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N.J. Supreme Court says participating in litigation for 21 months waives employer’s right to compel arbitration

By Ronald Miller, J.D.

An employer could not compel arbitration based on to the arbitration provision in an employee’s contract 21 months after being joined and actively participating in the litigation, ruled the New Jersey Supreme Court (Cole v Jersey City Medical Center, August 14, 2013, Cuff, M). Based on the totality of the circumstances and applying a fact-sensitive analysis, the state high court concluded that invoking the arbitration provision on the eve of trial constituted a waiver of the employer’s right to arbitrate.

The employer, Liberty Anesthesia, provided anesthesia services to a hospital, Jersey City Medical Center (JCMC), and contracted with the employee to provide services. Her employment agreement with Liberty included an arbitration provision. After a JCMC revoked the employee’s work privileges, Liberty terminated her employment pursuant to their agreement. Thereafter, the employee filed suit against JCMC asserting statutory and common law claims. In response, JCMC impleaded Liberty as a third-party defendant. The employee amended her complaint to include Liberty as a direct defendant. Although Liberty asserted a number of defenses against the employee none of them referred to arbitration.

Ultimately, JCMC settled the employee’s claim, and trial was set for two of her claims against Liberty. Three days before the trial, Liberty filed a motion to compel arbitration pursuant to the arbitration provision of the parties’ employment contract. Liberty asserted that it did not seek to compel arbitration sooner because JCMC was not a party to the agreement, and it did not want to risk disparate results from a jury and an arbitrator. However, the employee countered that Liberty waived its right to compel arbitration by failing to timely raise the issue and by actively participating in the litigation. Nonetheless, the trial court granted Liberty’s motion to compel arbitration. The appellate court reversed, concluding that Liberty was equitably estopped from invoking the arbitration provision. Thereafter, the state high court granted a petition for certification.

Waiver of arbitration. Waiver can occur implicitly if the circumstances clearly show that the party knew of the right and then abandoned it, either by design or indifference. Determining whether a party waived a right is a fact-sensitive analysis. In Wein v Morris, the New Jersey court recognized that certain circumstances can demonstrate waiver of a contractual arbitration right, including filing a complaint or answer and counterclaim without referring to a contractual arbitration provision and extensively engaging in discovery. However, the state high court observed that it has not directly addressed the standard necessary to establish that a party implicitly waived its right to arbitrate in order to receive a judicial adjudication.

Fact-sensitive analysis. After first reviewing the factors used by federal courts in determining whether waiver occurred, the court concluded that in deciding whether a party waived its right to arbitrate, courts must focus on the totality of the circumstances and apply a fact-sensitive analysis to determine if the party’s litigation conduct is consistent with its reserved right to arbitrate the dispute. Among other factors, courts should evaluate: (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 notification 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.

Applying those factors, the state high court found that Liberty’s conduct was inconsistent with its right to arbitrate the dispute with the employee. Liberty was a party to the litigation for 21 months before seeking to invoke the arbitration provision; did not include arbitration as an affirmative defense; moved to compel arbitration three days before the scheduled trial date, at which point the parties had conducted discovery; and engaged in motion practice. The court observed that Liberty’s tardy change in course and invoking arbitration on the eve of trial hindered only the employee, who was on the verge of a judicial resolution of her complaint, and would have to start over in a different forum under different rules. Thus, an evaluation of the totality of the circumstances led to the conclusion that Liberty waived its right to arbitrate.

Moreover, the court ruled that its analysis was not affected by the fact that the employee brought her suit against JCMC, a non-party to the arbitration agreement. A party that intended to invoke its right to arbitrate in a case where another party is a non-signatory 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 agreement that its litigation conduct should not be considered a waiver of its right to arbitrate.