St. Mary's Medical Center of Evansville, Inc. v. Disco Aluminum Products Co., Inc., 91-2544

CourtUnited States Courts of Appeals. United States Court of Appeals (7th Circuit)
Citation969 F.2d 585
Docket NumberNo. 91-2544,91-2544
PartiesST. MARY'S MEDICAL CENTER OF EVANSVILLE, INCORPORATED, Plaintiff-Appellee, v. DISCO ALUMINUM PRODUCTS COMPANY, INCORPORATED, n/k/a Luminar Products, Incorporated, Defendant-Appellant.
Decision Date05 August 1992

Patrick A. Shoulders (argued), Ziemer, Stayman, Weitzel & Shoulders, Evansville, Ind., for plaintiff-appellee.

R. Stephen LaPlante, Mark E. Miller, Stone, Keck, LaPlante & Folz, Evansville, Ind., Cyrus L. Booker, M. Clark Spoden (argued), Dearborn & Ewing, Nashville, Tenn., for defendant-appellant.

Before CUDAHY, COFFEY, and MANION, Circuit Judges. *

MANION, Circuit Judge.

St. Mary's Medical Center sued Disco Aluminum Products, Inc. for breaching a warranty in a construction contract. A little more than eight months after St. Mary's filed its complaint, Disco requested arbitration pursuant to the contract and asked the district court to stay the case pending arbitration pursuant to § 3 of the Federal Arbitration Act, 9 U.S.C. § 3. St. Mary's resisted on the ground that Disco had waived its right to arbitration and asked the district court to stay arbitration. The district court agreed with St. Mary's that Disco had waived arbitration, denied Disco's motion for a stay pending arbitration, and granted St. Mary's motion to stay arbitration. Disco appealed pursuant to 9 U.S.C. § 16(a)(1)(A), which authorizes interlocutory appeals from refusals to grant stays under § 3. See Perera v. Siegel Trading Co., 951 F.2d 780, 782-83 (7th Cir.1992). Because we agree that Disco waived its contractual right to arbitration, we affirm the district court's decision.

I.

In 1982, St. Mary's entered contracts with Nelson-Brantley Glass Contractors, Inc. and Disco to perform renovation work on its hospital building. Nelson-Brantley and Disco are subsidiaries of the same parent. Both contracts included provisions making any disputes arising from the contracts "subject to arbitration upon the written demand of either party."

The construction work did not turn out to St. Mary's satisfaction, so in July 1989, St. Mary's sued Nelson-Brantley for breach of contract. In September 1989, St. Mary's filed an amended complaint against Nelson-Brantley. Nelson-Brantley filed an answer but the answer did not mention the contract's arbitration clause.

The litigation between St. Mary's and Nelson-Brantley proceeded over the next ten months without Nelson-Brantley ever mentioning arbitration. During this time, St. Mary's realized that it should also have sued Disco. In July 1990, St. Mary's filed another amended complaint naming Nelson-Brantley and Disco as defendants. In November, the defendants (who were represented by the same attorneys) filed a joint motion to dismiss or for summary judgment. The motion did not claim that the dispute with St. Mary's was arbitrable. Instead, the defendants sought dismissal of St. Mary's case on the merits. The motion raised two issues regarding Disco. First, the motion stated that St. Mary's claim was barred by a one-year limitations period in the contracts. Resolving this issue required the court to interpret the contract between St. Mary's and Disco to determine if the contract contained any limitations provision that barred St. Mary's claim. The motion also stated that St. Mary's had not stated, or had not mustered sufficient evidence to prove, any claim against Disco.

St. Mary's responded to the motion to dismiss and the district court took the motion under advisement. Meanwhile, the litigation proceeded. In January 1991, the magistrate judge held a status conference at which he set discovery and settlement deadlines and a September 9, 1991 trial date. The defendants did not mention arbitration at the status conference. In April, Disco filed its preliminary statement of contentions. That statement did not mention arbitration.

In April 1991, the district court denied the defendants' motion to dismiss. Three weeks later, on May 14, the defendants filed a joint answer to St. Mary's complaint in which they mentioned arbitration for the first time by raising it as an affirmative defense. The defendants filed a motion to stay the case pending arbitration and St. Mary's filed a motion to stay arbitration. The district court denied the defendants' motion and granted St. Mary's motion. The court held that the defendants had waived their right to arbitration for three reasons: the defendants' delay in demanding arbitration; their participation in discovery; and their decision to file their motion to dismiss. Only Disco has appealed the district court's decision not to allow arbitration.

II.

