The recent decision in Sierra Pacific Industries Wage and Hour Cases by the California Court of Appeal for the Third District is a significant warning for employers regarding the waiver of the right to compel arbitration in the context of class action litigation. The appellate court affirmed the trial court’s finding that Sierra Pacific Industries, the employer, intentionally abandoned its right to exclude thousands of its employees from the class action by compelling individual arbitration, despite maintaining signed arbitration agreements with them. The central issue was whether the employer’s conduct throughout the years-long litigation process was markedly inconsistent with an intent to arbitrate.

The case began in 2018 as a wage and hour class action brought by a former employee who was not subject to an arbitration agreement. Although the employer possessed arbitration agreements with thousands of other non-exempt “signatory employees,” Sierra Pacific chose to defend the class action in court for years, participating in extensive class-wide discovery without ever attempting to invoke or preserve its arbitration rights or limit the scope of the putative class to exclude the signatory employees.

This litigation strategy proved fatal to the arbitration defense. Key to the trial and appellate court’s determination denying Sierra Pacific’s Motion to Compel Arbitration was its pattern of treating the signatory employees as class members throughout the process. Sierra Pacific produced contact, timekeeping, and payroll records for these employees in discovery without reserving its right to arbitrate their claims and used their declarations to oppose class certification. Furthermore, the employer participated in two separate class-wide mediations aimed at settling all claims, including those of the signatory employees. The court found these actions fundamentally incompatible with a desire to resolve the signatory employees’ claims individually through arbitration. Compounding the issue, the employer failed to include the arbitration defense in its operative answer to the complaint and repeatedly defied a court order, issued in February 2020, to produce the signed arbitration agreements. Sierra Pacific only finally produced the agreements and moved to compel arbitration after the court certified the class.

Affirming the lower court’s denial of Sierra Pacific’s effort to compel arbitration of the unnamed class members, the Court of Appeal applied the “clear and convincing evidence” standard for waiver, recently confirmed by the California Supreme Court, which focuses solely on the waiving party’s conduct and eliminates the requirement for the opposing side to prove prejudice. The appellate court emphasized that nothing prevented Sierra Pacific from asserting or reserving its arbitration rights earlier in the litigation process, such as by raising the defense in its operative answer (despite having raised it in a previous answer), seeking an immediate stay of discovery or otherwise obtaining a protective order limiting precertification discovery to exclude employees who signed an arbitration agreement. By choosing instead to engage in full-scale, class-wide litigation and settlement efforts for years, the employer demonstrated an intentional abandonment of its right. The Court of Appeal concluded that a party cannot engage in litigation conduct that treats a class as a single unit, only to selectively attempt to impose individual arbitration once the class is certified and the litigation posture becomes inconvenient. The decision serves as a stern reminder that employers must assert their arbitration rights consistently, promptly, and unequivocally at the earliest stages of litigation or risk losing them entirely through waiver.

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