Arizona Court of Appeals Clarifies Law Governing Arbitration Waiver

By Lindsay Short

In Security Alarm Financing Enterprises, L.P. v. Fuller, et al., Case No. 1 CA-CV 16-0255 (Ariz. Ct. App. July 6, 2017), the Arizona Court of Appeals recently held as a matter of first impression that Arizona state courts will interpret federal law, rather than state law, to determine whether a party has waived its right to arbitration under the Federal Arbitration Act, 9 U.S.C. §§1-16 (“FAA”). The most significant impact moving forward is that under federal law, Arizona courts will look to whether the party seeking to avoid arbitration can make a showing of prejudice by the arbitration seeker.

In the underlying case, the Maricopa County Superior Court denied Appellants’ Motion to Dismiss, finding that they had waived the ability to compel arbitration. The Appellants had signed arbitration agreements governed by the FAA, but their Answer did not raise the arbitration agreements as an affirmative defense. Twenty-nine days after filing their Answer, however, Appellants’ counsel raised the existence of the agreements for the first time. One month later, Appellants then moved to dismiss the Complaint and compel arbitration. The lower court determined that right waived. The Court of Appeals accepted jurisdiction as a “petition for special action”—invoked “when a party has no ‘equally plain, speedy, and adequate remedy by appeal,’ Arizona Rule of Procedure for Special Actions 1(a), and in cases involving a matter of statewide significance, or pure questions of law.”¹

The Court exercised its special action jurisdiction to determine whether Arizona law or federal law governs waiver of the right to arbitrate under the FAA. The analysis differs depending on the applicable law. Whereas Arizona law holds that a party waives the right to compel arbitration if not set forth in an Answer or pre-Answer Motion to Dismiss, federal law provides additional considerations.

The Court of Appeals concluded that federal law principles should guide the FAA waiver determination, according to § 3 of the FAA. Moving forward, Arizona courts will apply the Ninth Circuit Court of Appeals’ rule that “waiver of a right to arbitration under 9 U.S.C. § 3 requires a showing of ‘(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts.’”²  In this case, the court emphasized that there was “no showing” of prejudice by Appellants’ failure to cite the arbitration agreements in their Answer or subsequent delay.

Moving forward, defendants in Arizona courts should still consider raising the right to arbitrate in their initial filing as a best practice. If not there, though, parties should endeavor to create no prejudice through delays in invoking an arbitration agreement.