Posted on: 7/19/2012
Alicia M. Harrison, Starnes Davis Florie
View Latest Articles
If the resident of a
nursing home you represent is required to sign an arbitration agreement upon
their admission, chances are the nursing home will want to enforce the
agreement if the resident files a lawsuit against it. In order to ensure the
claims will be subject to arbitration, defendants must avoid undertaking
activity that may later be viewed as a waiver of the right to arbitration. This
article presents an overview of the law on waiver of arbitration in the
Eleventh Circuit and Alabama, provides specific examples of activity that may
constitute a waiver of the right to arbitration and/or result in prejudice to
the opposing party, and provides tips for avoiding waiver.
Law on Waiver of
Arbitration
In order to determine if
a party waived its contractual right to arbitrate in the Eleventh Circuit, the
court examines if, "'under the totality of the circumstances, the party
has acted inconsistently with the arbitration right' and, in so acting, has in
some way prejudiced the other party." See S & H Contractors, Inc.
v. A.J. Taft Coal Co., 906 F.2d 1507, 1514 (11th Cir. 1990) (internal
citations omitted). In Alabama, the party opposing arbitration must demonstrate
both "(1) that the party seeking arbitration has substantially invoked the
litigation process, bespeaking an intent to abandon arbitration in favor of the
judicial process, and (2) that the party opposing arbitration would be
'substantially prejudiced' by an order requiring it to submit to
arbitration." Aurora Healthcare, Inc. v. Ramsey, No. 1091561, 2011
WL 5009781, at * 4 (Ala. Oct. 21, 2011). The party opposing arbitration bears a
heavy burden, because waiver of arbitration will not be "lightly
inferred" due to the strong federal policy favoring arbitration. Mutual
Assurance v. Wilson, 716 So. 2d 1160, 1164 (Ala. 1998).
Substantially Invoking
the Litigation Process
There is no rigid test
for determining whether a defendant has substantially invoked the litigation
process. Each case will be decided on its own particular facts. See
Jones–Williams Constr. Co. v. Town and Country Prop., LLC, 923 So. 2d 321,
323 (Ala. Civ. App. 2005). That being said, there are several affirmative
actions defendants may take that likely will not be considered a waiver
of the right to arbitration. For example, removing a case to federal court,
standing alone, does not waive a party's right to compel arbitration. See
Goff Group, Inc. v. Greenwich Ins. Co., 231 F. Supp. 2d 1147, 1155 (M.D.
Ala. 2002). Similarly, the mere filing of a motion to dismiss does not waive
the right to arbitration. See Zedot Const., Inc. v. Red Sullivan's
Conditioned Air Servs., Inc., 947 So. 2d 396, 401 (Ala. 2006). Filing a
motion for a change of venue does not constitute a waiver either, as a
defendant has the right to have the proper venue established before it has any
obligation to move to compel arbitration. See Thompson v. Skipper Real
Estate Co., 729 So. 2d 287, 292 (Ala. 1999). In fact, answering complaints
on the merits, asserting a cross-claim or even participating in discovery,
without more, will not constitute a waiver. See Voyager Life Ins. Co. v.
Hughes, 841 So. 2d 1216, 1219–20 (Ala. 2001) (citations omitted).
Litigating a matter for
many months and filing several pleadings and motions in the process, however,
could result in a waiver of the right to arbitration. For example, in Paw
Paw's Camper City, Inc. v. Hayman, 973 So. 2d 344 (Ala. 2007), Camper City
answered the Haymans' complaint and asserted arbitration as an affirmative
defense, but also asserted a counterclaim and demanded a jury trial.
Thereafter, the Haymans served interrogatories and requests for production of
documents, moved the trial court for sanctions when Camper City failed to
respond, and deposed two Camper City employees. Camper City filed its own
interrogatories and requests for production, and deposed the Haymans. During
the depositions, both parties called upon the trial court numerous times to
intercede and settle disputes. The Haymans requested a trial setting, and
Camper City did not object. During discovery, Camper City never suggested that
the claims were subject to resolution by arbitration. Approximately ten months
after the Haymans filed their complaint, and just two months prior to the
scheduled trial, Camper City filed a motion to compel arbitration and stay
further discovery. The circuit court denied the motion and the grounds that
Camper City had substantially invoked the litigation process. The Alabama
Supreme Court agreed based on the fact that Camper City participated in full
blown pre-trial discovery on all issues in the case, asked the court to
intercede and settle disputes, and never mentioned to the court that any claim
was subject to arbitration.
In certain limited
circumstances, a defendant may be afforded a second chance to assert its right
to arbitration. The Eleventh Circuit Court of Appeals recently allowed a
defendant to rescind its previous waiver of arbitration, despite litigating for
nine months, where plaintiff's amended class action complaint set forth a new
class definition. See Krinsk v. SunTrust Banks, Inc., 654 F.3d 1194,
1203 (11th Cir. 2011). The revised class definition "greatly broadened the
potential scope" of the litigation "by opening the doors to thousands
– if not tens of thousands – of new class plaintiffs not contemplated in the
original class definition," and expanded the class period from "over
three months to over three years." The Eleventh Circuit stated that the
"vast augmentation of the putative class so altered the shape of
litigation that, despite its prior invocations of the judicial process,
SunTrust should have been allowed to rescind its waiver of its right to
arbitration." Id. at 1204.
