Inadvertent Waiver of Arbitration as to Absent Class Members: A Potential Trap for the Unwary

Reposted from Defense Research Institute (DRI) Newsletter-

Invoking a contractual arbitration provision has long been part of the playbook for responding to a class action lawsuit. The effectiveness and popularity of this tactic increased following the decisions in AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 131 S. Ct. 1740 (2011), American Express Company v. Italian Colors Restaurant, 570 U.S. 228, 133 S. Ct. 2304 (2013) and DIRECTV, Inc. v. Imburgia, 136 S. Ct. 463 (2015). However, raising the right to arbitrate can be complicated when arbitration clauses may apply to the unnamed members of a class, but not to the class representative. And failing to raise the issue early and often can be fraught with peril. Two recent appellate cases illustrate some of the complexities that can arise in this situation.

Gembarski v. Partssource, Inc., 11th Dist. No. 2016-PA00-77, 2017-Ohio-8940 (Ohio Ct. App. Dec. 11, 2017), involved a putative class action by employees who allegedly were denied commissions. The class representative did not have an arbitration clause in his employment agreement. Three years into the litigation, the plaintiff sought to certify a class with an amended class definition that included employees who had signed arbitration agreements. The defendant argued that the plaintiff’s claims were not typical of absent class members who had signed arbitration agreements. The plaintiff responded that the defendant had waived the right to arbitrate by failing to plead arbitration as an affirmative defense in its answer and failing to move to compel arbitration prior to the decision on class certification.

The Ohio Eleventh District Court of Appeals agreed with the plaintiff. It noted that the defendant was aware from the filing of the original complaint that the case was a putative class action. The Court of Appeals acknowledged that the named plaintiff was not subject to an arbitration provision “an issue going to typicality and adequacy…” However, it concluded the defendant was on notice that unnamed class members might be subject to arbitration. The Court of Appeals concluded that “appellant’s failure to assert the arbitration defense in its answer, or a supplement thereto, or seek to enforce the right to arbitrate at some point prior to its opposition to the certification was fundamentally inconsistent with its right to assert the defense.” Gembarski, 2017-Ohio-8940 at ¶ 66. Because the Court of Appeals held that the defendant had waived its arbitration “defense” it declined to consider whether the defense impacted the typicality of the class representative. Id. at ¶ 67.

On May 9, 2018, the Ohio Supreme Court accepted a discretionary appeal of Gembarski. Although the Ohio Supreme Court accepted three questions for review, the questions address two fundamental issues. First, when does the potential arbitrability of absent class members’ claims need to be raised in order to avoid waiver? Second, how does the potential arbitrability of absent class members’ claims impact the class certification analysis?

The first of these issues, the time to raise the arbitrability issue, was just addressed by the Eleventh Circuit in Gutierrez v. Wells Fargo Bank, N.A., 2018 U.S. App. LEXIS 12227 (11th Cir. May 10, 2018). Gutierrez is the latest in a string of decisions concerning arbitration arising out of the same multidistrict litigation over overdraft fees. The first case, Garcia v. Wachovia Corp., 699 F.3d 1273 (11th Cir. 2012), involved an effort by a defendant shortly after the decision in Concepcion to compel arbitration against a named class representative. There, the Eleventh Circuit affirmed the district court’s decision holding that the defendant had waived the right to arbitrate against the named class representative by participating in discovery and litigation concerning the plaintiff’s claims.

The defendant then moved, prior to class certification, to compel arbitration against unnamed class members. The district court held the defendant also had waived the right to arbitrate against the absent class members. This time the Eleventh Circuit reversed, holding that because no class had been certified, the district court lacked jurisdiction to rule on the arbitration obligations of unnamed class members and that the named plaintiffs lacked standing to assert waiver on behalf of the unnamed class members. In re Checking Account Overdraft Litig., 780 F.3d 1031 (11th Cir. 2015).

