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Arbitration / Court Decisions

Ninth Circuit Reaffirms District Courts’ Discretion to Dismiss When All Claims Are Subject to Arbitration

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The Ninth Circuit Court of Appeals considered whether the Federal Arbitration Act (FAA) requires a district court to stay a lawsuit pending arbitration, or whether a district court has the discretion to dismiss when all claims are subject to arbitration.

The plaintiffs were current and former employees of Intelliserve, an on-demand delivery service. The plaintiffs sued Intelliserve in Arizona state court, arguing that they were improperly classified as contractors rather than employees. Intelliserve removed the lawsuit to federal court and then moved to compel arbitration. Both parties ultimately agreed that the lawsuit was subject to arbitration but disagreed as to whether the action should be dismissed or stayed by the federal trial court pending the completion of the underlying arbitration. The trial court dismissed the case without prejudice, rejecting the plaintiffs’ argument that the FAA itself mandated that the case be stayed rather than dismissed. The plaintiffs appealed the trial court’s dismissal.

On appeal, the Ninth Circuit acknowledged that section 3 of the FAA expressly provides that where all claims in a lawsuit are subject to arbitration, the trial court “shall” stay the action pending arbitration. However, the court noted that long-standing Ninth Circuit precedent provides that, notwithstanding section 3 of the FAA, “a district court may either stay the action or dismiss it outright when, as here, the court determines that all of the claims raised in the action are subject to arbitration.” The court rejected each of the plaintiffs’ attempts to distinguish such Ninth Circuit precedent, which the court found to be binding on the panel, and rejected the argument that the district court abused its discretion by relying on such precedent. The Ninth Circuit affirmed the district court’s dismissal of the action accordingly.

Forrest v. Spizzirri, No. 22-16051 (9th Cir. Mar. 16, 2023).

Fifth Circuit Refuses to Vacate Arbitration Award, Holds That Party’s Arguments Merely Ask for Merits Review

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The Fifth Circuit Court of Appeals recently rejected a claim that an arbitration award should be vacated by holding that the challenging party’s arguments improperly asked the court to review the merits of the arbitration panel’s decision and noting that proving fraudulent inducement to sign a contract is not enough to evade arbitration because the fraud must relate to the arbitration clause itself.

Brendan Church of Old South Trading Company LLC and Joseph Agresti of Dream Medical Group LLC entered into a business arrangement whereby Old South supplied Dream Medical with personal protective equipment that Dream Medical then distributed. Dream Medical subsequently sent Old South a resolution agreement that contained an arbitration clause. Church initially refused to sign the agreement but later did so after Agresti purportedly told him that Dream Medical would never enforce the agreement. Dream Medical later sought to enforce the agreement to obtain a refund on a transaction, which led to arbitration when Old South refused to provide the full refund. Old South argued that it had been fraudulently induced to enter the agreement, but the arbitration panel rejected that argument and concluded in relevant part that Old South breached the agreement. Dream Medical applied to confirm the award and Old South moved to vacate it.

The district court confirmed the award and Old South appealed. It argued that the arbitrators violated section 10(a)(3) of the FAA “by not fully considering its fraudulent inducement claim” and violated section 10(a)(4) of the FAA “by failing to fully review Old South’s evidence of, and the applicable law regarding, fraudulent inducement.” The Fifth Circuit concluded that neither of these arguments warranted reversal. It explained that both arguments “functionally invite[d] [it] to reassess the merits of [the arbitration panel’s] fraudulent inducement claim and reach a different conclusion than the” panel, which was “not something [the court could] do.” Old South also argued “that it didn’t voluntarily consent to arbitration because it was fraudulently induced to sign the … Agreement,” but the Fifth Circuit rejected that claim, noting that “even if a contract had been induced by fraud, the arbitration clause is enforceable unless the plaintiffs were fraudulently induced into agreeing to the arbitration clause itself.”

Dream Medical Group, LLC v. Old South Trading Co., No. 22-20286 (5th Cir. Mar. 6, 2023).

