American Heart v. Hughey ( 1997 )

UNPUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
AMERICAN HEART DISEASE
PREVENTION FOUNDATION,
INCORPORATED, a nonprofit
corporation,
Plaintiff-Appellee,
v.
BYRON C. HUGHEY; JERRY C.
WATSON; THE WATSON AND HUGHEY
COMPANY; WASHINGTON LIST;
CAPITAL LIST; FOXHALL CORPORATION, No. 96-1199
d/b/a The Art Department; DIRECT
RESPONSE CONSULTING SERVICES,
Defendants-Appellants,
and
ALAMEDA-FORD GROUP,
INCORPORATED; CHAPMAN RESPONSE
SERVICES, LIMITED; JOHN DOES 1-50,
Inclusive,
Defendants.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
T. S. Ellis, III, District Judge.
(CA-95-1278-A)
Argued: September 23, 1996
Decided: February 4, 1997
Before WILKINS, Circuit Judge, BUTZNER, Senior Circuit Judge,
and MICHAEL, Senior United States District Judge
for the Western District of Virginia, sitting by designation.
Reversed and remanded and motion to dismiss denied by unpublished
opinion. Senior Judge Butzner wrote the opinion, in which Judge Wil-
kins and Senior Judge Michael joined.
_________________________________________________________________
COUNSEL
ARGUED: Mark Andrew Perry, GIBSON, DUNN & CRUTCHER,
Washington, D.C., for Appellants. Nicholas Theodore Christakos,
SUTHERLAND, ASBILL & BRENNAN, Washington, D.C., for
Appellee. ON BRIEF: John C. Millian, D. Jarrett Arp, GIBSON,
DUNN & CRUTCHER, Washington, D.C., for Appellants. Michael
J. Levin, Marc E. Sorini, SUTHERLAND, ASBILL & BRENNAN,
Washington, D.C.; Terrance G. Reed, REED & HOSTAGE, Wash-
ington, D.C., for Appellee.
_________________________________________________________________
Unpublished opinions are not binding precedent in this circuit. See
Local Rule 36(c).
_________________________________________________________________
OPINION
BUTZNER, Senior Circuit Judge:
The question raised by this interlocutory appeal is whether the Fed-
eral Arbitration Act requires a stay of the district court proceedings
pending arbitration of the underlying claims. 9 U.S.C. § 1 et seq.
Based on a contractual agreement to arbitrate, the appellants, Watson
and Hughey Company and parties related to the company (collec-
tively W&H), sought a stay pending arbitration. Because W&H took
part in extensive pretrial litigation before requesting the stay, the dis-
trict court held that it had waived any right to arbitration and denied
the stay. Reversing, we find that W&H's pretrial activities did not
result in the type of prejudice required to establish waiver.
Our jurisdiction over W&H's interlocutory appeal is established by
the Arbitration Act. 9 U.S.C. § 16(a)(1)(A). We review de novo the
2
district court's finding that W&H waived its right to arbitration. See
Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc. , 817 F.2d 250,
251-52 (4th Cir. 1987).
I
In August, 1986, the American Heart Disease Prevention Founda-
tion, Inc. (the Foundation), a nonprofit charitable organization,
entered into a five-year contract with the Watson and Hughey Com-
pany, a Virginia partnership. Under the contract, the Watson and
Hughey Company agreed to raise funds for the Foundation by solicit-
ing charitable donations. The contract provides for arbitration of any
claims "arising out of or relating to" the contract.
In August, 1994, the Foundation filed suit in federal district court
in Kansas against the Watson and Hughey Company and several
related parties. The essence of the suit is that the Watson and Hughey
Company, with the assistance and cooperation of the other defen-
dants, abused its contractual relationship with the Foundation for the
purpose of defrauding the Foundation and the donating public.
According to the allegations, W&H collected $26 million in donations
during the term of the contract but withheld $23 million to cover fees
and expenses, much of which was paid to defendants. Of course, for
purposes of this appeal we are concerned only with the enforceability
of the arbitration clause, not the merits of the underlying dispute. See
United Food and Commercial Workers Union, Local 400 v. Shoppers
Food Warehouse Corp., 35 F.3d 958, 961 (4th Cir. 1994).
All of the defendants named in the suit are related to either the
Watson and Hughey Company or its sole partners, Byron Hughey and
Jerry Watson. Defendant Direct Response Consulting Services
(DRCS) is the successor-in-interest to the Watson and Hughey Com-
pany. DRCS is a partnership made up of two corporations, wholly
owned by Byron Hughey and Jerry Watson. Defendant Foxhall Cor-
poration is a Virginia corporation also owned by Byron Hughey and
Jerry Watson. Defendants Washington List and Capitol List are ficti-
tious business names that were used by the Watson and Hughey Com-
pany during the contract for list brokerage services. The claims
against each defendant arise from the fund raising agreement between
the Watson and Hughey Company and the Foundation.
