In 2003, the California Supreme Court adopted a stringent test to determine whether an employer had waived its right to compel arbitration of an employee’s claims.  The most critical, and often determinative, factor was “prejudice” to the party resisting arbitration.  In other words, the courts were obligated to determine whether the party resisting arbitration had been prejudiced by the other party’s behavior – typically manifested through inordinate delay or litigation gamesmanship.

The facts in the recent case of Quach v. California Commerce Club, Inc., in which the California Supreme Court rejected its previous precedent, illustrates the very type of prejudice that courts abhor.  There, the employer filed a Motion to Compel Arbitration 13 months after the lawsuit was filed, propounded a “large amount” of written discovery, spent “significant” time meeting and conferring “over many months” and took the employee’s deposition.  In essence, the parties had spent substantial time and expense litigating the case and, more importantly, the employer’s conduct demonstrated “a position inconsistent [with the intent] to arbitrate.”  In defense, the employer claimed that it had only recently located a fully executed copy of the arbitration agreement.

Initially, the trial court denied the employer’s motion to compel arbitration – finding the employee to have been sufficiently prejudiced by the employer’s conduct.  The Court of Appeal reversed, finding that prejudice to the employee was “not supported by substantial evidence.”

In reversing the Court of Appeal’s decision, the California Supreme Court rejected its prior “prejudice” requirement and followed a 2022 decision by the United States Supreme Court which rejected the “prejudice” requirement when determining waiver under the Federal Arbitration Act (“FAA”).  The Court’s decision brings California law in line with federal law, ensuring that courts will apply the same waiver principles regardless of whether a case is governed by the FAA or the California Arbitration Act.  Under those principles, courts should focus “exclusively … on the waiving party’s words or conduct.”  Further, California’s trial judges should now “separately evaluate each generally applicable state contract law defense raised by [a] party opposing arbitration,” including waiver, forfeiture, estoppel, laches, and untimeliness, rather than “lump[ing] distinct legal defenses into a catch-all category called ‘waiver.’”

The takeaway for employers is loud and clear: if you have an arbitration agreement with an employee, do not wait to enforce your rights or you just might lose them.