In a significant shift, The California Supreme Court in Quach v. California Commerce Club, Inc., has aligned state law with a recent development in federal precedent, eliminating the arbitration-specific prejudice requirement when determining waiver of the right to enforce arbitration agreements. Historically, both California and federal courts required a showing of prejudice to establish waiver in the context of arbitration, a standard rooted in a policy favoring arbitration over litigation. However, following the U.S. Supreme Court's ruling in Morgan v. Sundance, Inc. (2022) 596 U.S. 411, which clarified that arbitration agreements should be treated like any other contract, the California Supreme Court has now repealed its prejudice requirement. This decision underscores the principle that arbitration agreements are placed on equal footing with other contracts, ensuring that waiver determinations are based solely on general contract law principles.
Facts of the Underlying Case
Peter Quach worked at the casino operated by California Commerce Club for almost 30 years. He was terminated and sued for wrongful termination, age discrimination, retaliation, and harassment. Quach signed an arbitration agreement with Commerce Club that provided for binding arbitration of all employment-related disputes.
Despite the agreement in place, after Quach filed his complaint, Commerce Club answered the complaint as well as discovery. No motion to compel arbitration was initially filed. In fact, in its first case management conference statement, Commerce Club checked the box for jury trial. A trial date was set by the court and jury fees paid by both sides. Although there was some interruption of the proceedings due to the COVID pandemic, Commerce Club did not file a motion to compel arbitration until thirteen months after Quach filed his suit. Commerce Club argued that the late filing did not prejudice Quach because there had only been minimal discovery completed. Quach opposed and asserted that Commerce Club had waived its contractual right to compel arbitration.
The trial court denied Commerce Club's motion to compel arbitration finding that the plaintiff would be prejudiced if forced to arbitrate as significant pre-litigation activities had taken place. On appeal that decision was reversed. Two weeks after the Court of Appeal published its opinion, the United States Supreme Court issued the opinion in Morgan, which found that "federal law does not require a showing of prejudice to establish waiver of the right to arbitrate." Id. at 413-414. The California Supreme Court granted review to "reexamine the California prejudice rule in light of Morgan."
No Arbitration Specific Prejudice Requirement
The court in Morgan clarified that when the Federal Arbitration Act (FAA) governs, the same waiver standards should apply as in other contractual contexts. This decision prompted this court to reconsider whether California's arbitration-specific prejudice requirement should continue under the California Arbitration Act (CAA).
The burden was traditionally on the party opposing arbitration to prove that the other side had waived its contractual arbitration rights. This included showing prejudice resulting from the other party's conduct in litigation. St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1203. California's public policy favoring arbitration often meant that courts were reluctant to find waiver unless significant prejudice, such as excessive discovery had occurred. However, "substantial expense and delay is not sufficient to show prejudice unless caused by the unreasonable or unjustified conduct of the party seeking arbitration." Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 377.
In this case, Commerce Club argued that Morgan does not necessitate change to California's precedent. The court disagreed and noted precedent can be reconsidered when legal developments, like Morgan, indicate it is unsound. Morgan rejected arbitration-specific procedural requirements, aligning with the principle that arbitration agreements should be treated like any other contracts. The court found this reasoning also applied to the CAA, suggesting that California's rule requiring prejudice to establish waiver should be abrogated. It reasoned that neither CAA's statutory language nor legislative history supported maintaining a prejudice requirement.
The court noted that both federal and state policies fundamentally aim to make arbitration agreements as enforceable as other contracts, not more so. Consequently, the court abrogated California arbitration-specific prejudice requirement. Recognizing that it was based on a now-overruled federal precedent. Moving forward, the court found that the procedural rules of the CAA, like those of the FAA should be grounded in treating arbitration agreements like any other contracts.
Under Generally Applicable Law, No Showing of Prejudice is Required to Establish Waiver of a Contractual Right
Under California law, defenses like waiver, forfeiture, estoppel, laches, or procedural timeliness apply when a party argues that another's litigation conduct should prevent arbitration. Each defense must be considered separately. Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 315. The waiver defense, specifically, requires clear and convincing evidence that the other party knowingly and intentionally relinquished its right to arbitrate. This assessment focuses on the waiving parties' conduct and intent, without considering the impact on the opposing party. Waiver does not require proof of harm or detrimental reliance. Waller v. Truck Ins. Exchange, Inc. (1995) 11 Cal.4th 1, 31.