3
Although the original complaint was filed in August, 1994, it was
not served on the defendants until December, 1994. After receiving
the complaint, W&H moved to dismiss the action for improper venue
or, in the alternative, to transfer the case to the Eastern District of Vir-
ginia. At the same time, it moved to dismiss the complaint on the
merits under Rules 12(b)(6) and 9(b) of the Federal Rules of Civil
Procedure. In addition, it asked the court to stay discovery until it
ruled on the motions.
The Kansas district court denied the stay of discovery, and discov-
ery proceeded according to the court's scheduling order. While the
case remained in Kansas, a scheduling conference was held, a discov-
ery plan was developed, the disclosures required by Federal Rule of
Civil Procedure 26 were made, documents were exchanged, W&H
obtained documents from third parties, and both sides served and
answered interrogatories. No depositions were taken. Then, in Sep-
tember, 1995, the court, responding to W&H's motion, transferred the
case to the Eastern District of Virginia.
In October, 1995, W&H moved to disqualify the Foundation's
counsel and one of its expert witnesses. The district court granted the
disqualification motion in November. In December, after retaining
new counsel, the Foundation filed an amended complaint. Before the
answer was due, W&H filed a motion to dismiss the complaint or,
alternatively, to stay the case pending arbitration. This was the first
time any party raised the issue of arbitration--16 months after the
original complaint was filed.
The district court denied the motion to stay pending arbitration. In
the court's view, the motion was untimely because, before seeking the
stay, W&H had engaged in 16 months of active litigation, including
successfully transferring the case, taking substantial discovery, and
disqualifying the Foundation's original counsel and expert witness.
The court determined that the delay prejudiced the Foundation, noting
particularly that it had expended considerable attorneys' fees and dis-
closed information to W&H that might not have been available in
arbitration.
W&H appealed the denial of the stay. It also sought a stay of dis-
trict court proceedings pending resolution of the appeal. We granted
the stay pending appeal.
4
II
When a party to a lawsuit in federal court requests a stay pending
arbitration pursuant to a written arbitration agreement, the court gen-
erally must grant the stay if two conditions are met. First, the matter
must be "referable to arbitration" under the written agreement. Sec-
ond, the party seeking the stay must not be "in default in proceeding
with . . . arbitration." 9 U.S.C. § 3.
The issue here is whether W&H waived--and thus defaulted--its
contractual right to arbitration by failing to assert that right more
promptly. In light of the strong federal policy favoring arbitration,
waiver will "not be lightly inferred." In re Mercury Construction Co.,
656 F.2d 933, 939 (4th Cir. 1981) (en banc), aff'd sub nom. Moses
H. Cone Hospital v. Mercury Construction Corp., 460 U.S. 1 (1983).
Accordingly, a party seeking to prove waiver bears a heavy burden.
Walker v. J.C. Bradford & Co., 938 F.2d 575, 577 (5th Cir. 1991).
Nevertheless, a delay in raising arbitration may constitute a waiver if
the party objecting to arbitration can show that it has been prejudiced
by the delay. Mercury, 656 F.2d at 939. Prejudice sufficient to cause
waiver may arise when the party asserting the right to arbitrate
actively participates in litigation in a manner that is inconsistent with
that right. See Mercury, 656 F.2d at 939-40; Maxum Foundations,
Inc. v. Salus Corp., 779 F.2d 974, 981 (4th Cir. 1985). Whether a
party has waived arbitration by participating in litigation turns on the
facts of each case. Tenneco Resins, Inc. v. Davy Int'l, AG, 770 F.2d
416, 420 (5th Cir. 1985).
The Foundation contends that W&H waived its arbitration rights
by participating in 16 months of litigation before raising the arbitra-
tion issue. In addition to the length of the delay, the Foundation
emphasizes that W&H was actively engaged in the litigation through-
out that period. W&H was able to secure a venue change, disqualify
the Foundation's attorney and expert witness, and obtain discovery.
In the Foundation's view, these acts were inconsistent with an intent
to arbitrate. The Foundation also asserts that it has been prejudiced by
the delay. Specifically, it complains that it has expended considerable
amounts of time and money to conduct the litigation, that W&H has
received documents through discovery that might not have been avail-
5
able in arbitration, and that the district court has dismissed substantial
portions of its RICO claims.
On the facts before us, we find that W&H did not waive its right
to arbitration. W&H raised the arbitration issue before filing its
answer to the complaint. As an affirmative defense, the existence of
a binding arbitration agreement is properly pleaded in the answer. See
Fed. R. Civ. P. 8(c) & 12(b). Failure to raise the issue of arbitration
before the answer is filed will rarely, if ever, amount to waiver of
arbitration. See Mercury, 656 F.2d at 940; but see Kramer v.
