Articles Posted in Arbitration

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Employee Attempt to Pursue Class Action Lawsuit Despite Having Agreed to Individually Arbitrate Any Disputes with Employer Fails as Supreme Court Rejects NLRB’s Effort to Carve Out Labor Law Class Actions from FAA Requirement that Arbitration Agreements be Enforced

The Supreme Court issued a seminal decision yesterday in Epic Systems Corp. v. Lewis, 584 U.S. ___ (May 21, 2018), ruling 5-4 that the Federal Arbitration Act (FAA) compels enforcement of an employer-employee arbitration agreement to resolve disputes on an individual basis, rejecting the employees’ claim that the National Labor Relations Act (NLRA) authorizes the utilization of the class action procedure to resolve employee complaints.

The Supreme Court’s decision affects three consolidated appeals – out of the Fifth Circuit, the Seventh Circuit and the Ninth Circuit.  Justice Gorsuch concisely summarized the central issue as follows: “Should employees and employers be allowed to agree that any disputes between them will be resolved through one-on-one arbitration? Or should employees always be permitted to bring their claims in class or collective actions, no matter what they agreed with their employer?” (Slip Opn., at 1.)

Yet again, consistent with well-settled Supreme Court precedent on the FAA, the Supreme Court held that the arbitration clause prevails.  Importantly for class action counsel in California, language in the Supreme Court opinion suggests that the California Supreme Court’s decision in Iskanian v. CLS Transp. Los Angeles, LLC, 59 Cal. 4th 348, 383, 327 P.3d 129, 148 (Cal. 2014), which held that an employee’s right to bring a Private Attorney General Act (PAGA) class action asserting labor law claims cannot be waived, may not withstand a federal court challenge.

The Supreme Court used the Ninth Circuit case of Ernst & Young LLP v. Morris, where the employer and an employee (Stephen Morris) agreed to resolve on an individual basis through arbitration any disputes that may arise out of Morris’s employment. Morris later filed a putative class action against Ernst & Young alleging violations of the federal Fair Labor Standards Act (FLSA) and California labor laws claiming that he had been misclassified as exempt. Ernst & Young successfully moved to compel arbitration of Morris’s individual claims, but the Ninth Circuit reversed on the grounds that the FAA’s “saving clause” (9 U.S.C. §2) exempted from arbitration lawsuits that other federal laws permit to be brought as class actions. In the Ninth Circuit’s view, the NLRA expressly authorized “concerted activities” by employees (29 U.S.C. §157), which it believed included class actions or collective actions.

The Supreme Court disagreed. Historically, the High Court observed, the FAA (which dates to 1925) and the NLRA (which dates to 1935) have coexisted. Indeed, in 2010 the NLRB’s General Counsel remarked that “employees and employers ‘can benefit from the relative simplicity and informality of resolving claims before arbitrators,’ [and] … opined that the validity of such agreements ‘does not involve consideration of the policies of the National Labor Relations Act.’” (Slip Opn., at 4, citation omitted.) It was not until 2012 that the NLRB concluded that the NLRA’s right to concerted activity supercedes the FAA’s power to enforce arbitration agreements. (Id.)

In rejecting this position, the Supreme Court summarized the employees’ argument as follows: The FAA’s saving clause “allows courts to refuse to enforce arbitration agreements ‘upon such grounds as exist at law or in equity for the revocation of any contract’” and this provision applies “because the NLRA renders their particular class and collective action waivers illegal.” (Slip Opn., at 6.) The Supreme Court rejected this argument due to a “fundamental” flaw – viz., “the saving clause recognizes only defense apply to ‘any’ contract” – thereby “establish[ing] a sort of ‘equal treatment’ rule for arbitration” – but “the clause offers no refuge for ‘defenses that apply only to arbitration or that derive their meaning from the fact that an agreement to arbitrate is at issue.’” (Id., at 7, citations omitted.) In other words, “the saving clause does not save defenses that target arbitration either by name or more subtle methods, such as by ‘interfer[ing] with fundamental attributes of arbitration.’” (Id., citations omitted.)

