Noted With Interest: Can Class Defendants Forfeit Their Right to Arbitration? The Intent to Arbitrate Post-Morgan

The Supreme Court recently held in Morgan v. Sundance Inc. that federal courts are not empowered to create “special, arbitration-preferring procedural rules” based on the Federal Arbitration Act’s “policy favoring arbitration.” 142 S. Ct. 1708, 1713 (2022). Prior to this decision, nine federal appellate courts had created a unique addition to the waiver doctrine for use when resolving motions to compel arbitration. These courts required the party opposing arbitration to show that it suffered prejudice from the moving party’s delay in compelling it. Morgan specifically rejected this rule, and called for courts to instead apply waiver and other contract doctrines just as they do in contract disputes. The Ninth Circuit’s first opinion following Morgan demonstrates the difficulty in applying this holding. There, a majority held that a class-action defendant’s failure to indicate its intent to arbitrate at earlier stages of the litigation waived its right to arbitrate, even though the named plaintiff was not subject to the arbitration provision. The dissent considered the majority’s holding to be a novel “forfeiture” rule and warned that class action litigants must now take care to invoke their right to arbitration as quickly as possible, even where the plaintiff is not subject to an arbitration clause and the scope of the class may be unknown.

I. Tiffany Hill v. Xerox Business Services, LLC¸ 59 F.4th 457 (9th Cir. 2023)

A.  Background

This litigation stemmed from Tiffany Hill’s class-wide allegations that Xerox Business Services, LLC (XBS) violated the Fair Labor Standards Act and various Washington state compensation laws. Beginning in 2002, XBS issued a Dispute Resolution Plan (DRP), in which one section bound signatories to arbitration. In September 2012, XBS issued an updated DRP that required arbitration on an individual basis and barred initiation of or participation in a class action. Not all signatories to the 2002 DRP signed the 2012 DRP. Hill herself did not sign either DRP, but other members of the putative class did.

Throughout the lawsuit, which was filed in April 2012, XBS repeatedly asserted that signatories to the 2012 DRP had failed to exhaust their administrative and contractual remedies by failing to submit the dispute to arbitration and that these signatories were expressly prohibited from participating in the class action for that reason. XBS also opposed class certification on predominance grounds based primarily on Hill’s status as a non-signatory to the 2012 DRP. XBS argued that, as a non-signatory to the DRP, Hill faced different defenses than other members of the class and thus could not adequately represent them. XBS pressed these arguments relating to the 2012 DRP over nine years’ worth of pleadings, merits briefing, and an interlocutory appeal certified to the Washington Supreme Court. XBS never raised arguments or issues regarding individual arbitration for the signatories to the 2002 DRP throughout these legal proceedings.

It was not until Hill moved to define the scope of the proposed class, on July 18, 2019, that XBS asserted for the first time that the signatories to the 2002 DRP were bound to individual arbitration, just like the 2012 DRP signatories that had been the subject of their litigation all along. XBS did not move to compel arbitration against the 2002 signatories, however; XBS instead continued to litigate merits issues against Hill. On March 5, 2020, after the notice administrator gave his report on the initial class size, XBS finally moved to compel arbitration by the class members who had signed the 2002 DRP. The district court denied the motion and found that XBS had waived its right to arbitration by not seeking it sooner while simultaneously litigating the merits of the case. XBS appealed.

The U.S. Supreme Court then issued its opinion in Morgan v. Sundance, which addressed whether the “prejudicial delay” extension to the waiver doctrine was correct. The Supreme Court determined that it was not, because this extension improperly made arbitration agreements more enforceable than normal contracts. Instead, courts should apply the standard waiver principles that apply to general contract disputes to arbitration clauses. Correctly stated, the waiver test considers only (1) knowledge of an existing right to compel arbitration and (2) intentional acts inconsistent with that existing right. The Supreme Court’s unanimous opinion, however, was limited to barring court-created “novel rules [that] favor arbitration over litigation.” The Court explicitly left open whether federal law, or even the “rules of waiver, forfeiture, estoppel, laches, or procedural timeliness” were an appropriate framework to resolve motions to compel arbitration. 

B.  Opinion

In Hill, the Ninth Circuit applied the two-part waiver test to evaluate XBS’s request to arbitrate. Under the first prong, the majority determined that XBS knew of its existing right to compel arbitration because XBS had raised the 2012 DRP throughout the decade of litigation and had sought discovery on the 2002 DRP (albeit without ever asserting its intent to compel individual arbitration for those signatories) well in advance of class certification. Under the second prong, the majority determined that the totality of XBS’s actions indicated that XBS had intentionally refrained from moving to compel arbitration while litigating the merits of the case for nine years. This showed “a conscious decision to continue to seek” a merits judgment. 

Finally, the panel rejected XBS’s contention that it would have been futile to seek to compel arbitration any sooner because the district court lacked jurisdiction over those individuals prior to class certification. The panel contended that waiver does not require a court to have jurisdiction or “even a lawsuit to have been filed.”[1] The majority indicated that its holding was limited: under these facts, “it was permissible to find that XBS” had waived the right to compel arbitration under the 2002 DRP.

C.  Dissent

In dissent, Judge Lawrence VanDyke contended that the majority’s decision transformed the Ninth Circuit’s “clear waiver rule” into “an opaque forfeiture rule” under which “a defendant loses its right to arbitrate against absent class members unless it affirmatively asserts the right long before it even knows who might be in the class, and even though it has no right to arbitrate with the named plaintiff with whom it is actually litigating.” In his view, XBS “never took a single act inconsistent with its intent to arbitrate the claims” of the signatories to the 2002 DRP. Judge VanDyke stressed the undisputed fact that XBS moved to compel arbitration “on literally the first day after it could do so.” Judge VanDyke would have held “that parties should be allowed to engage in normal precertification class discovery without fear of waiving any right to compel arbitration.”  The majority’s holding had, in his view, created “both a new rule and unnecessary uncertainty” for litigants—an “unwinnable Catch-22.”

II.  Conclusion

Hill teaches that class defendants should identify applicable arbitration clauses and assert the intent to arbitrate as early as possible—even if not by formal motion, and even if a lead class member is not subject to arbitration. Although Morgan left open how, or whether, to apply waiver or other contract principles when determining whether to grant a motion to compel arbitration, Hill demonstrates that the length of litigation is an important factor in determining whether arbitration has been waived, even without the prejudice analysis. Whether the majority’s holding create a novel “forfeiture” rule of the right to arbitrate for class defendants or merely restates the waiver analysis is something future cases will decide. In the meantime, class defendants must take care to assert their intent to arbitrate early to avoid the outcome in Hill.   

[1]   The panel also assessed and rejected XPS’s second futility argument, which related to a 2019 Supreme Court decision, in short order.