Client Advisory

The Third Circuit reversed the District of New Jersey in Dawn Valli, et al. v. Avis Budget Group, Inc., et al., finding that a car rental company did not waive its contractual right to compel arbitration through its litigation conduct in a class action. A class of car renters asserted that their rental agreements deprived them of the opportunity to contest traffic violations by paying the fines (and therefore admitting liability) before notifying renters of the infractions.

The parties disputed class certification for several years, with the District Court terminating and reinstating certification motions while discovery continued and mediation remained unsuccessful. Appellant, Avis Budget Group, Inc. (and its related entities) (“Avis”) continued to assert its arbitration rights while opposing certification. The District Court ultimately certified a subclass pursuant to Rule 23(c)(4)(B), and in its analysis, the Court determined Avis waived arbitrability by engaging fully in the underlying litigation for five years without having formally moved for arbitration. Avis then moved to compel arbitration and disputed its waiver, arguing that any earlier motion to compel directed at an unnamed class would have been futile before certification of a class. The District Court denied Avis’s motion to compel, concluding its pre-certification activity demonstrated waiver, and found fault in Avis for failing to formally seek to enforce arbitration until after a class had been certified.

On appeal, the Third Circuit considered the interplay of the doctrines of waiver and futility and turned to Chassen v. Fidelity National Financial, Inc., in which the Third Circuit determined that a financial investment company did not waive its right to arbitration despite years of litigation because any attempt for the defendant to formally move for arbitration would have failed due to then-controlling New Jersey law barring arbitration in adhesion contracts like the contract in Chassen. Avis argued Chassen was dispositive, foreclosing any consideration of its pre-certification conduct because it could not enforce its arbitration right until the District Court certified a class containing arbitration-bound members. Appellees argued Chassen was distinguishable because the futility in that case stemmed from controlling law, whereas here it turned on party status.

The Third Circuit ultimately determined that when enforceability of a right to arbitration hinges on the occurrence of a foreseeable procedural event, like the certification of a class, pre-litigation conduct is considered by the Court. With this in mind, the Court found that Avis’s intent to arbitrate was clear when reflecting upon the record, as evidenced by incorporating operative arbitration and class-waiver language into its rental terms; consistently asserting its prospective arbitration rights in opposing certification while discovery and mediation proceeded; and promptly moving to compel once it was no longer futile to do so. The Third Circuit therefore found Avis’s motion to enforce arbitration timely and remanded the matter back to the District Court to address the enforceability of the arbitration clause, which was not originally ruled upon at the district level.

Key Takeaway: It is important to act consistent with arbitration rights pre and post suit and clients may consider seeking a ruling early in the litigation as to the timing of enforcement at the trial court level.