"School Waived Arbitration Rights After Extensive Litigation - 9th Circuit"

Reuter Legal, Daily Labor Report, July 22, 2016

By Robert Iafolla

A California cosmetology school waived its right to force a proposed wage-and-hour class action into individual arbitration by litigating the case for nearly 17 months before moving to compel arbitration, a federal appeals court ruled on Thursday.

A unanimous three-judge panel of the 9th U.S. Circuit Court of Appeals said that the Amarillo College of Hairdressing Inc's delay cost the plaintiffs significant resources and arbitrating the case would require them to relitigate key legal issues that they have already won in court.

"A party may not delay seeking arbitration until after the district court rules against it in whole or in part; nor may it belatedly change its mind after first electing to proceed in what it believed to be a more favorable forum," Circuit Court Judge Stephen Reinhardt wrote for the panel, which also included Circuit Judge Kim McLane Wardlaw and U.S. District Judge Mark Bennett of the Northern District of Iowa sitting by designation.

The ruling stems from an October 2013 lawsuit brought by students at Amarillo College, a group of for-profit cosmetology colleges headquartered in Visalia, California. The plaintiffs, who also sued owner and president Gary Yasuda, sought to represent a California class on state wage law claims and a nationwide collective on federal Fair Labor Standards Act claims.

In their complaint filed in the U.S. District Court for the Central District of California, the plaintiffs accused Amarillo College of unlawfully using its students as unpaid employees. The college requires students to complete 1,600 hours of instruction and training, which can be satisfied by activities like performing cosmetology, barbering and manicure services for its paying clients or selling its beauty products.

Those students also had to sign an enrollment agreement that included an arbitration clause.

During a December 2014 scheduling conference, U.S. District Judge Philip Gutierrez in Riverside, California asked counsel for Amarillo College whether it would move to compel arbitration. Counsel said it had not decided, but that it was "probably better off just being here in court" because of Rule 23 and discovery procedures.

The college moved to compel arbitration in March 2015, nearly eight months after Gutierrez rejected its bid to dismiss the complaint on the grounds that the students were not its employees under wage law.

In April 2015, Gutierrez found Amarillo College had waived its right to compel arbitration. The college met all three factors of the 9th Circuit's waiver test, he wrote. It knew of its rights to compel, it acted inconsistently with those rights and its actions hurt the plaintiffs.

The 9th Circuit panel in Thursday's ruling backed Gutierrez's ruling and rejected the college's "attempts to manipulate the judicial and arbitral system and to gain an unfair advantage by virtue of their litigation conduct."

The decision means defendants cannot test the waters in court and use arbitration as a backup, said Bryan Schwartz of Bryan Schwartz Law, who represents the plaintiffs.

Amarillo College's attorney, Michael Hensley of Alvarado Smith, did not respond to requests for comment.

The case is Martin v. Yasuda, 9th U.S. Circuit Court of Appeals, No. 15-55696.

For the appellant: Michael Hensley of Alvarado Smith

For the appellees: Chaya Mandelbaum of Rudy Exelrod Zieff & Lowe, Bryan Schwartz of Bryan Schwartz Law and Leon Greenberg of Law Office of Leon Greenberg

(Reporting by Robert Iafolla)