When is it too late to arbitrate?

The Supreme Court of California recently decided to review a case where the Court of Appeal reversed an order denying a petition to compel arbitration that was filed thirteen months after plaintiff's lawsuit was filed.

In Quach v. California Commerce Club (2022) 78 Cal.App.5th 470, Plaintiff worked for California Commerce Club (Commerce Club or Company) supervising activity on the gambling floor of a casino, and he signed an arbitration agreement. After a customer paid with $100 in counterfeit bills during plaintiff's shift, he was terminated, and, on Nov. 22, 2019, plaintiff sued the Company for, among other things, wrongful termination, age discrimination, retaliation, and harassment. The Company answered plaintiff's complaint and asserted plaintiff should be compelled to arbitrate his claims, however, the Company did not move to compel the complaint to arbitration when it filed its answer.

Over the next thirteen months, the parties litigated the case, and Commerce Club propounded form interrogatories, special interrogatories, requests for admission, and requests for production of documents. The Company also posted jury fees, responded to Quach's discovery, engaged in meet and confer communications, and took Quach's deposition.

In late-December 2020, Commerce Club filed a motion to compel arbitration. In its motion, the Company stated the delay in moving to compel arbitration was due to (1) the impact the COVID pandemic had on the Company's access to information and witnesses; and (2) its inability to find a fully executed arbitration agreement. The Company stated it did not find Quach's arbitration agreement until it reviewed his employment file during discovery. Additionally, the Company argued Quach suffered no prejudice from the delay, because the parties had engaged in only "minimal discovery."

In opposition, Quach contended the Company waived its right to arbitrate, and the delay in moving to compel arbitration was prejudicial because Quach spent time and money preparing for litigation.

The trial Court denied the Company's motion due, in part, because the Company engaged in a "litany of pretrial exchanges and actions" despite being keenly aware of the existence of the arbitration agreement it required Quach to sign.

The Company appealed and the Court of Appeal, Second Appellate District, Division One, reversed the trial court's order, and instructed the trial court to grant Commerce Club's motion to compel arbitration.

In reaching its conclusion, the Court of Appeal cited St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1203. It held in St. Agnes Medical Center, the Supreme Court made it clear participation in litigation alone cannot support a finding of waiver, and fees and costs incurred in litigation alone will not establish prejudice on the part of the party resisting arbitration.

In its analysis, the Court found the record was "bereft of evidence" that the Company abused the judicial processes, and the parties only engaged in written discovery, and, prior to the motion to compel being filed, the parties had not involved the trial court's powers such as in binding motion practice. Moreover, the Court held Quach failed to show the thirteen-month delay caused his claims to be resolved less quickly in arbitration. "Perhaps most crucially," the Court determined Quach failed to show he spent any time or money on litigation he could have avoided if the Company moved to compel arbitration earlier.

In its thoughtful opinion, the Court analyzed numerous cases - including and cited in Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 374-375, as well as post- Iskanian cases, and held: "a party's delay in asserting the right to arbitrate is not "unreasonable" merely because the party could have asserted it at an earlier time. Rather, what makes the delay "unreasonable" is that it negatively impacts the party resisting arbitration, such as by requiring that party to expend resources it otherwise would have saved by arbitrating the dispute, or by allowing the party asserting arbitration to take advantage of judicial processes not available in arbitration. Quach has failed to show negative impact from Commerce Club's delay."

The Court further held that a delay in asserting the right to arbitrate is not "unreasonable" just because the party could have asserted earlier. Rather, a delay is "unreasonable" when it "negatively impacts the party resisting arbitration." The negative impacts include requiring a party to expend resources it otherwise would not have spent in arbitration, or taking advantage of judicial processes that are not available in arbitration.

Given the split in authority on the issue which has developed in California courts over time, the Supreme Court of California will determine whether a party has waived its right to compel arbitration by engaging in litigation, especially in light of the United States Supreme Court decision in Morgan v. Sundance, Inc. (2022) 142 S.Ct. 1708. The issue presented in Morgan, was whether an arbitration-specific requirement that the proponent of a contractual waiver defense proves prejudice violated the United States Supreme Court's instruction that lower courts must "place arbitration agreements on an equal footing with other contracts."

In Morgan, the company opted not to file a motion to compel arbitration, and instead filed a motion to dismiss plaintiff's nationwide collective wage and hour action. After litigating the case for eight months, Sundance moved to stay the litigation and compel arbitration under the Federal Arbitration Act (FAA). The SCOTUS granted certiorari to resolve a split in the Circuit Courts over whether federal courts may adopt an arbitration-specific waiver rule demanding a showing of prejudice. Ultimately, in a 9-0 vote, the SCOTUS held that courts may not create novel rules to favor arbitration over litigation, e.g., regarding waiver, based on the FAA's "policy favoring arbitration."

Pending review, the Quach opinion may be cited, not only for its persuasive value, but also for the limited purpose of establishing the existence of a conflict in authority that would in turn allow trial courts to exercise discretion to choose between sides of any such conflict. Until the California Supreme Court decides Quach, parties who are inclined to enforce an arbitration agreement would be wise to move to compel arbitration early on in litigation, and certainly before extensively utilizing any unique aspects of the judicial process that are not available in arbitration.