GOETHALS, J.
James Welch appeals from an order denying his motion to compel arbitration of a lawsuit filed against him by his former employer, Masimo Corporation. The trial court concluded that although the parties had entered into a valid arbitration agreement, Welch waived his right to enforce it by litigating Masimo's claims in court for over three and a half years, and then filing his petition to compel arbitration less than three weeks before the trial date.
Welch claims the court erred in concluding he waived his right to arbitrate and contends that because the facts of the underlying litigation are undisputed, we must review that conclusion de novo and reverse it based on our independent evaluation of the evidence. Welch argues that when the evidence is properly considered, it demonstrates that his delay in seeking arbitration was "not unreasonable and did not result in prejudice to Masimo."
We disagree. Waiver is an issue of fact, and our review would be de novo only if all the facts were undisputed and there were no conflicting inferences to be drawn from them. That does not describe this case. A nearly four-year period of intense litigation provided the trial court with a rich source of conflicting inferences to consider in reaching its decision. Chief among the disputed points were whether Welch's delay in seeking to compel arbitration was unreasonable—and perhaps even strategic—and whether, as a consequence, Masimo was prejudiced by that delay.
We apply the substantial evidence standard of review to such disputed issues. Under that standard, we are required to view the evidence in the light most favorable to the trial court's order and draw all available inferences in support of it. When we do that, it is clear the evidence is sufficient to uphold the trial court's ruling. We consequently affirm the order.
Masimo hired Welch in 2005, for the position of Vice President of Systems Engineering. In connection with that employment, Masimo and Welch entered into a stand-alone arbitration agreement specifying the parties would resolve disputes arising between them "by final and binding arbitration through the American Arbitration Association, or such other neutral arbitrator as [they] may select by mutual agreement." The agreement further provided that "[b]oth parties shall have the right to conduct reasonable discovery in the arbitration, as well as any discovery allowed by the arbitrator." Moreover, the agreement gives the arbitrator "full authority to award all relief available in a court of law, including but not limited to compensatory and punitive damages, costs and attorneys fees. The arbitrator shall render a written decision, which shall be subject to review in the courts to the extent allowed by law."
In September 2011, Welch left his employment with Masimo and took the position of Vice President of Clinical Engineering and Patient Safety at Sotera Wireless, Inc. Approximately a year and a half later, in May 2013, Masimo filed a lawsuit against Welch, Sotera, and one other defendant.
Welch, who was initially represented in the lawsuit by the same counsel representing Sotera, did not respond to the complaint by demanding arbitration. Instead, he successfully demurred to some of the causes of action alleged against him, and also moved to strike portions of the complaint which alleged Masimo's entitlement to equitable remedies and punitive damages. When Welch later answered Masimo's amended complaint, he failed to allege his entitlement to arbitrate as an affirmative defense.
Welch actively participated in discovery, serving interrogatories, requests for production of documents, and requests for admissions on Masimo. In one of its early responses to Welch's discovery, only five months after the complaint was filed, Masimo produced a copy of his arbitration agreement. Welch also took the deposition of a Masimo representative on the subject of its trade secrets, and later served notice of the deposition of an expert witness retained by Masimo. Although the case had originally been set for trial in June 2014, it was thereafter repeatedly continued due to the lengthy pleading and contentious discovery proceedings. In March 2016, Welch terminated his shared counsel relationship with Sotera and substituted in new counsel to represent him exclusively.
In September 2016, Sotera filed for bankruptcy. Welch thereafter filed an ex parte application for an order staying the case against him in light of the bankruptcy, or in the alternative, for an order continuing the existing trial date. Although the trial court acknowledged a bankruptcy stay was in existence with respect to Sotera, it denied Welch's request to also stay the proceedings against him personally. However, the court did order the trial date continued to February 14, as to both Welch and the other individual defendant.
In November 2016, Welch removed the case to the Federal Court; that court then transferred the case to the Bankruptcy Court where Sotera's bankruptcy case was pending. At about that same time, Welch again substituted new counsel to represent him.
