Waiver of Right to Arbitrate

In a decision this week, the Third Circuit found two related parties had waived their right to arbitrate claims.  One was no suprise — it had vigorously litigated the dispute for eleven months.  But the second may have been simply guilty by association, as it had only litigated for two months.  Supermedia v. Affordable Electric, Inc,, 2014 WL 1690749 (3d Cir. April 30, 2014).

In Supermedia, the plaintiff sued AEI for breach of contract.  The contract at issue had been signed by Mr. Morley, AEI’s alleged president.  AEI moved to dismiss the complaint, and when that failed, it answered the compaint and engaged in months of discovery, incuding discovery motions to the court.  During those eleven months, AEI never mentioned its alleged right to arbitrate the dispute.  Instead, it primarily disputed Mr. Morley’s right to bind it to a contract.  Therefore, about nine months after filing its first suit, the plaintiff also sued Mr. Morley directly.  The two cases were then consolidated.

Mr. Morley and AEI made a joint motion to compel arbitration.  The district court denied the motion, finding both defendants had waived any right to arbitrate.  On appeal, the Third Circuit affirmed.

In analyzing AEI’s waiver, the Third Circuit focused on the eleven months during which AEI never mentioned its alleged right to arbitrate and vigorously pursued the litigation.  Furthermore, AEI had taken the position that the arbitration agreement was unenforceable in previous litigation between the parties.  With respect to Mr. Morley, the court acknowledged it was “a closer call.”  Although Mr. Morley moved to compel arbitration just two months after the lawsuit began, he did three things that the court found sufficient to constitute waiver.  First, he asserted claims against third parties.  Second, in answering claims, he asserted that there was no binding agreement among the parties.  And third, he participated in the pre-trial conference and acquiesced in the consolidation of the cases.

California is the Judd Nelson of The Preemption Club.  (Or the John Bender, if you prefer using character names.)  The Supreme Court has sent the California courts to preemption detention for ignoring the Federal Arbitration Act in blockbuster, groundbreaking cases (see Concepcion).  But California cannot help itself.  It keeps coming up with novel arguments to avoid arbitration.  And in doing so, it keeps inviting reversal.  Of course, other states get sent to The Preemption Club (West Virginia and Oklahoma, for example), just not with the same panache.

Just last week, the Supreme Court reversed a decision of the California Court of Appeals and remanded it for reconsideration in light of AmEx. In CarMax Auto Superstores California, LLC v. Fowler, a putative class of CarMax employees alleged CarMax violated California labor laws.  The parties engaged in discovery and motion practice for over a year and then stayed the case.  Two years into the stay period, in June of 2011, CarMax moved to compel the plaintiffs to individually arbitrate their claims, in accordance with the terms of their employment agreement.  The plaintiffs opposed the motion, arguing that CarMax had waived its right to arbitrate and that the arbitration agreement was unconscionable.  Plaintiffs also relied on California’s Gentry rule, which provides that class-action waivers in employment arbitration agreements are invalid if “a class arbitration is likely to be a significantly more effective practical means of vindicating the rights of the affected employees than individual litigation or arbitration.”

The district court sided with CarMax but in March of 2013 the California Court of Appeals reversed.  It did not rest its decision on an uncontroversial issue like waiver, however.  (It gave CarMax a break for not moving to compel arbitration before Concepcion, as the motion would have likely been futile under California law, and it also said that the discovery and dispositive motion proceedings could have taken place in arbitration so there was no prejudice.)  The court also did not rest its decision on the alleged illusoriness of the arbitration agreement, because California law does not find agreements illusory, even if they can be modified without advance notice.  Instead, the court went with the riskiest possible basis for its decision: finding that Gentry was not preempted under the Concepcion analysis.  After the California Supreme Court refused to review the decision, CarMax took the issue up to the Supreme Court.

