Shalaby v. Arctic Sand Technologies, Inc.

Decision Date15 December 2014
Docket NumberMICV2014-03621
PartiesNadia Shalaby v. Arctic Sand Technologies, Inc. et al No. 129016
CourtMassachusetts Superior Court

Filed December 16, 2014

MEMORANDUM AND ORDER DENYING ARCTIC SAND'S MOTION TO COMPEL ARBITRATION and ALLOWING PLAINTIFF'S MOTION FOR LEAVE TO FURTHER AMEND HER COMPLAINT

Kenneth W. Salinger, Justice of the Superior Court.

This action concerns, among other things, whether Arctic Sand Technologies, Inc., fired Dr. Nadia Shalaby for cause and thus has a right to repurchase her Arctic Sand stock. Dr Shalaby is the former chief executive officer of Arctic Sand. She was replaced as CEO by Gary Davison in October 2013, and fired in March 2014. John Major served as Chairman of the Board of Directors when Arctic Sand took the actions challenged here by Shalaby. The court (Wilkins, J.) has dismissed five of the nine claims against Arctic Sand and all claims against Davison and Major.

Arctic Sand has moved to compel binding arbitration. It did so only after learning that not all of Shalaby's claims would be dismissed. Arctic Sand waived any right to compel arbitration by actively litigating this civil action and repeatedly seeking to invoke the court's jurisdiction to its benefit for six months, before abruptly changing course and attempting to force Shalaby into binding arbitration. The Court will therefore DENY Arctic Sand's motion to compel arbitration.

Dr Shalaby, in turn, has moved for leave to file a second amended complaint to add claims that all three defendants discriminated against Shalaby because of her sex and retaliated against Shalaby for making internal complaints about sex discrimination, in violation of G.L.c. 151B, § 4. Dr. Shalaby's second amended complaint alleges facts plausibly suggesting that Defendants took adverse actions against Shalaby because of her sex and retaliated against her because she opposed practices forbidden under this statute. Defendants will not be unfairly prejudiced by the addition of these claims at this time. The Court will therefore ALLOW Dr Shalaby's motion for leave to further amend her complaint.

1. Waiver of Arbitration by Litigation Conduct.

1.1. Question for the Court

The Court must decide whether Arctic Sand waived arbitration by litigating this dispute in court. This is presumptively a threshold issue to be decided by a judge, and the parties did not clearly and unmistakably agree that this issue will instead be decided by an arbitrator.

1.1.1. Presumption Under Federal Arbitration Act

Courts must presume that whether a contracting party has waived arbitration by participating in a civil action concerning the same dispute is to be determined by the court. Under Massachusetts law, the presumption is that all questions regarding the waiver of arbitration are to be decided by a judge, not an arbitrator. See O'Brien v. Hanover Ins. Co., 427 Mass. 194, 199, 692 N.E.2d 39 (1998) (" Whether a party has waived arbitration is [usually] a question of arbitrability for the court to determine." (applying the Massachusetts Arbitration Act and quoting Martin v. Norwood, 395 Mass. 159, 162, 478 N.E.2d 955 (1985)). Federal law is now more nuanced, but continues to presume that the particular kind of waiver at issue here is to be decided by a court.

Under the Federal Arbitration Act, " [c]ourts should not assume that the parties agreed to arbitrate arbitrability unless there is 'clea[r] and unmistakabl[e]' evidence that they did so." First Options of Chicago, Inc. v. Kaplan, 514 U.S. 938, 944, 115 S.Ct. 1920, 131 L.Ed.2d 985 (1995), quoting AT& T Technologies, Inc. v. Communications Wkrs. of America, 475 U.S. 643, 649, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986). Thus, when it comes to substantive questions of arbitrability, " the usual presumption in favor of arbitration is reversed." Massachusetts Highway Dept. v. Perini Corp., 83 Mass.App.Ct. 96, 100-01, 981 N.E.2d 721, rev. denied, 465 Mass. 1107, 989 N.E.2d 900 (2013). " In this manner the law treats silence or ambiguity about the question 'who (primarily) should decide arbitrability' differently from the way it treats silence or ambiguity about the question 'whether a particular merits-related dispute is arbitrable because it is within the scope of a valid arbitration agreement[.]'" First Options at 944-45. Since the question of " 'who (primarily) should decide arbitrability' . . . is rather arcane[, ] [a] party often might not focus upon that question or upon the significance of having arbitrators decide the scope of their own powers." First Options, 514 U.S. at 945. " And given the principle that a party can be forced to arbitrate only those issues it specifically has agreed to submit to arbitration, [courts should] hesitate to interpret silence or ambiguity on the 'who should decide arbitrability' point as giving the arbitrators that power, for doing so might too often force unwilling parties to arbitrate a matter they reasonably would have thought a judge, not an arbitrator, would decide." Id.

