Participation in Litigation-Related Activities Bars a Defendant’s Ability to Later Compel Arbitration

by Scott M. Franklin

For businesses that utilize written contracts with arbitration clauses, it certainly is a case of “use it or lose it.” Thus, in Roberts v. El Cajon Motors, Inc., a San Diego Court of Appeal found that a car dealer’s contractual right to arbitrate disputes with car buyers can be waived where the dealer takes substantial and prejudicial actions contrary to that right, such as participating in litigation activities and attempting to settle with potential claimants. Roberts reaffirms the rule that businesses run the risk of waiving the chance to arbitrate consumer disputes if they do not act swiftly to compel arbitration.

In Roberts, the car buyer claimed that the dealership charged her improper interest rates and failed to properly disclose allegedly applicable finance charges. The buyer brought a class action lawsuit seeking redress for herself and all customers who had been subject to the same sales practices by the dealer.

Following the filing of the lawsuit, the car dealer answered the lawsuit, but made no mention of arbitration. The buyer’s counsel, in reliance on the dealer’s implicit acquiescence to litigating a class action, prepared and propounded voluminous and expensive discovery into the identities of potential class members. The car dealer also attempted to settle with former customers whom the car dealer thought would be part of the class action suit. Seven months after the lawsuit was filed, the car dealer attempted to stay the class action lawsuit and compel arbitration under a provision in the sales contract.

Arbitration is usually much quicker than a lawsuit, but that is a result of several important omissions that tend to favor businesses over consumers. For example, in arbitration there is no possibility of a jury trial, discovery of information is limited, and there are few grounds upon which an arbitration award can be appealed. Further, some arbitration clauses, like the one signed by buyer in Roberts, include a provision that waives the consumer’s right to participate in a class action suit regarding the sale.

In addition to sitting on its right to arbitrate for seven months, the car buyer also made no mention of seeking its right to arbitrate in settlement correspondence to potential class members. Based on the car dealer’s conduct, the appellate court had no difficultly in affirming the trial court’s ruling that the car dealer – by answering the complaint, waiting seven months to move to compel arbitration, allowing the buyer’s attorney to conduct significant discovery, and the dealer’s attempts to settle with class members – waived its right to enforce the arbitration clause.

In determining that the car dealer had waived its right to arbitrate, the appellate court gave great weight to the fact that the car dealer’s delay in invoking the arbitration provision was due to the dealer’s efforts to “pick off” potential class members without even informing those class members of the existence of the class action lawsuit. Essentially, the appellate court was disturbed by the idea that the car dealer was intentionally delaying invoking its right to seek arbitration for the purpose of diminishing its potential damages exposure by reducing the pool of plaintiffs. Part of the appellate court’s finding of waiver then was based on its desire to not see the car dealer rewarded for engaging in intentionally dilatory behavior.

Also at issue in Roberts was whether California law even allowed buyers like the one in Roberts to waive participation in a consumer class action lawsuit as part of agreeing to arbitration. A recent U.S. Supreme Court decision has called into question whether certain types of arbitration clauses may preempt state consumer protection laws, including those allowing class action remedies. The Court of Appeal in Roberts intentionally did not reach this issue, however, as it decided the case based solely on its finding that the car dealer had waived enforcement of the arbitration provision through the dealer’s actions and delays.

Roberts reaffirms that arbitration clauses can be difficult to enforce against consumers, especially if there are any signs that the business was not diligent in enforcing its rights. If a business owner has any intention of moving a lawsuit into arbitration, the motion to compel arbitration should be filed as soon as is reasonably possible after litigation is commenced. As Roberts demonstrates, it is a rare instance where a business can safely delay in invoking the right to arbitration, and a decision to delay for any time period must be carefully planned so as to avoid the same appearance of impropriety and gamesmanship as in Roberts.

If your company desires to use alternative dispute resolution in its contract disputes with customers or vendors, Michel & Associates, P.C. can assist you in drafting valid and enforceable contract provisions to assist in your efforts. MAPC can also help you properly invoke the right to use those ADR provisions when such disputes arise.

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