In January 2017, the Bankruptcy Court remanded the case back to the state trial court. Following the remand, Masimo filed an ex parte application requesting the court set a trial date against Welch and his remaining co-defendant. In its motion, Masimo argued that Welch had engaged in a lengthy and sustained effort to delay the trial by any available means.
On January 13, 2017, during the hearing on Masimo's motion, Welch's counsel informed the trial court, for the first time, that Welch intended to file a motion to compel arbitration. As he explained to the court, "we recently found out that there is a binding arbitration agreement." The court responded skeptically, noting the case had been going on "a long time, so don't hold your breath on that one. We'll see what you come up with." Welch's counsel then suggested Welch had no stake in the court's decision to set a trial date because "[e]ither the court is going to compel arbitration or it's not. [¶] If the court does [not] compel arbitration, then we're going to appeal that order. And if the court does compel arbitration, then we're going to be pretty much out of this and not [in] the court's hair any more." At the conclusion of the hearing, the court ruled that it would keep the February 14 trial date on calendar.
On January 27, 2017—two weeks after the ex parte hearing, and less than three weeks before the scheduled February 14 trial date—Welch filed his petition to compel arbitration. Then, on February 8, 2017, he moved ex parte for an order staying the proceedings and continuing the trial date so his petition to compel arbitration could be resolved prior to trial. The court granted the requested stay and continued the trial date to June 5, 2017.
After considering Welch's petition to compel on the merits, the trial court denied it. The court found that although the parties had entered into a valid arbitration agreement, Welch had waived his right to enforce it in this case. In its order, the court explained its reasoning in detail, noting Welch's extensive participation in the litigation process was "inconsistent with the right to arbitrate." The court pointed out "Welch filed his petition to compel arbitration just 2.5 weeks before the previously set trial date of February 14, 2017. . . . 3 years and 8 months [after] the filing of the lawsuit; [and] 3 years and 3 months [after] plaintiff produced the arbitration agreement in discovery." The court also noted that "[a]lthough Welch argues that he did not become aware of the arbitration agreement until his current counsel brought it to his attention in 2016, case law holds that he had knowledge of his right to arbitrate from the moment he signed the agreement."
The court also found that Welch's delay in seeking arbitration was prejudicial: "Welch's delay has prejudiced plaintiff by depriving plaintiff of the benefits of arbitration. The parties have engaged in over three years of litigation, including discovery disputes, attacks on the pleadings, and a removal to federal court."
The public policy favoring arbitration means a claim of waiver is entitled to "close judicial scrutiny" and the "party seeking to establish a waiver bears a heavy burden" (St. Agnes Medical Center v. PacifiCare of California (2003) 31 Cal.4th 1187, 1195 (St. Agnes).) That heightened burden "guide[s] the trial court's determination, but do[es] not alter the standard of review on appeal." (Burton v. Cruise (2010) 190 Cal.App.4th 939, 946 (Burton).)
Instead, because `"[t]he question of waiver is one of fact"' (Berman v. Health Net (2000) 80 Cal.App.4th 1359, 1363), we review the court's ruling under the substantial evidence test. As this court has explained, that means "[t]he trial court's `determination of this factual issue, "`if supported by substantial evidence, is binding on an appellate court.'"" (Lewis v. Fletcher Jones Motor Cars, Inc. (2012) 205 Cal.App.4th 436, 443.) Thus, "[o]nly "`in cases where the record before the trial court establishes a lack of waiver as a matter of law, [may] the appellate court . . . reverse a finding of waiver made by the trial court.'"" (Ibid., italics added.)
The substantial evidence test places a heavy burden on the appellant. "`A party who challenges the sufficiency of the evidence to support a particular finding must summarize the evidence on that point, favorable and unfavorable, and show how and why it is insufficient. [Citation.]' [Citation.] Where a party presents only facts and inferences favorable to his or her position, `the contention that the findings are not supported by substantial evidence may be deemed waived.'" (Schmidlin v. City of Palo Alto (2007) 157 Cal.App.4th 728, 738.)
