Opinion
Case No. 8:01CV326
January 17, 2003
MEMORANDUM AND ORDER ON DEFENDANTS' APPEAL OF MAGISTRATE JUDGE'S ORDER
This matter is before the Court upon an Appeal from a Magistrate Judge's Order of June 19, 2002, brought by Defendants GERS, Inc., James Henderson and J. Michael Larkin. (Filing No. 28). In the Order, Magistrate Judge Kathleen Jaudzemis denied Defendants' motion to stay and compel arbitration (Filing No. 26). Plaintiffs Terrence F. Root and the Terrence F. Root Family Limited Partnership seek to have the Magistrate Judge's Order affirmed. The parties have fully briefed the issues presented. For the reasons provided herein, the Defendants' appeal shall be denied.
Procedural Background
Plaintiffs filed this action on June 20, 2001, seeking damages. Defendants were given an extension of time to answer or otherwise respond to the Complaint until August 9, 2001. On June 25, 2001, GERS and Henderson filed a complaint in a California state court ("the California action"), seeking declaratory relief that any claims against GERS should be arbitrated pursuant to an arbitration clause contained in Terrence Root's employment contract with GERS. On August 6, 2001, Root answered the California action, and moved to stay the California action contending that the issues relating to arbitration should be determined in this action.
On August 9, 2001, the Defendants responded to the Complaint in this action by filing a motion to dismiss or transfer the case to the Southern District of California, based on the forum selection clauses found in two contracts between the parties. In connection with the motion to dismiss or transfer, the Defendants argued that the claims alleged in the Complaint arose from the contracts that contained the forum selection clauses. Those contracts did not contain arbitration clauses.
On August 14, 2001, the parties submitted a Rule 26(f) planning report to Magistrate Judge Thomas Thalken. The report does not mention arbitration. The report does, however, convey Defendants' position at the time that the Plaintiffs' claims should be litigated in federal court in California. Judge Thalken stayed further proceedings in this action until the Court decided the Defendant's Motion to Dismiss or to Transfer.
The California action was voluntarily dismissed on August 21, 2001. I denied the Defendant's Motion to Dismiss or to Transfer on April 3, 2002, and the stay was lifted on April 12, 2002. Defendants then filed this Motion to Stay and Compel Arbitration.
Separate from the litigation process, on December 6, 2001, Plaintiff responded to a November 30, 2001, proposal by Defendant Larkin. (Filing No. 25, Ex. 7) In general terms, under the proposal Terrence Root was given the option to participate in the issuance of a new class of GERS stock and thereby avoid a dilution of his current interest in the company in exchange for an additional investment by him of approximately $100,000. (Id.) Root, who was required to decide whether to accept the proposal by December 7, 2001, declined the proposal.
Magistrate Judge's Order
In her June 19, 2002, Order, Judge Jaudzemis found that the Defendants had waived their right to compel arbitration under the three-prong test set forth in Ritzel Communications, Inc. v. Mid-American Cellular Tel. Co., 989 F.2d 966, 969 (8th Cir. 1993). The Magistrate Judge concluded that the Defendants knew of their right to arbitrate, and that they had taken actions inconsistent with their right to arbitrate, and that Plaintiffs had been unfairly prejudiced as a result. With regard to the second prong, Judge Jaudzemis found that Defendants moved to dismiss or to transfer this case to California, only after having asserted the right to arbitrate in the California action. The Defendants did not pursue their right to arbitrate the claims asserted in this action until this Court denied the Defendants' request to transfer the case to California. Judge Jaudzemis found that "the defendants acted consistently with a desire to litigate this case in California, but inconsistently with their asserted right to arbitration." With regard to the third prong, Judge Jaudzemis determined that the Plaintiff had been prejudiced by the Defendants' delay in asserting their right to arbitrate, not only in incurring expenses related to defending their position in the California action, but also because there had been a "significant and detrimental change in the capital structure of GERS, Inc."
Standard of Review
Pursuant to 28 U.S.C. § 636(b)(1)(A) and NELR 72.3, the court has reviewed the order from which this appeal has been taken. In an appeal from a magistrate judge's order on a nondispositive matter within 28 U.S.C. § 636(b)(1)(A), a district court may set aside any part of the magistrate judge's order shown to be clearly erroneous or contrary to law. 28 U.S.C. § 636(b)(1)(A); NELR 72.3(d); United States v. Apker, 139 F.R.D. 129, 131 (D.Neb. 1991). "`Clearly erroneous' is a high standard to meet; the challenger must convince the reviewing court that a mistake has been made." Smith v. BMI, Inc., 957 F.2d 462, 463 (7th Cir. 1992).
The Defendants contend that a de novo standard of review applies. To the extent the Defendants are correct, there is no issue because the Court in fact conducted a de novo review.
