Ninth Circuit Concludes Defendant Waived Right to Seek Arbitration of Class Action
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).