"9th Circuit Rules that Defendants Must be Prompt to Compel Arbitration" (PDF)

The Daily Journal, July 21, 2016

By Matthew Blake

A federal appellate panel on Thursday ruled that defendants in an employment dispute could not compel arbitration after litigating the case for 17 months.

Judge Stephen R. Reinhardt of the 9th U.S. Circuit Court of Appeals wrote that the Milan Institute of Cosmetology, a national group of accredited colleges, and its president, Gary Yasuda, waited 17 months to move to arbitrate a lawsuit alleging the school made students do unpaid labor unrelated to their education.

Reinhardt's opinion, which noted there is no concrete test for when parties engage in conduct inconsistent with their right to arbitrate, carves out another instance in which arbitration is not enforceable. Martin et al. v. Yasuda et al., 2016 DJDAR 7404.

The Milan Institute's delay in enforcing an agreement that students take grievances to an arbitrator was not fair to plaintiffs who had already fended off a motion to dismiss, Reinhardt wrote. 

The fact that arbitration meant the Milan would get a second chance to dismiss the case was "dispositive because the plaintiffs would be prejudiced if the defendants got a mulligan on a legal issue it chose to litigate in court and lost," according to the opinion.

A 2011 U.S. Supreme Court decision, AT&T Mobility LLC v. Concepcion, U.S. Supreme Court, 09-893, states arbitration contracts are almost always enforceable. But subsequent 9th Circuit decisions previously provided exceptions to the Concepcion rule. 

Those cases include Zaborowski v. MHN Government Services Inc., which ruled an arbitration contract was not conscionable, and Sakkab v. Luxxotica Retail North America Inc., which found representative California Private Attorney General Act claims are not subject to arbitration.

Bryan J. Schwartz of Bryan Schwartz Law, who brought the lawsuit on behalf of a putative class of beauty design students, said the ruling provides clarity on a key arbitration issue.

"You don't test your hand in district court and see if you can win for free," Schwartz said. "You have to make the choice out of the gate: Do you want to spend money on arbitration or do you want to litigate?"

Glenn Danas, a plaintiffs' lawyer at Capstone Law APC, concurred, adding that foot dragging on enforcing an arbitration deal is "surprisingly still somewhat common. Some defendants continue to employ a 'wait and see' approach, which is obviously a very risky move."

But Felix A. Shafir, an appellate defense attorney at Horvitz & Levy LLP, cautioned the ruling may not have too much of an impact, as Reinhardt focused on Martin's specific context.

"He was looking at a complex picture of a number of events in this case," Shafir said, including that even after losing their motion to dismiss, defendants stipulated to discovery before filing their motion to compel arbitration.

In one of several lawsuits nationally against cosmetology schools, the students sued for being made to clean, sell retail products and do other unpaid work that had little to do with acquiring the skills of a hairdresser or manicurist. 

Lawyers for the Milan Institute, including William M. Hensley, a shareholder at Alvarado Smith, appeared poised to litigate, noting at a status conference 14 months into the litigation they would prefer to keep the matter in court. 

When the defendants changed their tune three months later, plaintiffs contested they had waived their right to arbitrate, because the Milan Institute had gone too far in the litigation, costing plaintiffs significant resources. 

Messages left with Hensley were not returned. Chaya M. Mandelbaum, a lawyer at Rudy Exelrod & Zieff LLP, argued for plaintiffs in front of the 9th Circuit and did not return a message on Thursday.

matthew_blake@dailyjournal.com