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March 16, 2017 Articles

Third Circuit: Futility Avoids Arbitration Waiver

By Sheila J. Carpenter

Parties to a contract containing an arbitration clause who find themselves in litigation generally must promptly demand arbitration, and bring a motion to compel if needed, or they may waive their right to arbitration, especially if a party opposing arbitration can show prejudice from the delay. This rule prevents the waste of resources likely to occur if the parties litigate for months or years and then one party demands to start anew in arbitration. However, there are some exceptions to the waiver doctrine. One is that an arbitration demand earlier in the case would have been futile.

In Chassen v. Fidelity National Financial, Inc., 836 F.3d 291 (3d Cir. 2016), the Third Circuit addressed the futility exception. In a 2–1 decision, the Chassen court held that because the right to demand individual arbitration was not available to the defendants prior to the Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011), such a demand would have been futile at the outset of the litigation, and the defendants’ delay of over two years in demanding arbitration was excused.

Chassen was a proposed class action brought in 2009 by purchasers of residential property in New Jersey against various title insurance companies and others involved in the closing process. The plaintiffs claimed that agents of the title companies charged them more for recording deeds and mortgages than was actually charged by local officials, pocketing the difference. They asserted claims for breach of contract and violation of New Jersey statutory law. Damages per consumer were no more than a few hundred dollars, but the aggregate claims asserted by the plaintiffs exceeded $50 million. The arbitration clauses that the district court found were applicable to the plaintiffs’ claims did not reference individual or class arbitration specifically.

The court asserted that demanding arbitration at the outset of the litigation would have led to class arbitration under New Jersey law at the time the case was filed. Thus, any demand for arbitration by the defendants could have backfired, leaving them with the risks of class claims without the judicial protections provided to class defendants in the federal courts. The Third Circuit panel held that it was only after Concepcion made clear that the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq., preempted state laws permitting class arbitration without the consent of both parties that the defendants’ right to demand individual arbitration was available. Noting that other circuits had adopted the view that a party need not engage in futile gestures in order to avoid a claim of waiver, the court held that “futility can excuse the delayed invocation of the right to compel arbitration.” Chassen, 836 F.3d at 293. Waiver requires action inconsistent with a known right, and if the right does not exist, this prerequisite to waiver does not exist. While the law governing futility is, in the abstract, not particularly controversial, Chassen is a significant case because the defendants had a right to demand arbitration at the outset of the litigation. They chose not to; the court assumed that this decision was premised on the view that New Jersey law would have allowed the plaintiffs to insist on class arbitration.

The court noted that the four federal courts of appeal that have considered the issue have agreed that a party need not demand arbitration if such a demand would have been futile. As the Eighth Circuit noted in Ackerberg v. Johnson, 892 F.2d 1328 (8th Cir. 1989), when a change in the law empowers a demand for arbitration that the prior state of the law rendered unenforceable, that change in the law provides a right that did not previously exist. “To find that the . . . defendants waived a right they did not have until after [the Supreme Court case changing the law] is not only illogical, but also would encourage litigants, in order to avoid a finding of waiver, to file motions they knew to be futile.” Ackerberg, 892 F.2d at 1333. Thus, the futility doctrine allows courts to avoid one type of useless motions.

As in Concepcion and other recent Supreme Court cases, the Chassen court drew a sharp distinction between individual arbitration and class arbitration. (The Chassen court referred to the former as “bipolar arbitration”; this article uses the more familiar term.) Key to the Chassen decision is the panel’s holding that courts should distinguish between individual and class arbitration in analyzing the question of whether an arbitration demand would have been futile:

We next look at the futility exception in the context of this case. To do this, we first consider the existing [individual] and class arbitration case law and conclude that courts have typically treated each form of arbitration as substantively distinct. We therefore conclude that each can be independently waived, thereby requiring that each receive a separate futility analysis. We next ask what it means for the assertion of a right to have been futile, concluding that the appropriate test is whether assertion of that right was almost certain to fail. Finally, we apply this framework and hold that here, a motion to compel [individual] arbitration prior to Concepcion was almost certain to fail.

Chassen, 836 F.3d at 297. Concepcion was decided after the parties in Chassen had been involved in complex litigation for more than two years, including extensive discovery and motions practice, primarily involving class certification issues. Six weeks after Concepcion, the defendants demanded individual arbitration, a demand rejected by the plaintiffs. Ordinarily, the substantial delay and extensive discovery and motions practice in the district court would have weighed heavily against the defendants in their efforts to move the case to arbitration. However, because it distinguished the futility analysis required for individual arbitration as distinct from that required for class arbitration, the Third Circuit treated the parties’ substantial litigation efforts as a minor factor in considering whether the defendants’ delayed demand for arbitration was excused.

Plaintiffs contend that it would not have been futile for Defendants to have moved to enforce the arbitration clauses prior to Concepcion. Defendants, however, assert that this is not the proper question. Instead, they suggest that the real question is whether they could have compelled [individual] arbitration prior to Concepcion. We agree with Defendants that the latter question is the proper inquiry, largely because profound differences distinguish class and [individual] arbitration.

Chassen, 836 F.3d at 297 (footnote omitted). The court went on to discuss how class and individual arbitration are fundamentally different, citing Concepcion and other Supreme Court cases highlighting those differences. However, the court did not cite any cases directly dealing with the question of whether the futility analysis should be different, depending on whether individual or class arbitration is sought. Neither did it cite any authority for its key conclusion that the rights to individual and class arbitration are separate rights and may be separately waived. To date, other courts have not cited Chassen. The plaintiffs sought rehearing by the panel and rehearing en banc; both motions were denied.

Judge Rendell’s dissent argued that a motion to compel arbitration would not necessarily have been futile at the outset of the litigation in 2009. He noted that the case primarily relied on by the majority for its view that New Jersey law would have required a court to allow class arbitration if plaintiffs requested it, Muhammad v. County Bank of Rehoboth Beach, 912 A.2d 88 (N.J. 2006), involved a consumer contract of adhesion that explicitly prohibited classwide proceedings. The New Jersey Supreme Court held that such contracts could not forbid class proceedings in arbitration or litigation. Judge Rendell pointed out that in Chassen, the borrowers had the option to request an arbitration clause that required the consent of both parties for disputes to be referred to arbitration. He opined that the Muhammad case simply was not applicable and could not have been used to compel classwide proceedings. Judge Rendell also noted that the Supreme Court’s decision in Stolt-Nielsen S.A. v AnimalFeeds International Corp., 559 U.S. 662 (2010), made it unlikely that the defendants would be subjected to class arbitration if they demanded individual arbitration. Because Stolt-Nielsen held that arbitration clauses that are silent as to class arbitration cannot be assumed to represent the parties’ agreement to class treatment, and that class treatment in arbitration requires consent, Judge Rendell would appear to have an argument about the defendants’ delay until 2011 to demand arbitration. The majority opinion does not discuss Stolt-Nielsen.

Keywords: litigation, ADR, arbitration, futility, waiver, delay, Concepcion

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