Gordon Schuster v. Prestige Senior Management LLC , 193 Wash. App. 616 ( 2016 )

FILED
APRIL 28, 2016
In the Office of the Clerk of Court
WA State Court of Appeals, Division III
IN THE COURT OF APPEALS OF THE STATE OF WASHINGTON
DIVISION THREE
GORDON SCHUSTER, on behalf of )
himself, individually and on behalf of the ) No. 33242-0-III
Estate of RONALD SCHUSTER, DIANA )
YECKEL, individually, and PAT )
SCHUSTER, individually, )
)
Respondent, ) PUBLISHED OPINION
)
v. )
)
PRESTIGE SENIOR MANAGEMENT, )
L.L.C., an Oregon Limited Liability )
Company, d.b.a. BLOSSOM CREEK )
SENIOR ALZHEIMER COMMUNITY; )
SENIOR RESOURCE GROUP, INC., a )
Washington Corporation; LSRF HUSKY )
OPS HOLDINGS, L.L.C., a foreign )
Limited Liability Company; PRESTIGE )
CARE, INC., a Washington Corporation, )
d.b.a. BLOSSOM CREEK SENIOR )
ALZHEIMER COMMUNITY; )
PRESTIGE SENIOR LIVING, L.L.C., an )
Oregon Limited Liability Company, d.b.a. )
BLOSSOM CREEK SENIOR )
ALZHEIMER COMMUNITY; )
WENATCHEE SENIOR CARE, L.L.C., )
formerly a Washington Limited Liability )
Company, formerly d.b.a. BLOSSOM )
CREEK SENIOR ALZHEIMER )
No. 33242-0-III
Schuster v. Prestige ~enior Mgmt.
COMMUNITY; KARL W. LAMBERT, )
A.R.N.P., an individual; REDIMEDI )
HOUSECALL, P.L.L.C., a Washington )
Professional Limited Liability Company; )
REDIMEDI CLINIC & HOUSECALL, )
P.L.L.C., a Washington Professional )
Limited Liability Company; JOHN DOE )
1, M.D., an individual; JOHN DOE 2, an )
individual; JOHN DOE 3, an individual; )
and JOHN DOE 4, an individual, )
)
Defendants, )
)
LSREF GOLDEN OPS 14 (WA), L.L.C., )
A Delaware Limited Liability Company, )
d.b.a. BLOSSOM CREEK SENIOR )
ALZHEIMER COMMUNITY; LAVIDA )
COMMUNITIES, INC. a Delaware )
Corporation; SRG SERVCO )
OPERATING, L.L.C., a Delaware )
Limited Liability Company; SRG )
SERVCO OPERATING L.L.C. acting )
through a separate series SRG LAVIDA )
OPS NW SERIES, an entity of unknown )
ongm, )
)
Appellants. )
FEARING, CJ. -
Put more succinctly, at some point a party seeking to enforce an arbitration
agreement must use it or lose it. Nino v. Jewelry Exch., Inc., 609 F.3d 191, 212 n.10
(3rd Cir. 2010).
We address under what circumstances a party waives the right to compel
arbitration, pursuant to contract, by engaging in court litigation. In answering this
question, we apply federal law. The trial court held that appellants waived this right by
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lengthy litigation conduct. We agree and affirm the trial court's denial of the defense's
motion to compel arbitration.
FACTS
We first introduce the parties. The lawsuit stems from the treatment and care of an
elderly gentleman, Ronald Schuster, now deceased, at Blossom Creek Senior Alzheimer
Community (Blossom Creek). Plaintiffs Pat Schuster, Gordon Schuster, and Diana
Yeckel are respectively the widow, son, and daughter of Ronald Schuster. Gordon
Schuster serves as personal representative of his father's estate.
The four named defendants, LSREF Golden Ops 14 (WA) LLC (LSREF), La Vida
Communities Inc. (La Vida), SRG Servco as SRG La Vida Ops NW Series (SRG), and
Servco Operating LLC (Servco ), owned or managed Blossom Creek while Ronald
Schuster resided at the community. We refer to the four companies collectively as the
Blossom Creek entities or entities. Defendant Karl Lambert was Ronald Schuster's
primary care provider while Schuster resided at Blossom Creek. Defendants Redimedi
Clinic & Housecall PLLC and Omnicare Inc. are alleged to be related to Lambert.
Blossom Creek Senior Alzheimer Community, Wenatchee Senior Care LLC, and Husky
Ops Holdings LLC are named defendants, but not participants in the litigation.
In March 2009, Ronald Schuster entered Blossom Creek Senior Alzheimer
Community, located in Wenatchee, Washington. On April 15, 2009, Gordon Schuster, as
power of attorney for his father, signed an agreement with LSREF regarding the care of
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his father at Blossom Creek. The agreement contained an optional provision for
mandatory arbitration:
Arbitration
BOTH PARTIES UNDERSTAND THAT AGREEING TO
ARBITRATION IS NOT A CONDITION OF YOUR ADMISSION TO
THE COMMUNITY. By initialing the line at the end of this paragraph,
however, you agree that any and all claims and disputes arising from or
related to this Agreement or to your residency, care or services at the
Community, whether made against us or any other individual or entity,
shall be resolved by submission to neutral, binding arbitration in
accordance with the Federal Arbitration Act; except that any claim or
dispute involving unlawful detainer proceedings (eviction) or any claims
that are brought in small claims court shall not be subject to arbitration
unless all parties involved agree to arbitrate such proceedings. Both parties
give up their constitutional rights to have any such dispute decided in a
court of law before a jury, and instead accept the use of arbitration.
Arbitrations shall be administered by the National Arbitration Forum
under the Code ofProcedure then in effect. Arbitrations shall be conducted
by a single arbitrator agreed to by the parties, or if the parties cannot agree
upon an arbitrator, before an arbitrator assigned by the National Arbitration
Forum. Arbitrations will be held at an agreed upon location, or in the
absence of such agreement, at the Community. The dispute will be
governed by the laws of Washington. The arbitrator's fee shall be shared
equally by the parties. Any award by the arbitrator may be entered as a
judgment in any court having jurisdiction. In reaching a decision, the
arbitrator shall prepare findings of fact and conclusions of law. Each party
shall bear its own costs and fees in connection with the arbitration. This
arbitration clause binds all parties to this Agreement and their spouse, heirs,
representatives, executors, administrators, successors, and assigns, as
applicable. After termination of this Agreement, this arbitration clause
shall remain in effect for the resolution of all claims and disputes that are
unresolved as of that date.
_ _ _ _ _ _ _(Resident's initials)
Clerk's Papers (CP) at 634 (some emphasis in original). Gordon Schuster placed initials
at the end of the arbitration clause. The initials appear to be his individual initials rather
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than his father's initials, and Gordon did not specify that he signed as power of attorney
for his father.
The arbitration clause in Ronald Schuster's care agreement appointed National
Arbitration Forum to administer any arbitration proceeding. In July 2009, the Hennepin
County District Court, in Minnesota, entered a consent judgment in a suit brought by the
Minnesota Attorney General against National Arbitration Forum. Under the judgment,
National Arbitration Forum agreed to cease administering arbitration proceedings
involving consumers, including patients or residents of an assisted living facility. In the
Minnesota suit, the state attorney general accused National Arbitration Forum of
violating state consumer fraud, deceptive trade practices, and false advertising laws by
hiding financial ties to collection agencies and credit card companies that placed
arbitration clauses in consumer contracts and used its arbitration services.
According to Gordon Schuster, on February 27, 2010, he visited his father at
Blossom Creek and found his father overmedicated, emaciated, hungry, and thirsty. An
ambulance took Ronald Schuster from Blossom Creek. He died on May 21, 2010. We
know nothing of the events in Gordon Schuster's life between February 27 and May 21.
