Ohio-Sealy Mattress Mfg. Co. v. Kaplan

• Decision Date: 07 July 1983
• Docket Number: No. 82-2367,OHIO-SEALY,82-2367
• Parties: 1983-2 Trade Cases P 65,679 MATTRESS MANUFACTURING COMPANY, Sealy Mattress Company of Houston, Sealy Mattress Company of Fort Worth, Sealy Mattress Company of Puerto Rico, Inc., Sealy of the Northeast, and Sealy Mattress Company of Georgia, Plaintiffs-Appellants, v. Morris A. KAPLAN, Sealy Mattress Company of Illinois, William H. Walzer, Sealy Connecticut, Inc., Sealy Greater New York, Inc., Waterbury Mattress Company, Morton H. Yulman, Sealy of Eastern New York, Inc., Sealy of Minnesota, Inc., Peter D. Brown, Sealy Mattress Company of Michigan, Inc., T.C. Englehardt, Jr., Fred G. Hodges Bedding Company (A/K/A Sealy Mattress Company of Reading, Pa.), Sealy of Des Moines, Inc., Walter Hertz, Sealy Mattress Company of New Jersey, Inc., Joseph V. Moffitt, Sealy of the Carolinas, Peerless Mattress Company, Lloyd B. Rosenfeld, Sealy Mattress Company of Oregon, Joseph R. Rudick, Maryland Bedding Company, James Thompson, Howard G. Haas, Sealy Incorporated, Sealy Spring Corporation, Sealy Mattress Company of Colorado, Inc., Sealy Mattress Company of Northern California, Inc., Sealy Mattress Company of Southern Carolina, Inc., Sealy Mattress Company of Arizona, Inc., Sealy Mattress Company of Florida, Inc., Sealy Mattress Company of Pittsburgh, Inc., and Sealy Mattress Company of Philadelphia, Inc., Defendants-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 270

712 F.2d 270

1983-2 Trade Cases P 65,679

OHIO-SEALY MATTRESS MANUFACTURING COMPANY, Sealy Mattress Company of Houston, Sealy Mattress Company of Fort Worth Sealy Mattress Company of Puerto Rico, Inc., Sealy of the Northeast, and Sealy Mattress Company of Georgia Plaintiffs-Appellants, v. Morris A. KAPLAN, Sealy Mattress Company of Illinois William H. Walzer, Sealy Connecticut, Inc., Sealy Greater New York, Inc., Waterbury Mattress Company, Morton H Yulman, Sealy of Eastern New York, Inc., Sealy of Minnesota, Inc., Peter D. Brown, Sealy Mattress Company of Michigan, Inc., T.C. Englehardt, Jr., Fred G. Hodges Bedding Company (A/K/A Sealy Mattress Company of Reading, Pa.), Sealy of Des Moines, Inc., Walter Hertz, Sealy Mattress Company of New Jersey, Inc., Joseph V. Moffitt, Sealy of the Carolinas, Peerless Mattress Company, Lloyd B. Rosenfeld, Sealy Mattress Company of Oregon, Joseph R. Rudick, Maryland Bedding Company, James Thompson, Howard G. Haas, Sealy Incorporated, Sealy Spring Corporation, Sealy Mattress Company of Colorado, Inc., Sealy Mattress Company of Northern California, Inc., Sealy Mattress Company of Southern Carolina, Inc., Sealy Mattress Company of Arizona, Inc., Sealy Mattress Company of Florida, Inc., Sealy Mattress Company of Pittsburgh, Inc., and Sealy Mattress Company of Philadelphia, Inc., Defendants-Appellees.

No. 82-2367.

United States Court of Appeals, Seventh Circuit.

Argued March 28, 1983.

Decided July 7, 1983.

Frederic F. Brace, Jr., Brace & O'Donnell, P.C., Chicago, Ill., for plaintiffs-appellants.

Phil C. Neal, Friedman & Koven, Chicago, Ill., for defendants-appellees.

