Arbitration Award set aside on the Grounds that the Right to Arbitrate had been Waived

Arbitration Award set aside on the Grounds that the Right to Arbitrate had been Waived

      In a decision delivered by the Kentucky Court of Appeals, it held that an arbitration award would be set aside because, prior to reference of the action to arbitration, the plaintiff had taken actions inconsistent with bringing a claim in arbitration, including filing an action in Circuit Court.  Imhoff v Lexington Public Library Board of Trustees, No. 2014-CA-000385-MR, 2016 WL 192071 (Ky. App. Jan. 15, 2016).

      Imhoff had been the executive director of the Lexington Public Library, a position she filled pursuant to a written employment agreement.  The last of those agreements was entered into in June, 2007 for a period extending through June 30, 2011.  It provided that the agreement could be terminated by either party at any time upon 30 days prior written notice.  Eventually, the Board did give Imhoff 30 days’ notice of her termination, effective August 15, 2009.  Her salary was paid for a further 30 days, after which time the Library Board advised Imhoff that all of its financial obligations to her had been satisfied.  In response, Imhoff prepared a draft complaint and forwarded it to the Library Board, and they board engaged in an ultimately unsuccessful mediation.  A gender discrimination claim was pursued through the EEOC, which issued a right to sue letter.  Approximately a year after receiving notice of her termination, Imhoff filed suit against the Library Board, alleging it had breached the contract “by” failing to pay her salary and benefits through June 30, 2011, the employment agreement’s otherwise applicable termination date.  She also filed claims for defamation and gender discrimination, ultimately seeking both a jury trial and damages of approximately $5 million.  After the Library Board answered the complaint and sought dismissal of certain claims on grounds including sovereign immunity and failure to exhaust administrative remedies, Imhoff took part in additional court proceedings including a pretrial conference and the setting of a briefing schedule with respect to Library Board’s motion to dismiss.

      Some six weeks later, Imhoff gave notice that she intended to submit the dispute to arbitration pursuant to the arbitration clause in her employment agreement.  The Library Board argued against the referral of the dispute to arbitration, asserting that her conduct to date in the litigation constituted a waiver of her right to arbitrate.  Still, the Fayette Circuit Court stayed the action pending its resolution through arbitration, reserving the question as to whether her defamation and discrimination claims were subject to the arbitration agreement.  After ultimately dismissing the claim for defamation and granting summary judgment with respect to her allegation gender discrimination, only the claim for breach of contract was referred to arbitration by the Circuit Court.  Finally, nearly 3 years after the effective date of her termination, Imhoff filed a demand for arbitration with the American Arbitration Association.  Some seven months later, the arbitration panel would by majority decision hold that Imhoff’s employment agreement had a four-year term, and that the Library was obligated to pay her through the end of that term.  It would ultimately determine she was owed $907,761.55 including lost salary and other benefits, prejudgment interest and consequential damages.  The Library was also ordered to pay nearly $20,000 in arbitration costs.  

      Imhoff then filed a motion with the Fayette Circuit Court seeking to enforce the decision of the arbitration panel.  More than eight months later, the Fayette Circuit Court would hold that because of sovereign immunity enjoyed by the Library Board, the arbitration panel lacked the capacity to award consequential damages or pre- or post-judgment interest, and on that basis vacated a portion of the arbitration award.  It did, however, confirm $256,940.62 of the award, Imhoff’s unpaid salary for the remainder of the four-year term.  Imhoff would appeal on the basis that the Circuit Court should not have set aside those portions of the arbitration decision favoring her, asserting, in effect, that the Circuit Court had no authority to review the substance of that decision.  The Library Board in turn appealed, that the dispute should never have been referred to arbitration to begin with, arguing based on its sovereign immunity and Imhoff’s waiver of the right to arbitrate.  Imhoff’s response alleged that the Library Board lacked the capacity to, at this late date, argue arbitration should not have taken place.

      The Court of Appeals, as had the trial court, rejected the notion that the Library Board was late in appealing the referral of the case to arbitration. While the Library Board did not appeal the arbitration panel’s finding on breach of contract, the appeal of substantive arbitration awards being almost never permitted, it appealed the fact that the arbitration took place. In response to Imhoff’s argument that the appeal was untimely, the Court explained that while an order denying arbitration may be immediately appealed, an order granting arbitration may not be appealed until after the arbitration takes place, and after the trial court confirms the arbitration award, and reduces it to a judgment. Only then could the Library Board challenge the arbitrator’s decision, and as such, its appeal was timely.

      From there the Court of Appeals would hold that Imhoff had waived the contractual right to arbitrate her termination, which it reaffirmed is a question of law to be resolved by the court. Slip op. at 10, citing American General Home Equity, Inc. v. Kestel, 253 S.W.3d 543 (Ky. 2008). Working from there, the Court of Appeals explained why Imhoff’s right to arbitrate had in this instance been waived:

Imhoff was terminated from her position with the library effective August 15, 2009. She was aware of the arbitration clause included in the employment agreement since the terms of that agreement lie at the very heart of this dispute. Nevertheless, Imhoff sought to pursue legal action against the library board. She forwarded a draft complaint to the library board shortly after her termination. And she pursued an administrative claim through the Equal Employment Opportunity Commission to secure the right-to-sue letter from the agency. On July 13, 2010, Imhoff did, in fact, commence the threatened legal action against the library board in Fayette Circuit Court. In her complaint, Imhoff did not refer to the arbitration provision contained in the contract. Instead, she demanded a trial by jury. Imhoff’s decision to invoke judicial process is clearly at odds with an intention to assert her arbitration rights. Slip op. at 11.

      In effect, the claim for breach of contract will now be litigated as if the arbitration had never taken place:

It was incumbent upon the [circuit] court to set aside its earlier order compelling arbitration to avoid the arbitration proceedings in their entirety, and to proceed with the litigation of this case in the judicial forum that Imhoff herself had elected. Slip op. at 14.

     This is the second decision in as many months in which the Court of Appeals has set aside proceedings that have, apparently, otherwise addressed the substance of the dispute between the parties. In the Adcomm case decided in December, 12 years of litigation was set aside on the basis that the initial lawsuit should not have been brought, as the plaintiff lacked authority to do so. In that case, the trial court was presented with the argument that the suit lacked authority, but it never ruled upon that motion. CLICK HERE FOR A LINK for my review of that decision. In this instance, while less egregious, the trial court’s failure to find waiver based upon the facts relied upon by the Court of Appeals drove both the plaintiffs and defendants to engage in a “wasted” exercise of arbitration.