The Illinois Appellate Court, First District, recently upheld a lower court's ruling that a credit card issuer had waived its right to compel arbitration in a consolidated class action, reasoning that the card issuer's long delay in demanding arbitration and its zealous litigation of the class action over a ten-year period substantially prejudiced plaintiffs and acted as a waiver of its right to arbitration under the terms of the controlling arbitration agreement.
In so ruling, the Court noted in part that the card issuer previously had successfully litigated its right to arbitrate and thus had a known right to compel arbitration, and that a motion to compel arbitration at an earlier stage in the litigation, and prior to the U.S. Supreme Court's ruling in AT&T Mobility, LLC v. Concepcion, would not have been futile.
A copy of the opinion is available at: http://www.illinoiscourts.gov/Opinions/AppellateCourt/2013/1stDistrict/1120789.pdf
Various putative class action plaintiffs ("Cardholders") filed separate lawsuits against defendant credit card issuer ("Issuer") over Issuer's alleged improper disclosure of Cardholders' confidential data to third parties. The complaints alleged various causes of action including violation of the Illinois Consumer Fraud and Deceptive Practices Act and intrusion upon seclusion. The lawsuits were eventually consolidated.
The credit card agreements provided in part that all claims of any nature arising out of the credit card agreements were to be resolved by binding arbitration at the election at any time of either Issuer or Cardholders regardless of whether litigation had already commenced, "unless . . . the other party would suffer substantial prejudice as a result of the delay in demanding arbitration." The relevant agreements also provided that Arizona and federal law controlled.
In its pleadings and motions, Issuer did not assert a right to arbitrate the claims until after the class was certified, and after Issuer unsuccessfully sought review of the certification. Then, about ten years after commencement of the litigation, Issuer moved to compel arbitration and to stay the proceedings under the Federal Arbitration Act ("FAA"), arguing that the U.S. Supreme Court's decision in AT&T Mobility, LLC v. Concepcion, ___ U.S. ___, 131 S. Ct. 1740 (2011), established for the first time that Issuer had a known, existing right to compel arbitration of Cardholders' individual claims and avoid class arbitration.
In response, Cardholders argued that Issuer had waived any right to arbitration by zealously litigating the lawsuits for a decade, and that Issuer could not demonstrate that asserting the right to arbitrate would have been futile under Illinois or Arizona law prior to the Concepcion decision. Among other things, Cardholders also argued that the arbitration clause was unconscionable and thus unenforceable.
The lower court denied Issuer's motion to compel arbitration, finding that the extensive ten-year litigation in the case involving numerous motions, affirmative defenses, class certification, and attempts at mediation, as well as the pending discovery, all acted as a waiver of any right to compel arbitration. The lower court also rejected Issuer's assertion that it would have been futile to assert its right to arbitrate prior to the Concepcion decision, and agreed with Cardholders that arbitration of their claims would prejudice them, given the stage of the litigation.
The Appellate Court affirmed.
As you may recall, the FAA provides that courts must stay further proceedings and order arbitration if there is a valid arbitration agreement in effect and the agreement encompasses the dispute at issue. See 9 U.S.C. § 3 (1994). See also In re Toyota Motor Corp. Hybrid Brake Marketing, Sales, Practices & Products Liability Litigation, 828 F. Supp. 2d 1150 (C.D. Cal. 2011).
In noting the different approaches federal courts have taken on the issue of purported waivers of the right to arbitrate, the Appellate Court considered whether Issuer had: (1) knowledge of an existing right to arbitrate; and (2) engaged in acts inconsistent with that right. See Fisher v. A.G. Becker Paribas Inc. 791 F.2d 691, 694 (9th Cir. 1986). The Court pointed out among other things that futility of an arbitration demand prior to Concepcion was not clear, citing federal appeals court decisions stating that a party must move to compel arbitration whenever the arbitration agreement "was at least arguably enforceable" and that "a motion to compel arbitration will almost never be futile" absent Supreme Court or circuit court precedent foreclosing a right to arbitrate. See, e.g., Garcia v. Wachovia Corp. 699 F.3d 1273, 1278 (11th Cir. 2012); National Endowment for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772 (D.C. Cir. 1987).
In light of the development of the case law on waiver of the right to arbitrate, the Appellate Court, looking to Arizona for guidance on the enforceability of class action waivers in arbitration, ultimately rejected Issuer's contention, noting that when the complaints here were filed, there was no controlling legal authority in Arizona on the waiver or enforceability issues. The Court also noted that, because Issuer itself had successfully defended against certain prior challenges to its arbitration agreements during the early stages of this litigation, it would have been clear to Issuer that the arbitration agreements at issue in this case were at least arguably enforceable, which should have prompted Issuer to move to compel arbitration at a much earlier stage in this action. The Court accordingly ruled that Issuer had a known right to arbitrate, and that it would not have been futile to move to compel arbitration.
Next, based on the language in the arbitration agreement itself that arbitration may be elected "at any time . . . unless the other party would suffer substantial prejudice as a result of delay in demanding arbitration," the Court considered whether Issuer's acts inconsistent with an existing right to arbitrate substantially prejudiced Cardholders.
Observing that Issuer had twice previously successfully asserted its right to arbitrate in other cases, including once before this Court, the Court also ruled that Cardholders were prejudiced based on the time and money spent in litigation caused by Issuer's delay in moving to compel arbitration. In so ruling, the Court stated that the litigation expenses were not in any way a "self-inflicted wound," noting Issuer's motion to dismiss, cross-motion for summary judgment, its participation in pre-trial discovery as well as mediation and settlement conferences.
The Appellate Court thus concluded that the lower court: (1) did not err in ruling that Issuer had a known right to demand arbitration when Cardholders filed their complaints and failed to show it would have been futile to move to compel arbitration prior to Concepcion; and (2) did not abuse its discretion in finding that Issuer acted inconsistently with that known right by zealously litigating the class action for years and thereby prejudiced Cardholders.
Accordingly, the Appellate Court upheld the lower court's order denying Issuer's motion to compel arbitration.
Ralph T. Wutscher
McGinnis Wutscher Beiramee LLP
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Email: RWutscher@mwbllp.com
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