Your contract with XYZ Corporation includes a clause requiring arbitration of all disputes arising under the agreement. You believe you have an excellent chance of prevailing on your breach of contract claim against XYZ. On reflection, you would far prefer having the matter decided in court, where a judge may be less likely to "split the baby," and your right of appeal is preserved. Can you ignore the arbitration clause and instead pursue the matter in court? You can try -- but not without significant risks. Under certain circumstances you may be found to have forfeited all of your claims.
Plaintiffs commonly assume that the most serious potential consequence of a decision to disregard an arbitration agreement is the loss of time should the defendant force the matter into arbitration long after the court action commenced. While in most instances this assumption is correct, California courts on occasion impose a far more drastic penalty. The Supreme Court has held that a plaintiff who elects to ignore an applicable arbitration agreement impliedly waives its right to arbitrate and risks the possible dismissal of the case solely for that reason. Rounds v. Joint Council of Teamsters (1971) 4 Cal.3d 888. Should the case be dismissed, the plaintiff cannot fall back on the arbitration agreement. The right to arbitrate has evaporated.
Whether a court will impose this ultimate sanction depends initially on how the defendant responds to the plaintiff's decision to litigate the matter in court. In Rounds the Supreme Court identified three possible responses available to the defendant. (4 Cal.3d at 899.) First, the defendant may "elect to submit the matter to the jurisdiction of the court."
All the defendant must do to invoke this alternative is participate in the litigation and remain silent regarding arbitration. The case will proceed in court and the arbitration agreement will have been waived.
Second, the defendant may bring a motion to compel arbitration and to stay the court proceedings pending arbitration. So long as the arbitration clause covers all issues being litigated, and the defendant has not already waived its right to compel arbitration, the court will grant the motion.
Third, the defendant may "elect to demur or move for summary judgment on the ground that the plaintiff has failed to exhaust arbitration remedies." A demurrer to the original complaint is unlikely to result in an order dismissing the action. In virtually all cases the court will grant leave to amend, giving the plaintiff the opportunity to dismiss the action voluntarily and initiate arbitration.
Having once been warned, a plaintiff who persists in pursuing the matter in court should be concerned with the risk of a court dismissal. Indeed, this additional factor, i.e., the plaintiff's failure to heed the defendant's entreaties to arbitrate, appears crucial to a court's decision to dismiss the action with prejudice. In Rounds, for example, the court terminated the action at the commencement of trial -- but only after the defendant's repeated efforts to force the case to arbitration had failed.
A recent case out of California's First Appellate District, 24 Hour Fitness, Inc. v. Superior Court of Sonoma County (1998) 66 Cal.App.4th 1199, confirms the significance of this factor. Relying on Rounds, the court of appeal affirmed a summary judgment dismissing the plaintiff's sexual harassment action against 24 Hour Fitness -- her former employer -- due to the plaintiff's decision to proceed in court despite an applicable arbitration clause. As in Rounds, the court emphasized the plaintiff's persistence in litigating the matter despite repeated efforts by 24 Hour Fitness to convince her that the claims were subject to an arbitration agreement. (Though acknowledging that its decision left the plaintiff without any recourse, the court explained the result simply as the "consequence that flows from [the plaintiff's] decision to repudiate the arbitration agreement." ( Id. at 1216.)
For both practical and legal reasons, a defendant is unlikely to pursuade a court to dismiss an arbitrable action simply because the plaintiff has filed a complaint. The defendant must first have attempted to convince the plaintiff to arbitrate the dispute.
Once this effort has failed, may the defendant simply sit back, prepare for trial, and wait for the opportune moment to file its motion for summary judgment? Not likely. As noted earlier, a defendant may implicitly consent to the court's jurisdiction, and thus waive its ability to have the case dismissed (or even to compel arbitration), by failing to preserve its arbitration rights during the litigation.
In order to maintain its options, the defendant must, at a minimum, include the duty to arbitrate as an affirmative defense in its answer to the complaint. ( Butcher's Union v. Farmers Market (1977) 67 Cal.App.3d 905, 913.) "The failure to include such a defense in the answer amounts to a waiver of arbitration." (Id.) The Supreme Court in Rounds specifically noted that the defendants in that case had asserted the plaintiff's failure to arbitrate as an affirmative defense. The 24 Hour Fitness decision does not address this issue. The unequivocal holding of the court in Butcher's Union presumably would have prevented the court in 24 Hour Fitness from granting summary judgment, however, had the defendant not included the necessary affirmative defense in its answer.
A defendant who wants to convince a court to dismiss the plaintiff's lawsuit also should refrain from engaging in discovery. A defendant who urges the plaintiff to arbitrate and includes the arbitration agreement as an affirmative defense in its answer may nevertheless be found to have waived its right to have the action dismissed by undertaking discovery. Indeed, participation in significant discovery may constitute an implied election to submit the case to the court's jurisdiction -- resulting in a loss of the right to compel arbitration as well as the ability to have the case dismissed.
This is the lesson of Davis v. Continental Airlines Inc. (1997) 59 Cal.App.4th 205, where the court found that the defendant's participation in extensive discovery resulted in a waiver of the right to argue that the case must be arbitrated. The court rejected the defendant's assertion that it had preserved its right to compel arbitration by raising the arbitration agreement as an affirmative defense in its answer. The court noted that the defendant's inclusion of the duty to arbitrate in its answer was merely one factor to be considered. By failing to "timely seek relief either to compel arbitration or dispose of the lawsuit before the parties and the court have wasted valuable resources on ordinary litigation," the defendant had waived its right to seek such relief. (Id. at 216.)
In conclusion, a court's decision on whether to grant a motion to dismiss an arbitrable action will depend on whether the defendant has: (1) unsuccessfully urged the plaintiff to arbitrate, either formally or informally, (2) included the duty to arbitrate as an affirmative defense in its answer, and (3) refrained from participating in discovery in the action. A defendant who has satisfied all three tests has an excellent chance of convincing the court to dismiss the lawsuit based on plaintiff's failure to arbitrate.
On the other hand, a defendant may implicitly "accept" the plaintiff's waiver of its right to arbitrate and -- perhaps unwittingly -- permit the arbitrable dispute to be litigated in court. Whether the defendant has accepted the plaintiff's waiver -- i.e., waived its own right to compel arbitration or have the action dismissed due to the plaintiff's failure to arbitrate -- will turn on the court's evaluation of same three factors. Thus, a defendant who (1) remains silent regarding the arbitration agreement, (2) fails to assert the duty to arbitrate by way of an affirmative defense in the answer, and (3) participates in discovery, will certainly be found to have consented to litigating the matter in court notwithstanding the arbitration agreement.
In the majority of cases falling somewhere in the middle, the issue likely to be decided is whether the defendant has preserved its right to compel arbitration, not whether the action can be dismissed. Most courts are unlikely to dismiss an action outright unless the defendant has met all three factors.
This last conclusion may not comfort a plaintiff who desires to avoid an arbitration agreement but is not eager to risk having its claims dismissed. That plaintiff should think twice before allowing an arbitrable action to remain in court following requests by the defendant to arbitrate, particularly if the defendant has raised the arbitration defense in its answer. By the time the plaintiff receives the summary judgment motion, its fate may already have been sealed.