Justices Deny Former Accounting Employee Review on Arbitration Waiver Issue Under FAA

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By Kevin McGowan

Oct. 14 — Denying a former accounting firm employee's petition, the U.S. Supreme Court Oct. 14 declined to review a federal appeals court ruling that Ernst & Young LLP didn't waive its right to arbitrate the employee's state law wage and hour claims by not seeking arbitration until three years after she had sued.

The justices declined to review a U.S. Court of Appeals for the Ninth Circuit decision that, under the Federal Arbitration Act, a party arguing an arbitration agreement has been waived bears a “heavy burden” of showing she was prejudiced by the other party's delay in seeking arbitration, and former Ernst & Young employee Michelle Richards failed to show such prejudice (734 F.3d 871, 21 WH Cases2d 21 (9th Cir. 2013)).

In seeking review, Richards urged the Supreme Court to resolve a purported “deep conflict” among the federal circuit courts about whether the FAA requires a showing of prejudice for a court to deny a request for arbitration.

Even if prejudice must be shown, the lower courts also are split on what constitutes “prejudice,” Richards said. She certainly experienced prejudice when Ernst & Young waited until after a lawsuit was filed, discovery had occurred and the district court had issued some preliminary orders before requesting arbitration, Richards said.

Opposing review, Ernst & Young said the Ninth Circuit properly ruled no waiver had occurred because Richards suffered no prejudice from the delay and the accounting firm moved promptly to compel arbitration after the Supreme Court decision in AT&T Mobility, LLC v. Concepcion, 563 U.S. 321 (2011), made clear its arbitration agreement barring class claims was enforceable.

Arbitration Request Delayed

Richards sued Ernst & Young in 2008 in a California state court, alleging claims for overtime wages and other alleged violations of state law. Richards asserted she was misclassified as exempt from California's overtime, meal break and rest break requirements, and she sought relief for a purported class of similarly situated employees.

Ernst & Young never mentioned the arbitration agreement in responding to Richards's complaint and it successfully removed the suit to federal district court. Richards's suit eventually was consolidated with two other wage and hour suits against Ernst & Young in the U.S. District Court for the Northern District of California that had been pending since 2005.

Discovery ensued and the court in 2010 granted in part and denied in part Ernst & Young's summary judgment motion, dismissing Richards's meal and rest break claims without prejudice but allowing her overtime claims to proceed. The court also considered a class certification motion filed by Richards and a co-plaintiff.

In 2011, after the Supreme Court decided Concepcion, Ernst & Young filed a motion to dismiss or, in the alternative, to stay the consolidated suit including Richards's action and to compel arbitration.

The district court in September 2011 denied the motion, reasoning Ernst & Young had intentionally chosen to proceed with litigation and rejecting as “less creditable” the accounting firm's argument it hadn't sought arbitration because it would have been “futile” under prevailing California law prior to Concepcion.

Even “Richards acknowledges that the Ninth Circuit's decision to apply federal law rather than state law does not conflict with the decision of any other court of appeals; indeed, it is fully consistent with this [Supreme] Court's precedents interpreting the FAA,” Ernst & Young said in its brief opposing review.

But on appeal, the Ninth Circuit ruled that under Section 3 of the FAA, Richards must prove she was prejudiced by the delay in order to deny Ernst & Young's motion for a stay and for arbitration. That Ernst & Young had waited three years, that Richards spent time and money in discovery and that the district court had ruled on summary judgment motions filed by Ernst & Young weren't enough to show Richards was “prejudiced” and that the firm waived its right to arbitrate, the Ninth Circuit said.

Resolve Circuit Split

In seeking review, Richards said federal appeals courts are deeply split on whether FAA Section 3 requires a party opposing a judicial stay and arbitration to show “prejudice” before a court can deny an arbitration request by a party that has chosen to litigate.

Federal circuit courts not only are split on the “prejudice required” rule but also on what constitutes prejudice to the opposing party, with courts variously ruling that an answer to a complaint that doesn't mention arbitration, the parties' extensive discovery and/or the court's ruling on dispositive motions may prevent a defendant from seeking arbitration, Richards said.

Supreme Court precedent indicates the FAA intends arbitration agreements to be treated like other contracts, Richards said. State law principles therefore should apply, including the concepts of waiver and estoppel, Richards said.

She urged the court to accept review, reverse the Ninth Circuit, and rule employers waive their right to seek arbitration by engaging in lengthy litigation at the plaintiff's expense prior to requesting a stay and filing a motion to compel arbitration.

Ernst & Young made a “conscious choice” to participate in the wage and hour consolidated court case but after six years of litigation and some unfavorable district court rulings, it sought to compel arbitration, Richards said.

“Nothing in the arbitration contract, generally applicable state law defenses to enforcement of that contract, or the policies underlying the FAA allows, or should allow, a defendant to litigate for years in federal court and then to reevaluate its strategic options and move the case to arbitration,” Richards said.

“The conflict in the circuits should be resolved by eliminating the ‘prejudice required' rule and thereby advancing the purposes of the FAA and enforcing the contractual agreement between the parties according to its terms,” she said.

Max Folkenflik of Folkenflik & McGerity in New York was counsel of record for Richards.

Waiver Is Fact-Bound Decision

In its brief opposing review, Ernst & Young said the Ninth Circuit, like every other federal appeals court to consider the issue, analyzes waiver of the right to arbitrate under the totality of the circumstances, considering whether specific facts support a finding of waiver.

There's no significant split among the federal circuits about the standard to be applied and “their analysis is far more similar than divergent,” Ernst & Young said.

“That is doubly true in a case where, like here, a defendant has argued that an earlier motion to compel arbitration would have been futile,” Ernst & Young said.

“Whether a particular case results in a finding of waiver turns far more on the particular facts of the case than on any legal rule that Richards seeks here,” the firm said. “And even Richards acknowledges that the Ninth Circuit's decision to apply federal law rather than state law does not conflict with the decision of any other court of appeals; indeed, it is fully consistent with this [Supreme] Court's precedents interpreting the FAA.”

Concepcion Opened Door

Richards's case also is “a poor vehicle” to resolve the purported legal conflicts because “a separate and independent ground” supports the Ninth Circuit's decision that Ernst & Young didn't waive its right to arbitrate, the firm said.

Prior to Concepcion, any motion to compel arbitration would have been futile because of California state law precluding enforcement of arbitration pacts that barred class claims, Ernst & Young said. It was only after Concepcion was decided that Ernst & Young's arbitration agreement with Richards and other California-based employees was enforceable, the firm said.

“Ernst & Young could not have acted inconsistently with its right to arbitrate, or with any intent to forego that right, by seeking to compel arbitration only after Concepcion, because any earlier motion to compel arbitration would have been futile,” the firm said.

Rex S. Heinke of Akin Gump Strauss Hauer & Feld LLP in Los Angeles was counsel of record for Ernst & Young.

To contact the reporter on this story: Kevin McGowan in Washington at kmcgowan@bna.com

To contact the editor responsible for this story: Susan J. McGolrick at smcgolrick@bna.com