Southern Systems, Inc. v. Torrid Oven Ltd.

Decision Date25 July 2000
Docket NumberNo. 99-2089-DV.,99-2089-DV.
Citation105 F.Supp.2d 848
PartiesSOUTHERN SYSTEMS, INC., Plaintiff, v. TORRID OVEN LIMITED, Defendant.
CourtU.S. District Court — Western District of Tennessee

Michael I. Less, Ted M. Hayden, Less Getz & Lipman, Memphis, TN, Michele Fosco Salazar, Less Getz & Lipman, Memphis, TN, for Southern Systems, Inc.

Stephen P. Hale, Jennifer Ziegenhorn, Hale Headrick Dewey & Wolf, PLLC, Memphis, TN, for Torrid Oven Limited.

Dianne Vescovo, Memphis, TN, miscellaneous pro se.

Michael I. Less, Ted M. Hayden, Less Getz & Lipman, Memphis, TN, for United States Fidelity and Guaranty Co.

ORDER ON DEFENDANT'S MOTION TO STAY FOR ARBITRATION

DONALD, District Judge.

In this lawsuit plaintiff Southern Systems Incorporated ("SSI"), a subcontractor of defendant Torrid Oven Limited ("Torrid"), sued Torrid claiming that it was not paid for certain work that it performed on a conveyor system. Torrid counterclaimed asserting that SSI failed to properly perform the work on the conveyor system and that Torrid incurred substantial expense to correct the errors made by SSI. Torrid now seeks an order staying the lawsuit while the parties pursue arbitration.

This case has endured in the district court for nearly eighteen months since the original complaint was filed by SSI on January 28, 1999. During this year and a half, the parties have engaged in extensive discovery and motion practice. Soon after service of the complaint, Torrid, on May 26, 1999, sought an extension of time to respond. After the district court granted that motion, Torrid filed a motion on June 16, 1999, asking the court to dismiss the lawsuit pursuant to Fed.R.Civ.P. 12(b)(2) for lack of jurisdiction over the person or, in the alternative, to dismiss the case based on the doctrine of forum non conveniens. The motion was denied by the district court on August 2, 1999.

In the interim, a number of depositions were taken by both parties. On May 18 and 19, 1999, SSI took the depositions of four Torrid employees: Jeff Muyshondt, President of Torrid; Craig Corcoran, Vice-President of Operations at Torrid; John Adamse, project manager of Torrid; and Helmut Meir, engineering manager for Torrid. Torrid then took four depositions over the course of two weeks, those of: Larry Linton, Vice-President of SSI; V.L. Patel, project engineer for SSI; Charles Van Pelt, project engineer for SSI; and Leon Linton, President of SSI.

On August 16, 1999, Torrid filed its answer to SSI's complaint. Nowhere in the answer did Torrid assert that the dispute in this litigation was governed by an arbitration clause, nor did Torrid argue at that time that the court should stay proceedings while the parties engaged in arbitration. Torrid then served interrogatories and a request for production of documents on SSI on October 28, 1999, and answered SSI's discovery requests on October 29, 1999, and December 13, 1999. Additional discovery continued to take place, with SSI taking the depositions of three Torrid employees on January 17-20, 2000, in Ontario, Canada, continuing a deposition of one of the employees on February 15-16, 2000, and taking the depositions of two additional Torrid employees on March 7-9, 2000. Torrid was no stranger to the deposition process, taking six more depositions between May 9, 2000, and May 18, 2000. In the meantime, Torrid filed a counterclaim against SSI on February 22, 2000, and a third party complaint against United States Fidelity & Guaranty Co., SSI's surety, the same day. The present motion for stay of arbitration was not filed until June 16, 2000, less than one month prior to the discovery deadline of July 12, 2000, less than two months before the trial date of August 14, 2000, and nearly fifteen months after the complaint was filed.

ANALYSIS

The critical issue in this case is whether Torrid by participating in the litigation process has waived its right to arbitration.

Torrid seeks a stay of the present proceedings pending arbitration pursuant to an arbitration clause in a written proposal from SSI to Torrid which Torrid contends constitutes part of the contract between SSI and Torrid.1 Torrid argues that the Federal Arbitration Act ("FAA") governs and requires a stay of underlying litigation until arbitration has been held.2 Section 3 of the FAA provides:

If any suit or proceeding be brought in any of the courts of the United States upon any issue referable to arbitration under an agreement in writing for such arbitration, the court in which such suit or proceeding is pending, upon being satisfied that the issue involved in such suit is referable to arbitration under such an agreement, shall on application of one of the parties stay the trial of the action until such arbitration has been had in accordance with the terms of the agreement, providing the applicant for the stay is not in default in proceeding with such arbitration.

9 U.S.C. § 3. Torrid insists that the language of Section 3 is mandatory and that a court must grant a stay when any party requests it. See, e.g., In re H & M Charters v. Reed, 757 F.Supp. 859, 862 (S.D.Ohio 1991) (holding that the FAA does not allow for discretion by a district court, but rather mandates that the court order arbitration upon motion of either party). In response, SSI does not dispute the existence of an arbitration clause or the application of the FAA to the dispute,3 but contends that Torrid has waived its right to arbitration.

