Opinion
NOT TO BE PUBLISHED
APPEAL from a judgment of the Superior Court of Los Angeles County, No. BC374791, Phrasel L. Shelton (Retired Judge of the San Mateo S.Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.), Joseph R. Kalin (Retired Judge of the Los Angeles S.Ct. assigned by the Chief Justice pursuant to art. VI, § 6 of the Cal. Const.), and Teresa Sanchez-Gordon, Judges.
Hillel Chodos for Plaintiff and Appellant.
Charlston, Revich & Wollitz and Tim Harris for Defendants and Respondents.
CHANEY, J
Plaintiff Tuesday Knight appeals from a judgment confirming an arbitration award. She challenges both the order compelling arbitration and the arbitration award. She contends, among other things, that the trial court erred in granting the motion to compel arbitration because defendants waived their right to arbitrate. We agree with this contention.
Defendants moved to compel arbitration about eight months after Knight filed this action. By that time, defendants had propounded multiple sets of discovery to which Knight had responded, and numerous discovery motions were pending. Defendants had claimed “priority” in discovery, and then refused to respond to Knight’s discovery. The court ordered the matter to arbitration less than three months before the date set for trial. Although defendants’ answers raised arbitration as an affirmative defense, defendants waived the right to arbitrate by vigorously litigating this action in the trial court in a manner inconsistent with their right to arbitrate. Knight has demonstrated that she was prejudiced by defendants’ delay in seeking arbitration, as discussed below. The trial court’s order compelling arbitration is not supported by substantial evidence of nonwaiver. Accordingly, we reverse the judgment and remand the matter.
We need not consider the other issues Knight raises on appeal. Due to defendants’ waiver of the right to arbitrate, Knight may litigate this matter in the trial court regardless of the scope and enforceability of the arbitration agreements she signed. It is unfortunate that the parties incurred the time and expense of an arbitration hearing. But the trial court erred in granting the motion to compel arbitration, and Knight is entitled to raise that error on appeal from the judgment confirming the arbitration award.
BACKGROUND
On July 24, 2007, Tuesday Knight filed this action against her former employer, Toe Brights, Inc. (TBI), and two of its officers/directors/stockholders, Diane Keith and Lisa Wilcox (collectively, defendants). According to the allegations in her complaint, Knight is a costume jewelry designer who “began marketing her jewelry in 2000 under the trade name of Toe Brights.” In 2005, TBI was formed and Knight, Keith and Wilcox became stockholders, officers and directors of TBI. Knight worked for TBI from 2005 until early June 2007, when her employment was terminated.
Knight asserted causes of action against TBI and Keith for breach of contract, alleging that they failed to pay her more than $9,000 in salary and reimbursement for expenses that was due at the time of her termination, and also failed to repay a loan from her to TBI in the amount of $41,783. Knight additionally sought damages and an injunction against all defendants for their unauthorized use of (1) her jewelry designs and (2) her name and likeness. Finally, Knight sought access to TBI’s records and dissolution of the corporation.
On or about August 30, 2007, TBI filed its answer to Knight’s complaint. As an affirmative defense, TBI alleged: “Plaintiff’s action is barred by any arbitration agreement requiring that this action be arbitrated.” On or about September 10, 2007, Keith and Wilcox filed their answers, asserting the same affirmative defense about arbitration. Defendants did not demand arbitration at that time. They did not raise the issue of arbitration again with Knight until March 2008.
Over the course of seven months, the parties engaged in the discovery process and filed multiple motions to compel. Defendants began propounding discovery on Knight before they had even answered the complaint and appeared in the action, thereby allowing defendants to claim “priority” in discovery. Knight states, and defendants do not dispute, that she provided responses to defendants’ form and special interrogatories and requests for admission and production of documents. In response to the parties’ discovery motions, the trial court ordered the parties to meet and confer and eventually ordered that a discovery referee be appointed. At this point, Knight’s motions to compel production of documents and the depositions of Keith and Wilcox were pending.
