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.