Joca-Roca Real Estate LLC v. Brennan, Jr. , 772 F.3d 945 ( 2014 )


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  •           United States Court of Appeals
    For the First Circuit
    No. 14-1353
    JOCA-ROCA REAL ESTATE, LLC,
    Plaintiff, Appellant,
    v.
    ROBERT T. BRENNAN, JR.,
    Defendant, Appellee.
    APPEAL FROM THE UNITED STATES DISTRICT COURT
    FOR THE DISTRICT OF MAINE
    [Hon. John A. Woodcock, Jr., U.S. District Judge]
    [Hon. John H. Rich, III, U.S. Magistrate Judge]
    Before
    Lynch, Chief Judge,
    Selya and Kayatta, Circuit Judges.
    Jeffrey T. Piampiano, with whom Reade E. Wilson and Drummond
    Woodsum & MacMahon were on brief, for appellant.
    Matthew J. Williams, with whom Stephen Y. Hodsdon and Hodsdon
    & Ayer were on brief, for appellee.
    December 1, 2014
    SELYA, Circuit Judge.       Federal law favors agreements to
    arbitrate.     Thus, when contracting parties provide that disputes
    arising under a contract will be resolved by arbitration, federal
    courts ordinarily will honor that choice.         But arbitration clauses
    are not set in cement: such clauses can be waived, either expressly
    or through conduct.        The court below found such a conduct-based
    waiver and denied the plaintiff's motion to stay court proceedings
    in order to clear the way for arbitration.           The plaintiff appeals.
    We affirm.
    The   stage   is   easily   set.   On    September   18,   2005,
    plaintiff-appellant Joca-Roca Real Estate, LLC and defendant-
    appellee Robert T. Brennan, Jr., entered into an asset purchase
    agreement (the Agreement).         The Agreement paved the way for the
    transfer of title to certain real property that served as the site
    of an intermodal vehicle dealership in South Lebanon, Maine.1             The
    Agreement contained a broad provision requiring submission of all
    disputes "concerning the validity, interpretation and enforcement"
    of the Agreement to an arbitrator for final and binding resolution.
    The plaintiff came to believe that the defendant had
    misled it concerning certain attributes of the purchased property.
    Acting on this belief, the plaintiff sued the defendant in the
    1
    Although other firms were parties to the Agreement, none of
    them is involved in this litigation. Consequently, we treat the
    Agreement as if the plaintiff and the defendant were the only
    signatories.
    -2-
    United States District Court for the District of Maine on March 4,
    2013.    Invoking diversity jurisdiction, see 
    28 U.S.C. § 1332
    (a),
    the plaintiff's complaint asserted claims for fraud and breach of
    contract arising out of the Agreement.            Notably, the plaintiff
    commenced this civil action without making the slightest effort to
    pursue arbitration.
    The defendant answered the complaint, raising as an
    affirmative defense (which it subsequently never pressed) the
    plaintiff's "fail[ure] to seek relief in the manner required under"
    the Agreement.      A magistrate judge promptly entered a scheduling
    order closing discovery in August of 2013 and setting the case for
    trial in January of 2014.         The parties began discovery and, at
    their joint behest, the magistrate judge granted several extensions
    of the discovery deadline.        That deadline was eventually enlarged
    to December 16, 2013; the trial date was moved back to February 3,
    2014; and the parties were directed to notify the court of their
    intent to file summary judgment motions by December 23, 2013.
    During the course of pretrial proceedings, the parties
    conducted     sixteen    depositions,       propounded        and   answered
    interrogatories, and produced and exchanged thousands of pages of
    documents. In the process, the magistrate judge held no fewer than
    four    telephone   conferences    to   resolve   discovery    disputes   and
    scheduling conflicts.
    -3-
    On   December   6,   2013,    the   plaintiff    moved   to   stay
    proceedings pending arbitration. The motion offered no explanation
    for   the   plaintiff's     cunctation    in    invoking    the   Agreement's
    arbitration provision.       The defendant objected and notified the
    court of his intent to move for summary judgment.            The magistrate
    judge then denied the motion to stay on the ground that the
    plaintiff had waived its arbitral rights.            The plaintiff took a
    first tier appeal of this ruling to the district judge, see Fed. R.
    Civ. P. 72(a), who summarily affirmed the denial of the stay.
    This timely appeal followed.           Even though the order
    appealed from is interlocutory, we have jurisdiction to hear and
    determine the appeal.        See 
    9 U.S.C. § 16
    (a)(1)(A) (authorizing
    immediate appeals from denials of motions to stay court proceedings
    pending arbitration).
