Arbitration Waiver and Prejudice.

AuthorLeake, Timothy

Arbitration agreements are common in commercial and consumer contracts. But two parties can litigate an arbitrable dispute in court if neither party seeks arbitration. That presents a problem if one party changes its mind and invokes its arbitration rights months or years after the lawsuit was filed and substantial litigation activity has taken place. Federal and state courts agree that a party can waive its arbitration rights by engaging in sufficient litigation activity without seeking arbitration, but they take different approaches to deciding how much litigation is too much. Two basic methods exist. Some courts say waiver requires the party opposing arbitration to show it would be prejudiced by the delay. Others say that waiver does not require a showing of prejudice.

This Note demonstrates that the presence or absence of a prejudice requirement does not accurately capture the disagreements between the federal circuit courts. Indeed, some circuits that impose a prejudice requirement will find waiver in circumstances where other courts that do not impose a prejudice requirement will not. These divergent approaches result in uncertainty, delay, and expense, undermining arbitration's benefits. To resolve the circuit split, this Note proposes a bright-line standard under which engaging in litigation never supports a finding of waiver. It also shows that this approach is consistent with common law waiver doctrine and the Federal Arbitration Act.

TABLE OF CONTENTS INTRODUCTION I. WAIVER IN THE ARBITRATION CONTEXT A. Principles of Arbitration and Waiver B. Policy and Prejudice II. THE ROLE OF PREJUDICE IN WAIVER DETERMINATIONS A. The Circuit Split B. Is Prejudice Useful? C. Other Roles for Prejudice III. THE NO-WAIVER ALTERNATIVE A. Alternative Standard B. Consistency with the FAA C. Consistency with Waiver Doctrine D. Fair Dispute Resolution E. Risks of the Bright-Line Approach CONCLUSION INTRODUCTION

In 2017, the Shaw Group sued former employee Dorsey McCall in Louisiana state court for a breach of contract. (1) The contract included an arbitration agreement, and after Aptim Corporation acquired part of Shaw, it asked the state court to enforce the arbitration agreement. (2) The state court declined, finding that the litigation that had already taken place "constituted a waiver of the arbitration provision." (3) Undeterred, Aptim sought relief in federal court. Despite the fact that Louisiana state courts and the Fifth Circuit apply similar tests to determine whether a party has waived its arbitration rights, (4) the federal court decided that Aptim could pursue arbitration and stayed the state court case. (5)

Aptim Corp. v. McCall illustrates the confused state of the law about the waiver of arbitration rights. The basic question is easy to state: What standard should determine whether a party to an arbitration agreement has waived its right to arbitrate by engaging in litigation? The answer is less clear. Various state and federal courts have adopted conflicting tests. (6) In particular, the federal circuits have taken different views about whether prejudice to the party opposing arbitration is a necessary element of waiver. (7) And despite the Supreme Court's interest in arbitration waiver, (8) it has not yet resolved the circuit split. (9)

The question is especially important since the use of arbitration agreements has skyrocketed over time. Once a little-known method for quickly resolving disputes between businesses, arbitration agreements are now commonplace in consumer and employment contracts. (10) The Supreme Court has encouraged this trend by interpreting the Federal Arbitration Act to favor expansive arbitration rights. (11) In response, opponents of arbitration agreements have criticized their use in contexts ranging from employment (12) to banking. (13) Media scrutiny, meanwhile, has focused on the extent to which businesses can use arbitration agreements to conceal allegations of sexual harassment from the public. (14) Arbitration-waiver rules help to determine when these ubiquitous agreements are enforceable. For example, consumers' ability to sue a business as a class can depend on whether the business waived its arbitration rights. (15)

This Note provides a framework to resolve disagreements about arbitration waiver. Part I explores how standards for arbitration waiver evolved from interactions between common law waiver and the Federal Arbitration Act. Part II examines existing arbitration-waiver rules and challenges the usefulness of classifying them by the presence or absence of a prejudice requirement. Finally, Part III proposes a bright-line approach in which a party's litigation conduct does not support a finding of waiver. This bright-line approach is consistent with common law waiver doctrines and the Federal Arbitration Act.


