When Is A Waiver Of Arbitration A Waiver?

• Posted on: May 2 2018

It is well settled that arbitration is a favored means of resolving disputes. See, e.g., CPLR § 7501 (“A written agreement to submit any controversy . . . to arbitration is enforceable without regard to the justiciable character of the controversy and confers jurisdiction on the courts of the state to enforce it and to enter judgment on an award.”); Harris v. Shearson Hayden Stone, Inc., 82 A.D. 2d 87, 91-93 (1st Dep’t), aff’d, 56 N.Y.2d 627 (1981) (“[T]his State favors and encourages arbitration as a means of conserving the time and resources of the courts and the contracting parties. . . .”). Consequently, courts will interfere as little as possible with the agreement of consenting parties to submit their disputes to arbitration. Matter of Smith Barney Shearson v. Sacharow, 91 N.Y.2d 39, 49-50 (1997) (citations and quotation marks omitted).

Nonetheless, “[l]ike contract rights generally, a right to arbitration may be modified, waived or abandoned.” Sherrill v. Grayco Bldrs., 64 N.Y.2d 261, 272 (1985). Accordingly, a litigant may not compel arbitration when his/her use of the courts is “clearly inconsistent with [his/her] later claim that the parties were obligated to settle their differences by arbitration.” Flores v. Lower E. Side Serv. Ctr., Inc., 4 N.Y.3d 363, 372 (2005) (citations and internal quotation marks omitted).

“Generally, when addressing waiver, courts … consider the amount of litigation that has occurred, the length of time between the start of the litigation and the arbitration request, and whether prejudice has been established.” Cusimano v. Schnurr, 26 N.Y.3d 391, 400-01 (2015). There is no bright-line rule or rigid formula “for identifying when a party has waived its right to arbitration;” rather, the courts apply the foregoing factors to the facts of the case before it.  Louisiana Stadium & Exposition Dist. v Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F3d 156, 159 (2d Cir 2010). “That said,” however, “‘[t]he key to a waiver analysis is prejudice.’” Id. And, when examining whether there is prejudice, the courts look to see if the opposing party is procedurally and substantively harmed by arbitration and whether the opposing party will incur excessive costs and delay by going to arbitration. Id. See also Cusimano, 26 N.Y.3d at 401.

On April 17, 2018, the Appellate Division, First Department issued a decision in Black Rhino Investments LLC v. Wilson, 2018 N.Y. Slip Op. 02582 (1st Dept. Apr. 17, 2018) (here), in which it held that the plaintiffs had waived their right to arbitrate their claims after the defendant moved to dismiss the complaint.

Black Rhino Investments LLC v. Wilson

Background

Black Rhino arose from a business venture to sell wearable air purifying equipment in China. In April 2015, Plaintiff, Howard R. Levitt (“Levitt”), entered into discussions with John Wilson (“Wilson”) and non-party, Darui Jiang (“Jiang”), about launching the venture. The venture was to be known as Black Rhino (“Black Rhino,” the “Business” or the “Company”).

During the early stages of their discussions, Levitt, Wilson, and Jiang agreed that Levitt would provide certain services to the Business, including assisting in raising investment funds, acting as an advisor, and acting as a Board Member of the Company, in exchange for a 2% equity stake in the Business and other identified remuneration (the “Agreement”). The Agreement contained an arbitration clause, which provided, in pertinent part, that “[a]ny controversy or claim arising out of or relating to this contract … shall be settled by arbitration administered by the American Arbitration Association in accordance with its Commercial Arbitration Rules.”

In July 2015, Levitt introduced Wilson and Jiang to Plaintiff, Jonathan Bloostein (“Bloostein”). Following the introduction, Levitt, Bloostein, and Jiang began working to get the Business operational, while Bloostein also provided the funding necessary to do so. On September 16, 2015, the parties incorporated the Company in Delaware.

Thereafter, in October 2015, the parties met to discuss ownership of the Business. By the conclusion of the meeting, the parties agreed to supplement and revise the Agreement.