    We review decisions regarding whether waivers of arbitral
    rights have occurred de novo.       See Menorah Ins. Co. v. INX Reins.
    Corp., 
    72 F.3d 218
    , 220 (1st Cir. 1995).             Embedded within this
    standard, we review subsidiary findings of fact for clear error.
    See 
    id.
    Generally speaking, what contracting parties take they
    can give away — and parties to a contract normally are free to
    waive the right to arbitration.           See Restoration Pres. Masonry,
    Inc. v. Grove Eur. Ltd., 
    325 F.3d 54
    , 60 (1st Cir. 2003).              Such a
    -4-
    waiver may be either express or implied.          See 
    id. at 61
    .    This case
    deals only with implied waiver.
    In considering whether a waiver can be implied, we start
    with the strong federal policy favoring arbitration agreements.
    See AT&T Mobility LLC v. Concepcion, 
    131 S. Ct. 1740
    , 1745, 1749
    (2011); Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 
    460 U.S. 1
    , 24-25 (1983).       Given the strength of this policy, "mere
    delay in seeking [arbitration] without some resultant prejudice" is
    insufficient to ground a finding of conduct-based waiver. Creative
    Solutions Grp., Inc. v. Pentzer Corp., 
    252 F.3d 28
    , 32 (1st Cir.
    2001) (alteration in original) (internal quotation marks omitted).
    The   party    advocating   waiver   has   the    burden   of   demonstrating
    prejudice.      See Sevinor v. Merrill Lynch, Pierce, Fenner & Smith,
    Inc., 
    807 F.2d 16
    , 19 (1st Cir. 1986).
    In   determining   whether   a     conduct-based    waiver   has
    occurred, we ask whether there has been an undue delay in the
    assertion of arbitral rights and whether, if arbitration supplanted
    litigation, the other party would suffer unfair prejudice.                  See
    Marie v. Allied Home Mortg. Corp., 
    402 F.3d 1
    , 15 (1st Cir. 2005);
    Rankin v. Allstate Ins. Co., 
    336 F.3d 8
    , 12 (1st Cir. 2003).               That
    determination is informed by a salmagundi of factors, including:
    the length of the delay, the extent to which the party seeking to
    invoke arbitration has participated in the litigation, the quantum
    of discovery and other litigation-related activities that have
    -5-
    already taken place, the proximity of the arbitration demand to an
    anticipated trial date, and the extent to which the party opposing
    arbitration would be prejudiced.         See, e.g., Lomas v. Travelers
    Prop. Cas. Corp. (In re Citigroup, Inc.), 
    376 F.3d 23
    , 26 (1st Cir.
    2004); Restoration Pres. Masonry, 
    325 F.3d at 61
    .
    In the case at hand, the plaintiff asseverates that the
    district court applied the wrong legal standard because it found a
    waiver of arbitral rights without requiring a showing of prejudice
    to the defendant.2    This is pie in the sky: even a cursory reading
    of the district court's decision reveals that the court applied the
    correct legal standard.      The court noted that the party urging
    waiver (here, the defendant) must demonstrate prejudice and then
    considered whether the delay in this case resulted in any such
    prejudice.      Thus, the issue before us reduces to whether the
    court's   waiver   determination   was   correct.    We   turn   to   that
    question.
    It is common ground that a party must invoke its right to
    arbitration in a timeous manner or else risk forfeiting that right.
    See Rankin, 336 F.3d at 12.     Here, the plaintiff commenced a civil
    action, vigorously prosecuted it, and then — after many months of
    2
    The plaintiff's asseveration focuses on the rescript written
    by the magistrate judge.     This is understandable because the
    district judge's affirmance of the magistrate judge's order was
    entered without an accompanying opinion. We take an institutional
    view and refer throughout to the magistrate judge's analysis as
    that of the district court.
    -6-
    active litigation — tried to switch horses midstream to pursue an
    arbitral remedy. To make matters worse, it made this abrupt about-
    face in the absence of any material change in circumstances.3
    Seen in this light, the plaintiff's belated resort to
    arbitration was anything but timely. The plaintiff chose to eschew
    an available arbitral forum and, instead, brought suit in the
    federal district court.         The defendant then reminded the plaintiff
    of the availability of arbitration through an affirmative defense.
