Discover Property & Casualty Insurance Company v. Tetco, Inc.
Filing
88
ORDER: Mission and TETCO's Motion 68 to Compel Arbitration and to Dismiss is GRANTED. The Clerk is directed to enter judgment of dismissal and to close this case. Signed by Judge Janet Bond Arterton on 2/19/2014. (Bonneau, J)
UNITED STATES DISTRICT COURT
DISTRICT OF CONNECTICUT
DISCOVER PROPERTY & CASUALTY
INSURANCE COMPANY,
Plaintiff,
v.
TETCO, INC.,
Defendant.
Civil No. 3:12cv473 (JBA)
February 19, 2014
RULING ON MOTION TO COMPEL ARBITRATION
This is an insurance coverage dispute arising out of an underlying suit against
Shell Chemical (“Shell”) as a result of an explosion at a chemical plant in Fort Worth,
Texas, in which Discover Property & Casualty Insurance Company (“Discover”)
indemnified Shell and paid a confidential settlement under an insurance policy Discover
had issued to TETCO, Inc. (“TETCO”) and its subsidiary, Mission Petroleum Carriers,
Inc. (“Mission”). Discover alleges Breach of Contract (Count One), Unjust Enrichment
(Count Two), and Quantum Meruit (Count Three) against TETCO and seeks declaratory
judgment (Count Four) and attorneys’ fees and costs (Count Five). (See Compl. [Doc.
# 1].) In a consolidated action, Mission and TETCO brought suit against Discover for
specific performance to compel arbitration or in the alternative for breach of contract.
(See TETCO, Inc. et al. v. Discover Prop. & Cas. Ins. Co., No. 12cv1485, Notice of Removal
[Doc. # 1].) Mission and TETCO now move [Doc. # 68] to compel arbitration of this
dispute, and to dismiss or stay this action pending arbitration. For the reasons that
follow, Mission and TETCO’s motion is granted, arbitration is compelled, and this case is
dismissed.
I.
Background
In December 1995, TETCO and United States Fidelity and Guaranty Company
(“USF&G”)1 entered into an Indemnity Agreement that contained Connecticut choice–
of–law and forum selection clauses. (See Indemnity Agreement, Ex A to Compl. [Doc.
# 1] at 13–14.)2 Amendment #10 to the Indemnity Agreement, effective December 1,
2004, specifically amends Schedule A of the Indemnity Agreement to include
Commercial General Liability Insurance Policy No. D007L0016 (the “CGL Policy”). (See
Indemnity Agreement.) TETCO and Mission are named insureds on the CGL Policy,
which was issued by Discover. (See Compl. ¶ 4.)
On March 2, 2001, Mission entered into a Base Motor Carrier Agreement under
which Mission agreed to ship Shell’s petroleum products to Shell’s customers. (See id.
1
USF&G and Discover are both subsidiaries of The Travelers Companies, Inc.
(See Morin Aff. [Doc. # 32-2] ¶ 5.)
2
The Indemnity Agreement reads as follows:
This Agreement shall be governed by and construed in accordance with
the laws of the State of Connecticut, without regard to its rules regarding
conflict of laws.
To the extent that any legal action, suit or proceeding arises out of or
relates to this Agreement or to the transactions contemplated hereby, the
parties hereto irrevocably submit to the jurisdiction of the state courts of
the State of Connecticut or any federal court located in the State of
Connecticut to hear and determine such action, suit or proceeding. Each
party agrees not to assert as a defense in any such action, suit or
proceeding, any Claim that it is not subject personally to the jurisdiction of
such court; that its property is exempt or immune from attachment or
execution; that the action, suit or proceeding is brought in an inconvenient
forum; that the venue of the action, suit or proceeding is improper, or that
this Agreement or the subject matter hereof may not be enforced in or by
such court.
(Indemnity Agreement at 13–14.)
2
¶ 18; Base Motor Carrier Agreement, Ex. B to Compl.)
