The U.S. Court of Court of Appeals for the Eighth Circuit recently reversed a trial court's decision and remanded for entry of an order striking the plaintiff's class action allegations and compelling arbitration.
In so ruling, the Eighth Circuit concluded that it had appellate jurisdiction to review the trial court's denial of the defendants' motions to strike class action allegations because this denial was contained in an order reviewable under the Federal Arbitration Act ("FAA"), 9 U.S.C. § 16(a)(1)(B).
The Court also held that the defendants had not waived their right to arbitrate by moving to strike the plaintiff's class action allegations at the same time that they moved to compel arbitration.
In addition, on the merits, the Eighth Circuit agreed with the defendants that the arbitration clause was valid because it was supported by mutual assent and consideration, and was not unconscionable.
A copy of the opinion is available at: Link to Opinion
The plaintiff filed suit against an investment advisor, the financial services company employing the investment advisor, and the individual officers of the company, alleging violations of federal securities law. The plaintiff also sought to represent other clients of the advisor and the company in a class action.
The defendants filed motions to strike plaintiff's class action allegations and to compel arbitration, which the trial court denied. The defendants timely appealed.
The Eighth Circuit first addressed the plaintiff's arguments that either the Court did not have jurisdiction to hear the appeal or, alternatively, that the Court lacked jurisdiction over the denial of the motions to strike the class-action allegations.
The Eighth Circuit decided that the FAA gave it jurisdiction to review the denial of the motions to compel arbitration. The Court noted that section 16 of the FAA provides that "[a]n appeal may be taken from . . . an order . . . denying a petition under section 4 of [the FAA] to order arbitration to proceed." 9 U.S.C. § 16(a)(1)(B). Here, the defendants invoked section 4 of the FAA in their motions to strike the class-action allegations and to compel arbitration. The trial court denied these petitions in its order denying the defendants' motions to strike and to compel arbitration.
The Court also held that under section 4, which permits an appeal to be taken from an "order," it had jurisdiction to review the trial court's entire order. See Yamaha Motor Corp., U.S.A. v. Calhoun, 516 U.S. 199, 205 (1996) Thus, the Court also had appellate jurisdiction to review the trial court's denial of the defendants' motions to strike class-action allegations because this denial was contained in an order reviewable under section 16.
Next, the Eighth Circuit considered the plaintiff's claim that the defendants waived their right to arbitrate by moving to strike his class-action allegations at the same time that they moved to compel arbitration.
"A party may be found to have waived its right to arbitration if it: (1) knew of an existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts." Lewallen v. Green Tree Servicing, L.L.C., 487 F.3d 1085, 1090 (8th Cir. 2007)
"A party acts inconsistently with its right to arbitrate if the party substantially invokes the litigation machinery before asserting its arbitration right." Id. "[R]equest[ing] [that a court] dispose of a case on the merits before reaching arbitration is inconsistent with resolving the case through arbitration" and also counts as substantially invoking the litigation machinery. Hooper v. Advance Am., Cash Advance Ctrs. of Mo., Inc., 589 F.3d 917, 921 (8th Cir. 2009).
The Eighth Circuit concluded that a motion to strike class-action allegations (without an accompanying motion to dismiss the underlying individual allegations) is not a request for the court to dispose of a case "on the merits." See Dumont, 258 F.3d at 886-87. In the Court's view, this was especially true here, where the purpose of moving to strike was so that the trial court could compel arbitration under the terms of the Client Agreement. See Morgan v. Sundance, 992 F.3d 711, 714 (8th Cir. 2021).
Thus, the Eighth Circuit determined that the defendants did not substantially invoke the litigation machinery by moving to strike the plaintiff's class-action allegations and that they had not acted inconsistently with their right to arbitrate, meaning that they had not waived this right. Therefore, the Court held that it had jurisdiction to hear this case.
The Eighth Circuit then turned to the merits of the plaintiffs' appeal. The trial court denied the motion to compel arbitration because it found that there was no valid arbitration clause between the parties due to the absence of mutual agreement and lack of consideration. The trial court went on to deny the motions to strike the class-action allegations, suggesting that the plaintiff's allegations met Rule 23(a)(2)'s "single common question" requirement and that the defendants' arguments to the contrary were "more appropriate on a motion for class certification."
With respect to the validity issue, the plaintiff argued that Missouri substantive law governed whether the arbitration clause was valid, while the defendants claimed that Minnesota substantive law controlled in light of a choice-of-law clause in the Client Agreement. The Eighth Circuit did not find it necessary to resolve this dispute because, even assuming that Missouri substantive law governed this issue, the Court agreed with the defendants that the arbitration clause was valid. See Am. Broad. Cos. v. Aereo, Inc., 573 U.S. 431, 445 (2014)
First, the Eighth Circuit held that the parties mutually assented to the arbitration clause. Under Missouri law, "[a] valid arbitration clause . . . requires mutuality of agreement, which implies a mutuality of assent by the parties to the terms of the contract." State ex rel. Hewitt v. Kerr, 461 S.W.3d 798, 810 (Mo. 2015). Parties may assent to terms expressly in a contract or "incorporated into the contract by reference" so long as "[t]he intent to incorporate [is] clear." See id. "To incorporate terms from another document, the contract must make clear reference to the document and describe it in such terms that its identity may be ascertained beyond a doubt." Id. at 810-11
Although the defendants did not provide the plaintiff with a copy of the Client Agreement, which contained the arbitration clause, the Eighth Circuit held that the plaintiff still agreed to the arbitration clause because he was presented with and signed the Account Application, which expressly incorporated the arbitration clause in the Client Agreement.
