Six Months’ of Litigation Insufficient to Forfeit Right to Arbitrate, with Decent Excuse — How Little Is Required to Prove “Interstate Commerce” Triggering FAA — State Choice of Law Clause Does Not Trump FAA

Rota-McLarty v. Santander Consumer USA, Inc., 2012 U.S. App. LEXIS 24447 (4th Cir Nov. 28, 2012):

Rota-McLarty filed a putative class action in state court against Santander on March 9, 2010, alleging violations of various Maryland consumer protection laws for undisclosed finance charges and other unfair business practices. On April 13, 2010, Santander removed the complaint to federal court on the basis of diversity. Santander filed an answer the next day, and within a month the parties had agreed on a bifurcated discovery schedule, whereby the first stage would focus on the issue of hidden finance charges, with class and other discovery to follow. During the brief discovery period that ensued, Santander took Rota-McLarty's [*4] deposition on both stage one and stage two issues, and Rota-McLarty took Easterns's deposition and sought production of various documents. One such document was a letter Easterns had received from Santander in 2007, detailing the terms of the RISC assignment, which Rota-McLarty asserts supports her hidden finance charge allegations.

On September 30, 2010, Santander moved to compel non-class arbitration of Rota-McLarty's claims and to stay the proceedings in federal court. Santander claimed the delay in seeking arbitration was caused by uncertainty in the law regarding whether it would be forced into class arbitration, which was clarified by the Supreme Court's decision in Stolt-Nielsen S.A. v. AnimalFeeds Int'l Corp., 559 U.S. , 130 S.Ct. 1758, 1775 (2010) ("[A] party may not be compelled under the FAA to submit to class arbitration unless there is a contractual basis for concluding that the party agreed to do so."). Santander waited longer, until a district court had applied Stolt-Nielsen in the consumer context, to file its motion. ***

The underlying transaction here is simply a consumer credit arrangement between a citizen of one state and a financing company in another. Although diversity of citizenship--or lack thereof--is not by itself enough to determine the nature of a transaction, see Maxum Founds., Inc. v. Salus Corp., 779 F.2d 974, 978 n.4 (4th Cir. 1985) ("[T]he mere circumstance of diversity of citizenship between [the parties] is not sufficient to command the application of the [FAA]."), we need not rely solely on it here. The financing, which originated from a foreign state, was integral to Rota-McLarty's purchase of the used car from Easterns. We agree with sister circuits, which have concluded that reliance upon funds from a foreign source in a transaction is sufficient to implicate the FAA. See, e.g., Jenkins v. First Am. Cash Advance of Georgia, 400 F.3d 868, 874-75 (11th Cir. 2005) ("payday loan" completed by a Georgia consumer in the Georgia office of loan company involved interstate commerce where the funds were approved and disbursed by a national bank based in South Dakota). Therefore, the FAA applies.

Our conclusion is bolstered by two additional factors. First, we have held that the FAA does not impose a burden upon the party invoking the FAA to put forth specific evidence proving the interstate nature of the transaction. Maxum, 779 F.2d at 978 n.4 ("Where . . . the party seeking arbitration alleges that the transaction is within the scope of the [FAA], and the party opposing application of the [FAA] does not come forward with evidence to rebut jurisdiction under the federal statute, we do not read into the [FAA] a requirement of further proof by the party invoking the federal law."). Santander has made the requisite initial showing, which Rota-McLarty has failed to rebut. Indeed, she admits "the interstate nature of the transaction embodied in the RISC . . . should be hardly controversial," Appellee's Br. at 9, and we agree.

Footnote 7. Rota-McLarty contends that because the Buyer's Order contains a Maryland choice-of-law provision, Maryland law must govern the arbitration provision as well. See J.A. 17 ("This Agreement shall be governed and controlled in accordance with the laws of the State of Maryland.") Rota-McLarty's argument misunderstands several points of law. Unquestionably, a contract's general choice-of-law provision does not displace federal arbitration law if the contract involves interstate commerce. See Porter v. Hayden Co. v. Century Indem. Co., 136 F.3d 380, 382 (4th Cir. 1998) ("The Supreme Court has . . . squarely rejected the argument that a federal court should read a contract's general choice-of-law provision as invoking state law of arbitrability and displacing federal arbitration law."); Maxum, 779 F.2d at 978. Thus, while the general choice-of-law provision invokes Maryland substantive law for issues of contract interpretation--including the validity, enforceability, or revocability of the arbitration agreement--and for Rota-McLarty's consumer protection claims, it is irrelevant to the decision whether the FAA applies.