The Base Motor Carrier
Agreement stated that Shell would be named as an additional insured on Mission’s
insurance policy. (Compl. ¶ 19.) On July 28, 2005, Mission delivered a load of Shell
products to one of Shell’s customers in Fort Worth, Texas. (Id. ¶ 20.) During the
delivery, an explosion and fire erupted, damaging Shell’s customer and an adjacent
property. (Id.) The injured parties sued Shell and Mission to recover for their property
damage. (Id. ¶ 21.) As an additional insured under the CGL Policy, Shell demanded
coverage from Discover. (Id. ¶ 24.) When Discover rejected Shell’s claim, Shell sued
Discover. Before final judgment entered in that suit, Discover, with TETCO’s consent,
paid a confidential settlement amount to Shell to resolve the underlying property damage
suit. (Id. ¶¶ 31, 48–52.)
As a result of the settlement agreement, Mission and Discover entered into a
Letter Agreement in which they “agreed to reserve their respective rights with respect to
the CGL Policy and its application to defense and indemnity obligations with respect to
the underlying suit.” (See Letter Agreement, Ex. A to Mot. to Compel § 6.) The
settlement checks for the underlying settlement were issued and delivered before the
Letter Agreement was signed. (See 2d Morin Aff. [Doc. # 70-1] ¶ 6.) Under the Letter
Agreement, the parties first agreed to attempt to resolve the dispute themselves, then to
submit to mediation, and agreed that if the mediation failed to bring about a resolution,
the parties would submit the matter to binding arbitration in Texas within 90 days of the
mediation. (Id. § 7.)3
3
The parties entered mediation on June 21, 2011, but failed to
The relevant language of the Letter Agreement reads as follows:
MPC and Discover disagree about which party, MPC or Discover should
ultimately be responsible for the payment of . . . the “Shell Settlement” . . . .
3
resolve their dispute. (Morris Aff. [Doc. # 77] ¶¶ 3–4).4 Discover’s counsel attempted to
negotiate with Mission and TETCO’s counsel to pick an arbitrator and schedule
arbitration several times over the course of August and September 2011, but Mission and
TETCO’s counsel failed to cooperate and no arbitration demand was ever filed. (See
Email Correspondence, Ex. C to 2d Morin Aff.) Specifically, Discover’s counsel twice
proposed two possible arbitrators to Mission and TETCO’s counsel, but counsel for
Mission and TETCO failed to respond to these communications. (See Melinda Bradley
In consideration for Discover’s payment set forth above, MPC and
Discover agree to first attempt to come to a resolution regarding the
financial responsibility of MPC and Discovery for the Shell Settlement on
their own within 90 days of the consummation of the Chem-Solv
Settlement and the Valley Solvent Settlement, whichever occurs last. If the
parties cannot reach an agreement, the parties agree to submit the issues
between MPC and Discover regarding the financial responsibility of MPC
and Discover for the Shell Settlement to mediation in Texas . . . . If the
mediation fails to bring a resolution, the parties agree to submit the matter
to binding arbitration in Texas within 90 days of the mediation. The
parties agree that the binding arbitration proceedings and result will be
and remain confidential. The parties agree to arbitrate before one
arbitrator. The parties agree to negotiate in good faith regarding the
selection of the arbitrator and the rules and procedures governing the
arbitration. In the event the parties are unable to agree about such
matters, the arbitrator will be selected, and the arbitration will be
conducted in accordance with the most current version of the American
Arbitration Association Commercial Arbitration Rules.
(Letter Agreement ¶ 7.)
4
Discover objects to the Court’s consideration of the affidavits submitted in
connection with Mission and TETCO’s reply because they are untimely and because they
address arguments raised for the first time in reply briefing. (See Discover’s Sur-Reply
[Doc. # 82] at 1–2.) However, the Court granted Discover permission to file a sur-reply
and additional supporting documents to address and rebut the issues raised in Mission
and TETCO’s reply, and thus the Court will consider these documents and the arguments
raised in the reply.
4
Aff., Ex. A to Discover’s Sur-Reply [Doc. # 82] ¶¶ 4, 6.) Seven months later, on March 29,
2012, Discover filed the instant action.
On June 15, 2012, TETCO, with its subsidiary Mission, also filed suit in Texas
state court, seeking specific performance to compel arbitration under the Letter
Agreement. Discover removed the case to federal court in the Southern District of Texas
on July 13, 2012.
