Dicta Didn't Dictate that Court Couldn't Say It Was Too Late to Arbitrate

Hong v. CJ CGV America Holdings, Inc., No B246945 (D2d5 Dec. 18, 2013)

In an appeal of the denial of a motion to compel arbitration, the court holds that under the Federal Arbitration Act, the issue of whether a party waived arbitration by substantially participating in litigation is an issue for the court, not the arbitrator.  

This case is a shareholder derivative action involving plaintiffs’ investment in the lead defendant. Before moving for arbitration, defendants participated in discovery, and filed (and lost) a motion to require plaintiffs to post a derivative bond. Defendants also initiated a separate second litigation. They then moved to compel arbitration in this case. The trial court denied the motion, finding that defendants waived their right to arbitrate by substantially participating in the litigation. 

On appeal, defendants argued that the trial court erred because under the Federal Arbitration Act—which governed the agreement here—the question of waiver by participation was for the arbitrator, not the court to decide.  Defendants’ based their argument on a sentence in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002), that says “[s]o, too, the presumption is that the arbitrator should decide allegations of waiver, delay, or a like defense to arbitrability.” (internal quotes omitted). But the question of who decides whether a party waived arbitration by participating in the litigation was not actually presented in Howsam. And notwithstanding Howsam’s offhand reference to “waiver,” the overwhelming weight of federal and state courts that have addressed the issue have held that waiver by litigation is generally an issue for the court, not the arbitrator. Although the parties can agree to a different rule by drafting an arbitration clause that specifically provides otherwise, the agreement here did not do so. So the question was properly addressed by the court. 

Having resolved the procedural issue, in an unpublished part of the opinion,
the court holds that there was substantial evidence in support of the trial court’s finding that the defendants waived.

Affirmed.