In this case, Welch attempts to avoid the substantial evidence test by claiming "[t]his is a case appropriate for de novo review [because] there were no disputed material facts in contention in the arbitration debate below." Among other things, he claims "there was no dispute before the trial court regarding the circumstances that led to [his discovery] of the arbitration agreement so late in the proceedings."
Referring to St. Agnes in his opening brief, Welch properly concedes it is only "`when the facts are undisputed and only one inference may reasonably be drawn, [that] the issue is one of law and the reviewing court is not bound by the trial court's ruling.'" (Italics added.) Moreover, it is well settled that "[t]he trier of fact may accept circumstantial evidence . . . as proof of an ultimate fact, and reject direct evidence to the contrary." (Casetta v. United States Rubber Co. (1968) 260 Cal.App.2d. 792, 807.)
Given the length and complexity of the litigation leading up to Welch's petition to compel arbitration, the trial court was not obligated to accept Welch's depiction of the circumstances surrounding his "discovery of the arbitration agreement" just because Masimo was not in a position to directly contradict him. Instead, the court was free to draw any reasonable inference supported by the evidence. We consequently reject Welch's assertion that de novo review is appropriate and instead apply the substantial evidence standard of review to his claims of error.
In St. Agnes, our Supreme Court set forth several factors to be considered in assessing whether a contractual right to arbitrate has been waived, including "`"whether `the litigation machinery has been substantially invoked' and the parties `were well into preparation of a lawsuit' before the party notified the opposing party of an intent to arbitrate; . . . `whether important intervening steps, [e.g., taking advantage of judicial discovery procedures not available in arbitration] had taken place'; and . . . whether the delay `affected, misled, or prejudiced' the opposing party."'" (St. Agnes, supra, 31 Cal.4th at p. 1196.)
However, as the Supreme Court made clear, it is not sufficient for the party opposing arbitration to simply show that one or more of the factors is present. Instead, a determination of "prejudice . . . is critical in waiver determinations." (St. Agnes, supra, 31 Cal.4th at p. 1203.) And "[p]rejudice typically is found only where the petitioning party's conduct has substantially undermined this important public policy or substantially impaired the other side's ability to take advantage of the benefits and efficiencies of arbitration. [¶] For example, courts have found prejudice where the petitioning party used the judicial discovery processes to gain information about the other side's case that could not have been gained in arbitration [citations]; where a party unduly delayed and waited until the eve of trial to seek arbitration [citation]; or where the lengthy nature of the delays associated with the petitioning party's attempts to litigate resulted in lost evidence [citation]." (Id. at p. 1204.)
In St. Agnes, the Supreme Court noted there was no evidence "that the parties have litigated the merits or the substance of Saint Agnes's arbitrable claims, or that any discovery of those claims has occurred. Nor [was] there any . . . claim that [the respondent's] actions have impaired Saint Agnes's ability to have the arbitrable disputes in this action resolved fairly through arbitration." (St. Agnes, supra, 31 Cal.4th at p. 1204.) Based on that straightforward record, the court found no waiver had occurred.
However, in the wake of St. Agnes, several courts, including this one, have held that a party's unreasonable delay in seeking arbitration—a concern not present in St. Agnes itself—can result in prejudice where it "depriv[ed] the other party of the advantages of arbitration as an `expedient, efficient and cost-effective method to resolve disputes.'" (Burton, supra, 190 Cal.App.4th at p. 948.) As this court noted, "[a]rbitration loses much, if not all, of its value if undue time and money is lost in the litigation process preceding a last-minute petition to compel." (Ibid.; see Lewis v. Fletcher Jones Motor Cars, Inc., supra, 205 Cal.App.4th 436, 446 ["As the party seeking to compel arbitration, Fletcher Jones `had the responsibility to "timely seek relief either to compel arbitration or dispose of the lawsuit, before the parties and the court have wasted valuable resources on ordinary litigation""']; Adolph v. Coastal Auto Sales, Inc. (2010) 184 Cal.App.4th 1443, 1452 [California's "strong public policy in favor of arbitration . . . is founded upon the notion that arbitration is a `"`speedy and relatively inexpensive means of dispute resolution.'"' [Citation.] That goal was frustrated by defendant's conduct"].)
