Paige Martin v. Gary Yasuda

FOR PUBLICATION

UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT

PAIGE MARTIN, SUNDAE No. 15-55696
WORTHY, MARIA FORD,
and MEGAN TALLERICO, on D.C. No.
behalf of themselves and 5:13-cv-01961-PSG-DTB
classes of those similarly
situated;
Plaintiffs-Appellees, OPINION

v.

GARY YASUDA; AMARILLO
COLLEGE OF
HAIRDRESSING, INC., DBA
Milan Institute, DBA Milan
Institute of Cosmetology,
Defendants-Appellants.

Appeal from the United States District Court
for the Central District of California
Philip S. Gutierrez, District Judge, Presiding

Argued and Submitted June 8, 2016
Pasadena, California

Filed July 21, 2016
2 MARTIN V. YASUDA

Before: Stephen Reinhardt and Kim McLane Wardlaw,
Circuit Judges, and Mark W. Bennett,* Senior District
Judge.

Opinion by Judge Reinhardt

SUMMARY**

Arbitration

Affirming the district court’s denial of defendants’ motion
to compel arbitration of labor law claims, the panel held that
the defendants waived their right to arbitration by their
litigation conduct.

The panel held that the district court properly decided the
waiver issue. The panel held that this question of arbitrability
was presumptively for the court, rather than an arbitrator, to
decide, and the broad nature of the parties’ arbitration clause
did not overcome the presumption.

The panel held that the defendants waived their right to
arbitration because they engaged in acts inconsistent with this
right, and the plaintiffs were prejudiced.

*
The Honorable Mark W. Bennett, Senior District Judge for the U.S.
District Court for the Northern District of Iowa, sitting by designation.
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
 MARTIN V. YASUDA 3

COUNSEL

William M. Hensley (argued), Marc D. Alexander, and
Jonathan M. Werner, Alvarado Smith, Santa Ana, California;
Kirsten L. Clevenger, Matthew L. Hoppock, and Ronald L.
Holt, Dunn & Davison LLC, Kansas City, Missouri; for
Defendants-Appellants.

Chaya M. Mandelbaum (argued) and Michelle G. Lee, Rudy,
Exelrod & Zieff, LLP, San Francisco, California; Dana
Sniegocki and Leon Greenberg, Law Office of Leon
Greenberg, Las Vegas, Nevada; Adetunji Olude and Bryan J.
Schwartz, Bryan Schwartz Law, Oakland, California; for
Plaintiffs-Appellees.

OPINION

REINHARDT, Circuit Judge:

Defendants Gary Yasuda and Amarillo College of
Hairdressing appeal the district court’s denial of their motion
to compel arbitration. The district court found that the
defendants waived their right to arbitration by their litigation
conduct. We affirm.

FACTUAL BACKGROUND

Defendant Amarillo College of Hairdressing, Inc., doing
business as “Milan Institute” and “Milan Institute of
Cosmetology” (collectively “Milan”), is a group of nationally
accredited private colleges offering career training in
cosmetology. The plaintiffs are individuals who enrolled in
a cosmetology program at Milan Institute. As part of their
4 MARTIN V. YASUDA

enrollment, each of the plaintiffs signed an Enrollment
Agreement that contained a binding arbitration provision.
The arbitration agreement provides, in relevant part:

[A]ny dispute arising from my enrollment at
Milan Institute, no matter how described,
pleaded or styled, shall be resolved by binding
arbitration, under the substantive and
procedural requirements of the Federal
Arbitration Act, by a single arbitrator,
conducted by the American Arbitration
Association (AAA) at Milan Institute . . .
under its Commercial Rules. All
determinations as to the scope, enforceability
and effect of this arbitration agreement shall
be decided by the arbitrator, and not by a
court. The award rendered by the arbitrator
may be entered in any court having
jurisdiction.