In its analysis, the court noted that simply participating in litigation does not automatically result in a waiver of the right to arbitration. Additionally, courts do not typically find prejudice based on the opposing party incurring court costs and legal fees.
With the arbitration specific rule of waiver abrogated, the court considered the appropriate generally applicable state contract law principle to apply instead. According to Morgan, various defenses-such as waiver, forfeiture, estoppel, laches, or procedural timeliness- may be relevant when a party opposes arbitration due to the other party's litigation conduct. Similarly, under California law, a party's right to compel arbitration can be lost on these grounds.
Under generally applicable contract law, to establish waiver, the party opposing enforcement must prove by clear and convincing evidence that the waiving party knew of the contractual right and intentionally relinquished or abandoned it. McCormick v. Orient Insurance Co., (1890) 86 Cal.260, 262; D'Amico v. Board of Medical Examiners (1974) 11 Cal.3d 1, 18-19. This intent may be demonstrated through words expressing an intent to relinquish the right or through conduct so a factfinder would conclude the right had been abandoned. The focus of the waiver inquiry is exclusively on the waiving party's words or conduct, not on the impact of that conduct on the opposing party or the opposing party's subjective evaluation of the waiving party's intent. Id.
Commerce Club Waived Its Right to Arbitration
The trial court initially failed to apply the correct legal standard for determining waiver in this case. The evidence demonstrated that Commerce Club was aware of its right to compel arbitration but intentionally chose not to enforce it. Commerce Club engaged in extensive litigation activities, such as answering the complaint, requesting a jury trial, and conducting discovery- actions that indicated a preference for resolving the dispute in court rather than arbitration. It wasn't until thirteen months after the lawsuit was filed that Commerce Club first attempted to compel arbitration.
Given these facts, the court ruled that Commerce Club's actions were inconsistent with an intent to arbitrate, leading to the conclusion that it waived its right to do so, The court dismissed Commerce Club's arguments that it did not move to compel arbitration late or that its discovery methods were minimal, emphasizing that the key issue is Commerce Club's clear abandonment of its right to arbitrate over an extended period.
The record showed by clear and convincing evidence that Commerce Club knew of its right to compel arbitration. Despite claiming that its counsel struggled to find a complete copy of Quach's arbitration agreement earlier, Commerce Club's own admissions reveal that they were aware of this right from the beginning. The human resources director attested that all employees, including Quach, were required to sign an arbitration agreement in 2015. Additionally, in response to Quach's complaint Commerce Club acknowledged that Quach's arbitration agreement barred the lawsuit, and that arbitration should be compelled,
However, Commerce Club's subsequent actions, such as answering the complaint and actively participating in discovery, clearly indicated an abandonment of the right to arbitrate. Even though Commerce Club initially mentioned arbitration in its answer, it did not pursue it further with Quach's counsel or the court. Instead, Commerce Club requested a jury trial, left the arbitration option unchecked on the case management statement and continued to engage in discovery, including taking Quach's deposition.
It was thirteen months after the lawsuit began that Commerce Club first sought to compel arbitration. This delay and Commerce Club's conduct as a whole strongly suggested an intentional decision to litigate the case in court rather than pursue arbitration. Consequently, the court found that Commerce Club waived its right to arbitrate the dispute.
Key Takeaways
- Waiver of arbitration rights: Courts will not automatically consider a party's participation in litigation as a waiver of its right to compel arbitration. However, when a party engages in litigation conduct that is inconsistent with an intent to arbitrate, such as extensive participation in litigation proceedings, it can result in a waiver of that right.
- Intentional Relinquishment: To establish a waiver under generally applicable contract law, it must be proven by clear and convincing evidence that the party knew of the right to arbitrate and intentionally relinquished or abandoned that right. This is demonstrated through actions or words that are inconsistent with an intent to enforce the agreement.
- Abrogation of Arbitration-Specific Rules: The court's decision underscores the shift away from arbitration-specific procedural rules that previously required a showing of prejudice to establish waiver. Instead, the focus is now on applying the same standards and defenses that would apply to any other contract.
Conclusion
The court's decision in this case highlights the importance of consistent and timely actions when seeking to enforce arbitration rights. By engaging in extensive litigation before attempting to compel arbitration, Commerce Club effectively waived its right to arbitrate the dispute. The ruling reflects a broader trend toward treating arbitration contracts like any other contracts, without the need for arbitration-specific procedural requirements. This case serves as a reminder that parties wishing to enforce arbitration agreements must do so promptly and without engaging in conduct that suggests a preference for litigation.