Waiving the right to arbitrate by participating in litigation.

AuthorFrechette, Donald E.

THE SUPREME COURT has made it clear that in cases involving the Federal Arbitration Act (1) there is a liberal public policy favoring arbitration (2) and that courts should "rigorously enforce agreements to arbitrate...." (3) Consistent with these directives, where a contract contains an arbitration clause there is a strong presumption that arbitration should be compelled "unless it can be said with positive assurance that an arbitration clause is not susceptible of an interpretation which would cover the dispute at issue." (4)

At the same time, it is clear that the right to demand arbitration--like virtually any right--can be waived, (5) either expressly or by implication. (6). Because of the strong preference for arbitration in federal courts, "any doubts concerning whether there has been a waiver are resolved in favor of arbitration." (7) The issue of waiver must be considered "with a healthy regard for the policy of promoting arbitration." (8) Consequently, waiver is not to be lightly inferred, (9) and the proponent of waiver bears a "heavy burden." (10)

One way that a party can impliedly waive its right to arbitrate is by engaging in litigation with respect to issues that are otherwise arbitrable. (11) However, as the cases make clear, there are no "bright line" tests when it comes to the issue of waiver, (12) and each case must be judged on the totality of its particular facts. (13) This article will review the factors most commonly considered by courts when determining the issue of arbitral waiver and will examine several recent cases applying those facts. It will conclude with a discussion of common case themes that should assist in guiding the reader on the issue of whether a waiver has occurred.

  1. Participating in Litigation--How Much Is Too Much? (14)

    Not every act of participating in litigation will result in a finding that a party's right to demand arbitration has been waived. For example, waiver will generally not result simply because a party elects to remove a case from state to federal court. (15) Filing an answer (16) or even a counterclaim, (17) at least in the absence of any demonstrable showing of prejudice, is also usually insufficient to give rise to a valid defense of waiver.

    At some point, however, a party's participation in the litigation process becomes significant enough that it may safely be said that he has acted inconsistently with his arbitral rights, thus giving rise to a claim of waiver. But where is the line, and what does one have to do in order to cross it? The answer to that question will vary and the analytical framework employed, while theoretically consistent, is not uniform. (18) At ground, the cases make clear that three simple questions predominate the inquiry:

    * How long was the delay in demanding arbitration?

    * What litigation activity occurred during the period of delay?; and

    * What prejudice was suffered by the party opposing arbitration?

  2. How Courts Apply The Factors To Address The Issue Of Waiver

    In analyzing the issue of arbitral waiver, courts will employ a flexible approach that considers the totality of the circumstances. (19) A seven-month delay in asserting the right to arbitrate, standing alone, will likely not result in a finding of waiver. (20) But if during that seven months responsive pleadings are filed, discovery takes place, and a trial is scheduled, the result may be quite different. (21) Consequently while an examination of each of the waiver factors can be helpful, no factor standing alone is likely to give rise to a finding of waiver.

    1. The Amount of Delay

      The degree of delay in demanding arbitration is one of the first issues that will be considered when considering the issue of waiver. Generally speaking, delays of a month or two, without more, are insufficient to give rise to a claim of waiver. (22) On the other hand, delays approaching or exceeding one year, at least when other factors are present, augur in favor of a waiver. (23) Importantly, a number of courts have held that delay standing alone is insufficient to support a waiver claim. (24) As discussed below, the issue of waiver usually turns on the prejudice suffered by the party opposing arbitration. And, while delay alone may not equate to prejudice, it is unusual for a case to simply lay dormant for multiple months. Consequently, as the amount of delay increases, the greater the likelihood that litigation activity will take place, and that expenses will be incurred, both factors that inform the prejudice analysis. (25)

      The timing of the delay is also important, and the likelihood of a waiver finding will be increased when the arbitral demand comes on the eve of trial. (26)

    2. Participation In The Lawsuit

      Participation in a lawsuit is, on its face, inconsistent with any claimed arbitral right, suggesting waiver. (27) Courts have found the following actions may support a finding of waiver: (28)

      * Filing of a merits-based motion to dismiss; (29)