On August 17, 2010, the Schuster family informed Blossom Creek entities that the
family intended to file suit for damages arising from alleged negligent care of Ronald
Schuster. From August 2010 to November 2011, the Schuster family and the Blossom
Creek entities frequently communicated about the Schusters' claims.
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The facts succeeding the commencement of litigation loom more important on
appeal than the facts preceding the filing of suit. On February 5, 2013, the Schuster
family filed their first complaint. The family named LSREF Golden Ops 14 LLC as a
defendant but did not name other Blossom Creek entities. On April 2, 2013, LSREF filed
an answer to the complaint. The answer did not list arbitration as a defense or mention
the need to arbitrate the claims asserted by the Schuster family. On April 30, 2013, the
Schuster family filed their first amended complaint, which added the remainder of the
Blossom Creek entities as defendants. The family filed a second amended complaint on
May 17, 2013.
The parties exchanged written discovery requests. On August 20, 2013, the
Schuster family moved to compel discovery of interrogatories and requests for
production from the Blossom Creek entities. On August 26, LSREF responded to the
Schusters' interrogatories and requests for production. On September 11, La Vida and
SRG responded to the family's interrogatories and requests for production. On
September 12, 2013, the Blossom Creek entities filed a brief in opposition to the Schuster
family's motion to compel. The brief claimed that all relevant entities had responded to
discovery requests. The brief did not mention the care agreement arbitration clause or
suggest a need to arbitrate rather than litigate in court. The Schuster family struck its
pending motion to compel.
On October 14, 2013, the Schuster family filed a second motion to compel
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discovery. The motion complained that the Blossom Creek entities' August and
September responses failed to fully answer the discovery requests. Among other
purported shortcomings in the responses, the Blossom Creek entities omitted a privilege
log for documents over which they claimed the attorney-client privilege, and the entities
withheld names and addresses of former employees. The Blossom Creek entities
responded to the motion to compel on October 25. On January 10, 2013, the trial court
granted, in part, the second motion to compel. The order compelling discovery imposed
sanctions on the Blossom Creek entities, which the entities later paid. The entities did
not mention the necessity of arbitration when defending the second motion to compel.
On January 23, 2014, the Schuster family filed a third amended complaint. In
February 2014, the Blossom Creek entities deposed plaintiffs Gordon Schuster, Diana
Yeckel, and Pat Schuster. They also attended the deposition of Karl Lambert. On April
18, Karl Lambert and the Blossom Creek entities deposed Karl Steinberg, the Schuster
family expert.
During a conversation between the Schuster family's counsel and the Blossom
Creek entities' counsel, in July 2014, the entities first mentioned the arbitration clause in
Ronald Schuster's care agreement. By the time of this conversation, the parties had
communicated for three years and eleven months. The lawsuit had been pending for one
year and five months.
On September 26, 2014, the Schuster family filed a fourth amended complaint.
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On October 10, 2014, the Blossom Creek entities filed an answer to the third amended
complaint and asserted as an affirmative defense that the Blossom Creek entities were
entitled to arbitration. We do not know why the answer responded to the third amended
complaint rather than the fourth amended complaint.
PROCEDURE
On November 24, 2014, the Blossom Creek entities filed a motion to compel
arbitration. The Schuster family had filed the lawsuit one year and nine months earlier.
The Schuster family objected to the motion to compel. In support of the objection, the
family claimed it had incurred $10,000 in expenses and its attorneys had to date
expended more than $70,000 in labor. One of the Schuster family's counsel also testified
by declaration:
Plaintiffs [the Schusters] have obtained nine declarations from former
Blossom Creek employees. Had arbitration been proposed from the beginning,
Plaintiffs would have tailored those declarations as testimony so that they may be
entered at a hearing. Moreover, discovery through the National Arbitration Forum
is limited to twenty-five written questions. Plaintiffs would not have propounded
extensive interrogatories and requests for production had the matter been placed in
arbitration. Nor would the Plaintiffs [have] filed motions to compel on some of
those requests .
. . . In addition, Plaintiffs' strategy surely would have changed due to
the limiting costs of arbitration and the circumstances of this case; and,
... There has been over five thousand productions in this case
produced by Plaintiffs, LSREF/La Vida/SRG and Lambert/Redi-Medi
entities.
CP at 897. We do not know if "five thousand productions" is the delivery of five
thousand documents or five thousand pages. In its response to the motion to compel
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arbitration, the Schuster family informed the trial court of the Minnesota judgment that
precluded National Arbitration Forum, the care agreement's assigned administrator of
arbitration, from administering consumer claims.
The trial court denied the motion to compel arbitration. The court first ruled that
the forum selection clause appointing the National Arbitration Forum as the arbitration
administrator was integral to the arbitration agreement, and, with the disqualification of
the National Arbitration Forum as administrator, the Schuster family was no longer
bound by the arbitration clause. The trial court also ruled that the Blossom Creek entities
waived the provisions of the arbitration clause by its extended litigation conduct. In
response to a motion for reconsideration, the trial court reversed its decision that the
administration of arbitration by the National Arbitration Forum was integral to the
agreement. The court, however, preserved the ruling denying the motion to compel on
the ground of waiver.
LAW AND ANALYSIS
The Blossom Creek entities appeal the trial court's ruling that they waived the
right to enforce the arbitration agreement. The Schuster family cross appeals the trial
court's ruling on reconsideration that the arbitration administrator clause was not an
integral part of the arbitration agreement. Since we affirm the trial court's ruling on
waiver, we do not address the cross appeal.
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The Schuster family also contends that, even if we compel arbitration, the only
parties subject to the arbitration agreement are the plaintiff Estate of Ronald Schuster and
defendant LSREF. In other words, the Estate may continue with the lawsuit against other
defendants, including other Blossom Creek entities, and the other plaintiffs may proceed
with the lawsuit against all defendants, even LSREF. We need not address this
contention either.
Choice ofLaw
Ronald Schuster's care agreement declares that the parties submit any dispute to
arbitration in accordance with the Federal Arbitration Act, 9 U.S.C. §§ 1-14. Even
without this mention of the Federal Arbitration Act, we would probably rule that the
Federal Arbitration Act applies because the Blossom Creek entities likely engaged in
interstate commerce. 9 U.S.C. §§ 1-2; Circuit City Stores, Inc. v. Adams, 532 U.S. 105,
111-13, 121 S. Ct. 1302, 149 L. Ed. 2d 234 (2001). An arbitration agreement subject to
the Federal Arbitration Act is governed by federal substantive law, including waiver
principles. Southland Corp. v. Keating, 465 U.S. 1, 12, 104 S. Ct. 852, 79 L. Ed. 2d 1
(1984); Kinsey v. Bradley, 53 Wash. App. 167, 169, 765 P.2d 1329 (1989). All parties
concur that federal law controls.
We sit in the awkward position of being a state intermediate appellate court tasked
with applying federal law. We recognize we are bound by United States Supreme Court
decisions with regard to interpretation and implementation of federal statutes. James v.
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City ofBoise, _U.S._, 136 S. Ct. 685, 686, 193 L. Ed. 2d 694 (2016); Home Ins. Co.
ofNew York v. N. Pac. Ry., 18 Wash. 2d 798, 808, 140 P.2d 507 (1943); N. Pac. Ry. Co. v.
Longmire, 104 Wash. 121, 125, 176 P. 150 (1918); S.S. v. Alexander, 143 Wash. App. 75,
92, 177 P .3d 724 (2008). The Supreme Court holds the responsibility to say what a
federal statute means, and once the Court has spoken, it is the duty of other courts to
respect that understanding of the governing rule of law. Nitro-Lift Tech., LLC v. Howard,
_U.S._, 133 S. Ct. 500, 503, 184 L. Ed. 2d 328 (2012).
