Zaborowski et al v. MHN Government Services, Inc. et al

Filing 84

ORDER GRANTING PLAINTIFFS' MOTION TO STAY CASE PENDING APPEAL 81 (Illston, Susan) (Filed on 5/1/2013)

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IN THE UNITED STATES DISTRICT COURT

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FOR THE NORTHERN DISTRICT OF CALIFORNIA

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THOMAS ZABOROWSKI, et. al, on behalf of
themselves and a putative class,

United States District Court
For the Northern District of California

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ORDER GRANTING PLAINTIFFS’
MOTION TO STAY CASE PENDING
APPEAL

Plaintiffs,

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No. C 12-05109 SI

v.
MHN GOVERNMENT SERVICES, INC. and
MANAGED HEALTH NETWORK, INC.,
Defendants.

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Currently before the Court is defendants’ motion to stay the case pending the appeal of this
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Court’s order denying defendants’ motion to compel arbitration (“Arbitration Order”). Pursuant to Civil
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Local Rule 7-1(b), the Court determines that this matter is appropriate for resolution without oral
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argument. Having carefully considered the papers submitted, the motion is GRANTED, for the reasons
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set forth below.
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BACKGROUND
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Plaintiffs in this putative class action contracted to provided counseling services for defendants
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MHN Government Services, Inc. and Managed Health Network, Inc. (collectively “MHN”), as Military
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Family Life Consultants (“MFLCs” or “MFL Consultants”). On November 1, 2012, defendants moved
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to compel arbitration pursuant to an arbitration clause in the services contract between the MFL
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Consultants and MHN. The Court heard argument on the motion on March 15, 2013. Before the Court
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could issue a decision on the motion to compel arbitration, defendants moved to stay the case. On April
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3, 2013, the Court denied the motion to compel arbitration, and defendants appealed the Arbitration

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Order.

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On March 14, 2013, plaintiffs filed a motion for conditional FLSA collective action certification.

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The Court granted plaintiff’s motion for conditional FLSA collective action certification, and ordered

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the parties to jointly file a proposed notice by no later than May 3, 2013. After that order was issued,

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defendants renoticed their motion to stay the case pending the appeal of the Arbitration Order.
A substantially similar case is pending in the United States District Court for the Western

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District of Washington, Hiett v. MHN Gov’t Servs., Inc., No. 3:12-cv-5428 (filed on May 15, 2012).

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In that case, as in this case, the MHN defendants moved to compel arbitration, and the court denied the

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United States District Court
For the Northern District of California

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motion. However, that case is stayed pending resolution by the Washington Supreme Court of the

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“identical” arbitration issue presented in another case against MHN, Brown v. MHN Government

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Services, Inc., Pierce County No. 11-2-08582-7.

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LEGAL STANDARD

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A district court’s order denying a motion to compel arbitration does not effectuate an automatic

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stay of proceedings pending appeal. Britton v. Co-op Banking Group, 916 F.2d 1405, 1412 (9th Cir.

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1990). The system created by the Federal Arbitration Act (“FAA”) allows a district court to evaluate

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the merits of the moving party’s claim, and to grant or deny a stay as a matter of discretion, dependent

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on the case’s particular facts. Id. The party requesting the stay thus bears the burden of showing that

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the case’s circumstances justify favorable exercise of that discretion. Nken v. Holder, 556 U.S. 418,

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433-34 (2009).

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To determine whether the moving party has met its burden, the Ninth Circuit adheres to a four-

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factor test: (1) whether the party has made a strong showing it is likely to succeed on the merits; (2)

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whether it will be irreparably injured absent a stay; (3) whether issuance of a stay will substantially

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injure the other parties in the proceeding; and (4) where the public’s interest lies. Leiva-Perez v. Holder,

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640 F.3d 962, 964 (9th Cir. 2011); Nken, 556 U.S. at 434.

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In weighing these factors, courts apply a “sliding scale,” whereby the elements of the test are

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balanced “so that a stronger showing of one element may offset a weaker showing of another.” Leiva2

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Perez, 640 F.3d at 964. In particular, a moving party who under the first factor cannot satisfy a strong

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likelihood of success, must at minimum show that its appeal presents “a substantial case on the merits.”

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Id. at 965. Courts alternatively articulate this lesser threshold as whether “serious legal issues” are

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raised. See Abbassi v. INS, 143 F.3d 513, 514 (9th Cir. 1998). A party meeting this lower threshold is

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not required to show that it is more likely than not to win on the merits, but must then demonstrate that

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the balance of hardships under the second and third factors tilts sharply in its favor. Leiva-Perez, 640

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F.3d at 966, 970.

