Does Litigation Waive Arbitration?
When Does A Litigant Waive Arbitration?
Recently, the Fourth Circuit again examined whether a party’s participation in litigation amounted to a waiver of arbitration. In Rota-McLarty v. Santander Consumer USA, Inc., 2012 U.S. App. LEXIS 24447, (4th Cir. 2012) the Court reversed a decision from the United States District Court for Maryland and concluded that waiver of arbitration had not occurred despite a party’s six month delay in seeking to compel arbitration, along with having engaged in written discovery and depositions. Under federal law, a litigant defaults on its right to compel arbitration when it “‘so substantially utilize[s] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.'” Id. (citations omitted). The dispositive factor is whether there is actual prejudice to the other side and to determine that, two factors are considered: (1) the amount of the delay; and (2) the extent of the moving party’s trial-oriented activity. Id.
When Have You Waived Your Rights to Arbitration?
It is interesting to note that the Rota-McLarty Court reversed the District Court, in part, on its application of the “wrong law.” The District Court utilized Maryland’s state jurisprudence on the issue of waiver, which is different than the federal standard. Under Maryland’s state law framework, determining when a party waived its right to arbitrate depends on “the extent of its participation in judicial proceedings, including whether an answer has been filed; whether there was a legitimate reason for the participation; and whether the delay in seeking arbitration prejudiced the other party.” Rota-McLarty, quoting Abramson v. Wildman, 184 Md. App. 189, 964 A.2d 703, 710 (Md. App. 2009). Unfortunately for litigants, Maryland has declined to establish a “bright line” test as to how far a party can go before it waives arbitration and instead applies a balancing test. See, e.g., Freedman v. Comcast Corp., 190 Md. App. 179, 988 A.2d 68 (Md. 2010).
The Rota-McLarty decision also highlights another distinction between Maryland’s federal and state jurisprudence involving arbitration agreements. In this case, the Fourth Circuit reversed the District Court’s order denying a Motion to Compel Arbitration notwithstanding the fact that it was not a final order on the merits of the underlying litigation. As the Fourth Circuit observed “[t]he FAA provides for appeals from, inter alia, orders ‘refusing a stay of any action under section 3 of this title,’ or ‘denying a petition under section 4 of this title to order arbitration to proceed.’” Id. (citation omitted). The Court went on to explain “Congress’s purpose in creating appellate jurisdiction for these [arbitration] orders was to effectuate a ‘strong policy favoring arbitration’ through appeal rules, whereby ‘an order that favors litigation over arbitration . . . is immediately appealable, even if interlocutory in nature.’” Id., citing Stedor Enters., Ltd. v. Armtex, Inc., 947 F.2d 727, 730 (4th Cir. 1991). The federal approach under the FAA is in sharp contrast to the Maryland Court of Appeals’ interpretation of the same issue under the Maryland Uniform Arbitration Act. Compare, Addison v. Lochearn Nursing Home, LLC, 411 Md. 251, 983 A.2d 138 (2009) (concluding the denial of a motion to compel arbitration is not a final judgment and, therefore, not immediately appealable).
Professional Arbitration Attorneys in Maryland
In short, Rota-McLarty not only illustrates an example of when participation in litigation does not waive arbitration, it also identifies some important distinctions between the Federal Arbitration Act and the Maryland Uniform Arbitration Act. For more information on arbitration agreements in general, or when litigation amounts to a waiver of arbitration, contact the attorneys at Walker, Murphy & Nelson, LLP today.
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