Unfortunately United States Supreme Court decisions do not assist in resolving the
Schuster family's claim of waiver. The Blossom Creek entities rely on one United States
Supreme Court decision, Green Tree Financial Corporation-Alabama v. Randolph, 53 I
U.S. 79, 90-92, 121 S. Ct. 513, 148 L. Ed. 2d 373 (2000). The entities argue that Green
Tree supports the proposition that a plaintiff who initiates a lawsuit, despite an arbitration
agreement, suffers only a "self-inflicted wound" as a result of litigation expenses, and,
therefore, the plaintiff suffers no prejudice for purposes of waiver. However, Green Tree
never mentions this "self-inflicted wound" theory and does not discuss waiver of
arbitration.
We move to the intermediary United States appeals courts. Like most subject
areas of federal law, scores of United States Circuit Court of Appeals opinions address
the subject of arbitration waiver with the various circuits assuming varied slants. We
bodily lie within the Ninth Circuit Court of Appeals. Nevertheless, we rule that we are
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no more bound by Ninth Circuit cases than other Circuit Court of Appeals decisions.
Connecticut and Pennsylvania state courts follow their respective federal circuit
Court of Appeals' decisions on federal law so that litigants do not improperly walk across
the street to achieve a different result in federal court than would be obtained in state
court. St. Juste v. Comm 'r of Corr., 155 Conn. App. 164, 177, 109 A.3d 523, cert.
granted, 316 Conn. 901 (2015); Vazquez v. Buhl, 150 Conn. App. 117, 137, 90 A.3d 331
(2014).; Parr v. Ford Motor Co., 109 A.3d 682, 693 n.8 (Pa. Super. Ct. 2014), appeal
denied, 123 A.3d 331 (Pa.), cert. denied, 136 S. Ct. 557 (2015). Washington courts have
never embraced this parochial position. S.S. v. Alexander, 143 Wash. App. at 93 (2008).
"We have never held that an opinion from the Ninth Circuit is more or less persuasive
than, for example, the Second, Sixth, Seventh, Eighth, or Tenth Circuits." In re Pers.
Restraint of Markel, 154 Wash. 2d 262, 271 n.4, 111 P .3d 249 (2005).
In W G. Clark Construction Co. v. Pacific Northwest Regional Council of
Carpenters, 180 Wash. 2d 54, 322 P.3d 1207 (2014), our high court followed the Ninth
Circuit Court of Appeals' analysis on a federal Employee Retirement Income Security
Act of 1974, 29 U.S.C. §§ 1001-1461, question because of its persuasive reasoning, not
because of our geographic situs. The Illinois Supreme Court refused to follow its federal
Court of Appeals' decision when there was a split of authority among the federal circuits
and the court believed a Seventh Circuit case was wrongly decided. Weiland v.
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Telectronics Pacing Sys., Inc., 188 Ill. 2d 415, 423, 721 N.E.2d 1149, 242 Ill. Dec. 618
(1999).
We need not necessarily follow any particular federal circuit court decisions in
resolving the issue on appeal. When the lower federal courts are divided on a federal
question such as the interpretation of federal statutes and the United States Supreme
Court has not resolved the conflict, state courts may decide the question for themselves.
Home Ins. Co. v. N Pac. Ry. Co., 18 Wash. 2d at 808 (1943). Decisions of the federal
circuit courts are "entitled to great weight" but are not binding. Home Ins. Co. v. N Pac.
Ry. Co., 18 Wash. 2d at 808 (1943); e.g., W.G. Clark Constr. Co. v. Pac. Nw. Reg'! Council
of Carpenters, 180 Wash. 2d at 61 (2014). A state court is not bound by rulings on federal
statutory law made by a federal court other than the United States Supreme Court. State
v. Burnett, 93 Ohio St. 3d 419, 424, 2001-0hio-1581, 755 N.E.2d 857. Lower federal
court decisions, however, are persuasive. State Bank of Cherry v. CGB Enters., Inc.,
2013 Ill 113836, 984 N.E.2d 449, 459, 368 Ill. Dec. 503. In the absence of a United
States Supreme Court decision, the weight we may give federal circuit and district court
interpretations of federal law depends on factors such as uniformity of law and the
soundness of the decisions. S.S. v. Alexander, 143 Wash. App. at 92 (2008); State Bank of
Cherry v. CGB Enters., Inc., 984 N.E.2d at 458 (2013). If the federal courts are split, we
may elect to follow those decisions we believe to be better reasoned. Weiland v.
Telectronics Pacing Sys., Inc., 721 N.E.2d at 1154 (1999).
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Of course, Washington Supreme Court precedent binds us, and we might face a
quandary ifwe found state Supreme Court decisions to conflict with the best reasoned
United States Circuit Court of Appeals' rulings. Fortunately, Washington Supreme Court
decisions on waiver echo persuasive federal decisional law. Therefore, we focus on
federal decisions. We briefly analyze, in an appendix, Washington decisions addressing
arbitration waiver.
Federal Arbitration Act and Waiver
Section 2 of the Federal Arbitration Act states:
A written provision in any ... contract evidencing a transaction involving
commerce to settle by arbitration a controversy thereafter arising out of such
contract or transaction, or the refusal to perform the whole or any part thereof, or
an agreement in writing to submit to arbitration an existing controversy arising out
of such a contract, transaction, or refusal, shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the revocation
of any contract.
9 U.S.C. § 2 (emphasis added). This section declares a national policy favoring
arbitration of claims. Preston v. Ferrer, 552 U.S. 346, 353, 128 S. Ct. 978, 169 L. Ed. 2d
917 (2008). This policy applies in state as well as federal courts. Preston v. Ferrer, 552
U.S. at 353; Southland Corp. v. Keating, 465 U.S. at 16.
9 U.S.C. § 2 permits a court to decline enforcement of an arbitration clause on
legal and equitable grounds that would also permit avoidance of any contract. Brown v.
Dillard's, 430 F.3d 1004, 1010 (9th Cir. 2005). Two equitable principles employed by
all courts to preclude enforcement of a contract are equitable estoppel and waiver.
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Estoppel and waiver are distinct concepts with differing elements.
A waiver is an intentional relinquishment or abandonment of a known right or
privilege. Schneckloth v. Bustamante, 412 U.S. 218, 238-39, 93 S. Ct. 2041, 36 L. Ed. 2d
854 (1973); Johnson v. Zerbst, 304 U.S. 458, 464, 58 S. Ct. 1019, 82 L. Ed. 1461 (1938).
Estoppel entails reliance on an adversary's conduct in such a manner as to change one's
position for the worse and the reliance must have been reasonable in that the party
claiming estoppel did not know nor should it have known that its adversary's conduct
was misleading. Lyng v. Payne, 476 U.S. 926, 935, 106 S. Ct. 2333, 90 L. Ed. 2d 921
(1986); Heckler v. Cmty. Health Servs. of Crawford County, Inc., 467 U.S. 51, 59, 104 S.
Ct. 2218, 81 L. Ed. 2d 42 (1984). Waiver and estoppel are separate claims. Glass v.
United of Omaha Life Ins. Co., 33 F.3d 1341, 1347 (11th Cir. 1994). Although waiver
and estoppel are sometimes used interchangeably, there is a subtle but significant legal
distinction between the two. Pitts v. Am. Sec. Life Ins. Co., 931 F.2d 351, 357 (5th Cir.
1991 ). Strictly defined, waiver describes the act, or the consequences of the act, of one
party only, while estoppel exists when the conduct of one party has induced the other
party to take a position that would result in harm if the first party's act were repudiated.
Pitts, 931 F.2d at 357. In contrast to waiver, estoppel involves some element of reliance
or prejudice on the part of the party asserting estoppel. Pitts, 931 F.2d at 357. Waiver
requires no reliance.
