Commercial Litigation and Arbitration

Default (vs. Waiver) of the Right to Arbitrate — Effect of Litigating Factually Intertwined Claims

From Forrester v Penn Lyon Homes, Inc., 2009 U.S. App. LEXIS 994 (4th Cir. Jan. 21, 2009):

We review a district court's decision as to default of arbitration de novo but defer to the district court's underlying factual findings…. The Federal Arbitration Act (FAA), 9 U.S.C. §§ 1-16 (2006), governs the rights and responsibilities of the parties with respect to an arbitration agreement. ***

Under section 3 of the FAA, a party loses its right to a stay of court proceedings in order to arbitrate if it is "in default in proceeding with such arbitration." 9 U.S.C. § 3 (2006). Default in this context resembles waiver, but, due to the strong federal policy favoring arbitration, courts have limited the circumstances that can result in statutory default. ***For example, simply failing to assert arbitration as an affirmative defense does not constitute default of a right to arbitration... Similarly, delay and participation in litigation will not alone constitute default…. But a party will default its right to arbitration if it "so substantially utiliz[es] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay." …. The "heavy burden" of showing default lies with the party opposing arbitration. ***

Nor, contrary to Penn Lyon's assertion, does Micro-Strategy, 268 F.3d at 250-54, provide support for its position that by not specifically litigating the [arbitrable] structural warranty claim prior to filing its motion to compel arbitration, it did not default its right to arbitration. In MicroStrategy, we found no default although MicroStrategy, the party seeking arbitration, had previously initiated litigation against Lauricia. …. Those previous lawsuits involved claims legally and factually distinct from the later claims for which Micro-Strategy sought arbitration. ... Here, in contrast, the structural warranty claim is factually intertwined with the Forresters' other claims and, perhaps more importantly, is part of the lawsuit that Penn Lyon chose for two years to litigate in court rather than in arbitration.

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