This is where the employees’ argument stumbles. They don’t suggest that their arbitration agreements were extracted, say, by an act of fraud or duress or in some other unconscionable way that would render any contract unenforceable. Instead, they object to their agreements precisely because they require individualized arbitration proceedings instead of class or collective ones. And by attacking (only) the individualized nature of the arbitration proceedings, the employees’ argument seeks to interfere with one of arbitration’s fundamental attributes. (Slip Opn., at 7.)

The Supreme Court further held that the purpose of Section 7 of the NLRA is to allow employees “to organize unions and bargain collectively.” (Slip Opn., at 11.) It does not concern arbitration or resolution of disputes (id.), and could not have been intended to address class actions as Rule 23 “didn’t create the modern class action until 1966” (id.).

NOTE: The Supreme Court’s analysis, set forth in the indented quote above, casts doubt on whether the High Court would allow the California Supreme Court’s analysis in Iskanian – exempting PAGA labor law class actions from the reach of the FAA – to survive, and is likely to give birth to a new wave of challenges to PAGA class action lawsuits.

Download PDF of Epic System v. Lewis

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I recently contributed an article to Thomson Reuters’ Legal Current on Practical Considerations Regarding Class Action Waivers in Arbitration Agreements:

After the Supreme Court decision in AT&T Mobility LLC v. Concepcion, 563 U.S. 333 (2011) – which held that class action waivers in arbitration agreements are valid under the Federal Arbitration Act (“FAA”) – companies rushed into class action waiver arbitration agreements without heeding the proverb, “Look before you leap.” While avoiding class actions is an admirable goal, doing so through arbitration agreements may lead to unintended and painful consequences.  In addition, many companies have found courts reluctant to enforce the class action waiver and/or the arbitration clause, which can cost tens of thousands of dollars in law and motion practice only for the case to remain in state or federal court.  Read the full article here.

As I state in the article, “If it is advisable to adopt an arbitration clause with a class action waiver, a company should be aware that arbitration agreements are not widgets: one size does not fit all.” It is always advisable to have legal counsel draft agreements that are specific to your company and its intended goals.

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Federal Arbitration Act (FAA) Compels Enforcement of Class Action Waiver in Contract Even if Cost of Pursuing Federal Claim will be Prohibitively Expensive to Arbitrate U.S. Supreme Court Holds

Plaintiffs – a group of merchants who accept American Express cards – filed a putative class action against American Express alleging of the Sherman Act and seeking treble damages under the Clayton Act; the class action complaint alleged that American Express violated federal antitrust laws by “us[ing] its monopoly power in the market for charge cards to force merchants to accept credit cards at rates approximately 30% higher than the fees for competing credit cards.” American Express Co. v. Italian Colors Restaurant, __ U.S. __, __ S.Ct. __, 2013 WL 3064410, *1-2 (June 20, 2013). Plaintiffs’ contract with American Express “contains a clause that requires all disputes between the parties to be resolved by arbitration” and further provides that “[t]here shall be no right or authority for any Claims to be arbitrated on a class action basis.” Id., at *1 (citing In re American Express Merchants’ Litig., 667 F. 3d 204, 209 (2d Cir. 2012)). Accordingly, American Express moved under the Federal Arbitration Act (FAA) to compel arbitration of Plaintiffs’ individual claims, id., at *2. Plaintiffs opposed dismissal of their class action complaint, submitting an expert witness declaration that estimated the cost of proving Plaintiffs’ antitrust claims could “exceed $1 million,” while the maximum recovery for any individual plaintiff would be less than $40,000. Id. The district court rejected Plaintiffs’ argument, granted the motion to compel arbitration of the individual claims and dismissed the class action complaint. Id. The Second Circuit reversed, holding that because pursuit of Plaintiffs’ antitrust claims would be prohibitively expensive if pursued individually, the class action waiver was unenforceable. Id. (citing In re American Express Merchants’ Litig., 554 F. 3d 300, 315-16 (2d Cir. 2009)). The Supreme Court reversed.