To be true to 9 U.S.C. § 2, courts should apply both waiver and estoppel to
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motions to compel arbitration. Both doctrines are equally viable grounds that exist at law
or in equity for the revocation of any contract. The party defending the motion to compel
should be free to assert waiver or estoppel or even both. In tum, the court should analyze
separately whether estoppel or waiver applies, and, if one defense to the motion survives,
the court should deny the motion to compel. For some unknown reason, federal courts
employ only waiver when addressing unenforceability of an arbitration clause. Courts
have ignored estoppel as a ground to refuse ordering arbitration. Going further, courts
have conflated the two concepts such that elements of estoppel have been incorporated
into waiver. We discuss this error thorougher below. The Schuster family has not raised
estoppel as a ground to deny arbitration.
In part because of a strong policy favoring arbitration, waiver is not a favored
defense to compelling arbitration. Courts wish to encourage parties to resolve their legal
disputes by arbitration. Baltimore & Ohio Chicago Terminal R.R. Co. v. Wisconsin Cent.
Ltd., 154 F .3d 404, 409 (7th Cir. 1998). Therefore, a party seeking to prove waiver has a
heavy burden of proof. Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir.
1986). Any doubts concerning waiver should be resolved in favor of arbitration. Moses
H Cone Mem 'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S. Ct. 927, 74 L.
Ed. 2d 765 (1983); Fisher v. A.G. Becker Paribas Inc., 791 F.2d at 694 (9th Cir. 1986).
This acclaimed policy and proclaimed burden of proof may lack any importance since
courts readily apply waiver. No court has stated that the decision is a close call such that
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it will follow the rule that waiver is disfavored and deny application of waiver in the
pending case. Also, the Supreme Court, in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S.
213, 219-20, 105 S. Ct. 1238, 84 L. Ed. 2d 158 (1985), clarified that there is no
preference for arbitration over litigation and the policy favoring arbitration was one
simply of enforcing contracts.
Waiver can be implied as well as express. Cabinetree of Wisconsin, Inc. v.
Kraflmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995). Whether waiver occurs
necessarily depends on the facts of the particular case and is not susceptible to bright line
rules. Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993).
Under federal law, we review de novo the decision to deny a motion to compel
arbitration. JohnsonAssocs. Corp. v. HL Operating Corp., 680 F.3d 713, 716 (6th Cir.
2012); Brown v. Dillard's, Inc., 430 F.3d at 1009 (9th Cir. 2005); Baltimore & Ohio
Chicago Terminal R.R. Co. v. Wisconsin Cent. Ltd., 154 F.3d at 408 (7th Cir. 1998).
Therefore, appellate decisions often entail the weighing of facts. To the extent the trial
court makes factual findings, we review the findings for clear error. Gray Holdco, Inc. v.
Cassady, 654 F .3d 444, 451 (3rd Cir. 2011 ). Our trial court entered no findings.
Most federal courts employ a three-part test for waiver. Subway Equip. Leasing
Corp. v. Forte, 169 F.3d 324, 326 (5th Cir. 1999). To establish waiver of the right to
arbitration, the party opposing arbitration must demonstrate ( 1) knowledge of an existing
right to compel arbitration, (2) acts inconsistent with that existing right, and (3) prejudice
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to the party opposing arbitration resulting from such inconsistent acts. Brown v.
Dillard's, 430 F.3d at 1012; Stifel, Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th
Cir. 1991). This three-part test melds estoppel's element of prejudice into the doctrine of
waiver.
The Blossom Creek entities admit knowledge of an existing right to compel
arbitration. They dispute the second two elements. The entities contend that they acted
consistent with the right to arbitrate, and the Schusters were not prejudiced by any
inconsistent conduct. We now analyze the second and third elements of waiver.
Inconsistent Conduct
Most federal decisions readily find inconsistent conduct by the party seeking
arbitration. The decisions focus on prejudice instead.
The right to arbitrate is waived by conduct inconsistent with any other intention
but to forego a known right. Se. Stud & Components, Inc. v. Am. Eagle Design Build
Studios, LLC, 588 F.3d 963, 968 (8th Cir. 2009); Van Ness Townhouses v. Mar Indus.
Corp., 862 F.2d 754, 758 (9th Cir. 1988). A party acts inconsistently with its right to
arbitrate if the party substantially invokes the litigation machinery before asserting its
right to arbitration. Se. Stud & Components, Inc. v. Am. Eagle Design Build Studios,
LLC, 588 F.3d at 968. A party substantially invokes the litigation machinery when, for
example, it files a lawsuit on arbitrable claims, engages in extensive discovery, or fails to
move to compel arbitration and stay litigation in a timely manner. Se. Stud &
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Components, Inc. v. Am. Eagle Design Build Studios, LLC, 588 F.3d at 968. Filing an
answer and asserting affirmative defenses without raising the right to arbitration is
inconsistent with the arbitration right. Leadertex, Inc. v. Morganton Dyeing & Finishing,
Corp., 67 F.3d 20, 26 (2d Cir. 1995). An extended silence before demanding arbitration
indicates a conscious decision to continue judicial resolution of arbitrable claims. Van
Ness Townhouses v. Mar Indus. Corp., 862 F.2d at 759 (9th Cir. 1988).
A demand for arbitration, like the invocation of a forum-selection clause or any
other claim of improper venue, must be made as early as possible so that the other party
can know in what forum he has to proceed. Baltimore & Ohio Chicago Terminal R.R.
Co. v. Wisconsin Cent. Ltd., 154 F.3d at 408 (7th Cir. 1998). Although delay alone is not
sufficient to find waiver, waiver is more likely to be found the longer the litigation
elapses. Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d 102, 105 (2d Cir. 2002).
In Gray Holdco, Inc. v. Cassady, 654 F.3d at 457-58 (3rd Cir. 2011), the court noted that
a ten month delay was substantially longer than any other delay encountered wherein
they did not rule a waiver. The longest case it listed, wherein the court did not find a
delay, was two months. The Blossom Creek entities' delay was eighteen months.
In Menorah Insurance Co. v. INX Reinsurance Corp., 72 F.3d 218, 222 (1st Cir.
1995), the court concluded the defendant acted inconsistently and waived its right to
arbitrate when it chose not to invoke arbitration from July 1992 until October 1993 and
the plaintiff bore the costs of a lawsuit in the meantime. In Stone v. E.F. Hutton & Co.,
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898 F.2d 1542, 1544 (11th Cir. 1990), the court held the defendant acted inconsistently
and waived its right to arbitrate when it delayed its assertion of that right for twenty
months. In Peterson v. Shearson/American Express, Inc., 849 F.2d 464, 468 (10th Cir.
1988), the court concluded that Shearson's actions were inconsistent with its alleged
intent to arbitrate because it engaged in depositions and prepared for a scheduled trial
without objecting on the grounds of arbitration. In National Foundation for Cancer
Research v. A.G. Edwards & Sons Inc., 821 F.2d 772, 775 (D.C. Cir. 1987), the court
found waiver when the defendant invoked the litigation machinery by filing an answer
without asserting arbitration as an affirmative defense, requesting documents and
deposing plaintiffs witnesses, opposing plaintiffs motion to amend its complaint, and
moving for summary judgment.
The Blossom Creek entities argue that they never acted inconsistent with the right
to arbitrate because they never asked the court to resolve an arbitrable issue and they did
not engage in extensive motion practice. Nevertheless, the movant's litigation of the
merits of the arbitrable issue is a factor weighing in favor of waiver, but it is not
controlling.
LSREF Golden answered the Schusters' first complaint in April 2013 without
raising arbitration as a defense. Shortly thereafter, the Schusters brought the remaining
Blossom Creek entities into the action. The entities did not assert the defense in an
answer until their answer to the third amended complaint. One federal circuit has held
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Schuster v. Prestige Senior Mgmt.
that the failure to raise arbitration in one's answer alone is inconsistent with any reliance
on a right to arbitrate. Johnson Assocs. Corp. v. HL Operating Corp., 680 F .3d at 718
(6th Cir. 2012).
