Eighth Circuit nixes ‘no harm, no foul’ in arbitration cases

Earlier this month, the Eighth Circuit Court of Appeals revised the applicable analysis regarding when a party waives their right to arbitration. Arbitration clauses have long been critical components of commercial contracts, offering companies protection by resolving disputes through an expedited arbitration process rather than in court.

However, courts have often held that the right to arbitration may be waived under certain circumstances. The appellate court reaffirmed this principle and further simplified the test for waiver, potentially making it easier for courts to determine that companies have waived their right to arbitration.

In re Pawn America Consumer Data Breach Litigation, three nationwide class action consumer lawsuits arose after a chain of pawnshops, a payday lender and a prepaid card company were hit by cybercriminals. The defendants initially moved to dismiss the cases on various threshold issues. They did not, however, simultaneously move to compel arbitration.

After fully briefing the motion to dismiss, the defendants then engaged in preliminary litigation work, including preparing a joint discovery plan, requesting and participating in a pretrial conference and requesting a stay of discovery while the motion to dismiss was under consideration. Only months later, the defendants moved to compel arbitration, by which time the consumer plaintiffs argued that the right to arbitration had been waived.

The appellate court sided with the consumer plaintiffs, and in doing so, reworked the prior framework applicable to a waiver analysis. Previously, federal courts in Arkansas had to analyze whether the party seeking arbitration knew of the right to arbitrate, acted inconsistently with that right and prejudiced the opposing party by a delay in seeking arbitration.

Relying on a recent U.S. Supreme Court case, the appellate court determined that courts may no longer consider prejudice to the other party when determining whether a waiver occurred. Instead, the only two relevant considerations are whether the party seeking arbitration knew of the right to arbitrate and acted inconsistently with that right. Based on this truncated test, the appellate court held that the defendants had indeed waived their right to arbitration, regardless of whether the delay resulted in any harm to the consumer plaintiffs.

The court’s decision has significant ramifications for how businesses and their counsel approach litigation strategies for disputes governed by arbitration provisions. Before this holding, courts had more leeway to excuse a delay in seeking arbitration because they could consider if the delay caused any prejudice to the other party.

The prejudice analysis often favored the party seeking arbitration, as requests for arbitration are most often made in the very early stages of a case. That leeway is no longer available. Now, a party seeking arbitration must raise it at the earliest opportunity or risk waiver, even during the initial and routine litigation activities such as filing motions to dismiss or attending preliminary hearings.

The appellate court has made it clear: Litigants must act swiftly to preserve the right to arbitration. Litigants need to consider the following:
• Act promptly: Litigants must act promptly to compel arbitration. Delay can result in waiver.
• Avoid inconsistent actions: Ensure that all actions taken during litigation are consistent with the intention to arbitrate. Any actions that can be interpreted as engaging in the litigation process can result in waiver.
• Update litigation strategies: Businesses and their counsel need to ensure timely pursuit of arbitration.

These principles can help businesses and their legal teams better navigate the revised framework for arbitration waiver and protect their right to arbitration more effectively.

Editor’s note: Bourgon Reynolds is the managing member of the Rose Law Firm’s Northwest Arkansas office in Rogers. The opinions expressed are those of the author.