Rush v. Oppenheimer & Co.

Citation779 F.2d 885
Decision Date20 December 1985
Docket NumberD,No. 85-7335,No. 22,22,85-7335
PartiesFed. Sec. L. Rep. P 92,406 R. Stockton RUSH, III, Plaintiff-Appellee, v. OPPENHEIMER & CO., and Scott Seskis, Defendants-Appellants. ocket
CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)

Martin R. Gold, New York City (Gold, Farrell & Marks, Robert P. Mulvey, Beth M. Schillinger, of counsel), for Defendants-Appellants Oppenheimer & Co., Inc. and Scott Seskis.

Christopher Lovell, New York City (Lovell & Stewart, Victor E. Stewart, of counsel), for Plaintiff-Appellee R. Stockton Rush, III.

Before MANSFIELD, PIERCE and PRATT, Circuit Judges.

GEORGE C. PRATT, Circuit Judge:

Claiming unauthorized trading in his brokerage investment account, R. Stockton Rush, III brought this action against Oppenheimer & Co., Inc. and Scott Seskis, in which he alleged federal securities, RICO, and pendent common law claims. After approximately eight months of pretrial proceedings in the district court, defendants moved to sever the common law claim and to compel its arbitration. The United States District Court for the Southern District of New York, Robert W. Sweet, Judge, denied defendants' motion, 606 F.Supp. 300, holding that since Rush had been prejudiced by defendants' participation in the district court action, defendants had waived their right to compel arbitration. We disagree with the district

court that the standard for waiver of the right to compel arbitration has been satisfied here, so we reverse and remand for further proceedings.

BACKGROUND

On November 30, 1981, R. Stockton Rush, III opened an options trading account at Oppenheimer with Scott Seskis, a registered representative of Oppenheimer. The agreement signed by Rush included an arbitration clause by which Rush agreed that any controversy between the parties would be settled by arbitration according to the rules of either the National Association of Securities Dealers, Inc. or the New York Stock Exchange, Inc., as Rush elected. Despite the arbitration clause, Rush commenced this action in the district court for damages resulting from the alleged improper and excessive trading in his account.

Rush alleged three claims. First, he charged "churning" of the account in violation of sections 10(b) and 20 of the Securities Exchange Act of 1934. See 15 U.S.C. Sec. 78j(b), 78t. Second, he sought compensatory damages based on New York's common law principles of breach of fiduciary duty. In addition, under a gross fraud allegation, Rush charged that defendants' breach of their fiduciary duty to him involved a high degree of moral turpitude that entitled him to punitive damages under New York law. Third, Rush alleged a RICO violation, contending that defendants' methods of dealing with plaintiff and other members of the investing public constituted racketeering activity under 18 U.S.C. Sec. 1961(1)(D).

Defendants moved on June 25, 1984, to dismiss the complaint for failure to plead fraud with particularity, in violation of Fed.R.Civ.P. 9(b), and for failure to state a claim upon which relief could be granted under Fed.R.Civ.P. 12(b)(6). Rush then prepared an amended complaint, and on the same day that he served it, the district judge partially granted defendants' motion by (1) dismissing the punitive damages element of Rush's common law claim, and (2) dismissing the RICO claim on the basis of this court's holding in Sedima, S.P.R.L. v. Imrex Co., 741 F.2d 482 (2d Cir.1984), rev'd, --- U.S. ----, 105 S.Ct. 3275, 87 L.Ed.2d 346 (1985).

Rush moved for reargument of the punitive damages issue. While that motion was sub judice, defendants answered the amended complaint on August 31, 1984, alleging denials and thirteen affirmative defenses; however, they did not yet assert the agreement to arbitrate as a defense. On November 9, 1984, Judge Sweet vacated his prior order and, applying a different legal standard on the availability of punitive damages in fraud cases, reinstated the punitive damages element of the plaintiff's common law claim.

Approximately six weeks later defendants moved to sever the common law claim and to compel that it be arbitrated. Defendants contend that they had not sought arbitration earlier because the common law punitive damages claim, which could be considered only in the district court, had been dismissed and, thus, their primary motivation for demanding arbitration had been negated, albeit temporarily.

Rush initially opposed the motion to compel arbitration primarily on the ground of the intertwining doctrine, but when the Supreme Court rejected that doctrine in Dean Witter Reynolds Inc. v. Byrd, --- U.S. ----, 105 S.Ct. 1238, 1241, 84 L.Ed.2d 158 (1985), Rush shifted his attention to two other arguments: that the defendants had waived their right to compel arbitration by participating in the district court proceedings, and that the agreement to arbitrate had been fraudulently induced.

