Price v. Drexel Burnham Lambert, Inc.

• Decision Date: 11 June 1986
• Docket Number: No. 85-1524,85-1524
• Citation: 791 F.2d 1156
• Parties: Fed. Sec. L. Rep. P 92,790 Rayford PRICE and Barbara Ashley Price, Plaintiffs-Appellees, v. DREXEL BURNHAM LAMBERT, INC. and George Wilmot, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

Page 1156

791 F.2d 1156

Fed. Sec. L. Rep. P 92,790

Rayford PRICE and Barbara Ashley Price, Plaintiffs-Appellees, v. DREXEL BURNHAM LAMBERT, INC. and George Wilmot, Defendants-Appellants.

No. 85-1524.

United States Court of Appeals, Fifth Circuit.

June 11, 1986.

Edward S. Koppman, Patricia A. Nolan, Dallas, Tex., for defendants-appellants.

Robert F. Watson, Law, Snakard, Brown, H. Allen Pennington, Jr., Fort Worth, Tex., for plaintiffs-appellees.

Appeal from the United States District Court for the Western District of Texas.

Before GEE, RUBIN, and GARZA, Circuit Judges.

GARZA, Circuit Judge:

On November 22, 1982, Rayford Price and Barbara Ashley Price (the "Prices") established a brokerage account with Drexel, Burnham Lambert, Inc. ("Drexel"). ¹ At that time they signed a Customer's Agreement that contained the following provision:

Sixteenth: Any controversy between you and the undersigned arising out of said account or relating to this contract or the breach thereof, shall be settled by arbitration, in accordance with the rules, then obtaining, of the American Arbitration Association, the New York Stock Exchange, Inc., the American Stock Exchange, Inc., or the National Association of Securities Dealers, Inc., as the undersigned may elect.

The Prices later executed a Client's Option Agreement and Approval Form that contained similar language.

On December 19, 1983, the Prices filed suit against Drexel, asserting violations of both federal and state law in the handling of their brokerage account. Following discovery and other pretrial activity, Drexel On April 23, 1985, Drexel filed a Motion to Compel Arbitration and to Stay Proceedings Pending Arbitration. Drexel asserted that: (1) the Prices' claims were subject to the Federal Arbitration Act, 9 U.S.C. Sec. 2 et seq., and therefore, required the district court to stay the Prices' suit on issues referable to arbitration under the Customer's Agreement and the Option Agreement; (2) the Prices' claims are all subject to the arbitration clauses provided in the Customer's and Option Agreements; (3) it neither waived nor was estopped from asserting its right to arbitration because, prior to Dean, Witter, Reynolds, Inc. v. Byrd, 470 U.S. 213, 105 S.Ct. 1238, 8 L.Ed.2d 158 (1985), the case law of this circuit would have precluded arbitration of the Prices' claims under the doctrine of "intertwining"; (4) it had not engaged in dilatory conduct because it demanded arbitration promptly after the Supreme Court rendered its decision in Byrd; and (5) the Prices would not be prejudiced in proceeding to arbitration.

moved for dismissal and summary judgment on March 19, 1985. Drexel, on March 20, 1985, gave written notice of its demand for arbitration under the foregoing agreements. The Prices advised Drexel that they declined to submit any of their claims to arbitration, asserting that Drexel had waived or was estopped from demanding arbitration and, alternatively, that some of their claims were not arbitrable.

In an Order filed July 11, 1985, the district court ruled that Drexel had waived its right to compel arbitration. The court found that Drexel had substantially invoked the litigation process and that the Prices had shown sufficient prejudice to justify a finding of waiver. Drexel appeals the district court's Order. Finding jurisdiction pursuant to 28 U.S.C. Sec. 1292(a)(1), we now affirm.

WAIVER OF ARBITRATION

The Arbitration Act provides that written agreements to arbitrate controversies arising out of an existing contract "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. Sec. 2. In Byrd the Supreme Court stated that "the Act leaves no place for the exercise of discretion by a district court, but instead mandates that district courts shall direct the parties to proceed to arbitration on issues as to which an arbitration agreement has been signed ... absent a ground for revocation of the contractual agreement." 105 S.Ct. at 1241. (emphasis in original). Moreover, "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay or a like defense to arbitrability." Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 941, 74 L.Ed.2d 765 (1983) (emphasis added) (footnote omitted).

