NINO v. JEWELRY EXCHANGE, INC. No. 09-1268.
609 F.3d 191 (2010)
Rajae NINO, Appellant v. The JEWELRY EXCHANGE, INC.; Wendy Tarapani.
United States Court of Appeals, Third Circuit.
Opinion Filed June 15, 2010.
Terri L. Griffiths, Esq. [Argued], Charlotte Amalie, St. Thomas, USVI, for Appellant.
Jessica Chung, Esq. [Argued], Treston E. Moore, Esq., Moore, Dodson & Russell, P.C., Charlotte Amalie, St. Thomas, USVI, for Appellees.
Anna N. Occhialino, Esq., Equal Employment Opportunity Commission, Washington, DC, for Amicus Appellant.
Before McKEE, Chief Judge, FUENTES and NYGAARD, Circuit Judges.
OPINION OF THE COURT
FUENTES, Circuit Judge:
Rajae Nino brought this action against his former employer, alleging that he was discriminated against on account of his gender and national origin. After litigating the matter before the District Court for fifteen months, the employer invoked an arbitration provision in Nino's employment contract and moved the District Court to compel the parties to arbitrate their dispute. Nino opposed the motion, arguing (1) that the arbitration agreement was unconscionable and, therefore, unenforceable, and (2) that by engaging in extensive litigation of this dispute, the employer had waived its right to compel arbitration. The District Court concluded that although the arbitration agreement contained unconscionable terms, those provisions could be severed from the contract and the remainder of its terms could be enforced. The Court then concluded that the employer did not, through its litigation conduct, waive its right to compel arbitration. We disagree.
In our view, the pervasively one-sided nature of the arbitration agreement's terms demonstrates that the employer did not seek to use arbitration as a legitimate means for dispute resolution. Instead, the employer created a system that was designed to give it an unfair advantage through rules that impermissibly restricted employees' access to arbitration and that gave the employer an undue influence over the selection of the arbitrator. We hold that it is not appropriate, in the face of such pervasive one-sidedness, to sever the unconscionable provisions from the remainder of the arbitration agreement. We further conclude that the employer, by engaging in protracted litigation of this matter before belatedly seeking to arbitrate its dispute, waived its right to compel arbitration. We will thus reverse the District Court's order compelling the parties to arbitrate.
Diamonds International ("DI") is one of
Upon his arrival at the St. Thomas store, Nino was given a copy of the company's standard employment contract. The following are some of the procedures and deadlines contained in the contract that we find most troublesome. Article IV of the contract sets forth a grievance and arbitration procedure that the contract describes as "the sole, final, binding and exclusive remedy for any and all employment[-]related disputes." (J.A. at 80.) The remedial process outlined in Article IV requires an aggrieved employee to satisfy a series of requirements before he is eligible to arbitrate a dispute. First, the employee must file with his manager a detailed written grievance within five days of having received notice of the action complained of; the manager is then required to respond with a decision within two days. If the employee is unsatisfied with the manager's decision, he must re-file the grievance with the managing director within two days of having received the manager's decision; the managing director is then required to respond with a decision within five days. If the employee is not satisfied with the managing director's decision, he must file a written request for arbitration with the managing director within five days of having received the decision.
The contract makes clear that "[t]he time limits provided for above are binding and may not be waived except by written agreement of both parties," (id. at 82), meaning that an employee who does not file grievances within the applicable time frame loses the opportunity to arbitrate a dispute altogether. The contract insulates DI against a comparable risk of default—it provides that if DI fails to respond to an employee's grievance on a timely basis, "the last decision given by [DI] shall be a final and binding resolution of the grievance." (Id.)
If an employee satisfies these grievance filing requirements, DI must submit a request to the American Arbitration Association ("AAA") for a panel of four arbitrators. The parties then select a single arbitrator from this list according to the following method:
(Id. at 81.) Stated more directly, DI is permitted to strike two members from the list of potential arbitrators, but the employee is permitted to strike just one.
The contract provides that the arbitration must take place at DI's place of business "at a date and time mutually convenient to both parties but in no event more
On the same day that Nino signed the employment contract, he signed a separate one-page document entitled "Diamonds International AGREEMENT," in which Nino acknowledged that he had received DI's employee handbook. (Id. at 84.) In this one-page agreement, Nino also acknowledged that DI was authorized "to unilaterally amend its rules, regulations, policies, and procedures without prior notice to its employees." (Id.) Nino further acknowledged "that the grievance procedure[ ] set forth in the employee handbook is my exclusive remedy for my employment-related disputes." (Id.)
