Class Action Defendant Waived Right To Compel Arbitration After Class Action Certification

You probably remember the earlier opinion in Elliott v. KB Home, Inc., in which Judge Jolly certified a class action against the homebuilder KB Home over the improper installation of HardiePlank siding.

Last week, the Business Court ruled in another opinion in the case (2012 NCBC 55) that KB Home had waived its right to seek arbitration of those claims.  The waiver resulted from KB Homes'  delay in asserting its arbitration rights and the expense incurred by the Plaintiffs in litigating in court.

The standard for waiver was set out by the North Carolina Supreme Court in Servomation Corp. v. Hickory Constr. Co., 316 N.C. 543, 544 (1986).  Waiver of the right to compel arbitration occurs when the party with the arbitration right "acts inconsistently with arbitration, and the party opposing arbitration can show it has been prejudiced as a result."  Op. 35.

As for prejudice, that results: 

if [the plaintiff] [a] is forced to bear the expense of a long trial, [b] it loses helpful evidence, [c] it takes steps in litigation to its detriment or expends significant amounts of money on the litigation, or [d] its opponent makes use of judicial discovery procedures not available in arbitration.

Op. 35 (quoting Servomation Corp., supra, at 544).

The Plaintiffs in the KB Homes case had incurred fees and expenses of approximately $100,000 in litigating their claim by participating in four hearings and taking twenty depositions.  Judge Jolly said that:

KB Home's delayed attempt to enforce the arbitration provisions only after Plaintiffs have expended material amounts of time and resources in pursuing their Claims would be prejudicial to Plaintiffs.  Such time and resources were expended after KB Home's right to arbitrate accrued and could have been avoided through an earlier demand for arbitration. KB Home could have demanded arbitration as early as 2008, well before the named Plaintiffs actively litigated the Claims. Permitting KB Home to enforce its arbitration rights now would be inconsistent with the principles of waiver outlined in Servomation.

Op. 39.

The interesting issue from a class action perspective was whether the waiver of the right to arbitration ran to the unnamed class members.  KB Homes said that it couldn't have asserted its arbitration rights against the unnamed class members until the class was certified and that it hadn't delayed in moving to compel arbitration as to them.  

Judge Jolly rejected that argument, saying that it reeked of "gamesmanship."  Op. 41 & n.37.  He ruled that  ruling otherwise would give the Defendant a "second bite at the apple" chance to relitigate the class certification decision with the unnamed plaintiffs.  He relied on an unpublished decision on the point, Kingsbury v. U.S. Greenfiber, 2012 U.S. Dist. LEXIS 94854 (C.D. Cal. 2012).  In Kingsbury, the court stated:

[T]o accept [defendant's arguments and compel arbitration] would be to condone gamesmanship in the class certification process. A defendant could wait in the weeds and delay asserting its arbitration rights. It could file motions to dismiss, litigate the named plaintiff's legal theories, and oppose class certification motions. If and when a class is finally certified, the defendant could simply assert its arbitration rights and defeat certification of the previously-certified class. In the interests of the fair and efficient administration of justice, the Court cannot accept [defendant's] position.

The Business Court adopted the Kingsbury holding "for the same considerations of fairness and the efficient administration of justice."  Op. 41 & n.37.

This isn't the first time that the Business Court has considered a waiver of arbitration issue. Judge Tennille did so ten years ago, in  Polo Ralph Lauren Corp. v. Gulf Insurance Co., 2001 NCBC 3 (N.C. Super. Ct. Jan. 31, 2001) and found that a party had not waived its right to arbitration by pursuing discovery in the court proceeding.

 

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