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Court finds company litigated too long to enforce arbitration

The 8th U.S. Circuit Court of Appeals ruled Sept. 10 that it’s the job of the courts, not an arbitrator, to decide if a defendant litigated a case too long before seeking arbitration.

The federal appeals court said the defendant in a class-action lawsuit waived its right to enforce an arbitration clause by litigating the case for nearly a year in federal court.

“A party cannot keep a contractual right to arbitration in its back pocket and pull it out only when it is ready for a ‘do over,’” Judge David R. Stras wrote.

The case stems from a lawsuit filed in April 2019 in the U.S. District Court for the Western District of Missouri alleging that various real-estate entities engaged in anti-competitive practices. One defendant, HomeServices of America Inc., which is a parent company of Reece & Nichols, took part in the case “aggressively,” Stras wrote, joining motions to dismiss, seeking transfer to another court and other actions.

Then in February 2020 — 305 days after the suit was filed — HomeServices sought to compel arbitration, based on a contract the plaintiff home sellers had signed. The district court, however, said the company had waived its right by litigating the case so long.

The issue was whether the judge should have decided that issue, or whether it was up to the arbitrator to make the call. Such questions often arise in litigation seeking to enforce arbitration. For instance, in 2018 the Missouri Supreme Court ruled in Soars v. Easter Seals Midwest that an arbitration agreement can delegate to the arbitrator the power to decide if the arbitration agreement itself is valid.

Stras framed the case as one of clarification, rather than making new law. In a 1976 case, N&D Fashions Inc. v. DHJ Industries Inc., the 8th Circuit had said that a waiver of arbitration through “default,” such as active participation in the lawsuit, should be determined by the courts. In contrast, issues involving “conditions precedent” to arbitration, such as time limits or proper notice, should be addressed by the arbitrator because it had more expertise with its own rules.

Stras said “we have not spoken with absolute clarity” on the issue, pointing to a 2003 case, National American Insurance Company v. Transamerica Occidental Life Insurance Company,  that had appeared to take a different approach by allowing the arbitrator to decide whether action “in the Oklahoma courts” had waived arbitration.

Stras said the reference appeared to be mistaken, as the alleged waiver had to do with a prior arbitration, not litigation. At any rate, he added, the 1976 case came first and couldn’t be overruled by the later opinion. Chief Judge Lavenski R. Smith and Judge Morris S. Arnold concurred.

The case is Sitzer v. National Association of Realtors et al., 20-1779.