The employee handbook, in turn, sets forth a process for dispute resolution that partially resembles, but is not identical to, the grievance process described in the employment contract. Specifically, the process described in the handbook differs from the contract in that it does not mention a right to arbitration, it requires employees to file the initial grievance within two (rather than five) days of the complained-of action, and it makes the decision of the managing director final as to all decisions except terminations, which may be further appealed to a management panel for final resolution. The materials that DI provided to Nino do not purport to reconcile the differences between the contract and the handbook, nor do they explain which of these two dispute resolution mechanisms actually applies to an employee's grievances.
While the precise details of Nino's allegations of discrimination are not central to the issues presented in this appeal, we summarize them to provide the basis for his federal complaint. Nino, who is a gay man, did not initially disclose his sexual orientation to his co-workers in St. Thomas. According to his allegations, Nino's co-workers began to fixate upon the issue of his sexual orientation, making increasingly hostile comments during his employment. Eventually, Nino revealed to his co-workers that he was gay. According to the complaint, this revelation served only to intensify the harassment by his coworkers, which escalated to both verbal and physical assaults to which DI's management turned a blind eye.
According to Nino's allegations, on February 2, 2005, one of Nino's co-workers, Jason Lettsome, falsely accused Nino of "coming on" to him. (J.A. at 43.) Nino reported this incident to the store manager, and Lettsome in turn complained to the manager that Nino "acted and talked like a female" when he interacted with Lettsome. (Id.) In response to these complaints, the manager wrote up both Nino and Lettsome for being disruptive. Shortly thereafter, Nino was suspended for one week without pay and was threatened with termination. The rationale behind Nino's suspension was that Nino had allegedly used a profanity when he was informed that he was being written up, although Nino contends that this was a pretext for discrimination. Nino did not return to
On March 3, 2006, Nino filed a complaint against DI and Wendy Tarapani, a manager of DI's St. Thomas store, alleging, inter alia, that he had been discriminated against on the basis of gender and national origin.
On September 26, 2007, after litigating this dispute for fifteen months with no mention of the arbitration clause apart from the affirmative defense asserted in its answer to the complaint, DI filed a motion to dismiss Nino's claims on the grounds that the parties' contract made arbitration the sole method of resolving employment-related disputes. Nino opposed the motion on the grounds that the one-sided nature of the arbitration clause made it unconscionable and that, through its litigation conduct, DI had waived any right to enforce the clause.
The District Court granted DI's motion to dismiss. The Court initially noted that aspects of the arbitration clause were unconscionable. The Court held, however, that the unconscionable provisions were severable from the remainder of the arbitration agreement, because they did not constitute an "essential part of the agreed exchange" between Nino and DI. Restatement (Second) of Contracts § 184. The Court thus held that the remainder of the arbitration agreement was enforceable. Additionally, the Court determined that DI had not waived its right to enforce the arbitration clause, notwithstanding its fifteen-month delay in filing the motion to compel arbitration, because DI had raised arbitrability as an affirmative defense in its answer to Nino's complaint, and because DI had not engaged in dispositive motion practice prior to moving to compel arbitration. Nino filed this timely appeal of the District Court's dismissal order.
The District Court had jurisdiction over this case under 28 U.S.C. § 1331 and 48 U.S.C. § 1612(a). We have jurisdiction pursuant to 9 U.S.C. § 16(a)(3). See Green Tree Financial Corp.-Alabama v. Randolph, 531 U.S. 79, 89, 121 S.Ct. 513, 148 L.Ed.2d 373 (2000) (explaining that "where ... the District Court has ordered the parties to proceed to arbitration, and
We first address the District Court's decision to sever the unconscionable aspects of the parties' arbitration agreement and enforce the remainder of the agreement. We have repeatedly recognized that the Federal Arbitration Act ("FAA") establishes a "strong federal policy in favor of the resolution of disputes through arbitration." Puleo v. Chase Bank USA, N.A, 605 F.3d 172, 178 (3d Cir.2010) (citation omitted); see also Spinetti v. Service Corp. Intern., 324 F.3d 212, 213 (3d Cir.2003). Under the FAA, arbitration agreements "are enforceable to the same extent as other contracts." Alexander v. Anthony Int'l, L.P., 341 F.3d 256, 263 (3d Cir.2003) (internal quotations and citations omitted). "A party to a valid and enforceable arbitration agreement is entitled to a stay of federal court proceedings pending arbitration as well as an order compelling such arbitration." Id. (citing, inter alia, 9 U.S.C. §§ 3-4) (emphasis added).