The discovery requests, responses and motions are not included in the record on appeal. In opposition to defendants’ motion to compel arbitration, Knight submitted a “procedural history, ” attached to her counsel’s declaration. The procedural history lists the discovery propounded, responses made, motions filed and court proceedings held. Counsel’s declaration provides: “All factual statements set forth in the Procedural History attached hereto as Exhibit A are true and correct as to my personal knowledge and have been asserted in, and verified before, by me and my co-counsel..., in various motions, discovery and otherwise, filed by both counsel in this matter. I incorporate by reference each and every declaration filed by plaintiff with the Court since the inception of this lawsuit.” The record does not indicate that defendants objected to this procedural history in connection with the motion to compel arbitration. Defendants did object to Knight’s “procedural history” exhibit, however, in opposing Knight’s petition to vacate the arbitration award “on the ground that it is simply an unauthenticated series of pages and inadmissible as evidence.” Since the trial court apparently did not rule on defendants’ objection, and defendants did not raise the issue on appeal, these facts are in evidence. Defendants do not dispute that the discovery procedures and proceedings occurred as listed in Knight’s procedural history. Documents that defendants attached to their papers in the trial court—portions of Knight’s substantive responses to defendants’ special interrogatories and a letter between counsel regarding a court-ordered meet and confer on discovery motions—indicate the extensive nature of discovery between the parties.
Defendants filed a motion for leave to file a cross-complaint against Knight, which Knight opposed. Apparently the trial court granted the motion, and defendants’ cross-complaint was filed on or about March 13, 2008. The cross-complaint alleged that during the time Knight was an officer and director of TBI, she breached her fiduciary duty to TBI by taking TBI’s property and soliciting TBI’s employees to “to leave TBI and join Knight in a different business venture that in part competed with TBI, and in connection therewith, has used or intends to use TBI’s designs for jewelry and other TBI confidential data.” At the time defendants filed their cross-complaint, the date set for trial in this action was June 9, 2008.
On or about March 12, 2008, defendants sent Knight a letter, stating that they planned to file a motion to compel arbitration the next day: “Defendants hereby request that Plaintiff agree to a stay of the entire action pending the court’s ruling on Defendants’ motion to compel arbitration to be filed tomorrow. The arbitration agreement is found in the July 13, 2001 agreement between Plaintiff, Wilcox and DMG [Destiny Marketing Group, Inc.]. Defendants believe that the Agreement covers Plaintiff’s claims that TBI misappropriated her image, likeness and designs and that it similarly applies to Plaintiff’s claims to repayment of funds she alleges she loaned to TBI.”
Defendant Diane Keith signed this 2001 agreement as president of Destiny Marketing Group, Inc.
On or about March 19, 2008, defendants filed their motion to compel arbitration. They attached to their motion the July 2001 agreement referenced above, as well as a December 2001 limited partnership agreement for Toe Brights. Both agreements contain arbitration provisions and were signed by Knight, Keith and Wilcox. Defendants argued they did not waive the right to arbitrate, stating: “This case has not been litigated to judgment and trial has not commenced. Plaintiff could have and should have insisted upon this arbitration when she filed this action and did not acknowledge this agreement in her pleading. Defendants have not waived anything. Plaintiff has simply tried to evade the arbitration agreement she signed.” Defendants also noted that they had asserted “as a precaution” an affirmative defense based on “any arbitration agreement to which Plaintiff was a party.” Defendants added: “Plaintiff cannot claim she was ‘unaware’ of the possibility that this motion might be filed. Having now located the arbitration clause and asserted it, Plaintiff cannot claim surprise of any kind.”
Defendants also argued that, “Plaintiff cannot claim ‘prejudice’ merely because she has incurred legal fees in trying to avoid the arbitration clause.” Defendants asserted that Knight had “resisted and even delayed discovery” and refused to meet and confer as the court had ordered. In his declaration, defendants’ counsel asserted that “Plaintiff filed a motion to avoid responding to any of Defendants’ outstanding discovery.” Defendants also pointed out that Knight had not been deposed.
On or about March 20, 2008, Knight filed her answer to defendants’ cross-complaint. A week later she filed her opposition to the motion to compel arbitration. She argued that the arbitration provisions do not cover the claims alleged in her complaint and may not be enforced by TBI, an entity that was not formed until 2005 and was not a party to the July or December 2001 arbitration agreements. She also argued that defendants waived their right to arbitrate by litigating the matter “intensely” in the trial court and filing their motion less than three months before the trial date.
