Strategic delay in compelling arbitration deemed waiver of right against class

By deciding not to compel arbitration against the named plaintiff, a defendant in a putative class action can waive its right to compel arbitration against absent class members, the Division 1 of the 2nd District Court of Appeal has held. Sprunk v. Prisma LLC, 2017 DJDAR 8214 (Aug. 23, 2017).

The court said Prisma LLC "waived its right to seek arbitration by filing and then withdrawing a motion to compel arbitration against the named plaintiff, Maria Elena Sprunk, and then waiting until after a class had been certified to seek arbitration against class members." That tactical decision to wait four years, the court concluded, served as a waiver of its ability to enforce all of the absent class members' arbitration agreements.

This is just one of the cases chipping away at what may turn out to be a short break for from wage and hour class actions against employers following the California Supreme Court's Iskanian v. CLS Transportation Los Angeles, LLC, 59 Cal. 4th 348 (2014).

For the last six years, since the U.S. Supreme Court decided AT&T Mobility, LLC v. Concepcion, 131 S. Ct. 1740 (2011), employers have tried to use arbitration agreements to limit wage and hour class action exposure. In Concepcion, the U.S. Supreme Court upheld the enforceability of express class action waivers in consumer arbitration agreements under the Federal Arbitration Act. This meant that a putative class representative's claims would be compelled to individual arbitration if he or she signed an arbitration agreement with the defendant, and the class claims would be dismissed. The year before, in an antitrust case, the high court held that class arbitration -- with its high stakes, complex procedural requirements, and lack of appellate rights -- could not be imposed on parties who did not agree to it. See Stolt-Nielson, S.A. v. Animal Feeds International, Corp., 130 S. Ct. 1758 (2010). This affected arbitration agreements that were "silent" about class arbitration, which could result in a de facto class action waiver.

Employers argued the applicability of these U.S. Supreme Court cases to the employment context with mixed results until the California Supreme Court, in Iskanian, agreed that they applied.

Iskanian has been eroded somewhat. For example, the California Supreme Court issued a rule that effectively delegated to the arbitrator in most instances the issue of whether an agreement without an express class action waiver nonetheless permits class arbitration. See Sandquist v. Lebo Automotive, Inc., 1 Cal. 5th 233 (2016). Defendants wishing to avoid class arbitration would not want to risk moving to compel arbitration of a putative class representative's individual claims under this rule. Another example, in the employment context, is the split in authority on whether class action waivers unlawfully preclude "concerted activity" under the National Labor Relations Act, notwithstanding the Federal Arbitration Act. The U.S. Supreme Court will decide that next term.

The court in Sprunk held that Prisma waiving its right to avail itself of the arbitration agreement Sprunk signed was not controversial. Prisma promptly filed a motion to compel at the outset, but then withdrew its motion, opting instead to file a cross-complaint and engage in discovery.

It was not until its opposition to Sprunk's class certification motion that Prisma raised the argument that class treatment was improper because all of the putative class members signed arbitration agreements. Prisma contended that it could not have previously moved for individual arbitration of the unnamed class members' claims because they were not yet parties to the action. The court accepted that without deciding the issue.

Prisma also argued that it withdrew its motion to compel Sprunk's claims to individual arbitration, because it would have been "futile" to pursue it prior to Iskanian. The court rejected this argument, stating that Prisma "was not entitled to litigate indefinitely in court so long as there was some risk that it might lose a motion to compel individual arbitration. Plan B could reasonably make a strategic decision that it did not want to assume the risk that the trial court might order class arbitration. But risk is not the same as futility."

The court found Prisma's risk-averse decision to withdraw its motion vis-à-vis Sprunk critical, because that motion could have ended the action for the absent class members. Instead, the parties engaged in class discovery and prepared and argued a class certification motion, all of which would have been unnecessary if Prisma had not withdrawn its motion (or if the trial court accepted Prisma's argument that class treatment was inappropriate because the absent class members signed arbitration agreements).

Sprunk has important practical implications. First, defendants are faced with difficult questions. What should a defendant do if it believes a putative class representative signed an arbitration agreement with a class action waiver, but misplaced it or later discovers it when litigation is underway? What if the putative class representative signed an arbitration agreement made unenforceable by changes in the law, but absent putative class members signed a different version? Second, and more important, Sprunk has weakened the "futility" rule. The law on the enforceability of arbitration agreements is unsettled and defendants' ability to compel enforcement of their agreements may suffer when considering the risk of inadvertently compelling class arbitration or inadvertently causing a mass relinquishment of the right to enforce them against absent putative class members.