Sharif v. Wellness International Network, Ltd. , 376 F.3d 720 ( 2004 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
Nos. 03-3944 & 04-1358
RICHARD SHARIF and ROSEE TORRES et al.,
Plaintiffs-Appellants, Cross-Appellees,
v.
WELLNESS INTERNATIONAL NETWORK, LTD.,
a Texas corporation, a/k/a WIN, WIN NETWORK, INC.,
RALPH OATS, CATHY OATS, and SHERI MATTHEWS,
Defendants-Appellees, Cross-Appellants.
____________
Appeals from the United States District Court
for the Northern District of Illinois, Eastern Division.
Nos. 02 C 3047 & 02 C 5801—Samuel Der-Yeghiayan, Judge.
____________
ARGUED JUNE 9, 2004—DECIDED JULY 21, 2004
____________
Before FLAUM, Chief Judge, and BAUER and EVANS,
Circuit Judges.
EVANS, Circuit Judge. This case concerns two procedural
decisions issued by District Judge Samuel Der-Yeghiayan.
The first arises from the court’s dismissal of a suit for want
of prosecution after plaintiffs’ counsel failed to appear for a
hearing date. Second, the court denied Wellness Interna-
tional Network’s motion to compel arbitration. We consoli-
dated both appeals.
2 Nos. 03-3944 & 04-1358
This suit stems from distributorship contracts that the
plaintiffs signed with Wellness International Network
(WIN).1 The suit claims that WIN was only nominally en-
gaged in the business of selling health and wellness pro-
ducts and that they were actually running an illegal pyramid
scheme. The suit alleged violations of RICO, federal secur-
ities law, and the Illinois Consumer Fraud Act as well as
violations of the criminal law giving rise to an alleged right
to void the contracts as against public policy. An amended
complaint was filed in January 2003 in the Northern
District of Illinois.
Shortly thereafter, in March 2003, the plaintiffs filed an-
other lawsuit against the same defendants alleging substan-
tially similar claims. This suit was, however, styled a class
action. Budner v. Murnighan, No. 03 C 2100 (N.D. Ill.). In
Budner, WIN filed a motion to compel arbitration based on
contractual arbitration provisions which provided:
ANY DISPUTE OR CLAIM ARISING UNDER OR IN
CONNECTION WITH THE AGREEMENT OR WITH
RESPECT TO THE BUSINESS RELATIONSHIP
ESTABLISHED BY THIS AGREEMENT SHALL BE
RESOLVED EITHER BY BINDING ARBITRATION
CONDUCTED IN ACCORDANCE WITH THE RULES
OF THE AMERICAN ARBITRATION ASSOCIATION
OR BY A COURT OF COMPETENT JURISDICTION . . . .
District Judge James Moran granted WIN’s motion, 2003
WL 21544236 (N.D. Ill. June 9, 2003). The Budner plaintiffs
did not appeal; and they proceeded to file a demand for
arbitration with the American Arbitration Association.
1
Plaintiffs also brought suit against WIN’s general partner WIN
Network, Inc. and three of WIN’s principals: Ralph Oats, Cathy
Oats, and Sheri Matthews. For convenience, we will refer to the
defendants collectively as WIN.
Nos. 03-3944 & 04-1358 3
Returning to the present case, WIN filed motions to
dismiss under Federal Rule of Civil Procedure 12(b)(6) and
28 U.S.C. § 1406(a), alleging improper venue. The motions
were fully briefed before District Judge Blanche Manning.
Significant for our purposes, Judge Manning granted
plaintiffs’ motions for two short extensions of time to file
their briefs.
Before the motions were ruled on, in August 2003, the case
was transferred to Judge Der-Yeghiayan. Upon receiving
the case, the court “apparently” set an initial status date for
October 20, 2003. We say apparently because there is only
a docket entry to reflect this. There is no order in the
district court file and no docket number assigned to that
entry on the docket sheet. Moreover, plaintiffs’ counsel
insists that he never received notice of the hearing. For
whatever reason, plaintiffs’ counsel, as well as counsel for
one of the defendants, did not appear. That day, the court
checked to see what motions were outstanding and set a
status date of February 2, 2004. Also on October 20, WIN
filed a motion to compel arbitration. The motion was iden-
tical to the one presented to Judge Moran; and WIN in-
cluded a copy of Judge Moran’s order granting the motion.
