By Leslie King O’Neal

 Arbitration Rights Can Be Waived By Conduct

Montana Supreme Court Requires Evidence of Prejudice for Waiver

In Monarch Heating and Cooling, LLC v. Petra, Inc.[1] Petra, a general contractor, hired Monarch as the HVAC subcontractor on an apartment complex project. The subcontract included an arbitration clause. Over time the relationship between Monarch and Petra deteriorated, resulting in Monarch suing Petra for breach of contract and other claims. Although Petra’s registered agent received the summons and amended complaint, it failed to forward them to Petra, leading to entry of default.

The parties stipulated to set aside the default and Petra filed an answer, affirmative defenses, counterclaim and demand for jury trial on August 20, 2024. Petra’s 14 affirmative defenses did not include arbitration. Petra filed an amended answer on September 16, 2024, adding the defense that Monarch’s claims were subject to arbitration. On October 25, 2024, Petra moved to stay the litigation and compel arbitration. The trial court denied the motion, finding Petra acted in a deliberate manner inconsistent with its right to demand arbitration. The trial court noted Petra stipulated to set aside the default without asserting arbitration and waited nearly four months before moving to compel arbitration. During that time Monarch incurred costs in the litigation.

Montana Arbitration Act vs. Federal Arbitration Act

           The trial court held the Montana arbitration act applied[2] to this case, rather than the FAA. On appeal, the Montana Supreme Court agreed. Following Montana case law, the Montana Supreme Court found Petra was aware of the arbitration agreement, acted inconsistently with the right to arbitrate by reentering the litigation without mentioning arbitration and by failing to raise arbitration as an affirmative defense in its original answer. Further Monarch was prejudiced by having to spend time and money in motion practice and trial preparation. The Montana Supreme Court followed Montana case law, finding Petra was aware of the arbitration agreement and acted inconsistently with the right to arbitrate by reentering the litigation without mentioning arbitration and reinforced that position by failing to raise arbitration as an affirmative defense in its original answer. Further Monarch was prejudiced by having to spend time and money in motion practice and trial preparation.

SCOTUS Decision Holds Prejudice Not Required for Waiver

 The Montana Supreme Court declined to apply the recent U.S. Supreme Court case, Morgan v. Sundance, Inc.,[3] which overruled a judicially created rule requiring a party asserting its opponent waived arbitration to show it was prejudiced by the opponent’s delay in seeking arbitration.[4]  Writing for a unanimous court, Justice Kagan stated, “ . . . [P]rejudice is not a condition of finding that a party, by litigating too long, waived its right to stay litigation or compel arbitration under the FAA.”[5] It’s unclear why the Montana Supreme Court declined to follow Morgan.

Sixth Circuit Holds Defendants’ Motion to Dismiss Waived Arbitration

In Kloosterman v. Metropolitan Hospital, et al.,[6] the plaintiff sued her former hospital employer and several of its officials under 42 U.S.C. §1983, Title VII and Michigan law. The defendants engaged in substantial motion practice and unsuccessfully moved to dismiss all plaintiff’s claims on the merits. After a year of litigation, defendants moved to compel arbitration. The trial court granted this motion.

Conduct “Entirely Inconsistent” With Arbitration

The Sixth Circuit reversed, holding the defendants gave up their right to arbitrate by litigating in court for a year before invoking arbitration. “[O]ur cases treat a defendant’s actions as ‘entirely inconsistent’ with arbitration if the defendant first seeks ‘an immediate and total victory’ in court through a motion to dismiss under Rule 12(b)(6) and then moves to arbitrate only after the court rejects this initial attempt to end the dispute.”[7] In Kloosterman the defendants also held a discovery conference and agreed on a joint status report for the court, further conduct inconsistent with arbitration. The 6^th Circuit rejected defendant’s argument that it did not intentionally give up its right to arbitrate, noting case law allows a party to lose its arbitration rights through a mistake if it has imputed knowledge of the agreement.[8] The defendants here drafted the agreement, so it had no grounds to claim lack of knowledge.

Takeaways

• Look for arbitration clauses in contracts (including exhibits and attachments) before drafting a motion to dismiss a complaint.

• Raise arbitration issues as soon as possible to avoid possible waiver of arbitration rights.

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[1] (Case No: DA 24-0760) (Montana S. Ct. August 19, 2025). https://caselaw.findlaw.com/court/mt-supreme-court/117612275.html

[2] The court did not explain why it applied the MUAA rather than the FAA. This seems odd, since the parties were involved in a construction project, which usually involves “interstate commerce” (materials are often shipped from other states). The FAA applies to contracts involving “interstate commerce” even if the parties did not intend it. See Allied- Bruce Terminex Cos. v. Dobson, 513 U.S. 265 (1995) (…[W]e accept the “commerce in fact” interpretation, reading the Act’s language as insisting that the “transaction” in fact “involve” interstate commerce, even if the parties did not contemplate an interstate commerce connection.”)  See Post—FAA or State Arbitration Law: Which Applies & When? https://theconstructionadrtoolbox.com/2025/05/which-applies-faa-or-state-arbitration-law/

[3] 596 U.S. 411(2022)

[4] Nine circuits supported an arbitration-specific waiver rule requiring a showing of prejudice (CA 1, 2, 3, 4, 5, 6, 8, 9, 11); two did not (CA 7, DC).

[5] 596 U.S. at 419.

[6] (Case No: 25a0239p.06) (6^th Cir. August 27, 2025) https://law.justia.com/cases/federal/appellate-courts/ca6/24-1398/24-1398-2025-08-27.html

Judge Murphy’s concurring opinion discusses the difference between “waiver” and “forfeiture” of the right to arbitrate.

[7] Id. at p. 10 (citing Solo v. United Parcel Serv. Co., 947 F.3d 968 (6^th Cir. 2020).

[8] Citing Schwebke v. United Wholesale Mortgage, LLC, 96 F.4^th 971 (6^th Cir. 2024).