Analysis
The Defendants' primary argument in support of their appeal is that the June 19, 2002, Order is contrary to the law as stated by the Eighth Circuit Court in Dumont v. Saskatchewan Government Ins., 258 F.3d 880 (8th Cir. 2001). The Defendants argue that Dumont requires this Court to conclude that the Defendants did not take action inconsistent with their right to arbitration because in filing the motion to dismiss or to transfer, the Defendants were not litigating the merits of the case. I disagree with this restrictive interpretation of Dumont.Both Dumont and Ritzel, supra, which is relied upon in Judge Jaudzemis' June 19, 2002, Order, set forth the same three-prong test to determine whether a party has waived its right to enforce an arbitration provision of a contract, as follows:
We will find waiver of arbitrability where the party claiming the right to arbitrate: (1) knew of its existing right to arbitration; (2) acted inconsistently with that right; and (3) prejudiced the other party by its inconsistent actions.
Dumont, 258 F.3d at 886, citing Ritzel, 989 F.2d at 969. As the previous citation indicates, the Dumont court relied upon Ritzel in setting forth the test. Id. at 886.
At issue in Dumont was whether the defendant had acted inconsistently with its known right to compel arbitration. In considering the second prong of the waiver test, the Eighth Circuit Court found that the defendant had taken no action with respect to the merits of the case prior to the district court ordering arbitration. The court found that the defendants had sought an "early dismissal of the case on jurisdictional and quasi-jurisdictional grounds." Id. at 886-87. Defendants argue that, like the Dumont defendant, they had taken no action with respect to the merits of the case prior to requesting arbitration. Consequently, Defendants contend that Judge Jaudzemis' reliance on Ritzel, supra, and her finding that they took action inconsistent with their right to arbitration are in error.
It is true that the Eighth Circuit Court has distinguished a defendant's motion to dismiss based on failure to join necessary parties and failure to state a claim for relief on the merits, which it characterized as "a substantial, active invocation of the litigation process," see Ritzel, 989 F.2d at 969, from a defendant's motion seeking early dismissal of a case on jurisdictional and quasi-judicial grounds, as in Dumont. However in asking this Court to hold to a restrictive interpretation of Dumont, Defendants are asking the Court to ignore all the other circumstances that are relevant to determining whether a party has taken action inconsistent with the right to arbitration.
In both Dumont and Ritzel, the Eighth Circuit Court considered all of the circumstances surrounding the action in determining whether the defendant had acted inconsistent with its right to compel arbitration. For example, in Dumont, the Eighth Circuit Court also found that the defendant "repeatedly offered to engage in arbitration while the [plaintiffs] refused," and that the defendant had "specifically warned at the time it filed its dismissal motion that it would seek to compel arbitration." Id. at 887. Based on these findings, the Court stated:
We cannot equate SGI's seeking an early dismissal of this case solely on other than merits-based grounds, coupled with its concomitant express warning that it would seek to compel arbitration, as acts inconsistent with a known right to compel arbitration.
Id. (emphasis added).
I find it significant that the Dumont court did not rely solely on the nature of the motion to dismiss in holding that defendant had not acted inconsistently with its right to compel arbitration. The Dumont court emphasized the defendant's repeated offers to arbitrate and that the defendant had put the plaintiff clearly on notice that it intended to exercise its right to arbitrate after the motion to dismiss had been resolved. By giving this notice, defendant made it difficult for the plaintiff to later claim unfair prejudice. Those facts distinguish Dumont from the case at hand.
In this case, Judge Jaudzemis found that there was no mention of arbitration in this action until the Defendants filed their motion for stay and to compel arbitration, despite the Defendants' many opportunities to advise the parties and the Court of its intention in that regard. There is no reference to arbitration in the Rule 26(f) report to the Court. In fact, all references in the Rule 26(f) report indicate that the parties intended to zealously litigate the issues in this case.
In addition, when the arbitration issue was raised in the California action by the Plaintiff, the Defendants dismissed the California action. Instead of then filing a motion to compel arbitration in the Nebraska action, they filed a motion to dismiss or to transfer to California, rather than a motion to compel arbitration. Defendants contend that they were required to initially raise the venue issue or waive it under the Federal Rules of Civil Procedure. However, the Rules did not preclude Defendant from making a motion to compel arbitration in the alternative, or to put the adverse party and the Court on notice of its intention to pursue arbitration. The record plainly reveals that the Defendants did not attempt to exercise their right to compel arbitration in this action until it was clear that this Court would not transfer the case to the Southern District of California, and all of the Defendants' other actions during this time were inconsistent with its right to compel arbitration.
Defendants' motion to stay and compel arbitration came only after Plaintiffs had been forced to defend the California action, and after a significant motion to dismiss or to transfer had been litigated and resolved. I agree with Judge Jaudzemis that these facts demonstrate that the Defendants acted inconsistently with their known right to arbitration. I also agree with Judge Jaudzemis' finding that the Plaintiff was unfairly prejudiced by the Defendants' delay in pursuing their right to arbitration in that Plaintiffs incurred significant costs associated with defending the California action, and because Plaintiffs' interests have been affected by a significant and detrimental change in the capital structure of GERS that was initiated by Defendants.
After reviewing the record and the parties' briefs, the Court finds that the Magistrate Judge's Order of June 19, 2002, (Filing No. 26) is not clearly erroneous or contrary to law. Accordingly,
IT IS ORDERED that the Defendants' Appeal from the Magistrate Judge's Order of June 19, 2002, (Filing No. 28) is denied.