Knight asserted that defendants had “sought and obtained numerous benefits and advantages through the litigation that would not have been available to them if they had sought and obtained arbitration at the outset.” She noted that defendants filed a cross-complaint after seeking leave of court to do so. The parties participated in mediation with a court-appointed mediator. Knight responded to discovery that defendants would not have been entitled to propound in arbitration: “two sets of special interrogatories, two sets of requests for production of documents, one set of form interrogatories, and one set of admissions.” Knight stated that she filed a motion for a protective order after defendants propounded two additional sets each of form interrogatories, special interrogatories and requests for admission because defendants had not complied with her first set of requests for production of documents and her notices for the depositions of Keith and Wilcox. Defendants had claimed “priority” in discovery because they had served their notice of deposition of Knight before Knight had served her deposition notices. In fact, defendants had served their deposition notice before they had even appeared in the action.
As set forth above, Knight’s motions to compel this discovery were pending at the time defendants filed their motion to compel arbitration.
Knight claimed that she had “been forced to incur enormous legal expenses because of defendants’ desire to litigate every issue, even the smallest.” One of her attorneys submitted a declaration stating that she had “billed at least $8,000 in legal fees in handling the discovery portions of this lawsuit, which include researching, preparing and filing oppositions to defendants[’] five motions to compel, opposition to defendant[s’] motion for leave to file a cross-complaint, plaintiff’s motions to compel depositions and discovery, appearances in court on discovery issues, and other related matters.” Her other attorney submitted a declaration stating that he had “incurred over $50,000 of legal fees representing the plaintiff in this action since it was commenced.”
The trial judge assigned to this case, whom the parties had appeared before on discovery and other matters, was not present to hear defendants’ motion to compel arbitration. Another judge sitting temporarily in the department, who might not have been familiar with the procedural history of the case, granted the motion. Knight did not seek writ review of the order in this court.
Documents setting forth the trial court’s reasons for granting the motion (reporter’s transcript, minute order) are not included in the record on appeal.
The case proceeded through arbitration. The arbitrator awarded Knight $40,000 for the repayment of her loan plus “interest at the statutory rate from the date she filed her lawsuit.” The arbitrator also awarded her $5,250 “less statutory deductions” as a penalty under the Labor Code because TBI did not timely pay her all of her wages. Knight did not prevail on her other claims for unauthorized use of her jewelry designs, name and likeness. The arbitrator awarded defendants $60,000 in attorney fees and $1,160 in filing fees as the prevailing parties on some of Knight’s claims. The arbitrator denied Knight’s motion for attorney fees and costs.
Knight filed a petition to vacate the arbitration award. She repeated arguments she made in opposition to the motion to compel arbitration. She also argued that the arbitrator exceeded his authority by deciding issues that were not subject to arbitration and by awarding attorney fees to defendants under the federal Copyright Act. The trial court denied the petition, and entered judgment confirming the arbitration award.
DISCUSSION
On appeal Knight contends that defendants waived their right to arbitrate, and that the arbitrator exceeded his powers by deciding issues that were not subject to arbitration and by awarding attorney fees to defendants under the federal Copyright Act. We address only the waiver issue. Because we conclude that defendants waived their right to arbitrate, we need not consider Knight’s challenges to the arbitration award.
As Knight correctly points out, this court may review the trial court’s order compelling arbitration on appeal from a judgment confirming the arbitration award. (Fagelbaum & Heller LLP v. Smylie (2009) 174 Cal.App.4th 1351, 1359 [“‘[N]o immediate, direct appeal lies from an order compelling arbitration. [Citations.] But such an order is subject to review on appeal from the final judgment. [Citations.]’”].) Defendants’ argument that Knight is estopped from challenging the order compelling arbitration because she agreed to participate in the arbitration without seeking writ review in this court is without merit. Knight vigorously opposed defendants’ motion to compel arbitration. When she lost, she wrote defendants a letter, informing them that she believed the order was erroneous and noting that the order was appealable from a judgment confirming the arbitration award. Regardless of the time and expense of the arbitration, Knight is entitled to challenge the order sending the matter to arbitration. (Ibid.) Defendants will not prevail on a claim of “prejudice” based on Knight’s exercise of her rights on appeal. Having addressed this threshold issue, we now turn to the merits of Knight’s waiver argument.
