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ARTICLE

Waive Goodbye to Arbitration

Joel Levine

Summary

  • The Eighth Circuit ruled that the companies waived their right to arbitration by engaging in litigation actions inconsistent with arbitration.
  • The companies participated in various litigation activities, such as motion-to-dismiss hearings and discovery plans, without promptly seeking arbitration, leading the court to view their conduct as inconsistent with their arbitration rights.
  • The court emphasized that waiver of arbitration focuses on the actions of the party holding the right, not the impact on the opposing party, reinforcing that intentions for arbitration must be clear from the start.
Waive Goodbye to Arbitration
Liubomyr Vorona via Getty Images

A recent decision by the Eighth Circuit federal appeals court, Thomas v. Pawn America Minnesota, LLC (In re: American consumer Data Breach Litigation), No. 23-2292 (8th Cir. July 11, 2024), presents a prime example of “what it takes to waive a contractual right to arbitration.”

In September 2021, cybercriminals targeted a chain of pawnshops, a payday lender, and a prepaid-card company, obtaining customers’ personal information, including names, addresses, birth dates, and social security numbers. The targeted companies alerted customers of the data breach and were soon met with three nationwide class-action lawsuits by the customers in the Minnesota federal district court.

After agreeing to consolidate the cases, the companies moved to dismiss, claiming the customers lacked standing and had failed to state a claim, with no mention of arbitration.

Over the next two months, the companies briefed the issues raised by their motion to dismiss, prepared a joint discovery plan, and requested a pretrial conference. While there was disagreement about what happened next at a pretrial teleconference with the magistrate judge without a transcript—the companies claimed they orally stated they were going to file a motion to compel arbitration and the customers denied any such notice of was given—there was no mention of arbitration in the magistrate judge’s docket entry or ensuing order staying discovery (which did mention the issues raised as to standing).

Several weeks later, the district court held an hour-long hearing on the motion to dismiss, again with no mention of arbitration. Also, the companies had not yet brought a motion to compel arbitration as they claimed they would in their telling of the pretrial conference.

Two months later, the companies gave formal notice of their intent to arbitrate. The customers objected, and the district court sided with the customers. On appeal, the Eighth Circuit ruled that the companies’ litigation conduct amounted to a waiver of arbitration.

The Eighth Circuit in Thomas applied the test for waiver enunciated in Morgan v. Sundance, Inc., 596 U.S. 411 (2022): Did the party seeking arbitration know of the right to require arbitration but act inconsistently with it? Morgan made clear that prejudice is no longer a consideration, as the waiver analysis focuses on “the actions of the person who held the right,” not “the effects of those actions on the opposing party.” The question boils down to whether a party has intentionally relinquished or abandoned a known right.

Here, the companies knew of their existing right to arbitrate but acted inconsistently with it: They had invoked the litigation machinery rather than promptly seeking arbitration. In the three months following the pretrial conference, they had participated in the motion-to-dismiss hearing, stipulated to a discovery plan, and scheduled a mediation—all, as the appellate court put it, “hardly the actions of [litigants] trying to move promptly for arbitration.” Although by raising standing, the companies had “focused on more than just the merits.” They also sought “immediate and total victory” by arguing that the complaint failed to state a claim.

As the Eighth Circuit panel viewed it, “Only after [the companies] had a chance to preview the district court's thinking, did they begin to push for arbitration, with mediation only a week away.” The appeals court commented that this was “[j]ust in time to use the threat of arbitration as a powerful bargaining chip,” and was the “sort of gamesmanship” presenting “the worst possible reason for failing to move for arbitration sooner.”

The Eight Circuit thus confirmed the district court’s order granting the customers’ motion to deny arbitration as waived.

As the decision in Thomas shows, the prospect that a party can get a sense of the judge’s leanings through the litigation process, and then if unhappy with the direction things are going, seek to take the dispute to different “judges” (arbitrators), may itself provide sufficient justification to deny a late motion to compel arbitration. The lesson is plain: A litigant seeking arbitration must make its intentions crystal clear at the very outset.