      * Defending a merits-based motion to dismiss; (30)

      * Filing a summary judgment motion; (31)

      * Engaging in discovery, particularly where the discovery is of a type that would not have been permitted in arbitration; (32)

      * Taking depositions; (33)

      * Attending case management conferences; (34)

      * Stipulating to scheduling orders; (35)

      * Developing a discovery plan; (36)

      * Participating in mandatory mediation; (37)

      * Opposing class certification; (38)

      * Seeking a preliminary injunction; (39)

      * Moving to compel discovery; (40)

      * Seeking a disqualification of counsel; (41)

      * Filing of motions in limine; (42) and

      * Declining the court's invitations to move to compel arbitration. (43)

      Plainly, despite the absence of "hard and fast" rules, the likelihood of a finding of waiver increases as the parties expend time and money (not to mention judicial resources) in pursuing a litigated alternative. Of course, waiver issues usually arise when the party who is being sued belatedly invokes the arbitral process. (44) Occasionally, a plaintiff seeks to compel arbitration despite having initially filed suit. (45) As a general matter, courts that have addressed this issue have concluded that the "filing [of] suit without asserting an arbitration clause constitutes substantial invocation of the judicial process, unless an exception applies. (46)

      Indeed, short of directly saying so in open court, it is difficult to see how a party could more dearly evince a desire to resolve a dispute through litigation rather than arbitration than by filing a lawsuit going to the merits of an otherwise arbitrable dispute. We emphasize that the legal standard for waiver is the same regardless of which party is the party alleged to have waived arbitration. Differences between the two sides arise from the voluntariness and timing of their actions, not the legal standard. That is not to say there can be no exceptions. There are lawsuits that can be filed that would not be inconsistent with seeking arbitration. For example, a plaintiff might file suit solely to obtain a threshold declaration as to whether a valid arbitration agreement existed. A plaintiff might also have to file suit to obtain injunctive relief pending arbitration. Other situations may arise justifying an exception; the list here should not be seen as exhaustive. (47) C. Prejudice

      The circuits are split as to whether prejudice is an essential element of any claim that waiver has occurred. (48) In those cases where prejudice is required, it usually takes one of three forms. First, increased litigation activity increases the likelihood that the party opposing arbitration will incur costs that would not have been incurred in an arbitral setting. (49) This is sometimes referred to as "procedural" prejudice. (50) Second, "substantive" prejudice may be said to occur when merits-based motion practice occurs, and the losing party then seeks to invoke his arbitral rights. (51) In such cases, the losing party has benefitted by having a chance to first "test the waters" and prejudice to the prevailing party is manifest. (52) Finally, substantive prejudice can again be found when the party who is now seeking to arbitrate was first able to obtain discovery that would not have been available in an arbitration. (53)

  3. Recent Cases

    Cases involving arbitral waiver are sui generis. A checklist of activities that may lead to waiver can be prepared, but it is the of the activities, viewed in the context of the particular litigation at issue, that must be considered when the issue of waiver is at hand. Several recent cases may help to illustrate the point.

    In re Citigroup (54) involved a class action filed in a Connecticut superior court in March 2000 based on claims that the vesting and forfeiture provisions of an employer's stock compensation plan violated state law. The case was removed to the Connecticut federal court. Subsequently, along with eleven other consolidated cases, it was transferred to Massachusetts federal district court. The district court granted class certification in October 2001 and in July 2002 allowed one of the defendants, Travelers Property Casualty Corp. ("Travelers"), to amend its answer to assert an affirmative defense of arbitrability. In May 2003--more than three years after the complaint was first filed--Travelers moved to stay or dismiss the litigation as to those class members who had arbitrable claims. The district court denied the motion.

    In affirming, the First Circuit first articulated the factors relevant to its analysis:

    In determining whether a party to an arbitration agreement, usually a defendant, has waived its arbitration right, federal courts typically have looked to [1] whether the party has actually participated in the lawsuit or has taken other action inconsistent with his right, ... [2] whether the litigation machinery has been substantially invoked and the parties were well into preparation of a lawsuit by the time an intention to arbitrate was communicated by the...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT