Two Bites at the Apple: the Prejudicial Burden in Arbitration Waiver

• Publication year: 2019

Two Bites at the Apple: The Prejudicial Burden in Arbitration Waiver

Alexander H. Weathersby
University of Georgia School of Law

TWO BITES AT THE APPLE: THE PREJUDICIAL BURDEN IN ARBITRATION WAIVER

Alexander H. Weathersby^*

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Table of Contents

I. Introduction..........................................................................772

II. The FAA: History and Context..........................................777

A. THE MYTH OF JUDICIAL JEALOUSY.................................777
B. THE FAA'S PURPOSE........................................................ 780

1. The Congressional Reports......................................781
2. The Structure of the Act Itself..................................783

C. THE FAA IN THE COURTS................................................. 784

1. The Edifice of Arbitration Policy.............................786
2. Policy and Prejudice................................................790

III. The Circuit Views on Prejudice.......................................792

A. PREJUDICE CIRCUITS......................................................793
B. NO-PREJUDICE CIRCUITS................................................797

IV. Analysis and Conclusion..................................................798

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I. Introduction

Arbitration has ancient roots.¹ Disputants have long viewed arbitration as an attractive alternative to litigation.² In the years following the passage of the 1925 Federal Arbitration Law (FAA), commentators trumpeted arbitration's efficiencies to encourage acceptance of the FAA.³ The judicial climate of 1925 lent an air of relevance to these commentators' arguments in favor of the new federal regime,⁴ which put arbitration clauses on par with other contract clauses.⁵ Before 1925, common-law precedent prohibited courts from enforcing executory agreements to arbitrate against parties who wished to revoke an arbitrator's authority.⁶ This common-law holdover badly weakened the institution of

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arbitration—an institution that academics,⁷ legislators,⁸ and even judges⁹ agreed would aid dispute resolution in the United States.

With the courts unwilling to reverse precedent, legislatures stepped in to make arbitration agreements enforceable.¹⁰ The states were first to act,¹¹ but Congress followed soon after, passing the FAA in 1925. Now it was the courts' job to apply the law with regularity so that the acclaimed benefits of arbitration would inure to the American legal system.¹² The body of law that then emerged gave life to what the Supreme Court would call the "liberal federal policy favoring arbitration agreements."¹³ This policy means that courts liberally enforce arbitration agreements to advance the cost-saving policy goals of the FAA.¹⁴

What began as a countermeasure to judges' historical hostility¹⁵ —a countermeasure that aimed to place arbitration "upon the same footing as other contracts"¹⁶ —grew over the following decades into a strong federal policy that judges invoked when they enforced agreements to arbitrate.¹⁷ Even now, courts often use this

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policy to save costs, free up dockets, and call on expert decision makers.¹⁸

But courts' application of the federal policy favoring arbitration has caused inefficiencies, encouraging the kind of spending and delay that arbitration instead ought to prevent.¹⁹ These inefficiencies crop up perennially in the context of arbitration waiver. A party resisting arbitration based on the other party's alleged waiver must show that the waiving party acted as though it intended to litigate, not arbitrate.²⁰ This is true in arbitration waiver as it is in any contract waiver situation.²¹ All circuits require at least this showing, but most require more.²²

Most circuits have ruled that a party resisting a motion to compel arbitration must prove (1) that the movant acted inconsistently with its right to arbitrate and (2) that the movant's inconsistent acts caused the nonmovant prejudice.²³ Courts that maintain this rule place the burden on the nonmovant to show prejudice.²⁴ Even if the party moving to compel arbitration has broadcasted its plans to litigate through its overt acts, those acts may not amount to a waiver absent a showing that those acts prejudiced the nonmoving

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party.²⁵ Acts that would ordinarily show a party's intent to litigate include delaying before invoking its right to arbitrate, choosing a litigation venue or removing to a different litigation venue, undertaking preliminary motions practice, filing dispositive motions, collaborating with the court and the other party in pretrial meetings, or engaging in discovery.²⁶

