On September 13, 2013, in Morgan v. AT & T Wireless Services, Inc., Case No. B241242, 2013 WL 5034436 (Cal. Ct. App. Sept. 13, 2013), a California Court of Appeal reversed an order denying class certification, concluding that when a defendant waives its rights to compel arbitration, the waiver applies to the entire class. As a result, companies facing consumer class action lawsuits in California must be especially mindful of their discovery tactics if they intend to move to compel arbitration.

In Morgan, plaintiffs allege consumers who purchased Sony Ericsson T68i phones in 2003 for use with AT & T Wireless Services, Inc. (i.e., the predecessor to AT & T Mobility, hereinafter “AT&T”) were wrongfully deprived of use of their phones when AT&T made changes to its network. 2013 WL 5034436 at *1. Though AT&T provided free replacement phones to T68i phone purchasers, plaintiffs allege that the replacement phones were inadequate. Id. The plaintiffs seek relief under California’s Unfair Competition Law (Cal. Bus. & Prof. Code § 17200) and the California Consumers Legal Remedies Act (Cal. Civ. Code § 1750). Id. at *2.

All consumers who purchased T68i phones signed service contracts containing an arbitration provision and a second provision stating, “[y]ou and [AT&T] both agree that any arbitration will be conducted on an individual basis and not on a consolidated classwide or representative basis.” Id. at *1. In November 2011, six months after the U.S. Supreme Court held in AT &T Mobility LLC v. Concepcion, 131 S. Ct. 1740 (2011) that the Federal Arbitration Act (“FAA”) preempts state laws from invalidating collective arbitration waivers in consumer contracts, AT&T moved to compel arbitration. Id. at *3. (The court had denied a similar motion earlier in the case, before the Concepcion decision.) AT&T filed its motion after the plaintiffs moved to certify a class, and after engaging in “significant class certification-related discovery.” Id. at *2.

The trial court denied AT&T’s motion to compel arbitration because AT&T delayed filing for more than six months after Concepcion was decided and engaged in class-related discovery. Id. However, the trial court allowed AT&T to oppose class certification on the grounds that the arbitration provisions in the putative class members’ service contracts precluded certification. Id. Ultimately, the court denied the motion for class certification. Id. The trial court held that AT&T’s pre-certification discovery waived its right to compel arbitration of only the named plaintiffs’ claims because a defendant cannot move to compel arbitration of putative class members’ claims before the named plaintiffs move to certify a class. Id. Per the trial court, since AT&T could still move to compel putative class members to arbitrate, named class members, who were no longer subject to arbitration as a result of the discovery, were atypical, and class certification was improper. Id. at *3.

The Court of Appeal lambasted the trial court’s decision and reversed the denial. Id. at *5. It reasoned that “undertaking class-related discovery before moving to compel arbitration was manifestly incompatible with a desire to engage in arbitration as to the named plaintiffs and the putative class members.” Id. According to the court, even if a corporate defendant only takes discovery after a certification motion is filed, and for the specific purpose of acquiring information to defeat class certification, doing so before moving to compel arbitration amounts to participating in the litigation “on the plaintiffs’ terms, i.e., a putative class action[,]” and waives the defendant’s right to compel arbitration of the whole class.

Notably, the Court of Appeal restricted its decision to the circumstances presented in Morgan, where “the putative class members are readily definable (purchasers of T68i phones), limited in time and not prospective (because as of 2004 the phones were no longer being sold), and all were at least potentially subject to arbitration agreements (aside from individual claims of lack of enforceability).” Id. at *6. Thus, it is possible that where one of these elements is not present – particularly where not all putative class members may be subject to an arbitration agreement – the waiver as to one, waiver as to all holding in Morgan may not apply.

In any event, the Morgan decision reinforces the importance for companies that sell products with adhesion contracts containing mandatory arbitration provisions and that face consumer class action lawsuits, at least in California, to move to compel arbitration before participating in class discovery.