As the trial court noted, the Blossom Creek entities engaged in other inconsistent
conduct when participating in lawsuit related discovery and motion practice. For over a
year, the parties engaged in contentious discovery, and the Schusters brought two
motions to compel discovery. The Blossom Creek entities deposed three of the plaintiffs,
participated in the deposition of their expert, and responded to interrogatories and
requests for production. Although the Blossom Creek entities engaged in active litigation
with the Schusters, they did not mention in any pleading, motion, or argument the intent
to arbitrate until October 2014, eighteen months after the Schuster family filed their
complaint.
The Blossom Creek entities claim that their conduct was consistent with later
demanding arbitration because they delayed asking for arbitration with the hope of
settling the case. We find the argument unpersuasive for many reasons. First, the
Blossom Creek entities forward no facts of any settlement discussions. Second, the
parties had two and one-half years before the Schuster family filed suit to discuss
settlement. Third, even if the Blossom Creek entities wished to settle after filing suit,
they could have moved immediately to compel arbitration while engaging in negotiations.
Moving to compel arbitration did not interfere with and may have expedited settlement.
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Prejudice
A Nordic smorgasbord of United States Circuit Court of Appeals decisions greets
us on the subject of prejudice for purposes of arbitration waiver. Oodles of federal
appeals court decisions analyze the nature and extent of prejudice required and whether
the nonmoving party suffered prejudice sufficient to harness waiver. The various circuits
take differing views and apply distinct tests. Some courts consider the effects of the
conduct of the moving party that were inconsistent with arbitration to constitute sufficient
prejudice to the nonmoving party, thus blending the inconsistent action and prejudice
prongs of waiver. We review the various positions taken by the circuits, but conclude
that under most, if not all, circuits' rulings, the Schuster family shows sufficient
prejudice.
Remember that waiver, in other contexts, requires no showing of prejudice by the
party asserting the doctrine. Thus, at least two federal circuits have de-emphasized the
prejudice prong of the waiver test with regard to a right to arbitrate. Cabinetree of
Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995); St. Mary's
Med. Ctr. ofEvansville, Inc. v. Disco Alum. Prods. Co., 969 F.2d 585, 590 (7th Cir.
1992); Nat'! Found. of Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772
(D.C. Cir. 1987). In National Foundation of Cancer Research, the District of Columbia
Circuit found prejudice to the plaintiff by reason of an untimely motion to compel
arbitration. Nevertheless, the court wrote, in part:
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This circuit has never included prejudice as a separate and
independent element of the showing necessary to demonstrate waiver of the
right to arbitration. We decline to adopt such a rule today.
821 F .2d at 777 (citation omitted).
The Seventh Circuit Court of Appeals has traveled the farthest in eliminating
prejudice as an element of waiver. In Cabinetree of Wisconsin, Inc. v. Kraftmaid
Cabinetry, Inc., 50 F.3d 388 (7th Cir. 1995), Cabinetree filed suit in a Wisconsin state
court, in September 1993, against Kraftmaid, charging that Kraftmaid terminated the
former's franchise in violation of the Wisconsin Fair Dealership Law. Kraftmaid
removed the case to a federal district court. Discovery began. In January 1994, a trial
date of December 6, 1994, was set. In response to Kraftmaid's discovery demands,
Cabinetree produced almost two thousand documents. Kraftmaid untimely responded to
Cabinetree's discovery demands. On July 11, 1994, Kraftmaid moved the district court
to stay further proceedings pending arbitration of the parties' dispute pursuant to the
franchise agreement. The district court denied the motion to order arbitration and the
Court of Appeals affirmed.
On appeal, the Cabinetree court wrote that "to establish a waiver of the contractual
right to arbitrate, a party need not show that it would be prejudiced if the stay were
granted and arbitration ensued." 50 F.3d at 390. The court may have meant that the
opposing party must show prejudice, but prejudice always ensues when a party seeks
arbitration after first litigating in court. The court also penned: "we have deemed an
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Schuster v. Prestige Senior Mgmt.
election to proceed in court a waiver of a contractual right to arbitrate, without insisting
on evidence of prejudice beyond what is inherent in an effort to change forums in the
middle (and it needn't be in the exact middle) of a litigation." Cabinetree of Wisconsin,
Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d at 390. The Cabinetree court further declared
that an election to proceed before a nonarbitral tribunal for the resolution of a contractual
dispute is a presumptive waiver of the right to arbitrate. The court concluded that
Kraftmaid should have filed a motion to compel arbitration at the same time it removed
the suit to federal court. Otherwise, Kraftmaid manifested an intention to resolve the
dispute through the processes of federal court. Despite its holding, the Cabinetree court
noted that under some circumstances prejudice should be a factor to weigh in resolving
waiver.
Ifwe faced the need to decide whether prejudice is essential for waiver, we might
follow the District of Columbia and Seventh Circuits and forgo the element, in part
because of its inconsistency with the notion of waiver. Nevertheless, because of
prejudice suffered by the Schuster family, we reserve this issue for another day.
United States Circuit Courts of Appeals, other than the Seventh Circuit and the
District of Columbia Circuit, have held to the position that the party asserting waiver
must show prejudice. Joca-Roca Real Estate, LLC v. Brennan, 772 F.3d 945, 949 (1st
Cir. 2014); PPG Indus., Inc. v. Webster Auto Parts, Inc., 128 F.3d 103, 108 (2d Cir.
1997); Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912, 925-26 (3d Cir. 1992);
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Schuster v. Prestige Senior Mgmt.
Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 204 (4th Cir.
2004); Miller Brewing Co. v. Fort Worth Distrib. Co., 781 F.2d 494, 497-98 (5th Cir.
1986); Johnson Assocs. Corp. v. HL Operating Corp., 680 F.3d at 720 (6th Cir. 2012);
Lewallen v. Green Tree Servicing LLC, 487 F .3d 1085, 1093 (8th Cir. 2007); Fisher v.
A.G. Becker Paribas Inc., 791 F.2d at 694 (9th Cir. 1986); Hill v. Ricoh Americas Corp.,
603 F.3d 766, 773 (10th Cir. 2010); S&H Contractors, Inc. v. A.J. Taft Coal Co., 906
F.2d 1507, 1514 (11th Cir. 1990). Nevertheless, all ofthese circuits require little
prejudice and do not demand strict proof of prejudice. The courts assume prejudice
follows certain litigation practices.
The First Circuit Court of Appeals observed that, despite prejudice being essential
for a waiver, the required showing is "tame at best." Rankin v. Allstate Ins. Co., 336 F.3d
8, 14 (1st Cir. 2003). Some degree of prejudice ordinarily may be inferred from a
protracted delay in the assertion of arbitral rights when that delay is accompanied by
sufficient litigation activity. Restoration Pres. Masonry, Inc. v. Grove Eur. Ltd., 325
F.3d 54, 61 (1st Cir. 2003). This inference makes good sense since, during such a period
of delay, the opposing party usually will incur costs, measured in both out-of-pocket
expense and the value of time. Joca-Roca Real Estate, LLC v. Brennan, 772 F.3d at 949
(1st Cir. 2014).
In the Second Circuit Court of Appeals, the court will find sufficient prejudice to
infer waiver when a party seeking to compel arbitration engages in discovery procedures
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Schuster v. Prestige Senior Mgmt.
not available in arbitration, makes motions going to the merits of an adversary's claims,
or delays invoking arbitration rights while the adversary incurs unnecessary delay or
expense. Cotton v. Slone, 4 F.3d at 179 (2d Cir. 1993). No bright line defines prejudice.
