After an arbitration about-face by the defendant in a class action, the Eleventh Circuit ruled that the defendant had waived its right to compel arbitration by: participating in litigation for two years and affirmatively declining to enforce its arbitration agreement with the plaintiffs until after SCOTUS issued its Concepcion decision. Garcia v. Wachovia Corp., ___ F.3d. ___, 2012 WL 5272942 (11th Cir. Oct. 26, 2012).
The class of plaintiffs in Garcia claimed that banks unlawfully charged them overdraft fees. One of the banks, Wells Fargo, had arbitration clauses in its customer agreements, and the clauses precluded class arbitration. Despite that, it did not move to compel arbitration by the motion deadline in the scheduling order. Even when the district court specifically offered Wells Fargo the opportunity to move to compel arbitration at a later date, Wells Fargo told the court that it did not intend to seek arbitration of the plaintiffs’ claims.
However, after the Concepcion decision, Wells Fargo changed its strategic course and filed a motion to dismiss the class action in favor of arbitration. To explain its two year delay, Wells Fargo argued that the various state laws governing the agreements had declared class actions waivers unenforceable, so Wells Fargo had concluded that moving to compel arbitration would have been futile. The plaintiffs, of course, argued that Wells Fargo had waived its right to arbitration.
The Eleventh Circuit recognized that there is a futility exception of sorts — litigants are not required “to engage in futile gestures” — but concluded Wells Fargo’s behavior was not excused. The only time that a party’s failure to compel arbitration will not amount to waiver, after it has “substantially invoked the litigation machinery,” is when it “would almost certainly have been futile.” Wells Fargo did not meet that high burden here, because the Eleventh Circuit concluded that Concepcion did not change the law on preemption, it merely applied it in a new context. The court noted that “absent controlling Supreme Court or circuit precedent foreclosing a right to arbitrate, a motion to compel arbitration will almost never be futile.” For that reason, the court affirmed the district court’s denial of Wells Fargo’s motion to dismiss the action in favor of arbitration.
This decision reminds me of advice from my contracts professor in law school. When we began to ask her a series of follow-up questions about her modified Socratic method (where there was some rhyme and reason to who got asked questions when) that were clearly intended to identify on which days we could be unprepared, she cut off the questions curtly with “Don’t try to game it. Just be ready.” The same applies to attorneys representing parties with arbitration agreements. If there is a chance in hell that your arbitration agreement can be enforced (and that you strategically will want that to happen), make that argument early and often.