Non-Waiver Clause in Arbitration Agreement Does Not Preclude Finding that Party Has Waived Right to Arbitrate by Litigating Dispute in Court

From Gray Holdco, Inc. v Cassady, 2011 U.S. App. LEXIS 17032 (3d Cir. Aug. 17, 2011):

On November 13, 2009, Gray filed the complaint in this action in the District Court against Cassady and RWLS, asserting that Cassady breached the Option Agreement and tortiously interfered with Gray's existing contractual relationships. The complaint also asserted claims of unjust enrichment and civil conspiracy based on Cassady and RWLS's solicitation of Gray clients and employees. The complaint primarily requested injunctive relief although it also sought money damages. Significantly, the complaint did not mention the arbitration agreement in the New Hire Stock Option Plan or include any arbitration clause in the employment agreement labeled as "Exhibit A" which Gray attached to the complaint. On the same day that Gray filed the complaint, it filed a motion for a preliminary injunction against both defendants, requesting that the Court enjoin them from, among other things, soliciting Gray's customers and employees.

On November 17, 2009, Gray filed a motion for expedited discovery which the District Court granted the next day. ***

The parties intensely litigated the preliminary injunction proceedings. In the discovery Gray served 15 requests for the production of documents and 11 interrogatories and deposed Cassady and a corporate representative of RWLS. Cassady propounded 118 requests for production of documents and RWLS propounded 15 requests for production of documents, 7 requests for admissions, and 13 interrogatories. The District Court conducted an evidentiary hearing on the preliminary injunction application and on January 13, 2010, following the conclusion of the hearing, the Court filed an opinion setting forth its conclusion that Gray did not meet its burden to establish that it was entitled to injunctive relief under Federal Rule Civil Procedure 65. In its conclusion, the Court, inter alia, held "as a matter of law, that the agreement entered into between Cassady and the plaintiff is not enforceable" and that "the plaintiff has not demonstrated that it will likely succeed on the merits." Gray Holdco, Inc. v. Cassady, Civ. No. 2:09-cv-1519, 2010 WL 235106, at *5 (W.D. Pa. Jan. 13, 2010) (Gray I). Consequently, the Court denied Gray's motion for a preliminary injunction.

On March 2, 2010, the parties filed a Federal Rule Civil Procedure 26(f) discovery report and a proposed discovery plan. On March 9, 2010, the District Court conducted a status conference and set deadlines for mediation and for filing motions for judgment on the pleadings. On March 19, 2010, Cassady and RWLS separately moved for judgment on the pleadings pursuant to Fed. R. Civ. P. 12(c) or, in the alternative, to dismiss the complaint under Fed. R. Civ. P. 12(b)(6), with Cassady asserting that the Court's findings at the preliminary injunction hearing were "law of the case" and barred Gray's claims as a matter of law and RWLS asserting that Gray did not suffer any damage as a result of Cassady's alleged contract breach. As a matter of convenience we will refer to the motions simply as motions to dismiss. Gray filed a brief opposing the motions to dismiss. On June 8, 2010, the Court held another status conference and established discovery deadlines and on June 30, 2010, the Court denied Cassady's and RWLS's motions to dismiss.

On September 17, 2010, after obtaining a new attorney, Gray filed a demand for arbitration against Cassady with the AAA in Delaware. ***

The District Court granted Cassady's motion to enjoin the arbitration and denied Gray's motion to stay the proceedings pending arbitration. ***

We ... have held that a party seeking arbitration may waive its right to arbitration when the party opposing the arbitration demonstrates sufficient prejudice arising from the delay of the party seeking arbitration in making its demand. Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 223 (3d Cir. 2007). To that end, in Hoxworth [v. Blinder, Robinson & Co., 980 F.2d 912 (3d Cir. 1992),] we identified six non- exclusive factors to guide the prejudice inquiry: (1) timeliness or lack thereof of the motion to arbitrate; (2) extent to which the party seeking arbitration has contested the merits of the opposing party's claims; (3) whether the party seeking arbitration informed its adversary of its intent to pursue arbitration prior to seeking to enjoin the court proceedings; (4) the extent to which a party seeking arbitration engaged in non- merits motion practice; (5) the party's acquiescence to the court's pretrial orders; and (6) the extent to which the parties have engaged in discovery. Hoxworth, 980 F.2d at 926-27. While these factors generally are indicative of whether a party opposing arbitration would suffer prejudice attributable to the other party's delay in seeking arbitration, the answer to the question of whether a party invoking the arbitration clause waived its right to arbitrate is necessarily case specific and thus depends on the circumstances and context of each case. Nino, 609 F.3d at 209.***

