The Woman Advocate Committee.

Additionally, Section leaders advise practitioners to be aware of applicable state arbitration acts. The necessity of prejudice to show waiver will “depend on individual state arbitration laws,” states Samra, but Quach may signal that other “state courts will begin to make similar findings” over time, adds Romance.

It may also prove worthwhile to revisit the language of arbitration agreements given the increased likelihood of waiver. For example, Whitelock recommends “drafting terms in [the company’s] arbitration agreements that assist both the company and the consumer in achieving the goals promised by individual arbitration,” such as carving out provisions that outline what parties can file prior to moving to compel arbitration.