The Supreme Court made short work of the matter.  Just three days after considering the certiorari petition in conference, the Supreme Court granted cert, reversed the Court of Appeals, and remanded the case for reconsideration in light of AmExAmEx is the decision that, in June of 2013, seriously weakened the “effective vindication of statutory rights” line of cases.  So, what will the Court of Appeals do now?  I don’t see much room for fitting the case into what is left of the “effective vindication” doctrine, because that only applies to federal statutory rights and CarMax appears based on state statutory rights.  So if California really wants these CarMax employees to continue as a class, it either has to reverse itself on waiver, or come up with a different basis for finding the arbitration agreement unenforceable.  And in doing so, it will effectively say “Eat… My… Shorts” to SCOTUS.

In January of this year, the Eighth Circuit was the first federal appellate court to refuse to adopt the National Labor Relations Board’s ruling on class action waivers in employment contracts.  (The previous year, in D.R. Horton, the NLRB declared it a violation of federal labor law for employers to require employees to waive their rights to class actions.)  Last month, the Second and Ninth Circuits joined the Eighth Circuit in that stance.

In Sutherland v. Ernst & Young, __ F.3d__, 2013 WL 4033844 (2d. Cir. Aug. 9, 2013), an employee brought a putative class action for violations of the Fair Labor Standards Act.  The employer, E&Y, moved to compel arbitration.  Because the lead plaintiff had a potential recovery of only $1,900, but her attorneys fees and expert costs would likely reach $200,000, the district court relied on the Second Circuit’s Amex III decision and denied the motion to compel arbitration.  Now that SCOTUS has reversed the Second Circuit in Amex III, however, the Second Circuit ruled that this case against E&Y must proceed in individual arbitrations.

While the Second Circuit did not address the NLRB ruling directly, it expressed its disagreement sub silentio.  It found that Congress did not preclude the waiver of collective action claims in the FLSA, and cited the Eighth Circuit’s decision in Owen v. Bristol Care repeatedly.  It also hinted that recent Supreme Court rulings make clear that the NLRB ruling is unsupported.

In contrast, the Ninth Circuit did directly address the NLRB ruling in Richards v. Ernst & Young, LLP, __ F.3d__, 2013 WL 4437601 (9th Cir. Aug. 21, 2013).  In Richards, three employees brought wage and hour claims against the employer (E&Y again).  After the Concepcion decision in 2011, the employer moved to compel arbitration, and the district court denied the motion, finding E&Y had waived its right to arbitrate.  Although there was “years of litigation” before E&Y moved to compel, the Ninth Circuit found that the employee had not proven any prejudice and therefore E&Y had not waived its right to arbitrate.  In particular, dismissal of some claims (without prejudice) was not prejudicial, nor was the expense of discovery.

Although the court did not need to address the NLRB ruling (because it found the employee had not proven prejudice and had not raised the NLRB argument at the district court level), it went out of its way to say that “the only court of appeals, and the overwhelming majority of the district courts, to have considered the issue have determined tha they should not defer to the NLRB’s decision in D.R. Horton because it conflicts with the explicit pronouncements of the Supreme Court concerning the policies undergirding the Federal Arbitration Act.”  Therefore, the employee claims in Richards also had to proceed on an individual basis in arbitration.

What’s the opposite of a circuit split?  A circuit pile-on?  In any case, that’s what we’ve got so far on this issue.  The federal appellate courts are ganging up on the NLRB on the issue of contractually precluding class and collective waivers.

After reading more than 40 decisions about arbitration from state high courts, issued just in the past eight months, I have two bits of wisdom to share.  First, that is not the best way to spend your summer vacation, even for a devoted arbitration nerd.  And second, there are arbitration issues percolating in state courts that counsel practicing in this area should be aware of.  In particular, state courts are: 1) working hard to avoid having the FAA preempt their developed defenses to arbitration clauses; and 2) confronting a lot of issues relating to whether there is an agreement to arbitrate at all (especially authority issues in nursing home settings).


A big category of cases relate to preemption.  Most of these cases involve state courts trying to explain how application of state law is not preempted by federal law under Concepcion.  (One case that falls under this heading, Feeney, has already been reversed.)

