Case of the Week: Right to Compel Arbitration Is Not Waived by Failing to Raise It As an Affirmative Defense in Answer

In Sec. Alarm Fin. Enterprises, L.P. v. Fuller, 242 Ariz. 512, 398 P.3d 578 (Ct. App. 2017)

the Arizona Court of Appeals held that the right to compel arbitration was not waived due to a failure to raise it as an affirmative defense in the answer.

Security Alarm Financing Enterprises (“Security”) filed suit against several former employees (“Appellants”) for trade secret misappropriation, tortious interference with business expectancies, unfair competition, and breach of contract. In answering the complaint, the employees did not raise any affirmative defense concerning arbitration in their answer.  Twenty-nine days later, the employees contacted Security to raise the existence of arbitration agreements that employees had signed when they began working for Security. Security refused to arbitrate, so the employees moved to dismiss and compel arbitration.  The superior court denied the motion and the employees appealed.

The Court of Appeals held that the arbitration agreements were not governed by Arizona’s arbitration statutes, which do not apply to employment agreements, but by the Federal Arbitration Act (“FAA”).  The FAA required the court to order arbitration as long as the moving party was not in default in proceeding with such arbitration.

To determine if default had occurred by wavier, the court adopted the Ninth Circuit Court of Appeals’ interpretation of the FAA’s provision governing waiver, which requires in part a showing of prejudice.

The Court concluded that Security had not shown prejudice and therefore the employees had not waived their right to arbitration.  Accordingly, the Court reversed the order denying the motion to dismiss and compelling arbitration.

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