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State Courts Erred in Denying Defense Motion to Compel Arbitration Under FAA (Federal Arbitration Act) because They Failed to Consider Whether Any Claims were Subject to Arbitration

Plaintiffs filed a putative class action in Florida state court against various defendants, including KPMG LLP, for damages suffered as a result of investments made with Bernard Madoff; the class action named the investment funds, the entity that managed the funds, and KPMG as auditor. KPMG LLP v. Cocchi, 565 U.S. ___ (November 7, 2011) [Slip Opn., at 1-2]. With respect to KPMG, the class action alleged negligent misrepresentation, professional malpractice, aiding and abetting a breach of fiduciary duty, and violation of Florida’s Deceptive and Unfair Trade Practices Act (FDUTPA). Id., at 2. KPMG moved to compel arbitration under the Federal Arbitration Act (FAA) on the grounds that the audit services agreement between it and the funds’ management company contained an arbitration clause. Id. The trial court denied the motion, and the state appellate court affirmed on the ground that “‘[n]one of the plaintiffs…expressly assented in any fashion to [the audit services agreement] or the arbitration provision.’” Id., at 2-3 (citation omitted). However, the state courts apparently found it sufficient to conclude that neither the FDUTPA claim nor the negligent misrepresentation claim were subject to arbitration, without analyzing whether the professional malpractice or breach of fiduciary duty claim were subject to arbitration. Id., at 3. The Supreme Court granted certiorari and reversed.

Despite its April 27, 2011 decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011), some state courts have continued to find “creative” ways to avoid its mandate. “The Federal Arbitration Act reflects an ‘emphatic federal policy in favor of arbitral dispute resolution.’” KPMG, at 3 (citations omitted, italics added). “Agreements to arbitrate that fall within the scope and coverage of the [FAA]…must be enforced in state and federal courts.” Id., at 1 (italics added). Thus, “State courts…‘have a prominent role to play as enforcers of agreements to arbitrate.’” Id. (citation omitted). And because the FAA “has been interpreted to require that if a dispute presents multiple claims, some arbitrable and some not, the former must be sent to arbitration even if this will lead to piecemeal litigation,” id. (citation omitted), “[a] court may not issue a blanket refusal to compel arbitration merely on the grounds that some of the claims could be resolved by the court without arbitration,” id. (citation omitted).

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Supreme Court Decision in Concepcion Compelled Granting AT&T’s Motion to Compel Arbitration of Individual Claims because FAA Preempts California Laws Barring Class Action Arbitration Waivers

Plaintiff filed a putative class action against cellular telephone service provider, AT&T Mobility, alleging violations of California’s Unfair Competition Law (UCL), False Advertising Law (FAL), Consumer Legal Remedies Act (CLRA) and breach of contract. Kaltwasser v. AT&T Mobility LLC, ___ F.Supp.2d ___, 2011 WL 4381748 (N.D.Cal. September 20, 2011) [Slip Opn., at 1-2]. According to the allegations underlying the class action complaint, plaintiff renewed his cell service with AT&T based on the company’s representations that it had the “fewest dropped calls.” Id., at 2. Because he alleges that this representation was false, plaintiff filed this lawsuit. AT&T moved to compel arbitration and to dismiss the class claims on the grounds that the service contract included an arbitration clause with a class action waiver. Id. In April 2008, the district court denied AT&T’s motion finding the class action waiver unconscionable under Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). Id., at 2-3. Plaintiff subsequently filed a motion to have his lawsuit certified as a class action; the district court delayed ruling on the motion pending the U.S. Supreme Court’s decision in AT&T Mobility LLC v. Concepcion, 131 S.Ct. 1740 (2011). Id., at 1. Based on Concepcion, the federal court denied plaintiff’s motion and ordered his claims to be arbitrated on an individual basis. Id., at 1-2.

