Teresa Armstrong v. Michaels Stores, Inc. ( 2023 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
TERESA ARMSTRONG, No. 21-15397
Plaintiff-Appellant, D.C. No. 5:17-cv-
06540-LHK
v.
MICHAELS STORES, INC.; DOES, OPINION
1-100, inclusive,
Defendants-Appellees.
Appeal from the United States District Court
for the Northern District of California
Lucy H. Koh, District Judge, Presiding
Argued and Submitted July 26, 2022
San Francisco, California
Filed February 13, 2023
Before: M. Margaret McKeown and William A. Fletcher,
Circuit Judges, and Richard D. Bennett, * District Judge.
Opinion by Judge McKeown
*
The Honorable Richard D. Bennett, United States District Judge for
the District of Maryland, sitting by designation.
2 ARMSTRONG V. MICHAELS STORES, INC.
SUMMARY **
Arbitration
The panel affirmed the district court’s order compelling
arbitration in an employment dispute between plaintiff and
her employer Michael Stores, Inc.
Plaintiff agreed to arbitrate any disputes regarding the
terms and conditions of her employment, but when a dispute
arose, she filed a complaint in federal district court. The
district court ordered plaintiff to take her claims to
arbitration, and the arbitrator ruled in favor of Michaels.
Plaintiff argued that Michaels waited too long to move
for arbitration and therefore waived its right to the arbitral
forum. The panel held that the record did not establish that
Michaels chose to forgo arbitration. Michaels repeatedly
reserved its right to arbitration, did not ask the district court
to weigh in on the merits, and did not engage in any
meaningful discovery. Michaels did not actively litigate the
merits of the case for a prolonged period to take advantage
of being in court. Although Michaels did not immediately
move to compel arbitration, its actions did not amount to a
relinquishment of the right to arbitrate.
Following the Supreme Court decisions in Epic Systems
Corp. v. Lewis, 138 S. Ct. 1612 (2018), and Morgan v.
Sundance, Inc., 142 S. Ct. 1708 (2022), the panel recognized
that there was no longer a thumb on the scale in favor of
arbitration, and that the party opposing arbitration no longer
**
This summary constitutes no part of the opinion of the court. It has
been prepared by court staff for the convenience of the reader.
ARMSTRONG V. MICHAELS STORES, INC. 3
bore a “heavy burden” to show waiver of the right to
arbitration. The panel held that, even with this lighter
burden, plaintiff still failed to establish that Michaels acted
inconsistently with exercising its right to arbitrate.
COUNSEL
Thomas A. Segal (argued) and Shaun Setareh, Setareh Law
Group, Beverly Hills, California, for Plaintiff-Appellant.
Aileen M. McGrath (argued), and Michael J. Weisbuch,
Akin Gump Strauss Hauer & Feld LLP, San Francisco,
California; Gregory W. Knopp and Jonathan S. Christie,
Akin Gump Strauss Hauer & Feld LLP, Los Angeles,
California; for Defendants-Appellees.
4 ARMSTRONG V. MICHAELS STORES, INC.
OPINION
McKEOWN, Circuit Judge:
Litigation in this case was bookended by two Supreme
Court decisions on arbitration. In Epic Systems Corp. v.
Lewis, 138 S. Ct. 1612 (2018), the Court held that arbitration
agreements requiring individual arbitration, not class or
collective arbitration, are enforceable, and in Morgan v.
Sundance, Inc., 142 S. Ct. 1708 (2022), the Court concluded
that the Federal Arbitration Act restricts courts from creating
arbitration-favoring procedural rules. These two cases
inform our resolution of this appeal.
Teresa Armstrong agreed to arbitrate any disputes
regarding the terms and conditions of her employment with
Michaels Stores, Inc. But, when a dispute arose, Armstrong
filed a complaint in federal district court. The district court
ordered Armstrong to take her claim to arbitration, and the
arbitrator ruled in favor of Michaels. Armstrong now
appeals the district court’s order compelling arbitration. She
argues that Michaels waited too long to move for arbitration
and therefore waived its right to the arbitral forum.
We affirm the district court’s order because the record
does not establish that Michaels chose to forego arbitration.
Michaels repeatedly reserved its right to arbitration, did not
ask the district court to weigh in on the merits, and did not
engage in any meaningful discovery. Indeed, the only
significant motion filed was Michaels’s motion to compel
arbitration. Although Michaels did not immediately move
to compel arbitration, its actions do not amount to a
relinquishment of the right to arbitrate.