Three days later, on October 23, the district court held a
hearing on WIN’s motion to compel arbitration. Counsel for
all parties were present. At the hearing, nothing was said
about counsels’ absence 3 days earlier. Judge Der-Yeghiayan
orally denied WIN’s motion. The court later wrote “defendant
already had before this court a motion to dismiss this action
for lack of venue pursuant to 28 U.S.C. § 1406(a)” wherein
the “defendant presented to this court an agreement
between the parties that provided that proper venue for the
matter was in the state of Texas and that arbitration shall
take place in the state of Texas.” Accordingly, the district
court found that the motion to compel arbitration was
“superfluous” because “defendant’s pending motion to
dismiss for improper venue already included the arbitration
4 Nos. 03-3944 & 04-1358
clause in Texas.” The court ruled that it “did not deny the
Defendant’s motion to compel arbitration in Texas on the
merits, but ruled that it would not grant such a motion at
that time because the defendant already had a motion to
dismiss before this court and a ruling on the motion was
scheduled which would have been dispositive of the issue on
the merits.” WIN filed an interlocutory appeal.
At the same hearing, the court issued a minute order
which noted “Status hearing set for 02/02/04 to stand.” On
November 13, 2003, the parties were before the court pur-
suant to WIN’s motion to stay proceedings in the district
court while it pursued their appeal. Once again, counsel for all
parties were present. Judge Der-Yeghiayan called the
motion and immediately set a briefing schedule, calling for
plaintiffs to file a response on November 26 and defendants
to reply a week later. At the end of the day, Judge Der-
Yeghiayan said, “[A]nd we will be back, next status,
December 4, ‘03 at 9:00 o’clock.” Judge Der-Yeghiayan did
issue a minute order reflecting the briefing schedule. Both
plaintiffs and defendants filed their respective papers in
accordance with the court’s stated schedule.
On December 4, 2003, Judge Der-Yeghiayan held the
status hearing and denied WIN’s motion to stay proceed-
ings. Significantly, plaintiffs’ counsel was not present. The
transcript from December 4 reflects no comment or inquiry
by the court or defense counsel regarding plaintiffs’ coun-
sel’s absence.
Four days later the court issued a minute order dismiss-
ing the case without prejudice for want of prosecution due
to counsel’s failure to attend the December 4 hearing or to
later appear in court to explain the absence. The court also
noted that plaintiffs’ counsel had failed to appear for an
initial status call (the one on October 20) when the case had
been transferred to him. Finally, Judge Der-Yeghiayan
emphasized that plaintiffs had obtained two extensions of
time from Judge Manning.
Nos. 03-3944 & 04-1358 5
Plaintiffs filed a motion to vacate the dismissal order a
week later. The motion, which both attorneys at counsel’s
firm verified, stated that they had not received any order
setting the December 4 status date and had heard nothing
at the November 13th hearing regarding such a date. It
further noted that they had not received the order dismiss-
ing the suit for want of prosecution but had only learned of
it when their client (who had originally filed the suit pro se)
had received the order and called them about the suit’s
dismissal. Judge Der-Yeghiayan denied the motion. He
emphasized that even if it was true that counsel did not
hear the setting of the December 4 date, “This court expects
all counsel to heed such oral notifications and pay attention
at status calls in order to enable the status calls to be a
productive means of moving the case forward. Counsel
should not expect to rely on a subsequent minute order to
keep counsel apprized of the status of the case.”
Plaintiffs then filed a combined verified motion to recon-
sider the denial of the motion to vacate and a second motion
to vacate the dismissal order, along with a supporting
memorandum. Counsel explained the two extensions they
received from Judge Manning. They also emphasized that
the result of dismissal could be that the statute of limita-
tions might time-bar some of plaintiffs’ claims. The day
after the motion was filed, Judge Der-Yeghiayan denied it.
He noted that counsel failed to explain which claims would
be barred and why. He stated, moreover, that dismissal
“was the result of Plaintiffs’ own lack of diligence and thus
even if some claims may be barred by the statute of lim-
itations we would deny the instant motions.”
On January 16, 2004, plaintiffs filed another verified
motion to submit additional evidence proffering evidence
that defense counsel, too, had not heard the court set the
December 4 hearing date at the November 13 session. The
court denied this motion as well without a hearing. Plaintiffs
appealed. As noted above, we consolidated plaintiffs’ appeal
6 Nos. 03-3944 & 04-1358
of the dismissal for want of prosecution with WIN’s appeal
of the court’s denial of its motion to compel arbitration. We
will address each in turn.
We begin with Judge Der-Yeghiayan’s dismissal for lack
of prosecution. We review such a dismissal only to deter-
mine if the district court abused its discretion. Aura Lamp
& Lighting v. Int’l Trading Corp., 325 F.3d 903, 907-08 (7th
Cir. 2003). “The district judge should be presumed to have
acted reasonably, and reversal is warranted therefore only
if it is plain that the dismissal was a mistake or that the
judge did not consider factors essential to the exercise of
sound discretion.” Ball v. City of Chicago, 2 F.3d 752, 755
(7th Cir. 1993).