The Supreme Court of Washington, in particular, spilled a lot of ink explaining why Concepcion did not bar it from reaching various results.  For example, it held that an arbitration clause requiring that the demand be made within 30 days, the hearing take place in California, and the prevailing party recover attorneys fees was unconscionable.  Gandee v. LDL Freedom Enterprises, Inc., 293 P.3d 1197 (Wash. 2013).  It found Concepcion did not preclude that result.  Washington also concluded that Concepcion did not preclude it from enforcing a state statute prohibiting insurance contracts from calling for arbitration (it held FAA preemption was essentially preempted by the McCarran-Ferguson Act).  State v. James River Ins. Co., 292 P.3d 118 (Wash. 2013).  Finally, Washington refused to vacate an arbitration award in favor of Subway franchisees based on the franchisor’s argument that its arbitration agreement called for arbitration in Connecticut, but the Washington court compelled arbitration in Washington.  Saleemi v. Doctor’s Assocs., Inc., 292 P.3d 108 (Wash. 2013).  While rejecting the franchisor’s preemption arguments, the court said (pre Amex) “[w]hether Concepcion reaches beyond class arbitraiton procedures is subject to debate.”  Id.

Montana found that Concepcion did not prevent it from declaring the arbitration agreement in a payday loan unconscionable.  Kelker v. Geneva-Roth Ventures, Inc., 303 P.3d 777 (Mont. 2013).  The Supreme Court of Montana applied a Montana rule invalidating adhesion contracts if they are not within the weaker party’s “reasonable expectations” or are otherwise oppressive.  In applying the rule, it focused on the facts that the arbitration clause was not conspicuous, the plaintiff did not understand it, the plaintiff was less sophisticated than the lender, and the clause was vague.  Two justices dissented, noting that Montana has only applied the rule to evaluate arbitration clauses and therefore it is preempted under the Concepcion reasoning.  Those two justices got the last laugh — the Ninth Circuit in July found that Montana’s rule is preempted under Concepcion.

In another case involving a payday lender, the Supreme Court of Florida concluded the lower court’s ruling was preempted.  McKenzie Check Advance of Florida, LLC v. Betts, 112 So. 3d 1176  (Fla. 2013).  In that case, the trial court found the arbitration clause was void as against public policy because it would prevent consumers from vindicating their state statutory rights.  The high court, however, found that Concepcion prevented Florida from adopting its own state-law version of the Green Tree rule at issue in Amex (which only applies to federal statutes, and has now been decimated in any case). 

Finally, addressing both nursing home arbitration and preemption, New Mexico held that the party alleging an arbitration agreement is unconscionable bears the burden of proving that unconscionablility, even when the other party is a nursing home accused of negligent care.  Strausberg v. Laurel Healthcare Providers, LLC, __ P.3d __, 2013 WL 3226753 (N.M. 2013).  The court noted that to adopt the opposite rule would be preempted by the FAA.


Really, the heading for this could be “Nursing Home Arbitration Litigation,” because in 2013 there have already been five separate opinions from state high courts relating to when wrongful death or negligence claims against nursing homes have to be arbitrated.  In general, the issue is: did the relative who signed documents for the nursing home resident have the resident’s authority to sign on his or her behalf?  Without proof of authority, state courts have concluded that there is no valid arbitration agreement in the nursing home admission documents.  E.g., SSC Montgomery Cedar Crest Ooperating Co. v. Bolding, __ So. 3d__, 2013 WL 1173975 (Ala. 2013); Courtyard Gardens Health & Rehab., LLC v. Quarles, __ S.W.3d __, 2013 WL 2361051 (Ark. 2013); GGNSC Batesville, LLC v. Johnson,  109 So. 3d 562 (Miss. 2013); State v. King, 740 S.E.2d 66 (W. Va. 2013).  However, if the resident dies, his or her estate and heirs are bound by an arbitration agreement the resident actually signed.  Laizure v. Avante at Leesburg, Inc., 109 So. 3d 752 (Fla. 2013).


