Robyn Morgan v. Sundance, Inc. ( 2021 )

United States Court of Appeals
For the Eighth Circuit
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No. 19-2435
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Robyn Morgan, on behalf of herself and all similarly situated individuals
Plaintiff - Appellee
v.
Sundance, Inc.
Defendant - Appellant
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Appeal from United States District Court
for the Southern District of Iowa - Iowa City
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Submitted: September 23, 2020
Filed: March 30, 2021
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Before COLLOTON, GRUENDER, and GRASZ, Circuit Judges.
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GRASZ, Circuit Judge.
Sundance, Inc. appeals the district court’s order denying its motion to compel
arbitration of Robyn Morgan’s claims. We reverse.
I. Background
In September 2018, Morgan sued Sundance for violations of the Fair Labor
Standards Act. See 29 U.S.C. § 201. Morgan alleged Sundance failed to pay her,
and other similarly situated employees, for overtime.
In November 2018, Sundance moved to dismiss Morgan’s complaint, arguing
that under the “first-to-file” rule, 1 a similar lawsuit filed in a Michigan federal court
(the “Michigan case”) barred this lawsuit. The district court denied Sundance’s
motion to dismiss more than four months later in March 2019.
Sundance then answered Morgan’s complaint, but did not assert its right to
arbitrate Morgan’s claims. After filing its answer, Morgan participated in a
settlement mediation with the Michigan case plaintiffs. The Michigan case settled,
but Morgan’s case moved forward.
In May 2019, after the failed mediation and nearly eight months after the filing
of Morgan’s complaint, Sundance moved to compel arbitration. The district court
denied the motion, concluding Sundance’s participation in the litigation waived its
right to arbitration.
II. Discussion
We review de novo the district court’s conclusion that Sundance waived its
right to compel arbitration, and we examine the underlying factual findings for clear
error. Messina v. N. Cent. Distrib., Inc., 821 F.3d 1047, 1050 (8th Cir. 2016).
“[A]ny doubts concerning waiver of arbitrability should be resolved in favor of
arbitration.” Id. (internal quotation marks and citation omitted).
1
The “first-to-file” rule, as an extension of comity principles, states “where
two courts have concurrent jurisdiction, the first court in which jurisdiction attaches
has priority to consider the case.” Orthmann v. Apple River Campground, Inc., 765
F.2d 119, 121 (8th Cir. 1985).
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A party waives 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.” Messina, 821 F.3d at 1050 (internal quotation marks and
citation omitted). Utilizing this test, we conclude the district court erred in
determining Sundance waived its right to arbitrate because Sundance’s conduct,
even if inconsistent with its right to arbitration, did not materially prejudice Morgan.
Regarding the first element, Sundance does not dispute its knowledge of an
existing right to arbitration because the Morgan-Sundance employment agreement
included the arbitration clause.
We next consider the second element—whether Sundance acted
inconsistently with its right to arbitrate. “A party acts inconsistently with its right to
arbitrate if it ‘substantially invokes the litigation machinery before asserting its
arbitration right, . . . when, for example, it files a lawsuit on arbitrable claims,
engages in extensive discovery, or fails to move to compel arbitration and stay
litigation in a timely manner.’” Id. at 1050 (quoting Lewallen v. Green Tree
Servicing, 487 F.3d 1085, 1090 (8th Cir. 2007)). “To 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[.]’” Id. at 1050 (quoting Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry,
Inc., 50 F.3d 388, 391 (7th Cir. 1995)). A court looks to all of the circumstances to
decide whether the act is truly inconsistent with its right to arbitrate. See Lewallen,
487 F.3d at 1090–94 (considering a party’s discovery requests, its failure to timely
assert its right to arbitration, and its motion to dismiss in upholding a finding that the
party acted inconsistently with its right to arbitrate).
The district court found that Sundance substantially invoked the litigation
machinery primarily by waiting eight months to assert its right to arbitrate this
dispute. During the eight months prior to asserting its right to arbitration, Sundance
failed to mention the arbitration clause in its answer or motion to dismiss. The
district court stated Sundance’s conduct during the delay was sufficient to find
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Sundance invoked the litigation machinery. We question this finding in light of the
totality of the circumstances.
First of all, the time during which Sundance’s motion to dismiss was under
advisement must also be considered. This made up half the delay the district court
attributed to Sundance. Second, Sundance participated in mediation of the case.