    The plaintiff turned a blind eye to this reminder and waited more
    than       eight   months   before   seeking   a   stay   in   order   to   pursue
    arbitration.         By that time, the close of discovery was hard at
    hand, a summary judgment motion was in the offing, and trial was
    less than two months away.           Undue delay is manifest.
    Here, moreover, the delay is more troubling because the
    plaintiff never offered any explanation for it.                   When directly
    questioned about the plaintiff's lack of any explanation for its
    belated decision to abandon the courtroom in favor of an arbitral
    forum, appellate counsel was wholly uninformative.               We are left to
    infer that the change in direction may well reflect the plaintiff's
    dissatisfaction with the way the court case was proceeding — and we
    3
    This is not, for example, a case in which an amendment to
    the pleadings or a later-filed counterclaim raises an arbitrable
    issue for the first time. See, e.g., Comm'l Union Ins. Co. v.
    Gilbane Bldg. Co., 
    992 F.2d 386
    , 387 & n.1 (1st Cir. 1993).
    -7-
    do not condone the use of an arbitration clause as a parachute when
    judicial winds blow unfavorably.
    To be sure, prejudice is essential for a waiver — but the
    required showing is "tame at best."     Id. at 14.    Some degree of
    prejudice ordinarily may be inferred from a protracted delay in the
    assertion of arbitral rights when that delay is accompanied by
    sufficient litigation activity.    See, e.g., id.; Restoration Pres.
    Masonry, 
    325 F.3d at 61
    ; Navieros Inter-Americanos, S.A. v. M/V
    Vasilia Express, 
    120 F.3d 304
    , 316 (1st Cir. 1997); Menorah, 
    72 F.3d at 222
    . That inference makes good sense: during such a period
    of delay, the opposing party usually will incur cost, measured in
    both out-of-pocket expense and the value of time.
    So it is here: the plaintiff's conduct evinced a clear
    intent to forgo arbitration and resolve the disputed matter through
    litigation.   In response, the defendant undertook the discovery
    that he believed necessary to mount a defense.       Over a period of
    more than eight months, the parties engaged actively in discovery;
    and the defendant incurred what must have been substantial costs
    associated with more than a dozen depositions, interrogatories,
    document production, and conferences with the magistrate judge and
    opposing counsel.   With trial looming, an eleventh-hour stay in
    favor of arbitration would have forced the defendant into a new
    forum and, in the bargain, postponed resolution of the underlying
    -8-
    controversy. That would cause the defendant further prejudice4 and
    nullify one of the primary benefits of arbitration: its use as a
    cost-effective and expedient alternative to litigation.            See Com-
    Tech Assocs. v. Computer Assocs. Int'l, Inc., 
    938 F.2d 1574
    , 1576-
    77 (2d Cir. 1991).
    The plaintiff resists the conclusion that the defendant
    would be prejudiced by a stay.       It insists that delay, by itself,
    cannot constitute the requisite prejudice.              This overly broad
    argument fails to account for the myriad forms of prejudice that
    may result from a belated invocation of rights.
    We   agree   that   mere    delay   in   asserting   a   right   to
    arbitrate, without more, does not require a finding of waiver.
    See, e.g., Restoration Pres. Masonry, 
    325 F.3d at 61
    ; Creative
    Solutions, 
    252 F.3d at 32
    ; Comm'l Union Ins. Co. v. Gilbane Bldg.
    Co., 
    992 F.2d 386
    , 390 (1st Cir. 1993).            Here, however, there is
    more: this is not a case in which no significant activity occurred
    during the period of delay.      We evaluate whether any particular
    period of delay supports a finding of prejudice based largely on
    what did (or did not) take place during that period.
    4
    This prejudice is magnified because the district court
    proceedings have been held in abeyance since May of 2014, despite
    the absence of a formal stay. Without the plaintiff's change of
    heart, this matter likely would have been concluded, by summary
    judgment or by trial, before now.      Instead, the parties have
    remained locked in litigation and face the certain prospect of
    further proceedings at the conclusion of this appeal.
    -9-
    This appraisal is accomplished by assaying, among other
    things, the "litigation activities engaged in during that time."
    Restoration Pres. Masonry, 
    325 F.3d at 61
    .              Where those activities
    are extensive, prejudice may be "inferred from the necessary
    expenditures over that period."           Id.; accord Rankin, 336 F.3d at
    14; Menorah, 
    72 F.3d at 222
    .
