By Ronald Miller, J.D.
Because cosmetology schools waived their right to arbitrate by their litigation conduct, the Ninth Circuit affirmed a federal district court’s denial of their motion to compel arbitration of claims brought by students of a cosmetology school who alleged that they were "employees" of the schools entitled to minimum wages, overtime pay, and unpaid premiums for missed meal and rest breaks. The question of arbitrability was presumptively for the court to decide, and the broad nature of the parties’ arbitration clause did not overcome the presumption. Thus, the district court did not err in deciding the litigation conduct waiver issue itself. The defendants waived their right to arbitration because they engaged in acts inconsistent with this right, and the plaintiffs were prejudiced (Martin v. Yasuda
, July 21, 2016, Reinhardt, S.).
Plaintiffs were students enrolled in the schools’ cosmetology program. Each of them signed an enrollment agreement that contained a binding arbitration provision. In order to graduate from a cosmetology school, students must, among other things, complete 1600 hours of technical instruction and practical training, as mandated under California regulations. The students perform cosmetology, barbering, and manicure services for the college’s paying clients. They also cleaned the studio and utensils, sold retail products, and promoted the school’s services. The students were not paid for their work.
The plaintiffs filed a class action lawsuit against the colleges and their owner, alleging that the defendants violated the FLSA and state labor laws. Specifically, they contended that the schools were an "employer" under the FLSA, as well as state law, so that they were entitled to minimum and overtime wages and unpaid premiums for missed meal and rest breaks.
After the schools were served with the complaint, their counsel filed a notice of appearance. The parties filed a joint stipulation to extend time to file a motion for FLSA conditional certification and class certification. They further agreed that there should be discovery and an opportunity for the district court to resolve the question whether the plaintiffs were employees of the schools under the wage laws before any effort to certify the class. Thereafter, the plaintiffs filed a first amended complaint, and the schools moved to dismiss their state law claims against all defendants and their FLSA claim against the owner. The district court dismissed the causes of action against the owner, but denied the motion with respect to the state law claims.
On August 29, 2014, the plaintiffs filed a second amended complaint and the school responded with an answer. The defendants pleaded arbitration as one of 43 affirmative defenses, but did not move to compel arbitration.
Motion to compel arbitration.
On November 28, 2014, the parties filed a Joint Rule 26(f) Report, indicating that they had already begun exchanging written discovery requests, proposed discovery deadlines, and planned to take and defend depositions. However, in a footnote, the defendants maintained that each plaintiff executed an arbitration agreement and that they were not waiving any rights as to those agreements. On December 8, 2014, the district court held a scheduling conference, during which the court asked defendants’ counsel whether he intended to file a motion to compel arbitration. Counsel responded that he had not made a decision, and the court warned about the possibility of waiver. Discovery continued into 2015. On February 25, 2015, defendants’ counsel informed plaintiffs’ counsel of their intent to compel arbitration.
On March 20, 2015, almost 17 months after the start of the case, the defendants moved to compel individual arbitration. Applying the three factor waiver test employed in the Ninth Circuit, the district court denied the motion, holding that: (1) it was indisputable the defendants had knowledge of their existing right to compel arbitration, (2) they engaged in acts inconsistent with that right by delaying their motion to compel and deciding to actively participate in the litigation for 17 months, and (3) granting the motion after the start of litigation and after a ruling partly in favor of the plaintiffs on a motion to dismiss would result in prejudice to the plaintiffs.
Waiver by litigation.
The schools argued that the district court erred in two ways. First, they argued that an arbitrator, rather than the district court, should decide whether they waived their right to arbitration through litigation conduct. Second, they contended that even if the district court was correct to decide the issue, it erred by finding waiver.
In Howsam v. Dean Witter Reynolds, Inc.
, the Supreme Court distinguished between two categories of gateway issues on motions to compel arbitration. The first category of gateway issues is a "question of arbitrability"—that is, "whether the parties have submitted a particular dispute to arbitration." This category includes issues that the parties would have expected a court to decide. These disputes are "for judicial determination unless the parties clearly and unmistakably provide otherwise." In contrast, the second category—"procedural" issues—is "presumptively not
for the judge, but for an arbitrator, to decide."
In Cox v. Ocean View Hotel Corp.
, the Ninth Circuit made clear that waiver by litigation conduct is part of the first category of gateway issues. On the issue of whether the arbitrator should decide the issue, the appeals court concluded that the question whether a party waived its right to arbitrate on the basis of its litigation conduct is a question of arbitrability and is in the first category of gateway issues. Accordingly, under Howsam
, the question is presumptively for a court to decide. The First, Third, Sixth, and Eleventh Circuits, as well as the Supreme Courts of Colorado, Nebraska, Texas, and Alabama also allow courts to decide the waiver by litigation conduct issue.
The court next rejected the defendants’ contention that the broad nature of the arbitration clause overcame the presumption. It pointed out that the scope of the arbitration agreement was far less broad than the provision in Cox
, and so was insufficient to show an intent that an arbitrator decide the waiver by litigation conduct issue and to overcome the presumption to the contrary. Thus, the district court did not err in deciding the litigation conduct waiver issue itself.
The defendants conceded that they had knowledge of the right to compel arbitration. Thus, the appeals court addressed only whether they engaged in acts inconsistent with their right to arbitration and whether the students were prejudiced. There is no concrete test to determine whether a party has acted inconsistent with its right to arbitrate; however, the Ninth Circuit has stated that a party’s extended silence and delay in moving for arbitration may indicate a "conscious decision to continue to seek judicial judgment on the merits of [the] arbitrable claims," which would be inconsistent with a right to arbitrate. In this instance, the defendants spent 17 months litigating the case, including discovery and depositions. Moreover, they did not even note their right to arbitration until almost a year into the litigation and did not move to enforce that right until well after that time.
In order to establish prejudice, the plaintiffs must show that, as a result of the defendants having delayed seeking arbitration, they have incurred costs that they would not otherwise have incurred, that they would be forced to relitigate an issue on the merits on which they have already prevailed in court, or that the defendants have received an advantage from litigating in federal court that they would not have received in arbitration. Here, the appeals court agreed with the district court that the plaintiffs easily met the prejudice requirement. They expended considerable time and money due to the defendants’ failure to timely move for arbitration.