Trishia Hooper v. Advance America, etc. ( 2009 )

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
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No. 08-3252
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Trishia Hooper; Josephine Vaughan,*
*
Appellees, *
* Appeal from the United States
v. * District Court for the
* Western District of Missouri.
Advance America, Cash Advance *
Centers of Missouri, Inc., *
*
Appellant. *
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Submitted: October 22, 2009
Filed: December 16, 2009
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Before RILEY, BENTON, and SHEPHERD, Circuit Judges.
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RILEY, Circuit Judge.
Litigation or arbitration? Patricia Hooper (Hooper)1 and Josephine Vaughan
(collectively, Plaintiffs) want to litigate a class action against their payday lender,
Advance America, Cash Advance Centers of Missouri, Inc. (Advance America), in
federal court. Advance America, invoking a clause in Plaintiffs’ loans, wants to stay
1
Although the caption refers to Trishia Hooper, the parties and the record
usually refer to Patricia Hooper.
all litigation and compel Plaintiffs to binding arbitration. The district court2 held
Advance America waived its right to arbitration when it filed an extensive motion to
dismiss. We affirm.
I. BACKGROUND
Plaintiffs and Advance America entered into a series of payday loan
agreements.3 Each agreement contains a mandatory arbitration clause.
On March 10, 2008, Plaintiffs filed a seven-count, putative class-action
complaint against Advance America. In Count I, Plaintiffs asked the district court to
declare the loan agreements’ arbitration clauses unconscionable and unenforceable
under Missouri’s Declaratory Judgment Act, Mo. Rev. Stat. § 527.010. In Counts II
through VII, Plaintiffs alleged Advance America violated various provisions of
Missouri’s Merchandising Practices Act (MPA), Mo. Rev. Stat. §§ 407.010-407.1132,
and payday loan law, Mo. Rev. Stat. §§ 408.500, 408.505, and 408.562. Plaintiffs
complained Advance America was engaged in unfair, deceptive, and illegal lending
practices to the detriment of its Missouri borrowers.
On April 30, 2008, Advance America moved to dismiss Plaintiffs’ complaint.
Advance America sought dismissal of Count I for want of subject matter jurisdiction,
pursuant to Fed. R. Civ. P. 12(b)(1), and Counts II through VII for failure to state a
claim upon which relief could be granted, pursuant to Fed. R. Civ. P. 12(b)(6). In the
last sentence of its brief, Advance America purported to “reserve[] the right” to
2
The Honorable Nanette K. Laughrey, United States District Judge for the
Western District of Missouri.
3
The loans were unsecured but had high interest rates. For example, in June
2007, Advance America loaned $500 to Hooper. The annual percentage rate of the
loan was 277.40%.
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enforce the arbitration clauses in Plaintiffs’ loan agreements, if the court denied its
motion to dismiss.
Plaintiffs resisted Advance America’s motion. Although the merits of the
parties’ arguments are largely irrelevant for present purposes, it bears mention that
Advance America’s motion was extensive and required the district court to navigate
through uncharted territory in Missouri’s consumer protection laws. As the district
court would later observe, “[t]here is a dearth of case law on the issues” Advance
America raised in its motion to dismiss.
On July 15, 2008, the district court granted in part and denied in part Advance
America’s motion to dismiss. The court dismissed Count I for lack of subject matter
jurisdiction, but granted Plaintiffs leave to amend their complaint to assert an
analogous claim under the Federal Declaratory Judgment Act, 28 U.S.C. § 2201. The
court further dismissed Count VII as surplusage, but declined to dismiss Counts II
through VI. The district court held Advance America had not shown Counts II
through VI failed to state claims upon which relief could be granted. Plaintiffs later
amended their complaint to comply with the district court’s order.