We have repeatedly held that a district court ordinarily
may not dismiss a case for want of prosecution without first
providing an explicit warning to the plaintiff. See Aura
Lamp, 325 F.3d at 908; Bolt v. Loy, 227 F.3d 854, 856 (7th
Cir. 2000); FEC v. Salvi, 205 F.3d 1015, 108-19 (7th Cir.
2000); Ball, 2 F.3d at 760. However, the rule was adopted
specifically for situations in which claims are dismissed
with prejudice. Ball, 2 F.3d at 753; Bolt, 227 F.3d at 855.
Because a plaintiff may refile the same suit on the same
claim, dismissal without prejudice does not constitute such a
harsh sanction and does not foreclose a determination on
the merits. In such a circumstance, an explicit warning is
not normally required.
That is not, however, the situation here. Although Judge
Der-Yeghiayan ostensibly dismissed plaintiffs’ claims with-
out prejudice, the effect may be the same as a dismissal
with prejudice—plaintiffs may not have the ability to refile.
Indeed, plaintiffs notified the court that there may be
statute of limitations problems if the case is dismissed for
lack of prosecution. Nevertheless, without even considering
the impact of its holding, the court dismissed the case. To
do so, we hold, constitutes an abuse of discretion.
Nos. 03-3944 & 04-1358 7
In defense of Judge Der-Yeghiayan’s actions, WIN argues
that the plaintiffs failed to provide any details to the court
on which claims would be barred or how they would be
barred. Significantly, however, Judge Der-Yeghiayan’s
order emphasizes that “even if some claims may be barred
by the statute of limitation” he “would deny the instant
motions.” What is explicit is that it would have made no
difference if plaintiffs had provided such details.
We also emphasize that although Judge Der-Yeghiayan
had the authority to dismiss for lack of prosecution, we
question its application here. First, plaintiffs’ counsel had
actively participated in the case. Indeed, only weeks before
the case was dismissed counsel successfully defeated WIN’s
motion to stay proceedings. And there is no suggestion that
counsel needlessly delayed the case. Indeed, Judge Manning
had specifically authorized the delays (including one for
surgery) relied on in Judge Der-Yeghiayan’s order. Finally, we
emphasize that contacting counsel here, certainly a common
courtesy, would not have been too great a burden. Judge
Der-Yeghiayan’s clerk, another member of his staff, or even
defense counsel could easily have placed a telephone call to
plaintiffs’ counsel. Also, when presented with verified
claims that counsel failed to receive a court order, the
prudent course would be to ensure that the court has
counsel’s proper address before taking the drastic sanction
of dismissing the suit.
In sum, in merely setting aside plaintiffs’ concerns
regarding statute of limitations and imposing what poten-
tially could be an extremely harsh sanction, Judge Der-
Yeghiayan abused his discretion and plaintiffs are entitled
to have the dismissal order vacated.
We next turn to WIN’s cross-appeal and hold that Judge
Der-Yeghiayan erred in not granting WIN’s motion to com-
pel arbitration. We review a denial of a motion to compel
arbitration de novo. Livingston v. Assocs. Fin., Inc., 339 F.3d
553, 557 (7th Cir. 2003). At the outset, we emphasize
plaintiffs do not dispute that each plaintiff signed a contract
8 Nos. 03-3944 & 04-1358
that included an arbitration clause and that the arbitration
clause encompasses the plaintiffs’ claims. We also note that
Judge Moran granted a virtually identical motion.
Nevertheless, without even deciding whether the arbitra-
tion clause was applicable, the court denied WIN’s motion
on the grounds that the motion was superfluous with a
venue motion already before the court. In other words, the
court refused to consider the merits of the motion to compel
arbitration because of the pending venue challenge. The
Federal Arbitration Act, however, states that if the parties
have an arbitration agreement and the asserted claims are
within its scope, the motion to compel cannot be denied.
Kiefer Specialty Flooring, Inc. v. Tarkett, Inc., 174 F.3d 907,
909 (7th Cir. 1999). As the Fifth Circuit has noted:
An application for arbitration by either party under
section 3 requests the district court to refrain from fur-
ther action in a suit pending arbitration, and requires
the court to first determine whether there is a written
agreement to arbitrate between the parties, and then
whether any of the issues raised are within the reach of
the agreement.
Texaco Exploration v. AmClyde Engineered Prods. Co., 243
F.3d 906, 909 (5th Cir. 2001) (internal citations and quo-
tation marks omitted). The motion to compel arbitration,
rather than being superfluous, had to be addressed by the
court. In dismissing the motion, Judge Der-Yeghiayan erred.
