Opinion ID: 2834306
Heading Depth: 1
Heading Rank: 6

Heading: Was Arbitration Waived Here?

Text: It remains only to apply these rules to this case. Unquestionably, the Culls substantially invoked the litigation process, as their conduct here far exceeds anything we have reviewed before. Before arbitration was ordered, the Culls did not deny taking ten depositions, and the court’s file (of which the trial judge took judicial notice) included: $ their initial objection to arbitration covering 79 pages; $ the Defendants’ responses to requests for disclosure; $ the Culls’ five motions to compel, attached to which were 76 requests for production of documents regarding complaints, inspections, repairs, and settlements relating to eight other homes in the same subdivision; $ Perry Homes’ two motions for protective orders regarding six designees noticed for deposition by the Culls on nine issues (including purchase and preparation of the lot, design and construction of the foundation, sale of this home and others in the subdivision, and attempts to deal with the Culls’ and other foundation complaints), with an attachment requesting 67 categories of documents (including all photos, videos, correspondence, insurance policies, plans, soil tests, permits, subcontractors, contracts for sale, and repairs relating to the house or the suit, all complaints about any house in the subdivision, and Perry Homes’ articles of incorporation, by-laws, minutes, and financials); and $ the Culls’ notices of depositions for three of the Defendants’ experts with 24 categories of documents requested from each (including all documents relating to this case, all their articles, publications, or speeches given in their fields of expertise, all courses or seminars they had attended, all persons they had studied under, and all reference books or treatises in their libraries). There is simply no question on this record that the Culls conducted extensive discovery about every aspect of the merits. [89] But under the totality-of-the-circumstances test, discovery is not the only measure of waiver. Here, when the warranty defendants initially moved to compel arbitration, the Culls filed a 79-page response opposing it, asserting that the AAA “is incompetent, is biased, and fails to provide fair and appropriate arbitration panels.” They complained of the AAA’s fees, and asserted that as a result the “purported arbitration clause is unconscionable and unenforceable, and this Court’s enforcement of such would be nothing short of ridiculous and absurd.” This, plus their prayer asking the trial court to deny the motion to compel arbitration “in its entirety,” belies the court of appeals’ conclusion that “the Culls merely opposed the use of the AAA” rather than arbitration itself. [90] In some federal courts, the Culls’ objection alone could suffice to waive arbitration. [91] The Culls also moved for arbitration very late in the trial process. It is true that Perry Homes moved to continue the trial setting when the Culls sought arbitration, requesting about ten weeks to finish deposing experts. Because the trial court ordered arbitration, no one knows whether the case would have gone to trial (including the unnamed court clerk cited by the dissent). But in view of the written discovery and depositions already completed, the record is nevertheless clear that most of the discovery in the case had already been completed before the Culls requested arbitration. The rule that one cannot wait until “the eve of trial” to request arbitration is not limited to the evening before trial; it is a rule of proportion that is implicated here. [92] Then 14 months after filing suit and shortly before the December 2001 trial setting, the Culls changed their minds and requested arbitration. They justified their change of heart on the basis that they wanted to avoid the delays of an appeal. But their change unquestionably delayed adjudication of the merits; instead of a trial beginning in a few days or weeks, the plenary arbitration hearing did not begin until late September of 2002 — almost ten months after the Culls abandoned their trial setting. Moreover, to the extent arbitration reduces delay, it does so by severely limiting both pretrial discovery and post-trial review. Having enjoyed the benefits of extensive discovery for 14 months, the Culls could not decide only then that they were in a hurry. It is also unquestionably true that this conduct prejudiced the Defendants. “Prejudice” has many meanings, but in the context of waiver under the FAA it relates to inherent unfairness — that is, a party’s attempt to have it both ways by switching between litigation and arbitration to its own advantage: [F]or purposes of a waiver of an arbitration agreement[,] prejudice refers to the inherent unfairness in terms of delay, expense, or damage to a party’s legal position that occurs when the party’s opponent forces it to litigate an issue and later seeks to arbitrate that same issue. [93] Thus, “a party should not be allowed purposefully and unjustifiably to manipulate the exercise of its arbitral rights simply to gain an unfair tactical advantage over the opposing party.” [94] Here, the record before the trial court showed that the Culls objected to arbitration initially, and then insisted on it after the Defendants acquiesced in litigation. They got extensive discovery under one set of rules and then sought to arbitrate the case under another. They delayed disposition by switching to arbitration when trial was imminent and arbitration was not. They got the court to order discovery for them and then limited their opponents’ rights to appellate review. Such manipulation of litigation for one party’s advantage and another’s detriment is precisely the kind of inherent unfairness that constitutes prejudice under federal and state law.