A. "No Waiver" Clause

The arbitration agreement on which Gray relies contains a disclaimer that "either party may, without inconsistency with this arbitration provision, apply to any court having jurisdiction over such dispute or controversy and seek interim provisional, injunctive or other equitable relief until the arbitration award is rendered or the controversy is otherwise resolved." App. at 71. Gray argues that this provision precluded the District Court from considering its actions in pursuing litigation seeking a preliminary injunction in its analysis of the Hoxworth factors. The District Court disagreed and held that while Gray's pursuit of injunctive relief did not waive its right to arbitrate, neither did the "no waiver" clause act as a shield against a possible finding that Gray waived that right. Gray II, 2010 WL 4687744, at *3.5 Gray contends that the District Court, by factoring the preliminary injunction proceedings into its Hoxworth waiver analysis, refused to enforce Gray's agreement with Cassady insofar as that agreement allowed Gray to apply for injunctive relief without waiving its right to arbitration.

We agree with the District Court that the clause in the New Hire Stock Option Plan allowing either party to seek injunctive relief until the arbitration award is rendered does not override the applicability of the Hoxworth multipart analysis which examines whether a party, by its participation in litigation, has waived its right to invoke arbitration. Thus, we also agree with the holding in S & R Co. of Kingston v. Latona Trucking, Inc., 159 F.3d 80, 86 (2d Cir. 1998), "that the presence of a 'no waiver' clause does not alter the ordinary analysis undertaken to determine if a party has waived its right to arbitration."

We disagree with Gray's argument that the District Court, through its consideration of the proceedings on the preliminary injunction application in its Hoxworth analysis, nullified the contractual provision allowing either party, without inconsistency with the arbitration provision, to pursue injunctive relief. To the contrary, the Court specifically recognized Gray's contractual right to apply for injunctive relief and honored that provision by not weighing its participation in discovery related to the application in determining whether Gray waived the right to arbitration. ***

Nevertheless, like the District Court, we think that the contractual no waiver provision does not require a court to disregard completely Gray's conduct in pursuit of the preliminary injunction. Adopting Gray's position that any conduct in pursuit of a preliminary injunction is exempt from a prejudice inquiry could allow a party, under the guise of seeking a preliminary injunction, to conduct discovery which would not be allowed in arbitration proceedings. See, e.g., Zwitserse Maatschappij Van Levensverzekering En Lijfrente v. ABN Int'l Capital Mkts. Corp., 996 F.2d 1478, 1480 (2d Cir. 1993) (per curiam) (holding that taking deposition of witnesses not available in arbitration proceedings is sufficient prejudice to find waiver of right to arbitrate); St. Mary's Med. Ctr. of Evansville, Inc. v. Disco Aluminum Prods. Co., 969 F.2d 585, 591 (7th Cir. 1992) ("By delaying its demand for arbitration, Disco was able to obtain discovery it would not necessarily have been entitled to in an arbitration proceeding.").

Footnote 7. As Gray points out, Cassady does not claim that he was prejudiced in this manner. However, the cases above demonstrate why we will not adopt the position which Gray advocates.

More fundamentally, in addition to addressing the important question of whether the non-moving party suffers prejudice from the moving party's delay in invoking an arbitration clause, a court, by finding that there has been a waiver of the right to arbitrate predicated on a party's litigation conduct, effectuates the principle that a party may not use arbitration to manipulate the legal process and in that process waste scarce judicial resources. See, e.g., Republic Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 348 (5th Cir. 2004) (holding that a "no waiver" clause does not override district court's inherent authority to control its own docket and to find that a party, through extensive litigation, has waived its right to arbitrate); Nat'l Found. for Cancer Research v. A. G. Edwards & Sons, Inc., 821 F.2d 772, 776 (D.C. Cir. 1987) ("To give Edwards a second bite at the very questions presented to the court for disposition squarely confronts the policy that arbitration may not be used as a strategy to manipulate the legal process."). For example, if faced with a contract that stated that neither party implicitly would waive the right to arbitrate by engaging in extensive litigation inconsistent with that right a court would not need to dispense completely with a prejudice inquiry in analyzing whether one of the parties, through its pursuit of litigation, did, indeed, waive the right to arbitration. See Richard A. Lord, Williston on Contracts § 39:36 (4th ed. 2000) ("The general view is that a party to a written contract can waive a provision of that contract by conduct expressly or surrounding performance, despite the existence of a so-called anti-waiver or 'failure to enforce' clause in the contract.").

Therefore, while Gray's motion for a preliminary injunction in itself does not factor into the waiver inquiry, the question for purposes of finding an arbitration waiver remains whether Gray, through its litigation conduct, waived its right to compel arbitration because of the prejudice Cassady suffered attributable to Gray's delay in invoking its right to arbitrate. See Nino, 609 F.3d at 209. In answering that question, we find that it is appropriate to consider Gray's litigation conduct as a whole, including its conduct in its pursuit of a preliminary injunction.

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