Waiver of the right to arbitrate revisited

On June 10, 2022, I wrote in the Daily Journal that the United States and California Supreme Courts were not on the same page about the legal rule to apply when deciding whether a party seeking to compel arbitration has waived the right to arbitrate. (The United States and California Supreme Courts are not on the same page.) The recent cases of Morgan v. Sundance, Inc., 142 S. Ct. 1708 (2022) and Quach v. California Commerce Club, Inc., 78 Cal.App.5th 470 (2022), rev. granted, Aug. 24, 2022, S275121, highlighted the conflict between the federal and the California approach. Morgan, a unanimous decision, held it was not necessary for a party arguing its opponent had waived the right to arbitrate to show it had been prejudiced by its opponent's conduct. Rather, the party seeking to establish waiver only had to show that the party moving to compel arbitration had waived its right to arbitrate by acting inconsistently with that right. In contrast, Quach, following St. Agnes MediCenter v. PacifiCare of California, 31 Cal.4th 1187 (2003) and a long line of California cases, held that a showing of prejudice was necessary to establish waiver, and found waiver present in the case.

In the very recent case, Britani Davis v. Shiekh Shoes, LLC, 2022 WL 16546189 (2/1 10/31/22), the court quoted the trial judge: "[L]et me just say, to start, that this issue of waiver comes up at least once a month on the calendar." Because the issue of waiver of the right to arbitrate comes up so frequently, the legal rule to be applied is important.

In Davis, the state court applied the federal rule, because the parties agreed the Federal Arbitration Act applied; and, the FAA, as interpreted in Morgan, preempts any state rule regarding waiver. We now have a situation where the federal rule is likely to be applied in many state law cases, because federal preemption and the rule in Morgan will apply whenever interstate commerce is involved, and that is quite often. Moreover, the federal rule will also be applied in state court if the arbitration agreement provided the FAA shall govern the arbitration, and that too is often. And we can count as well on federal courts in California often applying the "prejudice not required" rule in Morgan.

The Davis opinion telegraphed its outcome in its first sentence: "Nineteen months after plaintiff Britani Davis filed suit against her former employer Shiekh Shoes, LLC (Shiekh), Shiekh moved to compel arbitration of Davis's claims." Given the court was going to apply the rule waiver does not require a showing of prejudice, it seemed a foregone conclusion that the court in Davis would affirm the trial court's order denying the motion to compel arbitration, because a nineteen months delay in moving to compel arbitration was conduct inconsistent with an intent to arbitrate. The Court of Appeal affirmed the trial court's order denying the motion to compel arbitration.

In addition to the delay in moving to compel, Shiekh had answered discovery, requested trial, and stipulated to a trial continuance. Shiekh's arguments that its litigation conduct had been de minimis, that Covid-19 led to delays, and that it had been unrepresented for 7 months were of no avail. Explained the court, "[W]e cannot fault the trial court for characterizing the totality of Shiekh's actions as inconsistent with an intent to arbitrate."

Because Quach has been accepted for review by the California Supreme Court, the California rule requiring a finding of prejudice to establish waiver may be scrutinized and even reconsidered. Uniform adoption of the federal rule regarding waiver of the right to arbitrate in California cases would present new issues. Two of those issues are discussed next.

One issue concerns the burden of proof to establish waiver: "clear and convincing" or "preponderance of the evidence." Thus far, California courts have applied the "preponderance of the evidence" standard: "Because the existence of the [arbitration] agreement is a statutory prerequisite to granting the petition, the petitioner bears the burden of proving its existence by a preponderance of the evidence. If the party opposing the petition raises a defense to enforcement - either fraud in the execution voiding the agreement, or a statutory defense of waiver or revocation (see § 1281.2, subds. (a), (b)) - that party bears the burden of producing evidence of, and proving by a preponderance of the evidence, any fact necessary to the defense." Rosenthal v. Great W. Fin. Sec. Corp., 14 Cal. 4th 394 (1996), quoting Strauch v. Eyring, 30 Cal.App.4th 181 (1994).

Thus, under California law, it appears that "preponderance of the evidence" is the standard to apply to establishing waiver of the right to arbitrate. However, the logic underlying the Federal Arbitration Act is that arbitration agreements should be placed "on the same footing" and treated the same way as other contracts. But under California law, waiver of a contractual right requires "clear and convincing" evidence." "'Waiver always rests upon intent. Waiver is the intentional relinquishment of a known right after knowledge of the facts.' ...The burden, moreover, is on the party claiming a waiver of a right to prove it by clear and convincing evidence that does not leave the matter to speculation, and 'doubtful cases will be decided against a waiver.'" DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd., 30 Cal. App. 4th 54 (1994).

A second issue is establishing "intent" to waive a right to arbitrate. Vacating the judgment of the Eighth Circuit Court of Appeals, Justice Elena Kagan explained in Morgan, "Stripped of its prejudice requirement, the Eighth Circuit's current waiver inquiry would focus on Sundance's conduct. Did Sundance, as the rest of the Eighth Circuit's test asks, knowingly relinquish the right to arbitrate by acting inconsistently with that right?" Morgan v. Sundance, Inc., 212 L. Ed. 2d 753, 142 S. Ct. 1708, 1714 (2022). However, if waiver requires establishing "intent" through conduct, then establishing intent of the person seeking to compel arbitration can sometimes be more difficult than establishing prejudice to the person opposing arbitration.

In California, "Waiver refers to the act, or the consequences of the act, of one side. Waiver is the intentional relinquishment of a known right after full knowledge of the facts and depends upon the intention of one party only. Waiver does not require any act or conduct by the other party." DRG/Beverly Hills, Ltd. v. Chopstix Dim Sum Cafe & Takeout III, Ltd., 30 Cal. App. 4th 54 (1994). This definition aligns with Morgan's focus on the conduct of the party seeking arbitration, and whether that conduct establishes "knowing relinquishment" of the right.

At first, it may seem that California cases requiring a showing of "prejudice" before finding a waiver of the right to arbitrate, make it easier to compel arbitration than the waiver rule in Morgan, which removes the added prejudice requirement. If it is harder to show waiver, because prejudice is required, it should be easier to compel arbitration, and if it is easier to show waiver, because prejudice is not required, it should be harder to compel arbitration. But on a case-by-case basis, this may not be so. Sometimes it could be easier to show prejudice to the person opposing arbitration than to establish intentional relinquishment of a known right by the party seeking to compel arbitration, especially, if intentional relinquishment of a known right needs to be established by "clear and convincing" evidence.

As the reader will have noticed, the California Supreme Court has accepted a petition for review in Quach, the California case applying the California rule requiring prejudice to establish waiver. We look forward to the California Supreme Court addressing whether California courts should adopt the federal rule regarding waiver of the right to arbitrate and considering how that will affect arbitration practice.