Another issue that comes up regularly in both state and federal courts is when arbitration can be enforced by or against non-signatories.  On that topic, the Supreme Court of New Jersey found that the lower courts had erred by allowing a non-signatory to compel arbitration.  Hirsch v. Amper Fin. Servs., LLC, __ A.3d __, 2013 WL 4005282 (N.J. 2013).  The court disliked the way the lower courts had applied the equitable estoppel doctrine.  “Equitable estoppel is more properly viewed as a shield to prevent injustice rather than a sword to compel arbitration.”  Id. at *1.   Even when the parties and claims are intertwined, New Jersey will not compel arbitration without proof of detrimental reliance.


The Supreme Court of Iowa recently concluded that an agreement to arbitrate existed, even though all negotiations of the contract were oral and did not mention arbitration.  Bartlett Grain Co. v. Sheeder, 829 N.W.2d 18 (Iowa 2013).  Over the course of several phone calls, Sheeder agreed to sell corn to Bartlett at particular prices on certain dates.  Bartlett then sent Sheeder confirmation forms to sign, which provided for arbitration under the National Grain Feed Association arbitration rules.  The court relied largely on the UCC to reject Sheeder’s argument that he was not bound by the arbitration term in the confirmations.


An interesting New Mexico case found an arbitration agreement was illusory.  Much like a 2012 Fifth Circuit case applying Texas law, the New Mexico Supreme Court found the employer’s promise to arbitrate was illusory because the employer could amend or terminate its Dispute Resolution Program at any time, even after the employee’s claim accrued.  Flemma v. Halliburton Energy Servs., Inc., 303 P.3d 814 (N.M. 2013).

In addition, the Gandee decision from Washington and Kelker decision from Montana (discussed in the preemption section above) both found arbitration agreements unconscionable in consumer settings.


One area where state courts seem to be completely in line with the federal courts is in enforcing the limited bases for appealing arbitration awards.  So far this year, for example, Mississippi declared that “manifest disregard of the law” is not a valid basis for vacating arbitration awards under Mississippi’s arbitration act.  Robinson v. Henne, 115 So. 3d. 797 (Miss. 2013); but see C-Sculptures, LLC v. Brown, __ S.E.2d __, 2013 WL 1898379 (S.C. 2013) (applying the state uniform arbitration act, not the FAA, and vacating an award based on the arbitrator’s “manifest disregard” of state law).

New Mexico held that an employee who did not raise any objection about the scope of his arbitration proceedings with the arbitrator had waived any right to later argue that he reserved some claims for litigation.  Horne v. Los Alamos Nat’l Security, LLC, 296 P.3d 478 (N.M. 2013).  That decision is in accord with the recent decisions of the Minnesota Court of Appeals finding that parties must raise objections with arbitrators or else they are waived.

**Why this doozy of a blog post?  Because ArbitrationNation just celebrated its second birthday!  Nothing else quite says “thanks for sticking with me” like 1250 dense words… **

The Ninth Circuit ruled this week that a class of car owners could pursue their court claims against the manufacturer, Toyota, for product defects and false advertising, despite the existence of an arbitration agreement in each of the owners’ purchase agreements with the car dealerships.  The court held that Toyota had not proven either of the types of equitable estoppel that would allow it, as a non-signatory to the purchase agreements, to enforce the agreements’ arbitration clause.   Kramer v. Toyota Motor Corp., __ F.3d __, 2013 WL 357792 (9th Cir. Jan. 30, 2013).  (How could I resist posting about an arbitration case with “Kramer’ in the caption?!)

The plaintiffs’ claims related to defects in the antilock brake systems of 2010 models of the Toyota Prius and Lexus HS 250h.  Plaintiffs asserted multiple claims against Toyota, including violation of California laws prohibiting unfair competition and false advertising, breach of the implied warranty of merchantability, and breach of contract.  After “vigorously litigating the action” for almost two years, Toyota moved to compel arbitration a few months after SCOTUS issued ConcepcionToyota pointed to language in the purchase agreements allowing arbitration, delegating scope issues to the arbitrator, and waiving any right to arbitrate as a class.  The district court denied the motion to compel arbitration.