Although we have repeatedly said arbitration agreements can be waived, today’s dissents would effectively hold they cannot. That would favor arbitration too much; because most agreements can be waived by the parties’ conduct, [95] arbitration contracts should not be more enforceable than other contracts. That is not what Congress intended when it enacted the FAA. [96] Indeed, one dissent cannot even bring itself to say the Culls substantially invoked the litigation process. If the litigation conduct here is not enough, it is hard to imagine what would be. The dissents make several mistakes in their analyses. First, they misconstrue the standard of review. Every abuse-of-discretion review is not identical because “a trial judge’s discretion may be applied to scores of situations and in many different ways.” [97] Reviewing a declaratory judgment fee award (where trial judges have broad discretion) [98] is not the same as reviewing admission of hearsay (where trial judges follow detailed rules), [99] even though an abuse-of-discretion standard applies to both. [100] Moreover, a totality-of-the-circumstances test presumes a multitude of potential factors and a balancing of evidence on either side; if appellate courts must affirm every time there is some factor that was not negated or some evidence on either side, then no ruling based on the totality-of-the-circumstances could ever be reversed. That standard of review would be the same as no review at all. By applying such a standard, both dissents would allow trial judges to send any case to arbitration no matter what has occurred in court. Under a proper abuse-of-discretion review, waiver is a question of law for the court, [101] and we do not defer to the trial court on questions of law. [102] We do defer to a trial court’s factual findings if they are supported by evidence, [103] but there was no factual dispute here regarding whether the Culls initially opposed arbitration, whether they conducted extensive merits discovery, or whether they sought arbitration late in the litigation process. This leaves only the conclusion whether such conduct constitutes prejudice, a legal question we cannot simply abandon to the trial court. [104] Second, the dissents define prejudice in a way that makes it impossible to prove. While recognizing that “waiver” has a special definition in the arbitration context, the dissents overlook that “prejudice” does too. Instead of the inherent-unfairness standard used by the federal courts, [105] they impose what appears to be an irretrievable-loss standard. One dissent would go so far as to hold that no amount of discovery, no matter how extensive, can show prejudice if the fees incurred might be compensated in the final arbitration award, even if erroneously . [106] No one could ever show prejudice under this standard, because even if a contract allowed no reimbursement of discovery costs (as in this case), [107] it is always hypothetically possible that a rogue arbitrator might reimburse costs regardless. The same dissent would find no prejudice from extensive discovery without proof that an arbitrator would have prohibited it. That again is impossible; arbitrators have almost unbridled discretion regarding discovery, so no one can predict what they might do in advance. Presuming (as the dissents do) that broad discovery is generally available in arbitration simply ignores one of its most distinctive features. [108] Third, both dissents quibble with the Defendants’ proof of prejudice because it was insufficiently detailed. [109] This confuses proof of the fact of prejudice with proof of its extent ; the Defendants had to show substantial invocation that prejudiced them, not precisely how much it all was. Referral to arbitration should be decided summarily with the evidence limited to disputed facts; [110] as the Culls did not dispute that the parties had conducted more than a dozen depositions and other extensive discovery on the merits, requiring proof of each one would have merely made the referral hearing longer and more expensive. The pre-arbitration record proved that discovery was extensive; the evidence demanded by the dissents would have merely showed how much it cost. Finally, the dissents’ focus on discovery ignores all the other circumstances that the totality-of-the-circumstances test requires us to consider. Because we must consider all the circumstances, the amount of discovery needed to show prejudice will vary depending on what the other circumstances are. As the Fifth Circuit has held, prejudice should be easier to show against a party that initially opposed arbitration than against one who sought it from the start: While the mere failure to assert the right to demand arbitration does not alone translate into a waiver of that right, such failure does bear on the question of prejudice, and may, along with other considerations, require a court to conclude that waiver has occurred. The failure to demand arbitration affects the burden placed upon the party opposing waiver. When a timely demand for arbitration was made, the burden of proving waiver falls even more heavily on the shoulders of the party seeking to prove waiver. A demand for arbitration puts a party on notice that arbitration may be forthcoming, and therefore, affords that party the opportunity to avoid compromising its position with respect to arbitrable and nonarbitrable claims. In contrast, where a party fails to demand arbitration . . . and in the meantime engages in pretrial activity inconsistent with an intent to arbitrate, the party later opposing a motion to compel arbitration may more easily show that its position has been compromised, i.e., prejudiced. [111] It is these other circumstances that make this case different from In re Vesta. [112] The parties seeking arbitration in Vesta had not opposed arbitration from the outset and then invoked it after getting all the discovery they wanted. [113] Nor was the Vesta case close to trial, as was the case here. The parties in Vesta had taken four depositions (rather than 15); they had also exchanged standard requests for disclosure and one request for production, but only one of those documents was in the record so there was no evidence whether this limited discovery related to the merits (as the extensive discovery here clearly did). [114] And while the party opposing arbitration in Vesta allegedly incurred more than $200,000 in expenses, most of that was incurred in getting discovery rather than providing it; [115] a party who requests lots of discovery is not prejudiced by getting it and taking it to arbitration in the same way that a party who produces lots of discovery outside the stricter discovery limits in arbitration. [116] Applying the proper standard of review and the proper definition of prejudice, we disagree with the dissents that the Defendants have failed to show prejudice here.
Finally, the Culls argue the warranty companies cannot object to arbitration for two reasons. First, the warranty companies originally requested arbitration (which the Culls opposed), so it could be argued that it is unfair to hold the Culls to their original position without holding the warranty companies to theirs. Of course, we cannot hold both parties to their original positions as those positions were contradictory. More important, while the parties’ original demands are relevant factors, the test is the totality of the circumstances. Looking to all the circumstances, it is quite clear from the parties’ extensive co-participation in months of discovery that everyone waived their right to arbitration — whether they asserted that right early (as did the warranty companies) or late (as did the Culls). Second, the Culls argue that the only objection to the trial court’s order compelling arbitration was filed by Perry Homes, not the warranty companies. It is true that only Perry Homes’ attorneys signed the motion, but in that motion and at the hearing held on it they represented that they were authorized to do so on behalf of all the Defendants. If the Culls wanted to question their authority to speak for the warranty companies, they should have done so by sworn motion. [117]    Accordingly, we reverse the court of appeals’ judgment, vacate the arbitration award, and remand this case to the trial court for a prompt trial. ______________________________ Scott Brister