News & Events

Don’t Test the Litigation Waters Before Wading Into Arbitration

A recent opinion by the Sixth Circuit Court of Appeals reiterates the long established principal that defendants cannot “test the water before taking the swim” by delaying assertion of their right to arbitration until the litigation is nearly complete. Johnson Assoc. Corp. v. HL Oper. Corp., No. 10-6468 (6th Cir. filed May 23, 2012). Following other circuit courts, the Sixth Circuit ruled for the first time that a “no waiver” clause in an arbitration provision does not preclude a ruling that a party waives its right to compel arbitration by actively participating in litigation. The Johnson court ruled that the defendant actions were completely inconsistent with any reliance on its right to arbitrate because it (1) failed to raise arbitration in its answer; (2) asserted a counterclaim for breach of contract; and (3) actively scheduled and requested discovery, including depositions, rather than moving to compel arbitration following the end of formal settlement discussions. Id. slip op. at 7. The Sixth Circuit was unpersuaded by the defendant’s argument that it did not act completely inconsistently with any reliance on its right to arbitrate because it participated only in a “minimal” amount of litigation before moving to compel arbitration. Id. at 8.

The Johnson opinion reminds defendants to assert arbitration as an affirmative defense in the answer. Id. at 6. “The filing of an answer is, after all, the main opportunity for a defendant to give notice of potentially dispositive issues to the plaintiff; and the intent to invoke an arbitration provision is just such an issue.” Id.

The court further ruled that the plaintiffs suffered prejudice because, in addition to an eight-month delay and expenses involved with numerous scheduling motions and court-supervised settlement discussions, plaintiffs also engaged in discovery. The combination of all of these factors caused plaintiffs to suffer “actual prejudice,” according to the court. Id. at 10.

Melody McAnally