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Employer's Active Litigation of Case Waives Right to Compel Arbitration

    Client Alerts
  • July 02, 2010

Many employers require that employees sign mandatory arbitration agreements upon commencement of employment. These agreements are especially used by employers in parts of the U.S. where courts or juries are known or suspected to hand down pro-plaintiff decisions. In recent years, mandatory arbitration agreements have come under assault from plaintiffs unhappy over their inability to argue their cases to a judge and jury rather than an independent arbitrator. In addition to judicial motions over the alleged unfairness of arbitration agreements, there are a number of bills pending in Congress that would restrict or eliminate the use of such agreements in employment.

Last month, the Third Circuit Court of Appeals cautioned employers over trying to have their cake and eat it too when it comes to invoking mandatory arbitration. In Nino v. The Jewelry Exchange, Inc., the plaintiff sued his former employer alleging gender and national origin discrimination. The employer actively defended the lawsuit in federal district court for 15 months before seeking to compel mandatory arbitration under an agreement signed by the plaintiff at the beginning of his employment.

The plaintiff claimed that the employer had waived its right to compel arbitration due to its active defense of the lawsuit in court. The Third Circuit agreed, reversing the lower court's dismissal of the claim. In its decision, the court noted that the employer had filed and argued motions on the claim, had participated in scheduling orders and had engaged in vigorous discovery efforts before seeking to compel arbitration. The fact that the employer had raised the arbitration agreement as a defense to the claim in its initial answer did not overcome the unnecessary delay and expense incurred by the plaintiff due to this long delay.

The Third Circuit was also influenced by time restrictions, attorneys' fee provisions and arbitrator selection criteria in the agreement that it concluded were unconscionable. If an employer decides to use mandatory arbitration agreements, the terms of those agreements need to be balanced, and the employer should invoke its right to arbitrate at the beginning of court proceedings in order to avoid a claim that these rights have been waived.