Brickstructures, Inc. v. Coaster Dynamix, Inc. ( 2020 )

In the
United States Court of Appeals
For the Seventh Circuit
____________________
No. 19‐2187
BRICKSTRUCTURES, INC.,
Plaintiff‐Appellee,
v.
COASTER DYNAMIX, INC.,
Defendant‐Appellant.
____________________
Appeal from the United States District Court for the
Northern District of Illinois, Eastern Division.
No. 1:16‐cv‐10969 — Joan B. Gottschall, Judge.
____________________
ARGUED DECEMBER 9, 2019 — DECIDED MARCH 11, 2020
____________________
Before EASTERBROOK, ROVNER, and SCUDDER, Circuit
Judges.
SCUDDER, Circuit Judge. Brickstructures, Inc. and Coaster
Dynamix, Inc. joined forces to create a LEGO‐compatible
roller coaster set. The venture later soured, and Brickstruc‐
tures filed a lawsuit in federal court against its former partner.
The two companies had signed an agreement that contained
an arbitration provision. Coaster Dynamix invoked that pro‐
vision in a second motion to dismiss. Brickstructures viewed
2 No. 19‐2187
the motion as untimely (indeed frivolous) and stated so in a
letter that threatened sanctions if Coaster Dynamix did not
withdraw its motion. The tactic worked, and Coaster Dy‐
namix withdrew its arbitration demand. When Coaster Dy‐
namix renewed the argument in a motion to compel arbitra‐
tion, the district court denied the resurrected request on the
ground that the earlier withdrawal amounted to a waiver of
the right to arbitrate. We agree.
I
Brickstructures, Inc. is a product design firm that creates
LEGO sets, those colorful plastic bricks used to form minia‐
ture castles, spaceships, and whatever else a youthful imagi‐
nation can conjure up. Coaster Dynamix, Inc. creates and sells
model roller coasters. The two companies agreed to partner
to design a roller coaster kit that would be compatible with
LEGOs or other plastic bricks, and in doing so, they executed
a joint venture agreement. The document was no master class
in contract drafting—it was a stock, fill‐in‐the‐blank agree‐
ment with spaces for the terms and details to be inserted.
Many of those blanks went unfilled.
The agreement contained this arbitration clause:
SECTION TEN: ARBITRATION
The assignment of specific duties and authority to
_______ [C.D.] was made to avoid major differences be‐
tween the parties as to conduct of the venture. The par‐
ties declare that the terms of this agreement are con‐
trolling as to each of them. Any matter in dispute, and
which is not provided for in this agreement, shall be
submitted to arbitration __________ [under the provi‐
sions of ________ (cite statute) or as the case may be].
No. 19‐2187 3
With the venture agreement in place, the collaboration
successfully released an initial product called the Roller‐
Coaster Factory. But the relationship fizzled once the compa‐
nies turned their sights toward a successor product that never
reached the market. For its part, Coaster Dynamix went on to
independently launch the Cyclone, a LEGO‐compatible roller
coaster kit, without attributing any credit to its former part‐
ner.
Brickstructures sued, claiming that Coaster Dynamix
breached the joint venture agreement and its fiduciary duties
and falsely advertised in violation of the Lanham Act. Coaster
Dynamix moved to dismiss the complaint under Federal Rule
of Civil Procedure 12(b)(6), principally arguing that the ven‐
ture arrangement was not an enforceable contract. The district
court dismissed the original complaint on the basis of a juris‐
dictional defect.
An amendment cured the jurisdictional issue and added
an unjust enrichment claim. Coaster Dynamix moved anew to
dismiss, this time under Rules 12(b)(2), 12(b)(3), and 12(b)(6).
Once again, the main contractual argument was that the
amended complaint did not allege a binding joint venture.
But this time Coaster Dynamix urged the court, if it did find
there was a contract, to dismiss the lawsuit under Rule
12(b)(3) for improper venue because the agreement contained
a provision that made arbitration the exclusive forum for the
claims. The company also raised a personal jurisdiction argu‐
ment.