On August 1, 2008, Advance America filed a motion to stay litigation and
compel arbitration (motion for arbitration). Plaintiffs filed a resistance in which they
argued Advance America had waived its right to arbitration. Plaintiffs recalled
Advance America had filed a motion to dismiss and the parties had made initial
discovery disclosures.4
The district court denied Advance America’s motion for arbitration. Applying
the tripartite test set forth in Dumont v. Saskatchewan Gov’t Ins., 258 F.3d 880 (8th
4
The record reveals the parties negotiated a proposed scheduling order and
discovery plan, which the district court adopted with modification. See, e.g., Fed. R.
Civ. P. 16(b) & 26(f).
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Cir. 2001) and other cases, the district court found Advance America waived its right
to arbitration because Plaintiffs had shown Advance America (1) knew it had a right
to arbitration, (2) acted inconsistently with such right, and (3) prejudiced Plaintiffs.
See id. at 886; Ritzel Commc’ns, Inc. v. Mid-Am. Cellular Tel. Co., 989 F.2d 966,
969 (8th Cir. 1993); Stifel, Nicolaus & Co. v. Freeman, 924 F.2d 157, 158 (8th Cir.
1991). Advance America appeals.
II. DISCUSSION
A. Jurisdiction
The district court had subject matter jurisdiction over this putative class action
because the amount in controversy exceeds $5,000,000, exclusive of interest and
costs, and Plaintiffs are citizens of Missouri and Advance America is a Delaware
corporation with its principal place of business in South Carolina. See 28 U.S.C.
§ 1332(d)(2)(A). Cf. Johnson v. Advance Am., 549 F.3d 932, 935-38 (4th Cir. 2008)
(holding district court lacked jurisdiction under 28 U.S.C. § 1332(d)(2)(A) absent
minimal diversity between the parties). The Federal Arbitration Act (FAA), 9 U.S.C.
§§ 1-307, grants us jurisdiction over Advance America’s interlocutory appeal. See 9
U.S.C. § 16(a)(1); Indus. Wire Prods., Inc. v. Costco Wholesale Corp., 576 F.3d 516,
518 (8th Cir. 2009) (declaring “[a]n order denying a motion to compel arbitration is
immediately appealable under the [FAA]”).
B. Standard of Review
“We review de novo the legal determination of waiver but examine the factual
findings underlying that ruling for clear error.” Lewallen v. Green Tree Servicing,
L.L.C., 487 F.3d 1085, 1090 (8th Cir. 2007) (citations omitted). “‘[I]n light of the
strong federal policy in favor of arbitration, any doubts concerning waiver of
arbitrability should be resolved in favor of arbitration.’” Id. (quoting Dumont, 258
F.3d at 886).
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C. Analysis
As the district court correctly observed, we routinely apply a tripartite test to
determine whether a party has waived its right to arbitration. We find waiver when
the party “(1) knew of its existing right to arbitration; (2) acted inconsistently with that
right; and (3) prejudiced the other party by its inconsistent actions.” Dumont, 258
F.3d at 886 (citing Ritzel, 989 F.2d at 969). We now apply this test to the record
before us.
1. Knowledge
Advance America does not squarely dispute the district court’s finding that
Advance America knew of its right to arbitration when Advance America filed its
motion to dismiss.5 In any event, we find no reason to disturb the district court’s
finding. Plaintiffs attached the arbitration clauses to their complaint. Advance
America drafted the arbitration clauses and discussed them in its motion to dismiss.
2. Inconsistent Action
The district court found Advance America acted inconsistently with its right to
arbitration when it filed its motion to dismiss before its motion for arbitration. The
district court noted the motion to dismiss was extensive and asked for judgment on the
merits of Plaintiffs’ claims, concluding Advance America “substantially invoked
litigation machinery” before filing its motion for arbitration.
