Kramer v. Hammond

• Decision Date: 19 August 1991
• Docket Number: 1885,Nos. 1724,D,s. 1724
• Citation: 943 F.2d 176
• Parties: Alan S. KRAMER, Petitioner-Appellee, v. Gaines W. HAMMOND, Respondent-Appellant. ockets 91-7178, 91-7412.
• Court: U.S. Court of Appeals — Second Circuit

Page 176

943 F.2d 176

60 USLW 2161

Alan S. KRAMER, Petitioner-Appellee, v. Gaines W. HAMMOND, Respondent-Appellant.

Nos. 1724, 1885, Dockets 91-7178, 91-7412.

United States Court of Appeals, Second Circuit.

Argued July 9, 1991.

Decided Aug. 19, 1991.

Michael R. Sonberg, New York City (Serchuk & Zelermyer, of counsel), for petitioner-appellee.

Howard S. Veisz, New York City (Kornstein Veisz & Wexler, Richard F. Lubarsky, of counsel), for respondent-appellant.

Before MESKILL, NEWMAN and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

Respondent Gaines W. Hammond appeals from a judgment of the United States District Court for the Southern District of New York, Kevin Thomas Duffy, Judge, granting petitioner's motion to compel arbitration. Hammond also appeals from the district court's denial of his Fed.R.Civ.P. 60(b) for relief from that judgment. For the reasons that follow, we reverse.

BACKGROUND

A. The Facts.

In 1984 Hammond entered into an agreement with a number of California inventors to license a medical device they had invented. This invention, the lithotripter, was designed to break up kidney stones with sound waves, thereby eliminating the need for surgery. Hammond agreed to raise capital and to lend his expertise to the project.

Petitioner Alan S. Kramer was the attorney for the group of California inventors, and allegedly drafted the agreement under which Hammond and the California inventors agreed to form a corporation named Hammond Technologies, Inc. The parties agreed that Hammond would have the option to license the invention, provided that he could obtain the necessary capitalization by October 22, 1984 (later extended to November Hammond was not successful in raising the necessary financing within the option period, so the option expired. The parties then signed a new subscription agreement, under which the California investors became active participants in the management of the corporation. Accordingly, both Hammond's responsibilities and ownership rights in the corporation were reduced.

                8, 1984 upon Hammond's payment of an additional $25,000).   The parties also entered into an arbitration agreement that bound them to arbitrate "any dispute arising between the parties in which this Agreement or its interpretation is in issue or alleging any breach thereof * * *."
                

B. Procedural History.

Dissatisfied with the position in which he then found himself, Hammond filed suit in March of 1986 in South Carolina state court. He alleged that Kramer and others "entered into a conspiracy and an agreement to fool, cheat and manipulate" him in order to "greatly dilute and/or take away" his rights in the corporation. Kramer made a special appearance in the South Carolina action, and moved to dismiss as against him for lack of personal jurisdiction. When this motion was denied, Kramer appealed to the South Carolina Supreme Court, which affirmed the decision of the lower court. Kramer then moved to stay the action pending his application to the United States Supreme Court for a writ of certiorari, but this motion was denied in July of 1990. Kramer then filed an answer, in which for the first time he raised the arbitration clause as an affirmative defense.

In the meantime, in September of 1987 Hammond had commenced an identical suit in the Supreme Court of the State of New York, apparently to protect his rights in the event that the South Carolina court should determine that it lacked personal jurisdiction over Kramer. Kramer served a notice to take Hammond's deposition, and a few days later he answered the complaint. In his answer, Kramer asserted six affirmative defenses, but did not raise the arbitration clause. He also advanced four counterclaims. Shortly thereafter, he moved for summary judgment.

The New York Supreme Court stayed all proceedings, including Kramer's summary judgment motion, pending the outcome of Hammond's action in South Carolina. Kramer appealed the stay order, but the appellate division affirmed. Kramer then moved for leave to appeal to the New York State Court of Appeals; the court of appeals dismissed the motion on June 30, 1989.

Nearly a year and a half later, and after he had finally lost his jurisdictional battle in South Carolina, Kramer, on November 16, 1990, petitioned the district court to compel arbitration. The district court, in a handwritten, one-sentence endorsement, granted this motion on January 22, 1991, stating that there was "an insufficient showing of 'waiver' to rebut the policy favoring arbitration." On February 13, 1991, Hammond filed a notice of appeal, and on March 13, 1991 moved under Fed.R.Civ.P. 60(b) for relief from the judgment. The district court denied this motion for lack of jurisdiction.

Hammond appeals from both the judgment and the 60(b) order. He argues that the arbitration clause upon which Kramer relies has been abrogated, and that in any event, Kramer waived his right to arbitrate. He further argues that the tort claims that form the basis for his action are not within the scope of the arbitration clause. We conclude that Kramer waived his right to arbitration by engaging in extensive pre-trial litigation for over four years, and we therefore remand the case to the district court with a direction to dismiss the petition to compel arbitration. Because we reverse on the waiver issue, we need not consider Hammond's other arguments.

DISCUSSION

There is, of course, a strong presumption in favor of arbitration. "[A]ny doubts concerning the scope of arbitration 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 Nevertheless, a party does waive this right when he engages in "protracted litigation", Com-Tech Assoc. v. Computer Assoc., 938 F.2d 1574, 1576 (2d Cir.1991), that results in prejudice to the opposing party. "[W]aiver of the right to compel arbitration due to participation in litigation may be found only when prejudice to the other party is demonstrated." Rush, 779 F.2d at 887. Prejudice can be substantive, such as when a party loses a motion on the merits and then attempts, in effect, to relitigate the issue by invoking arbitration, or it can be found when a party too long postpones his invocation of his contractual right to arbitration, and thereby causes his adversary to incur unnecessary delay or expense. See Com-Tech, 938 F.2d at 1576; Rush, 779 F.2d at 887-88.

                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).   In light of this presumption, a waiver of arbitration " 'is not to be lightly inferred.' "  Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir.1985) (citation omitted)
                

No bright line defines this second type of prejudice--neither a particular time frame nor dollar amount automatically results in such a finding--but it is instead determined contextually, by examining the extent of the delay, the degree of litigation that has preceded the invocation of arbitration, the resulting burdens and expenses, and the other surrounding circumstances.

In the instant case, over four years passed between the time that Hammond first brought suit and Kramer at last raised the arbitration clause as a bar. During this four-year period, Kramer engaged in extensive...