Arbitration: Third Circuit Agrees that an Arbitrability Merits Decision (Web)

The Third U.S. Circuit Court of Appeals affirmed a judgment of the Virgin Islands District Court's Appellate Division denying a motion to stay litigation pending an arbitration as sought by a casino owner in a personal injury case brought by an employee. Ehleiter v. Grapetree Shores Inc., No.06-2542, 2007 WL 1029647 (April 6, 2007) (available at http://www.ca3.uscourts.gov/opinarch/062542p.pdf).

Jack Ehleiter filed suit against employer Grapetree Shores, Inc., which owned the Virgin Island casino property, where Ehleiter slipped and fell. GSI leased the property to the casino operator.

After litigating the case before the Virgin Islands’ Superior Court for nearly four years, GSI moved to stay the court proceedings pending arbitration pursuant to Section 3 of the Federal Arbitration Act. The trial court denied the motion, finding that GSI had waived any right it may have had by actively litigating the plaintiff's claims. The appellate division affirmed, and the Third Circuit accepted an interlocutory appeal.

The Third Circuit examined three issues. First, with respect to appellate and review jurisdiction under the FAA, the unanimous panel concluded that the FAA appellate jurisdiction section, 16(a)(1)(A), conferred appellate jurisdiction on the Appellate Division to review the Superior Court's decision, and also provides the basis for the Third Circuit jurisdiction over GSI's appeal from the Virgin Islands’ appellate court.

The appeals court reviewed the Superior Court's “findings of fact for clear error,” using the same review standard applied by the Appellate Division. Ehleiter argued that GSI had waived its right to arbitrate by litigating the case in court. In reply, GSI contended that the waiver defense raised by Ehleiter was exclusively for an arbitrator to decide.

Addressing this second issue, the Third Circuit examined the U.S. Supreme Court decisions in Howsam v. Dean Witter Reynolds Inc., 537 U.S. 79 (2002), and Green Tree Fin. Corp. v. Bazzle, 539 U.S. 444 (2003)(plurality opinion). The unanimous panel stated that the “the Supreme Court did not intend its pronouncements in Howsam and Green Tree to upset the ‘traditional rule’ that courts, not arbitrators, should decide the question of whether a party has waived its right to arbitrate by actively litigating the case in court.”

The opinion holds “that waiver of the right to arbitrate based on litigation conduct remains presumptively an issue for the court to decide . . .”

The panel also noted that the agreement in the case did not show a clear and unambiguous intention to refer the issue for determination to the arbitrator.

On the third issue--whether the Superior Court correctly found on the merits that GSI waived any right it had to arbitrate by actively litigating the case--the Third Circuit cited Hoxworth v. Blinder, Robinson & Co. Inc., 980 F.2d 912, 919 (3d Cir.1992), which notes that “prejudice is the touchstone for determining whether the right to arbitrate has been waived” by litigation conduct.

To address the prejudice inquiry, the Third Circuit compiled a nonexclusive list of factors, including, “[1] the timeliness or lack thereof of a motion to arbitrate . . . [; 2] the degree to which the party seeking to compel arbitration [or to stay court proceedings pending arbitration] has contested the merits of its opponent's claims; [3] whether that party 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; [4] the extent of its non-merits motion practice; [5] its assent to the [trial] court's pretrial orders; and [6] the extent to which both parties have engaged in discovery.” Hoxworth at 926-927.

The Third Circuit held, again relying on Hoxworth, that “‘the right to arbitrate has been waived’ where a sufficient showing of prejudice has been made by the party seeking to avoid arbitration.”

The panel notes that, under Hoxworth, “‘prejudice’ that supports a finding of waiver can be ‘substantive’ prejudice to the legal position of the party opposing arbitration, such as when the party seeking arbitration loses a motion on the merits and then attempts, in effect, to relitigate the issue by invoking arbitration, or obtains information through discovery procedures not available in arbitration. Additionally, . . . a party may be prejudiced by the unnecessary delay or expense that results when an opponent delays invocation of its contractual right to arbitrate.” (Internal citations omitted; emphasis added by the Third Circuit).

The opinion concludes by affirming the Virgin Islands Appellate Division decision.

--Ongmu Tshering, CPR Intern