Days later Coaster Dynamix received a letter from Brick‐
structures’s attorneys. The letter demanded that the company
withdraw the personal jurisdiction and arbitration arguments
from its second motion to dismiss because Coaster Dynamix
4 No. 19‐2187
waived them by not advancing them in its first motion. The
letter called the arguments “clearly frivolous” and threatened
to seek sanctions.
Brickstructures’s letter proved effective. That very day
Coaster Dynamix informed the district court that it was with‐
drawing its personal jurisdiction and arbitration‐based venue
arguments. The notice Coaster Dynamix filed with the court
was clear and precise: “Since Coaster Dynamix did not explic‐
itly move on the personal jurisdiction and venue issues in its
motion to dismiss the original complaint, Coaster Dynamix
withdraws the sections of its pending motion to dismiss based
on lack of personal jurisdiction and improper venue.” That
left only Coaster Dynamix’s Rule 12(b)(6) argument—that the
joint venture agreement was not an enforceable contract—re‐
maining on the table. The district court denied the motion, de‐
termining that the amended complaint adequately alleged a
binding agreement.
Coaster Dynamix put the arbitration issue back on the ta‐
ble roughly one month later when it moved to compel arbi‐
tration. The company noted that it raised the argument in its
second motion to dismiss only then to receive no ruling from
the district court. Nowhere, however, did Coaster Dynamix
mention that it had withdrawn its motion. Brickstructures
caught the omission and argued that Coaster Dynamix was
playing games and had plainly waived its right to arbitrate,
both by withdrawing the Rule 12(b)(3) argument from the sec‐
ond motion to dismiss and by its conduct in the litigation (like
proceeding with some discovery). Coaster Dynamix replied
and insisted that it withdrew its arbitration argument only in
response to Brickstructures threatening sanctions.
No. 19‐2187 5
The district court declined to compel arbitration, finding
that Coaster Dynamix waived its right to arbitrate by ex‐
pressly withdrawing the arbitration demand in its second mo‐
tion to dismiss. “By first arguing that the 2012 agreement re‐
quires arbitration and then withdrawing that argument,” the
court reasoned, “Coaster chose a course inconsistent with
submitting the case to an arbitral forum.” Nor did the court
allow Coaster Dynamix to rescind its waiver. The court found
unconvincing the company’s contention that it was reasona‐
ble to abandon an arbitration demand in acquiescence to an
adversary’s threat to seek sanctions.
This appeal followed.
II
We start by assuring ourselves of our own jurisdiction.
Coaster Dynamix challenges an order denying its motion to
compel arbitration and invokes the Federal Arbitration Act as
the jurisdictional hook for the interlocutory appeal. The FAA
allows appeals from “an order … denying a petition under
section 4 of this title to order arbitration to proceed.” 9 U.S.C.
§ 16(a)(1)(B). Brickstructures argues that Coaster Dynamix’s
motion to compel arbitration was not a petition under § 4 of
the FAA but rather a motion challenging venue under Rule
12(b)(3). Brickstructures is right that Coaster Dynamix titled
its motion as being brought under Rule 12(b)(3). And so too is
Brickstructures correct that circuit courts lack jurisdiction
over an interlocutory decision to deny a challenge to venue.
See Lauro Lines s.r.l. v. Chasser, 490 U.S. 495, 496–98 (1989).
But it is the substance of a motion that counts, not its label.
See Obriecht v. Raemisch, 517 F.3d 489, 493 (7th Cir. 2008)
(“[W]hether a motion filed within 10 days of the entry of judg‐
ment should be analyzed under Rule 59(e) or Rule 60(b)
6 No. 19‐2187
depends on the substance of the motion, not on the timing or
label affixed to it.”); Travel All Over the World, Inc. v. Kingdom
of Saudi Arabia, 73 F.3d 1423, 1429 (7th Cir. 1996) (“The district
court may look beyond the technical nomenclature of motions
to dismiss to reach the substance of the movant’s conten‐
tions.”). Though Coaster Dynamix’s motion bore a Rule
12(b)(3) sticker, the venue argument was rooted in enforce‐
ment of the arbitration agreement. Even more, Coaster Dy‐
namix expressly clarified—before the district court ruled on
the motion—that it was brought under Rule 12(b)(1), Rule
12(b)(3), and § 4 of the FAA. Brickstructures dedicated most of
its district court response brief to analysis under the FAA,
suggesting it too understood the motion to invoke that stat‐
ute.
