Echoing a holding already issued by four other circuits, the Third Circuit recently found that a defendant does not waive its right to arbitration by continuing to litigate in court, if the reason it failed to move to compel arbitration is that the motion would have been futile. Chassen v. Fidelity Nat’l Fin., Inc., 2016 WL 4698256 (3d Cir. Sept. 8, 2016).
The case involves a class of real estate purchasers who claim they were overcharged for recording documents in New Jersey. Although there were arbitration agreements in the relevant contracts, the defendants did not move to compel “bipolar” arbitration for two and a half years. (Where did that term come from, Third Circuit? Are we equating individual arbitration to a mental health condition now?) In that time, plaintiffs served 150 non-party subpoenas and spent $50,000 on experts.
Although defendants did not attempt to explain their inaction, the Court concluded the long delay in seeking arbitration was excused. In short, New Jersey law had nearly outlawed class action waivers in consumer arbitration clauses, so until SCOTUS decided Concepcion in 2011 (finding California’s similar rule preempted by federal law), it would not have made sense for defendants to compel arbitration. The court reasoned that unlike in other cases of inaction, the prejudice to plaintiffs “is attributable to a change in the applicable law, not to any negligent action on the part of either party.” It also noted that futility is a recognized exception to ripeness and administrative exhaustion, two analogous doctrines.
Other than the use of “bipolar,” none of those conclusions strikes me as odd. But the opinion then plows some new ground. It finds that a defendant can independently waive individual and class arbitration, because those are “substantively distinct” types of arbitration. (And it concludes that the defendants here had a valid futility defense for both types.) Finally, the dissent points out a key piece of information: there was no class arbitration waiver in the arbitration clauses at issue. “These clauses…do not even mention class arbitration, let alone outright prohibit it.” Which the dissent (fairly) characterizes as seriously undercutting the futility analysis.
Now that Concepcion is more than five years old, this type of case is unlikely to come up often in terms of preempted state arbitration law, but the new rules from the CFPB (and legal challenges to those regulations) could make the futility doctrine relevant again.