On July 25, 2024, the California Supreme Court issued its unanimous decision in Quach v. California Commerce Club, eliminating the longstanding requirement under the California Arbitration Act (“CAA”) that a party opposing arbitration show that it had suffered prejudice as a result of the moving party’s delay in attempting to compel arbitration. No. S275121, 2024 WL 3530266 (Cal. July 25, 2024).
Litigation Background
The case was commenced by Peter Quach, who sued his former employer, California Commerce Club, alleging wrongful termination, age discrimination and other employment-related claims. 2024 WL 3530266, at *1. Before Quach filed the complaint, Commerce Club had provided him with the signature page of a form arbitration agreement he had signed during his employment tenure, which provided for binding arbitration of employment-related disputes. Id.[1]
After the litigation was filed, Commerce Club answered the complaint and propounded discovery, including as an affirmative defense that Quach should be compelled to arbitrate. Id. at *2. The parties proceeded with discovery, including document discovery and at least one deposition, and both sides posted jury fees. Id. Then, thirteen months after Quach filed the complaint, Commerce Club moved to compel arbitration, asserting that it had just located a complete copy of the arbitration agreement and that Quach had not been prejudiced by the delay in seeking to compel arbitration because only limited discovery had taken place. Id.
The trial court denied the motion to compel arbitration, finding “that Commerce Club ‘knew of its right to compel arbitration’ and instead of moving to compel arbitration, propounded a ‘large amount’ of written discovery, spent ‘significant’ time meeting and conferring ‘over many months,’ and took Quach’s deposition, demonstrating ‘a position inconsistent [with the intent] to arbitrate’ and causing ‘prejudice.’” Id.
After Commerce Club appealed, the Court of Appeal reversed, concluding that Commerce Club had not waived its right to compel arbitration and that the trial court’s finding that Quach had demonstrated prejudice was not supported by substantial evidence. Id.
After the Court of Appeal issued its decision, the United States Supreme Court issued a decision in Morgan v. Sundance, Inc., 596 U.S. 411 (2022). In Morgan, the United States Supreme Court found that under the Federal Arbitration Act (“FAA”), there is no requirement to show prejudice from delay, explaining that arbitration agreements should be put on equal footing with other contracts rather than subject to “special, arbitration-preferring procedural rules.” Id. at 418. Prior to Morgan, a number of federal appellate courts had created an arbitration-specific rule for claims of waiver, requiring the party opposing arbitration to show that it had been prejudiced by the moving party’s delay in compelling arbitration. Morgan rejected that rule at the federal level, holding that “the text of the FAA makes clear that courts are not to create arbitration-specific procedural rules. . . .” Id. at 412.
Quach then sought review by the California Supreme Court, arguing that in light of Morgan, he need not show that he was prejudiced by Commerce Club’s delay in moving to compel arbitration. Commerce Club responded by arguing that, even if Morgan was dispositive as to the FAA, the CAA’s procedural rules should apply, and that California should continue to maintain its prejudice requirement, in light of the state’s policy of treating arbitration agreements more favorably than other contracts.
The California Supreme Court Adopts Morgan’s Reasoning for Cases Arising Under the CAA
The California Supreme Court examined the history behind the prejudice requirement, explaining that “[o]utside the arbitration context, a California court will find waiver when the party seeking to enforce a known contractual right has intentionally relinquished or abandoned that right.” 2024 WL 3530266, at *1. However, in the arbitration context, California courts “have added a requirement: to find waiver, we have required that the party seeking to avoid arbitration show prejudice.” Id. The basis for this requirement was “a policy favoring arbitration over litigation as a form of dispute resolution.” Id. (citing St. Agnes Med. Ctr. v. PacifiCare of Ca. (2003) 31 Cal.4th 1187, 1203). This policy took into account factors such as that arbitration is “relatively inexpensive” and allows for a “speedy resolution” of claims. Id. at *4 (citing St. Agnes, 31 Cal. 4th at 1204).
As examples of prejudice, courts have found waiver in the past where “the parties had litigated the merits of arbitrable claims, substantial discovery related to such claims had occurred, the petition to compel arbitration was filed on ‘the eve of trial,’ the movant had used discovery ‘to gain information about the other side’s case that could not have been gained in arbitration,’ or evidence was lost as a result of delay ‘associated with the petitioning party’s attempts to litigate.’” Id. at *4. Prior to Morgan, California courts applied the prejudice requirement “regardless of whether the proceedings were governed by the FAA or the CAA.” Id. at *3.
The California Supreme Court examined the history of the prejudice requirement and explained that it had been based on the federal cases overruled by Morgan. Id. Since the federal precedent for the state-law doctrine has now been abrogated by Morgan, the Court found that it was appropriate to dispose of the “arbitration-specific prejudice requirement.” Id. at *1. While acknowledging that Morgan is not binding as to the CAA, the opinion observed that “our state-law arbitration-specific prejudice rule” was “based on a now abrogated federal rule that we had adopted in order to conform state procedure to federal procedure.” Id. at *6, 8. The Court observed the parallels between the FAA and CAA and concluded that nothing in the legislative history suggested a specific intention to create an arbitration-specific rule when determining if a party had waived the right to arbitrate under the CAA. Id. at *8.
While not a necessary part of the Court’s holding, the opinion also noted the practical benefits of conforming the FAA and CAA on the issue of waiver. If a different rule were applied under the CAA when determining whether a party has waived the right to arbitration, that would likely lead to increased litigation over the choice of law question of whether the FAA or CAA applies to a particular dispute; an issue that can often be avoided because of the similarity between the two statutes. Id. at *9.
The unanimous court also noted that adopting Commerce Club’s position would only encourage “gamesmanship,” incentivizing a defendant to litigate an arbitrable dispute and then move to compel arbitration if the litigation is not developing favorably for that party. Id. at *11.
Practice Tips
The elimination of the prejudice requirement will likely result in more frequent claims of waiver in opposition to a party’s attempt to enforce an arbitration agreement. Practitioners responding to a complaint should promptly investigate whether the dispute may be subject to an arbitration agreement before engaging in any litigation conduct including serving even initial discovery.
Even in the absence of an arbitration agreement, litigants must be proactive in invoking their right to arbitration at the earliest possible opportunity. Illustrative of this potential pitfall is a recent, post-Morgan Ninth Circuit decision, Tiffany Hill v. Xerox Business Services, LLC, in which a divided Ninth Circuit panel found that a defendant in a class action had waived its right to arbitrate with a subset of class members, even though the named plaintiff was not subject to an arbitration agreement. 59 F. 4th 457 (9th Cir. 2023).
Parties seeking to avoid arbitration clauses will likely test the boundaries of waiver and argue that even very limited litigation conduct should result in waiver. Parties seeking to avoid that result should diligently investigate issues of arbitrability and if appropriate, move to compel arbitration at the earliest opportunity.
For further questions or comments on the content of this post, please email Michael Kibler ([email protected]) or Michael Carnevale ([email protected]).
[1] The arbitration agreement at issue did not specifically reference either the CAA or the FAA. In light of the California Supreme Court’s ultimate holding, it was not necessary to determine which act applied to the parties’ dispute.
