Southern District Grants Stay Pending Appeal of Denial of Class-Wide Arbitration
The Southern District of California granted a stay of proceedings pending appeal of the trial court’s refusal to compel class-wide arbitration. Del Rio v. CreditAnswers, LLC, No. 10cv346-WQH-BLM, 2010 WL 3418430 (S.D. Cal. Aug. 26, 2010) (slip op.).
Plaintiff Luis Del Rio (“Del Rio”) filed a putative class action complaint alleging that Defendant CreditAnswers, LLC (“CreditAnswers”) “operates a for-profit debt settlement company,” which offers a “debt settlement program … targeted to consumers with thousands of dollars of unsecured debt.” Id. *1. Attached to the Complaint is a Debt Settlement Agreement (“Agreement”), which has the “electronic signature” of Plaintiff. Id. The Agreement contains the following arbitration clause:
9. Arbitration of Dispute. In the event of controversy, claim or dispute between the parties arising out of or relating to this agreement or the breach, termination, enforcement, interpretation or validity thereof, including the termination of the scope or applicability of this agreement to arbitrate, shall be determined exclusively by arbitration in Collin County, Texas, or in the county in which the Client resides, in accordance with the laws of the State of Texas or agreements to be made in and to be performed in Texas. The parties agree, the arbitration shall be administered by the American Arbitration Association (‘AAA’) pursuant to its rules and procedures…. The parties agree that either party may bring claims against the other only in his/her or its individual capacity and not as a plaintiff or class member in any purported class or representative proceeding. Further, the parties agree that the arbitrator may not consolidate proceedings of more than one person’s claims, and may not preside over any form of representative or class proceeding. The parties shall share the cost of arbitration, not to include attorney’s fees, equally. If the Client’s share of the costs is greater than $1,000.00 (one thousand dollars), the company will pay the Client’s share of costs in excess of that amount. In the event a party fails to proceed with arbitration, unsuccessfully challenges the arbitrator’s award, or fails to comply with the arbitrator’s award, the other party is entitled to costs of suit, including a reasonable attorney’s fee for having to compel arbitration or defend or enforce the award.
The court issued an order denying the Petition to Compel Arbitration. Id. *2. The Court held: (1) the class action waiver in the Agreement’s arbitration provision is unconscionable under California law; (2) the validity of the arbitration provision is governed by California law; and (3) the class action waiver renders the entire arbitration provision unenforceable.
CreditAnswers filed a Notice of Appeal and then a Motion to Stay.
The court noted that unlike in other jurisdictions, in the Ninth Circuit, a district court has discretion to decide whether to grant a stay. Id. (citing Britton v. Co-op Banking Group, 916 F.2d 1405, 1412 (9th Cir. 1990)). The court recited the factors regulating the issuance of a stay as follows:
(1) whether the stay applicant has made a strong showing that he is likely to succeed on the merits; (2) whether the applicant will be irreparably injured absent a stay; (3) whether issuance of the stay will substantially injure the other parties interested in the proceeding; and (4) where the public interest lies. Hilton v. Braunskill, 481 U.S. 770, 776 (1987). The Court of Appeals for the Ninth Circuit applies the Hilton factors by requiring the party seeking a stay to show either (1) “a strong likelihood of success on the merits [of its appeal] and the possibility of irreparable harm,” or (2) “that serious legal questions are raised and that the balance of hardships tips sharply in its favor.” Golden Gate Rest. Ass’n v. City & County of San Francisco, 512 F.3d 1112, 1115 (9th Cir. 2008). . . . These two alternatives “represent two points on a sliding scale in which the required degree of irreparable harm increases as the probability of success decreases.” Id. at 1116 (quotation omitted). A court must “consider where the public interest lies separately from and in addition to whether the applicant for stay will be irreparably injured absent a stay.” Id. (quotations omitted).
The court found that whether the arbitration provision in the Agreement is enforceable under California law presents a serious legal question, particularly in light of the Supreme Court’s grant of certiorari in AT&T Mobility, LLC v. Concepcion:
In particular, whether the amount of damages at issue in this action satisfies the test enunciated in Discover Bank v. Superior Court, 36 Cal.4th 148 (2005), presents a “substantial question,” Britton, 916 F.2d at 1412. See May 27, 2010 Order at 7-9, Doc. # 18. A second substantial question is presented by virtue of the recent grant of certiorari by the United States Supreme Court in AT & T Mobility, LLC v. Concepcion, 130 S.Ct. 3322 (May 24, 2010), which concerns the issue of whether the Federal Arbitration Act preempts California’s rules regarding the enforceability of arbitration agreements prohibiting class-wide arbitration. [FN1] See Pet. Writ Certiorari, AT & T Mobility, LLC v. Concepcion, 2010 WL 304265 at *2.
The court also found that that CreditAnswers has shown that it will suffer irreparable injury absent a stay.
“The difference in litigation expenses between a two-party case and a class action is substantial. In addition, arbitration offers “speed and economy” which may be “lost forever” if CreditAnswers is required to engage in formal discovery prior to the resolution of its appeal.
Id. *3. The court was not persuaded by plaintiff’s contention that the class would be significantly injured if the stay is granted because “Defendant retains potentially millions of dollars from Plaintiff and the putative classes in the form of unlawfully collected service fees, and Defendant continues to unlawfully extract these monies.” Id. Plaintiff is no longer enrolled in CreditAnswers’ program, and no longer paying CreditAnswers’ allegedly unlawful fees. And Plaintiff had previously contended that “any recovery a prospective plaintiff would legitimately seek against Defendant would be minimal-between $500 and $3,000 in most instances”, which the court did constitute a significant injury. Id. Thus, the court found that the balance of hardships tips sharply in CreditAnswers’ favor. Id. *4.
The court further found that a “stay pending the outcome of the appeal will serve the public interest by potentially preserving judicial resources and promoting the ‘strong federal policy encouraging arbitration as a prompt, economical and adequate method of dispute resolution for those who agree to it.’” Id. *5 (citing A.G. Edwards & Sons, Inc. v. McCollough, 967 F.2d 1401, 1404 n.2 (9th Cir. 1992)). The court noted that “[i]f the allegations of fraud have merit, any delay harms the public interest…. A delay of proceedings will allow any harm to the putative class members to continue, and therefore may materially affect the public interest in vindicating the rights of consumers.” Id. (citing Bradberry v. T-Mobile USA, Inc., No. C06-6567, 2007 WL 2221076, at *5 (N.D. Cal., Aug. 2, 2007)). But on balance, the Court found that the public interest is better served by staying the action pending appeal. Id.
The court concluded:
[S]erious legal questions are raised by CreditAnswers’ appeal, the balance of hardships tips sharply in CreditAnswers’ favor, and the public interest is better served by staying this action. Accordingly, the Motion to Stay is granted.
District Judge Hayes.