The Ninth Circuit affirmed.  In a very thorough opinion, the court found Toyota had no right to enforce the arbitration agreement, and therefore it was not necessary to consider whether Toyota had waived that right by participating in litigation.

The first legal issue the court addressed was whether to enforce the delegation clause in the arbitration agreement.  The purchase agreement stated that the parties would arbitrate “any claim or dispute about the interpretation and scope of this Arbitration Clause,” and Toyota argued that whether a non-signatory could compel arbitration was essentially a question of scope.  The court concluded that there was not the necessary “clear and unmistakable evidence” that the plaintiffs agreed to arbitrate arbitrability with Toyota.  (I take issue with this part of the opinion because it seems premised on the later conclusion that Toyota has no right to arbitrate under the agreement.  It would be simpler to rely on the default proposition, stated most recently in Granite Rock, that it is always for the court to determine whether an arbitration agreement exists at all.)

Having concluded that the court could properly address the merits of the dispute, the Ninth Circuit methodically destroyed Toyota’s arguments that it was entitled to compel arbitration under California’s equitable estoppel doctrine.   There are only two ways for a non-signatory to enforce an arbitration clause in California: 1) when the signatory’s claims rely on terms of the agreement containing the arbitration clause; and 2) when the signatory alleges concerted misconduct by the non-signatory and another signatory that is “intimately connected” with the agreement containing the arbitration clause.

The court concluded Toyota had not shown the first type of equitable estoppel, because the plaintiffs’ claims against Toyota were not sufficiently intertwined with their purchase agreements.  The court noted that the complaint never even referenced the purchase agreements.  With respect to the plaintiffs’ implied warranty claim, the purchase agreements clarified the dealer was not a party to the manufacturer’s warranty.  Therefore, the warranty claim against Toyota was not intertwined with the purchase agreements.  Similarly, though plaintiffs asserted breach of contract against Toyota, it was based on their alleged status as third-party beneficiaries to the contracts between the dealers and Toyota, and therefore did not relate to their purchase agreements.  The court also clarified that plaintiffs’ requested remedies were immaterial to an equitable estoppel analysis, only their claims were relevant.  (Toyota had argued that because the plaintiffs sought revocation of the purchase, which implicates the purchase agreements, they should be equitably estopped from avoiding arbitration.)

Finally, the court concluded Toyota had not show the second type of equitable estoppel.  It found the plaintiffs did not allege collusion between the dealerships and Toyota, and even if they had, that collusion was not connected to the purchase agreements at all, which is necessary for application of equitable estoppel.

This opinion is interesting because it provides another analysis of the nexus required between claims and an arbitration agreement to prove equitable estoppel.  It is also interesting because it shows what kind of fallout results from a major change in the law.  Before the 2011 decision in Concepcion, many states refused to enforce waivers of class arbitration.  So, frequently counsel for defendants like Toyota did not try to enforce that class waiver (by virtue of enforcing the arbitration agreement).  But, everything changed with first the Stolt-Nielsen and then the Concepcion decisions, and multiple defendants have made very tardy arguments in favor of arbitration (individual arbitration, in particular) to take advantage of those changes in the law.  Some have failed, like Toyota in this case, this defendant in the 11th Cir, and the defendant in Gutierrez v. Wells Fargo Bank, __ F.3d __, 2012 WL 6684748 (9th Cir. Dec. 26, 2012).  On the other hand, some have been successful, like this defendant in the 4th Cir. , and the defendant in Chassen v. Fidelity Nat’l Fin., Inc., 2013 WL 265228 (D.N.J. Jan. 23, 2013).  That mix of recent decisions show it is probably worth it for defendants to move to belatedly enforce arbitration agreements prohibiting class actions.  It also shows how important it is to have consistent case law that parties can rely on in making strategic decisions about litigation.

The Tenth Circuit this week refused to consider a plaintiff’s substantive arguments about its right to arbitrate because it found abstention was appropriate under the Colorado River doctrine.  D.A. Osguthorpe Family P’ship v. ASC Utah, Inc., __ F.3d __, 2013 WL 150221 (10th Cir. Jan. 15, 2013).  Though the factual situation in Osguthorpe is unusual, the decision highlights tension between the federal abstention doctrine and case law under the Federal Arbitration Act.

