Unreasonable Delay and Extensive Litigation Operates as Waiver of Right to Compel FINRA Arbitration


[author: Mark Hancock]

In an unpublished decision, the California Court of Appeal (Fourth Appellate District, Division One) held that the defendants waived arbitration through their extensive use of litigation machinery, unreasonable delay in requesting arbitration, and other actions inconsistent with arbitration. 

In February 2009, a class of plaintiffs brought an investment fraud action against defendants, a group of investment and real estate companies.  Plaintiffs alleged that the defendants were liable for investment and securities fraud, conspiracy, negligence and other common law causes of action.  In April 2011, defendants brought a motion to compel arbitration before FINRA, which was denied by the trial court.  Finding substantial evidence to corroborate the trial court’s finding that the defendants waived arbitration, the Court of Appeal affirmed.

The Court of Appeal outlined the factors that should be considered by a trial court regarding a party’s waiver of their right to arbitration:  (1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether the litigation machinery was “substantially invoked”; (3) whether the party delayed in their request for arbitration enforcement; (4) whether a counterclaim was filed without asking for a stay; (5) whether important intervening steps had taken place; (6) whether the delay “affected, misled or prejudiced” the opposing party.  St. Agnes Med. Ctr. v. PacifiCare of Cal. (2003) 31 Cal.4th 1187, 1196.  To support its holding, the Court found that defendants waived arbitration under each of the six St. Agnes factors. 

Of the six considered factors, the Court relied heavily on the defendant’s delayed request for arbitration – noting that the defendants waited more than two years after the suit’s origination to file a motion to compel arbitration.  Most notably, the Court pointed to the litigation that the defendants propounded during those two years — including 40 depositions, numerous requests to continue trial, over 10,000 discovery requests, and even prosecuting a cross-complaint until its final disposition.  Emphasizing that the defendant ultimately served plaintiff over 22,000 pages of discovery documents, the Court concluded that this not only prejudiced the plaintiffs, but was inconsistent with defendants’ purported right to arbitrate. 

The decision is Alspaugh v. Dunham, 2012 Cal. App. Unpub. LEXIS 4447, dated June 14, 2012.

Thanks to Sedgwick summer associate Natassia Kwan (UC Hastings School of Law Class of 2013) for preparing this post.


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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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