In order to graduate from a cosmetology school, students
must, among other things, complete 1600 hours of technical
instruction and practical training. Cal. Code Regs. tit. 16,
§ 950.2(a). The students perform cosmetology, barbering,
and manicure services for the college’s paying clients. The
students also clean, sweep, wash and fold laundry, set up and
take down studios, clean pedicure bowls, sell retail products,
schedule clients, and promote Milan’s services. The services
that students provide do not necessarily correspond to their
education, and they are not paid for their work.
 MARTIN V. YASUDA 5

PROCEDURAL BACKGROUND

The plaintiffs filed a class action lawsuit on October 28,
2013 against the college and its owner and President, Gary
Yasuda, alleging that the defendants violated state labor laws
and the Fair Labor Standards Act (“FLSA”). Specifically, the
plaintiffs contended, among other things, that Milan was an
“employer” within the meaning of state law as well as the
FLSA and thus, as uncompensated employees, they were
entitled to minimum hourly wages, overtime wages, and
unpaid premiums for missed meal and rest breaks. Over
seventy individuals opted to join the action between October
2013 and March 2014.

On February 19, 2014, the defendants were served with a
copy of the summons and complaint via substituted service
and by mail. They disputed the appropriateness of the service
of process. The parties then stipulated that the defendants
were properly and timely served with the summons and
complaint on March 10, 2014. The parties also agreed to
extend the defendants’ time to respond to June 9, 2014. The
defendants’ counsel subsequently filed a notice of appearance
on March 17, 2014.

On May 16, 2014, the parties filed a Joint Stipulation to
Extend Time to File Motion for FLSA Conditional
Certification and Class Certification with the district court.
They stated that they had “spent considerable time and effort
analyzing the most resourceful and efficient manner with
which to approach discovery and certification motions,” that
it was in the “best interest of judicial resources, time and
effort” to focus discovery on the issue whether the class
members were Milan’s employees under wage laws, and that
they agreed to extend the deadline to file motions for class
6 MARTIN V. YASUDA

and conditional certification. The parties further agreed that
there should be discovery and an opportunity for the court to
resolve the question whether the plaintiffs were employees of
Milan under wage laws before any effort to certify the class
because the lawsuit presents “unique legal claims regarding
whether or not the purported class members are employees of
the defendants, covered by wage laws.” The district court
subsequently granted the parties’ Joint Stipulation Motion.

The plaintiffs filed their first amended complaint on June
6, 2014. It named additional plaintiffs and added additional
state wage and hour claims. On June 23, 2014, the
defendants moved to dismiss the plaintiffs’ state law claims
against all defendants and their FLSA claim against Yasuda
pursuant to Federal Rule of Civil Procedure 12(b)(6).1 The
defendants asserted that plaintiffs were students and not
employees of Milan as a matter of law, and that the plaintiffs
failed to plead Yasuda’s individual liability. After briefing
and oral argument on the issue, on July 30, 2014, the district
court granted in part and denied in part the defendants’
motion to dismiss. The court dismissed the causes of action
against Yasuda with leave to amend, but denied the
defendants’ motion as to the plaintiffs’ state law claims. As
to the state law claims, the district court concluded after a
detailed analysis that the California Legislature could have
included students performing services at their school for the
fee-paying public within the categories of individuals who

1
The defendants sought to dismiss all of the plaintiffs’ state law claims
(the second through ninth causes of action) with prejudice. They also
sought to dismiss the plaintiffs’ state law and FLSA claims against Yasuda
with prejudice. If the motion to dismiss had been successful, it would
have left only the first cause of action, the FLSA claim, against Milan
intact.
 MARTIN V. YASUDA 7

may practice cosmetology without being paid. Because the
Legislature did not do so, the district court declined to
“usurp” the Legislature’s role by rewriting the Cosmetology
Act. The district court therefore held that the Cosmetology
Act did not preclude the plaintiffs’ arguments that they were
employees under state wage laws and that the parties could
proceed to discovery on the issue.

The plaintiffs then filed a second amended complaint on
August 29, 2014, which pleaded additional facts as to
Yasuda’s individual liability. On September 19, 2014, the
defendants filed their answer to the complaint. In addition to
responding to all of the plaintiffs’ causes of action, the
defendants pled arbitration as one of their forty-three
affirmative defenses. They, however, did not move to compel
arbitration.