“‘While in general arbitration is a highly favored means of settling disputes..., it is beyond dispute a trial court may deny a petition to compel arbitration if it finds the moving party has waived that right.’” (Zamora v. Lehman (2010) 186 Cal.App.4th 1, 12.) “Since arbitration is a strongly favored means of resolving disputes, courts must ‘closely scrutinize any claims of waiver.’ [Citations.] A party claiming that the right to arbitrate has been waived has a heavy burden of proof.” (Sobremonte v. Superior Court (1998) 61 Cal.App.4th 980, 991.)
“‘“ [T]he question of waiver is one of fact, and an appellate court’s function is to review a trial court’s findings regarding waiver to determine whether these are supported by substantial evidence.”... [Citation.]’” (Zamora v. Lehman, supra, 186 Cal.App.4th at p. 12.) In this case, we do not have before us a list of the trial court’s reasons for compelling arbitration. In any event it is evident the trial court made a finding that defendants did not waive their right to arbitrate, whether that finding was express or implied.
The analysis for determining whether a defendant waived the right to arbitrate is the same under the Federal Arbitration Act and the California Arbitration Act, so we need not focus on what statute applies to this dispute. (Zamora v. Lehman, supra, 186 Cal.App.4th at p. 11.) “‘[N]o single test delineates the nature of the conduct that will constitute a waiver of arbitration.’” (Id. at p. 15.)
“In determining waiver, a court can consider ‘(1) whether the party’s actions are inconsistent with the right to arbitrate; (2) whether “the litigation machinery has been substantially invoked” and the parties “were well into preparation of a lawsuit” before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) “whether important intervening steps [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place”; and (6) whether the delay “affected, misled, or prejudiced” the opposing party. [Citations.]’ [Citation.]” (Sobremonte v. Superior Court, supra, 61 Cal.App.4th at p. 992; St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1196.)
As this list of factors demonstrates, waiver may be found under circumstances where the case has not been litigated to judgment. Although participation in litigation does not automatically result in a waiver of the right to arbitrate, waiver may occur prior to a judgment on the merits if the party opposing arbitration can show prejudice. (Zamora v. Lehman, supra, 186 Cal.App.4th at p. 16.) Therefore, the fact that Knight’s action had not been litigated to judgment is not dispositive.
In evaluating the circumstances of this case, in light of the factors listed above, we believe a finding of waiver is compelled. First, there can be no doubt that defendants acted inconsistently with the right to arbitrate for more than six months prior to filing their motion. We recognize that in answering Knight’s complaint, defendants raised the possibility of arbitration as an affirmative defense. This one act consistent with the right to arbitrate is not sufficient to support a finding of nonwaiver. (See Davis v. Continental Airlines, Inc. (1997) 59 Cal.App.4th 205, 215-216; Sobremonte v. Superior Court, supra, 61 Cal.App.4th 980, 993, 998.) Defendants did not ask Knight to arbitrate this dispute from the outset. Instead, defendants began propounding discovery on Knight immediately, even before they had answered the complaint. The parties were engaged in discovery disputes for about six months, resulting in the filing of numerous motions to compel, multiple court appearances and an order requiring the appointment of a discovery referee. Defendants claimed priority in discovery and refused to respond to Knight’s discovery, yet received substantive discovery responses from Knight in response to defendants’ discovery requests. The parties participated in a court-ordered mediation. Defendants sought leave to file and did file a cross-complaint. All the while defendants remained silent about their intent to force the case to arbitration, even after the court set the trial date for June 9, 2008. These acts are inconsistent with exercising the right to arbitrate.
The trial date was presumably set at the November 20, 2007 case management conference, which was the only such conference held in this case. (See Cal. Rules of Court, rules 3.722(a) & 3.727-3.729.) Thus, the parties spent about four of the seven months of litigation gearing up for trial.
