In a unanimous United States Supreme Court opinion authored by Justice Elena Kagan, the court addressed the issue of when the right to arbitrate is waived. Morgan v. Sundance, U.S.May 23, 2022--- S.Ct. ----. The court held prejudice is not a condition for finding a party, by litigating too long, waived its right to stay litigation or compel arbitration under the Federal Arbitration Act. California courts, however, consider a finding the party resisting arbitration was prejudiced by delay, or expense, to be crucial to determining whether the party seeking to arbitrate has waived its right to arbitrate. How did we get here, and which rule makes sense?
St. Agnes Medical Care Center v. Pacificare of California, 31 Cal.4th 1187 (2003) is the leading case in California for determining whether there has been a waiver of the right to arbitrate. In St. Agnes, the Supreme Court approved a multi-factor test: “In determining waiver, a court can consider ‘(1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether “the litigation machinery has been substantially invoked” and the parties “were well into preparation of a lawsuit” before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) “whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place”; and (6) whether the delay “affected, misled, or prejudiced” the opposing party.’ ”
The United States Supreme Court now follows a simpler path that relies on the premise that agreements to arbitrate must be placed on the same footing as other agreements, and that relies on a classic definition of waiver: “Outside the arbitration context, a federal court assessing waiver does not generally ask about prejudice. Waiver, we have said, ‘is the intentional relinquishment or abandonment of a known right.’ …To decide whether a waiver has occurred, the court focuses on the actions of the person who held the right; the court seldom considers the effects of those actions on the opposing party. That analysis applies to the waiver of a contractual right, as of any other.” California courts have also relied on the classic definition of waiver in a contractual context. “California courts will find waiver when a party intentionally relinquishes a right or when that party’s acts are so inconsistent with an intent to enforce the right as to induce a reasonable belief that such right has been relinquished.” Wind Dancer Prod. Grp. v. Walt Disney Pictures, 10 Cal. App. 5th 56, 78 (2017). If arbitration agreements and other agreements were placed on an equal footing under California law, then a waiver of the right to arbitrate would occur when a party, knowing it has a right to arbitrate, delays invoking that right, and engages in litigation conduct inconsistent with an intent to enforce the right to arbitrate so as to induce a reasonable belief that such right has been relinquished.
But California courts have added additional requirements, most specifically, the requirement that the opposing party be prejudiced by the conduct of the party seeking arbitration, before the courts will find a waiver. This occurred recently in Quach v. California Commerce Club, 78 Cal.App.5th 470 (2022), a case published 13 days before Morgan v. Sundance. In Quach, the Court of Appeal reversed a finding of the superior court that the defendant employer’s delay in seeking to arbitrate, and thirteen months of discovery inconsistent with exercising a right to arbitrate, had resulted in the employer’s waiver of its right to arbitrate. The defendant employer, who mentioned a right to arbitrate in the answer it filed, was obviously aware of that right. The Court of Appeal reversed primarily because it concluded that the plaintiff employee had not demonstrated prejudice, because he admitted he did not spend money litigating that he would not have spent arbitrating. In so concluding, the Court of Appeal cited to St. Agnes and emphasized the importance of prejudice: “Our Supreme Court has made clear that participation in litigation alone cannot support a finding of waiver, and fees and costs incurred in litigation alone will not establish prejudice on the part of the party resisting arbitration.”
The majority opinion in Quach drew a partial dissent by superior court Judge James L. Crandall, sitting by assignment. He commented, “The unfairness of compelling non-unionized employees to forfeit their access to the civil justice system in favor of private arbitration is well recognized.” As did the majority, Crandall noted that “no single test delineates the nature of the conduct that will constitute a waiver of arbitration.” Crandall believed that Quach should not have had to prove the defendant’s serious delay prejudiced Quach. (If this were the law in California, California law would align with the rule in Morgan v. Sundance). “Because of the disputed evidence, the deferential standard of review traditionally used in arbitration waiver cases, and the very real prejudice Quach suffered as a result of Commerce Club’s tactics,” Crandall dissented. But note that after writing that Quach should not have to prove he was prejudiced, Crandall apparently felt constrained to say that Quach suffered “very real prejudice.”
The California Supreme Court wrote in St. Agnes, “More than two decades ago, we observed that “[u]nder federal law, it is clear that the mere filing of a lawsuit does not waive contractual arbitration rights. The presence or absence of prejudice from the litigation of the dispute is the determinative issue under federal law.” St. Agnes, 31 Cal. 4th at 1203. But the rule enunciated in Morgan v. Sundance is now quite different, because the presence or absence of prejudice is not the determinative issue.
Now, the California rule rests on a shaky frame: The leading California case, St. Agnes, extols the United States Supreme Court’s reliance on prejudice for determining whether there has been a waiver. And now the United States Supreme Court has rejected the prejudice analysis referenced in St. Agnes. So it is termites all the way down.
One might argue that there is a reason to preserve the California rule, as long as the Federal Arbitration Act does not apply to preempt the California rule. The argument would be that courts seek to promote arbitration – an argument, however, that the United States Supreme Court in Morgan v. Sundance refused to elevate above the importance of placing arbitration agreements on the same footing as other agreements.
Preserving the California rule leads to a curious result. Curious, because California courts have generally been more reluctant than the United States Supreme Court to enforce arbitration agreements. Preserving the California rule makes it harder to find a waiver of the right to arbitrate, because it keeps in place the requirement that prejudice must be shown to establish waiver. So the California rule makes it easier to enforce an arbitration agreement than does the United States Supreme Court’s analysis of waiver.
Preserving the California rule has consequences. Judge Crandall, for one, bucked against overextending “ourselves to preserve a compulsory arbitration agreement that the employer has clearly waived…” We can also foresee that whenever the parties are engaged in interstate commerce, making the Federal Arbitration Act applicable, the federal rule of waiver will have to be applied, and whenever interstate commerce is not involved, the California rule will be applied. Yet there is no obvious reason as to why the California rule, which places arbitration agreements on a different footing than other contracts, is a better rule than the federal rule. The California rule advantages those parties who can afford to take advantage of the litigation process, conduct discovery, file motions, and then for strategic reasons seek to arbitrate, arguing they have not waived the right to arbitrate if there is no provable prejudice. In light of the unanimous opinion in Morgan v Sundance, perhaps it is time for the California Supreme Court to reconsider the rule that will be applied to determining a waiver of the right to arbitrate.