On July 20, 2012, Discover moved to dismiss the Texas action for
improper venue or in the alternative to transfer to the District of Connecticut. On
October 12, 2012, the Southern District of Texas granted Discover’s motion to transfer
pursuant to the first-to-file rule. (See TETCO, Inc., et al. v. Discover Property & Casualty
Ins. Co., No. 12cv1485, Oct. 12, 2012 Order [Doc. # 17].) Discover moved [Doc. # 44] to
consolidate these two cases before this Court, which motion was granted on October 23,
2012. (See Order of Consolidation [Doc. # 47].)
On September 26, 2012, before either this Court or the Southern District of Texas
had ruled on the pending motions, TETCO filed a Demand for Arbitration in Texas to
resolve the dispute. On October 10, 2012, Discover moved [Doc. # 40] for a preliminary
injunction to stay the Texas arbitration until the motions pending in both federal courts
had been decided. During a status conference held before this District’s duty judge on
October 15, 2012, the parties agreed to informally stay arbitration pending the Court’s
ruling on Mission and TETCO’s pending motion to dismiss for lack of personal
jurisdiction and improper venue and motion to transfer to a more convenient forum.
(See Order [Doc. # 43] (denying as moot Discover’s motion for preliminary injunction).)
On March 18, 2013, this Court denied Mission and TETCO’s motions to dismiss
and to transfer, finding that the Court had personal jurisdiction over the parties and that
the forum was proper pursuant to the forum-selection clause in the Indemnity
5
Agreement. (See Ruling on Mot. to Dismiss and to Transfer [Doc. # 66].) Specifically, the
Court determined that “the arbitration clause in the Letter Agreement did not abrogate
the forum selection clause in the Indemnity Agreement, and Discover has alleged
sufficient facts to claim that the Court retains personal jurisdiction over TETCO pursuant
to this clause for the purpose of determining the arbitrability of this dispute.” (Id. at 9.)
II.
Discussion5
Mission and TETCO move to compel arbitration of this dispute pursuant to the
arbitration clause in the Letter Agreement, and to dismiss this action, or in the
alternative, to stay the action pending arbitration. The Federal Arbitration Act provides
that
[a] written provision in . . . a contract . . . to settle by arbitration a
controversy thereafter arising out of such a contract or transaction, or the
refusal to perform the whole or any part thereof, or an agreement in
writing to submit to arbitration any existing controversy arising out of
such a contract, transaction, or refusal, shall be valid, irrevocable, and
enforceable, save upon such grounds as exist at law or in equity for the
revocation of any contract.
5
When deciding a motion to compel arbitration, “the court applies a standard
similar to that applicable for a motion for summary judgment.” Bensadoun v. Jobe-Riat,
316 F.3d 171, 175 (2d Cir. 2003). The party seeking to compel arbitration “must
substantiate [its] entitled to arbitration by a showing of evidentiary facts” that support its
claim that an agreement to arbitrate exists. Oppenheimer & Co. v. Neidhardt, 56 F.3d 352,
358 (2d Cir. 1995). Once such a showing has been made, the party opposing arbitration
“must submit evidentiary facts showing that there is a dispute of fact to be tried” as to the
existence of a valid arbitration agreement. Id. “If there is an issue of fact as to the making
of the agreement for arbitration, then a trial [on that issue] is necessary.” Bensadoun, 316
F.3d at 175. “Only when there is no genuine issue of fact concerning the formation of the
agreement should the court decide as a matter of law that the parties did or did not enter
into such an agreement.” Par-Knit Mills, Inc. v. Stockbridge Fabrics Co., 636 F.2d 51, 54
(3d Cir. 1980).
6
9 U.S.C. § 2. The Act establishes “a liberal policy in favor of arbitration as a means to
reduce the costliness and delays of litigation.” Campaniello Imps., Ltd. v. Saporiti Italia
S.p.A., 117 F.3d 655, 665 (2d Cir. 1997) (internal quotation marks omitted) (citing Moses
H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983)); see also Deloitte
Noraudit A/S v. Deloitte Haskins & Sells, 9 F.3d 1060, 1063 (2d Cir. 1993). “[P]rior to
compelling arbitration, the . . . [C]ourt must first determine two threshold issues . . . (1)
Did the parties enter into a contractually valid arbitration agreement? and (2) If so, does
the parties’ dispute fall within the scope of the arbitration agreement?” Cap Gemini Ernst
& Young, U.S., L.L.C. v. Nackel, 346 F.3d 360, 365 (2d Cir. 2003).