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United States District Court
For the Northern District of California

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DISCUSSION
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Likelihood of Success or Substantial Legal Question

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Defendants argue that the pending appeal involves serious legal questions because the

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application of a recent Supreme Court case, AT&T Mobility LLC v. Concepcion, 131 S. Ct. 1740, 1746

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(2011), to California law governing arbitration agreements is still being determined by California and

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federal courts. Plaintiffs argue that the appeal is not likely to succeed, because the many substantively

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and procedurally unconscionable aspects of the arbitration agreement make it unlikely that the Ninth

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Circuit will overturn the Arbitration Order.

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To satisfy the first factor, defendants need not show a strong likelihood of success on appeal;

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a substantial case on the merits exists if there is a serious legal question to be answered by the court of

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appeals and the “balance of equities” of the final three factors strongly weigh in favor of granting a stay.

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Leiva-Perez, 640 F.3d at 967-70.

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Here, defendant’s appeal presents a legitimate, substantial question as to the applicability of the

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FAA to California law governing arbitration agreements. Although Concepcion explicitly left

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unconscionability available as a defense to arbitration agreements, the exact contours of this defense

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after Concepcion are still being determined by California and federal courts.

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2.

Irreparable Harm to Defendants

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Generally, monetary expenses incurred in litigation are not considered irreparable harm.

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However, arbitration is unique in this aspect. If a party must undergo the expense of trial before being
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able to appeal denial of a motion to compel arbitration, the anticipated advantages of arbitration – speed

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and economy – are lost. Alascom, Inc. v. ITT North Elec. Co., 727 F.2d 1419, 1422 (9th Cir.1984).

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If this litigation proceeds through trial, MHN will face substantial costs in defending it, which

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would affect the cost-limiting purpose of arbitration. The Court therefore finds that it is appropriate to

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stay the action to allow the arbitration appeal to be decided prior to trial. However, the costs that MHN

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will incur in notifying the conditionally certified FLSA class will not defeat the purpose of the

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arbitration agreement. These MFL Consultants will have the option to join this case or to undergo

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arbitration of their claims alone. Even if the Arbitration Order is reversed or the conditional FLSA class

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is decertified, the MFL Consultants may proceed with their claims in arbitration.1

United States District Court
For the Northern District of California

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Thus, the Court determines that, in the limited context of an interlocutory appeal of the

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Arbitration Order and once the conditionally certified FLSA class has received its notification,

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defendant would be irreparably harmed if the Court did not enter a stay.

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3.

Prejudice to the Plaintiffs

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Plaintiffs argue that they will be harmed if a stay is granted because the MFL Consultants would

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not be informed of their potential claims against MHN, and therefore evidence and memories may be

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lost, statutes of limitations may run, and relief would be delayed.

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The Court finds that, if MFL Consultants receive notification of the case prior to the effectuation

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of the stay, most of plaintiffs’ concerns are alleviated. Memories, evidence, and claims will be

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preserved. Although relief may be delayed, this case is still in its earliest stages, relief through the court

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system often takes a long time, and the delay may be mitigated by remedies such as prejudgment

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interest.

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Thus, the Court finds that plaintiffs will not suffer substantial harm from a stay of the case.

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4.

The Public Interest
The policy underlying the FAA is to promote judicial efficiency and economy. Thus, contrary

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The parties dispute whether MFL Consultants may proceed in arbitration as a class. The Court
need not decide that issue. Either way, arbitration remains an option for them.
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to public policy, judicial resources will be wasted if this case proceeds all the way to trial, only for the

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Court to later discover that the case should have proceeded through arbitration. Moreover, the unique

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procedural posture in this case raises further concerns for judicial efficiency. The Western District of

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Washington also stayed its substantially similar case pending resolution of the arbitrability question by

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the Washington Supreme Court in Brown. Because of the various stays, it has not yet been determined

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whether any of these cases are related and should be handled in tandem.

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Accordingly, the Court finds that the public interest weighs in favor of a stay.

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CONCLUSION

United States District Court
For the Northern District of California

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For the foregoing reasons, the Court GRANTS plaintiffs’ motion to stay the case pending appeal

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of the Arbitration Order. The stay shall become effective once the conditionally certified FLSA class

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has received its notification and invitation to opt into the case. The Court ORDERS the parties to

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incorporate information regarding the stay in their proposed notice, which shall be filed with the Court

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by no later than May 6, 2013. This resolves Docket Nos. 59, 81.

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IT IS SO ORDERED.

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Dated: May 1, 2013
SUSAN ILLSTON
United States District Judge

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