Kramer v. Hammond, 943 F.2d 176, 179 (2d Cir. 1991). Neither a particular time frame
nor dollar amount automatically results in such a finding. Kramer v. Hammond, 943 F.2d
at 179. Prejudice is instead determined contextually, by examining the extent of the
delay, the degree of litigation that has preceded the invocation of arbitration, the resulting
burdens and expenses, and the other surrounding circumstances. Kramer v. Hammond,
943 F.2d at 179.
In Cotton v. Slone, 4 F.3d 176 (2d Cir. 1993), William Slone actively litigated the
dispute in federal court. Both parties conducted discovery, with Slone initiating at least
two depositions, including those of Julie Cotton and her expert witness. Slone made
several substantive motions, including one for summary judgment. In resisting
discovery, Slone repeatedly invoked and submitted himself to the powers and procedures
of the district court. He sought extensions of time and revisions of the discovery
schedule, and at least twice sought protective orders that were denied. The court
reasoned that Slone's conduct imposed unnecessary expense and delay on Cotton, which
would be compounded if she were required to arbitrate her claim. The court did not
identify the expense and delay. The court held that the resulting prejudice to Cotton
compelled a finding of waiver.
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The Third Circuit Court of Appeals still maintains that prejudice is the touchstone
for determining whether the right to arbitrate has been waived. Hoxworth v. Blinder,
Robinson & Co., 980 F.2d at 925 (3d Cir. 1992). The Third Circuit Court of Appeals, in
Hoxworth, 980 F .2d at 926-27, identified six nonexclusive factors to guide the prejudice
inquiry: (1) timeliness or lack thereof of the motion to arbitrate, (2) extent to which the
party seeking arbitration has contested the merits of the opposing party's claims, (3)
whether the party seeking arbitration informed its adversary of its intent to pursue
arbitration prior to seeking to enjoin the court proceedings, (4) the extent to which a party
seeking arbitration engaged in nonmerits motion practice, (5) the party's acquiescence to
the court's pretrial orders, and (6) the extent to which the parties have engaged in
discovery. Gray Holdco, Inc. v. Cassady, 654 F.3d at 451 (3rd Cir. 2011). Not all the
factors need be present to justify a finding of waiver. Nino v. Jewelry Exch., Inc., 609
F.3d at 208-09 (3rd Cir. 2010).
In Hoxworth v. Blinder, Robinson & Co., 980 F.2d 912, the court found a waiver
following an eleven-month delay when the parties participated in numerous pretrial
proceedings and engaged in extensive discovery. The discovery included depositions that
could not be conducted in arbitration. Defendant brought a motion to dismiss the
complaint and to disqualify plaintiffs counsel. The court held there to be ample record
of prejudice, but did not identify the prejudice. The plaintiff did not quantify attorney
fees and costs for tasks that might be repeated upon arbitration. We find no decision that
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Schuster v. Prestige Senior Mgmt.
demands the resisting party quantify costs.
At least in one appeal, the Fourth Circuit Court of Appeals took a strict approach
to prejudice. In Patten Grading & Paving, Inc. v. Skanska USA Building, Inc., 380 F.3d
at 208-09 (4th Cir. 2004 ), the court reversed the trial court and ruled the defendant had
not waived its right to arbitration. The defendant waited eight months to compel
arbitration, the parties had engaged in discovery and mediation, the court resolved one
motion, and the plaintiff expended $5,862.52 to prosecute its case. In addition, the
plaintiff would pay, upon commencing arbitration, a substantial initial fee to engage the
American Arbitration Association.
The Sixth Circuit Court of Appeals has conflicting language in its decisions
regarding prejudice. Johnson Assocs. Corp. v. HL Operating Corp., 680 F.3d at 720 (6th
Cir. 2012) suggests some prejudice is needed. In Germany v. River Terminal Railway
Co., 477 F.2d 546, 547 (6th Cir. 1973), the circuit court recognized that a party may
waive arbitration without the court discussing prejudice as a factor. In American
Locomotive, Co. v. Gyro Process Co., 185 F.2d 316, 320 (6th Cir. 1950), the circuit
found waiver after recognizing the common law definition of "waiver" as being "an
intentional relinquishment of a known right."
The Ninth Circuit Court of Appeals follows a rule requiring prejudice. In Fisher
v. A.G. Becker Paribas Inc., 791 F .2d 691 (9th Cir. 1986), the Court of Appeals could
have resolved the case alone on the ground that the movant did not act inconsistently with
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No. 33242-0-111
Schuster v. Prestige Senior Mgmt.
desiring arbitration because the law did not earlier permit arbitration. Once the law
changed, the movant timely sought to compel arbitration. The court also resolved the
appeal on the basis of lack of prejudice. The Fishers contended that a later assertion of
the right to compel arbitration was prejudicial because they expended time, money, and
effort on responding to pretrial motions, preparing for trial, and conducting extensive
discovery of the arbitrable claims. The Ninth Circuit Court of Appeals disagreed. One of
the Fishers' claims remained subject to the lawsuit and any discovery could be used in
court to litigate the claim. The possibility that there might be some duplication in the
parallel proceedings was not sufficient prejudice. The court also characterized any
wound as "self-inflicted" since the Fishers willingly incurred the expense involved in
litigation despite knowing of the arbitration agreement. Fisher v. A.G. Becker Paribas
Inc., 791 F .2d at 698.
The Ninth Circuit Court of Appeals' decision in Fisher v. A.G. Becker Paribas,
Inc., conflicts with the tenor of other circuits' decisions. No other circuit has imposed
blame on the plaintiff for filing suit, despite the applicability of an arbitration agreement.
No other circuit has characterized the cost of litigation to be self-inflicted by the plaintiff
who files suit despite being party to an arbitration clause. Blame is more often imposed
on a defendant for untimely seeking arbitration.
Some circuits have refined principles and adopted concrete rules with regard to
waiver of arbitration. On the one hand, delay in seeking to compel arbitration does not
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Schuster v. Prestige Senior Mgmt.
itself constitute prejudice. Stifel, Nicolaus & Co. v. Freeman, 924 F .2d at 159 (8th Cir.
1991); Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir. 1985). On the other
hand, prejudice can result when a party too long postpones his invocation of his
contractual right to arbitration and thereby causes his adversary to incur unnecessary
delay or expense. Johnson Assocs. Corp. v. HL Operating Corp., 680 F .3d at 719-20 (6th
Cir. 2012); Kramer v. Hammond, 943 F.2d at 179-80 (2d Cir.1991).
Prejudice can be found when a party gained a strategic advantage by obtaining
something in discovery that would be unavailable in arbitration. Stifel, Nicolaus & Co. v.
Freeman, 924 F .2d at 159 (8th Cir. 1991 ). By delaying a demand for arbitration, a party
was able to obtain discovery it would not necessarily have been entitled to in an
arbitration proceeding. St. Mary's Med. Ctr. ofEvansville, Inc. v. Disco Alum. Prods.
Co., 969 F.2d at 591 (7th Cir. 1992). Taking depositions of witnesses not available in
arbitration proceedings is sufficient prejudice to find waiver of right to arbitrate.
Zwitserse Maatschappij Van Levensverzekering En Lijfrente v. ABN Int 'l Capital
Markets Corp., 996 F.2d 1478, 1480 (2d Cir. 1993).
In Johnson Associates Corp. v. HL Operating Corp., 680 F .3d at 720, in addition
to an eight-month delay and expenses involved with numerous scheduling motions and
court-supervised settlement discussions, the parties engaged in discovery. The court
concluded that the combination of all of these factors caused plaintiffs to suffer actual
prejudice. Plaintiffs represented that they engaged in more discovery than would be
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No. 33242-0-111
Schuster v. Prestige Senior Mgmt.
permitted in arbitration.
Ronald Schuster's care agreement assigned the task of administering arbitration to
the National Arbitration Forum. Neither party submitted to this court the National
Arbitration Forum's Code of Procedure. Therefore, we do not know the full extent to
which the Forum's procedures would have limited discovery. The Schuster family
provided a declaration that only twenty-five written questions would be permitted and the
Blossom Creek entities did not dispute this testimony.