On November 28, 2014, the parties filed a Joint Rule
26(f) Report, which detailed the scope of discovery and
contained proposed deadlines for the phases of discovery and
motions. In a footnote, the defendants maintained that each
plaintiff executed an arbitration agreement and that they were
not waiving any rights as to those agreements. In the body of
the report, the parties stated that they participated in a Rule
26(f) conference, exchanged initial disclosures pursuant to
Rule 26(a)(1), and had already begun exchanging written
discovery requests and noticing depositions to occur in early
2015. The parties agreed, subject to approval by the court,
that the first eight months of discovery should focus on the
“employee” issue so that the court could consider that issue
on motions for summary judgment, if the parties chose to file
such motions, followed by two months of expert discovery.
They also planned to exchange discovery requests and to take
and defend depositions of the parties to the case.
8 MARTIN V. YASUDA

The district court held a scheduling conference on
December 8, 2014, fourteen months after the plaintiffs filed
the original complaint. During the proceeding, the court
asked the defendants’ counsel whether he intended to file a
motion to compel arbitration. He responded, “[W]e haven’t
made a decision about that. And frankly . . . I think our view
of it is we are probably better off just being here in the court
with the procedures of Rule 23 and discovery and federal
practice than handling it in arbitration.”2 The court then
warned counsel about the possibility of waiver. The next day,
the court issued a scheduling order setting the deadlines for
different phases of discovery and motions.

Although the plaintiffs made written discovery requests
of the defendants in November 2014, they agreed to extend
the defendants’ time to respond in December 2014 and
January 2015. The defendants eventually produced the
discovery responses on February 4, 2015. Subsequently, on
February 20, 2015, the court issued a stipulated protective
order in which the parties agreed to abide by certain
procedures and guidelines during discovery. Then, on
February 25 and 26, 2015, plaintiffs deposed Milan’s Chief
Financial Officer. It was on February 25, 2015 that
defendants’ counsel informed the plaintiffs’ counsel of their
intent to compel arbitration.

2
At the conference in December 2014, defense counsel stated that he
thought “the agreements as written do not expressly state that they would
bar any individual plaintiff who’s arbitrating from representing not only
his or her own interests but also those of a proposed class.” By March 20,
2015, when defendants filed their memorandum in support of the motion
to compel individual arbitration, they had reversed their position, now
arguing that class arbitration was not permitted and that the arbitrator, not
the court, should decide the question.
 MARTIN V. YASUDA 9

On March 20, 2015, almost seventeen months after the
start of the case, the defendants actually moved to compel
individual arbitration. In the motion, they argued, among
other things, that the court must enforce the parties’
arbitration agreements, that the agreements were valid and
enforceable, and that they, the defendants, had not waived
arbitration. The plaintiffs opposed the motion by arguing that
the defendants had waived their right to compel arbitration
and that the terms were unconscionable and unenforceable.

Applying the three factor waiver test employed in this
circuit, the district court denied the defendants’ motion to
compel individual arbitration. The district court held that all
the factors were satisfied because: (1) it was indisputable that
the defendants had knowledge of their existing right to
compel arbitration, (2) the defendants engaged in acts
inconsistent with that right by delaying their motion to
compel and deciding to actively participate in the litigation
for seventeen months (including the resolution of a motion to
dismiss on the merits), and (3) granting the motion to compel
seventeen months after the start of litigation and after a ruling
partly in favor of the plaintiffs on the motion to dismiss
would result in prejudice to the plaintiffs. The defendants
timely appealed.

DISCUSSION

The defendants contend that the district court erred in two
ways. First, they argue that an arbitrator, rather than the
district court, should decide whether the defendants waived
their right to arbitration through litigation conduct. Second,
they contend that even if the district court was correct to
decide the issue, it erred by finding waiver.
10 MARTIN V. YASUDA

I.