Discover does not contest that the underlying dispute in this case falls within the
scope of the arbitration clause in the Letter Agreement. Rather, Discover opposes this
motion on the basis that (1) the arbitration clause has expired; (2) Mission and TETCO
waived the right to arbitrate the dispute; and (3) the arbitration clause is invalid because it
is not supported by consideration. Mission and TETCO counter that according to the
terms of the Letter Agreement, the expiration and validity of the arbitration clause and
the issue of waiver are reserved for the arbitrator, and that the Court must therefore
compel arbitration to decide these threshold issues.
A.
Choice of Law
“While the FAA expresses a strong federal policy in favor of arbitration, the
purpose of Congress in enacting the FAA was to make arbitration agreements as
enforceable as other contracts, but not more so.” Id. at 364 (internal citations and
quotation marks omitted) (emphasis in original). “Accordingly, while the FAA creates a
body of federal substantive law of arbitrability, applicable to any arbitration agreement
within the coverage of the Act, in evaluating whether the parties have entered into a valid
7
arbitration agreement, the court must look to state law principles.” Id. (internal citations
and quotation marks omitted). The parties contest whether this dispute is governed by
Texas or Connecticut law.
“As a federal court siting in diversity jurisdiction, [this] Court is obligated to apply
the law of the forum state in analyzing preliminary choice-of-law questions.” Id. at 365
(internal citations and quotation marks omitted). “The threshold choice of law issue in
Connecticut, as it is elsewhere, is whether there is an outcome determinative conflict
between applicable laws of the states with a potential interest in the case, if not, there is no
need to perform a choice of law analysis, and the law common to the jurisdiction should
be applied.” Cohen v. Roll-A-Cover, LLC, 131 Conn. App. 443, 465–66 (2011). “When
the applicable law of a foreign state is not shown to be otherwise” Connecticut courts will
presume it to be the same as Connecticut law. Id. at 465 (quoting Walzer v. Walzer, 173
Conn. 62, 76 (1977)) (emphasis in original).
Discover argues that because Mission and TETCO have failed to identify any
differences between Texas and Connecticut law concerning the issues in dispute in this
case, this Court should rely on Connecticut law. See Johnson v. Priceline.com, Inc., 711
F.3d 271, 276 n.2 (2d Cir. 2013) (“[C]ourts sitting in diversity may properly rely on the
forum state’s law where neither party asserts that another jurisdiction’s law meaningfully
differs.”). However, Mission and TETCO do highlight a potential conflict with respect to
the question of consideration. Discover cites only Connecticut law for the proposition
that the parties’ mutual agreement to arbitrate is not supported by adequate
consideration because the settlement payment was made prior to the signing of the Letter
Agreement. (See Discover’s Opp’n [Doc. # 70] at 9–12.) However, “the law in Texas is
clearly established that mutual agreements to arbitrate disputes and to give up the right to
8
litigate constitute adequate consideration for an arbitration agreement.”
Jiminez v.
Alicia’s Mexican Grille, Inc., Civil Action No. H-11-2695 (NFA), 2011 WL 4842467, at *1
(S.D. Tex. Oct. 12, 2011) (citing In re Odyssey Healthcare, Inc., 310 S.W.3d 419, 424 (Tex.
2010)). Thus, there appears to be a conflict of law between Texas and Connecticut
regarding this issue, and the Court must determine which law governs.
Discover argues that because the Court previously applied the forum-selection
clause in the Indemnity Agreement in concluding that it has personal jurisdiction over
Defendants, it should also apply the choice-of-law clause in that agreement to determine
that Connecticut law governs the interpretation of the Letter Agreement. The choice-oflaw clause in the Indemnity Agreement states that “[t]his Agreement shall be governed by
and construed in accordance with the laws of the State of Connecticut, without regard to
its rules regarding conflict of laws.” (Indemnity Agreement at 13.) While this clause
would mandate the application of Connecticut law to a dispute regarding the
interpretation of the Indemnity Agreement, by its plain terms it does not purport to
govern all disputes arising out of or related to the Indemnity Agreement, or to apply to
any other contracts. Therefore, it is not applicable to the Letter Agreement, which is a
separate contract negotiated between different parties.
