High Court’s Arbitration Ruling Gets Michaels 9th Circuit Test

A former Michaels Stores Inc. employee’s attempt to revive her wage-and-hour class action will provide an early test for a recent US Supreme Court decision limiting procedural rules on transferring lawsuits into arbitration.

The US Court of Appeals for the Ninth Circuit, which will hear oral argument in the case Tuesday, asked parties for supplemental briefing specifically on the effect of the high court’s unanimous May decision in Morgan v. Sundance.

That ruling held that courts can’t make special arbitration-specific procedural rules based on the Federal Arbitration Act’s “policy favoring arbitration,” specifically barring tests that tie whether a defendant waived their right to arbitration to the delay harming the plaintiff. The justices overturned a decision that allowed a Taco Bell franchise to push a worker’s wage-and-hour lawsuit into arbitration despite litigating the case for eight months.

The Ninth Circuit will review a San Francisco federal judge’s ruling that sent Teresa Armstrong’s wage-and-hour lawsuit against Michaels Stores into arbitration after it was litigated for 10 months. The Ninth Circuit could become the first federal appeals court to weigh in on the extent Sundance dials back companies’ latitude to move lawsuits out of open court and into private arbitration.

Armstrong argued that Sundance “dramatically changes the legal landscape for cases like this one” that turn on whether a company waived the right to arbitrate. Michaels had the ability to force arbitration but it chose not to, she said.

But Michaels said the Supreme Court’s decision doesn’t change the outcome of the case. Although Sundance strips the prejudice requirement from the Ninth Circuit’s waiver standard, the company’s motion to force arbitration still passes the remaining parts of that legal test because it didn’t act inconsistently with its intent to arbitrate, Michaels said.

Two Clinton-appointed Ninth Circuit judges, Margaret McKeown and William Fletcher, will hear the case. They’ll be joined by Richard Bennett, a judge from the District of Maryland appointed by George W. Bush, sitting on the three-judge circuit panel by designation.

Post-Sundance Orders

Federal district judges have cited Sundance in five orders denying company bids to halt litigation and send disputes to arbitration, as well as six orders granting those requests, according to a Bloomberg Law review of cases.

One district judge referenced the Supreme Court’s decision when issuing an order to halt an arbitration, while another scheduled an evidentiary hearing to decide whether an arbitration agreement was binding. A federal magistrate judge recommended denying a motion to compel arbitration, which will be reviewed by a district judge.

Federal judges typically grant most motions to compel arbitration, so the near 50-50 split between grants and denials in decisions citing Sundance suggest that it’s made jurists less inclined to move lawsuits out of court, said Sarah Rudolph Cole, a law professor at The Ohio State University Moritz College of Law and director of the school’s Program on Dispute Resolution.

But it could be too early to gauge—the Supreme Court ruled in Sundance just two months ago—plus courts and litigants might adjust to the decision, Cole added.

Sundance tightening the rules for waiving the right to enforce an arbitration agreement is consistent with one of the purposes of arbitration, which is to have a less costly and lengthy way to resolve disputes, she said.

“One result of Sundance might be defendants filing motions to compel arbitration sooner and not risking it,” Cole said.

Court to Arbitration

The Ninth Circuit case arises from Armstrong’s lawsuit alleging that Michaels Stores violated various provisions of California’s wage-and-hour law. She initially filed her complaint in state court in 2017. The company transferred to federal court a month later.

US District Judge Lucy Koh, an Obama appointee, granted the company’s arbitration request in late 2018.

Michaels Stores said it intended to enforce its arbitration agreement with Armstrong in multiple filings before its motion to compel arbitration, but believed it couldn’t until the US Supreme Court ruled that class action waivers in employment contracts are enforceable, Koh said. Although the company waited 10 months, it participated in only minimal discovery and didn’t file any substantive motions, she said.

Armstrong also failed to show the company’s delay prejudiced her by inflicting harms, like costs she wouldn’t have otherwise incurred or being forced to relitigate issues she already won in court, Koh said.

“Importantly, Plaintiff has not explained or provided case law showing that Defendant’s limited discovery requests resulted in Defendant gaining an unfair advantage that could not have been gained in arbitration,” she said in her ruling.

Koh sent Armstrong’s wage-and-hour allegations to arbitration and stayed her claims brought under California’s Private Attorneys General Act, which can’t be arbitrated.

Thumb Off the Scale?

Armstrong argued in her brief that Sundance did more than just eliminate the prejudice requirement from the Ninth Circuit’s test for waiver of arbitration. It also removed the pro-arbitration thumb off the scale when judges decide a motion to compel arbitration, she said.

Koh said in her ruling that Armstrong faced a “heavy burden of proof” to defeat the request for arbitration, but that’s no longer true in light of Sundance, Armstrong said.

In addition, Michaels acted inconsistently with its right to arbitration by not compelling arbitration before removing the case to federal court, she said. The company also could have asked for arbitration under Ninth Circuit precedent that was clear even before the Supreme Court ruled on class-action waivers, Armstrong said.

But Michaels argued that Koh said it had a “good faith” belief that it couldn’t compel arbitration before the high court ruled.

The minimal amount of litigation that took place before the company sought arbitration is a “far cry from the extensive litigation activity” that was at issue in Sundance, it said in a brief.

“And, as many courts have held, the ten months preceding Michaels’ motion to compel arbitration, without more, does not show waiver—particularly where Michaels repeatedly stated that it intended to seek arbitration,” the company said.

Michaels’ lawyer, Aileen McGrath of Akin Gump Strauss Hauer & Feld LLP, declined to comment.

Armstrong’s attorney, Shaun Setareh of Setareh Law Group, said Koh’s ruling should be reversed, especially because of the Supreme Court’s ruling in Sundance.

The case is Armstrong v. Michaels Stores, 9th Cir., No. 21-15397, oral argument 7/26/22.