In Howsam v. Dean Witter Reynolds, Inc., the Supreme
Court distinguished between two categories of gateway issues
on motions to compel arbitration, each of which has a
different presumption as to whether a court or an arbitrator
should decide. 537 U.S. 79, 83 (2002); see also Cox v. Ocean
View Hotel Corp., 533 F.3d 1114, 1120–21 (9th Cir. 2008)
(describing the two categories of disputes). The first category
of gateway issues is a “question of arbitrability”—that is,
“whether the parties have submitted a particular dispute to
arbitration.” Howsam, 537 U.S. at 83. This category
includes issues that the parties would have expected a court
to decide such as “whether the parties are bound by a given
arbitration clause” or whether “an arbitration clause in a
concededly binding contract applies to a particular type of
controversy.” Id. at 84. These disputes are “for judicial
determination unless the parties clearly and unmistakably
provide otherwise.” Id. at 83. (quoting AT & T Techs., Inc. v.
Commc’ns Workers of Am., 475 U.S. 643, 649 (1986)). In
contrast, the second category—“procedural” issues—is
“presumptively not for the judge, but for an arbitrator, to
decide.” Id. at 84. In Howsam, for example, the Court held
that the question as to whether a party met the arbitral
forum’s statute of limitations for filing a case was a
procedural question that the parties would have expected the
arbitrator to decide; accordingly, as the Court made clear, the
arbitrator should presumptively decide such disputes. Id. at
85.

We have made clear that waiver by litigation conduct is
part of the first category of gateway issues. Cox, 533 F.3d at
1121. In Cox, an employee who had been fired contended
that his employer waived its right to arbitrate his
 MARTIN V. YASUDA 11

discrimination claim because, among other things, it had
refused his earlier request to arbitrate. Id. at 1118, 1125.
Addressing the defendant’s argument that the arbitrator
should decide the issue, we concluded that the question
whether a party waived its right to arbitrate on the basis of its
litigation conduct is a question of arbitrability and is in the
first category of gateway issues. Id. at 1121; see also id.
1121 n.5. Accordingly, under Howsam, the question before
us is presumptively for a court and not an arbitrator to decide.
537 U.S. at 83. Every circuit that has addressed this
issue—whether a district court or an arbitrator should decide
if a party waived its right to arbitrate through litigation
conducted before the district court—has reached the same
conclusion. See Marie v. Allied Home Mortg. Corp.,
402 F.3d 1, 14 (1st Cir. 2005) (“The proper presumption in
this case is that the waiver issue is for the court and not the
arbitrator.”); Ehleiter v. Grapetree Shores, Inc., 482 F.3d
207, 217–218, 221 (3d Cir. 2007) (adopting the First Circuit’s
test); JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388,
394 (6th Cir. 2008) (“[W]e conclude that Howsam did not
disturb the traditional rule that the courts presumptively
resolve waiver-through-inconsistent-conduct claims.”);
Grigsby & Associates, Inc. v. M Sec. Inv., 664 F.3d 1350,
1353 (11th Cir. 2011) (“Today we conclude that it is
presumptively for the courts to adjudicate disputes about
whether a party, by earlier litigating in court, has waived the
right to arbitrate.”); see also Hong et al. v. CJ CGV Am.
Holdings, Inc. et al., 222 Cal. App. 4th 240, 256–58 (2013)
(finding that the First, Third, Sixth, and Eleventh Circuits, as
well as the Supreme Courts of Colorado, Nebraska, Texas
and Alabama allow courts to decide the waiver by litigation
conduct issue). But cf. Nat’l Am. Ins. Co. v. Transamerica
Occidental Life Ins. Co., 328 F.3d 462, 466 (8th Cir. 2003)
(holding that the arbitrator presumptively should decide if a
12 MARTIN V. YASUDA

party has waived the right to arbitration by litigation conduct
in state court).3

The defendants next argue that the broad nature of the
arbitration clause overcomes the presumption because it
contains a clear and unmistakable provision that the question
of waiver based on litigation conduct should be decided by
the arbitrator. Cox again provides the answer. In Cox, the
agreement stated that “[a]ny controversy . . . involving the
construction or application of the terms, provisions, or
conditions of this Agreement or otherwise arising out of or
related to this Agreement shall likewise be settled by
arbitration.” 533 F.3d at 1117. We nevertheless found that the
court and not the arbitrator should decide the issue of waiver
by litigation conduct. In the present case, the provision
regarding the scope of the arbitration agreement—“[a]ll
determinations as to the scope, enforceability and effect of
this arbitration agreement shall be decided by the arbitrator,
and not by a court”—is far less broad than the provision in
Cox, because it does not contain the all inclusive “arising out
of or related to” language. The language in the arbitration

