Waiver of Right to Arbitrate By Participation in Litigation

The issue of a party waiving its right to arbitrate by participating in litigation is not new. Sometimes a party will participate early on in litigation thinking they can get the case dismissed or moved to a different more favorable venue. The question always becomes how much participation is too much? A recent case by the United States Court of Appeals for the Eighth Circuit in Messina v. North Central Distributing, Inc. dba Yosemite Home Decor, 2016 WL 2640911 (8th Cir. May 10, 2016) sent out a reminder that the issue of arbitration should be raised at the earliest possible time.

Messina sued his former employer, Yosemite Home Decor, in Minnesota state court for breach of contract and wrongful termination. Yosemite removed the case to federal court, filed an answer and later moved to transfer venue to the Eastern District of California. The district court denied to the motion to transfer venue and then, eight months after Messina filed his complaint, Yosemite moved to compel arbitration. The court denied the motion to compel arbitration and concluded that Yosemite had waived its right to arbitrate. Yosemite then appealed to the United States Court of Appeals for the Eighth Circuit.

In affirming the denial of the motion to compel arbitration, the Eighth Circuit restated the test for determining whether a party waives its right to arbitrate. A party waives its right to arbitrate if it (1) knew of an existing right of arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by these inconsistent acts. Messina v. North Central Distributing, Inc., 2016 WL 2640911 (8th Cir. May 10, 2016), citing, Lewallen v. Green Tree Servicing, LLC., 487 F.3d 1085, 1090 (8th Cir. 2007). A party acts inconsistently with its right to arbitrate if it substantially invokes the “litigation machinery” before asserting its right to arbitrate. Id. 

The court found that Yosemite acted inconsistently because it proceeded in court for eight months before asserting its right to arbitrate and substantially invoked the litigation machinery by removing the case to federal court, filing an answer, participating in a pretrial hearing, filing a scheduling report and a motion to transfer venue. More importantly, the court held that Yosemite knew about its arbitration right during this entire process. The court also held that Messina was prejudiced because Yosemite used discovery that was not available in arbitration, had suffered delay and costs and potential duplication of efforts would occur if Messina was now required to arbitrate. Significantly, the court held that delay in seeking to compel arbitration does not itself constitute prejudice, but delay combined with other facts can serve as a basis to support a finding of prejudice. Based on the actions of Yosemite plus the delay, the court found that Yosemite’s conduct satisfied the Lewallen waiver test and affirmed the denial of the motion to compel arbitration.

The real moral of the story is that if there is an arbitration clause, and you actually want to arbitrate, you should move to compel arbitration at the earliest opportunity. Sitting on your right may cause a court to find that you waived your right to arbitrate. The opinions in this blog are solely the author’s and any comments, suggestions or replies should be sent to john@jrjoneslaw.com.

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Spanish and English Debt Collection Notices

The issue of sending out debt collection notices in Spanish and English under the Federal Debt Collection Practices Act (the “FDCPA”) has arisen again in a Virginia case. While the case has no precedential value because it was settled and dismissed, it still points out the dangers of mixing English and Spanish sentences and words in the same debt collection notice.

In Dykes v. Portfolio Recovery Associates, 111 F. Supp.3d 739 (E.D. Va. 2015), Dykes filed a putative class action alleging that Portfolio Recovery violated the FDCPA by sending three debt collection notices in Spanish rather than English. Specifically, Dykes claimed that the collection letters were false, deceptive, or misleading in violation of sections 1692e and 1692e(11) of the FDCPA, principally because the letters were written almost entirely in Spanish. Dykes never agreed to receive correspondence in Spanish and did not speak the language. Dykes had mistakenly been identified as a Spanish speaking consumer when Portfolio Recovery was skip-tracing Dykes, but soon realized the skip-tracing information was in error. However, Portfolio Recovery continued to send the Spanish language debt collection letters even after realizing its skip-tracing error.

Portfolio Recovery filed a motion to dismiss for failure to state a claim contending that the FDCPA does not mandate the English disclosures that Plaintiff sought. In response, Dykes stated that the three collection letters were false, deceptive or misleading under the FDCPA because the letters failed to disclose in English that Portfolio Recovery was a debt collector who was attempting to collect a debt, and that information obtained would be used for that purpose (i.e. the Mini-Miranda warning). Dykes did not allege that the letters were false, just that she could not read them because they were in Spanish, a language she could not read.

In evaluating the motion to dismiss, the district court had to determine if the representations (i.e. Spanish language letter to non-Spanish speaking consumer) constituted a material representation for it to consider whether a statutory violation had occurred. To make that determination, the court applied the least sophisticated consumer test and stated that courts should consider how a “naive” consumer would interpret the statements. Dykes v. Portfolio Recovery Associates, 111 F. Supp.3d 739 (E.D. Va. 2015), citing, Elyazidi v. SunTrust Bank, 780 F.3d 227, 234 (4th Cir. 2015).

In reviewing the letters, the court held that while there was nothing substantially false about the representations made by Portfolio Recovery, they could objectively affect the least sophisticated consumer’s decision making. Dykes v. Portfolio Recovery Associates, 111 F. Supp.3d 739 (E.D. Va. 2015), citing, Powell v. Palisades Acquisition XVI, LLC, 782 F.3d 119, 126-127 (4th Cir. 2014). The court also noted that while there is no official language requirement under the FDCPA, courts have been suspicious when a debt collectors use both English and Spanish in collection letters. Dykes v. Portfolio Recovery Associates, 111 F. Supp.3d 739 (E.D. Va. 2015), citing, Ehrich v. I.C. Sys., Inc., 681 F.Supp. 2d 265, 273-274 (E.D.N.Y. 2010) (inclusion of Spanish sentence indicates defendant’s awareness that recipients of the debt collection letter included Spanish-speaking consumers who did not speak English and were being targeted). Because Portfolio Recovery’s letters contained both English and Spanish language,  the reasoning in Ehrich applied. Because the court was considering a motion to dismiss, the Court was required to accept Dykes allegations as true and therefore, the court denied the motion to dismiss allowing Dykes’ case to proceed.

The court did note that while it was denying the motion to dismiss, it did not find any authority that requires debt collectors to predict the consumer’s native language when sending out collection letters. Courts should and must assess the reasonableness of the debt collector’s communication and determine whether the form and substance “could objectively affect the least sophisticated consumer’s decision making.” Dykes v. Portfolio Recovery Associates, 111 F. Supp.3d 739 (E.D. Va. 2015), citing, Powell v. Palisades Acquisition XVI, LLC, 782 F.3d 119, 126-127 (4th Cir. 2014).

In an increasingly diverse society, the use of English and Spanish language notices (or other languages) for contracts and debt collection notices is a thorny problem. What is not a thorny problem is mixing different languages in one notice. Just do not do it. When you do mix English and Spanish notices in the same notice, you raise the danger of someone filing a claim under section 1692g of the FDCPA that the Spanish notice overshadows the properly provided notice in English or vice versa. My practical advice is that if the original underlying documents are in English, you should generally send the notices in English. Otherwise, you start down a slippery slope in trying to determine the language to use. The opinions in this blog are solely the author’s and any comments, replies, or suggestions should be sent to john@jrjoneslaw.com.