The preceding qualification that an arbitration agreement be "valid and enforceable" before arbitration can be compelled, id., makes clear that when a party to an arbitration agreement challenges the validity of the agreement, a threshold question of arbitrability is presented for the court to decide.
Under Virgin Islands law, "[t]he doctrine of unconscionability involves both `procedural' and `substantive' elements." Edwards, 497 F.3d at 362 (citation omitted). The procedural component of the unconscionability inquiry looks to the "process by which an agreement is reached and the form of an agreement, including the use therein of fine print and convoluted or unclear language." Alexander, 341 F.3d at 265 (citation omitted). We have consistently found that adhesion contracts—that is, contracts prepared by the party with greater bargaining power and presented to the other party "for signature on a take-it-or-leave-it basis"—satisfy the procedural element of the unconscionability analysis. Id. (citation omitted); see also Edwards, 497 F.3d at 362; Parilla, 368 F.3d at 276. "A contract, however, is `not unconscionable merely because the parties to it are unequal in bargaining position.'" Alexander, 341 F.3d at 265 (quoting Restatement (Second) of Contracts § 208 cmt. d). Instead, a party challenging a contract on unconscionability grounds must also show that the contract is substantively unconscionable by demonstrating that the contract contains "terms unreasonably favorable to the stronger party." Id. (citation omitted). With these principles in mind, we turn to Nino's unconscionability challenge to the arbitration agreement at issue in this case.
Looking first to the question of procedural unconscionability, we agree with the District Court that Nino had no opportunity to negotiate with DI over the contract's terms, that DI was the stronger contractual party, and that the arbitration agreement is thus procedurally unconscionable. First and most significantly, as the District Court expressly found, DI presented the arbitration agreement to Nino "for signature on a take-it-or-leave-it basis." Id. at 266 (citation omitted). As Nino explained in his deposition, during his first week at the St. Thomas store, DI's human resources manager provided him with a copy of the company's employment contract and instructed him to "read it and sign it," (S.A. at 18), without affording him any opportunity to negotiate over its terms. As the District Court explained, "Nino was given no reasonable choice in accepting the challenged Arbitration Agreement." (J.A. at 13.)
Moreover, a significant disparity in bargaining power existed between Nino and DI. As was the case in Alexander, DI is a large corporation that "conducts business throughout the nation and the world, [and it] clearly possessed more bargaining power" than did Nino, a single, retail-level employee. Alexander, 341 F.3d at 266.
We likewise conclude that the arbitration agreement is substantively unconscionable because it contains terms unreasonably favorable to DI, the stronger party. See Zimmer, 523 F.3d at 228 ("Substantive unconscionability looks to whether the arbitration provision unreasonably favors the party asserting it.") (quotation marks and citation omitted). We address these unreasonable contract terms in turn below.
First, we agree with Nino and the District Court that the arbitration agreement's provision requiring that an employee file a grievance within five days of the complained-of incident in order to preserve his or her opportunity to arbitrate the dispute is substantively unconscionable. We have twice held in no uncertain terms that a thirty-day filing requirement in an arbitration agreement is substantively unconscionable. See Parilla, 368 F.3d at 277-78; Alexander, 341 F.3d at 266. As we explained in Alexander and reiterated in Parilla, while "a provision limiting the time to bring a claim or provide notice of such a claim to the defendant is not necessarily unfair or otherwise unconscionable," the time period designated by the agreement must still be reasonable. Alexander, 341 F.3d at 266; accord Parilla, 368 F.3d at 277-78. A thirty-day filing period, we made clear in both cases, is "clearly unreasonable and unduly favorable" to the employer. Alexander, 341 F.3d at 266.
If a thirty-day filing window is "clearly unreasonable," id., then the five-day filing requirement imposed by the parties' contract
Nino likewise argues, and the District Court found, that the arbitration agreement's requirement that the parties bear their own attorney's fees, costs, and expenses is substantively unconscionable. We agree. As we have explained:
Spinetti, 324 F.3d at 216 (internal quotations and citations omitted); Parilla, 368 F.3d at 279 (same); Alexander, 341 F.3d at 267 (same).