3
The defendants also cite language from Howsam that “the presumption
is that the arbitrator should decide allegations of waiver, delay, or a like
defense to arbitrability.” As other circuits have found, the reference to
waiver in Howsam was whether a party waived arbitration by failing to
comply with the arbitration forum’s specific rules—a question that the
Supreme Court logically concluded was better answered by the forum that
wrote the rules. Howsam, 537 U.S. at 85. The arbitrator, however, does
not have expertise regarding whether litigation conduct in front of the
district court was enough to constitute revocation of the arbitration clause
and would not be expected to resolve that dispute. Id. at 83–84
(differentiating between issues meant for arbitrators rather than judges
based on the parties’ expectations of who would decide); see also Ehleiter,
482 F.3d at 219. Thus, even if Cox did not foreclose the defendants’
argument, our answer would be the same.
 MARTIN V. YASUDA 13

contract before us is therefore a fortiori insufficient to show
an intent that an arbitrator decide the waiver by litigation
conduct issue and to overcome the presumption to the
contrary.

In sum, the district court did not err in deciding the
litigation conduct waiver issue itself. We have made clear
that courts generally decide whether a party has waived his
right to arbitration by litigation conduct. If the parties intend
that an arbitrator decide that issue under a particular contract,
they must place clear and unmistakable language to that
effect in the agreement. See Hong, 222 Cal. App. 4th at 258.
As they did not do so here, the district court did not err by
deciding the conduct waiver issue.

II.

The right to arbitration, like other contractual rights, can
be waived. United States v. Park Place Assocs., Ltd.,
563 F.3d 907, 921 (9th Cir. 2009). A determination of
whether “the right to compel arbitration has been waived
must be conducted in light of the strong federal policy
favoring enforcement of arbitration agreements.” Fisher v.
A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986).
Because waiver of the right to arbitration is disfavored, “any
party arguing waiver of arbitration bears a heavy burden of
proof.” Id. (quoting Belke v. Merrill Lynch, Pierce, Fenner
& Smith, 693 F.2d 1023, 1025 (11th Cir. 1982)). As such,
“[a] party seeking to prove waiver of a right to arbitration
must demonstrate: (1) knowledge of an existing right to
compel arbitration; (2) acts inconsistent with that existing
right; and (3) prejudice to the party opposing arbitration
resulting from such inconsistent acts.” Id. Here, the
defendants concede that they had knowledge of the right to
14 MARTIN V. YASUDA

compel arbitration; thus, we address only the latter two
factors.

A. The Defendants Engaged in Acts Inconsistent with
Their Right to Arbitration

There is no concrete test to determine whether a party has
engaged in acts that are inconsistent with its right to arbitrate.
We have stated, however, that a party’s extended silence and
delay in moving for arbitration may indicate a “conscious
decision to continue to seek judicial judgment on the merits
of [the] arbitrable claims,” which would be inconsistent with
a right to arbitrate. Van Ness Townhouses v. Mar Indus.
Corp., 862 F.2d 754, 759 (9th Cir. 1988) (quoting Nat’l
Found. for Cancer Research v. A.G. Edwards & Sons,
821 F.2d 772, 777 (D.C. Cir. 1987)). We find this element
satisfied when a party chooses to delay his right to compel
arbitration by actively litigating his case to take advantage of
being in federal court. See id. at 756, 759 (finding waiver
when party answered complaints, moved to dismiss the
action, and did not claim a right to arbitration in any of the
pleadings); Kelly v. Pub. Util. Dist. No. 2, 552 Fed. App’x
663, 664 (9th Cir. 2014) (finding this element satisfied when
the parties “conducted discovery and litigated motions,
including a preliminary injunction and a motion to dismiss”);
see also Plows v. Rockwell Collins, Inc., 812 F. Supp. 2d
1063, 1067–68 (C.D. Cal. 2011) (finding this element
satisfied when the defendant actively litigated the case by
removing it to federal court, seeking a venue transfer,
participating in meetings and scheduling conferences,
negotiating and entering into a protective order, and
participating in discovery that would not have been available
under the arbitration agreement). A statement by a party that
it has a right to arbitration in pleadings or motions is not
 MARTIN V. YASUDA 15