Before CUMMINGS, Chief Judge, and BAUER and COFFEY, Circuit Judges.

BAUER, Circuit Judge.

The issue in this case is whether Ohio-Sealy, Inc. waived its express right to arbitrate the amount of royalties due under its license agreement with Sealy, Inc. The district court, 545 F.Supp. 765, held that Ohio-Sealy waived its contractual right to arbitration when it told Sealy "[W]e stand ready to have the matter resolved by litigation or arbitration whenever you so choose." Accordingly, the district court refused to stay Sealy's counterclaim pending arbitration and ruled, as a matter of law, that Sealy was entitled to withheld royalties and late charges. We affirm.

I

The controversy arose when Ohio-Sealy attempted to collect a multi-million dollar judgment ¹ it had won against Sealy in a 1975 antitrust suit. The judgment had been stayed without bond, and during the stay Ohio-Sealy continued to pay Sealy royalties and other monies due under the license agreement. In March, 1976, however, Ohio-Sealy began withholding these monies and crediting them against the 1975 judgment. Ohio-Sealy also filed this action, charging that Sealy's Board of Directors was continuing to engage in the very conduct which had been held to be anticompetitive in the 1975 action. The contract claims raised in this appeal are just some of the many claims raised in Ohio-Sealy's six-count, seventy-two page amended complaint.

Sealy objected to the withholding of the monies, contending that Ohio-Sealy's action violated the license agreement. Sealy also moved to stay the new action Ohio-Sealy had just filed. The stay was granted. During the two-year stay the parties continued to dispute amounts due under the license agreement. Ohio-Sealy urged that these disputes be submitted to arbitration. Sealy responded by threatening to terminate Ohio-Sealy's license. In 1977, after considerable haggling, Ohio-Sealy made the following proposal: (1) it conceded the lawfulness of some of the royalties claimed by Sealy; (2) it issued a credit memorandum for the amount of these royalties; and (3) it offered to have the dispute over the remaining royalties resolved by litigation or arbitration. One year after Ohio-Sealy made this proposal the stay was lifted. Sealy then answered Ohio-Sealy's complaint and counterclaimed for the unpaid royalties and late charges.

After the 1975 judgment was upheld in this court and the United States Supreme Court denied certiorari, Ohio-Sealy Mattress Manufacturing Co. v. Sealy, Inc., 585 F.2d 821 (7th Cir.1978), cert. denied, 440 U.S. 930, 99 S.Ct. 1267, 59 L.Ed.2d 486 (1979), Sealy satisfied the judgment. Thereafter it renewed its threat to terminate Ohio-Sealy's license unless Ohio-Sealy paid all disputed royalties; Ohio-Sealy acquiesced under protest. The amount Ohio-Sealy remitted, however, did not include late charges. The disputed royalties and late charges are the subject of this appeal.

Contending that the royalties and late charges were contested on antitrust as well as contractual grounds, Ohio-Sealy requested the district court to stay consideration of the merits of Sealy's counterclaim until after arbitration. The district court, however, held that Ohio-Sealy had waived its right to insist on arbitration because, for approximately five years, it had offered Sealy the choice of resolving the dispute by litigation or arbitration. The district court also ruled on the merits of Sealy's counterclaim, granting summary judgment in Sealy's favor.

II

Ohio-Sealy contends that the district court erred in concluding that Ohio-Sealy waived its right to arbitration. Relying on section 3 of the Federal Arbitration Act, 9 U.S.C. § 3, Ohio-Sealy maintains that it did not waive its right to arbitration because it was not in default within the meaning of the statute. Ohio-Sealy asserts that to sustain a finding of default under section 3 the record must establish that: (1) the party seeking to invoke the right to arbitration took some judicial action inconsistent with the exercise of that right; and (2) the party opposing arbitration was prejudiced by that inconsistency. Ohio-Sealy maintains that neither of these two elements was satisfied.

