More on Stok and Arbitration Waiver

As promised, I have reviewed the papers in Stok & Associates, P.A. v. Citibank, N.A, Docket 10-514, in which the Supreme Court granted certioriari last week to decide the following question: “Under the Federal Arbitration Act, should a party be required to demonstrate prejudice after the opposing party waived its contractual right to arbitrate by participating in litigation, in order for such waiver to be binding and irrevocable?” In the opinion below, the Eleventh Circuit Court of Appeals reversed the district court’s finding that Citibank had waived its right to arbitrate a claim brought by Stok & Associates, P.A. Stok is a law firm that had deposited a large check from a client into its Citibank bank account. Citibank discovered the check was actually a forgery and removed the funds from Stok’s account. A dispute arose concerning Citibank’s actions, and Stok filed a complaint in Florida state court alleging various state law causes of action. About six weeks later, Citibank answered the complaint without reference to the pre-dispute arbitration clause in the bank’s customer agreement with Stok. Within a few weeks, Stok served an offer of judgment and a discovery request on Citibank, and filed a reply to the answer and a notice of readiness with the state court. Less than one month after it filed its answer, Citibank sent a letter to Stok electing arbitration, which Stok rejected. The next day, Citibank filed a motion to compel arbitration in state court, but then withdrew that motion and instead filed a petition to compel arbitration in federal district court for the Southern District of Florida. The state court then stayed discovery for 60 days in the pending state court action, and removed the case from the trial docket.

The federal district court denied Citibank’s petition to compel arbitration on the ground advanced by Stok – that Citibank had waived its right to elect arbitration because of its participation in the state court action. In its decision, the district court applied the Eleventh Circuit’s two prong waiver test, which required the movant to show the waiving party acted inconsistently with its right to arbitration and its actions prejudiced the moving party. Citibank appealed. The Eleventh Circuit reversed on the ground that, even if Stok met its burden of showing that Citibank acted inconsistently with its right to arbitration, it had not demonstrated that Citibank’s conduct prejudiced Stok.

Stok then sought review in the Supreme Court, arguing that there is a conflict among the circuits as to whether prejudice is a necessary element of the arbitration waiver analysis. Stok argued that a majority of circuits (nine) required a showing of prejudice, and a minority of circuits (three) did not. Stok also argued that the Court should rule that no showing of prejudice should be required, as such a requirement violates long-standing principles of common law contract. Citibank filed a very brief opposition (five pages) to the Petition, arguing only that there was no conflict in the circuits, as even the three circuits that did not explicitly include prejudice as a prong of its formal waiver test did consider prejudice as one factor in the overall analysis. Since the Supreme Court granted certiorari, it appears the Court concluded that the circuits were indeed split on this issue.

Thus, it appears that the issue is quite simple and clearly crystallized before the Court: Should courts require a showing of prejudice before concluding that a party has waived its right to arbitration? I am surprised that the Court granted certiorari in this case for several reasons. First, I do not believe that the circuit courts have acknowledged that a conflict exists among them on the waiver question. Second, the Court’s Federal Arbitration Act jurisprudence instructs lower courts to resolve questions of arbitrability in favor of arbitration – which would suggest requiring the party resisting arbitration to make a strong showing before finding that a party seeking arbitration had waived its right to arbitration. This strong showing presumably would stem from, in part, prejudice to the party opposing arbitration. Third, the facts in this case do not cry out for a finding of prejudice. As the Eleventh Circuit noted in its opinion, courts that have found prejudice to the party opposing arbitration were faced with far more compelling facts: litigation activities for several years, rather than the few weeks present in Stok; and motion practice and extensive discovery requiring the party opposing arbitration to incur substantial legal fees and other litigation costs, unlike the relatively brief reply to answer and other litigation documents that Stok filed and served in the intervening weeks in this case. Thus, even if the Court were to conclude that prejudice is a requirement before finding an arbitration waiver, no prejudice was present here, as the circuit court concluded. On the other hand, if the Court rules that prejudice is not required, this is not a case that plainly calls out for application of the waiver doctrine, as Citibank’s conduct in the five week time period at issue was arguably not even inconsistent with its right to arbitration. Finally, Citibank, a national banking institution with substantial litigation resources, barely opposed Stok’s cert petition, suggesting even Citibank did not think the issues on appeal were ripe for Supreme Court intervention.

It is notable that, even if the Supreme Court affirms the Eleventh Circuit and retains the prejudice prong of the waiver test, the Eleventh Circuit had remanded the case to the district court for consideration of Stok’s other arbitrability arguments opposing the motion to compel arbitration. Thus, victory in the Supreme Court would not result in an automatic grant of Citibank’s petition to compel arbitration. It would only ensure a date back in district court for consideration of Stok’s other arguments opposing the petition.

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