Employment Alert: Court Upholds Waiver of Employer’s Right to Arbitration

In Bower v. Inter-Con Security Systems, Inc., No. A135940, published December 31, 2014 (Bower), the California Court of Appeal, First Appellate District held that a defendant employer waived its right to arbitration based on substantial evidence it had acted inconsistently with the right to arbitrate once the lawsuit was filed.

The plaintiff, a security guard, filed a putative class action against his employer, Inter-Con, in August 2011. The plaintiff set forth various employment-related claims, alleging Inter-Con failed to pay wages and failed to provide meal and rest periods. Inter-Con filed an answer to the complaint, asserting the right to arbitration as an affirmative defense. It also responded to the plaintiff’s preliminary discovery, including an objection based on its right to arbitration. Inter-Con also propounded class-wide discovery on plaintiff. After settlement negotiations did not yield a class-wide settlement, Inter-Con filed a petition to arbitrate in June 2012. The trial court concluded that one could infer Inter-Con made a tactical decision to delay arbitration and, in doing so, waived the right to individually arbitrate the plaintiff’s claim.

The Court of Appeal affirmed. The court agreed Inter-Con invoked the litigation machinery prior to filing its petition to arbitrate and focused its analysis on the fact Inter-Con had sought class-wide discovery. Although the arbitration agreement between plaintiff and Inter-Con permitted discovery, the court concluded class-wide discovery was inconsistent with the individualized discovery contemplated by the arbitration agreement. Likewise, the court characterized Inter-Con’s participation in settlement negotiations related to a class-wide settlement as a strategic decision to litigate the claims in a judicial forum rather than arbitrate individual claims. Finally, the court found that the delay and cost of litigating and attempting to settle class claims constituted prejudice to the plaintiff. As such, the court held there was substantial evidence supporting waiver of Inter-Con’s right to arbitrate the plaintiff’s claim.

Bower is a cautionary decision for employers who consider litigation discovery and exploration of class settlement as opposed to arbitrating many individual claims. Although the finality and preclusive effect of a class settlement has its benefits, a substantial risk exists that class-wide litigation activity, or even delay, will be regarded as evidence of waiver. As such, where a party has a right to arbitration, that right should be exercised as early as possible and the consequences and timing of any other activity should be carefully considered. Bower demonstrates the costly consequences of trying to preserve a party’s right to arbitrate.

This document is intended to provide you with general information about employment law developments. The contents of this document are not intended to provide specific legal advice. This communication may be considered advertising in some jurisdictions.

January 6, 2015