After providing a general discussion of the FAA and Concepcion, the district court noted Concepcion’s holding that “California’s Discover Bank rule is preempted by the FAA.” Kaltwasser, at 5 (quoting Concepcion, at 1753). Plaintiff, however, argued that Concepcion did not require reconsideration of the district court’s prior order denying AT&T’ s motion to compel arbitration because (1) “Concepcion left intact a vindication-of-rights doctrine under federal common law” permitting him to avoid arbitration “if he can show that the costs involved in proving his claims exceed the damages he can potentially recover”; (2) “Concepcion did not affect public policy principles of contract law” which hold that “‘a law established for a public reason cannot be contravened by a private agreement’”; and (3) AT&T waived its right to arbitration. Id., at 5-6. The district court disagreed.

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Class Action Waivers in Arbitration Agreements are Valid under Federal Arbitration Act (FAA) and California’s Discover Bank Rule, Which Found Such Waivers Unenforceable as Unconscionable Under State Law, is Preempted by the FAA Supreme Court Holds

Plaintiffs filed a putative class action in California federal court against AT&T Mobility, with whom they had cellular telephone service, alleging “false advertising and fraud by charging sales tax on phones it advertised as free.” AT&T Mobility LLC v. Concepcion, ___ U.S. ___ (April 27, 2011) [Slip Opn., at 2-3]. According to the allegations underlying the class action complaint, plaintiffs purchased cellular telephone service from AT&T based on an advertisement for “free phones” because, even though they were not charged for the telephones, “they were charged $30.22 in sales tax based on the phones’ retail value.” Id. Defense attorneys moved to compel arbitration, id., at 3. The cellular telephone service contract required arbitration of disputes between the parties and included a class action waiver, providing that claims must be brought in a “individual capacity, and not as a plaintiff or class member in any purported class or representative proceeding.” Id., at 1. Plaintiffs opposed arbitration on the grounds that the class action waiver was unconscionable under California law. Id., at 3. Despite viewing the arbitration agreement “favorably,” the district court denied AT&T’s motion to compel arbitration because the class action waiver rendered the arbitration clause unconscionable under California law based on Discover Bank v. Superior Court, 36 Cal.4th 148 (Cal. 2005). Id. The Ninth Circuit affirmed, holding that “the Discover Bank rule was not preempted by the FAA because that rule was simply a ‘refinement of the unconscionability analysis applicable to contracts generally in California.’” Id., at 3-4 (citing Laster v. AT&T Mobility LLC, 584 F.3d 849, 857 (9th Cir. 2009). The Supreme Court granted certiorari and reversed.

The service agreement was consumer-friendly: It provided that a customer could initiate a dispute by filling out a one-page form available online, and if not resolved to the customer’s satisfaction within 30 days, the customer could initiate arbitration by filling out another form available online. If a customer commenced arbitration proceedings, the arbitration would be held “in the county in which the customer is billed” and AT&T was required to “pay all costs for nonfrivolous claims.” AT&T Mobility, at 2. (The customer could also elect to proceed in small claims court. Id.) Moreover, if the amount in dispute was less than $10,000, then the customer could elect whether the arbitration should be conducted “in person, by telephone, or based only on submissions.” Id. Additionally, “the arbitrator may award any form of individual relief, including injunctions and presumably punitive damages.” Id. AT&T was prohibited from seeking reimbursement of its attorney fees, and “in the event that a customer receives an arbitration award greater than AT&T’s last written settlement offer,” then the service agreement “requires AT&T to pay a $7,500 minimum recovery and twice the amount of the claimant’s attorney’s fees.” Id. (footnote omitted). Yet despite what appears to have been every effort to craft an arbitration clause favorable to its customer, albeit prohibiting class actions, the lower courts found the arbitration clause unconscionable and unenforceable under the Discover Bank rule. The Supreme Court reversed.