Following remand, the district court certified the class and the defendant again moved to compel arbitration of unnamed class members’ claims. The district court again held that that the right to arbitrate had been waived. The Eleventh Circuit reversed. It held that the defendant had provided fair notice of its intention to arbitrate the unnamed class members’ claims if those claims were certified. It noted that conservation of judicial resources and efficiency favored postponing a motion to compel arbitration of unnamed class members’ claims unless and until a class was certified. The Eleventh Circuit explained that “framing an effective motion to compel arbitration” was impossible prior to class certification because until that point the defendant “would not even have been able to identify the specific plaintiffs against which it planned to seek arbitration, much less ascertain its arbitration related rights as to them.” Gutierrez, 2018 U.S. App. LEXIS 12227 at *17.

To the extent the different fact patterns can be meaningfully compared, the Eleventh Circuit’s decision in Gutierrez appears to be better reasoned than the Ohio Court of Appeals decision in Gembarski. The exact identity of unnamed class members is rarely known or fixed before class certification, and in the meantime their status as “parties” to a case is complex and uncertain. Cf. Devlin v. Scardelletti, 536 U. S. 1, 9-10, 122 S. Ct. 2005 (2002) (“Nonnamed class members . . . may be parties for some purposes and not for others.”); Standard Fire Ins. Co. v. Knowles, 568 U.S. 558, 133 S. Ct. 1345 (2013) (holding that class representative cannot waive damages on behalf of unnamed class members prior to certification).

It is difficult to see why it is better to decide a motion to compel arbitration before the issue of class certification is resolved, how that could actually be done, or how such a decision practically would work prior to certification. Nevertheless, in a variety of factual and procedural contexts, several courts have held that the right to arbitrate absent class members’ claims can be waived if the issue is not raised prior to class certification. See, e.g., In re Cox, 790 F.3d 1112 (10th Cir. 2015); In re Citigroup, Inc., 376 F.3d 23 (1st Cir. 2004); Edwards v. First Am. Corp., 289 F.R.D. 296 (C.D. Cal. 2012); In re Currency Conversion Fee Antitrust Litig., 361 F. Supp. 2d 237 (S.D.N.Y. 2005); In re Universal Serv. Fund Tel. Billing Practices Litig., 320 F. Supp. 2d 1135 (D. Kan. 2004); Milbourne v. JRK Residential Am., LLC, 2016 U.S. Dist. LEXIS 33603 (E.D. Va. Mar. 15, 2016); Kingsbury v. U.S. Greenfiber, LLC, 2012 U.S. Dist. LEXIS 94854 (C.D. Cal. June 29, 2012); Tennyson v. Santa Fe Dealership Acquisition II, Inc., 364 P.3d 1273 (N.M. Ct. App. 2015); Elliott v. KB Home N.C., Inc., 752 S.E.2d 694 (N.C. Ct. App. 2013), cert. denied, 135 S. Ct. 494 (2014); Morgan v. AT&T Wireless Servs., 2013 Cal. App. Unpub. LEXIS 6537 (Sept. 13, 2013). Some courts have reached the opposite conclusion. See, e.g., In re Polyurethane Foam Antitrust Litig., 998 F. Supp. 2d 625 (N.D. Ohio 2014); Sky Sports, Inc. v. Superior Court, 201 Cal. App. 4th 1363  (holding that when the named representative in class action litigation has signed an arbitration agreement, but unnamed class members have not, the proper time for the defendant to bring a motion to compel arbitration is after certification).

As noted above, the certified questions in Gembarski also address how the potential arbitrability of unnamed class members’ claims impacts the class certification analysis. Many courts have held that the claims of a class representative who is not subject to arbitration are not typical of those of absent class members whose claims might be arbitrable. See, e.g., Avilez v. Pinkerton Gov’t Servs., Inc., 596 F. App’x 579, 579 (9th Cir. 2015) (named plaintiffs who did not sign class waivers are atypical and inadequate representatives to represent those who did sign class waivers); Santangelo v. Comcast Corp., 2017 U.S. Dist. LEXIS 200935 (N.D. Ill. Dec. 6, 2017); Tan v. GrubHub, Inc., 2016 U.S. Dist. LEXIS 186342 (N.D. Cal. July 16, 2016); King v. Capital One Bank (USA), N.A., 2012 U.S Dist. LEXIS 163562 (W.D. Va. Nov. 15, 2012). Other courts have looked at the issue as one of predominance or superiority, particularly if the validity of the arbitration agreements is at issue. See, e.g., Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 728 (9th Cir. 2007); Ford Motor Credit Co. v. Agrawal, 8th Dist. No. 103667, 2016-Ohio-5928, ¶ 35. Issues concerning the arbitration of unnamed class members’ claims can also impact the class definition, particularly when it might not be administratively feasible to determine which class members’ claims are subject to arbitration.

