No Showing of Prejudice Required to Argue Waiver of Right to Arbitration
Topics: Arbitration Agreements, Court Decisions
Many California employers require their employees to sign agreements to submit any disputes arising out their employment to binding arbitration. If an employee files a lawsuit in court, the employer then has the option of either proceeding with litigation or moving the court to order the matter to arbitration. However, if an employer chooses to litigate, the court may find that they waived any right to subsequently enforce the arbitration agreement. Recently, the California Supreme Court issued a decision making it even easier for employees to avoid arbitration when an employer delays in enforcing an arbitration agreement.
Previous State of the Law
Previously, both state and federal courts required that a party seeking to avoid arbitration first show that it was prejudiced by the moving party’s delay in moving to compel arbitration. Under that framework, a party could participate in litigation, including discovery and motion practice, and later move to compel the matter to arbitration, and unless the nonmoving party could meet the burden of proving they were prejudiced beyond merely the loss of time and expenses, the court could order the matter to arbitration.
That all changed when the U.S. Supreme Court decided Morgan v. Sundance, Inc. (2022) 596 U.S. 411. In Morgan (interpreting the Federal Arbitration Act or “FAA”), the U.S. Supreme Court observed that the FAA’s policy favoring arbitration over litigation did not allow courts to create additional, arbitration-specific procedural rules. The Court thus rejected the additional prejudice requirement for parties arguing waiver of arbitration rights.
The Morgan decision applied to all arbitration agreements under the FAA. However, the question remained whether the California Arbitration Act’s (“CAA”) procedural rules still required a showing of prejudice by the party opposing arbitration to prove waiver.
Quach v. California Commerce Club, Inc.
On July 25, 2024, the California Supreme Court took up the question of demonstrated “prejudice” in waivers of right to arbitration in Quach v. California Commerce Club, Inc. (S275121 ). Quach filed a lawsuit in 2018 after California Commerce Club terminated his employment. Before Quach filed his lawsuit, Commerce Club provided him with a copy of the signature page of the arbitration agreement he signed in 2015. The agreement provided for binding arbitration of all employment-related disputes.
However, rather than immediately moving to compel arbitration, Commerce Club answered the complaint. Beyond asserting an “affirmative defense” that the matter was subject to binding arbitration, Commerce Club’s attorney did not raise the arbitration agreement with Quach’s counsel or the court in any other way. Thereafter, Commerce Club engaged in significant discovery practice, including propounding multiple sets of written discovery, responding to written discovery, and taking Quach’s deposition. Then – 13 months after Quach filed his complaint – Commerce Club moved to compel the matter to arbitration. Quach opposed the motion, arguing that Commerce Club waived its right to arbitration. The trial court denied Commerce Club’s motion, finding that it waived its right to arbitrate and its delay prejudiced Quach. However, the Court of Appeal reversed the trial court, ruling that the court’s finding of prejudice was not supported by substantial evidence. Two weeks later, the U.S. Supreme Court issued its decision in Morgan.
The California Supreme Court granted review to consider Quach’s appeal in light of the Morgan decision. The Court found that California’s decades-long, arbitration-specific prejudice requirement was based upon the same federal precedent at issue in Morgan. However, as the Supreme Court clarified in Morgan, the public policy favoring arbitration does not allow courts to impose additional procedural requirements that are not required to enforce other contracts. Because California law does not require a showing of prejudice to prove waiver of a contractual right, courts cannot require a party opposing a motion to compel arbitration on the basis of waiver to prove they were prejudiced by the delay. The Court reversed and remanded back to the lower court.
Implications for Employers
The Morgan and Quach decisions underscore the importance of not only having enforceable arbitration agreements in place, but in moving disputes to arbitration promptly. Employers facing complaints from current and former employees should diligently search their records to determine whether those employees signed arbitration agreements, and if so, notify their counsel as soon as possible. If you need assistance in drafting an arbitration agreement, updating an older agreement, or have questions about arbitration agreements, please contact Christopher Dawood or your favorite CDF attorney, and subscribe to CDF’s California Labor & Employment Law Blog to ensure you stay up-to-date on future developments.