This is not a case where a party moved to compel arbitration after limited participation in trial court litigation (e.g., after losing on demurrer). Here, defendants first notified Knight of their intent to arbitrate on March 12, 2008, more than seven months after Knight filed this action and less than three months before the June 9, 2008 trial date. Defendants cannot dispute that “‘“the litigation machinery ha[d] been substantially invoked” and the parties “were well into preparation of a lawsuit” before [defendants] notified [Knight] of an intent to arbitrate.’” (Sobremonte v. Superior Court, supra, 61 Cal.App.4th at p. 992.) The record does not indicate that defendants ever explained why they waited until so close to trial to seek arbitration.
Defendants make light of the nature and extent of discovery conducted in this case before they disclosed their intent to arbitrate. It is clear that defendants would not have been permitted to serve multiple sets of form and special interrogatories and requests for admissions and documents in arbitration. Both the Code of Civil Procedure and the AAA arbitration rules applicable to this dispute provide for the exchange of documents and information and the identification of witnesses to be called at the arbitration hearing, but not discovery of the nature defendants conducted in this case. (See Code Civ. Proc., §§ 1282.2, subd. (a)(2)(A), (C), (F) & 1282.6, subd. (a); AAA Commercial Arbitration Rules, rule R-21.) AAA Commercial Arbitration Rules, rule R-21, which the parties agree applies to this case, does not permit a party to propound interrogatories or requests for admissions, as defendants did here.
In arbitrations which are designated “large, complex commercial disputes, ” the arbitrator has discretion to allow a party to propound interrogatories “upon good cause shown and consistent with the expedited nature of arbitration.” (AAA Commercial Arbitration Rules, rule L-4(d).) This case did not meet the requirement for a large, complex commercial dispute because the amount in controversy was less than $500,000. Nonetheless, defendants pointed out the complex case discovery rules to the trial court (by marking them in the copy of the AAA Commercial Arbitration Rules that they attached to their motion to compel arbitration). Defendants did not similarly mark rule R-21, the rule regarding the significantly more limited exchange of documents and information that is applicable to this case under these rules.
Defendants do not dispute that Knight actually responded to two sets of special interrogatories, two sets of requests for production of documents, one set of form interrogatories, and one set of requests for admissions. Defendants attached to their motion to compel arbitration a portion of Knight’s substantive response to defendants’ special interrogatories, thereby using the fruits of this discovery in a court proceeding. The record further indicates that Knight’s responses to discovery were substantive in that defendants took their four motions to compel off calendar after Knight served her responses. The record does not indicate, however, that defendants responded to Knight’s discovery. We note that the judge who was familiar with the discovery conducted in this case—who had held a hearing on the parties’ numerous discovery motions—was not available to hear defendants’ motion to compel arbitration.
The record before us demonstrates that Knight was prejudiced by defendants’ actions. “[C]ourts assess prejudice with the recognition that California’s arbitration statutes reflect ‘“a strong public policy in favor of arbitration as a speedy and relatively inexpensive means of dispute resolution”’ and are intended ‘“to encourage persons who wish to avoid delays incident to a civil action to obtain an adjustment of their differences by a tribunal of their own choosing.”’ [Citation.] Prejudice typically is found only where the petitioning party’s conduct has substantially undermined this important public policy or substantially impaired the other side’s ability to take advantage of the benefits and efficiencies of arbitration.” (St. Agnes Medical Center v. PacifiCare of California, supra, 31 Cal.4th at p. 1204.)
Defendants misled Knight by indicating that they intended to try this case in court. During the seven and a half months between the time Knight filed her complaint and defendants disclosed their intent to arbitrate, the parties vigorously litigated this case. Knight was responding to discovery and preparing her case for trial. With less than three months to go before trial, defendants apparently decided they would fare better in arbitration. After they had participated in a court-ordered mediation, filed a cross-complaint which Knight answered, and received responses from Knight to two sets of special interrogatories, two sets of requests for production of documents, one set of form interrogatories, and one set of requests for admissions, defendants forced the case to arbitration over Knight’s objection.