Second, in deciding to apply the FAA, we need not identify any specific effect upon interstate commerce, so long as "in the aggregate the economic activity in question would represent 'a general practice . . . subject to federal control.'" Citizens Bank v. Alafabco, Inc., 539 U.S. 52, 56-57 (2003) (citation omitted). We agree with Santander that "the broad impact of consumer automobile lending on the national economy" is evident. Appellant's Br. at 28; cf. Citizen's Bank, 539 U.S. at 58 ("[W]ere there any residual doubt about the magnitude of the impact on interstate commerce caused by the particular economic transactions in which the parties were engaged, that doubt would dissipate upon consideration of the 'general practice' those transactions represent. No elaborate explanation is needed to make evident the broad impact of commercial lending on the national economy or Congress's power to regulate that activity pursuant to the Commerce Clause." (internal citation omitted)).

***

Finally, we examine the district court's finding that Santander waived its right to enforce the arbitration agreement. ***

Applying Maryland arbitration law, the district court found that whether a party has waived its right to arbitrate depends on "the extent of its participation in judicial proceedings, including whether an answer has been filed; whether there was a legitimate reason for the participation; and whether the delay in seeking arbitration prejudiced the other party." J.A. 137. Additionally, the court proclaimed that the "'belated insistence on arbitration [that] has all the markings of a simple strategic decision' is improper." [*23] Id. (quoting Abramson v. Wildman, 964 A.2d 703, 710 (Md. Ct. Spec. App. 2009)). The district court then concluded that Santander had waived its right to arbitrate for four reasons: (1) Santander's delay in moving to compel arbitration; (2) Santander's participation in "discovery about Rota-McLarty's allegations of hidden finance charges, which included exchanging hundreds of pages of documents, serving and responding to interrogatories, and taking Rota-McLarty's deposition on all allegations," J.A. 138; (3) Santander's strategic decision based on its fear that class discovery would have been compelled prior to Stolt-Nielsen "is not a legitimate reason for engaging in litigation rather than immediately seeking arbitration," id.; and (4) Santander's failure to rebut Rota-McLarty's contention that Santander had delayed in order to use litigation to "fully evaluate [Rota-McLarty's] case," id. We must reject the district court's reliance on each of these findings, for the reasons that follow.

As a threshold matter, we note the district court erred by applying the wrong law. Under the FAA, a party may lose its right to compel arbitration if it "is in default in proceeding with such arbitration." 9 U.S.C. § 3. This principle of "default" is akin to waiver, but not identical. Unlike some waiver doctrines, "the circumstances giving rise to a statutory default are limited and, in light of the federal policy favoring arbitration, are not to be lightly inferred," Maxum, 779 F.2d at 981, and the party opposing arbitration bears a heavy burden to prove default, Am. Recovery Corp. v. Computerized Thermal Imaging, Inc., 96 F.3d 88, 95 (4th Cir. 1996).

Generally, a litigant defaults on its right to invoke the FAA where it "'so substantially utiliz[es] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay.'" Forrester, 553 F.3d at 343 (citation omitted). "Where a party fails to demand arbitration during pretrial proceedings, and, in the meantime, engages in pretrial activity inconsistent with an intent to arbitrate, the party later opposing a motion to compel arbitration may more easily show that its position has been compromised, i.e., prejudiced." Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250, 252 (4th Cir. 1987) (internal quotation marks omitted). The dispositive determination is whether the opposing party has suffered actual prejudice. Microstrategy, Inc. v. Lauricia, 268 F.3d at 249 (citing Fraser, 817 F.2d at 252); see also Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 205 (4th Cir. 2004). Two factors specifically inform our inquiry into actual prejudice: (1) the amount of the delay; and (2) the extent of the moving party's trial-oriented activity. Microstrategy, 268 F.3d at 249. Notably, the moving party's reason for delay is not relevant to the default inquiry under our precedent. We consider each of the two factors in turn.

Footnote 12. We are not unsympathetic to Rota-McLarty's position that parties should not be allowed to game the system and delay seeking arbitration to see how things go in federal court and thereby get "a second bite at the apple." In re Mirant Corp., 613 F.3d 584, 590 (5th Cir. 2010). As some of our sister circuits have pointed out in cases cited by Rota-McLarty, there are many reasons to favor the earliest possible selection of forum, including efficiency, preservation of judicial resources, and fairness. See, e.g., Cabinetree of Wisconsin v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (8th Cir. 1995) (noting that a party's desire to "weigh its options" in deciding whether to seek to compel arbitration while the litigation goes on is "the worst possible reason for delay" and amounts to "want[ing] to play heads I win, tails you lose"); Fisher v. A.G. Becker Paribas, Inc., 791 F.2d 691, 694 (9th Cir. 1986) ( default may be established if the opposing party can show: "(1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts"). However, in keeping with the strong policy in favor of arbitration established by the FAA, the Fourth Circuit has not expanded the default analysis to include consideration of a party's knowledge or motive. And, even under such a test, Rota-McLarty has failed to establish Santander was attempting to game the system, such as by seeking arbitration after the district court's unfavorable disposition of a motion or discovery dispute.

a.

First, in comparison to our decisions considering the issue, the length of delay in this case was relatively short. At most, Santander waited six and a half months --from the date Rota-McLarty filed her complaint in state court--to file its motion to compel arbitration and stay proceedings in federal court.13 We have previously held that a delay of several months, without more, is insufficient to demonstrate the opposing party suffered actual prejudice. See, e.g., Patten, 380 F.3d at 205 (no prejudice inherent in four-month delay); Maxum, 779 F.2d at 982 (same, with three-month delay); cf. Forrester, 553 F.3d at 343-44 (default proper where litigation had proceeded for over two years before the moving party sought arbitration); Fraser, 817 F.2d at 252-53 (same, with four-year delay).

Here, nothing in the record supports a finding that Rota-McLarty was prejudiced by the length of the delay itself. Her general assertion that she "committed substantial resources to the case on the premise that the Court would have an opportunity to rule on a motion for class certification," ... is both unsubstantiated and unconvincing. Although incurring significant expense as a result of extended litigation can be part of actual prejudice, such cases usually involve resources expended specifically in response to motions filed by the party who later seeks arbitration. See, e.g., Fraser, 817 F.2d at 252 (prejudice found in part because opposing party "had to respond to a number of potentially damaging motions, including a motion for partial summary judgment and three motions to dismiss.") And where, as here, Rota-McLarty has provided no evidentiary support for her claimed "significant expense," this argument fails entirely. Patten, 380 F.3d at 208 (declining to base prejudice on costs incurred where the opposing party failed to adequately prove the expense). Consequently, we conclude the district court erred to the extent it based its determination of default on the length of delay.

b.

The second factor in our prejudice inquiry looks to the nature and extent of Santander's litigation activities. Here, Santander "utilized the litigation machinery" in a few--mostly minimal--ways: it removed the complaint to federal court, filed an answer, proposed a bifurcated discovery plan, took Rota-McLarty's deposition on both phase one and phase two issues, and waited for clarity in the law in order to avoid class arbitration. No dispositive motions were filed. For her part, Rota-McLarty engaged in some discovery as well, which resulted in Easterns's production of a document that Rota-McLarty styles as a smoking gun proving her claim of an undisclosed finance charge. Rota-McLarty asserts these activities support a finding of prejudice because Santander proposed a two-phase plan that limited her discovery rights, while ignoring those limitations itself by taking her deposition on both phases, and exploiting pre-trial discovery not available in arbitration.

Like the district court, Rota-McLarty fails to tether her discussion of Santander's litigation activities to any actual prejudice. She does not explain how either her deposition or the document produced [*31] by Easterns would be to Santander's advantage, or unavailable, in arbitration. Neither the district court nor Rota-McLarty specified what aspect of Rota-McLarty's litigation strategy was revealed,16 or what benefit Santander has gained through litigation at Rota-McLarty's expense, thereby prejudicing her. The mere participation in discovery is not sufficient to indicate default. See Maxum, 779 F.2d at 982 (finding opposing party was not prejudiced by moving party's attendance at depositions, even though it may have benefited for purposes of later arbitration proceeding, and "declin[ing] to create a rule that would require a party seeking arbitration to avoid a finding of default by ignoring court-ordered discovery deadlines"). Consequently, Rota-McLarty has failed to establish the prejudice necessary to justify finding Santander defaulted on its right to enforce the arbitration agreement under the FAA. Rota-McLarty's claims should be sent to arbitration pursuant to the parties' agreement.

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