In Al-Nahhas v 777 Partners LLC, No. 23-2723 (7th Cir. Feb. 19, 2025), the Seventh Circuit affirms a district court order denying arbitration on account of waiver. One concurring judge, though, suggests that the de novo standard of review of such orders – the law of the circuit for over three decades – may be in error.
Plaintiff sued a payday loan business under RICO and state usury laws. “For fourteen months, the defendants participated in litigation, including by filing their answer, fielding discovery requests, and participating in status conferences. But then they decided that they wanted to arbitrate. Citing an arbitration provision in the four lending agreements that Al-Nahhas had signed, they asked the district court to refer the case to an arbitrator. The district court refused, finding that the defendants had waived their right to compel arbitration by participating in litigation.”
On appeal of the order denying the motion to compel, the Seventh Circuit affirms. The panel observes that the parties agreed that review of the district court’s finding of waiver was de novo. “This standard finds support in, for example, Sosa v. Onfido, Inc., 8 F.4th 631, 638 (7th Cir. 2021) . . . . However, as the concurrence points out, it is possible that the generally fact-intensive question before us (did the . . . Defendants waive their right to compel arbitration?) presents the type of mixed question that merits deference to the district court, not de novo review.” The panel holds that the outcome would be the same regardless of the appellate standard of review, obviating further discussion of the matter.
Judge Easterbrook, concurring, picks up the thread. “I join my colleagues’ opinion but offer some additional thoughts about one proposition that does not affect the outcome.” The opinion notes that Sosa and a long string of circuit authority recite the de novo appellate standard of review, but the opinions provide no rationale for it.
“As far as I can tell, these statements (and similar ones in other decisions) stem indirectly from Machinists Union v. Fansteel, Inc., 900 F.2d 1005, 1010 (7th Cir. 1990), which says that questions of arbitrability are reviewed without deference to an arbitrator. That proposition comes from AT&T Technologies, Inc. v. Communications Workers, 475 U.S. 643 (1986), which holds that a judge rather than an arbitrator decides whether the parties have agreed to arbitrate. Through a process in the nature of a rumor chain, the statement that arbitrability is a subject for a district judge morphed into the proposition that all judicial orders to arbitrate are reviewed independently by appellate judges. Nothing of the kind appears in or can be imputed to AT&T Technologies or John Wiley & Sons, neither of which concerns standards of appellate review.”
These cases, says the concurrence, cannot be squared with more recent Supreme Court authority. “Courts of appeals are fond of saying that they make independent (de novo) decisions about mixed questions of law and fact—that is, about the application of legal rules to the facts of particular cases. But that is not what the Supreme Court has told us to do.”
Citing U.S. Bank N.A. v. Village at Lakeridge, LLC, 583 U.S. 387 (2018), the concurrence states that “we must ask whether the parties’ dispute concerns the substance of the legal principles (which implies plenary appellate resolution) or how an established legal principle applies to the dispute at hand (which implies deferential appellate review) . . . . The standard for waiver of arbitration entails case-specific, discretionary assessments . . . . The parties disagree about how the district judge should have evaluated [defendants’] delay in demanding arbitration. That kind of dispute calls for deferential review under Lakeridge[.]”
“Many opinions contain formulaic statements of the standard of review that can be traced through a long chain of equally unreasoned citations. Every once in a while a court of appeals must stop and ask whether a formula from decades or generations ago represents the law articulated by the Supreme Court or other panels of this court. The approach in Sosa and its predecessors does not—it wrongly lumps arbitrability together with contextual matters such as waiver—and should be replaced. Today is not the day, however, not only because the parties have ignored this subject but also because on an independent view of things we come out the same way as the district judge. Occasionally, however, the standard of appellate review matters, and we should not employ formulas that depart from the Supreme Court’s approach.”
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