Because of a court order, the National Arbitration Forum would not have
administered any arbitration. Thus, we cannot precisely gauge what discovery would
have been permitted if the Blossom Creek entities timely demanded arbitration and the
parties or the court appointed another arbitration administrator.
We do not impose blame on the Schuster family for being unable to exactly
identify discovery prohibited in any arbitration. The Blossom Creek entities, not the
Schuster family, chose the National Arbitration Forum as the administrator for any
arbitration, an entity that entered a consent decree suggesting fraud on consumers. We
observe from experience that nearly all arbitration rules from the various arbitration
administrators limit discovery. It is well recognized that discovery generally is more
limited in arbitration than in litigation. In re Cotton Yarn Antitrust Litig., 505 F.3d 274,
286 (4th Cir. 2007). On this basis alone, we find sufficient prejudice to the Schuster
family to affirm the trial court's ruling of waiver.
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Schuster v. Prestige Senior Mgmt.
The Schuster family suffered other prejudice. The Schuster family contends
arbitration would change its strategy in forwarding claims against the Blossom Creek
entities. In Gray Holdco, Inc. v. Cassady, 654 F.3d at 457-61 (3d Cir. 2011), the court
noted that a party's capacity to develop a litigation strategy with regard to the likelihood
of arbitration diminishes the longer the case is litigated with no indication that a motion
to compel arbitration is forthcoming. Notice of arbitration could change a party's
approach to discovery as well as its litigation strategy based on whether it could recover
attorney fees.
The Schuster family claims prejudice also in the preparation of witness statements.
The family attorneys procured written statements from employees of the Blossom Creek
entities. If the family knew that the dispute would have been resolved by arbitration, the
attorneys would have prepared the statements for a form acceptable to the arbitrator. We
accept the Schuster family's contention that, with arbitration, it will need to repeat work
in preparing the witness statements.
As another important counterweight, arbitrations are not bound by rules of
evidence. Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20, 31, 111 S. Ct. 1647,
114 L. Ed. 2d 26 (1991). Consequently, a party's evidentiary and discovery needs will
substantially differ on whether a case is litigated or arbitrated. Nino v. Jewelry Exch.,
Inc., 609 F.3d at 211 n.9.
Participating in litigation for a year and one-half when the Blossom Creek entities
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No. 33242-0-111
Schuster v. Prestige Senior Mgmt.
could have immediately demanded arbitration also constitutes prejudice. The investment
of considerable time and money litigating a case may amount to sufficient prejudice to
bar a later asserted right to arbitrate. Nino v. Jewelry Exch., Inc., 609 F.3d at 209.
Arbitration is meant to streamline the proceedings, lower costs, and conserve private and
judicial resources, and it furthers none of those purposes when a party actively litigates a
case for an extended period only to belatedly assert that the dispute should have been
arbitrated, not litigated, in the first place. Nino v. Jewelry Exch., Inc., 609 F.3d at 209
(3rd Cir. 2010). Prejudice includes the time a party expends and money paid to educate
an attorney to prepare for a trial instead of the expedited procedure of arbitration. Gray
Holdco, Inc. v. Cassady, 654 F.3d at 458 (3d Cir. 2011). The cost of paying an arbitrator
also constitutes prejudice. Gray Holdco, Inc. v. Cassady, 654 F.3d at 458 (3d Cir. 2011).
We know from experience that the Schuster family would pay a substantial sum,
including a down payment, for arbitration. They already paid taxes to support the court
legal system.
When declaring a waiver, many courts find that the resisting party suffered
prejudice well beyond the prejudice incurred by the Schuster family. One form of
prejudice is a substantive motion from the party seeking arbitration having been denied
by the court. The Schuster family never faced a substantive motion by the Blossom
Creek entities. Nevertheless, the Schuster family suffered prejudice considered sufficient
by some courts. The Schuster family responded to discovery, including five thousand
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No. 33242-0-111
Schuster v. Prestige Senior Mgmt.
productions. The Schuster family needed to engage the assistance of the superior court in
order to obtain full discovery from the Blossom Creek entities. The court imposed, and
the defendants paid, sanctions. The Blossom Creek entities conducted depositions of all
three plaintiffs and their expert.
In St. Mary's Medical Center ofEvansville, Inc. v. Disco Aluminum Products Co.,
969 F.2d at 591 (7th Cir. 1992), the court held the plaintiff to have been prejudiced
simply by the defendant's filing of interrogatories and requests to admit and the
participation in the depositions of two of plaintiffs principal witnesses. In Nino v.
Jewelry Exchange, Inc., 609 F.3d 191 (3rd Cir. 2010), the court refused to compel
arbitration when the parties engaged in discovery over fifteen months, despite no
dispositive motion being brought.
In reviewing the Third Circuit Court of Appeals' six factors, we conclude that the
factors weigh in favor of waiver. The Blossom Creek entities untimely filed a motion to
compel arbitration. Through extensive discovery, the defendants contested the merits of
the Schuster family's claims. The Blossom Creek entities first mentioned arbitration
after the lawsuit had been pending for one year and five months. Even then, we have no
record of the Blossom Creek entities expressly stating an intent to compel arbitration.
The record only shows that their counsel remarked about the arbitration clause. Only one
factor favors the defense. The entities did not engage in motion practice that addressed
the merits of the suit. Otherwise, the Blossom Creek entities acquiesced in the trial
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No. 33242-0-III
Schuster v. Prestige Senior Mgmt.
court's order compelling discovery and awarding sanctions. The parties engaged in
extensive discovery, including interrogatories, requests for production, and depositions.
To our knowledge, the Blossom Creek entities have taken all of the depositions it desires.
The defendants do not dispute that the court litigation process allowed them to gain more
discovery than available in arbitration.
In addition to the Ninth Circuit's ruling in Fisher v. A.G. Becker Paribas Inc., 791
F.2d 691 (9th Cir. 1986), other decisions provide support to the Blossom Creek entities'
position. Subway Equip. Leasing Corp. v. Forte, 169 F.3d 324 (5th Cir. 1999); Rush v.
Oppenheimer & Co., 779 F .2d 885 (2d Cir. 1985); Shinto Shipping Co. v. Fibrex &
Shipping Co., 572 F.2d 1328 (9th Cir. 1978). Yet, the overwhelming majority of cases
support waiver under our appealed facts. Also, the Schuster family shows more prejudice
than the plaintiffs suffered in those decisions supporting the Blossom Creek entities.
The Blossom Creek entities claim the Schuster family failed to show prejudice
because additional discovery beyond what arbitration would allow benefitted, not
harmed, the family, any increased costs from compelling arbitration is speculative, and
the Schusters would have paid arbitration costs even if the Blossom Creek entities
compelled arbitration at the beginning. The Blossom Creek entities also emphasize that
the Schuster family fails to quantify the costs incurred as a result of the lawsuit in
superior court. The family's attorneys identify costs of $10,000 and labor incurred of
$70,000, but do not separate from these totals the amount of costs and attorney labor that
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No. 33242-0-111
Schuster v. Prestige Senior Mgmt.
would have been expended if the defendants timely sought arbitration. These arguments
from the Blossom Creek entities lack support in most federal cases on waiver. No federal
case has demanded that the party opposing the motion to compel arbitration quantify
costs.
One factor not mentioned by the parties arises from the defrocking of the National
Arbitration Forum. Assuming we compelled arbitration, the parties would assume the
task and expense of appointing a new arbitrator or arbitration administrator. If the parties
did not agree, they would assume the expense of litigating the appointment. We
recognize this expense alone cannot be the basis for waiver, otherwise, the
disqualification of the contract's appointed arbitrator or arbitration administrator would
always lead to a waiver. Nevertheless, the expense of appointing an arbitrator in these
unusual circumstances adds to the prejudice suffered by the Schuster family.