Provisions in arbitration clauses requiring parties to bear their own attorney's fees, costs, and expenses work to "the disadvantage of an employee needing to obtain legal assistance." Alexander, 341 F.3d at 267. Such provisions also undermine the legislative intent behind fee-shifting statutes like Title VII. Cf. Hackwell v. United States, 491 F.3d 1229, 1240 (10th Cir.2007) ("Title VII's fee-shifting provision, 42 U.S.C. § 2000e-5(k), was intended to encourage private citizens to enforce the statute's guarantees and [ ] if successful plaintiffs were forced to bear their own attorneys' fees, few aggrieved parties would be in the position to advance the public interest.") (citing H.R. Rep. 102-40(I), Civil Rights Act of 1991, 1991 U.S.C.C.A.N. 549 (Apr. 24, 1991)). The arbitration agreement's restriction on the arbitrator's ability to award attorney's fees, costs, and expenses is substantively unconscionable, as the District Court correctly concluded. See Spinetti, 324 F.3d at 216.
(J.A. at 81.) Although it is phrased in neutral, procedural terms, the upshot of this provision is that DI is permitted to strike two arbitrators from the four-member AAA panel, whereas the employee is permitted to strike just one.
This provision is "one-sided in the extreme and unreasonably favorable to [DI]." Alexander, 341 F.3d at 267. It confers an advantage upon DI for no discernable purpose other than to stack the deck in its favor. Courts of Appeals have not hesitated to conclude that provisions in arbitration agreements that give the employer an unreasonable advantage over the employee in the selection of an arbitrator are unconscionable, see, e.g., Hooters of America, Inc. v. Phillips, 173 F.3d 933, 940 (4th Cir.1999), and we have consistently recognized that arbitration provisions that confer an "unfair advantage" upon the party with greater bargaining power are substantively unconscionable, Alexander, 341 F.3d at 267. "By agreeing to arbitration in lieu of litigation, the parties agree to trade the procedures and opportunity for review of the courtroom for the simplicity, informality, and expedition of arbitration," but they do not accede to procedures "utterly lacking in the rudiments of even-handedness." Murray v. United Food & Commercial Workers Intern., 289 F.3d 297, 303 (4th Cir.2002) (internal quotations and citations omitted).
DI advances several arguments in defense of the arbitrator selection provision, all of which are thoroughly unconvincing. First, DI contends that because the agreement provides a secondary method for selecting an arbitrator—it permits the parties simply to agree upon "an arbitrator that would be mutually acceptable," (J.A. at 81)—the selection process does not unreasonably favor DI. This argument invites us to conclude that because the agreement authorizes DI not to use the advantage it holds in the one-sided arbitrator selection process, the process cannot be considered unreasonably favorable to DI. Such reasoning would provide cold comfort to an employee who is unable to agree with DI upon a "mutually acceptable" arbitrator, (id.), and it does not diminish the unfair advantage accorded to DI over the selection of an arbitrator if the parties do not reach such an agreement. The presence of an alternative avenue for selecting an arbitrator does not render less unfair the one-sided mechanism set forth in the arbitration agreement.
DI next suggests that because "the panel is comprised of neutral, impartial arbitrators, as must be presumed, DI will not gain any benefit by having an additional strike." (DI Br. 16.) We cannot agree. DI is of course correct that the panel is to be comprised of arbitrators with no connection to, or interest in, the parties or dispute at hand. The AAA's rules require
Finally, DI proposes that, rather than determining that the arbitrator selection clause is unconscionable, we should simply "alter[ ] the terms [of the arbitration agreement] so that the AAA supplies a panel of five (5) arbitrators instead of four (4)." (DI Br. 16.) Our precedent forecloses such an approach, and with good reason:
Parilla, 368 F.3d at 285 (emphasis in original). An arbitration agreement in an employment contract does not, in the context of litigation, become the employer's opening bid in a negotiation with the employee or the court over the agreement's unconscionable terms. As we have explained, "[b]ecause the employer drafted the arbitration agreement, the employer is saddled with the consequences of the provision as drafted." Spinetti, 324 F.3d at 217-18 n. 2 (citation omitted). DI's efforts to defend the arbitrator selection clause are unavailing, and we conclude that the clause, like the five-day filing window and the provision requiring parties to bear their own fees, costs, and expenses, is substantively unconscionable.
