A pleasant surprise for employers.

A California appeals court ruled last week that an employer did not waive its right to arbitration -- despite the fact that the parties had been in litigation for more than 13 months before the employer moved to compel arbitration.

Peter Quach sued his former employer for wrongful termination, age discrimination, retaliation, and harassment. The employer didn't immediately move to compel arbitration, but filed an answer that included as a defense that the case should be arbitrated. The parties then served, conferred about, and responded to each other's written discovery, and the employer took the plaintiff's deposition. The employer also posted jury fees.

Approximately 13 months after suit was filed, the employer moved to compel arbitration. According to the employer, it had been unable to find a complete copy of Mr. Quach's signed arbitration agreement until it gathered documents responsive to some of the plaintiff's discovery. The trial court said that it was too late for the employer to seek arbitration, but a California Court of Appeals disagreed.

According to the appellate court, Mr. Quach had failed to meet his “heavy burden” of showing that he had been prejudiced by the employer's failure to try to compel arbitration earlier.

(Yes, the burden of proof is on the party seeking to avoid arbitration.)

The appellate court relied on a 2003 decision from the California Supreme Court. In St. Agnes Medical Center v. PacifiCare of California, the Supreme Court said that a party doesn't waive the right to arbitrate simply by participating in litigation if there is not yet a judgment on the merits. For a waiver, the party opposing arbitration has to show that he or she was prejudiced by the delayed request for arbitration. In St. Agnes, the Court said that litigation expenses alone will not support a claim of prejudice. According to the Court, the following should be considered in determining whether a party has waived the right to arbitration:

  • Were the party’s actions inconsistent with the right to arbitrate?
  • Has “the litigation machinery has been substantially invoked” and were the parties “well into preparation of the lawsuit” before the moving party notified the opposing party of its intent to arbitrate?
  • Did the moving party wait until close to the trial date or delay for a long period?
  • Had the party seeking arbitration filed a counterclaim without asking for a stay of the court proceedings?
  • Had “important intervening steps” been taken, such as use of discovery procedures not available in arbitration?
  • Did the delay “affect[], misle[a]d, or prejudice[]” the opposing party?

The appellate court in the Quach case found that the parties had only participated in discovery with no court involvement (in other words, no motions). Moreover, Mr. Quach never claimed that the employer gained information or conducted discovery that it would not have been able to obtain in arbitration, that the delayed request to arbitrate caused evidence to be lost, or that the employer waited until the eve of trial to move to compel arbitration. In fact, Mr. Quach conceded that he did not spend any time or money on the case that he would not have spent if the employer had moved to compel arbitration earlier.

Probably most helpful to employers and employment counsel, the Quach court provided several examples of instances where the courts have found that a party did waive its right to arbitrate:

  • Delaying until so close to the trial date that the moving party had to seek ex parte relief to shorten the time to hear the motion. (In an ex parte proceeding, generally available only in emergencies and temporary, short-term situations, one party appears before the court without the other party present.) The opposing party had also selected and prepared experts suited for testifying to a jury rather than to a “more technically adept arbitration panel.”
  • Delaying until after conducting discovery that was not available in arbitration, soliciting putative class members in an effort to reduce the class size, and engaging in “extensive litigation” (two attempts to remove the case to federal court, a demurrer (motion to dismiss), discovery motions, and opposing a temporary restraining order).
  • Delaying until the opposing party had expended substantial time and resources conducting class discovery that “would be rendered useless” in arbitration due to a class action waiver in the arbitration agreement.
  • Delaying until after the opposing party had disclosed some of its trial tactics through the discovery process.
  • Failing to disclose an arbitration agreement and delaying until after the trial court had overruled a second demurrer.
  • Delaying until after the parties engaged in “substantial litigation requiring judicial involvement,” including filing demurrers, opposing discovery motions, seeking protective orders, and attempting to transfer the lawsuit to another court.
  • Withdrawing an earlier arbitration demand and instead engaging in discovery and motion practice unavailable in arbitration before moving to compel arbitration.
  • Waiting “several years” until after a Labor Commissioner hearing.

The Quach decision is fairly narrow because waiver issues are fact-specific. In this case, the employer's agreement did not limit the type of discovery available in arbitration (the agreement permits the parties to “conduct adequate discovery, including a fair and simple method for the employee to get information necessary for his/her claim”). Many arbitration agreements place more limitations on discovery than this.

St. Agnes and now Quach show that employers are not necessarily doomed to stay in court because they engaged in discovery before moving to compel arbitration. However, employers who want to compel arbitration after a delay should consult with employment counsel in reviewing the language of their arbitration agreements and considering the extent to which they have already engaged in litigation