Schmidt, Sethi & Akmajian Blog

Civil Procedure: Failure to Plead Right to Arbitration & Waiver/Application of Federal vs State Law

Posted by Ted A. Schmidt | Aug 10, 2017 | 0 Comments

Security Alarm Financing Enterprises v. Fuller,___ Ariz. Adv. Rep. __, 1CA-CV-16-0255 (App. Div. I, July 6, 2017) (J. Johnsen)

WHETHER FAILURE TO PLEAD RIGHT TO ARBITRATION UNDER FEDERAL ARBITRATION ACT CONSTITUTES WAIVER OF THIS RIGHT IS GOVERNED BY FEDERAL LAW WHICH REQUIRES A SHOWING OF PREJUDICE FOR WAIVER TO APPLY

Plaintiff sued several former employers and their new employer under a variety of contract and tort theories regarding the alleged theft of trade secrets.  Twenty nine days after answering the complaint defendants pointed out that contracts between the plaintiff and some defendants mandated arbitration under the Federal Arbitration Act, 9 U.S.C. § 1 et seq. Plaintiff refused to agree to arbitration so defendants moved to dismiss on this basis. The superior court denied the motion finding that failure to raise this defense in the answer constituted waiver. The Arizona Court of Appeals accepted special action jurisdiction and granted defendants the requested relief of dismissal.

The critical question here is whether federal or state law applies to the waiver analysis. Under state law, failure to plead a right to arbitration alone constitutes waiver. Under federal law the court is required to determine whether the party opposing arbitration has been prejudiced by the failure to plead this defense.

Here the court of appeals found the federal statute mandates federal law be applied in determining the existence of waiver.  Following the Ninth Circuit's analysis of this issue the court of appeals found, “[W]aiver under 9 U.S.C. § 3 requires proof that  the  party  seeking  arbitration  knew  of  an  ‘existing  right to  compel arbitration ,' it nevertheless committed ‘ acts inconsistent with that existing right,' and those inconsistent acts caused prejudice to the party opposing arbitration.”

Finally the court of appeals found the filing of a disclosure statement and the granting of extensions to answer the complaint did not prejudice the plaintiff. The disclosure would have been required in any event since not all defendants are parties to the contracts requiring arbitration and no harm was shown by granting extensions where the arbitration defense was raised less than a month after the issues were joined.

About the Author

Ted A. Schmidt

Ted's early career as a trial attorney began on the other side of the fence, in the offices of a major insurance defense firm. It was there that Ted acquired the experience, the skills and the special insight into defense strategy that have served him so well in the field of personal injury law. Notable among his successful verdicts was the landmark Sparks vs. Republic National Life Insurance Company case, a $4.5 million award to Ted's client. To this day, it is the defining case for insurance bad faith, and yet it is only one of several other multi-million dollar jury judgments won by Ted during his career. He is certified by the State Bar of Arizona as a specialist in "wrongful death and bodily injury litigation".

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