Supreme Court Of New Jersey Establishes Standard To Determine Whether A Party Implicitly Waived Its Right To Arbitrate

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Mandatory arbitration provisions are not always enforced. While arbitration is strongly favored, and courts routinely dismiss or stay matters in favor of arbitration, parties must still be cognizant that arbitration provisions are subject to general contract principles, including waiver. On August 14, the Supreme Court for the State of New Jersey unanimously held in Cole v. Jersey City Medical Center et al. that defendant, Liberty Anesthesia Associates, LLC (Liberty), waived its right to arbitrate claims by litigating the matter for 21 months and by waiting until three days before trial before filing a motion to compel arbitration. New Jersey courts previously addressed waiver of arbitration provisions by examining the litigation conduct of the party seeking to invoke the provision, but the standard for an implicit waiver had never been directly addressed by the New Jersey Supreme Court. Now, the Supreme Court has clarified the factors considered to determine if a party has implicitly waived the right to arbitrate, and provided guidance on the steps parties can take from the outset of litigation to preserve arbitration rights.

The plaintiff, Karen Cole, brought an action against Jersey City Medical Center (JCMC) for claims related to her termination of employment. She was a certified registered nurse anesthetist with an employment contract with Liberty. Liberty, in turn, had a contract with JCMC to provide anesthesia services at JCMC. Ms. Cole was assigned by Liberty to provide services at JCMC. While Ms. Cole was working at JCMC, JCMC requested that she submit to drug testing. Ms. Cole refused and, as a result, JCMC suspended her, leading to Liberty terminating her employment pursuant to her employment contract.

Although Ms. Cole initially only sued JCMC, she later amended her complaint and added Liberty as a defendant. At that time, Liberty made the strategic decision not to compel arbitration based on the arbitration clause in the employment contract because JCMC was not bound by the clause and Liberty wanted to avoid inconsistent rulings if court litigation and arbitration proceeded simultaneously. Accordingly, Liberty did not include arbitration as one of its 35 affirmative defenses. Liberty then actively participated in litigation for 21 months including completing discovery, filing and partially winning a motion for summary judgment, exchanging pre-trial information and submitting proposed voir dire questions and jury charges.

Three days before trial, Ms. Cole settled with JCMC, leaving Liberty as the only defendant and eliminating Liberty’s concern of inconsistent rulings. Shortly after the settlement, Liberty filed a motion to compel arbitration based on the arbitration clause in Ms. Cole’s employment contract. In response, Ms. Cole argued that Liberty waived its right to compel arbitration by failing to timely raise the issue and by actively participating in the litigation. The trial court granted Liberty’s motion to compel arbitration finding that (1) Liberty did not purposefully abuse the litigation process, but instead intentionally chose to litigate so that all of the parties could have their disputes resolved in a single forum and (2) Liberty filed its motion to compel arbitration shortly after JCMC’s dismissal. The Appellate Division reversed, concluding that Liberty was equitably estopped from compelling arbitration. The Supreme Court of New Jersey granted certification to address the issue.

The Supreme Court unanimously affirmed the appellate court’s decision denying Liberty’s motion to compel arbitration. In reaching its decision, the Court evaluated the totality of the circumstances and applied a fact-sensitive analysis to determine if Liberty’s conduct was consistent with its position that it reserved the right to arbitrate the dispute. While the test, as articulated, required a consideration of the totality of the circumstances, the Court did enumerate seven factors to consider, no one of which is dispositive. These factors are: (1) the delay in making the arbitration request; (2) the filing of motions and their outcomes; (3) whether the delay in seeking arbitration was part of the party’s litigation strategy; (4) the extent of discovery conducted; (5) whether the party raised the arbitration issue in its pleadings or provided other notice of its intent to seek arbitration; (6) the proximity of the date on which the party sought arbitration to the date of trial; and (7) the resulting prejudice suffered by the other party, if any.

The Court applied these factors and determined that almost all of them supported a waiver of arbitration by Liberty. Specifically, the Court found that Liberty waited 21 months to file its motion, filed and partially won a dispositive motion, delayed filing the motion as part of its litigation strategy, completed discovery, did not raise arbitration as an affirmative defense, waited until three days before trial to file its motion and that granting the motion to compel would prejudice Ms. Cole, who was on the verge of obtaining judicial resolution of her claims.

In addition to formalizing the standard for determining whether there has been an implicit waiver of an arbitration clause, the Court provided practitioners explicit instructions on how to avoid an implicit waiver. The Court instructed that:

A party that intends to invoke its right to arbitrate in a case where another party is a nonsignatory to the arbitration agreement may preserve its right by asserting arbitration in its answer as an affirmative defense, moving to compel arbitration in a timely manner, moving to stay the judicial proceeding, or notifying the other party to the arbitration agreement that its litigation conduct should not be considered a waiver of its right to arbitrate the dispute.

Rarely is the Court so precise in its guidance to practitioners. With this knowledge, best practices in New Jersey going forward when served with a complaint is to: (1) review any contractual agreements referenced in the complaint to determine if there is an arbitration clause that would apply to the dispute; (2) if there is, arbitration should be included as an affirmative defense; and (3) a reservation of arbitration rights letter should be sent to opposing counsel. While proceeding with litigation in the courts, including motions to dismiss and discovery, will not automatically constitute a waiver of arbitration, after reserving their rights to arbitration as noted above, parties should continually revisit at each step in the litigation whether proceeding in court will give rise to an argument that the adversary has been prejudiced if the matter is then moved to arbitration. By adhering to these practices, parties can ensure that if they decide to waive arbitration it will be an explicit choice and not one forced by implication by the courts.