Significantly, plaintiffs make no attempt to support the
trial court’s ruling on the grounds Judge Der-Yeghiayan
relied on. Rather, they argue that WIN waived its motion to
compel by waiting 18 months after the suit was filed, 3½
months after Judge Moran entered his decision on the motion
to compel arbitration, and filing four motions to dismiss
before filing the motion to compel. Plaintiffs contend, more-
over, that the arbitration clause by its own terms does not
apply to disputes involving claims of $100,000 or more
Nos. 03-3944 & 04-1358 9
“inclusive of costs and attorneys’ fees,” which limitation pre-
cludes compelling this case to go to arbitration.
A contractual right to arbitrate may be waived expressly
or implicitly, and a party that chooses a judicial forum for
the resolution of a dispute is presumed to have waived its
right to arbitrate. Ernst & Young LLP v. Baker O’Neal
Holdings, Inc., 304 F.3d 753, 757 (7th Cir. 2002). Courts
must examine the totality of the circumstances and “deter-
mine whether based on all the circumstances, the party
against whom the waiver is to be enforced has acted incon-
sistently with the right to arbitrate.” Id. (internal citation
omitted). Although several factors may be considered in
determining waiver, diligence or the lack thereof should
weigh heavily in the decision—“did that party do all it could
reasonably have been expected to do to make the earliest
feasible determination of whether to proceed judicially or by
arbitration?” Id. (quoting Cabinetree of Wis., Inc. v.
Kraftmaid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995)).
Considering this standard, WIN did not waive its rights
to arbitrate. Initially, plaintiffs were surely on notice that
WIN was likely to demand arbitration, since it had suc-
cessfully done so in Budner. Second, it is well-established
that a party does not waive its right to arbitrate merely by
filing a motion to dismiss. See Creative Solutions Group,
Inc. v. Pentzer Corp., 252 F.3d 28, 33 (1st Cir. 2001);
Williams v. Cigna Fin. Advisors, Inc., 56 F.3d 656, 661-62
(5th Cir. 1995); Rush v. Oppenheimer & Co., 779 F.2d 885,
888 (2nd Cir. 1985); Lake Communications, Inc. v. ICC Corp.,
738 F.2d 1473, 1477 (9th Cir. 1984). Likewise, a motion to
transfer venue does not constitute waiver of the right to
arbitrate. See Walker v. Countrywide Credit Indus. Inc.,
2004 WL 246406, at *4 (N.D. Tex. Jan. 15, 2004).
Cabinetree, relied on by plaintiffs, does not lead to a dif-
ferent result. There, the plaintiff filed suit in state court.
Instead of filing a motion to stay pending arbitration, the
10 Nos. 03-3944 & 04-1358
defendant instead removed the case to federal court, “mani-
fest[ing] an intention to resolve the dispute through the
processes of the federal court.” Id. at 389. In Cabinetree,
moreover, the defendant had propounded discovery and re-
ceived over 2000 documents in response. Id. at 391. Further-
more, the defendant waited until 5 months before trial
before invoking the arbitration clause. Here, in contrast,
WIN did not remove the case to federal court, no discovery
had taken place, and there was no trial date. All that had
occurred was a motion to dismiss under Rule 12(b)(6) and
28 U.S.C. § 1406(a).
Plaintiffs next claim that they are not bound by the ar-
bitration clause because the contract provides that if a
claim is worth more than $100,000, then it is not subject to
arbitration. Plaintiffs argue that because WIN has not
proved with “legal certainty” that plaintiffs’ claims are for
less than $100,000, arbitration is improper. WIN admits,
however, that only those plaintiffs with claims less than
$100,000 must be compelled to arbitrate. According to the
complaint, the majority of plaintiffs have such claims. Indeed,
the plaintiffs plead that 8 of the 11 claims are for damages
of less than $100,000.
Nevertheless, plaintiffs argue that the “combined” loss of
plaintiffs exceeds $100,000. However, arbitration claims of
multiple parties cannot be consolidated. Gov’t of the U.S. v.
Boeing Co., 998 F.2d 68, 69 (2nd Cir. 1993); Del E. Webb
Constr. v. Richardson Hosp. Auth., 823 F.2d 145, 150 (5th
Cir. 1987). Therefore, there is no justification for aggregat-
ing them for purposes of determining the “monetary damage”
claim. Plaintiffs’ argument that we should adopt the rules
for determining the amount in controversy in diversity is
equally unpersuasive. Even were we to adopt such a rule,
the combined losses of multiple plaintiffs cannot be aggre-
gated. Del Vecchio v. Conseco, Inc., 230 F.3d 974, 977 (7th
Cir. 2000). Thus, plaintiffs cannot aggregate their claims to
exceed the $100,000 ceiling.
Nos. 03-3944 & 04-1358 11
For the foregoing reasons, we VACATE the dismissal for
lack of prosecution. Further, we REVERSE the court’s denial
of WIN’s motion to compel arbitration and REMAND with
instructions to order arbitration on those claims subject to
arbitration.
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-02-C-0072—7-21-04