The case is a class action wage and hour claim against Milan Institute, a for profit cosmetology school. Plaintiffs are individuals who enrolled in the cosmetology program at Milan Institute. Plaintiffs have filed actions under the FLSA and California’s wage and hour laws, alleging that they are entitled to compensation for tasks they performed in Milan’s salon for paying clients that weren’t related to their education—like cleaning, washing laundry, selling retail products, scheduling clients, and promoting Milan’s services. Each student signed an enrollment agreement when they began at Milan Institute, which included an arbitration agreement.
Defendant’s filed an appeal after the district court denied Defendant’s motion to compel arbitration by finding that Defendant’s waived their right to arbitrate—arguing that the District court erred in denying their motion because (1) the issue of waiver should have been decided by an arbitrator and (2) the District court erred in finding waiver.
The Ninth Circuit affirmed the decision of the district court. On the first issue, the court explained that there are two categories of issues on motions to compel arbitration that govern whether a court or arbitrator should decide. The first category of issues is a “question of arbitrability.” This category includes issues that the parties would have expected a court to decide such as whether the parties are bound by an arbitration clause or whether an arbitration clause in a contract applies to a particular type of controversy. The court explained that these type of disputes are for judicial determination unless the parties “clearly and unmistakably provide otherwise.” The second category—procedural issues—is presumptively not for the judge, but for an arbitrator, to decide—like whether the arbitral forum’s statute of limitations has run for a particular claim.
The court held that waiver by litigation conduct is part of the first category of issues because whether a party has waived its right to arbitrate on the basis of its litigation conduct is always a “question of arbitrability.” Thus, the court found it was proper for the District Court to decide whether Defendants had waived their right to arbitration.
For the second issue on appeal, the court also affirmed the District Court’s finding of waiver by Defendants by applying the three factor waiver test. A party seeking to prove waiver of a right to arbitration must demonstrate: (1) knowledge of an existing right to arbitrate, (2) acts inconsistent with that existing right, and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts. The court did not conduct analysis under the first prong because Defendants conceded that they had knowledge of their right to arbitrate.
For the second prong, the court found that Defendant’s engagement in seventeen months of litigation before filing a motion to compel arbitration satisfied this element because Defendants took advantage of being in federal court.
Finally, the court also found that Plaintiffs satisfied the third element because if Defendant’s motion to compel arbitration was granted, Plaintiffs would be forced to relitigate an issue on the merits in which they already prevailed. At the District Court level, Defendant’s filed a Motion to Dismiss that reached the merits of the case—focusing on a key issue: whether plaintiffs were students and not employees of Milan as a matter of law. Plaintiffs defeated Defendant’s Motion to Dismiss, and the District Court held that CA’s Cosmetology Act did not preclude Plaintiff’s arguments that they were employees under state wage laws as a matter of law. Accordingly, the Ninth Circuit affirmed the district court’s decision that Defendants waived their right to arbitration.