So the burden of prejudice may allow, and even encourage, litigants to create the very costs that Congress introduced the FAA to save. A party may use arbitration as a "plan B" as soon as its litigation strategy has gone awry, or as soon as the party has won some advantage through litigation that it might not have won in arbitration. The burden of prejudice paves the way for a strategy that Judge Posner has called, "[H]eads I win, tails you lose."²⁷

Given how litigants have manipulated the rules that require a showing of prejudice, this Note advocates for a different rule: courts should find that a party has waived its right to arbitrate when the party undermines the purposes of the FAA by wastefully litigating before moving to arbitrate. The Seventh Circuit has held that a party's decision to proceed with a suit in court raises a rebuttable presumption that the party has waived its right to arbitrate.²⁸ This presumption has the virtue of eliminating the prejudice requirement, but does not squarely address the problems of duplicative litigation and gaming the system by trying two venues. Instead, courts should adopt a rule that is both broader and narrower than the Seventh Circuit's presumption. It is true that a bright-line presumption of waiver when parties fail to raise arbitration as a defense has the benefit of clarity. However, the trigger for this presumption (failure to raise an arbitration defense in an answer) is too mechanical and may encourage courts to find

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waiver where the party's failure was justified and the parties (and society as a whole) might still save time and money by arbitrating.

Instead, courts should apply a two-tiered analysis in finding arbitration waiver. Under the first tier, courts should automatically find waiver if a party deliberately manipulates the judicial process to gain a tactical advantage or gains an advantage it would not have gained in arbitration. For example, a party might win a smokinggun document in a discovery dispute, which it would not have won in arbitration's less-probing fact-finding process. That would should lead to automatic waiver.

Under the second, less-demanding tier, courts should rebuttably presume waiver where a party duplicates the machinery of arbitration by litigating in court. This rule would prevent most duplicative litigation while allowing an equitable outlet for parties that pursued litigation in good faith.²⁹ A party's good-faith decision to litigate, rather than arbitrate, is a lesser evil than a deliberate manipulation of the courts to gain a tactical advantage. But invoking arbitration after extensive pretrial proceedings is still wasteful and should raise a rebuttable presumption of waiver.³⁰

Part II of this Note traces the history of arbitration from its roots, focusing on its development in the English common law and its transfer to American courts. This survey will clarify the context in which Congress passed the FAA in 1925, the challenges that Congress sought to address, and the benefits that Congress hoped to provide. Part II will show how courts readily adopted and applied the FAA, but also how courts became overzealous in their application of the FAA. Part III will discuss the problematic overextension of the policy favoring arbitration in the arbitration waiver context. It will examine the prevailing rule among circuits,

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under which a party resisting a motion to compel arbitration must show that the movant's actions caused it prejudice. Finally, Part IV will advocate a two-tiered waiver rule that prevents duplicative litigation and strategies that abuse courts' ready enforcement of arbitration, while also affording parties an equitable outlet.

II. The FAA: History and Context

Congress devised the FAA to address a judge-made problem. On January 24, 1924, Representative George Scott Graham of Pennsylvania, speaking on behalf of the Committee on the Judiciary, described "an anachronism of our American law" that had created the need for the new legislation that he would shortly propose: the FAA.³¹ The anachronistic law was judge-made; the remedy would be legislative.

This Part discusses both the judicial problem and the legislative solution. It examines the history of courts' unwillingness to enforce arbitration and legislators' efforts to correct that unwillingness. And it explains how, in response to legislators' efforts, courts erected an "edifice of [their] own creation."³²

A. THE MYTH OF JUDICIAL JEALOUSY

Representative Graham explained that English courts' unwillingness to enforce arbitration agreements had passed into American law and embedded itself there.³³ Attempting to explain English courts' refusal to enforce agreements to arbitrate, Representative Graham cited "the jealousy of the English courts for their own jurisdiction."³⁴ He said that although American courts had criticized the rule and its illogicality, the rule was too strongly fixed for courts to overturn it without legislative permission.³⁵

Representative Graham's history was incomplete, but his conclusion about American courts' reluctance to change was apt. The Second Circuit would later call his conjecture about judicial

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jealously "quaint," a product of legal minds manufacturing a reason for a rule.³⁶ other commentators agreed that this jealousy rationale was a...