Martin v. Milan Institute: 9th Cir. Affirms Trial Court’s Finding of Arbitration Waiver

In Martin, et al. v. Yasuda, et al., No. 15-55696 (9th Cir. July 21, 2016) (slip op. available here), the Ninth Circuit Court of Appeals reaffirmed its holding that a court—not the arbitrator—determines whether arbitration has been waived, unless the arbitration agreement specifically reserves that task for the arbitrator, and found that the defendants’ litigation conduct over a seventeen-month period resulted in a waiver of the defendants’ right to arbitrate. This important ruling rejects the defendants’ attempt to manipulate the judicial and arbitral systems to gain an unfair advantage due to their litigation conduct. Slip op. at 21.

In Martin, students of the Milan Institute of Cosmetology (“Milan”) sued the school in federal court alleging that Milan was, in fact, their “employer” because they were required to perform unpaid work to graduate from Milan’s cosmetology program, including cleaning, sweeping, selling retail products, and promoting Milan’s services. Slip op. at 4. The students’ Enrollment Agreement contained an arbitration agreement that stated, “[a]ll determinations as to the scope, enforceability and effect of this arbitration agreement shall be decided by the arbitrator and not by a court.” Id. The plaintiffs filed their complaint on October 28, 2013, and the following events transpired during litigation: (1) the parties filed a Joint Stipulation to extend the time to file a motion for conditional and class certification, noting the considerable time and effort spent by the parties to conduct discovery to focus on the issue of whether Milan employed the students; (2) the court denied in part and granted in part the defendants’ motion to dismiss the plaintiffs’ First Amended Complaint, holding the plaintiffs could assert California state law claims; (3) the defendants answered a Second Amended Complaint and asserted arbitration as an affirmative defense; (4) the parties submitted a Joint Rule 26(f) Report detailing an eight-month period of discovery related to the “employee” issue and, at the scheduling conference, the court warned defense counsel about possibly waiving their right to arbitrate; (5) written discovery occurred and the deposition of Milan’s CEO was taken; and (6) seventeen months after the start of the case, the defendant moved to compel arbitration. Id. 5-9. The district court denied the defendant’s motion to compel arbitration, finding that the defendant had waived its right to arbitrate. The defendants then appealed.

The Ninth Circuit first held that there is a presumption that that the court, and not the arbitrator, should decide the waiver issue. Citing the Ninth Circuit’s decision in Cox v. Ocean View Hotel Corp., 533 F. 3d 1114, 1120-21 (9th Cir. 2008), the panel stated that waiver by litigation conduct is a gateway issue to be decided by the court, not the arbitrator, under the Supreme Court’s decision in Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 83 (2002). Slip op. at 10-11. The broad language in Milan’s arbitration agreement assigning duties to the arbitrator does not overcome the presumption because the clause did not contain “clear and unmistakable language” that the arbitrator may decide the waiver issue. Id. at 12-13. Presumably, the arbitration agreement must clearly and specifically provide that only the arbitrator can determine whether litigation conduct waives the right to arbitrate. But, the court reasoned, such a provision would place this decision in the hands of the arbitrator, who is less familiar with the litigation than the court and with someone who has a financial interest in finding no waiver so that the arbitrator may keep the case. See id. at 12 n3.

The Court of Appeals, applying its arbitration waiver test announced in Fisher v. A.G. Becker Paribas, Inc., 791 F.2d. 691, 694 (9th Cir. 1986), then found that the defendants waived the right to arbitrate because they had engaged in conduct inconsistent with the right to arbitrate that prejudiced the plaintiffs. In so doing, the appeals court held that a statement by a party that is has the right to arbitration in the pleadings or motions is not enough to defeat a claim of waiver. Further, the court found it particularly key that the defendants had structured discovery, including a deposition, so that the trial court could rule on the defendants’ motion to dismiss on a key merits issue: whether the Cosmetology Act legally precluded the students from being classified as employees. Because the court found for the plaintiffs on the issue, the plaintiffs would be prejudiced by the delay in moving to arbitrate because they would be forced to re-litigate an issue on the merits on which they had already prevailed in court. Slip op. at 17. Finally, spending a lengthy amount of time litigating in the more complex federal court system inevitably causes the parties to spend more time, money, and effort than had they proceeded to arbitration. Id. at 18.

In affirming the district court’s decision, the Ninth Circuit agreed that the defendants couldn’t have their cake and eat it too: a party that signed a binding arbitration agreement and then is sued “can either seek to compel arbitration or agree to litigate in court. It cannot choose both.” Slip op. at 21 (emphasis added).

Authored By:
Robert Drexler, Senior Counsel
CAPSTONE LAW APC