Osguthorpe involved a dispute over the development of a golf and ski resort in Utah.  The relevant parties included an arbitration clause within the Development Agreement.  However, when disputes initially arose, they were litigated in Utah state court.  After three years of state court litigation, one party (Wolf Mountain) moved to compel arbitration and the state courts (including the Utah Supreme Court) denied the motion after concluding Wolf Mountain had waived its right to arbitrate.  Before the Utah Supreme Court affirmed the waiver decision, however, D.A. Osguthorpe also moved to compel arbitration.  The state court denied Osguthorpe’s motion and Osguthorpe both appealed that decision in state court and filed a new action in the federal court seeking an order compelling arbitration and staying the state-court action.  Osguthorpe filed its federal case more than four years after it had initiated state court claims related to the same development, claims which had been proceeding in a consolidated case with related claims of other parties.

The federal district court dismissed Osguthorpe’s case for lack of subject-matter jurisdiction.  The Tenth Circuit affirmed.  After concluding that the Rooker-Feldman doctrine was not applicable in this case, the court held that “the Colorado River doctrine . . . mandates the dismissal of Osguthorpe’s suit.”  For those of you who, like me, avoided taking “federal jurisdiction” in law school because it had the dullest title in the course catalogue, I will summarize the Colorado River doctrine this way: sometimes federal courts can declare a lack of jurisdiction when there is a parallel state court proceeding that significantly overlaps with the proposed federal case.  In deciding whether to duck jurisdiction, courts have to analyze four factors.  The third and most “paramount” factor is “the desirability of avoiding piecemeal litigation.”  The Tenth Circuit leaned heavily on that third factor in its decision, relying on the incredible judicial resources that had already been committed by the Utah state court system in handling the protracted litigation over the five year period. (The state court case was “one of the greatest consumers of the resources of the [court] in many years” and “comprises more file volumes than any presently pending case in the [court].”)

In short, the federal court refused to exercise jurisdiction over Osguthorpe’s suit to enforce its right to arbitrate because doing so would entail piecemeal litigation.  How does that square with SCOTUS’ 2011 decision in Cocchi, saying in no uncertain terms that the point of the FAA is to enforce arbitration agreements, even if their enforcement results in piecemeal litigation?  Maybe the answer is that this case only relates to federal court jurisdiction, and it is up to the Utah state courts to enforce the Cocchi decision.  However, I can imagine cases where the conflict is more direct.  Seems like it would have consumed the same amount of federal judicial resources to hold that Osguthorpe had waived its right to arbitrate by participating in litigation for five years.


In contrast to recent decisions from other circuit courts, the Fourth Circuit found a defendant did not waive its right to arbitrate, despite litigating for more than 6 months and conducting discovery.  Rota-McLarty v. Santander Consumer USA, Inc., __ F.3d __, 2012 WL 5936033 (4th Cir. Nov. 28, 2012).

In this potential class action, the named plaintiff alleged a finance company violated Maryland consumer protection laws.  The finance company answered the complaint (asserting arbitration as an affirmative defense) and participated in discovery, including agreeing to phased discovery, taking and defending multiple depositions, and producing documents.  After six and a half months, the defendant moved to compel individual arbitration.  It explained its delay by pointing to “uncertainty” in the federal law regarding class arbitration, and saying it waited until after Stolt-Nielsen was decided and the district courts began applying it.

The district court found that the defendant’s actions waived its right to arbitrate, but the Fourth Circuit reversed.  It said the dispositive test in the Fourth Circuit is whether the opposing party has suffered actual prejudice (and noted that the reason for delay should not be considered).  It concluded that the plaintiff had not been prejudiced because six and a half months of litigation is “relatively short” and because the mere fact of participating in discovery does not equate to prejudice.