Our final task in addressing Nino's unconscionability challenge to the arbitration agreement is to determine whether the unconscionable terms may be severed from the agreement such that the remainder of its terms may be enforced. As the Restatement (Second) of Contracts explains, where aspects of an agreement are unenforceable, "a court may nevertheless enforce the rest of the agreement in favor of a party who did not engage in serious misconduct if the performance as to which the agreement is unenforceable is not an essential part of the agreed exchange." Restatement (Second) of Contracts § 184(1). We have frequently emphasized that determining whether or not the unconscionable provisions of an arbitration agreement should be severed "requires more than a count of the unconscionable provisions," and instead calls for an examination of the specific "nature of the provisions" themselves. Parilla, 368 F.3d at 286.
As we recognized most recently in Parilla, two lines of inquiry are relevant to the question of severability. The first of these is whether the unconscionable aspects "of the employment arbitration agreement constitute[ ] `an essential part of the agreed exchange' of promises" between the parties. Spinetti, 324 F.3d at 214 (quoting Restatement (Second) of Contracts § 184(1)). If the unconscionable aspects of the clause do not comprise an essential aspect of the arbitration agreement as a whole, then the unconscionable provisions may be severed and the remainder of the arbitration agreement enforced. See id. "Whether the performance is an essential part of the agreed exchange depends on its relative importance in the light of the entire agreement between the parties." Restatement (Second) of Contracts § 184, cmt. a.
The second consideration for the question of severability, which we discussed in Alexander and elaborated upon in Parilla, is whether the unconscionability of the arbitration clause demonstrates "a systematic effort to impose arbitration on an employee, not simply as an alternative to litigation, but as an inferior forum that works to the employer's advantage." Parilla, 368 F.3d at 288 (quoting Ferguson v. Countrywide Credit Indus., Inc., 298 F.3d 778, 787-88 (9th Cir.2002)); see also Alexander, 341 F.3d at 271. Put differently, "a multitude of unconscionable provisions in an agreement to arbitrate will preclude severance and enforcement of arbitration if they evidence a deliberate attempt by an employer to impose an arbitration scheme designed to discourage an employee's resort to arbitration or to produce results biased in the employer's favor." Parilla, 368 F.3d at 289; see also, e.g., Nagrampa
These two considerations provide separate and independent bases for declining to sever the unconscionable provisions from an arbitration agreement. That is, if the unconscionable provisions comprise essential aspects of the agreement as a whole, or if the agreement demonstrates that the employer sought to impose arbitration on the employee as an inferior, one-sided forum that worked to the employer's advantage, then severance of the unconscionable provisions is not called for, and the court should decline to enforce the arbitration agreement in its entirety. See id. at 288; Alexander, 341 F.3d at 270-71.
We need not discuss whether the unconscionable provisions of the parties' arbitration agreement comprise an essential aspect of the agreement as a whole, because we conclude that the one-sided nature of the arbitration agreement reveals unmistakably that DI "was not seeking a bona fide mechanism for dispute resolution, but rather sought to impose a scheme that it knew or should have known would provide it with an impermissible advantage." Parilla, 368 F.3d at 289. The provisions in question do not simply accord an advantage upon DI indirectly or by happenstance. Instead, they are baldly one-sided, with only one discernable purpose—to create advantages for the employer that are not afforded to the employee. Of the four members of the arbitration panel, the agreement permits DI to strike two and the employee to strike just one. The employee is required to give notice to DI of the claims he intends to arbitrate, while DI is under no such obligation to provide any notice to the employee. The employee must file a detailed grievance regarding the matter he seeks to arbitrate within five days of the underlying events or lose the right to go to arbitration altogether, while DI is insulated against the risk of default for any failure to adhere to its own filing deadlines. These procedures provided DI with an "impermissible advantage," Parilla, 368 F.3d at 289, because they "unreasonably favor [DI] to the severe disadvantage of [its employees]." Alexander, 341 F.3d at 271. When the unconscionable arbitration provisions "are so one-sided that their only possible purpose is to undermine the neutrality of the proceeding," Hooters, 173 F.3d at 938 (emphasis added), severance of those provisions and enforcement of the remainder of the arbitration agreement is not appropriate. See Parilla, 368 F.3d at 289; Alexander, 341 F.3d at 271; Graham Oil, 43 F.3d at 1248-49. The only conceivable purpose of the arbitration agreement's one-sided provisions is to stack the deck in DI's favor, making severance of the unconscionable terms inappropriate.