ARMSTRONG V. MICHAELS STORES, INC. 5
I. BACKGROUND
Armstrong filed a putative class action against Michaels
in California state court in October 2017, alleging violations
of state wage-and-hour laws. Michaels answered, asserting
its right to arbitration as an affirmative defense, and removed
the action to federal district court under the Class Action
Fairness Act. Armstrong then amended her complaint to add
a claim under California’s Private Attorney General Act
(“PAGA”), and Michaels again answered and asserted its
right to arbitration as an affirmative defense.
In February 2018, 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. At the initial case
management conference, Michaels reiterated its intent to
move to compel arbitration. Discovery began in February
2018. Michaels served five interrogatories and required
Armstrong to produce twenty-eight pages of documents
relevant to Armstrong’s non-arbitrable PAGA claim as well
as her arbitrable claims. Except for a request for a stipulated
protective order, neither party filed any discovery motions.
While discovery was ongoing, the Supreme Court
decided Epic Systems, overruling Ninth Circuit precedent
and holding that arbitration agreements that require
individual arbitration, rather than class or collective actions,
are enforceable under the Federal Arbitration Act. See 138
S. Ct. at 1632; see also O’Connor v. Uber Techs., Inc., 904
F.3d 1087, 1094 (9th Cir. 2018) (explaining that Epic
Systems foreclosed the argument that “arbitration
agreements are unenforceable because they contain class
action waivers that violate the National Labor Relations Act
6 ARMSTRONG V. MICHAELS STORES, INC.
of 1935”). Two weeks after the Epic Systems decision,
Michaels wrote to Armstrong requesting that she voluntarily
dismiss her non-PAGA claims in view of Epic Systems.
Armstrong did not oblige. In a case management statement
in July 2018, Michaels represented its intention to move to
dismiss or compel arbitration.
Michaels moved to compel arbitration in August 2018.
Armstrong opposed the motion on the grounds that Michaels
had waived its right to arbitration due to delay. The district
court ruled in favor of Michaels and sent the case to
arbitration. The arbitrator awarded summary judgment to
Michaels, and the district court dismissed Armstrong’s
PAGA claim. Armstrong timely appealed the district court’s
order compelling arbitration.
II. ANALYSIS
During the pendency of Armstrong’s appeal, the
Supreme Court issued a second decision central to the
resolution of this case, holding that the plain language of the
Federal Arbitration Act restricts courts from creating
arbitration-favoring procedural rules. See Morgan, 142 S.
Ct. at 1713–14. Prior to 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.
Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th
Cir. 1986). Like most circuits, we had crafted an
arbitration-specific waiver test: parties arguing that their
opponent waived the right to arbitrate bore “the heavy
burden of demonstrating: (1) knowledge of an existing right
to compel arbitration; (2) intentional acts inconsistent with
that existing right; and (3) prejudice to the person opposing
arbitration from such inconsistent acts.” Newirth ex rel.
ARMSTRONG V. MICHAELS STORES, INC. 7
Newirth v. Aegis Senior Cmtys., LLC, 931 F.3d 935, 940 (9th
Cir. 2019).
The Court in Morgan clarified that the pro-arbitration
“federal policy is about treating arbitration contracts like all
others, not about fostering arbitration.” 142 S. Ct. at 1713.
Put differently, the pro-arbitration federal policy is “to make
‘arbitration agreements as enforceable as other contracts, but
not more so.’” Id. (quoting Prima Paint Corp. v. Flood &
Conklin Mfg. Co., 388 U.S. 395, 404 n.12 (1967)). No
longer is there a “special” rule favoring arbitration. Rather,
courts “must hold a party to its arbitration contract just as the
court would to any other kind” but “may not devise novel
rules to favor arbitration over litigation.” Id. And it is error
to require parties arguing waiver of the right to arbitration to
demonstrate prejudice because “the usual federal rule of
waiver does not include a prejudice requirement.” Id. at
1714. In short, contractual waiver generally requires “an
existing right, a knowledge of its existence, and an actual
intention to relinquish it, or conduct so inconsistent with the
intent to enforce the right as to induce a reasonable belief
that it has been relinquished,” with no required showing of
prejudice. See United States ex rel. Army Athletic Ass’n v.
Reliance Ins. Co., 799 F.2d 1382, 1387 (9th Cir. 1986)
(internal quotation marks omitted) (quoting Mardirosian v.
Lincoln Nat’l Life Ins. Co., 739 F.2d 474, 477 (9th Cir.
1984)).
We recognize that Morgan overruled our prior
precedents in two respects. First, Morgan teaches that there
is no “strong federal policy favoring enforcement of
arbitration agreements.” Fisher, 791 F.2d at 694. The
federal policy is to treat arbitration agreements like other
contracts. Although the party opposing arbitration still bears
the burden of showing waiver, the burden is no longer
8 ARMSTRONG V. MICHAELS STORES, INC.
“heavy.” Instead, the burden for establishing waiver of an
arbitration agreement is the same as the burden for
establishing waiver in any other contractual context.