Additionally, "`the "bad faith" or "willful misconduct" of a party may constitute a waiver and thus justify a refusal to compel arbitration.'" (Engalla v. Permanente Medical Group, Inc. (1997) 15 Cal.4th 951, 983.) As this court has explained, courts "are loathe to condone conduct by which a defendant repeatedly uses the court proceedings for its own purposes (challenging the pleadings with demurrers) while steadfastly remaining uncooperative with a plaintiff who wishes to use the court proceedings for its purposes (taking depositions), all the while not breathing a word about . . . a desire to pursue arbitration." (Adolph v. Coastal Auto Sales, supra, 184 Cal.App.4th at p. 1452.)
With this legal framework in mind, we consider whether the evidence was sufficient to support the trial court's finding of waiver.
As Welch acknowledges, the trial court's finding of waiver was based largely on his "delay in moving to compel arbitration." However, he argues the court's reliance on that factor was erroneous based on "the record as a whole and the unique circumstances of this case"—which purportedly demonstrate his "reasons for the delay were not tactical." Instead, Welch asserts it is undisputed that "the first time that [he] was aware . . . arbitration was a possibility was in December 2016 when . . . his current counsel . . . informed [him] of the binding arbitration agreement and its implications." The trial court rejected this assertion, and we find no error in that determination.
Even assuming Welch's delay in seeking arbitration was not "tactical," it was nonetheless unreasonable. Welch's arbitration agreement was a stand-alone agreement—not an obscure clause buried in an agreement addressing other topics—and he admits he personally signed it. He is consequently presumed to know it exists, and what it says. "`Generally, one who assents to a writing is presumed to know its contents. . . .'" (Stewart v. Preston Pipeline Inc. (2005) 134 Cal.App.4th 1565, 1589.) And "`in the absence of fraud, overreaching or excusable neglect, . . . one who signs an instrument may not avoid the impact of its terms on the ground that he failed to read the instrument before signing it.'" (Id. at p. 1588.) Consistent with those principles, the trial court relied on Zamora v. Lehman (2010) 186 Cal.App.4th 1, 18 (Zamora), for the proposition that a defendant's "failure to remember [the] arbitration provision does not preclude a finding of waiver . . . [because] courts do not take a defendant's forgetfulness into account."
Welch argues the court "misapplied Zamora" because as he points out, the appellate court in Zamora reversed the finding of waiver as to one of the three defendants who "forgot that their employment agreements contained an arbitration provision." Therefore, according to Welch, "[t]he Zamora case shows a petitioner is not precluded from compelling arbitration even though [he] forgets to having signed an arbitration agreement."
That argument is accurate as far as it goes. It is true Zamora does not automatically preclude a petitioner from enforcing his arbitration agreement just because he claims to have forgotten about it for some significant period of time. But, as Zamora discusses, a critical issue in assessing waiver is whether the unreasonable delay in asserting the right was filled with litigation activity. In Zamora, the court observed that the two defendants whose waivers were affirmed had taken advantage of their delay to "serve[] Zamora with extensive discovery" (Zamora, supra, 186 Cal.App.4th at p. 18). And "`[t]hrough [their] delay . . . [Zamora] has lost whatever efficiencies that would otherwise have been available to [her] through arbitration.'" (Id. at p. 19.) This echoes the trial court's finding here.
By contrast, the Zamora court noted that the third defendant (whose request to arbitrate was granted) "did not waive the right to arbitrate because he attempted to settle the action and participated in an insignificant amount of discovery initiated by other parties." (Zamora, supra, 186 Cal.App.4th at p. 19.) Given that distinction, we find no error in the trial court's reliance on Zamora for the proposition that a party's forgetfulness about his right to compel arbitration does not preclude a finding that he waived the right.
