Brendan Gooley

The Southern District of New York denied class certification to a group of plaintiffs seeking to collectively sue a group of insurers over purported regulatory approval violations regarding workers’ compensation policies. The court concluded that class adjudication was not the superior method of litigation, in part because of the significant recovery purportedly available to each of the approximately 220 members of the prospective class.

A number of New York employers filed a putative class action alleging that several insurers from whom they purchased workers’ compensation policies had violated New York law requiring regulatory approval of, among other things, rates. Specifically, the plaintiffs claimed that the insurers sold them guaranteed cost policies that were properly approved by New York’s Department of Financial Services but later entered into “reinsurance participation agreements” with the plaintiffs that were not approved by the Department and that effectively converted the guaranteed cost policies to “quasi retrospective rating plans.” In essence, the plaintiffs alleged that the insurers converted the plans from fixed premium plans to variable premium plans that created the possibility that the employers would have to pay more for coverage.

The plaintiffs sought to certify a class of New York employers who were charged more for premiums as a result of the “reinsurance participation agreements.” The putative class purportedly encompassed some 220 class members collectively owed $62 million. Approximately a dozen of those class members had already initiated their own actions. In addition, the defendant insurers noted that all of the putative class members had agreed to forum-selection clauses agreeing to litigate disputes regarding the policies in Nebraska and/or class action waivers.

The district court denied class certification after concluding that the plaintiffs had failed to establish that a class action was the superior method of litigation under Rule 23(b)(3).

Under the first factor considered under Rule 23(b)(3) — whether class members have a strong interest in individually controlling the litigation — the court concluded that the individual plaintiffs had a strong interest in individually litigating this case. The value of the case per plaintiff was high ($62 million for 220 plaintiffs), and several of the plaintiffs had already initiated individual litigation. This was not a prototypical class action in which individual litigation was precluded because the cost of litigation far exceeded the value to individual plaintiffs.

Turning to the second factor — whether members of the class had already brought suit — the court reiterated that a dozen plaintiffs were pursuing individual actions and arbitrations.

With respect to the third factor — the desirability of concentrating the litigation in a particular forum — the court noted that there was some appeal to concentrating the litigation in New York because the plaintiffs were New York businesses, but the existence of Nebraska forum-selection clauses and class action waivers precluded a finding that New York was desirable.

Finally, the court concluded that the fourth factor — the manageability of a class action — weighed against certification because of the 12 individual actions, the class action waivers, and the forum-selection clauses. The court would be required to make individual determinations as to which individual actions to enjoin and which plaintiffs could remain part of the class.

In closing, the court once again emphasized that the significant potential recovery available to each plaintiff rendered a class action unnecessary in light of the above factors.

The court therefore denied the plaintiffs’ motion to certify their class.

Nat’l Convention Servs., LLC v. Applied Underwriters Captive Risk Assurance Co., No. 1:15-cv-07063 (S.D.N.Y. July 27, 2019).

The Ninth Circuit has concluded that a defendant in a putative class action waived its right to compel arbitration after sitting on that right for nearly a year while it sought adjudication of a merits-based dispositive motion to dismiss in the Northern District of California.

June Newirth and several other named plaintiffs filed a putative class action against Aegis Senior Communities LLC, the operator of the senior living communities in which they resided. The plaintiffs claimed that Aegis defrauded seniors by falsely representing that staffing levels were based on the needs of residents when staffing was in fact determined by budget considerations.

The agreements between the plaintiffs and Aegis contained an arbitration clause requiring the parties to arbitrate “any legal claim or civil action arising out of or relating to care or services provided” by Aegis. Aegis removed the plaintiffs’ action to federal court and filed a motion to compel arbitration and a motion to dismiss. Aegis subsequently withdrew its motion to compel arbitration, however. Over the course of the next year, the parties engaged in discovery, mediation, and litigated a motion to dismiss filed by Aegis on the merits of several of the plaintiffs’ claims.

The district court denied Aegis’ motion to dismiss. Aegis then filed a new motion to compel arbitration. By then, nearly a year had passed since Aegis’ original motion to compel.

The district court denied Aegis’ new motion to compel arbitration. The court concluded that Aegis had waived its right to seek to compel arbitration. Aegis appealed that decision.

The Ninth Circuit affirmed. The court noted that arbitration agreements are subject to general contract principles, including waiver, but that waiver of an arbitration clause is not favored and a party seeking to establish such a waiver bears a heavy burden of proof. The court also explained that the question whether a right to arbitrate has been waived is subject to a federal law standard that requires the party claiming waiver to establish: “(1) knowledge of an existing right to compel arbitration; (2) intentional acts inconsistent with that existing right; and (3) prejudice to the person opposing arbitration from such inconsistent acts.”

The first requirement — knowledge of a right to compel arbitration — was not at issue in this case. Aegis had moved to compel arbitration when the case was filed; it knew it had a right.

