Typical Outcome:
The question of waiver by litigation conduct is a case by case analysis with no bright
lines. “Thus, ‘a party may waive an
agreement to arbitrate by engaging in two courses of conduct: (1) taking
actions that are completely inconsistent with any reliance on an arbitration
agreement; and (2) “delaying its assertion to such an extent that the opposing
party incurs actual prejudice.”’” Shalabyv. Arctic Sand Technologies, Inc., et al., MICV2014-03621, Slip. Op. (Mass.Sup. Ct. 12/15/2014), quoting Johnson Assocs. Corp. v. HL Operating Corp.,
680 F.3d 713 (6th Cir. 2012), quoting in turn Hurley v. Deutsche Bank Trust Co. Ams., 610 F.3d 334, 338 (6th cir.
2010), quoting in turn O.J. Distrib.,
Inc. v. Hornell Brewing Co., 340 F.3d 345, 356 (6th Cir. 2003). In general, as a defendant engages in
affirmative conduct that involves the exercise of the power and authority of
the court, and
through the lapse of time, the likelihood that such conduct will be regarded as
a waiver increases. In Shalaby, for example, the defendant
filed a Rule 12(b)(6) motion to dismiss, engaged in contentious e-discovery
disputes, and requested the Court to issue a discovery protective order. Only
after the lapse of six months and partial denial of its dispositive motion did
Defendant first assert the affirmative
defense of arbitration and/or a right to compel arbitration. Under these facts, the Court found defendant
waived arbitration. Defendant acted completely inconsistent with its rights to
arbitration and caused prejudice to plaintiff through a “deliberate and
tactical delay six month delay” that caused plaintiff to incur greater expense
while also denying her the opportunity for an expeditious alternative to
litigation.
While this result is not that surprising, I found the
Court’s discussion on “who” should make the determination of waiver based upon
litigation conduct interesting.
Who should decide
waiver by litigation conduct: Court or Arbitrator? The Shalaby court addressed this question under the Federal Arbitration
Act and federal case law. It found the
issue “more nuanced” than Massachusetts law, which presumes that questions of
arbitrability are issues to be decided by a judge. See O’Brien v. Hanover Ins. Co., 427 Mass. 194, 199 (1998). Two lines
of federal case law are relevant:
· First
Options: “Under the [FAA], ‘[c]ourts should not assume that the parties
agreed to arbitrate arbitrability unless there is “clea[r] and unmistakabl[e]”
evidence that they did so.” Shalaby
at p. 2, quoting First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944 (1995), quoting in turn AT&T Technologies, Inc. v.
Communications Wkrs. of America, 475 U.S. 643, 649 (1986).
· Howsam:
“[T]he Supreme Court moved the line drawn in First Options by deciding that
under federal law ‘the presumption is that the arbitrator should decide “allegation[s]
of waiver, delay, or a like defense to arbitrability.”’” Shalaby at p. 2, quoting Howsamv. Dean Witter Reynolds, Inc., 537 U.S. 79, 85 (2002), quoting in turn Moses H. Cone Mem. Hospital v. Mercury
Constr. Corp., 460 U.S. 1, 24-25 (1983); see also BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198, 1207-1210
(2014); Green Tree Financial Corp. v.
Bazzle, 539 U.S. 444, 452-453 (2003).
In these cases, the Supreme Court has found that the questions of waiver
are “‘issues of procedural arbitrabillty’ concerning ‘conditions precedent to
an obligation to arbitrate’ that presumptively should be decided by an
arbitrator, not for the judge. Howsam,
537 U.S. at 85.
The Supreme Court has not answered whether the Howsam standard applies to waiver by
litigation conduct. Which standard
applies: First Options [court
decides] or Howsam [arbitrator
decides]? The Shalaby Court stated
the “consensus view” amongst “virtually every appellate court” is that “‘the
Supreme Court in Howsam and Green Tree did not intend to disturb the
traditional rule that waiver by conduct, at least where due to
litigation-related activity, is presumptively an issue for the court,’ and not
for the arbitrator, to decide.” Shalaby
at p. 2, quoting Marie v. Allied Home Mortgage Corp., 402 F.3d 1, 14 (1st Cir. 2005).