We also reject Welch's attempt to lay the blame for his delay on his prior attorneys. For purposes of this litigation, Welch is charged with the knowledge of the attorneys who represented him. (Lazzarevich v. Lazzarevich (1952) 39 Cal.2d 48, 50 ["Ordinarily a person is held to know what his attorney knows"]; Estate of Cantor (1974) 39 Cal.App.3d 544, 549 ["The law imputes knowledge of the agent (Edward's attorney) to the principal (Edward)"].) Thus, if Welch's original attorneys were aware of the arbitration agreement—as we must infer they were because the agreement was produced in discovery—then Welch is deemed to have known of it as well.
Because the evidence was sufficient to support the trial court's determination that Welch's lengthy delay in seeking to compel arbitration was unreasonable and unjustified, we reject his claim of error on that point.
Welch also contends the court erred in concluding his delay in seeking arbitration was prejudicial. He claims the court reached that conclusion "without any independent analysis [of] the facts," and suggests the court was "blinded by the passage of time between the commencement of Masimo's lawsuit and the filing of [his] petition to compel . . . over three years later." We reject this contention as well. Contrary to Welch's argument, the trial court made clear it was focused not only on the passage of time, but also on what happened during that time.
In the nearly four-year period between the date this case was filed in the trial court, and the date Welch filed his petition to compel arbitration, the parties engaged in extensive litigation. The trial court's register of actions runs 125 pages, and it includes more than 1,000 entries.
Such extensive litigation, when accompanied by "an egregious delay" in seeking arbitration (Burton, supra, 190 Cal.App.4th at p. 947), constitutes prejudice. As our Supreme Court has succinctly stated: "`[t]he courtroom may not be used as a convenient vestibule to the arbitration hall so as to allow a party to create his own unique structure combining litigation and arbitration.'" (Christensen v. Dewor Developments (1983) 33 Cal.3d 778, 784.)
Welch argues that no such prejudice can be inferred in this case because the parties' arbitration agreement provided for "reasonable discovery." He relies on Iskanian v. CLS Transportation Los Angeles, LLC (2014) 59 Cal.4th 348, 378 (Iskanian), in which the Supreme Court concluded that in light of a similar provision, "there is no indication [the defendant] obtained any material information through pretrial discovery that it could not have obtained through arbitral discovery."
Iskanian is distinguishable, however, because in that case, the Supreme Court explicitly concluded the delay in seeking arbitration was not unreasonable. Indeed, Iskanian expressly distinguished the cases, including Burton, which held that prejudice could be inferred from the effects of the moving party's unjustified delay. As the Supreme Court explained, "In each of [those cases], substantial expense and delay were caused by the unreasonable or unjustified conduct of the party seeking arbitration. In this case, the delay was reasonable in light of the state of the law at the time and Iskanian's own opposition to arbitration." (Iskanian, supra, 59 Cal.4th at p. 377.)
We also reject Welch's contention that his filing of demurrers and a motion to strike were not inconsistent with his right to arbitrate because "[c]hallenges to the legal sufficiency of allegations can be made in arbitration proceedings." In support of that assertion, Welch cites "American Arbitration Association Employment Rule 27, which provides, `the arbitrator may allow the filing of a dispositive motion" under certain circumstances.'"
However, nothing in this arbitration agreement requires the arbitrator to apply California law—or any other body of law—to any arbitration proceedings in this case. And in the absence of such a requirement, the arbitrator would be free to disregard any challenge to the "legal sufficiency" of the complaint. "Arbitrators, unless specifically restricted by the agreement to following legal rules, `"may base their decision upon broad principles of justice and equity. . . ." [Citations.] As early as 1852, [the Supreme Court] recognized that, "The arbitrators are not bound to award on principles of dry law, but may decide on principles of equity and good conscience, and make their award ex aequo et bono [according to what is just and good]." [Citation.]'" (Advanced Micro Devices, Inc. v. Intel Corp. (1994) 9 Cal.4th 362, 374-375; see also Moncharsh v. Heily & Blase (1992) 3 Cal.4th 1, 11 ["an arbitrator is not ordinarily constrained to decide according to the rule of law"].)