Hammond, 943 F.2d 176, 179 (2d Cir. 1991). But, even assuming that
failure to raise the issue of arbitration before filing an answer can con-
stitute a waiver, there was no such waiver in this case. W&H's litiga-
tion activities were not inconsistent with a desire to arbitrate. And,
perhaps more importantly, the Foundation has not demonstrated the
type of prejudice required to establish waiver.
After receiving the complaint, W&H challenged the venue chosen
by the Foundation. Under the Federal Rules of Civil Procedure, a
defendant, at its option, may contest venue before filing an answer.
Fed. R. Civ. P. 12(b)(3). By virtue of this arrangement, a party is not
required to litigate any issue--including arbitrability--in an improper
or inconvenient forum. Because W&H had the right to seek a transfer
before it pleaded the arbitration defense, doing so was not inconsis-
tent with a desire to arbitrate. Cf. Mercury, 656 F.2d at 940 (removing
action from state to federal court does not constitute waiver); Sedco
v. Petroleos Mexicanos Mexican Nat'l Oil, 767 F.2d 1140, 1144,
1150-51 (5th Cir. 1985) (finding no waiver despite three-year interval
between filing of complaint and answer due to legitimate jurisdic-
tional dispute). In addition, the fact that this case was transferred from
Kansas to Virginia does not, by itself, prejudice the Foundation's
position in arbitration.
Likewise, it cannot be seriously argued that W&H's successful
motion to disqualify the Foundation's original counsel and expert wit-
ness was somehow inconsistent with a desire to arbitrate. Just as a
party is not required to litigate the issue of arbitration in an improper
or inconvenient venue, a party should not be compelled to litigate that
or any other issue against ineligible counsel. Furthermore, any preju-
dice caused by the disqualification flows from the Foundation's use
6
of inappropriate counsel, not W&H's delay in raising the arbitration
issue. In short, we reject the proposition that W&H's appropriate
response to the Foundation's conduct constituted a waiver of arbitra-
tion.
Nor were W&H's discovery activities inconsistent with a desire to
arbitrate. After requesting the transfer, W&H moved to stay discovery
until the district court ruled on the venue motion. The court denied the
stay. As a result, discovery proceeded according to a schedule estab-
lished by the court. Under these circumstances, W&H's decision to
participate in discovery was sensible. A party need not disregard court
ordered discovery deadlines to avoid a finding of waiver. See Maxum
Foundations, 779 F.2d at 982.
In addition, W&H's discovery efforts were not prejudicial to the
Foundation. In order to show that pretrial discovery disclosures have
caused prejudice, the party seeking to establish waiver must show that
the opposing party has obtained information that would not have been
available in arbitration. See Walker, 938 F.2d at 578 n.3; Stifel,
Nicolaus & Co. v. Freeman, 924 F.2d 157, 159 (8th Cir. 1991).
Beyond making a conclusory allegation to that effect, the Foundation
was unable to identify--in its brief or when pressed at oral argument
--any prejudicial item turned over in discovery that W&H would not
have been able to obtain in arbitration. Also, there is no reason to
believe that the information shared through discovery will not be as
useful in arbitration as it would have been in litigation.
The Foundation also alleges that it was prejudiced by the district
court's partial dismissal of its RICO claims. The difficulty with this
argument is that W&H moved to dismiss the RICO claims at the same
time that it requested the stay pending arbitration. So, in essence, the
Foundation asks us to find that W&H impliedly waived its arbitration
rights by means of the very document that expressly asserts those
rights. We decline to do so. Under the Federal Rules of Civil Proce-
dure, W&H was permitted to present alternative defenses. Fed. R.
Civ. P. 8(c); American Home Assurance Co. v. Vecco Concrete Con-
struction Co., Inc., 629 F.2d 961, 963 (4th Cir. 1980). After the stay
was denied, W&H was not required, in order to avoid a finding of
waiver, to abandon or postpone its other defenses in the hope that this
7
court would reverse the district court's ruling. See Tenneco Resins,
770 F.2d at 420 n.5.
The Foundation also argues that the time and money it has spent
on litigation amount to sufficient prejudice to establish waiver. The
unnecessary use of time and money are both factors to be considered
when making the waiver determination. See Fraser , 817 F.2d at 252(time); Kramer, 943 F.2d at 179 (time and money). However, there
is no precise formula that measures how much time or money creates
cognizable prejudice. Instead, both factors are viewed in context and
weighed on a case-by-case basis. Kramer, 943 F.2d at 179. In this
case, a substantial portion of the Foundation's investment of time and
money became necessary only because it chose to file the lawsuit in
an inconvenient forum, employ improper counsel, and defend both of
those actions while, at the same time, prosecuting its case. Any preju-
dice suffered by the Foundation in this regard was a consequence of
its own choices and does not establish a waiver of arbitration by
W&H.
