Establishing Waiver of Arbitration by a Showing of Prejudice

Contract disputes are often governed by arbitration clauses. Arbitration serves as a relatively simple, quick, and efficient method of resolving controversies. The right to compel arbitration arises from the parties’ contract and is subject to waiver. Such waiver may be express or implied from the parties’ conduct. Waiver of the right to arbitrate “does not require a voluntary relinquishment of a known right . . .” (Burton v. Cruise (2010) 190 Cal.App.4th 939, 944.)

Generally, when a party seeks to establish a claimant has waived its right to arbitrate, it must demonstrate: (1) knowledge of an existing right to compel arbitration; 2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration. (U.S. v. Park Place Assocs. (9th Cir. 2009) 863 F.3d 907, 921.)

Prejudice To The Party Opposing Arbitration
Because of the strong policy favoring arbitration, prejudice typically is found only where the petitioning party has (1) unreasonably delayed seeking arbitration; or (2) substantially impaired an opponent’s ability to use the benefits and efficiencies of arbitration. Prejudice is not found where the party opposing arbitration shows only that it incurred costs and legal expenses in responding to an opponent’s pleadings and motions. (Saint Agnes v. PacifiCare, supra, 31 Cal.4th 1187, 1203.)

There is no bright line test for determining what amount of time constitutes an “unreasonable delay.” However, the California Court of Appeal has found a delay of three years to be unreasonable.

When a delay is not unreasonable, the party seeking a waiver of arbitration must show that the petitioner substantially impaired its ability to use the benefits and efficiencies of arbitration.

Substantially Impaired Ability To Use The Benefits And Efficiencies Of Arbitration
Typically, prejudice is found only where the petitioning party’s conduct has substantially undermined the strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution, or substantially impaired the other side’s ability to take advantage of the benefits and efficiencies of arbitration. (Saint Agnes v. PacifiCare, supra, 31 Cal.4th 1187, 1204.) Courts have found prejudice in the following circumstances:

• Where the petitioning party used the judicial discovery processes to gain information about the other side’s case that could not have been gained in arbitration. (Davis v. Continental Airlines, Inc. (1997) 59 Cal.App.4th 205, 215; Berman v. Health Net (2000) 80 Cal.App.4th 1359, 1366; Guess?, Inc. v. Superior Court (2000) 79 Cal.App.4th 553, 558; Augusta v. Keehan & Associates (2011) 193 Cal.App.4th 331, 340-341.)

• Where a party unduly delayed and waived until the eve of trial to seek arbitration. (Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 995-996.)

• Where the lengthy nature of the delays associated with the petitioning party’s attempts to litigate resulted in lost evidence. (Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 784.)

The following cases provide illustrative examples in which the petitioner substantially impaired the ability of the party seeking an arbitration waiver to use “the benefits and efficiencies of arbitration.”

1. Davis v. Continental Airlines, Inc.
In Davis v. Continental Airlines, Inc., supra, 59 Cal.App.4th 205, the defendants did not move to compel arbitration until nearly a year after the complaint was filed. Prior to seeking arbitration, the defendants served the plaintiff with discovery which resulted in the production of 1,600 pages of documents. (Id. at p. 208.) The defendants also took the plaintiff’s videotaped deposition over the course of two days prior to moving to compel arbitration. (Ibid.)

The trial court denied the defendants’ motion to compel arbitration on the grounds that the defendants waived any right to compel arbitration by unreasonably delaying their motion until after obtaining extensive discovery from the plaintiff. (Davis at p. 207.) The Court of Appeal affirmed, finding that the plaintiff was prejudiced:

Defendants used the discovery processes of the court to gain information about plaintiff’s case which defendants could not have gained in arbitration. After obtaining discovery from plaintiff by court processes, defendants then belatedly sought to change the game to arbitration, where plaintiff would not have equivalent discovery rights.

