Waiver of Arbitration based on Litigation-Related Conduct
United States Supreme Court
Whether an arbitration challenger must show prejudice to establish waiver of arbitration based on litigation-related conduct is an issue that might be the subject of a United States Supreme Court opinion in the not too distant future.
Federal Arbitration Act (“FAA”) Section 3 authorizes a stay of litigation in favor of arbitration “providing the applicant for the stay is not in default in proceeding with . . . arbitration.” 9 U.S.C. § 3 (emphasis added). The most common application of the “not in default” language occurs when a defendant in a lawsuit delays seeking a Section 3 stay and litigates on the merits. See, generally, Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217-19 (3d Cir. 2007); Doctor’s Associates, Inc. v. Distajo, 66 F.3d 438, 454-56 (2d Cir. 1995).
Defending the suit on the merits—rather than seeking a stay of litigation and moving to compel arbitration—is inconsistent with arbitration and at some point constitutes at least an implied rejection or abandonment of the right to arbitrate. Section 3’s “not in default” condition authorizes a plaintiff resisting a stay to assert that the defendant has waived its right to arbitrate. 9 U.S.C. § 3; see 482 F.3d at 218; 66 F.3d at 454-56.
We discussed waiver of arbitration based on litigation-related conduct in a prior post, here. Under general principles of contract law, waiver is the “intentional relinquishment of a known right.” See, e.g., Professional Staff Congress-City University v. New York State Public Employment Relations Board, 7 N.Y.3d 458, 465 (2006) (“A waiver is the intentional relinquishment of a known right with both knowledge of its existence and an intention to relinquish it. . . . Such a waiver must be clear, unmistakable and without ambiguity”) (citations and quotations omitted).
Waiver may be established by demonstrating that a party renounced or abandoned contract rights, whether by its representations or other conduct inconsistent with an intent to assert those rights. See, e.g., Fundamental Portfolio Advisors, Inc. v. Tocqueville Asset Mgmt, L.P., 7 N.Y.3d 96, 104 (2006).
It focuses solely on the conduct of the party charged with waiver—it does not require any showing that the other party detrimentally relied on the conduct or otherwise suffered any prejudice. See, e.g., United Commodities-Greece v. Fidelity Int’l Bank, 64 N.Y.2d 449, 456-57 (1985); Fundamental Portfolio Advisors, 7 N.Y.3d at 104, 106-07; Albert J. Schiff Assoc. v. Flack, 51 N.Y.2d 692, 698-99 (1980).
The concept that another’s untimely assertion of a right has prejudiced a person is central to the equitable doctrine of laches, not waiver. See Capruso v. Village of Kings Point, 23 N.Y. 3d 631, 641 (2014) (“Laches is defined as such neglect or omission to assert a right as, taken in conjunction with the lapse of time, more or less great, and other circumstances causing prejudice to an adverse party, operates as a bar in a court of equity. The essential element of this equitable defense is delay prejudicial to the opposing party.”) (citations and quotations omitted).
Prejudice is also an element required to establish estoppel, which is an equitable bar to enforcement of a contract right. See, e.g., Schiff Assoc., 51 N.Y.2d at 699 (“Distinguished from waiver, of course, is the intervention of principles of equitable estoppel, in an appropriate case, such as where an insurer, though in fact not obligated to provide coverage, without asserting policy defenses or reserving the privilege to do so, undertakes the defense of the case, in reliance on which the insured suffers the detriment of losing the right to control its own defense.”)
Waiver: The Circuit Split on Prejudice
There is a split in the circuits concerning whether a party opposing a stay must not only demonstrate litigation-related conduct inconsistent with arbitration to establish waiver but must also establish prejudice.
Most circuit courts of appeals have determined that prejudice is required to establish waiver of arbitration based on litigation-related conduct. See Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 1968); Gavlik Constr. Co. v. H. F. Campbell Co., 526 F.2d 777, 783-84 (3d Cir. 1975), overruled on other grounds by Gulfstream Aerospace Corp. v. Mayacamas Corp., 485 U.S. 271 (1988); Carolina Throwing Co. v. S & E Novelty Corp., 442 F.2d 329, 331 (4th Cir. 1971); Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497 (5th Cir. 1986); O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345, 356 (6th Cir. 2003); Stifel, Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991); ATSA of Cal., Inc. v. Cont’l Ins. Co., 702 F.2d 172, 175 (9th Cir. 1983); S & H Contractors, Inc. v. A.J. Taft Coal Co., 906 F.2d 1507, 1514 (11th Cir. 1990); see also Joca-Roca Real Estate, LLC v. Brennan, 772 F.3d 945, 949 (1st Cir. 2014) (prejudice requirement is “tame at best”).