III
The Foundation also argues that the doctrine of judicial estoppel
provides an independent basis for affirming the district court's ruling.
The equitable doctrine of judicial estoppel prevents a litigant from
gaining an unfair advantage by adopting a position"inconsistent with
one earlier taken in the same or related litigation." Federal Deposit
Ins. Corp. v. Jones, 846 F.2d 221, 234 (4th Cir. 1988).
In the Foundation's view, W&H adopted inconsistent positions by
first seeking the transfer to Virginia and then, after securing the trans-
fer, requesting a stay pending arbitration. If W&H had intended to
raise the arbitration issue, the Foundation argues, it would have
sought a transfer to New Jersey, which is the designated situs for arbi-
tration. By seeking a transfer to Virginia without mentioning arbitra-
tion, the argument goes, W&H misled the Kansas district court into
thinking that it had elected litigation over arbitration. By moving the
case to Virginia, W&H was able to take advantage of this circuit's
favorable RICO accrual rule. If W&H is now permitted to raise the
arbitration defense in Virginia, the Foundation argues, it will have
gained an unfair advantage by shifting its position on arbitration.
8
The basic difficulty with the Foundation's argument is that W&H's
acts do not indicate inconsistent positions with regard to arbitration.
By contesting venue, W&H asserted that the lawsuit had been filed
in an improper or at least inconvenient forum. The apparent purpose
of W&H's motion was to rectify this perceived error by transferring
the case to a proper or convenient forum. By doing so, it did not take
any position on the arbitrability of the claims at issue. It may be, as
the Foundation points out, that the proper forum in which to compel
arbitration is New Jersey; however, W&H sought only to stay the
lawsuit, not compel arbitration. As a proper and convenient forum,
the district court in Virginia has the authority to grant such a stay. 9
U.S.C. § 3; Shanferoke Coal & Supply Corp. v. Westchester Service
Corp., 293 U.S. 449, 452 (1935). Because W&H has not adopted
inconsistent positions, the doctrine of judicial estoppel is inapplicable.
IV
The Foundation's next argument is that the arbitration clause is
invalid due to fraud in the inducement. The fraud allegation relates to
the status of defendants Washington List and Capital List. When the
fund raising agreement was made, the Watson and Hughey Company
allegedly represented that Washington List and Capital List were indi-
vidual entities, separate from the Watson and Hughey Company. Dur-
ing the course of litigation, W&H has revealed that these entities are,
in fact, fictitious business names used by the Watson and Hughey
Company. The Foundation contends that the arbitration clause is
invalid because it was led to believe that Washington List and Capital
List were not part of the Watson and Hughey Company when it
agreed to arbitrate claims against the Watson and Hughey Company.
We decline to address this issue because the Foundation did not
challenge the validity of the arbitration clause in district court. See
Muth v. United States, 1 F.3d 246, 250 (4th Cir. 1993).
V
The Foundation's final contention is that, even if the Watson and
Hughey Company did not waive arbitration and it is entitled to a stay,
the other defendants do not share this right. In support of this conten-
tion, the Foundation asserts that the other defendants cannot compel
9
arbitration because they were not parties to the fundraising contract
and, as a result, do not have the right to a stay.
We need not determine whether each of the other defendants could
compel arbitration because the right to a stay pending arbitration is
not always coextensive with the right to arbitrate. See Morrie & Shir-
ley Mages Foundation v. Thrifty Corp., 916 F.2d 402, 406-07 (7th
Cir. 1990); but cf. IDS Life Ins. Co. v. Sunamerica, Inc., Nos. 96-
2314, 96-2871, 1996 WL 725771, at *7 (7th Cir. Dec. 18, 1996).
When arbitration is likely to settle questions of fact pertinent to non-
arbitrable claims, "considerations of judicial economy and avoidance
of confusion and possible inconsistent results . . . militate in favor of
staying the entire action." American Home Assurance, 629 F.2d at
964. In such cases, the stay can apply to parties who may play no role
in the arbitration. See, e.g., id. at 964. In the present case, all of the
claims are based on common factual allegations and arose as the
result of acts purportedly taken to satisfy the Watson and Hughey
Company's contractual obligations. Under these circumstances, all lit-
igation should be stayed.
VI
On remand, the district court should stay all litigation pending arbi-
tration. In light of our decision, the Foundation's motion to dismiss
the appeal of all appellants except the Watson and Hughey Company
is moot and, accordingly, denied.
REVERSED AND REMANDED;
MOTION TO DISMISS DENIED
10