Employer’s Litigation Conduct Waived Right to Arbitrate in California

In a cautionary tale for employers, a California appellate court held that an employer waived the right to arbitration after engaging in extensive discovery and litigation for years.

Quinton McDonald was employed by Sierra Pacific as an hourly, nonexempt worker at a sawmill.

In 2018, McDonald brought a class action, bringing claims for wage and hour violations.

Many of Sierra Pacific’s nonexempt employees had signed arbitration agreements that precluded class actions and required arbitration of all disputes arising out of the employment relationship.

However, neither McDonald nor any of the other named plaintiffs signed an arbitration agreement.

Sierra Pacific answered the complaint with a general denial and affirmative defenses. Although Sierra Pacific had included the affirmative defense of arbitration in a response to an earlier version of the complaint, it did not raise that defense in its response to the final iteration of the complaint.

Over the next four years, Sierra Pacific defended the action in the trial court, remaining silent on the subject of arbitration and refusing to produce the arbitration agreements signed by putative class members, despite being ordered to do so.

In November 2022, eight plaintiff classes were certified. Sierra Pacific then produced more than 3,000 signed arbitration agreements and moved to compel arbitration.

McDonald opposed the motion and moved for evidentiary and issue sanctions for failure to timely produce the arbitration agreements.

The trial court denied the motion to compel arbitration based on waiver and granted McDonald’s motion for sanctions, precluding the employer from presenting evidence of the arbitration agreement or arguing that class members had signed such agreements.

Sierra Pacific appealed, and the appellate court affirmed.

The trial court applied the multifactor test set forth in St. Agnes Medical Center v. PacifiCare of California to determine that Sierra Pacific waived its contractual right to arbitration.

But the state’s highest court issued an intervening decision, Quach v. California Commerce Club, Inc., establishing a new legal standard for waiver. Applying the new standard in Quach, the appellate court independently concluded that Sierra Pacific waived arbitration.

Pursuant to Quach, McDonald had the burden of establishing by clear and convincing evidence that Sierra Pacific had actual or constructive knowledge of its right to compel arbitration and that Sierra Pacific’s conduct was so inconsistent with an intent to enforce that right as to lead a reasonable factfinder to conclude Sierra Pacific had abandoned it.

Sierra Pacific did not deny having had actual or constructive knowledge of its own arbitration agreements, so the court focused on the second prong of the test.

“The undisputed record of trial court proceedings demonstrates that Sierra Pacific’s ‘words and conduct [were] markedly inconsistent with an intent to arbitrate,’” the court wrote. “Sierra Pacific spent years litigating this case in the trial court. For much of that time, Sierra Pacific actively resisted plaintiffs’ efforts to discover the extent to which putative class members might be subject to arbitration. Sierra Pacific refused for years to identify signatory employees or produce signed arbitration agreements, going to so far as to defy the trial court’s February 2020 order. That conduct was obviously inconsistent with an intent to arbitrate, as even Sierra Pacific appears to have recognized.”

Although Sierra Pacific couched its refusal to produce the arbitration agreements in terms of privacy concerns, the company made no effort to address those concerns through appropriate avenues, the court pointed out, such as a protective order limiting pre-certification discovery to exclude signatory employees.

“Instead, Sierra Pacific participated in extensive class discovery – both responding and propounding – all while saying nothing about any intent to arbitrate,” the court said. “And Sierra Pacific went beyond merely keeping quiet. Sierra Pacific repeatedly implied the signatory employees were part of the putative class(es), whose claims were to be litigated, rather than arbitrated.”

While Sierra Pacific argued that waiver typically involves an unreasonable delay in moving to compel arbitration and that it could not move to compel arbitration until the classes were certified, the court was not persuaded.

Sierra Pacific’s failure (or inability) to bring a motion to compel arbitration prior to class certification could not by itself constitute waiver, the court acknowledged. But that did not mean the waiver inquiry was limited to litigation conduct occurring after class certification, as arbitration rights can be waived before they become enforceable.

“Just as Sierra Pacific could affirmatively renounce arbitration ahead of class certification, so too could it impliedly waive arbitration through pre-certification conduct inconsistent with an intent to arbitration,” the court said. “Sierra Pacific’s overall litigation conduct was manifestly inconsistent with an intent to arbitrate, and so constituted clear and convincing evidence of waiver, despite the fact much of it preceded the trial court’s ruling on class certification.”

Siera Pacific engaged in two separate mediations that were undertaken in the hopes of achieving a settlement of all class claims – including those of the signatory employees – and the “hallmark” of its participation in discovery was its refusal to produce signed arbitration agreements for the signatory employees, conduct that could hardly be squared with an intent to arbitrate, the court said.

The court affirmed the trial court’s order denying Sierra Pacific’s motion to compel arbitration. It also dismissed the appeal of the sanctions order, finding that it was not appealable.

To read the opinion in Sierra Pacific Industries Wage and Hour Cases, click .

Why it matters: The decision provides an important lesson for employers about the dangers of a litigation strategy that results in a waiver of the contractual right to arbitration. To avoid a finding of waiver, employers should act consistently with an intent to arbitrate, beginning at the earliest opportunity to do so.