Arbitration Waiver and Prejudice

Arbitration agreements are common in commercial and consumer contracts. But two parties can litigate an arbitrable dispute in court if neither party seeks arbitration. That presents a problem if one party changes its mind and invokes its arbitration rights months or years after the lawsuit was filed and substantial litigation activity has taken place. Federal and state courts agree that a party can waive its arbitration rights by engaging in sufficient litigation activity without seeking arbitration, but they take different approaches to deciding how much litigation is too much. Two basic methods exist. Some courts say waiver requires the party opposing arbitration to show it would be prejudiced by the delay. Others say that waiver does not require a showing of prejudice. This Note demonstrates that the presence or absence of a prejudice requirement does not accurately capture the disagreements between the federal circuit courts. Indeed, some circuits that impose a prejudice requirement will find waiver in circumstances where other courts that do not impose a prejudice requirement will not. These divergent approaches result in uncertainty, delay, and expense, undermining arbitration’s benefits. To resolve the circuit split, this Note proposes a bright-line standard under which engaging in litigation never supports a finding of waiver. It also shows that this approach is consistent with common law waiver doctrine and the Federal Arbitration Act.