Second, the Eighth Circuit decided that the arbitration clause was supported by consideration because the company defendant provided a client account to the plaintiff. In general, "bilateral contracts are supported by consideration and enforceable when each party promises to undertake some legal duty or liability." Baker v. Bristol Care, Inc., 450 S.W.3d 770, 776 (Mo. 2014). But when the promises of one party are illusory rather than binding, there is no consideration. Id. "A promise is illusory when one party retains the unilateral right to amend the agreement and avoid its obligations." Id.
The Eighth Circuit observed that the company defendant did not have the right to unilaterally change the Client Agreement. Rather, any change required "acknowledgement and agreement" by the plaintiff in the form of "use of [his] account." Thus, the Court concluded that the source of consideration supporting the arbitration clause was not illusory.
Third, the Eighth Circuit determined that the arbitration agreement was not unconscionable. Unconscionability is defined as an inequality so strong, gross, and manifest that it must be impossible to state it to one with common sense without producing an exclamation at the inequality of it." Eaton v. CMH Homes, Inc., 461 S.W.3d 426, 432 (Mo. 2015). Because the arbitration clause was supported by mutual consent, was supported by consideration, and was not unconscionable, the Court held that it was valid and enforceable.
Because the arbitration clause was valid, the Eighth Circuit next had to consider whether it "encompasse[d] the dispute between the parties." See M.A. Mortenson Co. v. Saunders Concrete Co., 676 F.3d 1153, 1156-57 (8th Cir. 2012). By its own terms, the arbitration clause provided for arbitration of "ALL CONTROVERSIES THAT MAY ARISE BETWEEN US[2] . . . , WHETHER ARISING BEFORE, ON OR AFTER THE DATE THIS ACCOUNT IS OPENED," except for "PUTATIVE OR CERTIFIED CLASS ACTION[S]."
Thus, whether the arbitration clause encompassed this case turned on whether the class-action allegations should be stricken, as the defendants argued they should. Accordingly, the Court considered whether the trial court abused its discretion when it denied the defendants' motions to strike the plaintiff's class-action allegations. See Nationwide Ins. v. Cent. Mo. Elec. Co-op., Inc., 278 F.3d 742, 748 (8th Cir. 2001)
The Eighth Circuit agreed with the Sixth Circuit's holding that a trial court may grant a motion to strike class-action allegations prior to the filing of a motion for class-action certification. See Pilgrim v. Universal Health Card, LLC, 660 F.3d 943, 949 (6th Cir. 2011). The Court determined that this view was consistent with Rule 23(c), which governs class-action certification, because Rule 23(c)(1)(A) directs trial courts to decide whether to certify a class "[a]t an early practicable time," and nothing in Rule 23(c) indicates that the court must await a motion by the plaintiffs. Id. at 949.
Thus, the Eighth Circuit concluded that it was an abuse of discretion for the trial court to deny the motions to strike the class-action allegations. The Court reasoned that it was apparent from the pleadings that the plaintiff could not certify a class and that the class allegations were all that stood in the way of compelling arbitration.
In addition, the Eighth Circuit held that the plaintiff could not maintain a class action because the class claims would not be cohesive. The existence of a significant number of individualized factual and legal issues defeats cohesiveness and is a proper reason to deny class certification under Rule 23(b)(2). In re St. Jude Med. Inc., 425 F.3d 1116, 1122 (8th Cir. 2005).
Here, the Court decided that a significant number of individualized determinations needed to be made to determine whether Counts I and II had merit. Count I asserts violations of § 10(b) of the Securities Exchange Act and Rule 10b-5. Count II asserts violations of § 20(a) of the Securities Exchange Act.
As for Count III, breach of fiduciary duty under 15 U.S.C. § 80b-6, the Eighth Circuit concluded that the class-action allegations should have been stricken because the plaintiff could not obtain the relief required by Rule 23(b)(2) for this count. Rule 23(b)(2) permits a class action to be maintained if "final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." Because § 80b-6 does not afford any relief to private litigants, much less injunctive or declaratory relief, the Court decided that the plaintiff cannot certify class claims under Rule 23(b)(2) for violations of § 80b-6.
Under these circumstances, the Eighth Circuit reasoned that delaying the decision of whether the plaintiff could certify a class would have needlessly forced the parties to remain in court when they previously agreed to arbitrate. It also risked forcing the defendants to litigate, until the trial court ruled on the plaintiff's not-yet-filed motion for class certification, with one hand tied behind their backs to avoid substantially invoking the litigation machinery and waiving their right to arbitrate.
Accordingly, the Eighth Circuit reversed the trial court's denial of the defendants' motions to strike the class-action allegations and to compel arbitration, and remanded for entry of an order striking the class-action allegations and compelling arbitration.
Ralph T. Wutscher
Maurice Wutscher LLP
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