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June 01, 2016 Articles

Inconsistent as to One, Inconsistent as to All: Sometimes It's Too Late to Arbitrate

By Adwoa Ghartey-Tagoe Seymour and Christian J. Bromley

Once a plaintiff files a Fair Labor Standards Act (FLSA) collective action in the Sixth Circuit, the proverbial clock starts ticking on any contractual right to arbitrate with all plaintiffs, even if they have yet to opt in. On August 28, 2015, the Sixth Circuit Court of Appeals issued a decision in Gunn v. NPC International, Inc., 625 F. App'x 261 (6th Cir. 2015), that reiterated a two-factor test courts should employ to determine whether litigants have waived their rights to arbitrate: (1) when the litigant takes action completely inconsistent with an agreement to arbitrate and (2) that course of conduct results in actual prejudice to the opposing party. In Gunn, the appellate court declined to apply the test on an employee-by-employee basis and instead looked only to the franchisor's actions as to the five original FLSA plaintiffs. The defendant franchisor was deemed to have "slept on its rights" to arbitrate as to not only those original employee plaintiffs but also every employee who later opted into the collective action. This broad first-plaintiff approach to FLSA collective actions limits the Sixth Circuit's otherwise strong presumption in favor of enforcing arbitration agreements as set forth in Glazer v. Lehman Bros., Inc., 394 F.3d 444, 450 (6th Cir. 2005).

The defendant, NPC International, Inc., is the world's largest Pizza Hut franchisee employing 29,000 people in 1,250 Pizza Hut and over 140 Wendy's franchise locations. In January 2013, five NPC franchise employees brought separate actions alleging FLSA claims for unpaid minimum wages and overtime compensation. Nearly 15 months later, NPC sought to enforce the arbitration clause in the plaintiffs' employment contracts. In the interim, more than 200 employee plaintiffs opted into the collective actions at different times.

After various responsive actions were taken by NPC throughout 2013 and early 2014, the district court denied NPC's motion to compel arbitration under its employment contracts because NPC waited 15 months before filing its motion, and this appeal followed. The Sixth Circuit applied its previously crafted two-factor test, which defined "the parameters of [the court's] scrutiny," and found that NPC had waived its right to arbitrate under every employment contract at issue in the lawsuit regardless of when the individual employee plaintiff opted into the collective action. See Shy v. Navistar Int'l Corp., 781 F.3d 820 (6th Cir. 2015); Johnson Assocs. Corp. v. HL Operating Corp., 680 F.3d 713 (6th Cir. 2012); Hurley v. Deutsche Bank Tr. Co., 610 F.3d 334 (6th Cir. 2010).

The Two-Factor Waiver Test

Inconsistent actions. The Sixth Circuit defines inconsistency based on the number of months, or years, that elapse in litigation and the degree of active participation in that litigation before a party exercises the right to arbitrate.NPC took inconsistent actions when it proceeded with the litigation for almost 15 months before exercising its right to arbitrate. This delay fell right within the Sixth Circuit precedent on inconsistent action. In Johnson Associates, the defendant delayed 8 months before raising the issue of arbitration. The defendant in Hurley delayed even longer and participated in the litigation for 2 years before raising its arbitration right. NPC engaged in nearly 15 months of litigation, including settlement negotiations, a scheduling conference, and filing both dispositive and non-dispositive motions, which collectively constituted the requisite inconsistency with its arbitration agreements.

Actual prejudice. The Sixth Circuit's analysis of prejudice relies partially on the actual delay and the lack of justification for such deferment but also on the expense incurred as a result of the delay. The court found that NPC's inconsistent actions caused the plaintiffs actual prejudice. NPC's delay also corroborated the district court's position that NPC was "employing dilatory tactics and creating expense for the Plaintiffs." The court's actual prejudice finding was further supported by NPC's choice to compel arbitration only after it received unfavorable rulings on the dispositive motions it filed during the 15-month delay, which caused the plaintiffs to incur an estimated and arguably avoidable $20,000 in expenses.

The First-Plaintiff Rule
NPC contended that the district court erred in not evaluating the two-factor waiver test for each separate plaintiff who opted into the collective action. In NPC's view, it had not engaged in litigation with every plaintiff for 15 months in that more than 200 plaintiffs had joined the litigation since the five underlying putative collective actions were filed in 2013. The Sixth Circuit rejected any employee-by-employee application of the wavier test and instead imposed a pseudo constructive knowledge standard on NPC. NPC knew—or should have known—that all five actions were brought under the act on behalf of "similarly situated" employees in the same court, before the same judge, by the same counsel. When NPC asserted its arbitration right 15 months later, the more than 200 opt-in plaintiffs faced effectively the same unnecessary expense and delay if the court permitted NPC to arbitrate.

Impact for Collective Actions
The Sixth Circuit presumption in favor of enforcing the agreements, bolstered by the Federal Arbitration Act's policy favoring this same enforcement, is severely hamstrung when a defendant's right to arbitrate arises in collective actions. NPC attempted to draw a distinction between the posture of this litigation, in which employee plaintiffs continued opting into the collective action, and a class action post-certification, which had yet to occur here. The court found no need for an employee-by-employee analysis in collective actions. NPC had constructive knowledge that more plaintiffs may join from the original filing date. Accordingly, actions inconsistent with the arbitration agreement as to those original collective action plaintiffs are sufficient to waive a defendant's contractual arbitration rights as to all future plaintiffs because the defendant just should have known.

While the Sixth Circuit will not "lightly infer" a waiver of arbitration rights, it will find a broad waiver of those rights in collective actions when defendants act inconsistently and cause actual prejudice to the original plaintiffs. The choice of "venue"—before the court or an arbitrator—is a tactical one that must be made sooner than later.

Keywords: litigation, ADR, arbitration, agreement, waiver, Sixth Circuit, franchise, franchisee, collective action, prejudice, delay, expense