Use or Lose Your Right to Arbitrate
Updated: Mar 28, 2022
According to a state appellate court, a right to arbitration can be waived when brought almost two years into litigation. The court explained that three significant factors meant waiver of the defendant’s right to arbitrate: (1) the defendant’s knowledge of an arbitration agreement 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.
The case is an important reminder to use or lose your right to arbitration.
A plaintiff filed a complaint in November 2016 alleging wage and hour claims against his former employer. In January 2017, he filed an amended class action complaint. The defendant asserted several defenses, including that plaintiff signed arbitration agreements. All parties proceeded as if litigation was advancing, including by engaging in class-wide mediation and discovery.
Almost two years after the class-action suit was filed, the defendant moved to compel arbitration and requested a stay. To support its request, the defendant argued it did not find copies of the plaintiffs’ signed agreements until the prior June. During a hearing, the defendant admitted that when the suit was filed, it possessed documents confirming its policy of requiring employees to sign arbitration agreements and the checklists that showed what each employee had received, including the arbitration agreement.
The trial court denied the defendant’s motion, concluding the defendant knew about its arbitration policy when litigation began. Yet, the defendant continued to act in a manner inconsistent with the right to arbitrate and that the defendant’s delay prejudiced the plaintiffs after litigating their class-action suit.
The appellate court affirmed, explaining that a court could consider several factors when examining waiver. The court said the three factors most relevant in 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.
On delay, the 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.
The court noted 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 those acts support an inference that the defendant raised arbitration as a belated strategy, if not as a strategy of last resort.
Finally, the court said that substantial evidence supported the trial court’s conclusion that the defendant’s two-year delay impaired the plaintiffs’ ability to realize the benefits and efficiencies of arbitration and affirmed the trial court’s denial of the motion to compel arbitration.
Since arbitration is a contractually based option in litigation, a moving party must move to compel as soon as possible to preserve the option.