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Arbitration or Court: Defendants’ Choice?

By Gary E. Mason | 

Spotify, an Internet music provider, recently sent  a  notice to its customers advising them  that it had added an arbitration provision to its terms of service agreement.  With that, Spotify  joined the rapidly growing  list  of companies that have in recent months forced these provisios on their customers to keep them from initiating class actions against them in state or federal courts.   Public Citizen’s “Forced Arbitration Rogues Gallery” lists nearly 100 US companies that have stuck their customers with forced arbitration provisions. Yet some of these companies seem to have taken the tactic of litigating in court, even though they have an arguable enforceable arbitration provision. 

Why would they do that?  Because these crafty defendants  want first to test the waters in federal court, and scare potential litigants off with expensive litigation.  In other words, old fashioned forum shopping.  But a recent line of cases may have put a lid on this strategy before  it could gather much steam.

The first case in this series arise from a mass of a cases involving overdraft fees charged by most major banks.  The plaintiffs in these  cases claimed that the banks intentionally ordered the payment of checks to create overdrafts so they could charge their customers an over draft fee.  Suffice it to say, these case have not gone very well for the banks.  See. e.g.,, “Shady Overdraft Fees Could Cost Banks Over $1 Billion,”  (July 7, 2012).  Seeking to escape the prospects of settling the class action it, Well Fargo  moved in a class action pending against it case to compel arbitration. But it did so only after declining two invitation from the court to compel arbitration and, for more than a year thereafter, preparing its case for trial.   Finding that Wells Fargo had acted inconsistently with its arbitration right (a provision in its terms of service agreement),  the Ninth Circuit affirmed the lower court’s finding that Wells Fargo had waived it right to arbitration.  Garcia v. Wachovia Corp. et al, No. 11-16029 (9th Cir., Oct. 26, 2012).

Similarly, in a construction defect case pending in North Carolina. the Business Court denied a builder’s motion to compel more than  three years after a complaint filed against it. By that point, the parties had expended substantial effort, time and money in discovery and motion practice.  Indeed, the Court had granted plaintiffs’ motion for class certification.  The court held that the builder waived its right to compel arbitration. Elliott v. KB Home North Carolina, et al., No. 08-CVS-21190 (N.C. Super. Court,  Nov. 2, 2012.).

Recent federal decision further suggest that a defendants cannot se how it fares in court before moving  to compel arbitration.  A party “should not be allowed to delay its demand for arbitration and us federal court proceedings to test the water before taking a swim.”   In re: Pharmacy Benefit Managers Antitrust Litigation, MDL  1782, No, 12-1430 (3rd Cir,  Sept. 10. 2012).

In sum, defendant’s who use arbitration to forum shop are unlikely to succeed with that tactic.  If an arbitration provision is valid and enforceable, it  must be invoked early in the litigation so that it serves the one purpose for which it purportedly exists, that is, to avoid the high costs of  litigating in court.  

This article was originally published in The Corporate Observer.