August 31, 2011
Practice Group:
Mortgage Banking &
Consumer Financial
Products
“Everything Old Is New Again”: Following the
Concepcion Decision, New Motions to Compel
Individual Arbitration Are Granted in Old Class Actions
Following the Supreme Court’s recent decision in Concepcion,1 class-action defendants have met with
success in compelling individual arbitration even in longstanding litigation. The Northern District of
California recently ruled, for example, that because of the “futility” of seeking to compel individual
arbitration prior to Concepcion, defendants in a pending class-action litigation did not waive their
right to seek such relief.2 Other jurisdictions may reach a similar conclusion, providing businesses –
including those in the financial services, telecommunications, and other consumer services industries
– with a new opportunity to enforce class-action waiver provisions in consumer arbitration
agreements.
Right to Demand Individual Arbitration Not Waived
The right to demand resolution of a dispute through arbitration is created by contract. With some
variation among different states’ contract law, a party may waive its right to demand arbitration when
it knows of that right, acts in a manner inconsistent with that right, and the party opposing a
subsequent demand for arbitration establishes it would suffer prejudice as a result.3 Ordinarily, to
stymie a waiver argument, a defendant will move to compel arbitration early in the course of a
litigation.
In a recent California federal court decision, Estrella v. Freedom Financial,4 the plaintiffs brought
class-action claims against a group of defendants offering debt-relief services allegedly in violation of
the California Unfair Competition Law, Consumers Legal Remedies Act, and Financial Code
§ 12315.1, and of the federal Credit Repair Organization Act.5 The contract governing the parties’
relationship provided that they could seek to compel individual arbitration of disputes. When sued in
court, however, the defendants chose not to exercise their right to compel individual arbitration
because of the futility of seeking such relief in light of the California Supreme Court’s Discover Bank
v. Superior Court6 decision barring class-action waiver provisions in arbitration agreements.7 The
parties litigated the plaintiffs’ claims for over two years, and the court certified a class. Following the
Concepcion decision, the defendants filed a motion to compel individual arbitration, asserting that
they were now “for the first time, entitled to have the plaintiffs’ claims decided in arbitration on an
individual basis.”8 The plaintiffs responded that the defendants had waived their right to demand
individual arbitration.9
The Estrella court agreed with the defendants, ruling that they did not waive their right to demand
individual arbitration by choosing to exercise their right only after the issuance of the Concepcion
decision.10 The court reasoned that the defendants had not previously done so “because, prior to the
Supreme Court’s decision in Concepcion, it would have been futile for the defendants to file a motion
to compel arbitration: prior to Concepcion, California and Ninth Circuit law held that similar
arbitration agreements with class-action waivers were unconscionable and unenforceable.”11
Importantly, the court held the plaintiffs bore the “heavy burden” of proving waiver “[b]ecause waiver
of a contractual right to arbitration is not favored.”12 The plaintiffs, however, could not meet their
burden. The defendants did not act inconsistently with their right to arbitrate by choosing not to seek
“Everything Old Is New Again”: Following the Concepcion
Decision, New Motions to Compel Individual Arbitration
Are Granted in Old Class Actions
that relief prior to the “‘fundamental’ shift in how arbitration would occur” engendered by
Concepcion.13
In reaching its decision, the Estrella court relied on well-established Ninth Circuit precedent,
including Fisher v. A.G. Becker Paribas, Inc.,14 that defendants do not waive arbitration rights,
notwithstanding their participation in litigation, where (1) the law at the time the case was filed would
have rendered a motion to compel arbitration futile, and (2) a subsequent change in the law removes
the barrier to seeking arbitration.15
Other California federal courts have rendered similar decisions, granting post-Concepcion motions to
compel individual arbitration where the defendants had initially forgone such relief.16 In Quevedo v.