More recently, the Supreme Court moved the line drawn in First Options by deciding that under federal law " the presumption is that the arbitrator should decide 'allegation[s] of waiver, delay, or a like defense to arbitrability.'" Howsam v. Dean Witter Reynolds, Inc., 537 U.S. 79, 85, 123 S.Ct. 588, 154 L.Ed.2d 491 (2002), quoting Moses H. Cone Mem. Hospital v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983).[1] The Court explained that such questions are not " issues of substantive arbitrability" that presumptively should be decided by a court, but instead are " issues of procedural arbitrability" concerning " conditions precedent to an obligation to arbitrate" that presumptively should be decided by an arbitrator. Id. at 85, quoting Revised Uniform Arbitration Act of 2000, § 6, comment 2, 7 U.L.A. 13 (Sup. 2002). The actual holding in Howsam was that the question of whether a claim is barred by the six-year limitations period established in the National Association of Securities Dealers' Code of Arbitration Procedure " is a matter presumptively for the arbitrator, not for the judge." 537 U.S. at 85. The Court reasoned in part that " the NASD arbitrators, comparatively more expert about the meaning of their own rule, are comparatively better able to interpret and to apply it, " and that courts should " infer that the parties intended the agreement to reflect that understanding, " at least " [i]n the absence of any statement to the contrary in the arbitration agreement." Id. The Court has applied Howsam to other situations several times. Cf. BG Group, PLC v. Republic of Argentina, 134 S.Ct. 1198, 1207-10, 188 L.Ed.2d 220 (2014) (arbitrator should decide whether plaintiff investor complied with prerequisite, established by treaty governing investments in foreign nations, of first commencing litigation in local court where investment was made); Green Tree Financial Corp. v. Bazzle, 539 U.S. 444, 452-53, 123 S.Ct. 2402, 156 L.Ed.2d 414 (2003) (arbitrator should decide whether contracts forbid class arbitration). But it has not yet grappled with who should decide whether a party's litigation conduct constitutes waiver of a contractual right to compel arbitration.

Virtually every appellate court to address the issue has concluded that " the Supreme Court in Howsam and Green Tree did not intend to disturb the traditional rule that waiver by conduct, at least where due to litigation-related activity, is presumptively an issue for the court, " and not the arbitrator, to decide. Marie v. Allied Home Mortgage Corp., 402 F.3d 1, 14 (1st Cir. 2005); accord Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 221, 48 V.I. 1034 (3d Cir. 2007); JPD, Inc. v. Chronimed Holdings, Inc., 539 F.3d 388, 393 (6th Cir. 2008); Grigsby & Assocs., Inc. v. M Securities, Inc., 664 F.3d 1350, 1353-54 (11th Cir. 2011); Ocwen Loan Servicing, LLC v. Washington, 939 So.2d 6, 14 (Alabama 2006); Hong v. CJ CGV America Holdings, Inc., 222 Cal.App.4th 240, 255-58, 166 Cal.Rptr.3d 100 (Cal. 2013); Radil v. Nat'l Union Fire Ins. Co. of Pittsburg, PA, 233 P.3d 688, 694 (Colo. 2010); American General Home Equity, Inc. v. Kestel, 253 S.W.3d 543, 551-52 (Ky. 2008); Good Samaritan Coffee Co. v. LaRue Distributing, Inc., 275 Neb. 674, 748 N.W.2d 367, 372-75 (Neb. 2008); Perry Homes v. Cull, 258 S.W.3d 580, 588-89 (Tex. 2008).

The Court is persuaded by the First Circuit's reasoning in Marie and agrees with this consensus view. The presumption that courts should decide whether a party's own conduct constitutes waiver of its asserted right to compel binding arbitration has particular force where, as here, that conduct took place in court. " [B]ecause the inquiry into whether a party has waived its right to arbitrate by litigating the case in court heavily implicates 'judicial procedures' . . . the court should remain free to 'control the course of proceedings before it and to correct abuses of those proceedings, ' rather than being required to defer to the findings an arbitrator with no previous involvement in the case." Ehleiter, 482 F.3d at 218, quoting Marie, 402 F.3d at 13. " [T]he comparative expertise considerations stressed in Howsam and Green Tree argue for judges to decide this issue . . . Judges are well trained to recognize abusive forum shopping." Marie, 402 F.3d at 13, citing Howsam, 537 U.S. at 85, and Green Tree, 539 U.S. at 452-53. This consensus view is also consistent with the Supreme Court's observation that " parties to an arbitration contract would normally expect a forum-based decision maker to decide forum-specific procedural gateway matters." Howsam, 537 U.S. at 86.

1.1.2. No Agreement to Arbitrate Waiver by Litigation Conduct

Arctic Sand argues that it rebutted the presumption that the...

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