The Third Circuit Court of Appeals has overturned a lower court’s finding that Avis Budget Group waived its right to enforce arbitration clauses against customers in a long-running class action lawsuit. The appellate court ruled that Avis’s actions during years of litigation did not demonstrate an intentional preference for the court system over private arbitration, even though the company delayed seeking arbitration until a class was formally certified.
The case, brought by named plaintiffs Dawn Valli and Anton S. Dubinsky, stems from rental agreements signed in 2014, before Avis updated its terms and conditions to include mandatory arbitration provisions in April 2016. The lawsuit alleged that Avis improperly handled traffic and toll violations by paying fines upfront and then charging customers administrative fees without giving them a chance to contest the underlying infractions.
The Core Dispute: Waiver vs. Futility
The central issue before the Third Circuit was whether Avis waived its contractual right to arbitrate by engaging in extensive litigation—including filing motions to dismiss and participating in discovery and mediation—for years before finally moving to compel individual arbitration.
The District Court had concluded that Avis waived this right, relying partly on the fact that the company waited until after the class was certified in 2023 to formally demand arbitration. The District Court suggested this lengthy participation showed a preference for litigation.
However, the Third Circuit disagreed, focusing on the concept of “futility.” The court noted that for claims involving customers who signed the post-2016 agreements, Avis could not have moved to compel arbitration until the District Court formally certified a class that included those arbitration-bound members. The court found that compelling arbitration against unnamed class members pre-certification would have been futile because the court lacked jurisdiction to rule on those absent parties.
In its opinion, the Third Circuit clarified a key distinction between this case and prior precedent, specifically *Chassen v. Fidelity National Financial, Inc.* While *Chassen* excused delay based on controlling law that initially blocked arbitration, here the delay was excused because of a procedural hurdle—the need for class certification.
“Waiver is the ‘intentional relinquishment or abandonment of a known right,’ not merely of a presently enforceable one,” Judge Smith wrote for the panel, citing the Supreme Court’s *Morgan v. Sundance, Inc.* decision.
Preserving the Right: Notice is Key
The appellate court established a new standard for situations where enforcing an arbitration right depends on a foreseeable procedural event like class certification. The court held that while futility excuses the failure to file a formal motion before certification, it does *not* excuse all inconsistent pre-certification conduct.
To avoid implied waiver in such scenarios, a defendant must provide “clear, reasonably prompt record notice of its intent to exercise its arbitration right” even before certification occurs. Only once the event happens must the party promptly move to compel.
Applying this standard, the Third Circuit reviewed Avis’s conduct between April 2016 (when the clause was adopted) and February 2024 (when the motion to compel was filed).
The court found that Avis did not waive its rights for several reasons:
1. Prompt Reservation: Although Avis filed a motion to dismiss on the merits shortly after the clause took effect, it quickly clarified its position by pleading arbitration as an affirmative defense in its answer to the First Amended Complaint in May 2017. This action dispelled any inference that it had intentionally abandoned the right.
2. Class Uncertainty: Avis argued that early in the litigation, it was speculative whether the eventual class definition would even include customers bound by the new arbitration agreements.
3. Discovery Limitations: While Avis participated in discovery and mediation, the court noted that much of the information sought was relevant to non-arbitrable claims. Crucially, Avis never sought discovery specifically targeting the arbitration-bound members until after certification.
The court concluded that Avis’s consistent assertion of its arbitration rights while opposing class certification demonstrated it did not “evince a preference for litigation over arbitration.”
Remand for Further Proceedings
Despite ruling in Avis’s favor on the waiver issue, the Third Circuit declined to order immediate arbitration. The District Court had resolved the case solely on the waiver ground and had not yet addressed other arguments Avis raised regarding the enforceability of the arbitration clauses.
Specifically, the plaintiffs had argued that their claims fell under the arbitration agreement’s carve-out for small-claims court disputes, noting that individual claims were small. The Third Circuit rejected this, reasoning that because the case was aggregated under the Class Action Fairness Act (CAFA) with an amount in controversy exceeding $5 million, it far surpassed the $5,000 limit for small claims in New Jersey.
The plaintiffs also raised, for the first time on appeal, an argument that Avis should be barred from enforcing the clause because it was added mid-litigation. The Third Circuit deemed this forfeited because it was not raised below. However, the court noted that district courts possess broad authority under Rule 23(d) to control communications in class actions and, if properly presented on remand, the District Court may examine whether the mid-litigation addition of the clause was otherwise unenforceable due to misleading conduct.
Therefore, the Third Circuit vacated the order denying the motion to compel arbitration and sent the case back to the District Court for further proceedings consistent with its opinion.