Whatever it was called, Coaster Dynamix’s motion to com‐
pel arbitration was in substance a motion under § 4 of the
FAA, so we have jurisdiction and can proceed to the merits.
III
Federal law favors arbitration. See Epic Sys. Corp. v. Lewis,
138 S. Ct. 1612, 1621 (2018). Like other contractual rights,
though, the right to arbitrate is waivable. See Kawasaki Heavy
Indus., Ltd. v. Bombardier Recreational Prod., Inc., 660 F.3d 988,
994 (7th Cir. 2011). A waiver can be express or implied
through action. See id. Either way, the question is whether
“based on all the circumstances, the party against whom the
waiver is to be enforced has acted inconsistently with the right
to arbitrate.” Welborn Clinic v. MedQuist, Inc., 301 F.3d 634, 637
(7th Cir. 2002). The analysis can be short when the basis of the
waiver is an express abandonment of the right. In most situa‐
tions, “I waive arbitration” answers the question. The district
court found that Coaster Dynamix’s withdrawal of the
No. 19‐2187 7
arbitration argument amounted to an explicit waiver of any
right to arbitrate.
A
Our first stop is the standard of review, which the parties
dispute. Brickstructures urges us to apply a clear error stand‐
ard. It relies on St. Mary’s Medical Center of Evansville, Inc. v.
Disco Aluminum Products Co., 969 F.2d 585, 588 (7th Cir. 1992),
where we held that the clear error standard applies to both the
district court’s factual determinations and its application of
the legal standards to those facts. Coaster Dynamix, on the
other hand, points to cases in which we have said that factual
findings are reviewed for clear error but “the legal question
of whether the conduct amounts to waiver is reviewed de
novo.” Ernst & Young LLP v. Baker O’Neal Holdings, Inc., 304
F.3d 753, 756 (7th Cir. 2002); see also Kawasaki, 660 F.3d at 994;
Halim v. Great Gatsby’s Auction Gallery, Inc., 516 F.3d 557, 561–
62 (7th Cir. 2008).
We see no inconsistency. “[T]here is both a factual and a
legal dimension to the waiver inquiry.” Iowa Grain Co. v.
Brown, 171 F.3d 504, 509 (7th Cir. 1999). The facts drive the
waiver analysis, but the inquiry takes direction from the back‐
ground legal rules. See id. We review de novo the district
court’s determinations regarding the legal principles, like the
applicable common law rules and presumptions, but defer to
the district court’s findings with respect to the facts and the
legal consequences of those facts. See id. Where, as here, no‐
body contends that the district court “misunderstood the ap‐
plicable law, the result turns on whether the district court
clearly erred in its assessment of the situation.” Id.; see also
Smith v. GC Servs. Ltd. P’ship, 907 F.3d 495, 499 (7th Cir. 2018)
(articulating the same standard of review). Adhering to the
8 No. 19‐2187
position articulated in Iowa Grain, we apply the clear error
standard.
All for good reason too: waiver is an intensely fact‐bound
question and here the district judge is in a better position to
assess the parties’ conduct. See St. Mary’s, 969 F.2d at 588. As
the Supreme Court explained not long ago, in the case of
mixed questions of fact and law that “immerse courts in case‐
specific factual issues”—which require them to do things like
“marshal and weigh evidence” and “make credibility judg‐
ments”—“appellate courts should usually review [the] deci‐
sion with deference.” U.S. Bank Nat’l Ass’n ex rel. CWCapital
Asset Mgmt. LLC v. Vill. at Lakeridge, LLC, 138 S. Ct. 960, 967
(2018). Whether a party has waived its right to arbitrate by
acting inconsistently with the right is such a mixed question,
so we appropriately review the district court’s determination
with deference.
