COUNSEL

INTRODUCTION

FACTUAL AND PROCEDURAL BACKGROUND

In support of their motion defendants contended the employee handbook sets forth a binding procedure for arbitration of disputes. They contended plaintiff was bound by it because of her signed employment application and her receipt of the handbook, and because on two prior occasions plaintiff had herself invoked the procedures to protest disciplinary letters in her personnel file and sexual harassment by another employee. As evidence defendants relied both upon (1) the declaration of Field Human Resource Manager Donna Towle based upon personal knowledge of company procedures, company files, and documents obtained from plaintiff and (2) statements in plaintiff's deposition acknowledging her signature on the employment application, her receipt of a copy of the handbook, and her prior two invocations of the procedure.

In opposition to the motion, plaintiff argued (1) defendants waived the right to compel arbitration by their conduct after the filing of plaintiff's complaint, (2) plaintiff never explicitly waived her right to a jury trial, (3) the handbook procedure is not mandatory, and (4) public policy prohibits subjecting plaintiff's statutory causes of action to mandatory arbitration. Plaintiff relied on her attorney's declaration concerning the extensive discovery defendants conducted before they filed a motion to compel arbitration and on plaintiff's declaration that she did not use the appeal procedure in this case because she did not think she was required to do so.

In reply, defendants argued (1) they did not waive the right to compel arbitration, because they timely raised it as an affirmative defense in their answers to the complaint and their subsequent conduct did not waive it, (2) an express waiver of jury trial was not essential to plaintiff's agreement to arbitrate, (3) the appeal procedure should properly be interpreted to require binding arbitration despite its introductory language suggesting voluntariness and its use of the word "may" in reference to appeal, and (4) the FEHA does not prohibit an agreement to arbitrate claims arising under it.

The motion was argued at a hearing held February 14, 1996. After submission of the matter the court denied defendants' motion. The court's minute order states, "the Court finds that based upon the facts submitted and understood by the Court, plaintiff had no mandatory obligation to utilize Continental's appeal procedure. Furthermore, the Court finds that defendants by their untimely assertion, other than by an affirmative defense, of any claimed right to arbitration have waived it."

The court's oral remarks at the hearing suggest its reasoning. First, the court believed that the language of the manual would not suggest to a layperson such as plaintiff that the procedure was mandatory. Second, the court was very disturbed by defendants' behavior of waiting for many months to bring their motion. Although defendants set up an affirmative defense in their answers filed in May 1995, they sat on that defense and conducted discovery before bringing their motion months later. The court hinted it believed defendants' tactics were "dilatory." Continental's attorney responded by claiming that the discovery he conducted "ascertained such things as the plaintiff being familiar with the procedure, using the procedure, having received the procedure." He argued that discovery is allowable in a "special proceeding" (Code Civ. Proc., § 2016, subd. (b)(1)), that a petition to compel arbitration is a special proceeding (Lachkar v. Lachkar (1986) 182 Cal.App.3d 641, 646), and that it should not matter that he conducted discovery before initiating such a special proceeding. The court questioned that reasoning, commenting, "[Discovery in a special proceeding] would be discretionary with the court." Continental's counsel replied that he would be absolutely entitled to conduct discovery "if I initiated [a proceeding to compel arbitration] and said, `I am taking discovery specifically with respect to this pending petition and I want to establish that the plaintiff received the procedure, authenticates the signature, [and used] the procedure . . . .'"