The district court agreed that defendants had waived their right to compel arbitration. Judge Sweet emphasized that defendants had not urged severance and arbitration of the common law claim either in their motion to dismiss Rush's complaint or in their answer to Rush's amended complaint. Further, noting that prejudice to the other party is the touchstone in determining waiver of the right to compel arbitration, Judge Sweet held that such prejudice to Rush had resulted 1) from defendants'

participation in the litigation without sooner raising the arbitration issue, 2) from unnecessary cost and delay to Rush if arbitration were to be compelled at that point, and 3) from the fact that now that defendants had received an adverse decision on the punitive damage issue they were seeking a second chance to litigate the same claim in a new forum where punitive damages would not be allowed. Because he found waiver of the right to compel arbitration, Judge Sweet did not reach the question of whether the arbitration clause had been fraudulently induced, and that issue is not before this court.

DISCUSSION

Where, as here, the concern is whether the undisputed facts of defendants' pretrial participation in the litigation satisfy the standard for waiver, the question of waiver of arbitration is one of law, see Southwest Industrial Import & Export, Inc. v. Wilmod Co., 524 F.2d 468, 469-70 & n. 3 (5th Cir.1975), and is fully reviewable on appeal free from the clearly erroneous standard of Fed.R.Civ.P. 52(a) applicable to factual findings by the district court.

Any examination of whether the right to compel arbitration has been waived must be conducted in light of the strong federal policy favoring arbitration for dispute resolution. "The Arbitration Act establishes that, as a matter of federal law, 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); see also Coenen v. R.W. Pressprich & Co., 453 F.2d 1209, 1212 (2d Cir.), cert. denied, 406 U.S. 949, 92 S.Ct. 2045, 32 L.Ed.2d 337 (1972). Clearly, the policies underlying the federal arbitration act favor enforcement of agreements to arbitrate disputes. See In re Conticommodity Services Inc., 613 F.2d 1222, 1224-25 (2d Cir.1980) (quoting 9 U.S.C. Sec. 4).

Given this dominant federal policy favoring arbitration, waiver of the right to compel arbitration due to participation in litigation may be found only when prejudice to the other party is demonstrated. Demsey & Associates, Inc. v. S.S. Sea Star, 461 F.2d 1009, 1018 (2d Cir.1972); Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir.1968). "Waiver * * * is not to be lightly inferred, and mere delay in seeking a stay of the proceedings without some resultant prejudice to a party * * * cannot carry the day." Id. (citation omitted); see also Weight Watchers of Quebec Ltd. v. Weight Watchers International, Inc., 398 F.Supp. 1057, 1058-59 (E.D.N.Y.1975).

Nevertheless, we have recently reaffirmed "that the litigation of substantial issues going to the merits may constitute a waiver of arbitration", Sweater Bee By Banff, Ltd. v. Manhattan Industries, Inc., 754 F.2d 457, 461 (2d Cir.), cert. denied, --- U.S. ----, 106 S.Ct. 68, 88 L.Ed.2d 55 (1985), and in reliance upon this principle Judge Sweet below reasoned that "Oppenheimer's extensive involvement over the course of eight months in the litigation, including taking rather extensive discovery, bringing a motion to dismiss, and posing thirteen affirmative defenses to the amended complaint, all without raising the right to arbitration, constitutes prejudice to Rush and a waiver of the right to arbitrate." We disagree, however, because on this record none of the factors cited by the district court, whether viewed individually or in combination, warrants a finding of waiver of arbitration.

A. Expense and Delay

It is beyond question that defendants' delay in seeking arbitration during approximately eight months of pretrial proceedings is insufficient by itself to constitute a waiver of the right to arbitrate, for in addition, prejudice to Rush must be demonstrated. See Carcich, 389 F.2d at 696. The Supreme Court, when it rejected the intertwining doctrine, noted that: "The legislative history of the Act establishes that the purpose behind its passage was to ensure judicial enforcement of privately made agreements to arbitrate. We therefore reject the suggestion that the overriding goal of the Arbitration Act was to promote the expeditious resolution of claims." Dean Witter Reynolds Inc. v. Byrd, --- U.S. ----, 105 S.Ct. 1238, 1242, 84 L.Ed.2d 158 (1985).

Noting that prejudice is determinative of waiver, the district judge wrote that prejudice has been found "where a party has caused substantial expense and loss of...

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