You Can’t Have Your Cake And Eat It Too: Ninth Circuit Confirms a Party May Waive Its Right to Arbitration by Its Conduct

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04/25/2017

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You Can’t Have Your Cake And Eat It Too: Ninth Circuit Confirms a Party May Waive Its Right to Arbitration by Its Conduct

By: Rebecca Hause-Schultz

When properly drafted, arbitration agreements can protect employers from lengthy and expensive litigation in court. However, even when an arbitration agreement is valid, it may be waived by a party’s conduct during litigation. On June 21, 2016, the Ninth Circuit Court of Appeal confirmed this rule in Martin v. Yasuda.
 
In Martin, Plaintiffs were a group of cosmetology students who had studied at Defendants’ cosmetology school.  As part of their enrolment in the school, Plaintiffs signed an arbitration agreement. The agreement provided that any dispute with the school would be subject to binding arbitration. 
 
Despite the signed arbitration agreement, Plaintiffs filed a class-action lawsuit seeking unpaid wages and penalties. Plaintiffs contended that they were entitled to minimum hourly wages, overtime wages, and unpaid premiums for missed meal and rest breaks for the services they provided to the school, such as cleaning and washing laundry, that were unrelated to their education. 
 
The parties spent over a year actively litigating the case in district court, including agreeing on how to structure the litigation, arguing a motion to dismiss, answering discovery, and conducting depositions. During litigation, counsel for Defendants informed the court that Defendants were probably “better off” litigating in federal court and that they likely would not invoke their right to arbitration. 
 
In March 2015, approximately a year and a half after the lawsuit was filed, Defendants changed course and moved to compel arbitration. The district court denied Defendants’ request, and on appeal, the Ninth Circuit upheld the decision. The Ninth Circuit explained that the right to arbitration can be waived where a party: (1) had knowledge of its right to arbitrate, (2) acted inconsistently with its right to arbitrate, and (3) where moving the case to arbitration would prejudice the party opposing arbitration. As Defendants conceded that they knew of their right to arbitrate, the court examined whether Defendants acted inconsistently with the right to arbitrate and whether moving the case to arbitration would prejudice Plaintiffs. 
 
The court stated that a party that chooses to delay its right to compel arbitration by actively litigating the case to take advantage of being in federal court, as Defendants did here, has engaged in acts inconsistent with its right to arbitration.  The court further stated that Plaintiffs were prejudiced by Defendants’ actions because they had spent time, money, and resources litigating the case, including prevailing on a motion to dismiss. If the case was subsequently compelled to arbitration, Plaintiffs would be forced to re-litigate the same issues again before the arbitrator. According to the court, by their conduct, Defendants’ waived their right to arbitrate. 
 
COUNSEL TO MANAGEMENT: 
 
Even if you have a valid arbitration agreement, the right to arbitration may be deemed waived if the case is actively litigated in court. It is essential that employers are represented by expert counsel who will protect an employer’s option to compel arbitration where appropriate. Contact the Saqui Law Group if you have questions about how the Martin case can affect your business. 

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