As we now explain, we further conclude that the District Court erred in determining that DI did not waive its right to compel arbitration after litigating this case for fifteen months. "Consistent with the strong preference for arbitration in federal courts, waiver is not to be lightly inferred, and waiver will normally be found only where the demand for arbitration came long after the suit commenced and when both parties had engaged in extensive discovery." PaineWebber Inc. v. Faragalli, 61 F.3d 1063, 1068-69 (3d Cir.1995) (internal quotations and citations omitted). Notwithstanding the preference for arbitration, however, "a court may refuse to enforce an arbitration agreement where, for example, `the alleged defaulting party has acted inconsistently with the right to arbitrate,'" Doctor's Assocs., Inc. v. Stuart, 85 F.3d 975, 981 (2d Cir.1996) (quoting St. Mary's Medical Ctr. v. Disco Aluminum Prods. Co., 969 F.2d 585, 588 (7th Cir.1992)), and "we will not hesitate to hold that the right to arbitrate has been waived where a sufficient showing of prejudice has been made by the party seeking to avoid arbitration." Ehleiter, 482 F.3d at 223 (internal quotations and citations omitted).
In Hoxworth v. Blinder, Robinson & Co., Inc., 980 F.2d 912 (3d Cir.1992), we set forth "a nonexclusive list of factors relevant to the prejudice inquiry." Ehleiter, 482 F.3d at 222. The Hoxworth factors are:
Hoxworth, 980 F.2d at 926-27 (internal citations omitted). As is evident by our repeated characterization of these factors as a nonexclusive list, not all the factors need be present to justify a finding of waiver, and "[t]he waiver determination must be based on the circumstances and context of the particular case." Doctor's Assocs., 85 F.3d at 981.
We have, moreover, consistently emphasized that "prejudice is the touchstone for determining whether the right to arbitrate has been waived by litigation conduct." Ehleiter, 482 F.3d at 222 (quotations and citations omitted). As the Hoxworth factors themselves make clear, the concept of prejudice includes not only "substantive prejudice to the legal position of the party claiming waiver," but also extends to "prejudice resulting from the unnecessary delay and expense incurred by the plaintiffs as a result of the defendants' belated invocation of their right to arbitrate." Id. at 224. For example, we stated in Hoxworth that:
Id. (internal quotations and citations omitted). In other words, the investment of considerable time and money litigating a case may amount to sufficient prejudice to bar a later-asserted right to arbitrate. This recognition that the right to arbitrate may be waived under such circumstances is consistent with the purpose behind arbitration itself—arbitration is meant to streamline the proceedings, lower costs, and conserve private and judicial resources, and it furthers none of those purposes when a party actively litigates a case for an extended period only to belatedly assert that the dispute should have been arbitrated, not litigated, in the first place.
In rejecting Nino's argument that DI had waived its right to enforce the arbitration clause, the District Court focused almost exclusively on two of the six Hoxworth factors: the fact that, by including mandatory arbitration among the ten affirmative defenses asserted in the answer, DI had "informed its adversary of the intention to seek arbitration," and the fact that DI had not filed a dispositive motion prior to moving to enforce the arbitration agreement. Hoxworth, 980 F.2d at 926-27. As we now explain, in emphasizing these factors, the District Court gave insufficient consideration to the remaining Hoxworth factors, and, consequently, to the more practical question of whether DI has "acted inconsistently with the right to arbitrate." St. Mary's, 969 F.2d at 588. We conclude that DI, through its litigation conduct, waived its right to compel arbitration of Nino's claims. We address the six Hoxworth factors in turn below.
A. The Timeliness of DI's Motion
The first Hoxworth factor requires that we consider whether DI moved to compel arbitration on a timely basis.
Moreover, to the extent that our review of the motion's timeliness should consider the movant's explanation for its delay, DI's stated rationale for having waited so long to seek to enforce the arbitration agreement is utterly unconvincing. DI explains that it delayed filing a motion to enforce the arbitration agreement because Nino's complaint alleged that Nino and DI had signed a new contract updating the terms of Nino's compensation; "DI had difficulty in locating this document"; and it was not until Nino's July 25, 2007 deposition that DI understood that the complaint's reference to a new contract was, in fact, a reference to a letter of understanding that amended Nino's prior contract. (DI Br. 24.)