Macy’s, Inc.,17 for example, the United States District Court for the Central District of California
concluded that the defendants’ litigation of a class action for two years was “not inconsistent with the
right to arbitrate and [did] not evidence any intent by [the defendant] to waive its rights under the
arbitration agreement.”18 Applying the Fisher futility exception to the waiver of arbitration rights, the
Quevedo court ruled that no waiver occurred because until Concepcion, “California law made class
action bans in arbitration agreements unenforceable.”19
Other Courts May Follow Suit
Although, following the issuance of the Concepcion decision, only California federal courts have
rendered decisions applying the futility exception to the waiver of arbitration rights, other courts may
well follow suit. Prior to Concepcion, courts in other jurisdictions had found that state
unconscionability law barred the enforcement of class-action waiver provisions in arbitration
agreements. The holding in Concepcion, namely that the FAA preempted California
unconscionability law by essentially “[r]equiring the availability of classwide arbitration,”20 is likely
applicable to other states’ unconscionability jurisprudence where it resembles pre-Concepcion
California law.21 Indeed, federal courts in a number of jurisdictions have already recognized the
impact that Concepcion has had on state-law unconscionability analysis, compelling individual
arbitration based on agreements that would have been unenforceable prior to the Supreme Court’s
ruling.22 In those jurisdictions, defendants who initially chose not to compel arbitration may now be
able to do so pursuant to a futility exception to the waiver of arbitration rights.
Conclusion
In prior years, many entities that provide consumer services chose not to enforce consumer arbitration
agreements, knowing that the presence of a class-action waiver provision would likely lead to a ruling
that the agreement was unconscionable and, thus, unenforceable. The Supreme Court’s ruling in
Concepcion vindicates businesses’ contractual rights to seek individual arbitration of disputes and
may provide businesses the opportunity to compel individual arbitration even where litigation has
been ongoing.
2
“Everything Old Is New Again”: Following the Concepcion
Decision, New Motions to Compel Individual Arbitration
Are Granted in Old Class Actions
Authors:
Andrew C. Glass
Partner
andrew.glass@klgates.com
+1.617.261.3107
R. Bruce Allensworth
Partner
bruce.allensworth@klgates.com
+1.617.261.3119
Roger L. Smerage
Associate
roger.smerage@klgates.com
+1.617.951.9070
1
AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1748 (2011) (holding that the Federal Arbitration Act, 9 U.S.C. §§ 1,
et seq. (“FAA”), preempted California unconscionability law because it “interfere[d] with fundamental attributes of
arbitration” by essentially “[r]equiring the availability of classwide arbitration”).
2
Estrella v. Freedom Fin., No. C 09-03156 SI, 2011 WL 2633643, at *4-5 (N.D. Cal. Jul. 5, 2011).
3
See Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986).
4
No. C 09-03156 SI, 2011 WL 2633643 (N.D. Cal. Jul. 5, 2011).
5
2011 WL 2633643, at *1.
6
113 P.3d 1100 (Cal. 2005).
7
See Estrella, 2011 WL 2633643, at *2, *4; see also Shroyer v. New Cingular Wireless Servs., Inc. 498 F.3d 976, 981-83
(9th Cir. 2007) (applying Discover Bank v. Superior Ct., 113 P.3d 1100 (Cal. 2005), and holding that class-action waiver
provisions generally render consumer arbitration agreements unconscionable).
8
Estrella, 2011 WL 2633643, at *4.
9
Id.
10
Id. at *4-5.
11
Id. at *5 (citing Discover Bank and Shroyer).
12
Estrella, 2011 WL 2633643, at *4.
13
Id. at *5.
