The United States Court of Appeals for the Eleventh Circuit recently confirmed that waiting too long to raise an arbitration agreement’s delegation clause waives the right to ask the court to send threshold questions of arbitrability to the arbitrator for resolution.
In Johnson v. KeyBank National Association, David Johnson, a customer of KeyBank, filed a putative class action against KeyBank alleging that the bank violated Washington law by changing the order of posting of debit card transactions to increase the overdraft fees it charged on his account. KeyBank moved to compel arbitration and stay all proceedings, but did not mention the arbitration agreement’s delegation clause. Johnson opposed, arguing that the arbitration agreement was unconscionable under Washington state law, and the district court agreed, denying the motion to compel arbitration because the arbitration agreement’s class action waiver effectively prohibited individual plaintiffs from filing claims due to the potentially high costs.
The Eleventh Circuit vacated the district court’s order and remanded for further consideration in light of the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion. On remand, KeyBank filed a renewed motion for arbitration, raising the arbitration agreement’s delegation clause for the first time. On August 27, 2013, the district court granted KeyBank’s motion to compel arbitration, finding that the delegation clause required the arbitrator to resolve threshold questions of arbitrability. Johnson appealed.
On appeal, the Eleventh Circuit began by noting that its precedent states that arbitration should not be compelled when the party seeking to compel arbitration has waived that right. Under that precedent, waiver occurs when the party seeking arbitration substantially participates in litigation to a point inconsistent with an intent to arbitrate and the opposing party suffers prejudice in the form of incurring litigation expenses that arbitration was designed to alleviate.
Here, the Eleventh Circuit noted that KeyBank proceeded for years without raising the delegation clause, giving the impression that it believed the district court should resolve threshold questions of arbitrability. In addition, the Court held that Johnson undoubtedly suffered prejudice as a result, incurring substantial attorney’s fees in litigating the threshold questions before the district court and on appeal.
The lesson from this case is simple: if a litigant’s arbitration agreement contains a delegation clause and the litigant prefers resolution of threshold questions of arbitrability by the arbitrator, the delegation clause should be raised at the earliest opportunity, usually in the motion to compel arbitration, to avoid any claims of waiver.