enough to defeat a claim of waiver. See In Re Mirant Corp.
v. Castex Energy, Inc., 613 F.3d 584, 591 (5th Cir. 2010) (“A
party cannot keep its right to demand arbitration in reserve
indefinitely while it pursues a decision on the merits before
the district court.”); Hooper v. Advance Am., Cash Advance
Ctrs. of Missouri, Inc., 589 F.3d 917, 923 (8th Cir. 2009) (“A
reservation of rights is not an assertion of rights.”). This is
especially true when parties state well into the litigation that
they do not intend to move to compel arbitration. Garcia v.
Wachovia Corp., 699 F.3d 1273, 1277 (11th Cir. 2012)
(stating, in denying a motion to compel arbitration, that the
defendant “even went so far as to say that it did not intend to
seek arbitration in the future of the claims brought by most of
the existing plaintiffs . . .”). Additionally, although filing a
motion to dismiss that does not address the merits of the case
is not sufficient to constitute an inconsistent act, seeking a
decision on the merits of an issue may satisfy this element.
Compare Lake Commc’ns, Inc. v. ICC Corp., 738 F.2d 1473,
1476–77 (9th Cir. 1984) (finding defendant did not act
inconsistently with right to arbitrate by filing a motion to
dismiss for lack of personal jurisdiction, in which it alluded
to its right to arbitrate and its intention to rely upon the right),
overruled on other grounds by Mitsubishi Motors Corp. v.
Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632–35 (1985);
and United Computer Systems v. AT&T Corp., 298 F.3d 756,
765 (9th Cir. 2002) (holding that defendant did not waive
arbitration by bringing motion to dismiss based on res
judicata in which the issue of remedy was not raised) with
Van Ness Townhouses, 862 F.2d at 759 (finding that a
“conscious decision to continue to seek judicial judgment on
the merits of [an] arbitrable clai[m]” is inconsistent with a
right to arbitrate); Hooper, 589 F.3d at 922 (holding that
defendant acted inconsistently by seeking a decision on the
merits, which resulted in a game of “heads I win, tails you
16 MARTIN V. YASUDA

lose”) (citations omitted); Petroleum Pipe Ams. Corp. v.
Jindal Saw, Ltd., 575 F.3d 476, 480 (5th Cir. 2009) (“A party
waives arbitration by seeking a decision on the merits before
attempting to arbitrate.”); and Lewallen v. Green Tree
Servicing, L.L.C., 487 F.3d 1085, 1092 (8th Cir. 2007)
(“[Defendant] also acted inconsistently with its right to
arbitrate by urging the bankruptcy court to dispose of
[plaintiff’s] claims on the merits, reserving arbitration as an
alternative avenue to resolve the dispute.”).

Here, the defendants engaged in conduct inconsistent with
their right to arbitrate. They spent seventeen months
litigating the case. This included devoting “considerable time
and effort” to a joint stipulation structuring the litigation,
filing a motion to dismiss on a key merits issue4, entering into
a protective order, answering discovery, and preparing for
and conducting a deposition. The defendants did not even

