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COA Issues Significant Arbitration Waiver Decision

By Sean E. Andrussier

Today the Court of Appeals (COA) issued a significant arbitration decision: the Court held that if a defendant loses a motion to compel arbitration, the defendant's failure to take an immediate interlocutory appeal may result in a waiver of the right to arbitration. The case is Gemini Drilling & Foundation, LLC v. Nat'l Fire Ins. Co. of Hartford.

Generally interlocutory orders aren't immediately appealable. An established exception, however, concerns an order denying a motion to compel arbitration. It's immediately appealable. Yet, even when an interlocutory order is immediately appealable, that doesn't mean it must be appealed immediately. Rather, it means the loser has the option to appeal immediately, or to defer the appeal until after the final judgment has issued.

That's what the defendant did in today's case. After losing its motion to compel arbitration, it decided to litigate and to wait to appeal until after a final judgment was entered against it on the merits. Then, on appeal, it contended that the trial court erred in denying the motion to compel arbitration. By failing to take the immediate appeal and instead litigating the case in court, the defendant waived its right to arbitrate the dispute, the COA held. Here's the relevant part of the COA's analysis:

"[A]fter Judge Jolly denied defendant's motion to compel arbitration, defendant actively litigated this dispute by seeking multiple extensions, engaging in discovery, and participating in a full bench trial. Plaintiff has been prejudiced by defendant's conduct: Plaintiff engaged in a trial that, although it occurred in a single day, was long enough to produce a 189-page transcript, twenty-seven exhibits, and five witnesses. Defendant delayed this trial through its requests for extensions, and the trial concluded fourteen months after Judge Jolly's denial of the motion to compel arbitration and twenty-three months after plaintiff filed its initial claim. Now, three years have passed since Judge Jolly entered his order and four since plaintiff filed this suit." Quoting the Second Circuit, the COA said that the objectives of the Federal Arbitration Act "would be defeated if a party could reserve its right to appeal an interlocutory order denying arbitration, allow the substantive lawsuit to run its course (which could take years), and then, if dissatisfied with the result, seek to enforce the right to arbitration on appeal from the final judgment."

The COA cautioned that it wasn't holding categorically that a defendant must immediately appeal such an interlocutory order to avoid a finding of waiver. "The determination arose from defendant's conduct and plaintiff's resulting prejudice, not merely from defendant's failure to immediately appeal Judge Jolly's order," the COA stressed. But the COA's analysis raises the risk of waiver in most cases in which a trial court denies a motion to compel arbitration. After all, if the defendant doesn't immediately appeal, the defendant will end up participating in the litigation in court--conducting discovery, filing motions, etc.--and thus will be subject to the type of waiver analysis applied by the COA today.

Hence the cautionary rule of today's case: if you lose a motion to compel arbitration, appeal immediately.

Full post as published by North Carolina Appellate Blog on September 02, 2008 (boomark / email).