DISCUSSION

Given its implied finding that defendants engaged in extensive discovery from plaintiff before moving to compel arbitration, the trial court could properly find defendants waived arbitration. Defendants contend that even if they did obtain discovery, plaintiff has not shown "prejudice" and therefore defendants cannot be found to have waived arbitration. Defendants contend it is not enough that plaintiff has suffered certain court costs or legal expenses, rather plaintiff must show either that defendants actually "litigated" the case before moving to compel arbitration, or that plaintiff has suffered a specific type of prejudice affecting plaintiff's ability to arbitrate, for example faded recollection of witnesses due to defendants' delay. (See Thorup v. Dean Witter Reynolds, Inc. (1986) 180 Cal.App.3d 228, 237 [motion by employer to compel arbitration of plaintiff's wrongful termination lawsuit; held, the loss of plaintiff's employment is not by itself the prejudice sufficient to show waiver of employer's right to arbitrate; "`Prejudice' in the present context obviously relates to a diminution or impairment of plaintiff's ability to proceed to arbitration"]; Doers v. Golden Gate Bridge etc. Dist., supra, 23 Cal.3d 180, 188 & fn. 3 [right to arbitrate may be waived by having actually litigated in court to a judgment on the merits, or prejudice might also be shown by events occurring prior to a court judgment on the merits]; Christensen v. Dewor Developments, supra, 33 Cal.3d 778, 784 [trial court's finding of waiver affirmed where delay in seeking arbitration resulted in "faded memories and lost records"]; cf. Keating v. Superior Court, supra, 31 Cal.3d 584, 608 [affirming trial court's finding of nonwaiver where although the party seeking arbitration had engaged in some discovery (described later in Christensen, 33 Cal.3d at p. 782 as a "preliminary skirmish"), the extent of discovery was reciprocal and the opposing parties made no "specific claims of prejudice"].)

There is more prejudice in the present case than plaintiff's mere incurring of court costs or legal expenses. The vice involved here, whether characterized as "unreasonable delay," "bad faith misconduct," "gamesmanship" or "unilateral discovery" (all are words mentioned in Christensen) is that defendants used the discovery processes of the court to gain information about plaintiff's case which defendants could not have gained in arbitration. After obtaining discovery from plaintiff by court processes, defendants then belatedly sought to change the game to arbitration, where plaintiff would not have equivalent discovery rights. (Brock v. Kaiser Foundation Hospitals, supra, 10 Cal.App.4th at p. 1802 & fn. 10.) Kaneko Ford Design v. Citipark, Inc., supra, 202 Cal.App.3d 1220, 1229, held that disclosure of defenses and strategies is a prejudice which accrues in such circumstances. Kaneko was followed on this point in Zimmerman v. Drexel Burnham Lambert Inc. (1988) 205 Cal.App.3d 153, 159-160, which affirmed a trial court's finding of waiver where the defendants engaged in extensive discovery; the court stated, "Prejudice . . . results from the disclosure of defenses and strategies." Although defendants' participation in discovery would not necessarily compel a finding of prejudice and waiver (Keating v. Superior Court, supra, 31 Cal.3d at p. 607), this presents a factual question for the trial court based on the particular circumstances of the case. (Id. at pp. 605, 606, 607, 608 [affirming trial court's finding of nonwaiver, where, in the class action there was limited discovery which benefited the opposing party, and in the individual actions there was reciprocal discovery and the trial court established conditions to prevent the moving party from taking unfair advantage of previous discovery].) Here, the trial court could reasonably find the discovery conducted was not equivalent for both sides and would work an unfair advantage for defendants if arbitration were ordered. These facts support the trial court's finding of waiver. (Christensen v. Dewor Developments, supra, 33 Cal.3d at pp. 783-784; Kaneko Ford Design v. Citipark, Inc., supra, 202 Cal.App.3d at p. 1229; Zimmerman v. Drexel Burham Lambert Inc., supra, 205 Cal.App.3d at pp. 159-160.)

Defendants claim that because they raised the arbitration/grievance issue as an affirmative defense in their answers, they cannot possibly be held to have waived arbitration, no matter what their conduct subsequent to filing their answers. This argument is not persuasive and is not supported by the authorities defendants cite.