14
791 F.2d 691 (9th Cir. 1986).
15
Estrella, 2011 WL 2633643, at *4-5 (citing Fisher, 791 F.2d at 694-97). In Fisher, the Ninth Circuit examined the impact
on arbitration demands following the Supreme Court’s decision in Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213
(1985). Byrd rejected the so-called “intertwining doctrine” under which some federal courts, including those in the Ninth
Circuit, would not compel the arbitration of common law claims that were “intertwined” with non-arbitrable securities law
claims. 470 U.S. at 216-17. The Fisher court concluded that because, prior to Byrd, it would have been futile for the
defendants to seek arbitration, they had not waived their right to do so by choosing to exercise their right only after Byrd
changed the law. 791 F.2d at 697. Other circuits have also recognized the “futility” exception to waiver of arbitration
rights. See, e.g., Ackerberg v. Johnson, 892 F.2d 1328, 1332-33 (8th Cir. 1989) (noting Eleventh Circuit’s application of
futility exception); Benoay v. Prudential-Bache Sec., Inc., 805 F.2d 1437, 1439-40 (11th Cir. 1986) (applying reasoning
that litigants are not required “to engage in futile gestures merely to avoid a claim of waiver” of arbitration rights); Ketchum
v. Almahurst Bloodstock IV, 685 F. Supp. 786, 795-96 (D. Kan. 1988) (concluding that motion to compel arbitration would
have been futile under existing Tenth Circuit law).
16
See, e.g., Swift v. Zynga Game Network, Inc., No. C-09-5443 EDL, 2011 WL 3419499, at *8-10 (N.D. Cal. Aug. 4,
2011); Bryant v. Serv. Corp. Int'l, No. C 08-01190SI, 2011 WL 2709643, at *4-5 (N.D. Cal. Jul. 12, 2011); In re Cal. Title
Ins. Antitrust Litig., No. 08-01341 JSW, 2011 WL 2566449, at *2-3 (N.D. Cal. Jun. 27, 2011); Quevedo v. Macy’s, Inc., --F. Supp. 2d ----, 2011 WL 3135052, at *4-5, *7 (C.D. Cal. Jun. 16, 2011); see also Morse v. ServiceMaster Global
3
“Everything Old Is New Again”: Following the Concepcion
Decision, New Motions to Compel Individual Arbitration
Are Granted in Old Class Actions
Holdings Inc., No. C 10-00628SI, 2011 WL 3203919, at *2-3 (N.D. Cal. Jul. 27, 2011) (relying upon “evidence that
plaintiffs would likely have attempted to arbitrate their claims on a classwide basis had defendants moved to compel
arbitration before Concepcion”).
17
--- F. Supp. 2d ----, 2011 WL 3135052 (C.D. Cal. Jun. 16, 2011).
18
2011 WL 3135052, at *4.
19
Id.
20
131 S. Ct. at 1748, 1750-51.
21
For instance, a trio of Missouri state court decisions dating back to 2005 concluded that class waivers rendered
arbitration agreements unconscionable because they precluded vindication of rights under state consumer protection laws
and exculpated defendants from liability. See Ruhl v. Lee’s Summit Honda, 322 S.W.3d 136, 139-40 (Mo. 2010); Shaffer
v. Royal Gate Dodge, Inc., 300 S.W.3d 556, 559-61 (Mo. App. Ct. 2009); Whitney v. Alltel Commc’ns, Inc., 173 S.W.3d
300, 309-14 (Mo. App. Ct. 2005).
22
See, e.g., Cruz v. Cingular Wireless, LLC, --- F.3d ----, 2011 WL 3505016 (11th Cir. Aug. 11, 2011) (examining Florida
law); Alfeche v. Cash Am. Int’l, Inc., No. 09-0953, 2011 WL 3565078, at *3-5 (E.D. Pa. Aug. 12, 2011); Hopkins v. World
Acceptance Corp., --- F. Supp. 2d ----, 2011 WL 2837595, at *5-7 (N.D. Ga. Jun. 29, 2011); Bernal v. Burnett, --- F. Supp.
2d ----, 2011 WL 2182903, at *5-7 (D. Colo. Jun. 6, 2011); Day v. Persels & Assocs., LLC, No. 8:10-CV-2463-T-33TGW,
2011 WL 1770300, at *5-7 (M.D. Fla. May 9, 2011).
4
“Everything Old Is New Again”: Following the Concepcion
Decision, New Motions to Compel Individual Arbitration
Are Granted in Old Class Actions
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5
“Everything Old Is New Again”: Following the Concepcion
Decision, New Motions to Compel Individual Arbitration
Are Granted in Old Class Actions
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6