Advance America argues the district court erred in finding Advance America
substantially invoked the litigation machinery and acted inconsistently with its right
to arbitration. Advance America emphasizes (1) Plaintiffs—not Advance
America—initiated this litigation; (2) only three months elapsed between the filing of
5
In arguing its motion to dismiss is not inconsistent with its right to arbitration,
Advance America maintains “there is no way [it] could have been certain of . . . its
existing right to arbitration” until the district court “either dismissed or otherwise
resolved Count I.” We discuss this argument in the next subsection.
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Advance America’s motion to dismiss and its motion for arbitration; (3) Advance
America filed its motion for arbitration ten days after Plaintiffs amended their
complaint; and (4) the parties did not engage in discovery or participate in any
hearings.
“A party acts inconsistently with its right to arbitrate if the party ‘substantially
invokes the litigation machinery before asserting its arbitration right.’” Lewallen, 487
F.3d at 1090 (quoting Ritzel, 989 F.2d at 969). We agree with the district court.
Advance America’s motion to dismiss was extensive and exhaustive, and substantially
invoked the litigation machinery. Advance America drew the district court’s attention
to multiple matters of first impression, asserted Plaintiffs failed to state claims upon
which relief could be granted, and encouraged the district court to resolve the parties’
entire dispute in Advance America’s favor. See, e.g., id. at 1092 (holding a motion
to dismiss for failure to state a claim, arguing the merits, substantially invoked the
litigation machinery); Kelly v. Golden, 352 F.3d 344, 349-50 (8th Cir. 2003)
(affirming district court’s finding of waiver in part because the party asserting the
right to arbitration had “consistently encouraged the district court to resolve the entire
dispute”); Ritzel, 989 F.2d at 969 (stating the motion to dismiss for failure to state a
claim “represent[ed] a substantial, active invocation of the litigation process” and
supported a finding of waiver). In other words, Advance America sought a final
decision from the district court upon the merits of the parties’ dispute, see Federated
Dep’t Stores, Inc. v. Motie, 452 U.S. 394, 399 n.3 (1981) (noting a “dismissal for
failure to state a claim” under Rule 12(b)(6) is a “judgment on the merits” (internal
marks omitted)), even though a request to dispose of a case on the merits before
reaching arbitration “is inconsistent with resolving the case through arbitration.”
Lewallen, 487 F.3d at 1092 (citation omitted); see also Petrol. Pipe Ams. Corp. v.
Jindal Saw, Ltd., 575 F.3d 476, 480 (5th Cir. 2009) (“A party waives arbitration by
seeking a decision on the merits before attempting to arbitrate.”) (citation omitted);
St. Mary’s Med. Ctr. of Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d 585,
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589 (7th Cir. 1992) (“Submitting a case to the district court for decision is not
consistent with a desire to arbitrate.”).
Not every motion to dismiss is inconsistent with the right to arbitration. See,
e.g., Sharif v. Wellness Int’l Network, Ltd., 376 F.3d 720, 726 (7th Cir. 2004) (stating
“it is well-established that a party does not waive its right to arbitrate merely by filing
a motion to dismiss”) (citations omitted); Rush v. Oppenheimer & Co., 779 F.2d 885,
888 (2d Cir. 1985) (similar); see also Dumont, 258 F.3d at 886-87 (declining to find
waiver where the party “took no action with respect to the merits of the case prior to
the district court ordering arbitration,” but rather “sought early dismissal . . . on
jurisdictional and quasi-jurisdictional grounds”); Khan v. Parsons Global Servs., Ltd.,
521 F.3d 421, 427 (D.C. Cir. 2008) (stating “a motion to dismiss may not be
inconsistent with the intent to arbitrate, as where a party seeks the dismissal of a
frivolous claim”) (citations omitted); Sweater Bee by Banff, Ltd. v. Manhattan Indus.,
754 F.2d 457, 463 (2d Cir. 1985) (recognizing a motion to dismiss may be necessary
to sort out arbitrable and nonarbitrable claims). Motions to dismiss are not
homogeneous. District courts should continue to consider the totality of the
circumstances. See Ritzel, 989 F.2d at 971 (“Whether there is waiver depends on the
particular facts before us.”).
