Arbitration is intended to be a quicker, less costly alternative to courtroom litigation. But what happens when one party in a dispute seems to want to pursue the matter in court, only to profess a desire to arbitrate years after the complaint was first filed?
That was the question presented to the California Court of Appeal by a recent case (Sierra Pacific Industries Wage and Hour Cases).
Quinton McDonald worked as an hourly employee from 2015 to 2018 at a sawmill operated by Sierra Pacific Industries. The family-owned company has 18 sawmills in California, Oregon and Washington, and manages 2.4 million acres of timberland in the West.
Many of the firm’s other nonexempt or hourly employees signed arbitration agreements when they joined the company. These agreements required that all employment-related disputes be arbitrated. They also precluded class actions involving such disputes.
McDonald, who had not signed an arbitration agreement, filed a class action complaint against Sierra Pacific on October 19, 2018. It alleged various violations of California laws on wage and hour matters and against unfair competition.
The lawsuit claimed to be on behalf of eight classes of current and former employees, including those who had signed arbitration agreements that barred class actions.
The company filed a response denying the allegations and offering various affirmative defenses. The defenses did not include a claim that the dispute should be arbitrated.
McDonald filed an amended complaint in February of 2019. When Sierra Pacific responded to this complaint, it added arbitration as an affirmative defense.
A second amended complaint was filed two years later, to which the company responded with 24 defenses – but not including arbitration.
Shortly after filing his lawsuit, in support of his goal to achieve class action status for his lawsuit McDonald asked for various documents and information from the company related to its dealings with non-exempt employees, including wage information and “documents that pertain to any arbitration agreements” signed by its non-exempt employees in California.
Sierra Pacific objected, saying the requests were overbroad and sought information that was “private, privileged and protected.”
His request for information about arbitration agreements, the company said, were “entirely premature and irrelevant at this pre-certification stage,” since the court had not ruled on whether the case could proceed as a class action on behalf of other similarly situated employees.
The trial court granted McDonald’s request, ordering Sierra Pacific to produce records for employees at two of its California facilities and to provide “representative samples” of records for 20 percent of non-exempt employees at its other plants in the state.
The case moved into the discovery phase, but “not without controversy” as court documents note; Sierra Pacific was hit with sanctions of $4,210 for failing to produce some documents and for violating a court order to send required notices to certain employees.
When the court considered the request for class action certification, Sierra Pacific argued that thousands of its employees had signed arbitration agreements that barred them from participating in a class action on employment-related claims of the type McDonald was alleging.
McDonald responded that he had not signed an arbitration agreement, and that all employees who had signed them could be removed from the proposed class.
On March 10, 2023, Sierra Pacific produced more than 3,400 signed arbitration agreements and asked the court to compel arbitration of McDonald’s claims for any of these workers.
It said this motion, filed nearly five years after the lawsuit began, was timely because the court has not yet certified the case as a class action.
McDonald’s attorneys disagreed. The argued that the company had waived its right to compel arbitration by “engaging in years of litigation conduct inconsistent with an intent to arbitrate.” This included refusing to produce arbitration agreements for workers who had signed them even after the court had ordered it to do so.
The trial court denied the company’s request to compel arbitration and hit it and its attorneys with sanctions for what it called their “history of noncompliance with their discovery obligations in this case.” It noted that sanctions had been imposed on Sierra Pacific three prior times during the litigation.
The company appealed the trial court’s ruling denying arbitration and its imposition of sanctions.
The appellate justices dismissed the company’s objections to the sanctions imposed by the trial court. California law bars an appeal from such an order, they said.
Turning to Sierra Pacific’s request to arbitrate the dispute, the appellate justices said a court can compel parties to an arbitration agreement to arbitrate their dispute unless the court finds that “the right to compel arbitration has been waived by the petitioner.”
To determine whether arbitration has been waived, they said, a judge can look at “whether the party’s actions are inconsistent with the right to arbitrate,” and whether “litigation machinery has been substantially invoked.”
If a party waits until preparations for a lawsuit are well underway, or requests arbitration close to the date a trial is set to begin, a court can conclude that the party has waived its right to arbitrate, the justices said.
Sierra Pacific participated in extensive discovery “while saying nothing about any intent to arbitrate,” they noted, and it “deleted arbitration from the long list of affirmative defenses” it offered in responding to McDonald’s complaint.
The company’s “overall litigation conduct was manifestly inconsistent with an intent to arbitration and so constituted clear and convincing evidence of waiver” of its right to arbitrate the dispute.
The justices affirmed the lower court’s order denying the company’s motion to compel arbitration of the complaint and awarded the plaintiffs their costs on appeal.
The lesson to be drawn from this case is clear: arbitrate or litigate, but don’t expect a court to let you try to use one to “game” the other.
By Laurie Murphy