Mediation is an effort to avoid “invok[ing] the litigation machinery.” See Lewallen,
487 F.3d at 1090.
It is true, as the district court noted, that Sundance failed to assert its right to
arbitration in its answer. Sundance’s strategy of waiting to assert its right to
arbitration until after filing a motion to dismiss and an answer demonstrates an active
participation in the litigation process and seemingly an invocation of the litigation
machinery. However, instead of focusing on Sundance’s failure to raise its right to
arbitration earlier, the district court should have considered the nature of Sundance’s
motion to dismiss. In this regard, we conclude it significant that Sundance did not
address the merits of the dispute, but instead focused on the quasi-jurisdictional
“first-to-file” rule. So, although there was an eight-month delay, the parties spent
very little of this time actively litigating and no time on the merits of the case. Thus,
shifting to arbitration would not duplicate the parties’ efforts.
This all bears on the third element: prejudice. “Whether inconsistent actions
constitute prejudice is determined on a case-by-case basis.” Stifel, Nicolaus & Co.
v. Freeman, 924 F.2d 157, 159 (8th Cir. 1991). “Prejudice may result from lost
evidence, duplication of efforts, use of discovery methods unavailable in arbitration,
or litigation of substantial issues going to the merits.” Id. A “delay in seeking to
compel arbitration ‘does not itself constitute prejudice[,]’” but it can “combine with
other factors to support a finding of prejudice.” Messina, 821 F.3d at 1051; see also
Kelly v. Golden, 352 F.3d 344, 350 (8th Cir. 2003) (concluding claimant’s delay in
seeking arbitration prejudiced defending party who incurred expense, experienced
“substantial” delay, and would have to duplicate its efforts).
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The district court found Morgan was prejudiced by having to respond to
Sundance’s motion to dismiss over the eight-month span of litigation. We disagree.
Four months of the delay entailed the parties waiting for disposition of Sundance’s
motion to dismiss. No discovery was conducted. And, the record lacks any evidence
that Morgan would have to duplicate her efforts during arbitration. Instead, most of
Morgan’s work focused on the quasi-jurisdictional issue, not the merits of the case.
For these reasons, we hold Morgan was not prejudiced by Sundance’s litigation
strategy.
In the absence of a showing of prejudice to Morgan, we conclude Sundance
did not waive its contractual right to invoke arbitration.
III. Conclusion
The judgment of the district court is reversed, and the case is remanded for
proceedings consistent with this opinion.
COLLOTON, Circuit Judge, dissenting.
When Morgan sued Sundance, Inc., in the Southern District of Iowa,
Sundance made a strategic choice to forego arbitration for more than seven months.
At that point, Sundance asked the district court to compel arbitration and dismiss the
lawsuit. On this record, Sundance waived its right to arbitration under the contract,
and I would affirm the order of the district court denying the motion to compel.
In response to Morgan’s complaint, Sundance did not move to compel
arbitration. Instead, Sundance expressed its preference for a judicial forum in the
Eastern District of Michigan and moved to stay or dismiss this action under the
“first-filed rule.” (This rule concerns selection of venue; it is not “quasi-
jurisdictional.” See Nw. Airlines, Inc. v. Am. Airlines, Inc., 989 F.2d 1002, 1004 (8th
Cir. 1993)). Sundance argued that Morgan’s case was “duplicative” of an action
pending in federal court in Michigan, and urged the district court in Southern Iowa
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to avoid “conflicting rulings and duplicative discovery” by staying or dismissing this
case.
When the district court denied that motion, Sundance answered Morgan’s
complaint on the merits. The answer listed fourteen affirmative defenses, but made
no mention of arbitration. The parties then participated in a mediation, but no
settlement agreement was reached. Only then, more than seven months after the
complaint was filed, did Sundance move to compel arbitration in May 2019.
This conduct by Sundance amounts to a waiver of its contractual right to
arbitration. “To 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.” Lewellen v. Green Tree Servicing,
L.L.C., 487 F.3d 1085, 1091 (8th Cir. 2007) (internal quotation omitted). In the
terms of our cases, Sundance knew of its existing right to arbitration and acted
inconsistently with that right. See Stifel, Nicolaus & Co. v. Freeman, 924 F.2d 157,
158 (8th Cir. 1991).
Moving to dismiss or stay this action as “duplicative” so that it could be
litigated in federal court in Michigan is an action inconsistent with arbitration. When
a party waits to seek arbitration until after it loses a motion to transfer venue, it
demonstrates an effort to play “heads I win, tails you lose”—a game that is
inconsistent with exercising a right to arbitration. Messina v. N. Cent. Distrib., Inc.,
821 F.3d 1047, 1050-51 (8th Cir. 2016). Filing an answer that sets forth numerous
defenses on the merits, but never mentions a right to arbitrate the dispute, is also
inconsistent with the right. “The filing of an answer is, after all, the main opportunity
for a defendant to give notice of potentially dispositive issues to the plaintiff; and
the intent to invoke an arbitration provision is just such an issue.” Johnson Assocs.
