Ninth Circuit Recognizes Precedent Restricting Arbitration-Favoring Rules, Compels Parties to Arbitrate Anyway

In litigation “bookended by two Supreme Court decisions on arbitration,” namely, Epic Systems Corp. v. Lewis and Morgan v. Sundance Inc., the Ninth Circuit recognized Morgan’s holding prohibiting courts from creating “arbitration-favoring procedural rules” but nonetheless found that the lower court correctly compelled the parties to arbitrate their wage and hour dispute over the plaintiff’s protest.

Teresa Armstrong sued Michaels Stores Inc., alleging violations of California wage and hour laws on behalf of a putative class of Michaels’ employees. Michaels answered and asserted its right to arbitration as an affirmative defense. Thereafter, the parties submitted a joint case management statement listing the legal issues in the case, including whether Armstrong agreed to arbitrate her claims. Michaels represented that it planned to move to compel arbitration after conducting discovery. Michaels subsequently served five interrogatories and required Armstrong to produce 28 pages of documents relevant to certain non-arbitrable claims. Neither party filed any discovery motions.

Michaels moved to compel arbitration in August 2018, approximately 10 months after Armstrong had originally filed suit. Armstrong opposed it, arguing that Michaels had waived its right to arbitration due to delay. The district court ruled in favor of Michaels and the arbitrator awarded summary judgment to Michaels. Armstrong appealed to the Ninth Circuit.

While the appeal was pending, the U.S. Supreme Court decided Morgan, which held that “the plain language of the Federal Arbitration Act restricts courts from creating arbitration-favoring procedural rules.” The Ninth Circuit noted that, before Morgan, “to give voice to the FAA’s policy favoring enforcement of arbitration agreements, we held that waiver of the right to arbitration was disfavored.” Like most other circuits, the Ninth Circuit had created “an arbitration-specific waiver test,” which imposed a “heavy burden” on parties arguing that the right to arbitrate had been waived. After Morgan, courts are now required to treat arbitration agreements just like any other contract and, as such, “may not devise novel rules to favor arbitration over litigation.”

In light of Morgan, parties asserting waiver must now demonstrate (1) knowledge of an existing right to compel arbitration and (2) intentional acts inconsistent with that existing right. Unlike before, parties no longer have to demonstrate prejudice to the person opposing arbitration caused by such inconsistent acts.

The Ninth Circuit applied the precedent to Michaels’ actions in the litigation and found that Michaels had not intentionally acted inconsistently with its right to compel arbitration. On the contrary, Michaels consistently stated its intent to move to compel arbitration. Further, Michaels did not actively litigate the merits of the case in the district court. Its limited discovery requests were related to Armstrong’s non-arbitrable claims. Finally, Michaels’ motion to compel arbitration was filed within a year of the lawsuit originally being filed against it. Even under the post-Morgan regime for analyzing waiver of the right to compel arbitration, the Ninth Circuit held Michaels’ actions in this case insufficient to waive its right.

Armstrong v. Michaels Stores Inc., No. 21-15397 (9th Cir. Feb. 13, 2023)