Parties wishing to enforce arbitration clause must take care not to forfeit right

Posted in: Arbitration by Steven Vartabedian on

El Cajon Motors Inc. was sued by one of its customers, Yaube Roberts, acting for herself and the class of other customers, for El Cajon’s allegedly backdating installment purchase contracts, failing to properly disclose finance charges, and charging illegal interest. El Cajon answered the complaint in mid-August 2009 with a general denial and 24 affirmative defenses, but made no mention of the existence of an arbitration provision.

The parties exchanged written discovery requests in mid-October 2009. In late January 2010, El Cajon responded to discovery and filed its motion to compel arbitration. Roberts opposed arbitration, claiming unconscionability.
Also during late January, El Cajon sent letters to putative class members: one offering individual settlements of $50, and a second letter enclosing a small refund check and admitting an oversight in the computation of interest. In Mid-February 2010, upon learning of these mailings, Roberts conducted discovery regarding the communications and briefed its additional claim that El Cajon had forfeited it s right to arbitrate. The motion to compel arbitration was denied. El Cajon appealed.

The California Court of Appeal, Fourth Appellate District, Division One, affirmed the order denying the motion to compel arbitration in Roberts v. El Cajon Motors, Inc. (filed November 8, 2011) 2011 DJDAR 16358. The court rejected El Cajon’s arguments that it engaged in no conduct inconsistent with its right to arbitrate, and that a 5-month delay without prejudice to Roberts was insufficient delay to show waiver or forfeiture. The court found it need not decide whether a 5-month delay is insufficient as a matter of law because there was ample proof that the conduct was inconsistent with the intent to arbitrate and such conduct prejudiced Roberts.

As the court saw it, the problem for El Cajon was the discovery both parties had conducted largely pertained to the class claims. El Cajon now wanted to enforce its arbitration provision which waived class actions. Had El Cajon promptly informed of its position to compel arbitration, Roberts would not have done extensive discovery work concerning the class aspect of the case. This demonstrated both conduct on El Cajon’s part inconsistent with it’s the arbitration provision and prejudice to Roberts. El Cajon additionally used this five-month period to attempt to reduce the size of the putative class by trying to get many to settle any claim such class members might have in this lawsuit.

I get the feeling that both the trial and appellate courts here were irked that El Cajon was trying to “have its cake and eat it too.” (See blog entry of March 24 which discusses Augusta v. Keener Associates.) As the appellate court states in footnote 10, El Cajon could not have it both ways in claiming its delay in demanding arbitration was because it was unsure of the state of the law regarding enforceability of arbitration on class claims, while eventually arguing enforceability. El Cajon also seemed to want to have it both ways in first trying to “test the waters” regarding the class claims both through discovery and through negotiating settlements with class members without disclosing these contacts to plaintiff’s counsel. While I think the prejudice argument is marginal here because it is rare that the affirmative conduct of discovery of what might become irrelevant is deemed prejudicial, the plaintiffs got the benefit of the doubt here because the courts felt defendant was trying to pull a fast one.

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