Recent cases shows significant difference among the federal circuit courts in how they are evaluating claims that a party waived its right to arbitrate.  For example:

  • In the Fourth Circuit, 6.5 months and significant discovery is not enough to waive the right to arbitrate.  In the Third Circuit, however, 10 months and no discovery is enough to waive the right to arbitrate, if a dispositive motion was filed.
  • In the Eleventh Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction waives its right to arbitrate.  While in the Fourth Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction does not waive its right to arbitrate.

Because there is so much flux in the law, defendants who want to retain their right to arbitrate should err on the side of caution and make their motion to compel early.

In answer to the proverbial question “how much litigation waives the right to arbitrate?,” the Third Circuit has responded that ten months does the trick, if the party seeking arbitration has engaged in significant motion practice, regardless of whether any discovery was exchanged. In re Pharmacy Benefit Managers Antitrust Litig., __ F.3d __, 2012 WL 5519658 (3d Cir. Nov. 15, 2012).  This marks a change in the Third Circuit’s case law on waiver, which had previously placed a strong emphasis on the exchange of discovery as the point of no return.

In re Pharmacy involves a class of retail pharmacies that brought suit in federal court alleging the pharmacy benefits manager violated antitrust laws.  The defendant/benefits manager responded by first bringing a motion to dismiss, arguing the plaintiffs had no antitrust injury.  After that motion was denied, defendant filed its answer without asserting any right to arbitrate.  After the defendant obtained new counsel, and the case had been underway for ten months, the defendant filed a motion to compel arbitration.  The district court granted the motion to compel and stayed the case, finding that defendant had not waived arbitration.  The plaintiffs refused to bring their claims in arbitration and instead dismissed their claims in order to appeal the order compelling arbitration.

The Third Circuit first addressed its jurisdiction over the appeal.  The defendant argued the plaintiffs should not be rewarded for dismissing their claims in order to find an “end run” around the rule that a successful motion to compel arbitration is not normally appealable unless the judge simultaneously dismisses the case.  However, the Third Circuit found it irrelevant how the claims were dismissed–jurisdiction over the appeal was proper because the plaintiffs’ claims were dismissed (as opposed to just stayed).

Then the Third Circuit reversed the district court, finding that the defendant had waived its right to arbitrate.  The court analyzed all six relevant factors from its Hoxworth decision on waiver, but focused heavily on these two acts by the defendant: waiting ten months to bring its motion to compel arbitration without any explanation other than its change of counsel; and making a significant motion to dismiss on the merits.  However, another factor, the extent of discovery, cut against waiver because the parties had not engaged in any discovery.  Indeed, the Third Circuit acknowledged that its “cases finding waiver have uniformly featured significant discovery activity in the district court.”  Even so, the Third Circuit relied on cases from other circuits and the general rule that a defendant cannot “act inconsistently with the right to arbitrate” in finding that the benefits manager had waived its right to arbitrate.  

Because the Third Circuit reversed on the question of waiver, it did not address whether the arbitration clause was unenforceable due to its limitation on the remedies available under antitrust laws.

After an arbitration about-face by the defendant in a class action, the Eleventh Circuit ruled that the defendant had waived its right to compel arbitration by: participating in litigation for two years and affirmatively declining to enforce its arbitration agreement with the plaintiffs until after SCOTUS issued its Concepcion decision.  Garcia v. Wachovia Corp., ___ F.3d. ___, 2012 WL 5272942 (11th Cir. Oct. 26, 2012).

The class of plaintiffs in Garcia claimed that banks unlawfully charged them overdraft fees.  One of the banks, Wells Fargo, had arbitration clauses in its customer agreements, and the clauses precluded class arbitration.  Despite that, it did not move to compel arbitration by the motion deadline in the scheduling order.  Even when the district court specifically offered Wells Fargo the opportunity to move to compel arbitration at a later date, Wells Fargo told the court that it did not intend to seek arbitration of the plaintiffs’ claims.