    The   longer   the    delay     and   the    more   extensive   the
    litigation-related activities that have taken place, the stronger
    the inference of prejudice becomes. Here, the delay was protracted
    and the litigation-related activities were copious.              These are the
    very elements that the district court weighed in finding a waiver.
    Endeavoring to undermine this finding, the plaintiff
    argues that money and time spent in discovery should not be deemed
    prejudicial where the same discovery would have been pursued in
    arbitration.5     In support, the plaintiff cites our decision in
    Sevinor,6   in    which    we    concluded    that      the   party   resisting
    5
    As an offshoot of this argument, the plaintiff posits that
    much of the discovery undertaken in this matter was relevant only
    to its fraud claim, the arbitrability of which is disputed. It
    speculates that if the fraud claim is not arbitrable, discovery
    anent that claim would have been necessary regardless of what might
    have transpired in arbitration.     But the plaintiff has made no
    effort in this court either to explain why the fraud claim might
    not be arbitrable or to identify what discovery was peculiarly
    related to that claim. This line of argument is, therefore, not
    properly before us. See United States v. Zannino, 
    895 F.2d 1
    , 17
    (1st Cir. 1990).
    6
    The plaintiff also relies on Page v. Moseley, Hallgarten,
    Estabrook & Weeden, Inc., 
    806 F.2d 291
     (1st Cir. 1986), abrogated
    on other grounds by Shearson/Am. Express, Inc. v. McMahon, 482 U.S.
    -10-
    arbitration had not demonstrated prejudice though answering over
    300 interrogatories and responding to a dozen requests for document
    production.     See 
    807 F.2d at 19
    .      But our decision in Sevinor was
    case-specific: the party invoking arbitration had put its opponent
    on notice of its preference for arbitration before any discovery,
    thus ameliorating any potential prejudice.          See id.; accord Hilti,
    Inc. v. Oldach, 
    392 F.2d 368
    , 371 (1st Cir. 1968).         Early notice of
    intent   to    pursue   arbitration    tends   to   mitigate   prejudice    by
    allowing the opposing party to seek prompt resolution of the
    arbitrability question or consider circumscribed discovery.                See
    Nino v. Jewelry Exch., Inc., 
    609 F.3d 191
    , 211 (3d Cir. 2010).             The
    plaintiff gave no such early notice here, and its unremitting
    pursuit of litigation deprived the defendant of any opportunity to
    mitigate prejudice.
    Nor does the district court's professed inability to
    determine which discovery procedures undertaken in this litigation
    would have been available in arbitration tip the decisional scales.
    The defendant could have offered evidence on this point, but was
    not required to do so; after all, arbitration is not an exotic
    dispute-resolution mechanism.          See Gilmer v. Interstate/Johnson
    Lane Corp., 
    500 U.S. 20
    , 31 (1991) (noting "the simplicity,
    informality, and expedition of arbitration" (internal quotation
    220 (1987).  This reliance is misplaced.  In Page, the party
    opposing arbitration stipulated that discovery had not been
    prejudicial. See id. at 294.
    -11-
    marks omitted)).    Given the streamlined nature of arbitration and
    the   limited   type,   kind,   and    quantum   of   discovery   generally
    available in that forum, we think it highly improbable that the
    discovery undertaken here would have occurred in arbitration.          And
    at any rate, the plaintiff's belated about-face deprived the
    defendant of any opportunity to tailor his discovery strategy to
    the much different demands of arbitral proceedings.7
    We need go no further.       "[T]here is no bright-line rule
    for a waiver of arbitral rights, and each case is to be judged on
    its particular facts." Tyco Int'l Ltd. v. Swartz (In re Tyco Int'l
    Ltd. Sec. Litig.), 
    422 F.3d 41
    , 46 (1st Cir. 2005).         According due
    weight to the chronology and circumstances recounted above, we
    think it is nose-on-the-face plain that the defendant demonstrated
    that granting a stay would cause him prejudice.              We think it
    equally plain that the district court did not err in concluding
    that the plaintiff has, through its conduct, waived its right to
    demand arbitration.
    Affirmed.
    7
    We add a coda. Even if the discovery taken in the lawsuit
    could have been conducted in arbitration, the fact remains that the
    defendant had to respond to a lawsuit, litigate it over a nine-
    month period, prepare for trial, and then — shortly before trial
    was to begin — respond to a belated attempt to move the case to an
    arbitral forum. The time spent and expenses incurred in taking
    these steps would support a finding of prejudice, whether or not
    the scope of discovery was the same in arbitration as in federal
    court.
    -12-