4
The defendants argue that the ruling on the motion to dismiss was not
a merits ruling because the motion to dismiss was granted in part and
denied in part without prejudice and because “it was only based on the
pleadings and not directed to the entire dispute.” These arguments are
erroneous. Although a dismissal without prejudice on an issue is not a
merits ruling, Richards v. Ernst & Young, LLP, 744 F.3d 1072, 1074–75
(9th Cir. 2013), the district judge here denied the motion to dismiss with
regard to the key merits issue: whether the Cosmetology Act legally
precluded the students from being classified as employees. He granted the
motion to dismiss without prejudice only with respect to the individual
claims against Yasuda. Accordingly, the ruling was in principal part a
ruling on the merits. More important, whatever the judge may have done,
the defendants sought a ruling on the merits. The defendants’ second
contention—that this was not a merits ruling because they were seeking
a ruling on the pleadings—is likewise wrong. When defendants move for
dismissal with prejudice on a key merits issue that would preclude relief
as to one or more of plaintiffs’ claims, as they did here, they are seeking
a ruling on the merits. See In re Mirant., 613 F.3d at 589.
 MARTIN V. YASUDA 17

note their right to arbitration until almost a year into the
litigation and did not move to enforce that right until well
after that time. Indeed, fourteen months into the litigation,
they told the district judge and opposing counsel that they
were likely “better off” in federal court. We agree with the
district court that the totality of these actions satisfies this
element.

B. The Plaintiffs Were Prejudiced

Although litigation conduct inconsistent with a right to
arbitrate most frequently causes prejudice to the opposing
party, the link is not automatic. Lake Commc’ns, 738 F.2d at
1477 (holding that to prove waiver, “[m]ore is required than
action inconsistent with an arbitration provision; prejudice to
the party opposing arbitration must also be shown.”). To
prove prejudice, plaintiffs must show more than “self-
inflicted” wounds that they incurred as a direct result of suing
in federal court contrary to the provisions of an arbitration
agreement. Fisher, 791 F.2d at 698; see also Richards, 744
F.3d at 1074–75. Such wounds include costs incurred in
preparing the complaint, serving notice, or engaging in
limited litigation regarding issues directly related to the
complaint’s filing, such as jurisdiction or venue. In contrast,
in order to establish prejudice, the plaintiffs must show that,
as a result of the defendants having delayed seeking
arbitration, they have incurred costs that they would not
otherwise have incurred, see Van Ness Townhouses, 862 F.2d
at 759, that they would be forced to relitigate an issue on the
merits on which they have already prevailed in court, see id.,
or that the defendants have received an advantage from
litigating in federal court that they would not have received
in arbitration, see Richards, 744 F.3d at 1075 (noting that a
plaintiff can show prejudice if the opposing party has
18 MARTIN V. YASUDA

“gain[ed] information about the other side’s cases that could
not have been gained in arbitration.” (quotation marks
omitted)).

We agree with the district court that the plaintiffs here
easily meet the prejudice requirement. We note first that
arbitration is designed to provide a simpler and more
expeditious system of resolving certain types of disputes—a
system that values “greater efficiency and speed” over
“procedural rigor.” Stolt-Nielsen S.A. v. AnimalFeeds Int’l
Corp., 559 U.S. 662, 685 (2010); see also 14 Penn Plaza LLC
v. Pyett, 556 U.S. 247, 257 (2009) (“Parties generally favor
arbitration precisely because of the economics of dispute
resolution.”). Spending a lengthy amount of time litigating
in the more complex federal court system with its rigorous
procedural and substantive rules will almost inevitably cause
the parties to expend more time, money, and effort than had
they proceeded directly to arbitration. On the other hand, the
federal court system provides advantages that some parties
still prefer to retain, including the type of relief available and
the potential for precedential decisions.

When a party has expended considerable time and money
due to the opposing party’s failure to timely move for
arbitration and is then deprived of the benefits for which it
has paid by a belated motion to compel, the party is indeed
prejudiced. See, e.g., Kelly, 552 Fed. App’x at 664 (finding
prejudice when the defendants waited eleven months to
compel arbitration); Joca-Roca Real Estate, LLC v. Brennan,
772 F.3d 945, 949, 951 n.7 (1st Cir. 2014) (finding prejudice
with a nine-month delay after the filing of the complaint);
Gray Holdco, Inc. v. Cassady, 654 F.3d 444, 454–55 (3d Cir.
2011) (holding that a ten-month delay before moving to
compel, while not dispositive, weighed in favor of waiver);
 MARTIN V. YASUDA 19

