In the Fourth Circuit, Actual Prejudice Determines Waiver
In Rota-McLarty v. Santander Consumer USA, Inc., No. 11-1597, 2012 WL 5936033 (4th Cir. Nov. 28, 2012), the Fourth Circuit reversed the district court's holding that Defendant Santander had waived its right to enforce a valid arbitration agreement in part because it delayed six months before moving to compel arbitration while waiting for the district court's interpretation on a related arbitration issue.
Antonia Rota-McLarty purchased a used car but returned it as allegedly defective without making any loan payments; the lender, Santander, sought collection of the balance due. Rota-McLarty sued Santander in state court under state consumer protection laws for unfair business practices, including alleged undisclosed finance charges. Santander successfully removed the matter to federal court, submitted an answer, and proceeded with certain discovery, including depositions. Then, more than six months after suit originally was filed, Santander moved to stay the proceeding and compel arbitration.
The district court denied Santander's motion to compel arbitration, ruling that the standard of waiver under the Maryland Uniform Arbitration Act (MUAA) applied in lieu of the FAA due to lack of interstate commerce, and that Santander had waived its right to enforce a valid arbitration clause because of unjustified delay and significant participation in discovery. The district court also found that Santander had improper motives for its delay in seeking arbitration. Specifically, Santander claimed that it did not want to be forced into class arbitration; therefore, it waited to file its motion until the district court interpreted the recent Supreme Court case Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. 662, 130 S.Ct. 1758, 1775 (2010).
On appeal, the Fourth Circuit determined that the transaction involved interstate commerce and, therefore, the default standard of the FAA applied, rather than the waiver standard of the MUAA. The Court noted that while waiver and default are similar standards, they are not identical. In keeping with the "strong policy favoring arbitration" and broad reach of the FAA, statutory defaults are limited and "not to be lightly inferred"; there is a heavy burden on the nonmoving party to prove default. Id. at 15–16; Id. at 5–6, citing Stedor Enters., Ltd. v. Armtex, Inc., 947 F.2d 727, 730 (4th Cir. 1991).
The Court held that actual prejudice is the determining factor in the evaluation of default under the FAA. Id. Such prejudice would occur "where [the moving party] so substantially utilizes the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay." Id., citations omitted. The Court went on to hold that "[t]wo factors specifically inform our inquiry into actual prejudice: (1) the amount of the delay; and (2) the extent of the moving party's trial-oriented activity." Id. In addressing the first factor, the Court's guidance was that a six-and-a-half-month delay prior to moving for arbitration is "relatively short," and the Court elaborated that "a delay of several months, without more, is insufficient to demonstrate the opposing party suffered actual prejudice." Id. at 17–18. A litigant should provide actual evidence that she "was prejudiced by the length of the delay itself." Id. at 18. With respect to the second factor, the Court will analyze the extent of the moving party's participation in the litigation and the extent of actions taken that require time and expense to be expended by the party opposing arbitration. Examples of potentially prejudicial actions include the filing of summary judgment motions and motions to dismiss, though there is no bright-line rule "that the mere filing of a dispositive motion on the merits is inherently prejudicial." Id. at 19, n. 15. Additionally, "[T]he mere participation in discovery is not sufficient to indicate default." Id. at 19. A court is not eager to encourage the violation of court-ordered discovery requirements to avoid default.
The Fourth Circuit concluded that Rota-McLarty was not prejudiced by Santander's delay and participation in litigation. The Court clarified that, although it encouraged "the earliest possible selection of forum," Santander's motive for delay was immaterial. "In keeping with the strong policy in favor of arbitration established by the FAA, the Fourth Circuit has not expanded the default analysis to include consideration of a party's knowledge or motive." Id. at 17, n. 12. Actual prejudice is the most important consideration.
The Eleventh Circuit Uses a Two-Prong Test to Determine Waiver
In contrast, and in what some may see as a circuit split, the Eleventh Circuit recently found waiver of the right to arbitration in Garcia v. Wachovia Corp., No. 11-16029, 2012 WL 5272942 (11th Cir. Oct. 26, 2012). The Court analyzed the issue under the standard of "waiver" as opposed to "default." However, a detailed look reveals that the tests of the two circuits are not inconsistent; that the factors upon which they based their analyses were quite similar; and that the disparate results were based upon highly distinguishable facts rather than different standards.
