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July 2010

Use It Or (Potentially) Lose It

California Court of Appeal Expands Waiver of Arbitration in Employment Agreements

Zamora v. Lehman (2010) 2010 Cal.App. LEXIS 993

The California Court of Appeal for the Second District recently expanded the circumstances under which the right to arbitrate an employment agreement is deemed to have been waived by finding that such a waiver does not require the "relinquishment of a known right." In Zamora v. Lehman, the Court of Appeal held that the defendants, who forgot about the arbitration clause in their employment agreement, waived their right to arbitrate when they "engaged in acts inconsistent with arbitration" by litigating the case for two years.

The defendants were three officers/directors of a failed company that filed for bankruptcy in 2001. Four years later, Nancy Zamora, the trustee of the bankruptcy estate, filed suit against officers/directors Stephen Lehman, Eric Weiss, and Daniel Yukelson for breach of fiduciary duty. Defendant Yukelson tried to settle, but Lehman and Weiss actively engaged in discovery. Zamora produced over 60,000 documents in response to Lehman's and Weiss's discovery requests.

In 2007, a full two years after Zamora filed the complaint, all defendants moved to compel arbitration, submitting declarations that they had forgotten about their arbitration clauses. The arbitration provision designated "American Arbitration Association rules for Labor Agreements," which allow very limited discovery. Zamora argued that the defendants had waived arbitration and that the defendants' delay had prejudiced her, especially as she had responded to extensive discovery that would have been unavailable under the applicable arbitration rules. The trial court held that because the defendants had forgotten about the arbitration provision, they had not relinquished a known right and could not have waived it. Zamora appealed.

As to defendants Lehman and Weiss, the Court of Appeal agreed with Zamora and found a valid waiver. The Court of Appeal quoted the California Supreme Court, stating "generally, a waiver denotes the voluntary relinquishment of a known right. But it can also mean the loss of an opportunity or a right as a result of a party's failure to perform an act it is required to perform, regardless of the party's intent to abandon or relinquish the right?." (Platt Pacific, Inc. v. Andelson (1993) 6 Cal.4th 307, 315.) While California courts have applied this broader waiver approach in other contractual contexts, including construction, health services, and banking, this case indicates that an employee can waive his or her right to arbitrate without the express intent to abandon it.

The Zamora court evaluated waiver by applying a multi-factor test from another California Supreme Court case. (St. Agnes Medical Center v. Pacificare (2003) 31 Cal.4th 1187.) The factors include whether the parties' actions were inconsistent with the right to arbitrate, if the parties were "well into preparation of a lawsuit" before seeking arbitration, the length of delay, if a party took advantage of mechanisms such as discovery that would otherwise be unavailable, and the extent of prejudice to the opposing party. The Zamora court found it very compelling that Zamora was significantly prejudiced by the defendants' actions. She had disclosed trial tactics that she would not have otherwise revealed and she lost any of the efficiencies of arbitration.

As for defendant Yukelson, the Court of Appeal found that Yukelson had not waived his right to arbitrate. All three defendants forgot about their arbitration clauses and delayed for two years; none intended to give up arbitration. The vital distinction for Yukelson was that he did not "engage in acts inconsistent with arbitration" as his participation in discovery was minor, and thus Zamora was minimally prejudiced as to him.

This Court's decision shows that the arbitration rules parties select are important. For example, here, one word may have changed the outcome of the case. Had the clause cited the "American Arbitration Association Rules for Employment Agreements," (as opposed to Labor Agreements) which allow significant discovery, Zamora may not been able to show she was prejudiced by participating in discovery. The Court of Appeal also held that the waiver was valid under both the Federal Arbitration Act ("FAA") and the California Arbitration Act ("CAA").

Zamora emphasized that courts still recognize a strong public policy in favor of arbitration, close scrutiny of claims of waiver, and a general disfavor of invalidating parties' express intentions. Accordingly, the burden to show waiver remains high – but not insurmountable.

Employment Law

Employment Law