Substantial Prejudice
In determining whether a
party has waived its right to arbitrate a case, courts also consider the
prejudice that will result to the party opposing arbitration if a motion to
compel arbitration is granted. The Alabama Supreme Court recently held that the
defendants had not waived their right to arbitrate, despite the fact that they
did not file their motion to compel arbitration until one year after the
complaint was filed, because plaintiff failed to show that she would be
substantially prejudiced by an order requiring her to arbitrate. See Aurora
Healthcare, Inc. v. Ramsey, No. 1091561, 2011 WL 5009781, at * 5-*7 (Ala.
Oct. 21, 2011).
On November 3, 2005,
Sharon Ramsey, in her capacity as administratrix of Mary Pettway's estate,
filed a wrongful death lawsuit in Wilcox County against a nursing home. The
defendants filed a motion to dismiss or for a change of venue. The parties
vigorously litigated the issue of venue, and the case was eventually
transferred to the Jefferson County Circuit Court. Defendants filed an answer
and did not assert its right to arbitration. One year after the initial
complaint was filed, defendants filed a motion to compel arbitration, but continued
actively litigating the case. Over four years after the complaint was filed,
the circuit court entered an order denying defendants' motion to compel
arbitration, stating that defendants substantially invoked the litigation
process by continuing to file significant pleadings after the case was
transferred and by participating in discovery. The circuit court also
determined that Ramsey had been prejudiced by incurring significant attorney
fees in participating in the litigation. Id. at *1-*2.
On appeal, the Alabama
Supreme Court examined only whether plaintiff would be prejudiced if the case
were submitted to arbitration. The court considered whether plaintiff was
forced to incur the type of expenses that arbitration was designed to
alleviate. The court found that much of plaintiff's costs were incurred
litigating the issue of venue, and held that incurring those costs did not
constitute prejudice because a defendant has the right to have a proper venue
established before it has any obligation to move to compel arbitration. Id.
at *5. The court also considered whether the defendant "took advantage of
judicial discovery procedures not available in arbitration." Id.
The court consulted the Code of Procedure of the National Arbitration Forum,
which was expressly incorporated into the arbitration agreement. The Code
required arbitrating parties to exchange available documents in support of, or
in opposition to, all claims. The court found that little, if any, discovery
was conducted of the sort that suggests the defendants took advantage of
judicial discovery procedures not available in arbitration. Id.
The court then examined
the time spent on the matter by plaintiff's counsel. The record reflected that
plaintiff's counsel spent much of his time after November 2006 opposing
arbitration. The court held that "[e]xpenses incurred by the party
opposing arbitration are not considered prejudicial." Id. at 5. The
court placed substantial weight on the fact that plaintiff's opposition to
arbitration presented only conclusory assertions that she had incurred
litigation costs. Her motion was not accompanied by an affidavit or any other
evidence in support of the allegation that she would be prejudiced by being
compelled to arbitrate her claims. She did not allege how many hours her
counsel had spent in litigation matters or the amount of fees or expenses
incurred in such matters. The court held that Ramsey failed to establish that
she was prejudiced by the defendants' "belated assertion of their
arbitration right," because she failed to show resulting substantial
prejudice. Id. at *7.
Tips for Avoiding Waiver
In conclusion,
defendants should be wary of conducting any litigation activity that may
arguably constitute a waiver of the right to arbitration. Defense counsel should:
1. Make efforts to
locate any potential arbitration agreement the moment the file is assigned.
2. File a motion to
compel arbitration with the answer if possible. If not possible, be sure to
include an affirmative defense in the answer stating that the case may be
subject to arbitration, and file the motion to compel arbitration as soon
thereafter as possible.
3. Do not issue
discovery or file notices of intent to issue subpoenas or notices of deposition
if there is uncertainty whether an arbitration agreement exists.
4. If immediate
discovery is necessary, consider entering into an agreement with opposing
counsel which specifically states that the discovery being undertaken will not
be considered an invocation of the litigation process.
5. Avoid engaging court
involvement beyond that absolutely necessary (e.g., venue, arbitration) and
object to any court involvement while simultaneously re-asserting the
arbitration defense.
6. View the rules of the
selected arbitration forum to determine what discovery is allowed. If there is
a time lapse between the filing of the complaint and filing of the motion to
compel arbitration, argue that the discovery conducted would have been allowed
in the arbitration forum, and does not constitute an invocation of the litigation
process or result in any substantial prejudice to the opposing party.
Alicia M. Harrison
Starnes Davis Florie LLP
Birmingham, Alabama
aharrison@starneslaw.com