In any dispute where an arbitration provision may be invoked, pursuing litigation in court can be a gamble and result in the waiver of arbitration rights. California Commerce Club, Inc. (“Commerce Club”) is no stranger to rolling the dice as the operator of a hotel and casino in the City of Commerce, California.
In 2015, Commerce Club required all of its employees to sign a new arbitration policy as a condition of continued employment. Among those employees was supervisor Peter Quach, who was terminated following an incident in which a customer paid the casino with one hundred dollars in counterfeit bills during Mr. Quach’s shift. Mr. Quach subsequently filed suit against Commerce Club with the case winding its way up to the California Supreme Court (Quach v. California Commerce Club, S275121), which recently granted review.
Although Commerce Club acknowledged in its pleadings that Mr. Quach should be compelled to arbitrate based on his employment agreement, it did not move to compel at that time. A full thirteen months after the filing of the action, Commerce Club moved to compel arbitration with the explanation that it had finally located the complete copy of the arbitration agreement. Mr. Quach opposed, asserting that Commerce Club already possessed the agreement, which they provided to him via his signed signature page just prior to the lawsuit. The trial court denied Commerce Club’s motion finding that it waived its arbitration rights by engaging in a litany of pretrial exchanges and actions despite knowing of its right to compel arbitration and the company policy to secure arbitration agreements from each employee. The large amount of written discovery, the taking of Mr. Quach’s deposition, and the months of meet and confer communications convinced the trial court that Commerce Club took a position inconsistent with arbitration, which resulted in prejudice to Mr. Quach.
On appeal, the trial court’s order was reversed. The Court of Appeal ruled that an employer’s participation in litigation did not result in the waiver of its right to arbitrate based on the employee’s failure to show he was prejudiced by the employer’s delay. Peter Quach v. California Commerce Club, Inc. (2022) 78 Cal.App.5th 470. Mr. Quach’s showing of prejudice was inadequate as a matter of law and he failed to meet the heavy burden of overcoming California’s laws and public policy strongly favoring arbitration. The Court of Appeal found that although discovery had occurred, the trial court itself had not made any determinations on the merits, and everything uncovered thus far in discovery would ultimately have been revealed in an arbitration itself, thus no advantage was gained by Commerce Club. Moreover, the motion to compel arbitration was heard almost seven months prior to the trial date, not on the eve of trial.
While no single factor or test determines whether waiver has occurred, the question of prejudice is critical in waiver determinations. Thus, the Court of Appeal distinguished Mr. Quach’s case from others in which arbitration was waived as a result of expert selection, removal proceedings, demurrers, attempts to settle with class members, disclosure of trial tactics, protective orders, transfers of venue, and final decisions rendered by the Labor Commissioner. The ruling emphasized that courts will not find prejudice where the party opposing arbitration shows only that it incurred costs and legal expenses.
While the Quach case remains pending before the California Supreme Court, the United States Supreme Court reached a different result earlier this year, finding that prejudice is not a condition of determining whether waiver of arbitration rights has occurred in matters involving the Federal Arbitration Act (“FAA”). Robyn Morgan v. Sundance, Inc. (2022) 142 S. Ct. 1708. Petitioner Robyn Morgan was an hourly employee at a Taco Bell owned by Sundance, Inc. (“Sundance”). Ms. Morgan signed an employment agreement which contained a confidential binding arbitration clause, yet brought a nationwide collective action in federal court for violations of the Fair Labor Standards Act, alleging that Sundance improperly recorded her working hours in order to prevent any week’s total from exceeding forty hours.
Sundance did not assert its arbitration rights at the outset and instead unsuccessfully moved to dismiss the suit, and then answered the complaint without asserting mandatory arbitration as an affirmative defense. Eight months after the action began, Sundance moved to compel arbitration under the FAA. The lower courts applied the Eighth Circuit precedent which included prejudice as a factor in determining waiver of arbitration. The U.S. Supreme Court granted certiorari to resolve a circuit split concerning the waiver issue, ultimately holding that the Eighth Circuit was wrong to condition a waiver of the right to arbitrate on a showing of prejudice. The High Court instead focused the waiver inquiry on the parties’ conduct, asking for instance, whether there was a knowing relinquishment of the right to arbitrate by acting inconsistently with that right.
In the meantime, Mr. Quach awaits his own ruling from the California Supreme Court. Barring a reversal of the Court of Appeals’ ruling, the old adage will still hold true: the house always wins.
John H. Woo is an Associate attorney at Hunt Ortmann handling construction related matters, business disputes, contract actions, and real property claims. If you would like additional information about the subject matter of this HuntLaw Update, please contact John Woo at woo@huntortmann.com.