Advance America characterizes its motion to dismiss as merely seeking
clarification. With some force, Advance America maintains it could not have known
for certain Counts II through VII were arbitrable until the district court dismissed
Count I. The problem with Advance America’s argument is that its motion to dismiss
sought more than clarification. Advance America did not, for example, file a motion
to dismiss Count I for lack of jurisdiction and simultaneously move to compel
arbitration on Counts II through VII pending the district court’s ruling. See, e.g.,
Lewallen, 487 F.3d at 1091 (emphasizing that, “[t]o safeguard its right to arbitration,
a party must ‘do all it could reasonably have been expected to do to make the earliest
feasible determination of whether to proceed judicially or by arbitration’” (quoting
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Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir.
1995)). Instead, Advance America sought a decision on the merits on Counts II
through VII, an immediate and total victory in the parties’ dispute. The district court
correctly inferred, citing Cabinetree, that instead of merely seeking clarification,
Advance America “wanted to see how the case was going in federal district court
before deciding whether it would be better off there or in arbitration.” Id. Advance
America “wanted to play heads I win, tails you lose,” which “is the worst possible
reason” for failing to move for arbitration sooner than it did. Id.
3. Prejudice
The district court found Advance America’s inconsistent actions prejudiced
Plaintiffs. The district court noted (1) Advance America waited over four-and-a-half
months before filing its motion for arbitration; (2) Advance America’s motion to
dismiss forced Plaintiffs to brief fully a number of substantive issues; (3) Plaintiffs
relied on the court’s resulting order in drafting and filing an amended complaint; and
(4) Advance America would presumably seek to reargue in arbitration the issues it lost
in the district court’s ruling on its motion to dismiss, i.e., “attempt to take a proverbial
second bite at the apple.”6
Advance America argues the district court erred in finding prejudice. Advance
America reemphasizes the timing of its motion and reiterates the parties did not
engage in discovery or participate in any hearings. Advance America opines “[t]he
only cost [Plaintiffs] incurred was drafting a 15-page Opposition.” Advance America
suggests its motion to dismiss benefitted Plaintiffs insofar as the district court’s
subsequent ruling “allowed [Plaintiffs] to focus and strengthen their claims.”
6
In its thoughtful opinion, the district court also expressed concern that a ruling
to the contrary would promote forum shopping and waste judicial resources. We
share these concerns, but they do not control our analysis. We focus on the prejudice
to Plaintiffs, not to the judiciary.
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Advance America contends the final reservation sentence in its motion to dismiss
provided Plaintiffs early notice that Advance America might seek arbitration.
We agree with the district court. Plaintiffs suffered prejudice. Although
prejudice manifests itself in myriad ways, “[p]rejudice results when . . . parties . . .
litigate substantial issues on the merits, or when compelling arbitration would require
a duplication of efforts.” Kelly, 352 F.3d at 349. See also Stifel, 924 F.2d at 159
(“Prejudice may result from . . . litigation of substantial issues going to the merits.”).
As previously indicated, Advance America’s motion to dismiss forced Plaintiffs to
litigate substantial issues on the merits.7 Compelling arbitration presumably would
require a duplication of effort insofar as Advance America in arbitration would
reargue issues upon which the district court ruled. Cf. Lewallen, 487 F.3d at 1093
(determining the party asserting waiver “likely would incur duplicative expenses if
forced to arbitrate issues that have already been presented to the courts”). Advance
America’s statement in its motion to dismiss—that it might seek arbitration if the
district court denied its motion to dismiss—did not forestall the prejudice Plaintiffs
suffered. A reservation of rights is not an assertion of rights. Cf. Dumont, 258 F.3d
at 887 (declining to find waiver in part because the party affirmatively stated it would
seek arbitration).
