The Sixth Circuit easily affirmed a district court’s finding that the defendant had waived its right to arbitration by participating in litigation for eight months. Johnson Assoc. Corp. v. HL Operating Corp., __ F.3d __, 2012 WL 1861675 (6th Cir. May 23, 2012). Plaintiffs had filed suit in late December of 2009 and a discovery deadline was set for August 26, 2010. The defendant did not assert its right to arbitrate in its answer, engaged in judicial settlement conferences, and participated in discovery. Then, the day before the discovery deadline, the defendant moved to compel arbitration. The court found that the defendant’s behavior was inconsistent with its right to arbitrate. Furthermore, it found the plaintiffs were prejudiced by the defendant’s behavior, largely because they “engaged in more discovery than would be permitted in arbitration.”

Neither of those rulings is especially surprising, but the court also had to address an interesting argument by the defendant. It argued that it could not have waived arbitration, because the contract at issue stated “no waiver by either party of any provision of this Agreement or of any breach or default shall constitute a continuing waiver of such provision or of any other provisions of this Agreement.” In essence, the defendant was hoping it had contracted around federal case law holding that parties can waive their arbitration rights. The Sixth Circuit made clear that a “no waiver” clause will not affect courts’ analysis of whether a party waived its right to arbitrate. It quoted reasoning from the Second Circuit:

“[T]o allow the ‘no waiver’ clause to preclude a finding of waiver would permit parties to waste scarce judicial time and effort and hamper judges’ authority to control the course of the proceedings” and allow parties to “test[] the water before taking the swim” by delaying assertion of their right to arbitration until the litigation is nearly complete.

I don’t usually associate arbitration with swimming, but the policy point here is right on target.

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by Liz Kramer

Liz Kramer is a shareholder at Leonard, Street and Deinard, one of the largest law firms in Minnesota, where she litigates complex business and construction disputes. Liz graduated from Yale Law School and is deeply knowledgeable on arbitration law. Website: www.arbitrationnation.com