Corp. v. HL Operating Co., 680 F.3d 713, 718 (6th Cir. 2012).
Sundance then engaged in a mediation process designed to resolve a lawsuit
in federal court. This was further participation in litigation-related activities, and
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another act inconsistent with arbitration. Settlements depend on the parties’
assessment of the applicable law, the procedural characteristics of the forum, the
availability of discovery, the cost of litigation, and the overall potential risks and
rewards of proceeding to a final decision. The relevant calculations may differ
considerably depending on whether an action is pending in federal court or in
arbitration. Mediation in one forum is not interchangeable with mediation in the
other. See Jill I. Gross, Bargaining in the (Murky) Shadow of Arbitration, 24 Harv.
Negot. L. Rev. 185, 202-03 (2019) (“Unable to predict and thus manage the
downside risk of arbitration, negotiators will be more willing to settle a claim in
arbitration as opposed to that same claim in court.”).
When Sundance eventually moved to compel arbitration, the company
acknowledged that its change of heart was tactical. In its memorandum, Sundance
asserted that Lamps Plus, Inc. v. Varela, 139 S. Ct. 1407 (2019), filed April 24, 2019,
had “a significant bearing on this litigation,” because “[u]nder the prior state of the
law, [Sundance] risked being compelled to arbitrate this matter as a collective
action.” The district court concluded that Sundance was wrong on the law: Lamps
Plus held that an ambiguous agreement is insufficient to establish that parties agreed
to arbitrate on a classwide basis, id. at 1415, but the Sundance arbitration agreement
is silent on the question. The “prior state of the law” already established that a court
may not compel arbitration on a classwide basis when an agreement is silent on the
availability of such arbitration. Stolt-Nielsen S.A. v. AnimalFeeds Int’l Corp., 559
U.S. 662, 685-87 (2010). But even assuming that Sundance’s agreement is arguably
ambiguous, the salient point is that Sundance was content with a judicial forum until
it believed that an intervening court decision improved its prospects in arbitration.
The majority does not dispute that Sundance acted inconsistently with
arbitration, but reverses the district court’s determination of waiver on the ground
that Morgan was not prejudiced. Prejudice is a debatable prerequisite. Arbitration
is a contractual right, and “in ordinary contract law, a waiver normally is effective
without proof of consideration or detrimental reliance.” Cabinetree v. Kraftmaid
Cabinetry, Inc., 50 F.3d 388, 390 (7th Cir. 1995) (citing E. Allan Farnsworth,
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Contracts § 8.5 (2d ed. 1990); 3A Arthur Linton Corbin, Corbin on Contracts § 753
(1960)). Accordingly, some circuits allow a finding of waiver of arbitration without
a showing of prejudice. St. Mary’s Med. Ctr. v. Disco Alum. Prods. Co., 969 F.2d
585, 590 (7th Cir. 1992); Nat’l Found. for Cancer Rsch. v. A.G. Edwards & Sons,
821 F.2d 772, 777 (D.C. Cir. 1987).
This court initially followed a Ninth Circuit decision to establish a prejudice
requirement, Stifel, 924 F.2d at 158-59, but later acknowledged the conflict in
authority and recognized that the issue was “unsettled” by the Supreme Court.
Erdman Co. v. Phx. Land & Acq., LLC, 650 F.3d 1115, 1119 (8th Cir. 2011); see
Citibank, N.A. v. Stok & Assocs., P.A., 387 F. App’x 921, 924-25 (11th Cir. 2010)
(holding that prejudice is required), cert. granted, 562 U.S. 1215, cert. dismissed,
563 U.S. 1029 (2011). Under current circuit law, the prejudice threshold is “not
onerous.” Erdman Co., 650 F.3d at 1119 (quoting Hooper v. Adv. Am., Cash Adv.
Ctrs., 589 F.3d 917, 923 (8th Cir. 2009)). As the Seventh Circuit put it, “[o]ther
courts require evidence of prejudice—but not much.” Cabinetree, 50 F.3d at 390.
Morgan showed sufficient prejudice to support the district court’s
determination of waiver. We concluded in a prior decision that nearly identical
conduct by a defendant—waiting eight months to mention arbitration while forcing
a plaintiff to defend against a motion to transfer venue to another judicial district—
supported a finding of prejudice. Messina, 821 F.3d at 1051. Sundance also led
Morgan to waste time and money engaging in a fruitless mediation based on an
inaccurate premise that the case would be litigated in federal court. These
impositions on the plaintiff are enough to satisfy the modest prejudice requirement
employed in this circuit.
For these reasons, I would affirm the order of the district court denying the
motion to compel arbitration.
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