Third Circuit Affirms Finding That Defendant Waived Its Arbitration Rights

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In White v. Samsung Electronics America Inc., the Third Circuit Court of Appeals, in a precedential opinion, affirmed a district court order denying defendant Samsung’s motion to compel arbitration, concluding that, “[t]hrough its actions expressing an intent to litigate, Samsung waived its right to arbitration.”

The plaintiffs in this putative class action filed in 2017 brought claims alleging that Samsung, and others, illegally monitored their use of certain internet-based services on their smart TVs and collected personally identifying information, which they transmitted to third-party advertisers and data brokers. The “terms and conditions” the plaintiffs had to accept when setting up their smart TVs included an arbitration provision. Samsung initially moved to dismiss the complaint; however, the parties agreed to a stay and administrative dismissal of the case. In early 2018, the case was reinstated when the plaintiffs filed an amended complaint, which Samsung again sought to dismiss. Samsung also submitted a proposed discovery plan, which did not raise the arbitration provision or a possible motion to compel arbitration. The district court granted the motion to dismiss, after which the plaintiffs filed a second amended complaint in November 2018, which Samsung again moved to dismiss. The district court granted the motion in part, dismissing all but the Wiretap Act claims.

In May 2020, Samsung filed a motion to compel arbitration, which was denied without prejudice. Samsung then refiled its motion to compel in May 2021, arguing that “it did not waive its right to arbitrate because ‘the prerequisites of waiver — extensive discovery and prejudice — are lacking, and the [relevant] factors do not support a finding of waiver.’” The district court denied the motion, concluding that Samsung had waived its right to arbitrate, and the plaintiffs would suffer “significant prejudice” if compelled to arbitrate. Samsung appealed the district court’s decision to the Third Circuit, and while the appeal was pending, the U.S. Supreme Court issued its decision in Morgan v. Sundance Inc. Through supplemental briefing, Samsung brought the decision in Morgan to the court’s attention, arguing that the decision rejected a “prejudice-based waiver analysis” in connection with motions to compel arbitration.

Relying on the Federal Arbitration Act and the recent decision in Morgan, the Third Circuit concluded that “Samsung’s litigation actions here evince a preference for litigation over arbitration.” The court noted that Samsung agreed to stays in discovery so it could instead pursue its motions to dismiss the plaintiffs’ claims on the merits, which, to Samsung’s advantage, resulted in the dismissal of all but one claim. The court also found that Samsung “engaged in multiple instances of non-merits motion practice and acquiesced to the District Court’s pre-trial orders” and noted that Samsung submitted pro hac vice applications in the case and participated in several court conferences. The court also noted that the discovery plan asked whether the case was subject to court-annexed arbitration and, while the case was not subject to that particular type of arbitration, “Samsung should have disclosed that another type of arbitration may be applicable.” Relying on Morgan, the court affirmed the district court’s decision refusing to refer the matter to arbitration, concluding that Samsung waived its right to arbitrate.

White v. Samsung Electronics America Inc., No. 22-1162 (3d Cir. Mar. 7, 2023).

Ninth Circuit Affirms District Order Refusing to Compel Arbitration

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In City of Laurel, Mississippi v. Cintas Corp. No. 2, the Ninth Circuit Court of Appeals addressed the issue whether a valid arbitration agreement existed between the plaintiff City of Laurel, Mississippi, and defendant Cintas Corporation No. 2. The court affirmed the district court’s order denying Cintas’ motion to stay proceedings and compel arbitration, concluding that “there is no valid arbitration agreement between Cintas and the City.”

The case involved two contracts. The first contract, referred to as the “master agreement,” was between Cintas and “the lead public agency” and included an arbitration clause. The second contract was between Cintas and the city, and included provisions establishing how Cintas would deal with the city and other “participating public agencies.” The parties did not dispute that there was a valid arbitration agreement between Cintas and the “lead public agency” as stated in the first contract. Rather, the dispute focused on whether “the same [arbitration] agreement exists between Cintas and the City.”