No aspect of this explanation withstands scrutiny. First, while the complaint indeed refers to a May 22, 2002 agreement between Nino and DI to modify the terms of his compensation, the complaint certainly does not suggest that this subsequent agreement in any way addressed or modified the original contract's arbitration agreement. DI's contention that the complaint led it to believe that the parties had somehow altered their arbitration agreement is unconvincing, as nothing in the complaint's language supports such an inference. Second, if DI had in fact experienced difficulty in locating the contract it drafted and in assessing its impact upon the parties' arbitration agreement, it could (and presumably would) have propounded interrogatories to Nino to clarify which contract the complaint referred to and whether that contract had, in fact, affected the arbitration agreement;
B. Whether DI Contested the Merits of Nino's Claims
We next consider "the degree to which the party seeking to compel arbitration has contested the merits of its opponent's claims." Hoxworth, 980 F.2d at 926. DI is correct that this factor weighs against a finding of waiver, as it did not engage in motion practice on the merits
C. Whether DI Informed Nino of its Intent to Seek Arbitration
The third Hoxworth factor is whether the party seeking arbitration "has informed its adversary of the intention to seek arbitration even if it has not yet filed a motion to stay the district court proceedings." 980 F.2d at 926-27. The District Court relied primarily upon this factor in its analysis, reasoning that because DI included mandatory arbitration among the ten affirmative defenses asserted in its answer, it had provided Nino with adequate notice of the fact that it would eventually move to enforce the arbitration agreement. According to the District Court, "[a]fter the defendants raised the affirmative defense of arbitration in their answer, Nino was on notice that arbitration may be forthcoming and had the opportunity to plan his litigation strategy accordingly." (J.A. at 23.)
While DI is correct that this factor weighs in its favor, the District Court's analysis overstates its significance in this case. It is undoubtedly true that DI's answer disclosed the possibility that it would seek to compel arbitration, and that this disclosure is an important consideration, although it is by no means a dispositive one, for the waiver analysis. Hoxworth, 980 F.2d at 926-27.
However, the significance, for purposes of the waiver analysis, of DI's invocation of arbitration in its answer decreased the longer DI participated in this litigation without further invoking or even mentioning the prospect of arbitration. Contrary to the District Court's reasoning that Nino could strategize around the initially disclosed prospect of arbitration, a party's capacity to develop a litigation strategy with regard to the likelihood of arbitration diminishes the longer the case is litigated with no further indication that a motion to compel arbitration is forthcoming. Cf. Thyssen, Inc. v. Calypso Shipping Corp., S.A., 310 F.3d 102, 105 (2d Cir.2002) ("[W]aiver is more likely to be found the longer the litigation goes on, the more a party avails itself of the opportunity to litigate, and the more that party's litigation results in prejudice to the opposing party[.]"). A party's approach to discovery, for instance, will differ based upon whether the case is to be litigated or arbitrated.
D. Extent of Non-Merits Motion Practice
Under Hoxworth, we also consider the non-merits motion practice that transpired in this case during the fifteen-month period between when DI was served with the complaint and when it filed its motion to compel arbitration. Id. Significantly, here the non-merits motion practice is equivalent to that in Hoxworth, in which the defendant was found to have waived its right to compel arbitration—as in Hoxworth, DI "inadequately answered [Nino's] discovery requests," requiring Nino to file three detailed motions to compel, which DI opposed. Id. at 925. And as in Hoxworth, the consequence of the parties' motion practice over these discovery disputes was to require Nino to "devote[ ] substantial amounts of time, effort, and money in prosecuting the action." Id. at 926 This factor weighs strongly in favor of a finding of waiver.
