The issue of a party waiving its right to arbitrate by participating in litigation is not new. Sometimes a party will participate early on in litigation thinking they can get the case dismissed or moved to a different more favorable venue. The question always becomes how much participation is too much? A recent case by the United States Court of Appeals for the Eighth Circuit in Messina v. North Central Distributing, Inc. dba Yosemite Home Decor, 2016 WL 2640911 (8th Cir. May 10, 2016) sent out a reminder that the issue of arbitration should be raised at the earliest possible time.
Messina sued his former employer, Yosemite Home Decor, in Minnesota state court for breach of contract and wrongful termination. Yosemite removed the case to federal court, filed an answer and later moved to transfer venue to the Eastern District of California. The district court denied to the motion to transfer venue and then, eight months after Messina filed his complaint, Yosemite moved to compel arbitration. The court denied the motion to compel arbitration and concluded that Yosemite had waived its right to arbitrate. Yosemite then appealed to the United States Court of Appeals for the Eighth Circuit.
In affirming the denial of the motion to compel arbitration, the Eighth Circuit restated the test for determining whether a party waives its right to arbitrate. A party waives its right to arbitrate if it (1) knew of an existing right of arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts. Messina v. North Central Distributing, Inc., 2016 WL 2640911 (8th Cir. May 10, 2016), citing, Lewallen v. Green Tree Servicing, LLC., 487 F.3d 1085, 1090 (8th Cir. 2007). A party acts inconsistently with its right to arbitrate if it substantially invokes the “litigation machinery” before asserting its right to arbitrate. Id.
The court found that Yosemite acted inconsistently because it proceeded in court for eight months before asserting its right to arbitrate and substantially invoked the litigation machinery by removing the case to federal court, filing an answer, participating in a pretrial hearing, filing a scheduling report and a motion to transfer venue. More importantly, the court held that Yosemite knew about its arbitration right during this entire process. The court also held that Messina was prejudiced because Yosemite used discovery that was not available in arbitration, had suffered delay and costs and potential duplication of efforts would occur if Messina was now required to arbitrate. Significantly, the court held that delay in seeking to compel arbitration does not itself constitute prejudice, but delay combined with other facts can serve as a basis to support a finding of prejudice. Based on the actions of Yosemite plus the delay, the court found that Yosemite’s conduct satisfied the Lewallen waiver test and affirmed the denial of the motion to compel arbitration.
The real moral of the story is that if there is an arbitration clause, and you actually want to arbitrate, you should move to compel arbitration at the earliest opportunity. Sitting on your right may cause a court to find that you waived your right to arbitrate. The opinions in this blog are solely the author’s and any comments, suggestions or replies should be sent to firstname.lastname@example.org.