However, after the Concepcion decision, Wells Fargo changed its strategic course and filed a motion to dismiss the class action in favor of arbitration.  To explain its two year delay, Wells Fargo argued that the various state laws governing the agreements had declared class actions waivers unenforceable, so Wells Fargo had concluded that moving to compel arbitration would have been futile.  The plaintiffs, of course, argued that Wells Fargo had waived its right to arbitration.

The Eleventh Circuit recognized that there is a futility exception of sorts — litigants are not required “to engage in futile gestures” — but concluded Wells Fargo’s behavior was not excused.  The only time that a party’s failure to compel arbitration will not amount to waiver, after it has “substantially invoked the litigation machinery,” is when it “would almost certainly have been futile.”  Wells Fargo did not meet that high burden here, because the Eleventh Circuit concluded that Concepcion did not change the law on preemption, it merely applied it in a new context.  The court noted that “absent controlling Supreme Court or circuit precedent foreclosing a right to arbitrate, a motion to compel arbitration will almost never be futile.”   For that reason, the court affirmed the district court’s denial of Wells Fargo’s motion to dismiss the action in favor of arbitration.

This decision reminds me of advice from my contracts professor in law school.  When we began to ask her a series of follow-up questions about her modified Socratic method  (where there was some rhyme and reason to who got asked questions when) that were clearly intended to identify on which days we could be unprepared, she cut off the questions curtly with “Don’t try to game it.  Just be ready.”  The same applies to attorneys representing parties with arbitration agreements.  If there is a chance in hell that your arbitration agreement can be enforced (and that you strategically will want that to happen), make that argument early and often.

The Supreme Court of South Carolina just ruled that contracts for the sale of residential property are not interstate commerce, and therefore are outside the reach of the Federal Arbitration Act.  Bradley v. Brentwood Homes, Inc., __ S.E.2d __, 2012 WL 2847616 (S.C. July 11, 2012).  That is a surprising result in my view, given that the FAA applies to all agreements that involve or affect interstate commerce, Allied-Bruce Terminix Cos. v. Dobson, 513 U.S. 265, 271-72 (1995), and the Supreme Court has been largely unreceptive to states’ attempts to carve out certain types of arbitration contracts (like those in nursing home contracts). 

In Bradley, the plaintiff bought a “completed dwelling” in Myrtle Beach from defendant.  Two years later, the plaintiff sued in state court, alleging construction defects.  The parties engaged in six months of discovery before the defendant asserted its right to arbitrate and moved to compel arbitration.  The district court denied the motion, not on the basis of waiver (which would have been much simpler), but by finding that the arbitration agreement was unenforceable.  It held the arbitration agreement was unenforceable under South Carolina’s Uniform Arbitration Act, because it did not comply with technical requirements of that statute, and also held that the agreement did not involve interstate commerce and therefore was not covered by the Federal Arbitration Act (which would likely have made the agreement enforceable, as the FAA does not have the same technical requirements about font size, etc). 

The facts related to interstate commerce are these: 

  • the agreement stated that the defendant was “not acting as a contractor” for the plaintiff;
  • the defendant did, however, construct the home using subcontractors, materials and suppliers from outside South Carolina;
  • the defendant provided a warranty from a national company; and
  • the plaintiff used an out of state bank to finance the transaction.

Despite those last three facts, the South Carolina court held that the FAA did not apply to this arbitration clause.  The analysis relied heavily on the court’s assessment that real estate contracts are unique; it begins with a “discussion of the historical intrastate character of real estate transactions.”  To support the exceptional nature of real estate contracts, it cited a state court case from South Carolina and federal district court cases from Puerto Rico and Kentucky.  The court held that none of the facts cited by the defendant (out-of-state banks, warranty programs, subcontractors, supplies) “negate the intrastate nature of the sale and purchase of residential real estate.”  The court was careful to narrow its ruling, however, noting that if the agreement had been for the construction of the home, instead of for the completed dwelling, its arbitration clause would have been governed by the FAA. 

Because the conventional wisdom is that the vast majority of arbitration agreements are covered by the FAA, this decision provides rare support to parties who want to keep their claims in court, despite an arbitration agreement that could be unenforceable under state law grounds.