Thus, Welch's effort to strictly enforce California law with respect to Masimo's pleadings is inconsistent with his later decision to submit the dispute to arbitration. (See Lewis v. Fletcher Jones Motor Cars, Inc., supra, 205 Cal.App.4th at p. 450 ["Fletcher Jones fails to recognize it engaged in actual litigation of the merits by filing its demurrers challenging Lewis's claims"].)
We consequently conclude substantial evidence supports the trial court's determination Masimo was prejudiced by Welch's unreasonable delay in seeking to compel arbitration.
Finally, even if the evidence were insufficient to demonstrate that Welch's delay in seeking arbitration was unjustified, and that Masimo was prejudiced as a consequence, we would nonetheless affirm the trial court's finding of waiver based on our conclusion that substantial evidence supports a finding that Welch's invocation of his right to arbitrate, on the eve of trial, was in bad faith—i.e., that it was born of his desire to force another delay of trial, rather than actually engage in an arbitration of Masimo's claims. Welch would certainly not be the first defendant to conceive of such a tactic. (See, e.g., Diaz v. Professional Community Management, Inc. (2017) 16 Cal.App.5th 1190 [concluding that the defendant's last-minute assertion of the right to arbitrate was part of a bad faith effort to unilaterally derail the scheduled trial.)
In this case, the inference of bad faith is supported by the evidence of Welch's repeated efforts to delay the trial over the course of the litigation, including his removal of the action to Federal Court and his unsuccessful request for an order staying the proceedings against him. It was only after all of those other options had been exhausted that Welch launched his eleventh-hour effort to enforce the arbitration agreement.
This inference of bad faith is also supported by the statements of Welch's counsel, who informed the trial court, a month before trial, that he not only planned to file the petition to compel arbitration, but he also planned to appeal any adverse ruling on that petition—a decision he reached without any apparent regard for what the merits of that theoretical ruling might be. As Welch's counsel explained to the court, his right to an immediate appeal from any order denying his petition meant he would be able to avoid the scheduled trial no matter how the court ruled. He then filed his petition to compel two weeks later—only two and a half weeks prior to the trial date.
We do not mean to suggest that every attorney who appreciates the strategic significance of an immediate right to appeal would be acting in bad faith by pursuing that strategy. But our obligation in this case is to draw every available inference in favor of the trial court's order. And because these facts are sufficient to support a finding that Welch's last-minute petition to arbitrate was part of a tactical effort to avoid the scheduled trial, rather than a genuine effort to seek arbitration, we must infer that finding in support of the ruling. (Fladeboe v. American Isuzu Motors Inc. (2007) 150 Cal.App.4th 42, 58 ["The doctrine of implied findings requires the appellate court to infer the trial court made all factual findings necessary to support the judgment"]; see Adolph v. Coastal Auto Sales, Inc., supra, 184 Cal.App.4th at p. 1452 ["Although the trial court made no express finding of bad faith, the tone of its ruling is suggestive of such a finding and, had it been made, sufficient evidence would have supported the finding"].)
As we have already explained, a finding that the party invoking the right to arbitration has acted in bad faith is, in and of itself, a sufficient basis to find that the right to arbitrate has been waived. (Engalla v. Permanente Medical Group, Inc., supra, 15 Cal.4th at p. 983.) As the Supreme Court stated in Christensen v. Dewor Developments, supra, 33 Cal.3d at p. 784, "procedural gamesmanship provides ample support for the trial judge's conclusion that plaintiffs filed their action in bad faith, and by doing so waived their right to arbitrate." Consequently, we would also affirm the trial court's order on that basis.
The order is affirmed. Masimo is to recover its costs on appeal.
BEDSWORTH, ACTING P. J. and IKOLA, J., concurs.
