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After Substantial Litigation and Full Arbitration, Second District Reverses Order Compelling Arbitration Finding That Defendants Waived Right to Arbitrate

In Uncategorized on November 15, 2010 at 9:23 am
Day 222 (Or is this Day 1 now?) - Oops!
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The Second District Court of Appeal reversed an order compelling arbitration after the conclusion of an arbitration and judicial confirmation of the arbitration award because defendants waived their right to arbitrate.  Knight v. Toe Brights, Inc., et al., No. B220648, 2010 WL 4542324 (Cal. App. 2d Dist. Nov. 12, 2010).

Background

Plaintiff Knight filed an action against her former employer, Toe Brights, Inc. (TBI), and two of its officers/directors/stockholders, alleging that they failed to pay her more than $9,000 in salary and reimbursement for expenses that was due at the time of her termination, and also failed to repay a loan from her to TBI in the amount of $41,783. Id. TBI filed its answer to Knight’s complaint, and alleged as an affirmative defense that “Plaintiff’s action is barred by any arbitration agreement requiring that this action be arbitrated.”  Id.

Defendants moved to compel arbitration about eight months after plaintiff Knight filed her suit.  Id. *1.  By that time, defendants had propounded multiple sets of discovery to which Knight had responded, and numerous discovery motions were pending.  Id. Defendants had claimed “priority” in discovery, and then refused to respond to Knight’s discovery.  Id. The court ordered the matter to arbitration less than three months before the date set for trial. Id.

The case proceeded through arbitration, and the arbitrator awarded Knight $40,000 for the repayment of her loan plus “interest at the statutory rate from the date she filed her lawsuit”.  Id. *4. Knight did not prevail on her other claims for unauthorized use of her jewelry designs, name and likeness, and the arbitrator awarded defendants $60,000 in attorney fees and $1,160 in filing fees as the prevailing parties on some of Knight’s claims. Id. The arbitrator denied Knight’s motion for attorney fees  and costs. Id.

Knight filed a petition to vacate the arbitration award. Id.

Ruling

The court found that although defendants’ answers raised arbitration as an affirmative defense, defendants “waived the right to arbitrate by vigorously litigating this action in the trial court in a manner inconsistent with their right to arbitrate.” Id. *1. The court found prejudice by defendants’ delay in seeking arbitration.  Id. The court concluded that “It is unfortunate that the parties incurred the time and expense of an arbitration hearing. But the trial court erred in granting the motion to compel arbitration, and Knight is entitled to raise that error on appeal from the judgment confirming the arbitration award.” Id.

The court reasoned that “waiver may be found under circumstances where the case has not been litigated to judgment” where the party opposing arbitration can show prejudice.  Id. *5. “Prejudice typically is found only where the petitioning party’s conduct has substantially undermined this important public policy or substantially impaired the other side’s ability to take advantage of the benefits and efficiencies of arbitration.” Id. *7 (internal citation omitted).

Defendants misled Knight by indicating that they intended to try this case in court. During the seven and a half months between the time Knight filed her complaint and defendants disclosed their intent to arbitrate, the parties vigorously litigated this case. Knight was responding to discovery and preparing her case for trial. With less than three months to go before trial, defendants apparently decided they would fare better in arbitration. After they had participated in a court-ordered mediation, filed a cross-complaint which Knight answered, and received responses from Knight to two sets of special interrogatories, two sets of requests for production of documents, one set of form interrogatories, and one set of requests for admissions, defendants forced the case to arbitration over Knight’s objection.

Knight did not reap the benefits of arbitration. She responded to discovery which defendants would not have been permitted to propound in arbitration, and she received no responses from defendants to her discovery. She endured more than six months of discovery battles rather than a more limited and controlled exchange of information, “consistent with the expedited nature of arbitration.” (AAA Commercial Arbitration Rules, rule R-21.) Defendants took advantage of the many ways a party can gain information about an opponent’s case in trial court litigation through discovery and court-ordered mediation. And defendants ensured that Knight would not experience the efficiencies of arbitration.

Id.

The court concluded that the “trial court’s order compelling arbitration is not supported by substantial evidence of nonwaiver.” Id. *8.  Defendants “have incurred the expense of an arbitration hearing, and now possibly will incur the additional expense of a trial, as a result of their gamesmanship.”

Judges and Attorneys

Justice Victoria Gerrard Chaney wrote the opinion for the court.  Presiding Justice Robert M. Mallano concurred.  Justice Frances Rothschild dissented.

Appeal from a judgment of the Superior Court of Los Angeles County. Phrasel L. Shelton (Retired Judge of the San Mateo Sup.Ct. assigned by the Chief Justice pursuant to art. VI, s 6 of the Cal. Const.), Joseph R. Kalin (Retired Judge of the Los Angeles Sup.Ct. assigned by the Chief Justice pursuant to art. VI, s 6 of the Cal. Const.), and Teresa Sanchez-Gordon, Judges.

Hillel Chodos for Plaintiff and Appellant.

Charlston, Revich & Wollitz and Tim Harris for Defendants and Respondents.

By CHARLES JUNG

 

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