Security Alarm Financing Enterprises, L.P. v. Fuller
242 Ariz. 512
| Ariz. Ct. App. | 2017Background
- Security Alarm Financing sued former employees (Fuller, Griffis, Reeves) and a new employer for breach of contract, trade-secret misappropriation, unfair competition, and tortious interference.
- Defendants answered but did not assert arbitration as an affirmative defense.
- Within 29 days after answering, defendants’ counsel notified Security of signed FAA-governed arbitration agreements and asked whether Security would agree to arbitrate; Security refused about a month later.
- Four days after Security’s refusal defendants moved to dismiss and compel arbitration under the Federal Arbitration Act (FAA).
- The superior court denied the motion, ruling defendants waived arbitration by failing to plead it in their answer; the defendants sought appellate review by special action.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Arizona appellate jurisdiction exists over denial of an FAA motion to compel arbitration | Denial is appealable under A.R.S. §12-2101.01(A)(1) | Defendants sought special action; FAA motion not brought under state arbitration statutes | Court lacked ordinary appellate jurisdiction but exercised discretionary special-action jurisdiction to decide the legal question |
| Whether state or federal law governs waiver of arbitration under the FAA | State (Arizona) law applies; failure to plead arbitration is an affirmative-defense waiver per Cortez | Federal law under FAA §3 governs waiver and requires a federal standard | Federal law under §3 governs waiver analysis; state contract-law principles under §2 do not control waiver |
| Standard for waiver of the right to arbitrate under FAA §3 | Failure to plead arbitration in answer is sufficient to waive under Arizona precedent | Waiver requires (1) knowledge of the right, (2) acts inconsistent with arbitration, and (3) prejudice to the opposing party (Ninth Circuit rule) | Adopted Ninth Circuit standard: knowledge + inconsistent acts + prejudice (prejudice is essential) |
| Application of the waiver standard to these facts | Security: defendants’ failure to plead arbitration and litigation participation waived the right | Defendants: they notified Security promptly (within ~29 days) and sought arbitration; Security suffered no prejudice | Held: no waiver — defendants did not default; Security failed to show prejudice, so motion to compel arbitration should have been granted |
Key Cases Cited
- Richards v. Ernst & Young, LLP, 744 F.3d 1072 (9th Cir. 2013) (waiver under FAA requires knowledge, inconsistent acts, and prejudice)
- Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207 (3d Cir. 2007) (prejudice is central to waiver analysis under §3)
- Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1 (1983) (any doubts about arbitrability should be resolved in favor of arbitration)
- Doctor's Associates, Inc. v. Casarotto, 517 U.S. 681 (1996) (state law governs generally applicable contract defenses to arbitration agreements)
- In re Estate of Cortez, 226 Ariz. 207 (App. 2010) (Arizona precedent treating arbitration as an affirmative defense, but factual distinctions noted)