Federal policy favors the enforcement of private arbitration agreements. See Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 225-26, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987); Midwest Window Systems, Inc. v. Amcor Industries, Inc., 630 F.2d 535, 536 (7th Cir.1980). This policy is embodied in the Federal Arbitration Act, which provides that arbitration agreements "shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or equity for the revocation of any contract." 9 U.S.C. § 2; see McMahon, 482 U.S. at 226, 107 S.Ct. at 2337. As can be seen from § 2's language, however, the federal policy favoring arbitration is not an absolute preference for arbitration over litigation anytime an arbitration agreement exists. Courts may refuse to enforce arbitration agreements on a number of grounds, and federal courts have consistently held that among those grounds is waiver of the right to arbitrate. See, e.g., Morrie & Shirley Mages Foundation v. Thrifty Corp., 916 F.2d 402, 405 (7th Cir.1990); Midwest Window, 630 F.2d at 536; National Foundation for Cancer Research v. A.G. Edwards & Sons, 821 F.2d 772, 774 (D.C.Cir.1987) ("NFCR ").

Waiver can either be express or inferred. Disco did not expressly waive its right to arbitrate in this case, so the question is whether the district court could infer waiver from Disco's actions. No rigid rule exists as to what constitutes a waiver of the right to arbitrate. Instead, the issue depends on the circumstances of each particular case. See Morrie & Shirley Mages Foundation, 916 F.2d at 405; Ohio-Sealy Mattress Mfg. Co. v. Kaplan, 712 F.2d 270, 273 (7th Cir.1983); Dickinson v. Heinold Securities, Inc., 661 F.2d 638, 641 (7th Cir.1981); accord NFCR, 821 F.2d at 774. The essential question is whether, based on the circumstances, the alleged defaulting party has acted inconsistently with the right to arbitrate. Morrie & Shirley Mages Foundation, 916 F.2d at 405; Dickinson, 661 F.2d at 641.

This brings us to the question of our standard of review. Disco, based on cases from several other circuits, contends that we should review the district court's decision de novo. Somewhat surprisingly, St. Mary's, which is defending the district court's judgment and which one might suppose would therefore argue for a more deferential standard, agrees with Disco that de novo review is appropriate.

The caselaw from other circuits generally supports the parties' agreement that de novo review is appropriate. See, e.g., NFCR, 821 F.2d at 774; Fraser v. Merrill Lynch Pierce, Fenner & Smith, Inc., 817 F.2d 250, 251-52 (4th Cir.1987); Fisher v. A.G. Becker Paribas, Inc., 791 F.2d 691, 693 (9th Cir.1986); Rush v. Oppenheimer & Co., 779 F.2d 885, 887 (2d Cir.1985). We have been unable to find a case expressly applying a more deferential standard of review. Our opinion in Midwest Window does contain a comment toward its end that the court considered the district court's decision to allow arbitration "to have been an abuse of discretion." 630 F.2d at 537. This suggests that we were applying a more deferential standard of review. However, no other Seventh Circuit case has picked up on this comment or even addressed the proper standard of review. There is no other indication in Midwest Window itself that the standard of review was an issue in the case. Standing alone, Midwest Window provides slim support for deferential review of a district court's decision regarding waiver.

However, Midwest Window 's offhand suggestion that deferential review is appropriate is more consistent with Seventh Circuit law regarding standards of review generally than is the position that de novo review is appropriate. The waiver question is, if not strictly a factual question, an application of a legal standard to a set of facts. In this circuit, "[t]he application of a legal standard to undisputed facts is classified as a fact for purposes of delimiting the respective spheres of the trial and appellate courts. We defer to the factfinder's application just as we do to his findings with regard to the facts to which to apply the standard. In either case the appellate standard is clear error." Central States, Southeast and Southwest Areas Pension Fund v. Slotky, 956 F.2d 1369, 1373 (7th Cir.1992); see also Tyson v. Jones & Laughlin Steel Corp., 958 F.2d 756, 759 (7th Cir.1992); Mars Steel Corp. v. Continental Bank N.A., 880 F.2d 928, 933 (7th Cir.1989) (citing cases) (en banc).

There are two reasons why we deferentially review a district court's application of legal standards to facts. First, the trier of fact is closer to the facts than we are and therefore better able to assess their legal significance. Second, an appellate court's primary function is to establish and articulate legal rules. When the answer to a question is closely bound up to the facts of a particular case, this function is not at stake because the resolution of the question in a particular case is not likely to establish uniform rules for future decision. See Mars Steel, 880 F.2d at 933-34; United States v. McKinney, 919 F.2d 405, 419 (7th Cir.1990) (Posner, J., concurring). Both these factors are at play here. This court has emphasized that waiver of the right to arbitration depends on the facts of each particular case....

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