Messina v. N. Cent. Distrib., Inc., No. 15-2323, — F.3d —,
2016 WL 2640911, at *3 (8th Cir. May 10, 2016) (finding
prejudice after an eight month delay); and In re Mirant, 613
F.3d at 591 (considering litigation expenses in prejudice
inquiry after defendant waited 18 months before moving to
compel arbitration). At that point, the cost and expenses of
litigating in district court are no longer simply “self-inflicted”
wounds on the part of the plaintiffs, Fisher, 791 F.2d at 698,
because the defendants’ actions have shown that they, too,
have sought at least for some period of time to attempt to
resolve the issue in court rather than in arbitration. See Van
Ness Townhouses, 862 F.2d at 759; see also Kelly, 552 Fed.
App’x at 664 (“A party that is aware that it has a right to
compel arbitration of a dispute cannot wait to exercise that
right until the parties have expended a significant amount of
time and money to litigate that dispute in federal court.”);
Plows, 812 F. Supp. 2d at 1068 (holding that thirteen months
of legal fees and presumably the different choices that would
have been made had plaintiffs known the case was going to
arbitration were contributing factors to a finding of
prejudice).5

5
When we have granted motions to compel filed after substantial
litigation, there have been unique circumstances that have explained the
long delay in filing a motion to compel, such as absence of knowledge, a
party’s pro se status, or intervening law. See Britton v. Co-Op Banking
Group, 916 F.2d 1405, 1413 (9th Cir. 1990) (a two-year delay was not
inconsistent when the party moving for arbitration lacked knowledge of
his right until six months before making the motion and had spent part of
that two years in pursuit of a court-appointed attorney); Fisher, 791 F.2d
at 694–95 (finding that waiting three and a half years to file the motion to
compel did not constitute an inconsistent act because the moving party
“properly perceived that it was futile to file” such a motion until an
intervening Supreme Court case changed the rule).
20 MARTIN V. YASUDA

Here, because the defendants failed to move for
arbitration for seventeen months, the plaintiffs expended
considerable money and effort in federal litigation, including
conferring with opposing counsel regarding how to conduct
the case on the merits, analyzing how to approach discovery
and class certification, and contesting the defendants’ motion
to dismiss on the merits. As discussed above, even if the
parties exchanged the same information in court as they
would have in arbitration, the process of doing so in federal
court likely cost far more than determining the answer to the
same question in arbitration. The unnecessary, additional
costs incurred by the plaintiffs as a result of the defendants’
dilatory motion to compel constitutes obvious prejudice.

Moreover, the plaintiffs have shown prejudice here
because, should this case go to arbitration, they would have
to relitigate a key legal issue on which the district court has
ruled in their favor. We and other circuits routinely have
found this factor 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. See, e.g., Van Ness
Townhouses, 862 F.2d at 759; Kelly, 552 Fed. App’x at 664
(“A late shift to an arbitrator would force the parties to bear
the expense of educating arbitrators and threaten to require
the appellees to relitigate matters decided by the district
judge.”), Hooper, 589 F.3d at 923 (finding prejudice when
defendant’s “motion to dismiss forced Plaintiffs to litigate
substantial issues on the merits”), and In re Mirant, 613 F.3d
at 591 (finding prejudice when the defendant “waited
eighteen months before moving to compel arbitration while
it attempted to obtain a dismissal with prejudice”).

Because the defendants had knowledge of their right to
arbitrate and they engaged in acts inconsistent with that right
 MARTIN V. YASUDA 21

for a significant period of time, and because the plaintiffs
would be prejudiced should the court now compel arbitration,
we conclude, as did the district court, that the defendants
waived their right to arbitrate.

***

A party that signs a binding arbitration agreement and has
subsequently been sued in court has a choice: it can either
seek to compel arbitration or agree to litigate in court. It
cannot choose both. 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. Allowing it to do so would result in a waste
of resources for the parties and the courts and would be
manifestly unfair to the opposing party. Here, we reject the
defendants’ attempt to manipulate the judicial and arbitral
systems and to gain an unfair advantage by virtue of their
litigation conduct. Accordingly, they have waived their right
to compel arbitration.

The district court is AFFIRMED.