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Ninth Circuit Michaels Arbitration Case Will Test SCOTUS Ruling

Aug. 22, 2022, 8:00 AM

The US Court of Appeals for the Ninth Circuit during oral argument on July 26 in Armstrong v. Michaels Stores Inc. grappled with the impact of the US Supreme Court’s ruling in Morgan v. Sundance Inc., a seminal case that resolved a circuit split concerning the test for determining when a party has waived its right to arbitrate.

Following Morgan, the guiding question is: Under the totality of the circumstances, did the party seeking to compel arbitration knowingly relinquish its right to arbitrate by acting inconsistently with that right?

Courts like the Ninth Circuit previously required a finding of prejudice to waive the right to arbitrate. They are now trying to determine what conduct they should consider in answering that question and whether a certain action, by itself, is determinative of the entire inquiry.

Questions that may guide a court include: Is there a specific amount of time that always will lead to a finding of waiver? Is removal of the case from state to federal court indicative of a waiver? Does the filing of a dispositive motion waive the right of a party to arbitrate?

Although no ruling was made on the record, it appears there will not be a one-size-fits-all approach for finding a waiver. The Ninth Circuit is not likely to create a bright-line rule for what types of actions are inconsistent with one’s arbitration right. Instead, it will likely be a sliding scale. Based on the panel’s commentary, we believe:

Holistic Approach Likely

Removing a case to federal court will not by itself constitute waiver of the right to arbitrate. On the other hand, filing a dispositive motion in most cases will be the determinative factor.

The amount of time that passed between filing the complaint and the motion to compel arbitration would only be one factor in the overall analysis. The extent of discovery taken— and on what topics—will be another factor courts are likely to consider. Failing to raise arbitration as an affirmative defense in the answer and/or during the case management conference is more likely than not to support a finding of waiver.

Courts are likely to take a holistic approach and will weigh factors on a case-by-case basis. It is unclear whether one factor or action (or inaction) will weigh more heavily than others in determining whether a party has waived its right to arbitrate.

Indeed, in the Armstrong case, although the case was removed to federal court where it was pending for 10-plus months, Michaels did not engage in substantive motion practice; instead, it propounded limited discovery focused on the non-arbitrable claims at issue.

Perhaps most important, was that Michaels waited to see what the Supreme Court would say about class action waivers in employment contracts in the case of Epic Systems Corp. v. Lewis before it moved to compel arbitration. Those facts may play a significant role in the outcome of the case.

In short, it appears the inquiry will be more than just the delay in moving to compel. Instead, courts will weigh what actions were taken following the filing of the complaint and if any of them were inconsistent with the right to arbitrate. In other words, courts will focus on what the party did during the period of time when it was weighing its options to litigate versus arbitrate.

So, what should companies consider when debating whether to move to compel arbitration?

Inferring Intention to Waive Arbitration

The threshold inquiry needs to be: “Can the court infer from my actions that I intended to waive my right to arbitrate in this specific action?” Until the case law is more developed, companies should look to prior decisions by the D.C. Circuit and Seventh Circuit.

The two circuits that did not require a showing of prejudice to find there was a waiver of the right to arbitrate before Morgan) that analyzed conduct found to be “inconsistent” with the right to arbitrate.

In the present state of the law, companies that take the wait and see approach before compelling arbitration are potentially risking a finding that they waived the right to arbitrate. The lack of precedent applying the current waiver test may lead to unpredictable results.

Companies that choose to wait or are unsure whether a particular case is arbitrable should try to preserve their right to arbitrate by indicating, at every stage in the proceeding, that it may compel arbitration or invoke the arbitration clause when available.

As the case law develops, it would be prudent to make whatever path you take defensible and in accordance with the intent to arbitrate at a future point in time.

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

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Steven Appelbaum is a litigation partner with Saul Ewing Arnstein & Lehr. He represents individuals and businesses in a variety of complex disputes pending in state and federal court, as well as clients in arbitration and companies facing national and state-wide class actions.

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