There is a strong federal policy in favor of arbitration. See generally National Found. for Cancer Research v. A.G. Edwards & Sons, Inc., 821 F.2d 772, 774 (D.C.Cir.1987) (citing Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 218-24, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985)). The strong federal policy is based upon the goal of Congress to enforce terms of a contract rather than a preference for arbitration. See Dean Witter Reynold's, Inc., 470 U.S. 213, 219, 105 S.Ct. 1238, 84 L.Ed.2d 158 (1985). Any doubts concerning arbitration should be resolved in favor of arbitration. See AT & T Technologies, Inc., 475 U.S. at 650, 106 S.Ct. 1415; Moses H. Cone Mem. Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25, 103 S.Ct. 927, 74 L.Ed.2d 765 (1983). Some courts have held that an order to arbitrate should not be denied unless the contractual arbitration clause clearly does not cover the dispute at issue. See, e.g., United Steel-workers of Am. v. Warrior & Gulf Navigation Co., 363 U.S. 574, 80 S.Ct. 1347, 4 L.Ed.2d 1409 (1960); see also AT & T Technologies, Inc. v. Communications Workers of Am. et. al., 475 U.S. 643, 106 S.Ct. 1415, 89 L.Ed.2d 648 (1986); Pearce v. E.F. Hutton Group, Inc., 828 F.2d 826 (D.C.Cir.1987); Cash Converters USA, Inc. v. Burns, No. 99 C 146, 1999 WL 98345, at *6 (N.D.Ill. Feb.19, 1999).

The federal policy favoring arbitration is not absolute. It is well settled that a party can waive its contractual right to arbitration like any other contractual provision. See American Locomotive Co. v. Gyro Process Co., 185 F.2d 316, 318 (6th Cir.1950) (holding "the contract right of arbitration [can] be waived"); Morewitz, 62 F.3d 1356, 1365 (11th Cir.1995) ("Arbitration should not be compelled when the party who seeks to compel arbitration has waived that right."); Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1489 (10th Cir.1994) (recognizing that a contractual right to arbitration can be waived like any other contract provision); Magallanes Inv., Inc. v. Circuit Systems, Inc., 994 F.2d 1214, 1217 (7th Cir.1993) ("The right to arbitration also can be waived."); Kramer v. Hammond, 943 F.2d 176, 179 (2nd Cir.1991) (finding waiver of right to arbitration where party engages in protracted litigation and prejudice results to the opposing party); Miller Brewing Co. v. Fort Worth Distributing Co., Inc., 781 F.2d 494, 497 (5th Cir.1986) ("The right to arbitration, like any other contract right, can be waived."); Cornell & Co. v. Barber & Ross Co., 360 F.2d 512 (D.C.Cir.1966) (finding waiver where defendant filed motion for transfer of venue, filed counterclaim, took depositions, and procured the production of documents); Radiator Specialty Co. v. Cannon Mills, 97 F.2d 318, 319 (4th Cir.1938) ("One having the right to arbitrate and to stay an action at law, pending arbitration under this statute may waive such right.").

Various jurisdictions have adopted different tests to determine waiver of arbitration rights. See U.S. v. Darwin Constr. Co., 750 F.Supp. 536, 538 (D.D.C.1990). A number of circuits regard prejudice as the pivotal factor in determining waiver. See Rush v. Oppenheimer, 779 F.2d 885, 887 (2nd Cir.1985) (holding waiver of right to compel arbitration may be found only where prejudice to the other party in demonstrated.); accord Leadertex v. Morganton Dyeing & Finishing Corp., 67 F.3d 20, 26 (2nd Cir.1995); Sweater Bee v. Manhattan Indus., Inc., 754 F.2d 457, 463 (2nd Cir.1985); Gavlik Construction Co. v. H.F. Campbell Co., 526 F.2d 777, 782 (3rd Cir. 1975) (holding that the presence or absence of prejudice to the opposing party, not inconsistency, is determinative of the issue of waiver). See also Miller Brewing Co. v. Fort Worth Distrib. Co., Inc., 781 F.2d 494, 497 (5th Cir.1986) (finding waiver of arbitration right when "the party seeking arbitration substantially invokes the judicial process to the detriment or prejudice of the other party."); accord Walker v. J.C. Bradford & Co., 938 F.2d 575, 577 (5th Cir.1991) (citing Miller, 781 F.2d at 497); Stifel, Nicolaus & Co., Inc. v. Freeman, 924 F.2d 157, 158 (8th Cir. 1991) (adopting same three prong test as the Ninth Circuit); Fisher v. A.G. Becker Paribas, Inc., 791 F.2d 691, 694 (9th Cir. 1986) (adopting a three prong test for determining waiver: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that right; and (3) prejudice to the opposing party resulting from the inconsistent acts); accord Hoffman Constr. Co. of Oregon v. Active Erectors and...

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