Employ the wrong litigation strategy and wave goodbye to arbitration
In a recent decision, the United States Court of Appeals for the Seventh Circuit affirmed a trial court’s denial of a defendant’s motion to compel arbitration finding that the party had waived the right to arbitrate. In Brickstructures, Inc. v. Coaster Dynamix, Inc., ___ F.3d ___, Case No. 19-2187 (7th Cir. March 11, 2020), the Plaintiff brought suit against its former business partner alleging That Coaster Dynamix breached a joint venture agreement and its fiduciary duties and false advertising in violation of the Lantham Act. Id. at *3. Coaster Dynamix moved to dismiss the complaint pursuant to Federal Rule 12(b)(6). Arguing that the joint venture agreement was an unenforceable contract. The trial court, however, dismissed the complaint on jurisdictional grounds. Id.
Brickstructures amended its complaint curing the jurisdictional issue and added a new claim for unjust enrichment. Coaster Dynamix moved again to dismiss the amended complaint under Rules 12(b)(2), 12 (b)(3) and 12(b)(6). Again, Coaster Dynamix argued that the joint venture was an unenforceable contract. But Coaster Dynamix also argued that if it did, then the lawsuit should be dismissed under Rule 12(b)(3) for improper venue based on the existence of the arbitration clause which made arbitration the exclusive forum for the claims in the lawsuit. Id.
Brickstructure’s counsel wrote Coaster Dynamix days after the motions to dismiss was filed. The letter demanded that Coaster Dynamix withdraw several arguments including the arbitration arguments because Coaster Dynamix waived The argument by not advancing them in the initial motion. The letter also threatened to seek sanctions. Id. at *3-4. In response to the letter, Coaster Dynamix withdrew its arbitration-based venue argument. Coaster Dynamix filed a notice with the court that clearly and precisely withdrew these arguments. Id. at *4. The court then denied the remaining argument on the motion to dismiss the amended complaint finding that the amended complaint adequately alleged a binding agreement. Id.
Coaster Dynamix resurrected the arbitration issue by moving to demand arbitration. In its motion, Coaster Dynamix argued that it raised the issue in its second motion to dismiss but that it had received no ruling on the argument. Coaster Dynamix failed, however, to note that it had withdrawn its 12(b)(3) motion. Brickstructures noted this omission in its response and argued that Coaster Dynamix was “playing games” and had waived its right to arbitrate by withdrawing its earlier 12(b)(3) motion and by the way that it had engaged in the litigation itself by proceeding with discovery. Id. Coaster Dynamix argued in reply that it had only withdrawn the argument after Brickstructures had threatened sanctions. Id.
The trial court denied the motion to compel arbitration finding that Coaster Dynamix waived its right to arbitrate by withdrawing its motion directed at venue and enforcement of the arbitration clause. Id. at 5. The trial court reasoned that Coaster Dynamix’s conduct in the litigation was inconsistent with submitting the case to arbitration. The trial court further did not allow Coaster Dynamix to rescind its waiver in light of the threat of sanctions made by Brickstructures finding that its argument was unconvincing.
On appeal, the Seventh Circuit began its analysis by noting that while Federal law favors arbitration, the right to arbitrate is waivable. Id. at *6 (citations omitted). Waiver can be either express or implied through a party’s actions. Id. the court noted that that the question to be resolved in determining whether a waiver occurred is whether, based on all the circumstances, the party against whom the waiver is being enforced has acted inconsistently with the right to arbitrate. Id. The court found that the issue before it was a mixed question of fact and law applied the “clear error” standard of review. Id. at *7-8. This standard gives deference to the trial court’s determination.
The court found that Coaster Dynamix had expressly waived its right to arbitrate by involving the arbitration clause in its motion urging dismissal of the lawsuit and then withdrawing this argument. Id. at *8. The court noted that Coaster Dynamix having “put the arbitration card on the table and then taken it back, was not permitted to play that card again later.” Id. Importantly, the Seventh Circuit acknowledged that parties do not waive the right to arbitrate if a motion to compel is not the first thing they file on the docket. Id. at *9. In this case, by filing the motion to dismiss based on the arbitration clause, Coaster Dynamix evidenced an understanding of its right to arbitrate and then took action to expressly withdraw the argument finding that the withdrawal was intentional and voluntary. Id. at *8-9.
Coaster Dynamix tried to overcome its withdrawal by arguing that it had withdrew its motion to compel arbitration under Rule 12(b)(3) and not Section 4 of the Federal Arbitration Act. Id. at *10. In response to this argument, the court noted that it is the party’s conduct and not the procedural mechanism that controls. Id. Based on this, the court concluded that the trial court committed no error and affirmed the denial of the motion to compel arbitration. Id.
This case demonstrates that conduct matters. If a party wishes to preserve its right to arbitrate, it must act consistently with that right. Even under the threat of sanctions, a party cannot withdraw any type of motion to compel arbitration. Even if it is not the first motion brought in the litigation, a party must act consistently with its desire to exercise its right to arbitrate. The further any party proceeds in the litigation process, the less secure the right to arbitrate will become. Therefore, counsel and clients must weigh the consequences of litigation activities when they desire to compel arbitration.