(Id. at p. 215.)
2. Berman v. Health Net
In Berman v. Health Net, supra, 80 Cal.App.4th 1359, Defendants Health Net and Health Systems International, Inc. (collectively “Health Net”) appealed from an order of the trial court denying their petition to compel arbitration. The plaintiffs filed a complaint in 1996 and Health Net filed a demurrer to the complaint on May 3, 1996. (Id. at p. 1363.) Thereafter, beginning on May 8, 1996, Health Net served extensive discovery requests on the plaintiffs, as well as third party subpoenas for medical records. (Ibid.) Health Net’s discovery requests included demands for production of documents in 103 categories, several sets of interrogatories, form interrogatories, notices of deposition, and subpoenas for medical records. (Id. at p. 1364.) Health Net answered the Third Amended Complaint on October 22, 1996, and filed a petition to compel arbitration on November 12, 1996. (Ibid.)

The trial court denied Health Net’s petition, finding it had waived its right to arbitration by engaging in extensive discovery. (Berman at p. 1362.) The trial court reviewed hundreds of pages of discovery and drew an inference Health Net had sought and obtained information not available in arbitration, thus causing prejudice to the plaintiffs. (Id. at p. 1366.) In doing so, the trial court noted that Health Net’s discovery requests “get to the heart of this case.” The Court of Appeal affirmed, finding there was substantial evidence of an implied finding of prejudice.

(Id. at p. 1364.)
3. Guess?, Inc. v. Superior Court
In Guess?, Inc. v. Superior Court, supra, 79 Cal.App.4th 553, Plaintiff Guess?, Inc. sued multiple defendants, alleging intentional interference with contractual relations and prospective economic advantage, unfair competition, and various forms of fraud. On July 9, 1999, defendants answered Guess’s complaint with a general denial. (Id. at p. 556.) Later that same month, Guess commenced discovery. (Ibid.) It served document demands and interrogatories on Defendants, and scheduled more than 10 third-party depositions. (Ibid.) Although Defendants objected on a variety of grounds, they did not assert a right to arbitration. (Ibid.) On October 1, 1999, Defendants moved to compel arbitration. (Ibid.)
The trial court held there was no waiver and granted Defendants motion to compel arbitration. (Guess?, Inc. at p. 555.) The Court of Appeal overturned the trial court’s ruling, concluding that all the evidence supported an inference that Defendants waived the right to arbitrate. (Id. at p. 557.) The Court of Appeal found that Defendants conduct was wholly inconsistent with a desire to arbitrate. (Id. at p. 558.) In support of this conclusion, the Court of Appeal cited the following:

• Defendants fully participated in the discovery process, objecting to Guess’s interrogatories and demands for production on a variety of grounds, but never once suggesting that discovery should be barred because the dispute had to be arbitrated.
• Defendants sent two sets of lawyers to the third-party depositions and took full advantage of the opportunity to cross-examine the deponents, but did not suggest that depositions were inappropriate because this dispute had to be arbitrated.
• For four months Defendants remained mute on the subject of arbitration but were vocal on the subject of their other objections to Guess’s discovery demands, taking full advantage of the opportunity to test the validity of Guess’s claims, both legally and factually, primarily at Guess’s expense.

(Ibid.)

The Court of Appeal stated that it was immaterial that it was Guess, not Defendants, that initiated the discovery. (Guess?, Inc. at p. 558.) “It is the manner in which [Defendants] responded that matters, and it was [Defendants’] response that was inconsistent with [their] present claim of a right to arbitrate.” (Ibid.) The Court of Appeal held that Guess had been prejudiced because, through discovery, it had disclosed more of its trial tactics to Defendants that it otherwise would have been required to disclose in arbitration. (Ibid.)

Takeaway
Courts will look to the demonstrated intent of the parties when determining if the right to arbitrate has been waived. Prejudice will be found and arbitration waived if the petitioner unreasonably delays its right to compel arbitration, or takes advantage of the civil discovery process prior to petitioning for arbitration.

ABOUT THE AUTHOR
Morgan Van Buren is an associate at Tyson & Mendes LLP. He specializes in personal injury and high net worth insurance issues. Contact Morgan at 858.263.4107 or mvanburen@tysonmendes.com.

Download full article here: Establishing Waiver of Arbitration by a Showing Of Prejudice

Copyright © 2017 Tyson & Mendes LLP. All Rights Reserved. Website by Thriveline.