Contributors

Eric P. Weiss

Principal

California Supreme Court follows federal law in holding that a showing of prejudice is no longer required when deciding whether a party has waived a right to arbitration.

On July 25, 2024, the California Supreme Court published its opinion in Quach v. California Commerce Club, Inc. which abrogated long-standing California Supreme Court precedent that, for over 21 years, has governed the often-disputed issue of whether a party waives a right to arbitration. In short, the Court held that a showing of prejudice to the party resisting arbitration is no longer required when determining whether the opposing party has waived the right to arbitration. The holding is consistent with federal courts that have addressed the issue in connection with the Federal Arbitration Act.

Background

Parties can waive their right to compel arbitration by waiting too long to assert it or engaging in other conduct inconsistent with an intent to arbitrate. Under the test for waiver the California Supreme Court adopted in St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, the most “critical” (and often “determinative”) factor is prejudice to the party resisting arbitration. The St. Agnes rule is an arbitration-specific exception to general state-law principles governing waiver of contract rights, which focus entirely on the conduct of the party that assertedly waived the right.

In Morgan v. Sundance (2022) 596 U.S. 411, however, the United States Supreme Court rejected a similar rule under the Federal Arbitration Act (“FAA”). SCOTUS held that the FAA does not authorize courts to apply an arbitration-only rule asking whether a party’s waiver resulted in prejudice for the opposing side.

Facts of the Quach case

Peter Quach filed his Complaint in 2018 against his former employer, the California Commerce Club (“Club”) which operated a casino where Quach worked for almost 30 years. His Complaint alleges claims for wrongful termination, retaliation, and harassment. The Complaint also expressly demanded a jury trial. Prior to the filing, the Club anticipated that Quach would file a lawsuit, so it provided Quach with a copy of an arbitration agreement that he signed in 2015 which required, among other things, that all employment-related disputes shall be decided in binding arbitration. Quach ignored the Club.

Rather than immediately filing a motion to compel arbitration, the Club filed an Answer to the Complaint which included an affirmative defense that arbitration was required pursuant to the agreement. In addition to filing the Answer, the Club propounded written discovery to Quach consisting of form interrogatories, special interrogatories, requests for admission, and requests for production of documents.

Prior to the initial Case Management Conference (“CMC”), the Club submitted its required CMC Statement. In that statement, the Club requested a jury trial. Furthermore, the Club did not check the box indicating that it was willing to participate in binding arbitration. Finally, the Club did not identify a motion to compel arbitration in the space provided for listing motions it expected to file prior to trial.

At the CMC, the trial court set a trial date. Thereafter, both sides posted jury fees and continued to engage in significant discovery. Although the proceedings were delayed due to COVID-19, the Club continued to actively participate in discovery, including taking Quach’s deposition. The Club also responded to Quach’s discovery including producing – again - a signed signature page of the arbitration agreement.

Finally, 13 months after the lawsuit was filed, the Club filed a motion to compel arbitration under the FAA and/or the California Arbitration Act (“CAA”). In response to the argument that it had unreasonably delayed in filing the motion, the Club explained that it had only recently located a complete copy of the arbitration agreement.

The trial court denied the Club’s motion finding that the Club “knew of its right to compel arbitration” and instead of moving to compel, propounded a “large amount” of written discovery, spent “significant” time meeting and conferring “over many months” and took Quach’s deposition. To the trial court, the Club’s conduct demonstrated “a position inconsistent [with the intent] to arbitrate.” The trial court also found that the delay had caused prejudice to Quach which, at the time, was required to be shown pursuant to St. Agnes.

The Court of Appeal reversed finding that the Club did not waive its right to compel arbitration, concluding that the trial court’s finding that Quach had shown prejudice was not supported by substantial evidence.

Two weeks after the Court of Appeal published its decision, SCOTUS published the Morgan opinion holding that federal law does not require a showing of prejudice to establish waiver of the right to arbitrate.

The California Supreme Court granted review of the Court of Appeal’s opinion to “reexamine our California prejudice rule in light of Morgan.”

Issue presented in the California Supreme Court

In deciding whether a party has waived its right to compel arbitration, should courts consider prejudice to the party resisting arbitration (as per St. Agnes), or instead focus only on the conduct of the waiving party (as per Morgan)?

California Supreme Court’s holding

In reversing the Court of the Appeal, the Court held that trial courts should not consider prejudice to the party resisting arbitration. As such, the Court expressly abrogated the St. Agnes rule. Based on the decision, he parties will proceed to trial as opposed to binding arbitration.

The Court concluded:

The record in this case shows that, being fully aware of its right to compel arbitration, Commerce Club chose not to do so for 13 months, affirmatively indicated its intent to pursue a jury trial rather than arbitration, and actively engaged in discovery — words and conduct markedly inconsistent with an intent to arbitrate. Accordingly, we conclude Commerce Club waived its right to arbitrate the dispute.

The conclusion is based solely on the Club’s conduct. Prejudice to Quach, if any, as a result of the delay, was not considered in light of the Court’s abrogation of St. Agnes.

Key takeaways

First and foremost, a party seeking to enforce arbitration agreements should move to compel arbitration promptly, ideally immediately after filing a response to the complaint. Furthermore, such parties should avoid engaging in any conduct—including litigation of the merits and factual development through discovery—that suggests an inconsistent intent to proceed in court.

Second, the Court’s decision brings California law in line with federal law, ensuring that courts will apply the same waiver principles regardless of whether a case is governed by the FAA or the CAA. Under those principles, courts should focus “exclusively … on the waiving party’s words or conduct.”

Third, by eliminating the “stringent” prejudice requirement, the decision will make it easier for parties resisting arbitration to show that the party invoking an arbitration agreement had waived its rights under the agreement. Future courts will focus on any “undue delay and gamesmanship” in the invocation of an arbitration agreement.

Finally, the Court also cautioned that lower courts “should separately evaluate each generally applicable state contract law defense raised by [a] party opposing arbitration,” including waiver, forfeiture, estoppel, laches, and untimeliness, rather than “lump[ing] distinct legal defenses into a catch-all category called ‘waiver.’”