Knight did not reap the benefits of arbitration. She responded to discovery which defendants would not have been permitted to propound in arbitration, and she received no responses from defendants to her discovery. She endured more than six months of discovery battles rather than a more limited and controlled exchange of information, “consistent with the expedited nature of arbitration.” (AAA Commercial Arbitration Rules, rule R-21.) Defendants took advantage of the many ways a party can gain information about an opponent’s case in trial court litigation through discovery and court-ordered mediation. And defendants ensured that Knight would not experience the efficiencies of arbitration.
The trial court’s order compelling arbitration is not supported by substantial evidence of nonwaiver. As the Court of Appeal stated in Sobremonte v. Superior Court, supra, 61 Cal.App.4th 980, 998: “We have thoroughly reviewed the record and find that the only affirmative act the [defendants] took to invoke arbitration was to allege [their] right to arbitrate as an affirmative defense in an answer. The remainder of [defendants’] conduct was inconsistent with an intent to arbitrate. We find no substantial evidence to support the trial court’s determination that the [defendants] had not waived [their] right to arbitration.” As set forth above, Knight has demonstrated that she was prejudiced by the delay.
We find that defendants waived their right to arbitrate. They have incurred the expense of an arbitration hearing, and now possibly will incur the additional expense of a trial, as a result of their gamesmanship.
DISPOSITION
The judgment is reversed. On remand, the trial court shall restore this case to the civil active list. Appellant is entitled to recover costs on appeal.
I concur: MALLANO, P. J.
ROTHSCHILD, J., Dissenting.
The appellant bears the burden of providing us with a record sufficient to show both error and prejudice. (Rancho Santa Fe Assn. v. Dolan-King (2004) 115 Cal.App.4th 28, 46.) The trial court found as a matter of fact that defendants did not waive their right to arbitrate. As the majority acknowledges, we review that factual finding under the substantial evidence standard. (Zamora v. Lehman (2010) 186 Cal.App.4th 1, 12.) Because the record before us fails to establish that the trial court’s finding is not supported by substantial evidence, I would affirm.
“[A] waiver generally does not occur where the arbitrable issues have not been litigated to judgment.” (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1201 [hereafter St. Agnes].) Moreover, “‘“[w]aiver does not occur by mere participation in litigation”’ if there has been no judicial litigation of the merits of arbitrable issues, [but] ‘“‘waiver could occur prior to a judgment on the merits if prejudice could be demonstrated.’”’ [Citation.]” (St. Agnes, supra, 31 Cal.4th at p. 1203.) Knight does not contend (and the majority does not hold) that the merits of arbitrable issues were judicially litigated before defendants moved to compel arbitration, so Knight’s waiver argument depends entirely on her showing of prejudice. In addition, “[b]ecause merely participating in litigation, by itself, does not result in a waiver, courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses. [Citations.]” (Ibid.)
Under the foregoing standard, Knight cannot establish waiver by showing that the parties vigorously litigated the case for seven and one-half months, participated in court-ordered mediation, filed pleadings and cross-pleadings, and incurred court costs and legal expenses in the process. “[M]erely participating in litigation, by itself, does not result in a waiver, ” and “courts will not find prejudice where the party opposing arbitration shows only that it incurred court costs and legal expenses.” (St. Agnes, supra, 31 Cal.4th at p. 1203.)
The only other possible basis for Knight’s waiver argument is discovery. Again, the burden and expense of responding to the discovery propounded by defendants does not show waiver. (See St. Agnes, supra, 31 Cal.4th at pp. 1203, 1205.) Knight could, however, establish waiver by showing that defendants “used the judicial discovery processes to gain [valuable] information about [Knight’s] case that could not have been gained in arbitration.” (Id. at p. 1204.) But Knight has not made that showing. She argues that defendants propounded types and quantities of discovery that would not have been permitted in arbitration, and that may be true. But that does not show they gained information about her case, let alone useful information, as a result of those discovery efforts. The record does not contain Knight’s discovery responses, so we have no idea what information defendants gained about Knight’s case. Nor is Knight’s description of the types and quantities of discovery propounded by defendants sufficient, on its own, to show prejudice.