California courts, like most federal courts, have historically held that a party does not waive its contractual right to compel arbitration unless the party opposing arbitration has been prejudiced by the moving party’s delay in seeking arbitration. However, last term in Morgan v. Sundance, Inc., the U.S. Supreme Court clarified that the Federal Arbitration Act (FAA) and the federal policy favoring arbitration does not impose such a prejudice requirement. Rather, under federal law, the party seeking to compel arbitration may waive its right to do so even if the opposing party has not been prejudiced by the delay.

The issue before the California Supreme Court in Quach v. California Commerce Club was whether California state law dictates a different result, specifically: Does the California Arbitration Act and state policy favoring arbitration nevertheless require a showing of prejudice to establish a waiver of the right to compel arbitration? The California Supreme Court answered, “No.”

Background

Peter Quach filed an employment-related lawsuit against his former employer, the California Commerce Club. When the California Commerce Club moved to compel arbitration based on an arbitration agreement Quach signed during his employment, he argued that the Commerce Club had waived its right to seek arbitration. Quach stressed that the California Commerce knew at the outset of the case that Quach had signed an arbitration agreement yet waited 13 months after the lawsuit was filed to move to compel arbitration and engaged in extensive discovery during that time.

The trial court initially sided with Quach, finding that the California Commerce Club waived its right to arbitration due to its delay and extensive discovery efforts (which included propounding written discovery and taking Quach’s deposition). However, the California Court of Appeal reversed the trial court’s decision, ruling that the California Commerce Club had not waived its right to arbitration. Relying on California’s multi-factor test for determining waiver of the right to compel arbitration under California law, which includes whether the party opposing arbitration has been prejudiced, the Court of Appeal emphasized that participation in litigation alone does not constitute a waiver of the right to arbitrate and found that Quach had not demonstrated sufficient prejudice from the delay to justify a waiver.

Notably, the Court of Appeal issued its decision before the U.S. Supreme Court issued its decision in Morgan. In Morgan, the U.S. Supreme Court went on to hold that federal law does not impose any prejudice requirement when determining whether a party has waived the right to compel arbitration. The U.S. Supreme Court held that the FAA and federal policy favoring arbitration requires that arbitration agreements be treated equally with other contracts; it does not mean that federal courts can develop arbitration-specific procedural rules that treat arbitration agreements more favorably than other contracts. Federal courts therefore cannot graft an arbitration-favoring prejudice requirement to a finding of waiver.

The California Supreme Court Opinion

In the wake of Morgan, the California Supreme Court reversed the Court of Appeal and held that California law also does not impose a prejudice requirement when determining whether a party has waived the right to compel arbitration. The California Supreme Court reasoned that California’s historical practice of requiring a showing of prejudice to establish a waiver of the right to compel arbitration arose out of federal case law, which the U.S. Supreme Court rejected and overturned in Morgan. Moreover, nothing in the California Arbitration Act’s legislative history convinced the California Supreme Court that the California legislature intended to create an arbitration-specific prejudice requirement in the waiver context.

Accordingly, under California law, the test for determining whether a party has waived the right to compel arbitration is the same as determining waiver in the context of any other contract. Specifically, to establish waiver, the party opposing arbitration must prove by clear and convincing evidence that the purported waiving party knew of the contractual right to compel arbitration and intentionally relinquished or abandoned it by acting inconsistent with the intent to arbitrate. Critically, this is an objective test exclusively focused on the purported waiving party’s words and conduct, rather than a party’s subjective intent.

Takeaway

As a practical matter, the California Supreme Court’s decision means that employers seeking to compel arbitration need to promptly assert their right to arbitrate and avoid taking actions inconsistent with an intent to arbitrate the dispute.