In our last installment, we described a dispute between CBS, on the one hand, and three former producers of the CBS show Big Brother, on the other, in which the former producers argued that CBS had waived its contractual right to arbitrate by spending months pursuing litigation against the former producers before demanding arbitration. Because many employment contracts have mandatory arbitration clauses, the possibility of waiver must be on the radar screens of parties to an employment dispute. We discussed the flipside of this issue, arbitration by estoppel, in July.
The threshold question is whether the party seeking arbitration acted inconsistently with the right to arbitrate.
Courts addressing the question of waiver, including in the employment context, generally begin their analysis with the Federal Arbitration Act (the “FAA”, for short). The Supreme Court has held that the FAA applies to employment contracts that “affect interstate commerce” – which is most employment contracts – except (somewhat ironically) those governing transportation workers. (Just this week, the Supreme Court reaffirmed that the FAA also applies in state courts and is controlling over state law.) Section 2 of the FAA provides that a written agreement to arbitrate “shall be valid, irrevocable, and enforceable” except where grounds exist at law or in equity to revoke the contract. This language evinces a strong federal policy favoring arbitration. Further evidence of such policy is found in Section 3 of the FAA, which empowers a party with a contractual right to arbitrate to demand a stay of litigation to pursue arbitration, so long as that party “is not in default in proceeding with such arbitration.” Default is not lightly inferred.
Courts differ somewhat on the precise test to apply to determine whether a party has defaulted on or waived its right to arbitrate, and the question of waiver depends primarily on the particular circumstances of each case. The general rule, though, is that a party may waive its right to insist on arbitration if it fails to timely assert that right, such as by waiting until long after litigation has begun, and where permitting arbitration would cause the objecting party to suffer actual prejudice. Here is a sampling of cases where courts found waiver:
- In a dispute between a former mid-level manager and his former employer, the former employer requested arbitration more than ten months after filing its complaint, aggressively litigated a preliminary injunction motion involving extensive discovery (which it lost) and opposed motions to dismiss, assented to the district court’s pre-trial orders, and notified its former employee of its intent to arbitrate on the same day it filed its demand for arbitration and only after the former employee had expended significant time and expense opposing the lawsuit and preparing for trial. Gray Holdco, Inc. v. Cassady & RWLS, LLC (3d Cir. 2011).
- In a dispute between the widow of a former employee and her husband’s former employer, the widow sought arbitration more than ten months after filing the complaint, filed a motion to remand and an amended complaint, made initial disclosures, engaged in a meet-and-confer, responded to discovery requests, sat for her own deposition and took the deposition of a third party, and forced her husband’s former employer to conduct the bulk of activity necessary to defend against the claims short of actually trying the case. Nicholas v. KBR, Inc. (5th Cir. 2009).
- In a dispute between an employee and his employer, the employer moved to compel arbitration after moving for summary judgment, opposing the employee’s motion for reconsideration, and arguing on appeal that the grant of summary judgment should be upheld, thereby forcing the employee to expend time and resources to litigate the substantive issues in the case (even though the summary judgment motion was brought in conjunction with, and as an alternative to, an earlier motion to compel arbitration or to dismiss, and no discovery was taken). Khan v. Parsons Global Servs., Ltd. (D.C. Cir. 2008).
Courts did not find waiver where:
- In a dispute between a former employee and his former employer, the former employer moved to compel arbitration six months after the complaint was filed and four months after it answered the complaint; very little had occurred in the litigation besides the exchange of minimal written discovery – discovery that likely would take place in arbitration; and trial was still 11 months away. Hill v. Ricoh Americas Corp. (10th Cir. 2010).
- In a dispute between a successor-in-interest general contractor and its sub-contractor, the general contractor learned of the arbitration clause only three months prior to moving to compel arbitration, filed only minimal responsive pleadings, did not initiate the several non-merits motions decided during litigation, exchanged written discovery with the sub-contractor but did not notice any depositions, and participated in court-ordered mediation. Patten Grading & Paving, Inc. v. Skanska USA Building, Inc. (4th Cir. 2004).
- In a dispute between the former head of Human Resources and her former employer, the former employer requested arbitration less than six months after initiating the first of its three lawsuits against the former employee; the prior actions, though pursued aggressively by the former employer, related to a separate set of claims from those it sought to arbitrate; and the former employee failed to meet her burden of showing prejudice based on a theory that discovery obtained in the prior actions would not be available in arbitration. Microstrategy, Inc. v. Lauricia (4th Cir. 2001).
The lesson from these cases is that a delay in seeking arbitration of more than six months from the filing of the complaint, an attempt to adjudicate the merits of the claims sought to be arbitrated, extensive discovery – particularly where that discovery would not be available in arbitration – and significant time and expense incurred by the party opposing arbitration (through no fault of its own) make it more likely that a court will find that the party seeking arbitration has waived that right.