Second, as we recently noted, Morgan abrogates our
precedents to the extent they required the party opposing
arbitration to demonstrate prejudice. See Hill v. Xerox Bus.
Servs., No. 20-35838, 2023 WL 1490808, at *9 (9th Cir.
Feb. 3, 2023). In view of Morgan, the party asserting waiver
must demonstrate: (1) knowledge of an existing right to
compel arbitration and (2) intentional acts inconsistent with
that existing right. Id.The parties agree that Armstrong satisfied the first prong,
so we consider only whether Armstrong has established that
Michaels’s intentional acts were inconsistent with its right to
compel arbitration. We review de novo the question of
whether “the undisputed facts of [Michaels’s] pretrial
participation in the litigation” satisfy the waiver standard.
Richards v. Ernst & Young, LLP, 744 F.3d 1072, 1074 (9th
Cir. 2013) (per curiam) (quoting Fisher, 791 F.2d at 693).
Because there is no “concrete test,” for assessing
whether Michaels took acts inconsistent with its right to
arbitration, “we consider the totality of the parties’ actions.”
Hill, 2023 WL 1490808, at *11 (quoting Newirth, 931 F.3d
at 941). We ask whether those actions holistically “indicate
a conscious decision . . . to seek judicial judgment on the
merits of the arbitrable claims, which would be inconsistent
with a right to arbitrate.” Id. at *13 n.19 (quoting Martin v.
Yasuda, 829 F.3d 1118, 1125 (9th Cir. 2016)). Under our
precedent, a party generally “acts inconsistently with
exercising the right to arbitrate when it (1) makes an
intentional decision not to move to compel arbitration and
(2) actively litigates the merits of a case for a prolonged
period of time in order to take advantage of being in court.”
ARMSTRONG V. MICHAELS STORES, INC. 9
Newirth, 931 F.3d at 941. Neither of those circumstances is
present here.
First, the record is unequivocal that Michaels did not
make an intentional decision not to move to compel
arbitration. In Martin, we concluded that the defendants
intentionally refrained from moving to compel arbitration
after they failed to raise their right to arbitrate for nearly a
year after the case was filed and, after noting their right to
arbitrate, “told the district judge and opposing counsel that
they were likely ‘better off’ in federal court’” than in
arbitration. 829 F.3d at 1126. In marked contrast, Michaels
pleaded arbitration as an affirmative defense in its answers
to both the original complaint and amended complaint, and
explicitly and repeatedly stated its intent to move to compel
arbitration in both case management statements and in the
initial case management conference before the district court.
Additionally, Michaels moved to compel arbitration
promptly after the Supreme Court decided Epic Systems and
Armstrong declined to dismiss her non-PAGA claims
voluntarily. Although 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,’” id. at 1125 (alteration in original),
Michaels was consistently vocal about its intent to move to
compel arbitration.
Second, Michaels did not actively litigate the merits of
the case for a prolonged period to take advantage of being in
court. Obviously, “[s]eeking a decision on the merits of a
key issue in a case indicates an intentional and strategic
decision to take advantage of the judicial forum.” Newirth,
931 F.3d at 941. For good reason, we have held that a
defendant waived the right to arbitrate after litigating in
federal court for two years and then filing a motion to
10 ARMSTRONG V. MICHAELS STORES, INC.
dismiss on the merits. See Van Ness Townhouses v. Mar
Indus. Corp., 862 F.2d 754, 759 (9th Cir. 1988). Likewise,
a party that litigated in federal court for over a year, filed a
motion to dismiss “on a key merits issue,” and received an
adverse ruling before moving to compel arbitration was
found to have waived the right to arbitration. Martin, 829
F.3d at 1126. Unlike either Van Ness or Martin, Michaels
never wavered from the view that it had a right to arbitration,
as evidenced by Michaels moving to compel arbitration
within a year after Armstrong filed the complaint, never
seeking or obtaining a ruling on the merits, and never
waffling about whether to arbitrate or stay in district court.
Finally, Michaels’s limited discovery requests did not evince
a decision to take advantage of the judicial forum. The very
limited requests were related at least in part to Armstrong’s
non-arbitrable PAGA claim. See Fisher, 791 F.2d at 697.
Following Epic Systems and Morgan, we recognize that
there is no longer a thumb on the scale in favor of arbitration,
and that the party opposing arbitration no longer bears a
“heavy burden” to show waiver of the right to arbitration.
Even in this new landscape, Armstrong has failed to
establish that Michaels acted inconsistently with exercising
its right to arbitrate. We affirm the district court’s order
compelling arbitration.
AFFIRMED.