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Beware Waiting to Compel Arbitration

Some defendants, when facing a lawsuit filed in federal court, may elect to litigate in that court even though a binding arbitration provision is available to them. The reasons for doing so may be unimpeachable, such as availability of certain types of relief or the potential for precedential decisions. A strategy to delay making that decision to see “how it goes” in court, however, is fraught with peril, as a recent Ninth Circuit case illustrates.

In Martin v. Yasuda, ___ F.3rd ___, 2016 DJDAR 7404, the Court affirmed a ruling by the district court that defendants had waived their right to compel arbitration by engaging in litigation for an extended period and having moved unsuccessfully to dismiss the complaint on the merits. While on the surface the decision seems clear-cut, there are important cautionary lessons to be learned from the case.

Plaintiffs were students at a cosmetology college who, in addition to technical instruction, had to engage in “practical training,” including performing chores for which they were not paid. They sought class certification and a determination that the college was their “employer” within the meaning of state and federal law.

The parties agreed that they wanted to focus on the class action initially, by engaging in discovery and having the court decide the employment issues. They proceeded to litigate the case with the required exchange of information and formal discovery pursuant to the federal rules, and defendants also filed a motion to dismiss virtually all of plaintiffs’ claims. The court denied most of the motion without leave to amend, and one portion with leave. In addition, during a court hearing defense counsel stated that defendants intended to remain in the district court.

Nevertheless, defendants then switched positions and moved to compel. Their motion was denied because, the court found, they had waived their right to arbitration through their litigation conduct. The Ninth Circuit agreed. Although arbitration contracts are almost always enforceable, there are exceptions, and a defendant’s conduct in first pursuing litigation before moving to compel arbitration is one. Waiver is established when the defendant knows of its existing right to compel arbitration, acts inconsistently with that right and thereby prejudices the opposing party. In Martin, defendants acknowledged in open court that they knew of their right, they voluntarily engaged in litigation in the district court for seventeen months before attempting to exercise that right, and thereby prejudiced plaintiffs.

At first glance, the case may seem to be almost sui generis, because defendants stipulated that they were aware of the arbitration provision, as well as the length of time that the case was in the district court. There are two lessons from this decision that should be considered beyond the facts of the case, however. First, the time in which a party may remain in the district court before becoming susceptible to a waiver claim may be shorter than expected. As the Court stated:

“There is no concrete test to determine whether a party has engaged in acts that are inconsistent with its right to arbitrate. We have stated, however, that a party’s extended silence and delay in moving for arbitration may indicate a ‘conscious decision to continue to seek judicial judgment on the merits of [the] arbitral claims’ that would be inconsistent with a right to arbitrate.”

A much shorter time than seventeen months in the district court may be all that is required to demonstrate that “conscious decision.” Indeed, causing the opposing party to incur any costs beyond the “self-inflicted” costs they chose to incur by filing in the federal court in the first place may be enough, since the there is “no concrete test” that a court must follow.

Second, any attempt to obtain rulings on the merits may easily lead to a finding of prejudice to the opposing party. While lengthy litigation in the district court alone may be enough to establish the element of prejudice, potentially putting the opposing party in a position of having to successfully defend the same motion on the merits in two forums almost certainly will result in a finding of prejudice. Here, plaintiffs successfully opposed the motion to dismiss. Had defendants’ motion to compel been granted, they would have been confronted with the prospect of the issue being raised again in the arbitration, thus subjecting them to a “double jeopardy.”

The take-away lesson from the Martin case is to decide early in the litigation whether to exercise your right to arbitration, if you have it, or to proceed in court. The point of no return may be earlier than you think.

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