With respect to the second requirement — that Aegis had to engage in acts inconsistent with its right to compel — the Ninth Circuit looked to the totality of Aegis’ actions to determine whether Aegis “(1) ma[de] an intentional decision not to move to compel arbitration and (2) actively litigate[d] the merits of a case for a prolonged period of time in order to take advantage of being in court.” After surveying its case law applying that test, the court concluded that “Aegis took actions inconsistent with its known right to arbitrate” by filing and withdrawing its initial motion to compel and actively litigated the case by filing a motion to dismiss for failure to state a claim, which sought dismissal with prejudice on a key merits issue. (The court noted, however, that seeking to avoid or frustrate litigation, by, for example, opposing discovery or filing a motion to dismiss on a non-merits issue, is insufficient to avail oneself of the judicial forum.) (Aegis did not argue that the factual issue regarding one of the named plaintiffs affected Aegis’ knowledge of its ability to compel arbitration under the first factor described above. Aegis clearly knew it could compel arbitration with respect to the other plaintiffs, but it apparently elected not to do so at least in part because it originally mistakenly believed it would still have had to litigate the class action in federal court because of the named plaintiff who it thought had not agreed to arbitrate.)

The Ninth Circuit rejected Aegis’ various arguments regarding its acts that were inconsistent with its right to arbitrate, including: (1) Aegis never expressly waived its right to compel arbitration (a party can impliedly waive a right); (2) Aegis filed a motion to compel (but Aegis withdrew that motion); (3) Aegis engaged in the minimum amount of litigation necessary to comply with court rules and orders (Aegis failed to renew its motion until after an adverse judgment, had sought a judgment on a merits issue, and failed to avail itself of rules allowing relief from case management and discovery obligations); and (4) Aegis mistakenly believed that one of the named plaintiffs had not signed an arbitration agreement (the record established that Aegis had learned that the plaintiff in question had signed such an agreement more than seven months before Aegis ultimately renewed its motion to compel arbitration).

Turning to the third and final requirement — prejudice to the opposing party — the Ninth Circuit concluded that the plaintiffs had been prejudiced by having to defend against Aegis’ motion to dismiss. That was a merits-based issue that the plaintiffs had been forced to address by Aegis’ decision to file a dispositive merits-based motion. The court noted, however, that the plaintiffs had not been prejudiced by issues directly related to their decision to file an action instead of seeking arbitration, including participating in discovery and conferring about mediation, etc.

While the court recognized that a party seeking to establish waiver of an arbitration clause faces a heavy burden, the Ninth Circuit concluded that burden was satisfied in this case.

Newirth v. Aegis Senior Cmtys., LLC, 931 F.3d 935 (9th Cir. July 24, 2019).

The Fifth Circuit has joined a number of other circuits and concluded that whether class arbitration is appropriate under the terms of a particular arbitration agreement is a “gateway” issue to be decided by courts, not an arbitrator, absent “clear and unmistakable” language to the contrary.

The court further concluded that there was no “clear and unmistakable” language allowing an arbitrator to rule on the propriety of class arbitration in the agreement before it.

20/20 Communications Inc. employs a number of field sales managers. It requires them to sign an arbitration agreement that bars class arbitration. Several sales managers initiated arbitration and sought to assert class claims. 20/20 filed a declaratory judgment action seeking a declaration that class claims were barred under the agreement. While that action was pending, however, an arbitrator concluded that the class arbitration bar was unenforceable under the National Labor Relations Act. 20/20 filed a separate action seeking to vacate that ruling. The district court denied 20/20’s request and confirmed the arbitrator’s ruling. The district court in 20/20’s declaratory judgment action subsequently concluded that the arbitration agreement at issue authorized arbitrators, not the courts, to determine the propriety of class arbitration.

The Fifth Circuit consolidated 20/20’s appeals from both rulings against it. The court first held that whether an agreement allows or prohibits class arbitration is a threshold/”gateway” issue for courts to decide unless the arbitration agreement “clearly and unmistakably” provides that the issue is for an arbitrator to decide. The Fifth Circuit noted that this conclusion was consistent with the conclusion reached by every other circuit court (the 4th, 6th, 7th, 8th, 9th, and 11th Circuits) to consider the issue. Turning to the agreement at issue, the Fifth Circuit concluded that the arbitration agreement did not clearly and unmistakably allow the arbitrator to determine the propriety of class arbitration. The agreement “prohibit[ed] class arbitrations to the maximum extent permitted by law,” and it made no sense for the parties to have included such language yet at the same time mean for the arbitrator to decide whether he could hear class claims. The court also rejected the claim that various provisions that vested arbitrators with broad and general powers allowed them to adjudicate whether class arbitration was allowed. Those provisions did not include “the requisite clear and unmistakable language that arbitrators, rather than courts, shall decide questions of class arbitrability.” Thus, the court reversed and vacated the judgments of the district court.

20/20 Commc’ns, Inc. v. Crawford, No. 18-10260 (5th Cir. July 22, 2019) (consolidated with 20/20 Commc’ns, Inc. v. Blevins, No. 19-10050).