Nevertheless, the right to arbitration, like any contractual right, may be waived. Miller Brewing Co. v. Fort Worth Distributing Co., Inc. (FWDC), 781 F.2d 494, 497 (5th Cir.1986); Sedco, Inc. v. Petroleos Mexicanos Mexican National Oil Co. (Pemex), 767 F.2d 1140, 1150 (5th Cir.1985). Although "[t]he burden on one seeking to prove a waiver of arbitration is a heavy one," Sibley v. Tandy Corp., 543 F.2d 540, 542 (5th Cir.1976), cert. denied, 434 U.S. 824, 98 S.Ct. 71, 54 L.Ed.2d 82 (1977), "[w]aiver will be found when the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party." Miller Brewing, 781 F.2d at 497 (footnote omitted). As this court noted in E.C. Ernst, Inc. v. Manhattan Construction Co. of Texas, 559 F.2d 268 (5th Cir.1977),

[w]hen one party reveals a disinclination to resort to arbitration on any phase of suit involving all parties, those parties are prejudiced by being forced to bear the expenses of a trial ... Arbitration is designed to avoid this very expense. Substantially invoking the litigation machinery qualifies as the kind of prejudice ... that is the essence of waiver.

Id. at 269.

In its Order denying Drexel's Motion to Compel Arbitration, the district court found

                that Drexel "initiated extensive discovery, answered twice, filed motions to dismiss and for summary judgment, filed and obtained two extensions of pre-trial deadlines, all without demanding arbitration."    The court further found that the "mounting attorneys fees," "seventeen-month delay," and "disclosure which has resulted from the numerous depositions and production of documents" constituted prejudice sufficient to prevent Drexel from invoking arbitration.  The court, therefore, concluded that Drexel had waived its right to demand arbitration
                

STANDARD OF REVIEW

Our primary task is to determine the standard by which to review the district court's finding that Drexel waived its right to compel arbitration. If the issue is treated as factual, the district court's decision is final unless clearly erroneous. F.R.Civ.P. 52(a). A finding is clearly erroneous "when although there is evidence to support it, the reviewing court on the entire evidence is left with a definite and firm conviction that a mistake has been committed." Anderson v. City of Bessemer City, N.C., 470 U.S. 564, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985) (quoting United States v. United States Gypsum Co., 333 U.S. 364, 394-95, 68 S.Ct. 525, 541-42, 92 L.Ed. 746 (1948)). On the other hand, if the issue is treated as legal, the district court's conclusion is subject to plenary review. Matter of Missionary Baptist Foundation of America, Inc., 712 F.2d 206, 209 (5th Cir.1983).

Whether waiver of the right to arbitration is an issue of fact or law has heretofore not been clearly elucidated in this circuit. Some decisions appear to treat the question as one of fact. See e.g., Burton-Dixie Corp. v. Timothy McCarthy Construction Co., 436 F.2d 405, 408 (5th Cir.1971) ("There is no set rule, however, as to what constitutes a waiver or abandonment of the arbitration agreement. The question depends upon the facts of each case and usually must be determined by the trier of facts"). Accord, Tenneco Resins, Inc. v. Davy International, AG, 770 F.2d 416, 420 (5th Cir.1985); Howard Hill, Inc. v. George A. Fuller Co., Inc., 473 F.2d 217, 218 (5th Cir.1973). Others treat the issue as one of law. See e.g., Southwest Industrial Import & Export, Inc. v. Wilmod Co., Inc., 524 F.2d 468, 470, n. 3 (5th Cir.1975) ("We consider the question of waiver to be a conclusion of law not subject to the strictures of limited review dictated by F.R.Civ.P. 52(a) as to factual findings of the Trial Court"). Most recently, in Miller Brewing Co., supra, this court treated waiver of arbitration as a legal conclusion. 781 F.2d at 496-97.

It appears to us that a finding that a party has waived its right to arbitration is a legal conclusion subject to our plenary review, but that the findings upon which the conclusion is based are predicate questions of fact, which may not be overturned unless clearly erroneous. With this standard in mind, we turn to the case at bar.

1. Prejudice

On appeal Drexel argues that the district court erred in its finding that the Prices had been prejudiced. Drexel makes several arguments. First, Drexel asserts that pretrial discovery below related to nonarbitrable claims, and therefore, could not have prejudiced the Prices. Although we agree that pretrial discovery relating to nonarbitrable subject matter cannot prejudice a party opposing arbitration, see Dickinson v. Heinold Securities, Inc., 661 F.2d 638, 642 (7th Cir.1981), our review of the record discloses pretrial activity relating to all the Prices' claims, including claims which Drexel maintains are arbitrable.

Second, Drexel contends that pretrial discovery initiated either by the Prices or by agreement of the parties should not be deemed prejudicial. We find no merit in this argument. Neither a party's participation nor cooperation in the discovery process should affect a trial court's determination of prejudice and waiver of arbitration rights. Any other result would defeat Third, Drexel asserts that the Prices have not been prejudiced because, at the time of its motion to compel arbitration, the pretrial discovery in this case was not "meaningful" in the sense that it did not cause the Prices to incur considerable delay and expense....