The Majority Approach to Arbitration Waiver: A Workable Test or A License for Litigants to Play Games with the Courts?

Abstract

[Excerpt] “The freedom of parties to agree to arbitrate their disputes is enshrined by contract law and federal law. By inserting a mandatory arbitration clause in a contract, both parties agree that, should a dispute arise between them, they will not bring the matter to court. Instead, they agree to submit any disputes to a mutually-agreed-to third party, such as the American Arbitration Association; this third-party acts like a judge and resolves the dispute. Arbitration has many advantages, such as reducing the cost and increasing the efficiency of dispute resolution. Because of these reduced costs and greater efficiency, businesses can pass along their savings to consumers by offering them lower prices and more value. Notwithstanding all of these advantages, the freedom of parties to insert enforceable arbitration clauses in their contracts has its fair share of detractors. Big businesses often insert such clauses in take-it-or-leave-it consumer contracts, such as credit card and cell phone agreements. Consumers who want or need the service provided by these businesses are forced to agree to mandatory arbitration clauses, which grant to both parties the legal right to insist upon arbitration as the sole dispute resolution method. While almost no one disagrees that arbitration is efficient and less costly, some argue that it is an unfair process. Since the business party usually appears before the third-party arbitrator repeatedly, whereas the consumer appears before him only once, the arbitrator may feel inclined to find in favor of the business party, its repeat customer. This debate between efficiency and the unfairness underlies any discussion about arbitration. This note will address this debate by analyzing merely one facet of arbitration: arbitration waiver. All of the circuits agree that when a party with a contractual right to arbitrate chooses to litigate a dispute, the party’s election to litigate may waive his ability to move the case out of court and into arbitration. However, they disagree about what test should be applied to decide whether a particular election to litigate constitutes arbitration waiver. The circuits have formulated primarily two different tests. In the majority of circuits, two elements must be proven: (1) the party seeking arbitration must have participated in litigation; and (2) the party resisting arbitration must show that he will suffer prejudice. A minority of circuits keep the first element, but the prejudice requirement has been eliminated.