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Unconscionability Challenge to Class Action Waiver in Cardmember Agreement Governing Credit Card was Properly Determined by District Court, not Arbitrator, so District Court did not Err in Granting Bank’s Motion in Putative Class Action to Compel Plaintiffs to Arbitrate Individual Claims Third Circuit Holds

Plaintiffs filed a putative class action against Chase Bank alleging that the Bank improperly increased the interest rates on their credit card account balances, and that it did so retroactively. Puleo v. Chase Bank USA, N.A., ___ F.3d ___ (3d Cir. May 10, 2010) [Slip Opn., at 1, 4]. The class action was filed in Pennsylvania state court, but removed to federal court on grounds on diversity. Id., at 6-7. According to the allegations underlying the class action complaint, the Bank retroactively increased the interest rate on one plaintiff’s account from 4.99% to 29.99%, and on another plaintiff’s account from 14.74% to 25.99%. Id., at 4. Defense attorneys argued that the terms of the Cardmember Agreements permitted the challenged interest rate increases, and that the interest rate increases did not violate state or federal laws. Id. However, the propriety of the increases is not relevant to the appeal. Rather, the appeal focused on the arbitration clause in the Cardmember Agreement, which prohibits class actions. Id., at 3. Plaintiffs filed the putative class action in state court, and Chase removed the action to federal court and moved the district court to compel plaintiffs to arbitrate their claims on an individual basis because of the class action waiver in the Cardmember Agreement, id. Plaintiffs countered that the class action waiver was unconscionable, and that the question of its enforceability should be decided by the arbitrator instead of the court. Id. The district court disagreed, “concluding, first, that [plaintiffs’] challenge to the enforceability of the class action waiver was a question of arbitrability for the court to decide, and, second, that the entirety of the Arbitration Agreement was enforceable.” Id. On appeal, plaintiffs argued only that the district court erred in ruling on the issue of the unconscionability of the class action waiver, id. In a 6-4 decision, the Third Circuit concluded that the district court properly determined the enforceability of the class action arbitration wavier and affirmed. Id.

The Cardmember Agreement required credit card account customers to arbitrate any disputes with Chase on an individual basis. Puleo, at 5-6 (see NOTE, below). “Despite the express ban on class actions, [plaintiffs] initially brought this case as a putative class action in Pennsylvania state court on behalf of themselves and other similarly situated Chase credit card holders in Pennsylvania.” Id., at 6 (footnote omitted). As noted above, defense attorneys removed the putative class action to federal court, and the district court granted a defense motion to compel plaintiffs to arbitrate their claims on an individual basis, upholding the enforceability of the class action waiver. Id., at 7-8. The Third Circuit began its analysis by noting that “Congress enacted the Federal Arbitration Act (‘FAA’) ‘to reverse the longstanding judicial hostility to arbitration agreements . . . and to place arbitration agreements upon the same footing as other contracts.’” Id., at 9 (citations omitted). And with respect to the specific issue presented by the appeal, the Circuit Court noted that Supreme Court authority holds that “[t]he question whether the parties have submitted a particular dispute to arbitration, i.e., the question of arbitrability, is an issue for judicial determination unless the parties clearly and unmistakably provide otherwise.” Id., at 9-10 (citation omitted).