In Garcia, the plaintiffs were litigants in five separate class actions claiming that banks improperly imposed overdraft fees on checking accounts; these actions were consolidated with similar cases against about 30 banks. The facts outlined by the Eleventh Circuit include that on November 6, 2009, after the June 2009 case consolidation, the district court set December 8, 2009, as the deadline for Wells Fargo to file all motions directed to the complaints "including any motions to compel arbitration." Garcia, Id. at 4. Wells Fargo filed an omnibus motion to dismiss with other defendants but did not file a motion to compel arbitration. Moreover, in April 2010, the district court offered Wells Fargo a second chance to move to compel arbitration, but it responded that it was not moving to compel and did not "intend to seek arbitration of their claims in the future." Garcia, Id. at 5, quoting the district court. Over the course of the following year, the parties prepared their cases, exchanging about 900,000 pages of documents in discovery, propounding and responding to interrogatories, and taking nearly 20 depositions. Wells Fargo moved for arbitration in April 2011, after the Supreme Court held 5–4 in AT&T Mobility v. Concepcion, 563 U.S. 131 S. Ct. 1740 (2011), that arbitration clauses excluding class actions are valid. Wells Fargo explained its delay by arguing that the law had significantly changed and that it would have been futile to move for arbitration before the ruling.
In affirming the district court's decision that Wells Fargo had waived its right to arbitrate, the Court set forth a two-pronged test. The first test was whether "under the totality of the circumstances, the party has acted inconsistently with the arbitration right." Id. at 7, citations omitted. The Court held that a party does so when it "substantially invokes the litigation machinery prior to demanding arbitration." Id. at 7–8, citations omitted. The Court then looked to whether the nonmoving party has been prejudiced by the litigation-related actions of the party seeking to compel arbitration. Id. at 8. The length of a delay and the expenses incurred by the nonmoving party are factors a court will consider when evaluating the second prong. Particularly significant are the kinds of expenses that arbitration is designed to avoid or limit, such as depositions.
The Eleventh Circuit first found that Wells Fargo did not act consistently with its arbitration right because it failed to move to compel when given two explicit opportunities, and further stated it did not intend to seek arbitration. The Court went on to hold that Wells Fargo "substantially invoked the litigation machinery" by delaying its arbitration application for more than a year and participating in numerous aspects of the litigation. During that time, the parties conducted one year's worth of substantial and expensive discovery. Aside from the expense, the Court noted that conducting discovery alone could be prejudicial enough to constitute waiver, depending on the circumstances. The party moving to compel may benefit from discovery to which it might otherwise not have been entitled in arbitration.
Notably, the Court also found the circumstances in Garcia did not fall within the narrow "futility exception" to waiver. This exception would be valid if a party were "almost certain," as opposed to "unlikely," to fail in its motion to compel arbitration, but then made the motion after a law change affecting that certainty. Id. at 11. The Court read this exception narrowly and did not find that the Conception ruling placed Wells Fargo's application in this narrow exception.
Prejudice to the Nonmoving Party is the Primary Consideration in Both Jurisdictions
Although Rota-McLarty and Garcia articulate facially different standards for determining whether a party has relinquished its right to arbitrate, the factors they consider and their analysis are ultimately quite similar. The test for default in Rota-McLarty is solely a measure of the prejudice suffered by the party opposing arbitration. The behavior of the party seeking arbitration is not material unless it is prejudicial. In contrast, Garcia's two-pronged test analyzes both prejudice and the extent to which a movant has acted inconsistently with the right to arbitrate. On the surface, these may seem to be different tests, but the two courts arguably take a similar approach. For the Rota-McLarty court, acting inconsistently with the right to arbitrate may lead to prejudice. Accordingly, to some extent, Garcia's second prong is subsumed within Rota-McLarty's single-part test. Further, like the Fourth Circuit in Rota-McLarty, the Garcia court viewed prejudice as an essential element in its analysis. The Eleventh Circuit appears to indicate it would not deny a motion to compel arbitration on the basis of waiver without significant prejudice to the nonmoving party, despite the movant's significant participation in the litigation.
The length of delay prior to a party requesting dismissal in favor of arbitration is only one of several factors both courts considered when evaluating whether an otherwise legitimate right to arbitration had been relinquished. These recent decisions create no bright-line rule but provide several examples with which to evaluate the prejudice sustained by a nonmoving party subsequent to a delayed filing of a motion to compel arbitration. Among the additional considerations are the moving party's level of participation in discovery, participation in motion practice generally, and the filing of dispositive motions that would force the nonmoving party to expend time and money. Regardless of the jurisdiction or the specific test utilized by the court, the deciding factor in either jurisdiction appears to be whether compelling arbitration will prejudice the nonmoving party.
Keywords: ADR, litigation, FAA, waiver, default, compel arbitration