Courts frequently cite the FAA’s federal policy favoring arbitration as justifying a prejudice requirement for waiver. See, e.g., Stifel, Nicolaus & Co., 924 F.2d at 158 (citing Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)). Other circuit courts do not require prejudice. See St. Mary’s Med. Ctr. of Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d 585, 590 (7th Cir. 1992); Nat’l Found. for Cancer Rsch. v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 774 (D.C. Cir. 1987).
State supreme courts are also split. Compare, e.g., St. Agnes Med. Ctr. v. PacifiCare of Cal., 82 P.3d 727, 738 (Cal. 2003) (prejudice required under state arbitration law); Advest, Inc. v. Wachtel, 668 A.2d 367, 372 (Conn. 1995) (prejudice required; following Second Circuit authority) with Hudson v. Citibank (S.D.) NA, 387 P.3d 42, 47-49 (Alaska 2016) (prejudice not required under federal law); Raymond James Fin. Servs., Inc. v. Saldukas, 896 So.2d 707, 711 (Fla. 2005) (prejudice not required under federal law); Cain v. Midland Funding, LLC, 156 A.3d 807, 819 (Md. 2017) (prejudice not required under state law).
The Morgan SCOTUS Petition: Waiver, Prejudice, and the “Equal Footing” Principle
This raises an important question concerning FAA Section 2’s “equal footing principle,” which has been presented to the Supreme Court in a recent petition for certiorari: “Does the arbitration specific requirement that the proponent of a contractual waiver defense prove prejudice violate this Court’s instruction that lower courts must ‘place arbitration agreements on an equal footing with other contracts?’” Morgan v. Sundance, Inc., No. 21-328, Petition for a Writ of Certiorari (the “Petition”), Question Presented (quoting AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 339 (2011)). (See SCOTUS Docket here for more information and copies of papers.) Opposition papers are due on October 1, 2021, which means that the Court may grant or deny the petition before the end of 2021.
The question is a substantial one since the purpose of “savings clause” of FAA Section 2 “was to make arbitration agreements as enforceable as other contracts, but not more so.” See Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967). FAA Section 2’s “savings clause” provides that arbitration agreements falling under the FAA “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” 9 U.S.C. § 2.
Courts that require prejudice to establish waiver are arguably making arbitration agreements more enforceable than ordinary contracts. And that may violate the “equal footing” principle.
Back in 2011 the Supreme Court granted a petition for certiorari seeking review of essentially the same question, but the parties settled the case before it was fully submitted and SCOTUS dismissed it as moot without reaching the merits. Citibank, N.A. v. Stok & Assocs., P.A., 387 F. App’x 921 (11th Cir. 2010), cert. granted, 562 U.S. 1215 (2011), cert. dismissed, 563 U.S. 1029 (2011) (See SCOTUS Docket here.)
Morgan v. Sundance, Inc., presents another opportunity for the Court to resolve the circuit and state supreme court conflicts on litigation-conduct-related waiver. As set forth in the comprehensive and well-written petition, Morgan presents a good vehicle for SCOTUS to resolve a long-standing (and deep) circuit/state-supreme-court conflict, which continues to be worthy of review.
If the Supreme Court grants certiorari; reverses the U.S. Court of Appeals for the Eighth Circuit’s decision, which required the plaintiff to show prejudice; and holds that prejudice is not required to establish waiver, then parties who wish to demand arbitration after being named a defendant in a litigation will need to move promptly to stay litigation and compel arbitration or risk losing the right to do so. While that might create some enforcement risks for parties who wish to arbitrate, it may also reduce, or at least streamline, FAA enforcement proceedings concerning litigation-related-conduct-based waiver.
Contacting the Author
If you have any questions about arbitration, arbitration-law, arbitration-related litigation, or this article, or if you wish to discuss possibly retaining the Loree Law Firm to provide legal advice or other legal representation, please contact the author, Philip Loree Jr., at (516) 941-6094 or at PJL1@LoreeLawFirm.com.
Philip J. Loree Jr. has more than 30 years of experience handling matters arising under the Federal Arbitration Act and in representing a wide variety of clients in arbitration, litigation, and arbitration-related litigation.
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The U.S. Supreme Court decision, Badgerow v. Walters, 142 S. Ct. 1310 (2022) (discussed here), requires that an independent basis for subject matter jurisdiction (usually diversity) must appear on the face of petitions to confirm, vacate, or modify arbitration awards, and, by extension, petitions to enforce arbitral subpoenas or appoint arbitrators. See Badgerow, 142 S. Ct. at 1314, 1320. That independent basis for subject matter jurisdiction cannot be established by “looking through” to the underlying arbitration proceeding. In other words, the federal court cannot base subject matter jurisdiction on whether the court would have had subject matter jurisdiction over the merits of the controversy had they been submitted it to court rather than to arbitration. See Badgerow, 142 S. Ct. at 1314, 1320.