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Party to Arbitration Clause Governed b y FAA (Federal Arbitration Act) may not be Compelled to Arbitrate Class Action Claims where Arbitration Clause is Silent on Class Action Arbitration Supreme Court Holds

Plaintiff AnimalFeeds is a company that “supplies raw ingredients, such as fish oil, to animal-feed producers around the world”; “AnimalFeeds ships its goods pursuant to a standard contract known in the maritime trade as a charter party.” Stolt-Nielsen S. A. v. AnimalFeeds Int’l Corp., ___ U.S. ___ (April 27, 2010) [Slip Opn., at 1]. Defendants are various “shipping companies that serve a large share of the world market for parcel tankers—seagoing vessels with compartments that are separately chartered to customers wishing to ship liquids in small quantities.” Id. The charterers – like plaintiff – “typically select the particular charter party that governs their shipments”– not the shipowners. Id., at 2. And the contracts here at issue contained an arbitration clause that was silent as to the availability of class action relief in any arbitration, id. After a Department of Justice criminal investigation uncovered an illegal price-fixing conspiracy among the defendants, plaintiff filed a class action complaint in federal district court alleging antitrust violations. Id., at 2-3. The Judicial Panel on Multidistrict Litigation eventually consolidated the class action with similar class action lawsuits brought by other charterers. Id., at 3. The parties agreed that plaintiff must arbitrate the antitrust dispute, and plaintiff served defendants with a demand for class action arbitration in New York. Id. Defendants argued that class action relief was unavailable under the arbitration clause because “[a]ll the parties agree that when a contract is silent on an issue there’s been no agreement that has been reached on that issue”; the parties agreed to submit the question of class arbitration to a panel of three arbitrators. Id., at 3-4. The arbitrators disagreed and concluded that class action relief could be had under the arbitration clause. Id., at 4. Defendants moved the district court to vacate the arbitrators’ award; the district court agreed with defendants that the arbitrators’ decision constituted a “manifest disregard” of federal maritime law and accordingly vacated the award. Id., at 4-5. The Second Circuit reversed on the ground that “because [defendants] had cited no authority applying a federal maritime rule of custom and usage against class arbitration, the arbitrators’ decision was not in manifest disregard of federal maritime law.” Id., at 5. The Supreme Court granted certiorari “to decide whether imposing class arbitration on parties whose arbitration clauses are ‘silent’ on that issue is consistent with the Federal Arbitration Act (FAA), 9 U. S. C. §1 et seq.” Id., at 1. The High Court reversed.

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Class Action Challenging Monthly Fees Imposed by Satellite TV Provider not Subject to Arbitration on Individual Basis because Class Action Waiver in Arbitration Provision was Unenforceable Georgia Federal Court Holds

Plaintiff filed a putative class action in a Georgia federal court against his satellite television provider, DirecTV, alleging breach of contract and unjust enrichment, and seeking an accounting as well as injunctive and declaratory; specifically, the class action complaint alleged that DirecTV “collect[ed] excessive ‘tax’ charges and improperly billed lease fees” in connection with the satellite television service, and sought to prohibit it from collecting or billing customers “for taxes in excess of those actually due and owing.” Jones v. DirecTV, Inc., 667 F.Supp.2d 1379, 1380-81 (N.D.Ga. 2009). As part of the service, plaintiff signed a written customer agreement; “DIRECTV mails any amendments to the terms of the initial customer agreement with subsequent billing statements when necessary.” Id., at 1380. Plaintiff signed up for service with DirecTV in 2002, and received a copy of the customer agreement, which “stated that customers should immediately cancel their service should they choose to reject the terms of the agreement and that use of the DIRECTV service without rejection constitutes acceptance.” Id. In May 2007, plaintiff received an amended agreement (the April 2007 agreement) containing an arbitration clause with a class action waiver provision. Id. The arbitration provision provided that “if the class action waiver provision is unenforceable, then the entire arbitration clause is also unenforceable.” Id., at 1381. In May 2007, plaintiff obtained two DirecTV receivers, signing an “equipment lease addendum” that “expressly incorporated the April 2007 agreement, specifically the agreement’s arbitration provisions.” Id., at 1380. Defense attorneys moved the district court to compel arbitration of plaintiff’s individual claims in light of the class action waiver in the agreement’s arbitration clause. Id., at 1380-81. The federal court denied the motion.

