Federal and state courts have consistently upheld the use of mandatory arbitration in employment and other agreements. Faced with rejection of claims challenging the validity of such agreements, plaintiffs wishing to avoid their application have shifted to arguments regarding the procedural fairness of the arbitration provisions as applied to specific circumstances. Last week, the North Carolina Supreme Court rejected a claim that the arbitration provision was voided when the defendant engaged in discovery proceedings prior to the granting of its motion to compel arbitration.
HCW Retirement and Fin. Servs., LLC v. HCW Employee Benefit Services, LLC was a commercial dispute between two business owners. Their operating agreement provided for mandatory arbitration. The defendant moved to compel such arbitration, but during the pendency of the motion, it sent written discovery requests and deposed the plaintiff's main witness. The plaintiff contended that by taking these steps prior to the initiation of arbitration proceedings, the defendant had prejudiced any subsequent arbitration, and had therefore waived its right to arbitrate the dispute.
The North Carolina Supreme Court rejected these claims, reversing the lower court's decision. While discovery proceedings could prejudice subsequent arbitration, in this case the discovery conducted by the defendant was of a type allowed through discretion of the arbitrator. Therefore there was no prejudice, and the defendant did not waive its right to arbitration by taking these steps.
Employers seeking to compel mandatory arbitration of employment claims should be very cautious about using the court system to conduct discovery before the matter is deferred to the arbitrator. However as this case illustrates, a strategic decision to engage in some discovery prior to this point will not result in an automatic waiver of the right to arbitrate the claim.