B
We find no clear error in the district court’s finding that
Coaster Dynamix waived its right to arbitrate. The company
expressly invoked the venture agreement’s arbitration provi‐
sion and urged dismissal of Brickstructures’s suit because ar‐
bitration was the “exclusive venue.” But then Coaster Dy‐
namix withdrew the argument—a litigation choice incon‐
sistent with the right to arbitrate. The withdrawal signaled to
Brickstructures and the district court that Coaster Dynamix
was content to leave the litigation where it was in federal
court. Having put the arbitration card on the table and then
taken it back, Coaster Dynamix was not permitted to play that
card again later.
As the district court observed, Coaster Dynamix em‐
ployed a wait‐and‐see approach—it decided to retract the
No. 19‐2187 9
arbitration issue and roll the dice on its other dismissal argu‐
ments before seeking a ruling on the proper venue. Parties
seeking to enforce their arbitration rights ought to get to it as
soon as possible. Traveling too far down the judicial road be‐
fore reversing course to restart in an arbitral forum wastes
time and resources. See Cabinetree of Wisconsin, Inc. v. Kraft‐
maid Cabinetry, Inc., 50 F.3d 388, 391 (7th Cir. 1995) (“Selection
of a forum in which to resolve a legal dispute should be made
at the earliest possible opportunity in order to economize on
the resources, both public and private, consumed in dispute
resolution.”). Taking the time to weigh one’s options “is the
worst possible reason for delay.” Id.
That does not mean parties waive their right if a motion to
compel arbitration is not the first thing they file on the docket.
As Coaster Dynamix points out, we have acknowledged be‐
fore that taking certain actions, like filing a motion to dismiss
or requesting a transfer of venue, does not automatically
waive the right to arbitrate. See Halim, 516 F.3d at 562; Sharif
v. Wellness Int’l Network, Ltd., 376 F.3d 720, 725–26 (7th Cir.
2004). But Coaster Dynamix did not just file a motion to dis‐
miss. By identifying the arbitration argument in its motion to
dismiss, the company showed that it knew of its right to arbi‐
trate, and by then expressly withdrawing the argument, it
surrendered the right.
Coaster Dynamix insists that waiver must be based on vol‐
untary conduct and that its withdrawal of the arbitration ar‐
gument was not voluntary because it was spurred by Brick‐
structures’s sanctions letter. The waiver analysis does not re‐
quire us to delve into the deeper motivations behind counsel’s
litigation choices. Even if it did, there can be no doubt that
Coaster Dynamix’s choice to withdraw its arbitration
10 No. 19‐2187
argument was intentional and voluntary. Indeed, Coaster Dy‐
namix itself calls the withdrawal a “strategic decision.” It had
options after receiving Brickstructures’s letter. It could have
conducted its own research and concluded that the arbitration
argument was neither frivolous nor sanctionable and moved
forward with the second motion to dismiss. Or it could have
taken the course it ultimately took—withdraw the arbitration
demand and see if the other dismissal arguments win the day.
Coaster Dynamix voluntarily chose the option inconsistent
with the right to arbitrate.
Coaster Dynamix tries to reframe the issue by focusing on
the different ways it raised arbitration. It says the arbitration
argument in the second motion to dismiss was made under
Rule 12(b)(3) and the later filed motion to compel arbitration
was brought under the FAA. This distinction matters, the ar‐
gument goes, because even if withdrawal of the arbitration
demand from the former motion constituted waiver, the
waiver would be limited to Rule 12(b)(3) and would not fore‐
close the later argument under the FAA. This misunderstands
the proper inquiry. We do not ask whether Coaster Dynamix
waived a particular argument under a certain rule or statute
but rather whether it waived its contractual right to arbitrate.
The procedural mechanism it sought to use does not control.
Nor was Coaster Dynamix entitled to rescind its waiver. A
district court has the discretion to allow a party to rescind a
waiver of the right to arbitrate. See Iowa Grain, 171 F.3d at 509–
10. But rescission is reserved for “abnormal” circumstances,
Cabinetree, 50 F.3d at 391, which this case does not present.
The district court committed no error in so holding.
All of this leads us to AFFIRM.