Client Advisory
Additional Recent Client Advisories
Third Circuit Confirms Timing of Motion to Compel Arbitration to Avoid Implied Waiver
The Third Circuit recently confirmed that defendants are entitled to a meaningful opportunity to investigate facts related to arbitrability before moving to compel arbitration.
In Parkin v. Avis Rent-a-Car System, LLC, two United Kingdom citizens rented a vehicle through a rental car agency using a third-party website. Separately, both plaintiffs were offered and accepted a package of upgrades, including additional supplemental liability insurance. When plaintiffs arrived to pick up their rented vehicles, they were provided with a form that offered optional upgrades, including the supplemental liability insurance they had previously selected. The form stated the renter had reviewed and agreed to all notices and terms in the “rental jacket.” Both plaintiffs signed the form and then were provided with the rental jacket, which contained several additional terms and conditions to the rental agreement, including: (1) a clause stating that the supplemental liability insurance would be provided from an excess automobile policy issued to the rental agency; (2) and a mandatory arbitration clause with a small-claims exception.
Both plaintiffs later learned the rental agency had not purchased supplemental liability insurance but rather intended to indemnify plaintiffs from its own funds.
After plaintiffs’ vehicle rentals, the Third Circuit ruled in Bacon v. Avis Budget Group Inc. that an arbitration clause in a rental jacket was not binding on customers who did not receive the rental jacket until after they signed the rental agreement.
Plaintiffs brought a putative class action against defendants for several claims, including breach of contract, fraudulent misrepresentation, and violations of state consumer protection acts.
Defendants moved to dismiss the complaint for failure to state a claim on all three counts. In their opening briefs, defendants did not mention the issue of arbitrability, but in a footnote in their reply brief, defendants indicated they were reserving their right to compel arbitration. The trial court denied defendants’ motion on the breach of contract claim but granted it on the other counts.
In a joint discovery plan, defendants noted they reserved their right to compel arbitration pending further discovery, and in their joint disclosures, defendants identified an agreement to arbitrate as a potential defense. As part of their discovery plan, defendants deposed plaintiffs, both of whom testified they believed the information contained in the rental jackets was part of their rental agreements.
Two months later, defendants moved to compel arbitration, arguing that plaintiffs were unlike the plaintiffs in Bacon because they knew of the arbitration clause when they signed their rental agreements, and their reliance on the supplemental liability insurance provision, which was also contained in the rental jacket, meant they were estopped from avoiding the arbitration clause.
Plaintiffs opposed defendants’ motion, contending they were not subject to the arbitration clause, defendants waived arbitrability by litigating the case before moving to compel, or the small claims exclusion of the arbitration clause applied. The district court denied defendants’ motion to compel, finding defendants impliedly waived arbitration because their behavior did not reflect a genuine intent to arbitrate.
Defendants appealed, and in the interim, the Third Court issued its decision in Valli v. Avis Budget Group, Inc, a case in which the defendant had litigated for seven years before moving to compel arbitration. The court recognized that despite extensive litigation, the defendant had repeatedly indicated its intent to arbitrate through briefing and oral argument, and once its right to arbitrate was enforceable, it moved to compel. The Valli court held that the implied waiver analysis begins the moment a movant knows of its right to arbitrate rather than when the right is enforceable. Further, a presently unenforceable right to arbitration can be preserved by providing clear notice of the intent to exercise that right followed by a prompt motion to compel once enforceable.
In Parkin, while the Court acknowledged defendants engaged in some conduct before they expressly reserved their right, including filing an opening brief with no mention of the right to arbitration and opting to move to dismiss the complaint rather than answer with an affirmative defense of arbitrability, their conduct did not imply waiver. Because the allegations in the complaint were insufficient to determine whether plaintiffs were bound by the arbitration clause, defendants engaged in limited discovery to assess arbitrability. After plaintiffs’ depositions when defendants learned the case was arbitrable, they promptly moved to compel arbitration. The Court held that so long as defendants provide notice they intend to exercise the right to arbitration, they are entitled to a meaningful opportunity to investigate whether the case is arbitrable before moving to compel arbitration. The Third Circuit vacated the denial of defendants’ motion to compel and remanded the case to the district court.
In light of the court’s ruling, defendants should remain vigilant in preserving their right to arbitration through clear notice of intent to exercise that right and should consider whether discovery prior to a motion to compel is advantageous if arbitrability is not readily apparent from the complaint.