How Much Litigation Waives Right to Arbitration?

May 23, 2014

According to the Third Circuit, two months may be enough, at least on the very specific facts in Supermedia v. Affordable Electric, Inc., 2014 WL 1690749 (3d Cir. April 30, 2014).

Supermedia sued Affordable Electric (AE) in district court, alleging breach of a contract for advertising services.  Over a period of nearly one year, AE moved unsuccessfully for dismissal, answered the complaint, and participated in discovery, all without raising the existence of an arbitration agreement as an affirmative defense. One defense AE did raise was that Martin Morley, who had signed the contract on behalf of AE, did not have authority to bind the company.  Several months after its first suit, AE also sued Morley directly for breach of warranty based on representations he made in forming the advertising contract, and the district court consolidated the cases.   

Only then did Morley and AE move to compel arbitration, which the district court denied, finding that both AE and Morley had waived any right to arbitrate. The Third Circuit affirmed.

The court noted that that “[c]onsistent with the strong preference for arbitration in federal courts, waiver is not to be lightly inferred, and . . . 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.” (citations omitted). In making its determination, the court applied the Third Circuit’s non-exclusive list of factors set out in Hoxworth v. Blinder, Robinson, & Co., 980 F.2d 912, 926-27 (3d Cir. 1992):

(1) the timeliness of the motion to compel arbitration;
(2) the degree to which the party seeking to compel arbitration has contested the merits of its opponent’s claims;
(3) whether the moving party provided sufficient notice to the nonmoving party of its intention to seek arbitration;
(4) the extent of the moving party’s non-merits motion practice;
(5) whether the moving party has assented to the court’s pretrial orders; and
(6) the degree of discovery engaged in by the parties.

The appellate court had little difficulty finding that AE had waived arbitration, not only by vigorously pursuing litigation – including a motion to dismiss – for eleven months without invoking the arbitration agreement, but also by challenging the enforceability of the same arbitration provision in a related state-court proceeding.  

Morley, however, had moved to enforce the arbitration agreement only two months after Supermedia’s complaint against him directly, making his situation, according to the court, “a closer call,” and he had not engaged in significant discovery. The court nevertheless found waiver for three reasons:

1.       Morley, along with AEI, elected to engage in litigation on the merits by filing a third-party complaint against Supermedia and two of its employees, prior to filing his motion to compel arbitration, and replied to the third-party answer;

2.       In his reply to the third-party answer, Morley expressly “denied there is a contract and/or that there is any binding agreement . . . to arbitrate disputes;” and

3.       Morley participated in the pre-trial conference and acquiesced in the consolidation of the cases.

The court could also have found that – regardless of whether or not he was authorized to bind AI – Morley was not a party to the Supermedia contract and was therefore not entitled to invoke that contract’s arbitration provision.  Because its finding that both Morley and AI had waived arbitration applied to any right they might have had, the appellate court found it unnecessary to address this issue, and affirmed the district court’s denial of the motion to compel arbitration.

-          Bette Shifman, CPR Institute