Employer – Employee Arbitration Agreements – Use Them or Lose Them!
Arbitration agreements are becoming increasingly commonplace in employer-employee relationships in California, and are generally entered into during the onboarding process. In the event a dispute arises later on, a valid arbitration agreement is useful in reducing an employer’s legal costs, and in many situations helps secure a more favorable outcome for the employer than would the normal court process.
A number of specific provisions are required to make an arbitration agreement enforceable, which will not be addressed here in the interest of brevity. Once an employer has a valid arbitration agreement in place, however, and a dispute arises, the employer must take care to ensure it does not lose the right to arbitration that it so carefully secured.
A recent decision by the Ninth Circuit Court of Appeals serves as a warning to employers to invoke their right to arbitration in a timely manner after an employee lawsuit arises, or else risk not arbitrating at all. The court held that if an employer does not properly invoke the right to arbitration when an employee files suit, the right to arbitration that would otherwise exist under the arbitration agreement could be waived. The time within which arbitration must be invoked varies on a case-to-case basis, but generally requires that the employer not dive so far into court litigation that it would be unfair to switch to arbitration.
Although arbitration is generally favored by the court system, the right to arbitration can be waived when an employer:
- Knows it has a right to compel arbitration (i.e. knows it has a valid arbitration agreement);
- Acts inconsistently with that right; and
- As a result of such inconsistency, the employee would be prejudiced if arbitration was ordered.
The court found that when an employer is silent about arbitration and/or delays too long in moving for arbitration after an employee files a lawsuit, this may be interpreted as a “conscious decision” to continue with the regular court process instead of arbitration. When an employer actively litigates the case in court, a court can reasonably find that the employer has waived its right to arbitration. It is insufficient for an employer to include in its pleadings and motions a statement that it has a right to arbitration. The employer must actually take affirmative action to compel arbitration.
In the case decided by the court, the employer had litigated the case for 17 months, filed a motion to dismiss on a key merits issue, responded to the complaint, stipulated with the employees regarding the structure of the litigation, and engaged in discovery – all before the employer ever asserted its right to arbitration. The court found that the totality of these actions were “inconsistent” with the right to arbitration. The court emphasized that delving into the merits of the litigation is key in finding an “inconsistent act” that can result in waiver. In contrast, simply moving to dismiss on the grounds of jurisdiction would not be inconsistent with arbitration.
Once an “inconsistent act” is established, the employee has to establish that he/she would be prejudiced if forced to arbitrate the claim instead of proceeding with the court case. The employee must show more than “self-inflicted” wounds – it is not enough for the employee to complain that he/she already spent money on the filing fee, service fees, and costs involved in litigating jurisdictional issues.
Instead, the employee must show that because the employer delayed in invoking the right to arbitration, the employee suffered extraordinary costs that he/she otherwise would not have, that the employee would be forced to relitigate an issue on the merits on which the employee already prevailed in court, or that the employer received an advantage from the court litigation that it would not have in arbitration (i.e. by taking advantage of a procedural tool available in court but not arbitration).
The court found that the employees were prejudiced because they had expended “considerable time and money” litigating in court due to the employer’s delay in invoking arbitration, and then were deprived of the benefits of the court system, including the opportunity for more relief than in arbitration and the potential for a precedential decision. The court found that even if the employees would have learned the same information in the arbitration process that they did by going to court, the fact that it is more expensive to litigate in court than in arbitration, and thus more expensive to obtain that same information, prejudiced the employees.
Although this was a federal court decision, and would be controlling with respect to federal court cases filed in California, a similar rule has been applied in California courts. To be safe, California employers should consider their right to arbitration as soon as a lawsuit is filed against them, regardless of the court in which the suit is filed. If employers do not insist on their right to arbitrate before becoming entrenched in the merits of the litigation, they risk not only paying the increased costs associated with court litigation, but also risk the more employee-friendly outcome that tends to result from a jury instead of an arbitrator decision.
Martin v. Yasuda (9th Cir. July 21, 2016, No. 15-55606) 2016 U.S. App. LEXIS 13323.