Defendants who try their hands at litigation on the merits and seek arbitration only after things don’t go their way, risk losing the right to arbitrate—as the Ninth Circuit Court of Appeals made clear in the recent case of Martin v. Yasuda . In the case, the court barred a beauty school and its president from arbitration after they took a series of actions the court held were inconsistent with the right to arbitrate. These included filing a mostly unsuccessful motion to dismiss, submitting a detailed discovery plan to the court, negotiating with the plaintiff regarding discovery responses, telling the judge “we are probably just better off being here in the court,” and waiting for 17 months after the start of the case to move to compel arbitration.

On October 28, 2013, students enrolled in a cosmetology program at the Milan Institute brought a purported class action case against Amarillo College, which does business as Milan Institute, and its president Gary Yasuda, arguing that they violated wage and hour laws by failing to pay students for the work they performed as trainees. The college and Yasuda filed a motion to dismiss, arguing that the plaintiffs were students, not employees, and that they failed to plead the president’s individual liability. The court denied the bulk of the motion but gave the plaintiffs leave to amend their claims against the president. The defendants then answered on September 19, 2014, claiming the right to arbitrate as an affirmative defense—but failed to take any action indicating an intention to do so.

The parties then engaged in litigation, including written discovery and noticing depositions, until March 20, 2015, when the defendants finally moved to compel individual arbitration. The district court denied the motion, holding that the defendants had waived arbitration because: (1) they had knowledge of their right to arbitrate, (2) they engaged in acts inconsistent with that right, and (3) allowing arbitration would result in prejudice to the plaintiffs—especially after the court had already ruled mainly in the plaintiffs’ favor on the motion to dismiss.

In affirming the lower court decision, the Ninth Circuit rejected the defendants’ arguments on appeal: (1) that an arbitrator, rather than the court, should decide the waiver issue, and 2) even if the court could decide the issues, it erred in finding that that the defendants had waived their right. With respect to whether the court or the arbitrator should decide waiver, the Ninth Circuit cited numerous cases holding that “courts generally decide whether a party has waived his right to arbitration by litigation conduct.” The court, quoting a 2002 Supreme Court case, held that the question of arbitrability is “for judicial determination unless the parties clearly and unmistakably provide otherwise.” The court rejected the defendants’ arguments that its broad arbitration clause met this clear and unmistakable standard.

With respect to whether the lower court erred in finding waiver, the Ninth Circuit panel noted that delay alone does not waive the right to arbitrate. However, seeking a decision on the merits, and participating in discovery, coupled with “silence and delay in moving for arbitration,” could indicate a conscious decision to waive the right.

The court also affirmed that arbitration would prejudice the plaintiffs because they had already incurred costs that they would not otherwise have incurred and might have to relitigate issues in arbitration that they had already prevailed on in the motion for dismiss.

Practical Impact

The case provides a cautionary tale for defendants who delay compelling arbitration while rolling the dice in court. “A party that signs a binding arbitration agreement and has subsequently been sued in court has a choice: it can either seek to compel arbitration or agree to litigate in court. It cannot choose both,” the three-judge panel wrote in a unanimous decision.

Martin provides companies with an admonitory roadmap on how to waive arbitration, despite their contrary intentions. The case demonstrates that the defendants should make decisions to arbitrate early in the case, and parties considering arbitration should be wary about engaging in conduct contrary to that intention—especially litigation on the merits. The case reminds companies they should not start down a road of significant motion practice, discovery, and litigation and then expect a court to entertain their desire to arbitrate. Rather, defendants should consider whether to arbitrate as part of their early case assessment. Moreover, companies that want an arbitrator to make waiver determinations should review their arbitration agreements to ensure they clearly state such, including the all-inclusive “arising out of or related to” language required by Ninth Circuit precedent. Although waiver is disfavored, as the court noted, judges are suspicious of parties who appear to be gaming the system or forum shopping by pursuing litigation on the merits before making a bid for arbitration.