Today’s post covers three new developments from this past week. The Fifth Circuit found a defendant waived its right to arbitrate a class action; the Second Circuit found arbitrators retain power to clarify ambiguous awards; and Jay-Z found his list of potential arbitrators sorely lacking in diversity.

In Forby v. One Technologies, 2018 WL 6191349 (5th Cir. Nov. 28, 2018), a class of plaintiffs filed an action for consumer fraud. The defendant waited two years before compelling arbitration. In the meantime, it removed the case to federal court, transferred venue, and filed a Rule 12 motion to dismiss, which was only partially successful.

In response to the motion to compel, the plaintiffs argued the defendant had waived its right to arbitrate. The district court disagreed, finding that “delay alone is insufficient” to establish the prejudice required to prove waiver. On appeal, however, the Fifth Circuit found prejudice because the plaintiff would “have to re-litigate in the arbitration forum an issue already decided by the district court in its favor”, i.e. the Rule 12 issue. Even if defendant did not make another motion to dismiss in arbitration, the court disapproved of the tactic of “check[ing] the district court’s temperature” on the dispositive issue, before moving the case to another forum.

In General Re Life Corp. v. Lincoln Nat’l Life Ins Co., 2018 WL 6186078 (Nov. 28, 2018), the Second Circuit examined whether a panel of arbitrators can clarify their own award. In the underlying reinsurance arbitration, the arbitrators had ordered the parties to unwind their agreement, and work together to figure out how much money had to be repaid. In the award, the arbitrators retained jurisdiction to resolve any dispute over the payments. The parties did not agree on the amount of repayment, or even how to calculate it. So, more than three months after the final award, one party wrote the arbitrators, seeking resolution of the payment dispute. The other side objected, characterizing the request as one to reconsider the final award. The panel clarified its award, after finding the award had ambiguities.

The Second Circuit confirmed the clarified award. Although usually an arbitration panel loses authority after issuing the final award, five circuits have recognized an exception to that “functus officio” doctrine where the final award is “susceptible to more than one interpretation”. The Second Circuit adopted the same exception, but limited it to when three conditions are present: the award is ambiguous; the clarification only clarifies the award, and does not substantively modify the award; and the clarification comports with the parties’ arbitration agreement.

Finally, making headlines across the country, Jay-Z has asked a New York state court to stay his arbitration, due to a lack of available African-American arbitrators. I will let you know when I hear of a decision. But, the underlying premise is one I have wondered about – are large arbitration providers a place of “public accommodation”? In the meantime, maybe Jay-Z will write a rap about arbitration… then it could be my theme song!

The highest state court in West Virginia just found that a credit card company did not waive its right to arbitrate, despite initially choosing a court forum and waiting almost five years to raise its right to arbitrate.  That is a somewhat surprising decision from a court that has been repeatedly willing to buck SCOTUS precedent in order to let parties avoid arbitration.

It was the right decision under current precedent though. The parties in Citibank, N.A. v. Perry, __ S.E.2d __, 2016 WL 6677944 (W. Va. Nov. 10, 2016), had an arbitration provision that could be enforced at any time.  It said a party who starts a court proceeding “may elect arbitration with respect to any Claim advanced in that proceeding by any other party.”  It also stated that “[a]t any time you or we may ask an appropriate court to compel arbitration of Claims…unless a trial has begun or a final judgment has been entered.”  And finally, the arbitration provision had a class action waiver and said it could not be waived without a written agreement.

The case started in 2010 with Citibank filing a debt collection action against the credit cardholder. The consumer appeared to acknowledge the debt, and Citibank filed a motion for judgment on the pleadings.  But the trial court never ruled.  In December of 2014, Citibank served discovery and got a scheduling order in place.  In May of 2015, the consumer filed a class counterclaim.  In response, Citibank asked the court to compel individual arbitration of the claims.  The district court found Citibank had waived its right to arbitration.

On appeal, Citibank argued that under the plain terms of its arbitration agreement, it could compel arbitration at any time before trial or judgment, unless the opposing party could show actual prejudice. The court was not willing to base its decision on the language of the agreement, however, citing federal cases that refuse to allow “no waiver” clauses to alter the usual waiver analysis.  Instead, it focused on whether Citibank’s conduct demonstrated that it had intentionally relinquished its right to arbitrate. Critically, the court turned the tables and said that in a situation where the consumer waited 4.5 years to assert a counterclaim, “we will not attribute the lengthy duration of activity…solely to Citibank.”  The court noted that the counterclaim changed the character of the case, and after that happened, Citibank timely filed a motion to compel arbitration.

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In the “Don’t get too cute” category… An exotic dancer just won her right to keep her wage-and-hour claims in court, despite an arbitration agreement in her contract. Why?  Because the club styled her contract as a landlord/tenant arrangement in which she leased the stage.  Because the arbitration clause applied only to disputes arising out of the agreement, and the agreement purported to be a lease, the court refused to find its scope broad enough to cover her FLSA claims. Herzfeld v. 1416 Chancellor, Inc., 2016 WL 6574075 (3d Cir. Nov. 7, 2016).

The issue in analyzing whether a party waived its right to arbitrate is usually whether the defendant waited too long to assert the arbitration obligation.  But, this week the Second Circuit had the opportunity to address whether a plaintiff waives its right to arbitrate by the simple fact of bringing a case in court.

In LG Electronics, Inc. v. Wi-LAN USA, Inc., 2015 WL 5254894 (2d Cir. Sept. 10, 2015), the appellate court affirmed the district court’s decision that defendant Wi-LAN had not waived its right to arbitrate.  The court found that Wi-LAN’s four month delay in asserting arbitration was not sufficient to show waiver, when LG could not prove prejudice other than litigation expenses.  Furthermore, the court noted that Wi-LAN had not waived its right to arbitration merely by bringing suit in federal court in the first place.

The Supreme Court of Alabama made that same point earlier this year in IBI Group, Michigan, LLC v. Outokumpu Stainless USA, 2015 WL 2161150 (Ala. May 9, 2015).  In that case, clients had sued the designer of their facilities in federal court.  After the parties had engaged in Rule 26 disclosures and served discovery (and even debated whether there was complete diversity of citizenship to support federal jurisdiction), the clients/plaintiffs demanded arbitration and asked the federal court to stay litigation.  In response, the designer brought its counterclaims in state court and the clients moved to compel arbitration of the state court claims.

The Alabama courts enforced the arbitration clause, despite the clients’ initial filing of the federal action.  The Alabama Supreme Court noted it had previously held that plaintiffs are not barred from exercising contractual arbitration rights just because they initiated litigation.  But the complicating factor in this case was that the arbitration agreement gave the clients the “sole discretion” to choose whether a dispute would be arbitrated or litigated, and the designer argued that once the clients made that decision, it was “irrevocable.”  The Alabama courts disagreed, interpreting the arbitration agreement to allow the clients to change their mind about the dispute resolution forum.

Finally, in a more run-of-the-mill waiver case, the Sixth Circuit recently concluded that the defendant had waived its contractual right to arbitrate by participating in federal litigation for 15 months, including filing dispositive and non-dispositive motions.  Gunn v. NPC Int’l, Inc., 2015 WL 5061545 (6th Cir. Aug. 28, 2015).

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.