Unfortunately, as this sampling of the decisions suggests, it is not entirely clear how and when to best assert the right to arbitrate the claims of unnamed class members. Nevertheless, the big takeaway from these cases is that to avoid any risk of waiver you must try to preserve the right to arbitrate the claims of absent class members in every way you can.

First, it is not enough to evaluate only the claims of the class representative to determine whether arbitration might be an issue. As early as possible, defendants should evaluate all versions of potential absent class members’ contracts to determine if there are any potential grounds to arbitrate the claims. A similar evaluation should be conducted whenever there is a potentially significant change to the class definition.

Second, the potential arbitrability of absent class members’ claims should be disclosed as soon as possible in the litigation. Many of the decisions holding that defendants have waived the right to arbitrate express concerns about “gamesmanship” by defendants and the impact of an “untimely” assertion of the right to arbitrate on the resolution of the litigation. See, e.g., In re Cox, 790 F.3d at 1119. Putting the plaintiff and court on notice of the arbitration issue early and often can mitigate these concerns. A motion to strike the class allegations based on the failure to exclude persons with arbitration clauses is perhaps the earliest option to consider.

Third, defendants should evaluate the precedent in their jurisdiction and determine whether the arbitrability of absent class members’ claims must be raised in an original answer or in a subsequent amended pleading. Where the answer is unclear, the safest course might be to plead and reserve the right to arbitrate the claims of absent class members, even if procedurally awkward, to minimize the risk of a potential waiver. The issue can also be flagged in the Report of Parties’ Planning meeting in federal court. Scheduling orders should also be carefully examined to determine how they might impact the timing of a motion to compel arbitration of unnamed class members’ claims, particularly since a standard scheduling order might not clearly address the issue. Cf. Gutierrez, 2018 U.S. App. LEXIS 12227 at *14–17 (discussing ambiguities in scheduling order with respect to arbitration of unnamed class members’ claims).

Finally, assuming the absent class member arbitration issue is preserved, the arbitrability of unnamed class members’ claims can impact class certification in several ways. It can serve as a basis to attack several elements of the class certification analysis, such as predominance, superiority, typicality and adequacy, or to support an argument for excluding persons with arbitration clauses from any certified class. Depending on the facts of the case, defendants should carefully consider where arguments concerning arbitration best fit into the opposition to class certification.

If a class is certified despite the foregoing efforts, a motion to compel arbitration as to absent class members should be evaluated. Unless the relevant arbitration clauses include a clear class waiver, however, that option should be exercised with a sharp eye on the risk of class arbitration. In this regard, the United States Supreme Court just granted certiorari to review a Ninth Circuit decision finding implied consent to class arbitration in a standard arbitration clause silent on class waiver. Varela v. Lamps Plus, Inc., 701 Fed. Appx. 670 (9th Cir. 2017), cert. granted 2018 U.S. LEXIS 2729 (U.S., Apr. 30, 2018). The Ninth Circuit reached this result despite past Supreme Court decisions warning that consent by silence was not permitted under the Federal Arbitration Act. Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., 559 U.S. 662, 684, 130 S. Ct. 1758 (2010) (“[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so.”); Oxford Health Plans LLC v. Sutter, 569 U.S. 564, 565, 133 S. Ct. 2064 (2013) (“Class arbitration is a matter of consent: An arbitrator may employ class procedures only if the parties have authorized them.”).

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