    The Federal Arbitration Act (FAA) (16) determines when a party can ask a court to enforce an arbitration agreement. Under the FAA, a party to a suit involving an arbitrable claim is ordinarily entitled to a stay of the litigation to allow arbitration to proceed. (17) But section 3 of the FAA says that a party "in default in proceeding with such arbitration" is not entitled to a stay. (18) One way to default is to litigate rather than invoke a binding arbitration agreement. (19) Just how much a party can litigate before it defaults under section 3 is a question that has long divided both federal and state courts. The answer depends on principles of common law waiver and the policy underlying the FAA.

    1. Principles of Arbitration and Waiver

      The FAA does not define "default," so courts seek guidance in the common law doctrines of waiver and forfeiture. Most compare default to waiver. (20) Broadly speaking, waiver refers to the "voluntary relinquishment or abandonment--express or implied--of a legal right or advantage." (21) Waiver can be established by words or conduct without any particular formal requirements; however, it does require a "clear, unequivocal, and decisive act." (22) It does not rely on any acts by the opposing party, and a waiving party must know that it possesses an underlying right in order to waive it. (23) Finally, waiver is an equitable doctrine with the ultimate goal of "further[ing] the interests of justice." (24) Under this approach, litigation conduct inconsistent with arbitration supports waiver. (25) Unfortunately, no clear test exists to determine if litigation conduct is inconsistent with arbitration rights. (26)

      At least three federal circuits invoke doctrines of forfeiture to analyze defaults under section 3 in addition to, or instead of, waiver. Forfeiture, generally defined as "failure to make a timely assertion of a right," does not require intent. (27) In Zuckerman Spaeder, LLP v. Aujfenberg, for example, the D.C. Circuit embraced forfeiture as the proper mode of analysis for claims of default under section 3. (28) Similarly, the Seventh Circuit has distinguished waiver from forfeiture in the criminal context. (29) In the arbitration context, on the other hand, it decided to use waiver as an umbrella term encompassing both concepts. (30) The Fourth Circuit has also referred to both waiver and forfeiture of the right to arbitrate, but it did not distinguish them. (31) Nevertheless, some decisions in the Fourth, Seventh, and D.C. Circuits have spoken in terms of waiver rather than forfeiture. (32) The willingness of these courts to use forfeiture and waiver interchangeably suggests that the distinction has little practical effect. Consistent with the majority approach, this Note uses waiver as a general term to refer to defaults under section 3 caused by excessive litigation activity.

      Regardless of terminology, there is broad agreement that the right to arbitrate can be waived in some fashion. (33) And courts have recognized both express and implied waiver. (34) Beyond these general principles, however, there is "no set rule as to what constitutes a waiver or abandonment of the arbitration agreement." (35)

    2. Policy and Prejudice

      Without a clear waiver test in the FAA's text, courts look to the law's purpose of promoting arbitration and the benefits that stem from it. Arbitration allows parties to resolve disputes quickly by limiting access to procedural devices like discovery and class certification. (36) Parties can also provide for arbitration by a subject-matter expert, which helps them resolve technical disputes outside the judiciary's expertise. (37) Moreover, parties can protect proprietary information like trade secrets by imposing confidentiality requirements in arbitration. (38)

      Despite these benefits, courts were once wary of enforcing arbitration agreements. (39) In response, Congress passed the FAA to establish a "liberal federal policy favoring arbitration." (40) The FAA has two specific goals: "enforcement of private agreements and encouragement of efficient and speedy dispute resolution." (41) Consistent with the first goal, arbitration is "a matter of contract," so state contract law typically determines whether a dispute is arbitrable. (42) However, the use of contract law doctrines like unconscionability to limit arbitration might undermine the FAA's efficiency goals. (43) For this reason, the FAA preempts traditional contract law principles when those principles are "applied in a fashion that disfavors arbitration." (44)

      To accommodate the FAA's pro-arbitration stance, many courts have grafted prejudice requirements onto traditional waiver tests. (45) Prejudice refers to an "unfair tactical advantage" that one party would gain over another by engaging in litigation and then moving to compel arbitration. (46) For example, a party faces prejudice if its opponent moved for arbitration after the opponent obtained discovery unavailable in arbitration. (47) A party also faces prejudice if its opponent moved for arbitration after the opponent lost on a motion going to the...

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