The rationale is that the conduct that formulates the claim of waiver
through litigation conduct primarily occurs before the the court and the court is in the
best position to identify abuses and forum shopping.
After finding that the First
Options rule applies to waiver by litigation conduct, the Shalaby Court inquired whether under the
facts of the case there was “‘clear and unmistakable evidence’ of such an
intent in the arbitration agreement [or in arbitration rules adopted by
contract].” In Shalaby, the agreement cited the JAMS employment arbitration rules
which provide that the arbitrator will decide any “Jurisdictional and
arbitrability disputes, including disputes over the formation, existence,
validity, interpretation or scope of the agreement under which Arbitration is
sought[.]” Shalaby at p. 3, citing to JAMS Employment Arbitration Rule 11. The Court found the rule insufficient to
overcome the First Options presumption.
· Reason
#1: “Federal law appears to render ineffective any contract provision
purporting to delegate the issue of litigation-conduct waiver to an
arbitrator.” The explanation here is that “waiver” constitutes a “default” by a
party seeking to enforce an arbitration clause and Section 3 of the FAA (9 U.S.C. § 3) restricts
a court from issuing a stay pending arbitration where there is no default. [Question: wouldn’t the same reasoning apply
to the Howsam line of
cases?] The court continued its analysis
even if such an agreement were enforceable.
· Reason #2: The
arbitration rules at issue in the case could not overcome the First Options presumption. The Court
stated: “The JAMS rule does not clearly and unmistakably provide that an
arbitrator must decide the parties’ dispute as to whether [the moving party’s]
conduct in this civil action constitutes a waiver of its right to compel
arbitration. While the JAMS rule makes clear that the parties agreed to
arbitrate ‘the gateway question of whether the underlying substantive dispute
between [the parties] is arbitrable,’ nothing in this rule ‘similarly evidences
a clear and unmistakable intent to have an arbitrator decide’ whether [the
moving party] waived arbitration by ‘actively litigating the underlying dispute
in court. There are no references to waiver of arbitration in this or any other
provision of the’ JAMS rules.” Shalaby
at p. 4, quoting Ehleiter v.
Grapetree Shores, Inc., 482 F.3d 207, 221 (3d Cir. 2007).
Takeaways: Courts
are likely to keep the issue of “waiver by litigation conduct”
until the U.S. Supreme Court extends its “procedural arbitrability”
rule to this specific form of waiver.
While the Shalaby Court does
not expressly say so, it is clear that the Court did not wish to reward the perceived
purposeful litigation tactics of the employer moving party. For example, the Court commented:
[Defendant] was happy to litigate
Plaintiff’s claims in the Superior Court so long as it thought that it could
obtain a quick judgment in its favor on the merits. It only moved to compel
arbitration after its motion to dismiss on the merits was denied in part, in a
16-page memorandum of decision dated September 3, 2014. In essence, [Defendant]
‘“wanted to play heads I win, tails you lose,” which “is the worst possible
reason” for failing to move for arbitration sooner than it did.’
Shalaby at p. 5
(internal citations omitted) (emphasis added).
For those arbitration advocates that believe all issues of
arbitrability including waiver from litigation conduct should be decided by an
arbitrator, not a court, add language to your client’s arbitration agreement that the issue of waiver of arbitration,
including but not limited to waiver from litigation conduct shall be exclusively decided by the Arbitrator
through the arbitration process.” This added language would present the issue squarely for the next court that addresses
this issue.
* Tom is a member of the steering committee for Division 1: Litigation and Dispute Resolution of the ABA Forum on
Construction Law. Tom also helps manage The Dispute Resolver Blog. In his life away from Division 1, Tom is a
Partner at Pierce Atwood, LLP. He
practices construction law and business dispute resolution in Massachusetts and
Rhode Island. If you are interested in
submitting an article to The Dispute
Resolver or to learn more about FCL or Division 1, feel free to contact Tom
at rtdunn@PierceAtwood.com.