Advance America correctly identifies Plaintiffs suffered less—in terms of delay
and cost—than other parties in whose favor we have found waiver of the right to
arbitration. Cf. Se. Stud & Components, Inc. v. Am. Eagle Design Build Studios,
L.L.C., No. 08-3448, 2009 WL 4545200, *3-*4 (8th Cir. Dec.7, 2009) (finding
prejudice where the party asserting the right to arbitration waited thirteen months to
seek arbitration, filed and pursued a motion for judgments on the pleadings, and
7
In this respect there is overlap between the second and third prongs of our
tripartite analysis, at least as applied to the facts of the case at bar. See Petrol. Pipe,
575 F.3d at 480 n.2 (recognizing overlap and citing Price v. Drexel Burnham Lambert,
Inc., 791 F.2d 1156, 1158 (5th Cir. 1986)).
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responded and objected to requests for production of documents); Lewallen, 487 F.3d
at 1090, 1093-94 (finding prejudice where the party asserting a right to arbitration
waited eleven months to seek arbitration, prepared, served and responded to extensive
discovery requests, and participated in six pretrial hearings); Ritzel, 989 F.2d at 971
(finding prejudice where the party asserting a right to arbitration “fully tried its case”).
The prejudice threshold, however, is not onerous. See, e.g., Cabinetree, 50 F.3d at
390 (stating “[o]ther courts require evidence of prejudice—but not much”).8 It is
sufficient Advance America forced Plaintiffs to litigate substantial issues on the
merits, and compelling arbitration would require a duplication of effort, see Kelly, 352
F.3d at 350, because “[a]n arbitration provision . . . does not go so far as to ‘allow or
encourage the parties to proceed . . . sequentially, in multiple forums.’” Lewallen, 487
F.3d at 1092 (quoting Cabinetree, 50 F.3d at 390).
D. Summary
Experienced trial lawyers “know how important it is to settle on a forum at the
earliest possible opportunity,” and Advance America’s “failure . . . to move promptly
for arbitration is powerful evidence that [it] made [its] election—against arbitration.”
Cabinetree, 50 F.3d at 391. Plaintiffs have shown Advance America knew of its
8
There remains a circuit split as to whether the party asserting waiver of a right
to arbitration must demonstrate prejudice at all. Compare Petrol. Pipe, 575 F.3d at
480 (requiring prejudice); United States v. Park Place Assocs., Ltd., 563 F.3d 907, 921
(9th Cir. 2009) (same); Crossville Med. Oncology, P.C. v. Glenwood Sys., L.L.C.,
310 F. App’x 858, 859 (6th Cir. 2009) (same); Forrester v. Penn Lyon Homes, Inc.,
553 F.3d 340, 343 (4th Cir. 2009) (same); Zimmer v. CooperNeff Advisors, Inc., 523
F.3d 224, 231 (3d Cir. 2008) (same); In re Tyco Int’l Ltd. Secs. Litig., 422 F.3d 41,
46 (1st Cir. 2005) (requiring “a modicum of prejudice”); Thyssen, Inc. v. Calypso
Shipping Corp., 310 F.3d 102, 105 (2d Cir. 2002) (requiring prejudice); Ivax Corp.
v. B. Braun of Am., Inc., 286 F.3d 1309, 1315-16 (11th Cir. 2002) (same); and Adams
v. Merrill Lynch, Pierce, Fenner & Smith, 888 F.2d 696, 701 (10th Cir. 1989)
(requiring “substantial prejudice”), with Khan, 521 F.3d at 425 (stating prejudice is
not required), and Cabinetree, 50 F.3d at 390 (same).
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existing right to arbitration, acted inconsistently with that right, and prejudiced
Plaintiffs by Advance America’s inconsistent actions. See Dumont, 258 F.3d at 886.
Therefore, we hold Advance America waived its right to arbitration when it filed and
pursued its motion to dismiss.
III. CONCLUSION
We affirm the district court’s well-reasoned order denying Advance America’s
motion for arbitration.
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