Despite reviewing the question of waiver de novo, we recognize the trial court to
be in a good, if not better, position to comprehend the prejudice that results from a party
participating in a lawsuit for more than a year and then demanding arbitration. The trial
court personally participated in the motion practice that occurred during the pendency of
the suit in superior court. By untimely demanding arbitration, the Blossom Creek entities
not only expended the Schuster family's time and money but also unnecessarily
consumed the superior court's scarce time and resources. Waiver of the right to arbitrate
predicated on a party's litigation conduct effectuates the principle that a party may not
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No. 33242-0-111
Schuster v. Prestige Senior Mgmt.
use arbitration to manipulate the legal process and, in that process, waste scarce judicial
resources. Republic Ins. Co. v. PA/CO Receivables, LLC, 383 F.3d 341, 348 (5th Cir.
2004); Gray Holdco, Inc. v. Cassady, 654 F.3d at 453-54 (3rd Cir. 2011).
CONCLUSION
We affirm the trial court's ruling that the Blossom Creek entities waived the right
to arbitrate the dispute with the Schuster family. We remand the suit for further
proceedings before the superior court.
WE CONCUR:
£JiJw4t5 J'
Siddoway, J. Lawrence-Berrey, J.
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Appendix A
Washington Law
The Washington Supreme Court's latest discussion of waiver of arbitration comes
in Townsendv. Quadrant Corp., 173 Wash. 2d 451, 268 P.3d 917 (2012). Homeowners
brought action against their builder and its parent companies for fraud, negligence,
negligent misrepresentation, and rescission. They also asked the court to void an
arbitration clause for unconscionability. Parent companies brought a summary judgment
motion to dismiss on the basis that they were not proper parties to the suit. After losing
the motion, the two companies successfully sought to compel arbitration. The Supreme
Court considered the initial motion to dismiss consistent with the later motion to compel
arbitration, perhaps because the motion to dismiss did not address the merits of the
plaintiffs' claims. The court held there was no waiver. The court did not mention
prejudice as an element of arbitration waiver.
In Otis Housing Association v. Ha, 165 Wash. 2d 582, 201 P.3d 309 (2009), the
court, in a 5-4 decision, held that an optionee under a lease agreement waived the right to
arbitration of claims because of a failure to assert the claims during an unlawful detainer
action. The optionee defended the unlawful detainer action by asserting the option to
purchase the property prevented an eviction, but did not mention the option's arbitration
clause. The court held that defending the unlawful detainer action without seeking
arbitration was inconsistent with an intent to arbitrate. The court did not mention any
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Schuster v. Prestige Senior Mgmt.
requirement that the nonmoving party assert or show prejudice. Thus, Washington law
may reject prejudice as an element of arbitration waiver. The dissent also did not
mention prejudice, but rather mentioned that waiver requires a voluntary and intentional
relinquishment of a known right. Both the majority and dissenting opinions relied only
on state law.
In Adler v. Fred Lind Manor, 153 Wash. 2d 331, 103 P.3d 773 (2004), an employer
sought to compel arbitration under the employment agreement. The trial court granted
the motion to compel and the Supreme Court affirmed. Although the employer engaged
in mediation before the employee filed suit, the employer, in its answer to the complaint,
raised the defense of arbitration. The employer promptly brought a motion to compel.
The court did not mention prejudice as being an element of waiver. Instead, the Supreme
Court, consistent with the distinction between waiver and equitable estoppel, analyzed
separately whether the employee showed estoppel in order to preclude arbitration. Thus,
Washington may be the only state to correctly distinguish between waiver and estoppel
for purposes of the right to arbitrate. We find no other decision, in which a state court
engaged in the two analyses.
In Pedersen v. Klinkert, 56 Wash. 2d 313, 3 52 P .2d 1025 (1960), the defendant
argued the trial court lacked jurisdiction over the dispute because the parties' contract
contained an arbitration clause. The court not only ruled that an arbitration agreement
does not wrest jurisdiction from the courts, but the defendant waived any right to arbitrate
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because he failed to invoke the right upon commencement of suit. The decision omits a
discussion of prejudice.
In Wiese v. Cach, LLC, 189 Wash. App. 466, 358 P.3d 1213 (2015), credit card
debtors sued the assignee of the debt for civil conspiracy and violations of the Consumer
Protection Act, chapter 19.86 RCW, and the Collection Agency Act, chapter 19.16 RCW.
The assignee previously obtained judgments against the debtors. Upon the filing of the
debtors' suit, the assignee immediately sought to compel arbitration. The debtors argued
that the assignee waived the arbitration clause in the debt contract by previously filing
suit to recover the debt. This court ruled that no waiver occurred because the suit against
the assignee was on a dispute unrelated to the claim litigated in the assignee's suit. We
cited federal decisions that hold that incurring of legal expenses inherent in litigation,
without more, is insufficient evidence to justify a finding of waiver.
In Saili v. Parkland Auto Center, Inc., 181 Wash. App. 221, 329 P.3d 915, review
denied, 181 Wash. 2d 1015 (2014 ), the buyer brought suit against the car dealership,
asserting claims in connection with the purchase of the truck from the dealership and the
dealership's later repossession of the truck and another vehicle. After the buyer moved
for summary judgment, the dealership moved for an order staying proceedings and
compelling arbitration. The trial court denied the motion and this court affirmed on the
ground of waiver. We noted the dealership omitted any reference to arbitration in its
answer, engaged in discovery, and waited until after the buyer brought a summary
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No. 33242-0-111
Schuster v. Prestige Senior Mgmt.
judgment motion before seeking an order compelling arbitration. The delay lasted seven
months.
In Shepler Construction, Inc. v. Leonard, 175 Wash. App. 239, 306 P.3d 988 (2013),
the court held both parties waived arbitration. The plaintiff contractor brought suit to
foreclose on a mechanic's lien. The defendant homeowner counterclaimed for defective
construction. Neither party sought arbitration until six years after litigation began.
In River House Development Inc. v. lntegrus Architecture, PS, 167 Wash. App. 221,
272 P.3d 289(2012), the plaintiff filed suit and engaged in litigation but later requested
arbitration. This court held that the plaintiff waived its right to arbitration when that
party attended a status conference in person with the assigned judge, agreed to a case
schedule and trial date, exchanged trial witness lists with the opposing party, participated
in formal discovery and motion practice regarding discovery, and represented to the court
that it was preparing for trial.
In Verbeek Properties, LLC v. GreenCo Environmental, Inc., 159 Wash. App. 82,
246 P.3d 205 (2010), a landowner, who hired an environmental company to remediate the
soil to meet Department of Ecology standards, brought action against the company,
alleging breach of contract, fraud, negligent misrepresentation, and violation of
Consumer Protection Act. The landowner also filed a motion to dismiss the
environmental company's lien on its property for the contract amount withheld. This
court ruled that landowner's failure to mention arbitration in its complaint against the
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company was not a waiver of arbitration and the landowner did not waive the right to
I arbitrate through its preliminary attempt to remove the company's lien on the ground that
it was frivolous.
In Ives v. Ramsden, 142 Wash. App. 369, 174 P.3d 1231 (2008), this court held that
a defendant waived his right to arbitration when he answered the plaintiffs complaint
without mentioning arbitration, engaged in extensive discovery, deposed witnesses,
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submitted and answered interrogatories, and prepared fully for trial without moving to
stay the action to allow the parties to arbitrate. Three years and four months had elapsed
since the complaint was filed and the party seeking arbitration did not raise the issue until
the day before trial. This court did not require that the plaintiff show any prejudice.
In Lake Washington School District No. 414 v. Mobile Modules Northwest, Inc.,
28 Wash. App. 59, 621 P.2d 791 (1980), the defendant's answer referred to the arbitration
clause and requested a stay of court proceedings pending arbitration. The defendant
formally moved for a stay three months later. This court held that there was no waiver,
emphasizing that the party preserved the right to arbitrate in its answer and that the three-
month delay was insufficient to establish waiver.
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