Ninth Circuit Michaels Arbitration Case Will Test SCOTUS Decision

The United States Court of Appeals for the Ninth Circuit during oral argument July 26 in Armstrong v. Michaels Stores Inc. grappling with the impact of the decision of the Supreme Court of the United States in Morgan c. Sundance Inc.a founding case which resolved a split circuit regarding the test to determine when a party waived its right to arbitration.

Next Morganthe guiding question is: in all the circumstances, did the party seeking to compel arbitration knowingly waive its right to arbitrate by acting inconsistently with that right?

Courts like the Ninth Circuit previously required a finding of injury to waive the right to arbitrate. They are now trying to determine what conduct they should consider to answer this question and whether a certain action, in itself, is determinative for the whole investigation.

Questions that can guide a court include: Is there a specific time limit that will always lead to a finding of waiver? Does the referral of the case from a state to a federal court indicate a waiver? Does the filing of a determinative motion waive a party’s right to arbitrate?

While no decision has been rendered on the record, it appears that there will be no one-size-fits-all approach to finding a waiver. The Ninth Circuit is unlikely to create a clear rule for what kinds of actions are inconsistent with its right to arbitrate. Instead, it will likely be a sliding scale. Based on the panel’s comments, we believe:

Courts are likely to take a holistic approach

Referral of a matter to the Federal Court does not in itself constitute a waiver of the right to arbitrate. On the other hand, the filing of a dispositive motion in most cases will be the determining factor.

The time that elapsed between the filing of the complaint and the request to compel arbitration would only be one factor in the overall analysis. The extent of the discovery made – and on what topics – will be another factor that courts are likely to consider. Failure to raise arbitration as an affirmative defense in the Response and/or at the Case Management Conference is more likely than not to support a finding of waiver.

Courts will likely take a holistic approach and assess the factors on a case-by-case basis. It is unclear whether one factor or action (or inaction) will outweigh others in determining whether a party has waived its right to arbitration.

Indeed, in the amstrong case, although the case was returned to federal court where it had been pending for more than 10 months, Michaels did not engage in a substantive motion practice; instead, he offered a limited disclosure focused on the non-arbitrable claims at issue.

Perhaps most importantly, Michaels was waiting to see what the Supreme Court would say about class action waivers in employment contracts in the case of Epic Systems Corp. against Lewis before requesting arbitration. These facts can play an important role in the outcome of the case.

In short, it seems that the investigation will be more than just the delay in moving to duress. Instead, courts will assess what steps were taken as a result of the complaint being filed and whether any of them were inconsistent with the right to arbitrate. In other words, the courts will focus on what the party did during the period when they were weighing their options to litigate or arbitrate.

So what should companies consider when debating whether to use binding arbitration?

Infer intent to waive arbitration

The preliminary inquiry must be: “Can the court infer from my actions that I intended to waive my right to arbitration in this specific action?” Until the case law is further developed, companies should look to previous DC Circuit and Seventh Circuit decisions. The two circuits that did not require proof of injury to find that there was a waiver of the right to arbitrate before Morgan) which analyzed conduct deemed “incompatible” with the right to arbitration.

Under the current state of the law, companies that take a wait-and-see approach before imposing arbitration potentially risk being found to have waived the right to arbitrate. The lack of precedent applying the current waiver test may lead to unpredictable results.

Businesses that choose to wait or are unsure whether a particular case is arbitrable should try to preserve their right to arbitration by indicating, at each stage of the procedure, that they can compel arbitration or invoke the clause arbitration when available.

As the case law evolves, it would be prudent to make any course you take arguable and consistent with the intent to arbitrate at a later time.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Steven Appelbaum is a litigation partner at Saul Ewing Arnstein & Lehr. He represents individuals and businesses in a variety of complex litigation matters pending in state and federal courts, as well as clients in arbitration and businesses facing national and statewide class actions.

Stephanie L. Denker is a trial attorney at Saul Ewing Arnstein & Lehr. His practice includes representing clients in state and federal lawsuits involving contract disputes, commercial torts and property damage claims, as well as defending insurance companies in class actions.

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