Normally, when a party takes an action inconsistent with the contractual right to arbitrate, the courts consider that the inconsistent action to litigate versus arbitrate constitutes a waiver of the right to arbitrate. At first glance, it appears to be a bright line rule concerning arbitration. However, there are clear and logical circumstances where a defendant can seek dismissal and, if dismissal is denied, the defendant can still exercise the contractual right to arbitrate. In AMS Staff Leasing, trial judge Rosa Rodriguez got it wrong. Fortunately, court of appeal Judge Leslie Rothenberg, writing for the 3rd District Court of Appeal, corrected the error.
After the plaintiff, Ochoa, filed its complaint, AMS initially sought dismissal on the merits and then amended its motion to assert its right to arbitrate. The trial judge was of the incorrect opinion that by seeking dismissal before seeking arbitration, AMS waived its right to arbitration. The 3rd District’s opinion juxtaposed two different rules that apply to arbitration and determined that there was no waiver. These rules will be discussed later.
The opinion falls squarely within U.S. Supreme Court precedent which, by the nature of the right to arbitrate, affects state court arbitration decisions. Over the last decade, the U.S. Supreme Court has consistently ruled that arbitration is bound by, and part of, the sanctity of contracts.
First, in order to put the right to arbitration in the correct legal framework, it is important to understand the U.S. Supreme Court’s interpretation of contractual arbitration provisions; particularly in light of state court rulings. The framework arises out of 9 U.S. Code Section 1-16. The essential provision, as applied to contracts states:
“A written provision in…a contract…to settle by arbitration a controversy thereafter arising out of such contract…or an agreement in writing to submit to arbitration an existing controversy arising out of such contract…shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” (Sec. 2).
Over the last decade, the Supreme Court has treated arbitration as perhaps the most important contractual right between contracting parties. It would be helpful to see just how the Supreme Court has consistently ruled concerning the right to arbitration.
In Howsam v. Dean Witter, 537 U.S. 79 (2002), the court said that only the arbitrator can decide whether a securities rule was violated, not a law court. The court said, “issues of substantive arbitrability…are for a court to decide and issues of procedural arbitrability…are for arbitrators to decide.”
Arbitration has become so sacrosanct that in Pacificare Health Systems v. Book, 538 U.S. 401 (2003), Justice Scalia, writing for the Court, stated that an arbitrator could decide whether punitive damages under the Racketeer Influenced and Corrupt Organizations Act (RICO) could be awarded, regardless of whether the arbitration clause prohibits an award of punitive damages under this type of legislation. The court reasoned there was no way to know how the arbitrator would deal with the punitive damages limitations, and therefore the court should not step in and second-guess the arbitrator. Thus, the Court sent the case to arbitration.
Recently, in Rent-A-Center, West, Inc. v Jackson, 130 S. Ct. 2272 (2012), Justice Scalia, writing for a 5-4 majority, even determined that an arbitrator could decide a case contrary to state law. In Rent-A-Center, an arbitration provision was unconscionable and contrary to state law. The Supreme Court instead decided that because the parties contractually agreed to arbitrate, that the arbitrator was empowered to decide whether the contract was contrary to state law, not the law judge. By ruling this way, the Court concluded that arbitration agreements are on equal footing with contracts.
Turning back to Judge Rothenberg’s opinion, the case ultimately revolved around subject matter jurisdiction. The opinion recognized the general rule that actions taken that are inconsistent with arbitration constitute a waiver of the right to arbitrate. But, the opinion also recognized the exception to the general rule which states that filing a motion to dismiss does not “rise to the level of active participation…sufficient to waive the right to compel arbitration.”
The opinion found that the motion to dismiss for lack of subject matter jurisdiction was both appropriate and the only proper action that AMS could take at the particular juncture of the case. Basically, filing a motion to dismiss due to lack of subject matter jurisdiction in a court without authority over the claim is consistent with AMS’s right to compel arbitration. Thus, the opinion reasoned: “Failing to file a motion to compel arbitration before a tribunal with no authority to enter the order cannot constitute a waiver.”
Judge Rothenberg stated that the trial court committed reversible error by not submitting the case to arbitration just because AMS filed its motion to dismiss. Clearly, the trial court improperly applied the law. The case was reversed and was properly ordered to arbitration.