Participation in Litigation as a Waiver of the Contractual Right to Arbitrate: Toward a Unified Theory

• Publication year: 2021

92 Nebraska L. Rev. 86. Participation in Litigation as a Waiver of the Contractual Right to Arbitrate: Toward a Unified Theory

Participation in Litigation as a Waiver of the Contractual Right to Arbitrate: Toward a Unified Theory

Thomas J. Lilly, Jr.(fn*)

TABLE OF CONTENTS

I. Introduction .......................................... 87

II. The Law of Arbitrability Framework .................. 90
A. The FAA .......................................... 90
B. The Scope of the Agreement to Arbitrate ........... 93
C. Procedural Arbitrability ........................... 94
D. Allegations Concerning the Validity of the Entire Contract .......................................... 95
E. Allegations Concerning the Formation of the Entire Contract .......................................... 96
F. Waiver of the Right to Arbitrate Generally ......... 97
G. Conclusions Concerning the Law of Arbitrability . . . 99

III. The Various Approaches to Waiver by Participation in Litigation ............................................. 100
A. Who Decides Whether a Party Waived Its Right toArbitrate by Participating in Litigation ............ 100
B. Courts That Require a Showing of Prejudice ....... 102
1. Circuits That Impose a "Heavy Burden" to Show Prejudice ...................................... 103
2. The First Circuit "Modicum of Prejudice" Standard ...................................... 106
3. Circuits Between a "Modicum" Standard and a "Heavy Burden" Standard ..................... 106
C. Courts That Do Not Require a Showing of Prejudice .......................................... 107
D. Conclusions on the Current State of the Law ....... 112

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IV. A Proposed Resolution of the Waiver by Participation in Litigation Issue ....................................... 112
A. Waiver by Participation in Litigation Should Be Determined by a Court, Not an Arbitrator ......... 113
B. Waiver by Participation in Litigation Should Not Require a Showing of Prejudice .................... 115
1. Policy Considerations Under the FAA .......... 115
2. Application of Established Doctrines ........... 117
3. Efficient Dispute Resolution ................... 121

V. Conclusion ............................................ 123

I. INTRODUCTION

During the almost ninety years since passage of the Federal Arbitration Act (FAA),(fn1) the United States judiciary has stood the old common law hostility toward arbitration on its head. Whereas once arbitration agreements were disfavored and regarded as revocable at will by either party,(fn2) the federal judiciary has now taken to heart the maxim that there is a "liberal federal policy favoring arbitration agreements."(fn3)

The embrace of a policy favoring arbitration is particularly evident in decisions of the United States Supreme Court over the last few decades. In 1985, the Supreme Court declared "we are well past the time when judicial suspicion of the desirability of arbitration and of the competence of arbitral tribunals inhibited the development of arbitration as an alternative means of dispute resolution."(fn4) In three recent decisions, the Supreme Court has preferred an expansive reading of the FAA: the Supreme Court has held a party's claim that the entire contract containing an arbitration clause was illegal and void ab initio should be decided by the contract arbitrator rather than a court;(fn5) the arbitration agreement in a collective bargaining agreement between a

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union and an employer may preclude an individual employee from litigating a statutory claim;(fn6) and a state statute prohibiting the enforcement of arbitration agreements that do not allow for class actions is preempted by the FAA.(fn7) These cases illustrate a strong trend in the Supreme Court toward an expansive reading of the FAA and a vigorous enforcement of agreements to arbitrate.

Despite that trend, however, there are still circumstances under which a party that wishes to litigate a contractual dispute will not be forced to arbitrate. The FAA states that federal courts are to order parties to arbitration only "upon being satisfied that the making of the agreement for arbitration or the failure to comply therewith is not in issue."(fn8) Consistent with that dictate, it is a fundamental tenet of American arbitration law that "a party cannot be required to submit to arbitration any dispute which he has not agreed so to submit."(fn9) To determine whether a particular contractual dispute is one that the parties have agreed to arbitrate, the federal judiciary has developed common law rules of arbitrability. Although the law of arbitrability is largely based on the terms of the FAA and has now had almost ninety years to develop, it remains confused and confusing in some aspects. In part, the confusion is attributable to the ad hoc nature of the common law method by which the law of arbitrability developed.(fn10) It is also partially attributable to the necessarily circular nature of the arbitrability inquiry, which requires a court to decide the issue of whether it should decide an issue.(fn11)

One aspect of the law of arbitrability on which the federal courts so far have been unable to agree concerns whether a party that participates in the litigation of a dispute has waived its right to arbitrate that dispute.(fn12) It sometimes occurs that parties to a contract with a

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valid arbitration provision decide to litigate instead of arbitrate. That situation presents no obvious procedural problem so long as both parties agree to waive the right to arbitrate and then litigate their dispute through to conclusion. A problem does arise, however, if at some stage during the litigation process one of the parties changes its mind about its preferred forum and moves to compel arbitration instead. Under what circumstances has a party that wishes to switch from litigation to arbitration waived its contractual right to compel arbitration? For example, may a litigant decide as the jury is being charged at the end of a trial that it would like to invoke the arbitration clause in the contract after all? At the opposite end of the spectrum of possibilities, should the rule be that once a party voluntarily participates in litigation to any extent it has waived its right to compel arbitration of the same dispute? If the best answer is somewhere between those two poles, where is the point of no return, beyond which a party participating in litigation will be held to have waived its right to arbitrate?

This Article proposes answers to the above questions. To do so, the first Part of the Article reviews the current state of the law of arbitrability, which provides the framework within which the issue of waiver by participation in litigation must be analyzed. The second Part of this Article examines the different ways that the United States circuit courts have attempted to deal with the issue of when participation in litigation will be found to constitute a waiver of the right to arbitrate. The most fundamental split in the circuits on that issue concerns whether some prejudice to the party resisting arbitration is a necessary element of such a waiver.(fn13) In addition, even among those circuits that require a showing of prejudice, there is disagreement as to what type of showing is required. The third Part of this Article proposes a uniform resolution of the issue of when a party's participation in litigation should be found to constitute a waiver of the contractual right to arbitrate. It is argued that a rule that does not require a showing of prejudice to the party resisting arbitration better effectuates the policies of the FAA. Rather, the goal of fair and efficient dispute resolution in conformity with the parties' agreement is better served by a rule that the contractual right to compel arbitration of a

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dispute is waived if it is not asserted by the time the defendant answers the complaint.

II. THE LAW OF ARBITRABILITY FRAMEWORK

As the Supreme Court has noted, the word "arbitrability" is used in two different senses-one broad and the other narrow.(fn14) In the broad sense, "arbitrability" can refer to "any potentially dispositive gateway question" that might prevent a determination on the merits by an arbitrator.(fn15) For example, one party to a contractual dispute might argue to an arbitrator that the other party's claim is time-barred. In such a circumstance, the arbitrator might rule on the issue of "arbitrability," that is, whether the claim is time-barred, before considering the merits of the underlying claim.(fn16) In the narrow, more technical sense, the word "arbitrability" refers to the question of whether an arbitrator should be considering the gateway question at all or if the gateway question is one that should be decided by a court.(fn17) Both senses of the word are relevant to the issue of when a party's participation in litigation will constitute a waiver of the right to arbitrate. The law is currently unsettled both as to who should decide issues of waiver by participation in litigation(fn18) and as to what standard the decision maker should be apply.(fn19)

A. The FAA

Any discussion of the modern American law of arbitrability must begin with a review of the provisions of the FAA. Prior to enactment of the FAA, the courts of the United States followed the old English common law rule that parties were free to breach an agreement to arbitrate so long as an...