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July 21 — A cosmetology school must litigate its students' wage and hour claims because it waited too long to seek arbitration of their claims, the U.S. Court of Appeals for the Ninth Circuit ruled ( Martin v. Yasuda, 2016 BL 234083, 9th Cir., No. 15-55696, 7/21/16 ).
The decision shows how a company may waive its ability to compel arbitration of workplace disputes if it actively participates in court litigation over covered claims and the plaintiffs are harmed by its delay in seeking arbitration.
Amarillo College of Hairdressing Inc., which runs cosmetology career training schools, didn't seek to enforce students' arbitration agreements until 17 months after some students sued under the Fair Labor Standards Act and California law. A federal district court by then already had denied Amarillo's motion to dismiss. The district court said requiring arbitration of the students' wage and hour claims at that stage would prejudice the plaintiffs.
The district court properly decided the waiver issue, which is a “gateway” inquiry that a court rather than an arbitrator should resolve, the Ninth Circuit said July 21.
It also affirmed that by waiting 17 months to seek arbitration, after its merits-based motion to dismiss was denied and the parties were well into the court case, Amarillo waived its right to arbitrate.
“We're delighted the Ninth Circuit saw through the defendants' transparent attempt” at forum shopping after the district court rejected its motion to dismiss, said Bryan Schwartz, an Oakland, Calif., lawyer who represented the students.
The court made clear arbitration is “a real choice” a company must make at the outset of the case, not after it gambles on litigating and loses, Schwartz told Bloomberg BNA July 21.
The ruling should give employers pause about dipping their toes in litigation and then later seeking to compel arbitration if the court doesn't see things their way, Schwartz said.
An attorney representing Amarillo didn't respond to Bloomberg BNA's request for comment July 21.
Amarillo and its owner, Gary Yasuda, argued that an arbitrator, not a court, should decide whether they waived their right to arbitrate.
Courts decide questions of “arbitrability,” unless the parties' agreement makes unmistakably clear an arbitrator should do so, the Ninth Circuit said. Whether a party has waived its right to arbitrate by litigation conduct is a question of arbitrability that a court should decide, the court said.
“If the parties intend that an arbitrator decide that issue under a particular contract, they must place clear and unmistakable language to that effect in the agreement,” Judge Stephen Reinhardt wrote in an opinion joined by Judges Kim McLane Wardlaw and Mark W. Bennett. “As they did not do so here, the district court did not err by deciding the contract waiver issue.”
The party urging waiver must show knowledge of an existing right to arbitrate, acts inconsistent with that right, and prejudice to the party opposing arbitration.
Amarillo conceded knowledge of its right to arbitrate, so the relevant disputes are whether it acted inconsistently with that right and the students were prejudiced, or harmed, by its delay in seeking arbitration.
“Here, the defendants engaged in conduct inconsistent with their right to arbitrate,” the court said. “They spent  months litigating the case. This included devoting ‘considerable time and effort' to a joint stipulation structuring the litigation, filing a motion to dismiss on a key merits issue, entering into a protective order, answering discovery, and preparing for and conducting a deposition.”
A party doesn't forfeit its right to arbitrate by delay alone, the court said.
But Amarillo took advantage of the litigation process and sought arbitration only after the district court declined to dismiss the students' claims that they might be employees entitled to wage and hour protections, the court said.
To prove prejudice, the students must show more than “the self-inflicted costs” they incurred because they sued contrary to an arbitration agreement's provisions, the court said.
The students must show that because of Amarillo's delay, “they have incurred costs they would not have otherwise incurred,” the court said.
“[T]he plaintiffs here easily meet the prejudice requirement,” the court said.
The students spent “considerable money and effort in litigation,” including conferring with opposing counsel on how to conduct the court case, analyzing how to approach discovery and class certification, and defending a motion to dismiss on the merits, the court said.
Even if the parties might have exchanged some of the same information in arbitration, “the process of doing so in federal court likely cost far more than determining the answer to the same question in arbitration,” the court said. “The unnecessary, additional costs incurred by the plaintiffs as a result of the defendants' desultory motion to compel constitutes obvious prejudice.”
If the case were sent to arbitration, the students would have to retry a key issue on which the district court ruled in their favor, the court said.
This is crucial because the students “would be prejudiced if the defendants got a mulligan on a legal issue [they] chose to litigate in court and lost,” the court said.
“Because the defendants had knowledge of their right to arbitrate and they engaged in acts inconsistent with that right for a significant period of time, and because the plaintiffs would be prejudiced should the court now compel arbitration, we conclude, as did the district court, that the defendants waived their right to arbitrate,” Reinhardt wrote.
Rudy Exelrod & Zieff LLP and the Law Office of Leon Greenberg also represented the students. Alvarado Smith and Holt Dunn & Davison LLC represented Amarillo and Yasuda.
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Text of the opinion is available at http://www.bloomberglaw.com/public/document/PAIGE_MARTIN_SUNDAE_WORTHY_MARIA_FORD_and_MEGAN_TALLERICO_on_beha.
Copyright © 2016 The Bureau of National Affairs, Inc. All Rights Reserved.
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