Sometime later, Wilson allegedly reneged on the deal with the other members of the Company.

Motion Court Proceedings

Plaintiffs commenced the action on July 17, 2016. Two months later, Wilson moved to dismiss the complaint.

On October 26, 2016, following the filing of the motion, and pursuant to the arbitration provision in the Agreement, Plaintiffs filed a Demand for Arbitration and Statement of Claim (the “Arbitration Demand”) with the AAA. Although Plaintiffs Bloostein and Black Rhino were not parties to the Agreement, Bloostein and Black Rhino each executed and submitted a form along with the Arbitration Demand submitting to AAA arbitration. Following a conference with the motion court, Plaintiffs moved to compel arbitration pursuant to CPLR § 7503(a).

The motion court granted Plaintiffs’ motion. The Court rejected the argument that Plaintiffs waived their right to arbitration by filing the Arbitration Demand after Defendant filed the motion to dismiss, stating that such activity “is not sufficient” and “has never been held to be sufficient prejudice.” Instead, the motion court explained that the activity needed to constitute a waiver was greater than filing a complaint and a motion to dismiss: “Extensive discovery, extensive motion practice, hearings, trials, that is” required.

Defendant appealed.

The First Department’s Decision

The First Department “unanimously reversed” the motion court’s order. In a terse decision, the Court found that by moving to compel arbitration after the filing of the motion to dismiss, Plaintiffs waived their right to arbitration notwithstanding the arbitration clause in the Agreement:

Plaintiffs commenced this action upon an alleged oral agreement entered into in October 2015 involving the ownership of plaintiff Black Rhino and the licensing of defendant’s intellectual property. Upon defendant’s motion to dismiss the complaint, plaintiffs claimed for the first time that the controversy had to be arbitrated, pursuant to a separate agreement entered into in April 2015 involving services to be performed for Black Rhino by plaintiff Levitt. We find that plaintiffs waived their right, if any, to arbitration (see Cusimano v Schnurr, 26 NY3d 391, 400-401 [2015]; Louisiana Stadium & Exposition Dist. v Merrill Lynch, Pierce, Fenner & Smith Inc., 626 F3d 156, 159 [2d Cir 2010]).

Although the First Department did not elaborate further, its citation to Cusimano is notable. In Cusimano, the plaintiff sought to compel arbitration after filing a complaint in Supreme Court, New York County, and after the defendant had filed a motion to dismiss under CPLR § 3211. The Court of Appeals held that such activity demonstrated a waiver of arbitration. In so holding, the Court found that the defendant had been prejudiced by the attempt to arbitrate in terms of the imposition of excessive costs and time delay, and the forum shopping engaged in by the plaintiff, which the Court viewed as an attempt to avoid a court ruling on claims that the motion court found to be “vexatious and largely time-barred.” 26 N.Y.3d at 401 (relying on Louisiana Stadium, supra).

Takeaway

Prior to Cusimano, New York courts placed a lot on emphasis on the degree of participation by the parties in the action to determine whether their actions were consistent with the assertion of the right to arbitrate:

The crucial question, of course, is what degree of participation by the defendant in the action will create a waiver of a right to stay the action. In the absence of unreasonable delay, so long as the defendant’s actions are consistent with an assertion of the right to arbitrate, there is no waiver. However, where the defendant’s participation in the lawsuit manifests an affirmative acceptance of the judicial forum, with whatever advantages it may offer in the particular case, his actions are then inconsistent with a later claim that only the arbitral forum is satisfactory.

De Sapio v. Kohlmeyer, 35 N.Y.2d 402, 405 (1974).

In Cusimano, the Court of Appeals placed the inquiry more squarely on the prejudice felt by the party opposing arbitration. As the Court noted, “waiver cannot be established in the absence of prejudice.”

Consistent with Cusimano, Black Rhino underscores the importance of examining the substantive and financial prejudice incurred by the party opposing arbitration. Although the procedural posture of the case remains important, Cusimano and its progeny, like Black Rhino, make it clear that it is the prejudice incurred that should drive the analysis.