Arbitration — Circuit Split as to Whether Party Asserting Waiver of Right to Arbitrate Must Show Prejudice

From Erdman Co. v. Phoenix Land & Acquisition, LLC, 650 F.3d 1115 (8th Cir. 2011):

[A]rty may waive its contractual right to arbitrate. See Lewallen, 487 F.3d at 1090. Although the issue of waiver arises under a variety of arbitration agreements and in a variety of procedural settings, we apply a uniform three-factor test in determining whether a party has waived its right to arbitration, finding waiver when the party seeking arbitration "(1) knew of its existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by its inconsistent actions." Hooper v. Advance Am., Cash Advance Ctrs. of Mo., Inc., 589 F.3d 917, 920 (8th Cir. 2009) (quotation omitted). ***

The third factor, prejudice to the party opposing arbitration, is the most controversial. There is a circuit split over whether the party asserting waiver must show prejudice. See Hooper, 589 F.3d at 923 n.8. The Supreme Court in the Term just ended granted a petition for a writ of certiorari presenting the question

Under the Federal Arbitration Act ("FAA"), should a party be required to demonstrate prejudice after the opposing party waived its contractual right to arbitrate by participating in litigation, in order for such waiver to be binding and irrevocable?

Stok & Assocs., P.A. v. Citibank, N.A., 131 S. Ct. 1556, 179 L. Ed. 2d 299 (2011). However, that case was dismissed by agreement of the parties, 131 S. Ct. 2955, 180 L. Ed. 2d 243 (2011), so the prejudice issue remains unsettled.

Although we apply the prejudice requirement even when the party who belatedly seeks to arbitrate commenced the litigation, "[w]hether inconsistent actions constitute prejudice is determined on a case-by-case basis." Stifel, Nicolaus & Co., Inc. v. Freeman, 924 F.2d 157, 159 (8th Cir. 1991). "The prejudice threshold . . . is not onerous." Hooper, 589 F.3d at 923, quoting Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995) ("Other courts require evidence of prejudice -- but not much.").

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