District Court (Cal.) Sends Rosenthal Act Case to Arbitration Despite Creditor Having Filed Collection Action in State Court, But Preserves Debtor’s Right to Argue Waiver Before the Arbitrator

Ngo contends that Defendants waived their right to demand arbitration by filing a civil action against in him in the California Superior Court for the County of San Francisco, rather than pursuing arbitration of Defendants’ claim for Ngo’s purported failure to repay his loan. . . .Defendant PMRI, through its agent Defendant Kenosian, filed the state court action against Ngo as a limited civil action, checking a box indicating that the amount demanded was “$25,000 or less.” RJN Ex. 2 at 9 of 138. The complaint sought damages totaling $5,398.14, plus unspecified attorneys’ fees and costs. Id. at 17 of 138. Given the clear distinction between small claims actions and limited civil actions under California law, and the fact that the demand of the state court complaint exceeded the jurisdiction of a California small claims court for a claim by a corporate entity, Defendants’ argument that their civil action falls within the arbitration agreement’s exception for “small claims tribunals” is frivolous.  The question, then, is whether Defendants’ filing of a civil action in state court rather than a claim for arbitration waives their right to demand arbitration of Ngo’s claims here. The parties agree that the test described by a California appellate court in Aviation Data, Inc. v. American Express Travel Related Services Co., 152 Cal. App. 4th 1522 (2007), applies to this case:  “To prove that a waiver of arbitration exists, a party must demonstrate ‘(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.’ [Letizia v. Prudential Bache Sec., 802 F.2d 1185, 1187 (9th Cir. 1986).] The party arguing waiver ‘bears a heavy burden of proof.’ [Fisher v. A.G. Becker Paribas, Inc., 791 F.2d 691, 694 (9th Cir. 1986).] Any doubts as to waiver are resolved in favor of arbitration. [See Moses H. Cone, 460 U.S. 1, 24–25 (1983).]” Aviation Data, 152 Cal. App. 4th at 1537 (quoting Creative Telecomms., Inc. v. Breeden, 120 F. Supp. 2d 1225, 1232 (D. Haw. 1999) (internal citations in brackets appear in Creative Telecommunications but were omitted in Aviation Data); see also Mot. at 9 (quoting this standard); Opp’n at 6 (same). The Aviation Data court described this as “the federal rule,” but held that the “California rule on such a litigation waiver is in accord.” Aviation Data, 152 Cal. App. 4th at 1537 (citing St. Agnes Med. Ctr. v. PacifiCare of Cal., 31 Cal. 4th 1187, 1195 (2003)). . . .It is worth noting that Defendants’ decision to file the state court action rather than pursue arbitration did not merely fail to utilize a right granted by the loan agreement, but in fact appears to have violated the loan agreement’s arbitration provision. The agreement provides in relevant part that, unless pursued in a small claims court, “all disputes…shall be resolved by binding arbitration.” Guzman Decl. Ex. A at 4, ¶ 2; see also id. at 5, ¶ 5. The term “disputes” is defined to “all claims asserted by us [i.e., LoanMe and its successors or agents] against you [i.e., Ngo], including claims for money damages to collect any sum we claim you owe us.” Id. at 3. This might be a relevant consideration in determining whether Defendants waived the right to arbitrate claims arising out of their own litigation activities taken in apparent violation of the agreement to arbitrate, as Ngo’s claims do here.  The parties’ initial briefs failed to address, however, the question of whether waiver is itself an issue for this Court to decide, or for an arbitrator. The Supreme Court has held that waiver is not a “question of arbitrability” presumptively for a court to decide, but instead falls among a class of “ ‘procedural’ questions which grow out of the dispute and bear on its final disposition [that] are presumptively not for the judge, but for an arbitrator, to decide.” Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 84 (2002) (citation and internal quotation marks omitted). Thus, “the presumption is that the arbitrator should decide ‘allegation[s] of waiver, delay, or a like defense to arbitrability.’ ” Id. (quoting Moses H. Cone, 460 U.S. at 24–25) (emphasis added). That presumption holds particularly true here, where the arbitration agreement at issue explicitly delegates to the arbitrator “disputes…arising from or relating directly or indirectly to the signing of this Arbitration Provision, the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision.” Guzman Decl. Ex. A at 3; see also Mohamed, 848 F.3d at 1208–09 (holding that even certain threshold issues not presumptively allocated to an arbitrator may be delegated to an arbitrator if such intent is clearly stated in an arbitration agreement) (citing, e.g., Rent-A-Center, W., Inc. v. Jackson, 561 U.S. 63, 67 (2010)).   In his supplemental brief, Ngo cites section 1281.2 of the California Code of Civil Procedure, which states that a court shall compel arbitration “unless it determines that…[t]he right to compel arbitration has been waived by the petitioner.” Cal. Civ. Proc. Code § 1281.2; Supp’l Br. at 1–2. The Court explicitly and unequivocally denied Ngo’s request at the hearing to address this issue in his supplemental brief, instead limiting the scope of that brief to the supplemental evidence submitted by Defendants. Regardless, as noted above, the Ninth Circuit and Supreme Court have construed the FAA as requiring courts to enforce parties’ explicit agreements to arbitrate threshold issues of arbitrability. Rent-A-Ctr., 561 U.S. at 70 (“An agreement to arbitrate a gateway issue is simply an additional, antecedent agreement the party seeking arbitration asks the federal court to enforce, and the FAA operates on this additional arbitration agreement just as it does on any other.”); Mohamed, 848 F.3d at 1208–09. The Supreme Court has also held that “[w]hen state law prohibits outright the arbitration of a particular type of claim, the analysis is straightforward: The conflicting rule is displaced by the FAA.” AT&T Mobility LLC v. Concepcion, 563 U.S. 333, 341 (2011). Reading Rent-A-Center and Concepcion together, state law cannot prohibit arbitration of threshold issues of arbitrability if the parties have expressly agreed to arbitrate them in a contract governed by the FAA.  The broad scope of the delegation clause here encompasses a claim of waiver, as falling within “disputes [regarding] the validity and scope of this Arbitration Provision and any claim or attempt to set aside this Arbitration Provision.” See Guzman Decl. Ex. A at 3. To the extent that section 1281.2 could be construed as requiring judicial determination rather than arbitration of waiver under these circumstances, it is preempted by the FAA. The Court need not decide whether, in the absence of an express delegation clause, section 1281.2 controls over “the presumption…that the arbitrator should decide ‘allegation[s] of waiver, delay, or a like defense to arbitrability.’ ” See Howsam, 537 U.S. at 84 (quoting Moses H. Cone, 460 U.S. at 24–25). Accordingly, the Court holds that although the motion to compel arbitration cannot be denied on the basis of waiver, Ngo remains free to assert this argument to an arbitrator.