E. DI's Assent to the Court's Pretrial Orders
Also significant is the fact that DI "assent[ed] to the [trial] court's pretrial orders," id. at 926-27, an important consideration that the District Court failed to address in its resolution of the waiver issue. In the fifteen months between June 2006 and September 2007, the magistrate judge convened no fewer than ten pretrial conferences. DI does not dispute Nino's contention that it did not even mention the prospect of arbitration at any of these conferences, nor did it object to any of the magistrate judge's pretrial orders based upon its intent to compel arbitration. While the case-specific waiver analysis is not susceptible to precise line-drawing, certainly DI's participation in ten pretrial conferences over the course of fifteen months shows unmistakably that it "acted inconsistently with the right to arbitrate." St. Mary's, 969 F.2d at 588; see Restoration Preservation Masonry, Inc. v. Grove Europe Ltd., 325 F.3d 54, 61 (1st Cir.2003) (noting, inter alia, the expense plaintiffs incurred in participating in thirteen pretrial conferences in concluding that defendant waived right to compel arbitration).
The authorities upon which DI relies do not compel a contrary conclusion. DI draws our attention to Maxum Found., Inc. v. Salus Corp., 779 F.2d 974, 983 (4th Cir.1985), and, in particular, to that court's observation that "the party seeking arbitration does not lose its contractual right by prudently pursuing discovery in the face of a court-ordered deadline." DI appears to overlook the context in which the court made the cited statement. In Maxum, the plaintiff argued that the defendant waived its right to seek arbitration because the defendant participated in discovery and pretrial conferences after it had filed its motion to compel arbitration, but before the trial court ruled on the motion. Id. at 982-83. There was no inconsistency between the defendant's litigation conduct and its intent to arbitrate in that case, because the litigation conduct in question
F. Extent to Which Both Parties Engaged in Discovery
Finally, the parties engaged in significant discovery during the fifteen-month period before DI filed its motion to compel arbitration. During this time the parties conferred and prepared a proposed case management order which contained no mention of arbitration, propounded interrogatories, served and supplemented disclosures, exchanged requests for document production, and attended the depositions of four witnesses. Additionally, as was noted supra, Nino expended additional resources on discovery-related matters as a result of DI's inadequate responses to his discovery requests, which resulted in significant discovery-related motion practice. While the scope of the parties' discovery during the fifteen-month period at issue in this case was not as extensive as the discovery at issue in Hoxworth and Ehleiter, the discovery in this case was by no means de minimis.
DI, in arguing that the parties' discovery-related activities do not demonstrate that it engaged in pretrial activity inconsistent with an intent to arbitrate, notes that the parties' arbitration agreement authorizes the parties to conduct discovery "pursuant to the Federal Rules of Civil Procedure." (J.A. at 81.) In light of Hoxworth's finding that the plaintiffs in that case had been prejudiced by the fact that, in litigating the case in court, the "defendants were able to use the Federal Rules to conduct discovery not available in the arbitration forum," Hoxworth, 980 F.2d at 926, DI contends that there could be no prejudice in this case, since discovery would have been available in the arbitral forum.
The force of this argument is undermined, however, by the arbitration agreement's firm requirement that the arbitration take place "in no event more than thirty (30) days after the selection of an arbitrator has been made." (J.A. at 81.) That is, while the parties would undoubtedly have had some opportunity for discovery had the arbitration clause been invoked on a timely basis, the time constraints placed upon such discovery would have been much more restrictive, and, by consequence, the resources expended on discovery would have been much more limited. See Restoration Preservation Masonry, 325 F.3d at 61. The mere fact that some discovery would have been available in arbitration does not mean that Nino was not prejudiced by having to participate in fifteen months' worth of discovery in federal court before DI elected to move to compel arbitration. The extent of the parties' discovery between June 2006 and September 2007 weighs firmly in favor of a finding of waiver.
In summary, four of the Hoxworth factors—the untimeliness of DI's motion, the
The fifteen-month delay between the service of the complaint and DI's invocation of arbitration was significant, see Ehleiter, 482 F.3d at 223, and DI's delay "caused [Nino] the expense of litigating in court, as well as ... making [Nino] endure [fifteen months] of what would have been (had [DI] succeeded) wasted litigation." St. Mary's, 969 F.2d at 591; see also Ehleiter, 482 F.3d at 222 (such expense and delay constitute prejudice). While we are mindful of the fact that "waiver is not to be lightly inferred," it is not appropriate to compel arbitration where, as here, "the demand for arbitration came long after the suit commenced and when both parties had engaged in extensive discovery." PaineWebber Inc., 61 F.3d at 1068-69 (internal quotations and citations omitted).
For the foregoing reasons, we will reverse the District Court's order compelling arbitration and remand for further proceedings.
- No Cases Found