The city brought breach of contract claims against Cintas, and the district court denied Cintas’ motion to stay the action and compel arbitration. In affirming the district court’s decision, the Ninth Circuit first noted that under the FAA, “the court is limited to determining (1) whether a valid agreement to arbitrate exists, and, if it does, (2) whether the agreement encompasses the dispute at issue.” The court found the contract between Cintas and the city did not include an arbitration clause, and instead provided that Cintas and the city would resolve disputes “directly between them in accordance with and governed by the laws of the State in which [the City] exits.” The court found that if this language compelled arbitration, “it would be superfluous in light of the arbitration agreement incorporated into the Master Agreement,” noting that courts “must avoid interpreting a contract in a way that would render provisions ‘redundant and superfluous.’” The court also rejected Cintas’ argument that the court should “harmonize” the two contracts by applying the arbitration agreement contained in the contract between Cintas and the lead public agency, citing Morgan v. Sundance Inc., which stated that “a court may not devise novel rules to favor arbitration over litigation.”

In a dissenting opinion, one of the circuit judges concluded that the underlying agreement between the parties compels arbitration of the dispute, and he would reverse the judgment of the district court and remand the case with instructions to compel arbitration.

City of Laurel, Mississippi v. Cintas Corp. No. 2, No. 22-15476 (9th Cir. Mar. 6, 2023).

Ninth Circuit Recognizes Precedent Restricting Arbitration-Favoring Rules, Compels Parties to Arbitrate Anyway

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In litigation “bookended by two Supreme Court decisions on arbitration,” namely, Epic Systems Corp. v. Lewis and Morgan v. Sundance Inc., the Ninth Circuit recognized Morgan’s holding prohibiting courts from creating “arbitration-favoring procedural rules” but nonetheless found that the lower court correctly compelled the parties to arbitrate their wage and hour dispute over the plaintiff’s protest.

Teresa Armstrong sued Michaels Stores Inc., alleging violations of California wage and hour laws on behalf of a putative class of Michaels’ employees. Michaels answered and asserted its right to arbitration as an affirmative defense. Thereafter, the parties submitted a joint case management statement listing the legal issues in the case, including whether Armstrong agreed to arbitrate her claims. Michaels represented that it planned to move to compel arbitration after conducting discovery. Michaels subsequently served five interrogatories and required Armstrong to produce 28 pages of documents relevant to certain non-arbitrable claims. Neither party filed any discovery motions.

Michaels moved to compel arbitration in August 2018, approximately 10 months after Armstrong had originally filed suit. Armstrong opposed it, arguing that Michaels had waived its right to arbitration due to delay. The district court ruled in favor of Michaels and the arbitrator awarded summary judgment to Michaels. Armstrong appealed to the Ninth Circuit.

While the appeal was pending, the U.S. Supreme Court decided Morgan, which held that “the plain language of the Federal Arbitration Act restricts courts from creating arbitration-favoring procedural rules.” The Ninth Circuit noted that, before Morgan, “to give voice to the FAA’s policy favoring enforcement of arbitration agreements, we held that waiver of the right to arbitration was disfavored.” Like most other circuits, the Ninth Circuit had created “an arbitration-specific waiver test,” which imposed a “heavy burden” on parties arguing that the right to arbitrate had been waived. After Morgan, courts are now required to treat arbitration agreements just like any other contract and, as such, “may not devise novel rules to favor arbitration over litigation.”

In light of Morgan, parties asserting waiver must now demonstrate (1) knowledge of an existing right to compel arbitration and (2) intentional acts inconsistent with that existing right. Unlike before, parties no longer have to demonstrate prejudice to the person opposing arbitration caused by such inconsistent acts.

The Ninth Circuit applied the precedent to Michaels’ actions in the litigation and found that Michaels had not intentionally acted inconsistently with its right to compel arbitration. On the contrary, Michaels consistently stated its intent to move to compel arbitration. Further, Michaels did not actively litigate the merits of the case in the district court. Its limited discovery requests were related to Armstrong’s non-arbitrable claims. Finally, Michaels’ motion to compel arbitration was filed within a year of the lawsuit originally being filed against it. Even under the post-Morgan regime for analyzing waiver of the right to compel arbitration, the Ninth Circuit held Michaels’ actions in this case insufficient to waive its right.

Armstrong v. Michaels Stores Inc., No. 21-15397 (9th Cir. Feb. 13, 2023)