Primarily defendants rely on Charles J. Rounds Co. v. Joint Council of Teamsters No. 42 (1971) 4 Cal.3d 888 (hereafter Rounds), which they claim stands for the proposition (defendants' words) "that a defendant precludes any possibility of waiver of the right to enforce an arbitration agreement if it appropriately raises arbitrability in its answer." Defendants misinterpret the significance of Rounds. In Rounds the trial court dismissed the action at trial on the ground that compliance with an agreed grievance procedure was a condition precedent to bringing suit on a collective bargaining agreement. The issue on appeal was whether the trial court could dismiss the action or instead should have stayed the action pending an arbitration. (Id. at p. 894.) Based on prior case law and subsequent statutory enactments, the Supreme Court held those procedures were alternative remedies which a defendant could elect. (Id. at pp. 894-899.) The Supreme Court concluded, "where the only issue litigated is covered by the arbitration clause, and where plaintiff has not pursued or attempted to pursue his arbitration remedy, it should be held that (1) plaintiff has impliedly waived his right to arbitrate, such that defendant could elect to submit the matter to the jurisdiction of the court; (2) defendant may also elect to demur or move for summary judgment on the ground that the plaintiff has failed to exhaust administrative remedies; and (3) defendant may also elect to move for a stay of proceedings pending arbitration if defendant also moves to compel arbitration." 3 (Id. at p. 899, italics added.) Thus a defendant who believes the plaintiff's claims are subject to arbitration may seek to compel such arbitration (type 3) or seek a summary disposition of the lawsuit on the ground the plaintiff failed to satisfy a condition precedent (type 2); otherwise the defendant may be deemed to have submitted the dispute to the jurisdiction of the court (type 1). Implicit in Rounds' approval of summary procedures such as demurrer or summary judgment is that a defendant should timely seek relief either to compel arbitration or dispose of the lawsuit, before the parties and the court have wasted valuable resources on ordinary litigation. On the other hand, Keating v. Superior Court, supra, 31 Cal.3d at page 605, tells us that mere participation in some litigation, without prejudice to the opposing party, does not establish waiver of arbitration.

Rounds itself, and International Assn. of Bridge etc. Workers v. Superior Court (1978) 80 Cal.App.3d 346, also cited by defendants, were type 2 cases where the defendant did not seek to compel arbitration but only to secure a dismissal of the lawsuit. In that context those cases held that the defendant, having pleaded the affirmative defense, did not in the particular circumstances waive the right to seek a dismissal of the lawsuit.

The instant case, however, is type 3. Although defendants pleaded an affirmative defense in their answers, defendants subsequently elected their Rounds remedy when they moved to stay the action and to compel arbitration. Plaintiff's opposition to defendants' motion squarely raised for the trial court the issue whether defendants waived the right to compel arbitration based on the extensive discovery defendants conducted before bringing their motion. The fact that defendants had pleaded an affirmative defense in their answers became, at that point, merely one factor for the trial court to consider. (E.g., Gunderson v. Superior Court (1975) 46 Cal.App.3d 138, 144, also cited by defendants [motion to compel arbitration must be denied where defendant not only failed to plead the arbitration clause in the answer but also delayed seeking to compel arbitration and conducted itself in a manner clearly inconsistent with intent to arbitrate].) Contrary to defendants' contention, their pleaded answers did not preclude finding that by their subsequent conduct of this litigation defendants waived the right to compel arbitration.

Here, defendants answered the complaint in May 1995, but did not move until November 1995 to stay the action in order to compel arbitration. In the meantime defendants engaged in discovery. The extent, significance, and consequences of this discovery were disputed, but reasonable inferences support the trial court's conclusion that plaintiff suffered prejudice from defendants' delay in seeking arbitration and that defendants therefore waived the right to compel arbitration.

Because we conclude substantial evidence supports the trial court's finding that defendants waived the right to diligently compel arbitration, even assuming that defendants had such a right, we need not consider whether plaintiff was actually required to use the company appeal procedure or whether public policy precludes requiring plaintiff to arbitrate a statutory claim for sexual harassment under the FEHA.

DISPOSITION

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FN1. The prayer for relief in this motion sought an order that plaintiff submit all her claims "for resolution pursuant to the terms of the Appeal Procedure" in the employee handbook.