The Risk of Litigating Before Moving to Arbitrate

Many employers in California ask or require their employees to execute arbitration agreements. When a claim arises, the employer has a choice—proceed with litigation notwithstanding the arbitration agreement or move to compel arbitration. Taking the first approach is risky because choosing to litigate may be construed as a “waiver” of the right to compel arbitration later.

But just how risky is it? For a long time, both state and federal courts required a party opposing a motion to compel arbitration on the ground that the moving party waived its right to arbitrate by litigating first to show that it was “prejudiced” by the delay. That is, the party opposing arbitration had to show that the moving party’s conduct had “substantially impaired [its] ability to take advantage of the benefits and efficiencies of arbitration.” For example, while incurring costs and legal expenses in litigation was not enough to show prejudice, being forced to respond to oppressive discovery or litigating up to the eve of trial could be sufficient.

The U.S. Supreme Court Eliminates “Prejudice” for Purposes of the FAA

In 2022, in Morgan v. Sundance, Inc., 596 U.S. 411 (2022), the U.S. Supreme Court scrapped the prejudice requirement for purposes of cases governed by the Federal Arbitration Act (“FAA”). The upshot was that it would be easier for an employee to oppose a motion to compel arbitration on waiver grounds because they would no longer have to clear the prejudice hurdle.

After Morgan, the question remained whether the prejudice requirement survives for purposes of cases governed by the California Arbitration Act (“CAA”).

The California Supreme Court Does the Same

Today, the California Supreme Court held that it does not. In Quach v. California Commerce Club, Inc., S275121, the court followed the U.S. Supreme Court’s lead in Morgan and held that there is no longer a prejudice requirement to show waiver under state law.

The state high court wrote that, like federal policy, California policy “puts arbitration agreements on equal footing with other types of contracts.” Because for non-arbitration contracts, waiver does not require a showing of prejudice, an arbitration-specific prejudice rule places arbitration agreements on higher, not equal, footing and, thus, cannot stand.

The court went on to explain that trial courts, when evaluating a challenge to arbitration based on litigation conduct, must “separately evaluate each generally applicable state contract law defense” (e.g., waiver, forfeiture, estoppel, laches, or procedural timeliness) and “should not lump distinct legal defenses into a catch-all category called ‘waiver.’”

Then, focusing on the specific concept of “waiver,” the court explained that “the party opposing enforcement of a contractual agreement must prove by clear and convincing evidence that the waiving party knew of the contractual right and intentionally relinquished or abandoned it.” This inquiry is focused “exclusively . . . on the waiving party’s words or conduct; neither effect of that conduct on the party seeking to avoid enforcement of the contractual right nor that party’s subjective evaluation of the waiving party’s intent is relevant.”

Applying this standard to the facts of the case, the court found that the defendant, Commerce Club, had lost its right to compel arbitration. It was aware of its right to compel arbitration early on, and asserted that right in its answer. It actively pursued discovery (including taking plaintiff’s deposition) and affirmatively indicated its preference for a jury trial. In its case management conference statement, Commerce Club  left the box indicating it was “willing to participate” in arbitration unchecked and stated it planned to file a “dispositive motion.” Despite all this, it was not until 13 months after plaintiff had filed his complaint that Commerce Club moved to compel arbitration. On these facts, the court concluded that plaintiff had met his burden to show that Commerce Club had intentionally abandoned its right to arbitration.

Takeaway

As we advised when the U.S. Supreme Court decided Morgan, it is critical for employers to move quickly to compel arbitration. Employers facing claims by current or former employees should be diligent in searching their files for any arbitration agreements the plaintiff may have signed, and they should discuss any such agreements with their counsel at the earliest possible moment. Undue delay can result in a waiver of the right to compel the case to arbitration.