Emphasizing that federal policy strongly favors arbitration and that the purpose of the Federal Arbitration Act, 9 U.S.C. § 1 et seq., is to make agreements irrevocable and enforceable, Ohio-Sealy states that it has sought arbitration consistently since 1976. Further, it maintains that it did not default within the meaning of the statute because it raised the arbitration issue in its answer and later filed a motion for a stay pending arbitration.

To determine whether a party has defaulted in proceeding with arbitration, thereby waiving the arbitration agreement, the court must analyze all the facts and circumstances. Martin Marietta Aluminum, Inc. v. General Electric Co., 586 F.2d 143 (9th Cir.1978). Prejudice and delay are significant factors the court must consider in applying the default provision of section 3 of the Federal Arbitration Act, 9 U.S.C. § 3. In re Mercury Construction Corp., 656 F.2d 933 (4th Cir.1981), aff'd sub nom. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., --- U.S. ----, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983); Midwest Window Systems, Inc. v. Amcor Industries, Inc., 630 F.2d 535 (7th Cir.1980).

Ohio-Sealy states that as early as October, 1977, it told Sealy to arbitrate or litigate in order to collect the disputed royalties. The record is replete with correspondence reiterating Ohio-Sealy's offer. Appendix, Vol. II at 534, 902, 904, 905, 919-20. Ohio-Sealy argues that this correspondence does not constitute participation in any judicial proceeding and, therefore, should not have been considered by the court. We cannot agree. There is no rigid rule as to what constitutes a waiver of an arbitration agreement; the issue depends on the facts of the particular case. Reid Burton Construction, Inc. v. Carpenters District Council of Southern Colorado, 614 F.2d 698 (10th Cir.), cert. denied, 449 U.S. 824, 101 S.Ct. 85, 66 L.Ed.2d 27 (1980). Delay, especially when it causes actual prejudice, may constitute default under the statute. In re Mercury Construction Corp., 656 F.2d 933 (4th Cir.1981), aff'd sub nom. Moses H. Cone Memorial Hospital v. Mercury Construction Corp., --- U.S. ----, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). See also Dickstein v. du Pont, 443 F.2d 783 (1st Cir.1971). And, the correspondence is highly relevant to whether Ohio-Sealy asserted its right to arbitration in a timely manner.

We are aware that when a party raises its arbitration right as an affirmative defense, the party seeking to prove waiver has a heavy burden. Martin Marietta Aluminum, Inc. v. General Electric Co., 586 F.2d 143 (9th Cir.1978). We believe, however, that Sealy has sustained that burden. Sealy has offered evidence that, despite the arbitration provision, Ohio-Sealy continually has offered Sealy the option of litigation or arbitration. Sealy chose litigating, filing its answer and counterclaim soon after the stay was lifted. Both parties then went forward with the litigation, engaging in extensive pretrial activities. Clearly, in view of Ohio-Sealy's participation in these proceedings, and its failure to assert its right to arbitration, Sealy was justified in concluding that Ohio-Sealy had decided to waive arbitration.

Without conceding that it was guilty of delay in seeking arbitration, Ohio-Sealy argues that assuming, arguendo, it did delay, the trial judge failed to consider whether this delay prejudiced Sealy. Ohio-Sealy asserts that the trial court's failure to consider the issue of prejudice automatically mandates reversal. Appellants' br. at 13. It is difficult to understand how Ohio-Sealy can make this assertion, for the trial judge specifically stated that "[w]aiver will be found where the party seeking to invoke the right to arbitration has taken some action inconsistent with the exercise of that right and the party opposing arbitration has been prejudiced by that inconsistency." Ohio-Sealy Mattress Manufacturing Co. v. Sealy, Inc., No. 76 C 810, slip op. at 22 (N.D.Ill. Aug. 20, 1982).

Similarly, it is difficult to understand how Ohio-Sealy can contend that Sealy would not have been prejudiced if Ohio-Sealy were permitted to insist on its right...