The district court recognized that the Federal Arbitration Act (FAA) “dictates that binding arbitration clauses in written agreements are enforceable in federal court.” Jones, at 3181 (citation omitted). But it also noted that “such a clause may be invalidated under any applicable state law that governs contracts generally, including ‘fraud, duress, or unconscionability.’” Id. The court concluded that, under Georgia law, the class action waiver in the arbitration clause was unconscionable. Id., at 1381-82. Plaintiff (and the other class members) stood to recover but “a very small amount” – the class action challenged monthly lease fees of $4.99 and sales taxes of $0.80. Id., at 1382. Moreover, “the arbitration provision leaves the determination of whether to award fees for attorneys and expert witnesses to the chosen arbitrator,” making it unlikely that an individual would choose to pursue arbitration. Id. The district court concluded, therefore, that “the remedies available to the plaintiff and members of the proposed class are effectively foreclosed.” Id. Accordingly, the class action waiver was unenforceable, rendering the entire arbitration clause unenforceable (as provided by the agreement). Id. The district court therefore denied the motion to compel arbitration. Id.

Download PDF file of Jones v. DirecTV

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District Court Erred in Compelling Arbitration on Individual Basis of Class Action Claims because Texas Choice of Law Provision was Unenforceable and Class Action Waiver in Mandatory Arbitration Clause was Unenforceable under California law Ninth Circuit Holds

Plaintiffs filed a putative class action against Dell alleging product liability claims involving laptop computers; specifically, the class action complaint asserted various California state law claims “predicated on the allegation that Dell designed, manufactured, and sold defective notebook computers.” Omstead v. Dell, Inc., ___ F.3d ___ (9th Cir. February 5, 2010) [Slip Opn., at 2101, 2104-05]. According to the allegations underlying the class action complaint, plaintiffs had purchased notebook computers through Dell’s website, id., at 2105. As part of those purchases, “plaintiffs were required to accept a written agreement titled ‘U.S. Terms and Conditions of Sale’” (the “Agreement”). Id. In pertinent part, the Agreement stated that Texas law governed any dispute among the parties, and that any dispute between the customer and Dell “shall be resolved exclusively and finally by binding arbitration” and that the parties waived any right “to join or consolidate claims by or against other customers, or arbitrate any claim as a representative or class action,” id., at 2105-06. Defense attorneys moved to stay the class action and to compel arbitration of the plaintiffs’ individual claims based on an arbitration clause (which contained the class action waiver) in the Agreement. Id., at 2105, 2106. The district court granted the defense motion, id., at 2106. Plaintiffs, however, refused to comply with the arbitration order, so the district court dismissed the lawsuit based on plaintiffs’ failure to prosecute. Id., at 2105, 2106. Plaintiffs appealed the dismissal and the district court’s order compelling arbitration. Id., at 2105. The Ninth Circuit reversed.

Reviewing the district court order for an abuse of discretion, the Ninth Circuit first held that plaintiffs’ action should not have been dismissed for failure to prosecute the lawsuit. See Omstead, at 2107 et seq. Plaintiffs did not cause unreasonable delay of the lower court proceedings, id., at 2107-08, and they advised Dell and the district court of their interest in prosecuting the lawsuit as a class action and of their belief that the order compelling arbitration “was fatal to their action” and therefore requested “the district court to enter an order that would permit appellate review of the arbitration issue,” id., at 2108. In essence, the Circuit Court agreed with plaintiffs that the arbitration order placed them in an untenable position – prosecute the claims individually (which plaintiffs insisted that they lacked the financial means to do), or permit the court to dismiss the lawsuit and then pursue an appeal. Id., at 2108-09. The Ninth Circuit therefore exercised its discretion to treat the district court’s order of dismissal under Rule 41(b) as a voluntary dismissal with prejudice under Rule 41(a)(2), and turned to the merits of whether the class action claims should have been ordered to arbitration. Id., at 2109.

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