See Western Dermatology
Consultants, P.C. v. VitalWorks, Inc., 145 Conn. App. 169, 202–03 (2013) (where a
choice-of-law clause was not a “complete” choice-of-law clause, and only addressed the
construction and interpretation of the contract itself, the provision did not control the
choice-of-law analysis for issues not involving the construction or interpretation of the
contract in which it was found). Furthermore, the Letter Agreement itself does not
contain a choice-of-law provision.
9
Connecticut has adopted the “most significant relationship” approach to
determining which jurisdiction’s law governs a contract, and “[w]here there is no choice
of law provision in the contract, the general rule to be applied is that of [the Restatement
(Second) of Conflict of Laws] § 188.” American States Ins. Co. v. Allstate Ins. Co., 282
Conn. 454, 461 (2007). Section 188 of the Restatement sets forth five factors for courts to
consider in determining the applicable law: “(a) the place of contracting; (b) the place of
negotiation of the contract; (c) the place of performance (d) the location of the subject
matter of the contract; and (e) the domicil[e], residence, nationality, place of
incorporation and place of business of the parties.” Restatement (Second) of Conflict of
Laws § 188(2). Further, “[i]f the place of negotiating the contract and the place of
performance are in the same state, the local law of this state will usually be applied.” Id.
§ 188(3).
Based on the affidavits submitted by the parties, the Letter Agreement appears to
have been negotiated and executed in Texas (see Melinda Bradley Aff. ¶ 2; Matthew
Bradley Aff. [Doc. # 76] ¶¶ 8–12.) Thus, the place of contracting and the place of
negotiation of the contract is Texas. Furthermore, the place of performance is Texas, as
the parties’ mediation was conducted in Texas (see Melinda Bradley Aff. ¶ 3), and the
Letter Agreement calls for the parties to submit the dispute to arbitration in Texas (see
Letter Agreement § 7).
Similarly, the location of the subject matter of the contract is
Texas, because the Letter Agreement calls for Texas mediation, and involved the
settlement of a Texas lawsuit regarding an accident that occurred in Texas. With respect
to the final factor, Discover has its principal place of business in Connecticut while
Mission and TETCO are citizens of Texas. (See Compl. ¶¶ 11–12.) Therefore, based on
10
the totality of the § 188 factors, this Court will apply Texas law in interpreting the Letter
Agreement.
B.
Whether the Court or the Arbitrator Should Decide Discover’s
Arguments
In its ruling on the motions to dismiss for lack of personal jurisdiction, this Court
held that
the Indemnity Agreement and the Letter Agreement could be read
together to mean that TETCO waived personal jurisdiction objections for
the purposes of a suit in Connecticut to determine whether there is a valid
agreement between the parties to arbitrate this dispute. Therefore, the
arbitration clause in the Letter Agreement did not abrogate the forum
selection clause in the Indemnity Agreement, and Discover has alleged
sufficient facts to claim that the Court retains personal jurisdiction over
TETCO pursuant to this clause for the purpose of determining the
arbitrability of this dispute.
(Ruling on Mot. to Dismiss and to Transfer at 9.) However, Mission and TETCO now
argue, for the first time in their reply, that the defenses to arbitration raised by Discover
must be decided by the arbitrator, pursuant to federal law and the terms of the arbitration
clause. The Supreme Court has determined that procedural questions including “waiver,
delay, or other like defenses to arbitrability” . . . [and] “whether prerequisites such as time
limits, notice, laches, estoppel, and other conditions precedent to an obligation to
arbitrate have been met” are not “questions of arbitrability,” but rather are presumptively
questions for the arbitrator, not the court, to decide. Howsam v. Dean Witter Reynolds,
Inc., 537 U.S. 79, 84–85 (2002). Furthermore, the arbitration clause states that if the
parties cannot agree on the rules and procedures governing the arbitration, “the
arbitration will be conducted in accordance with the most current version of the
American Arbitration Association Commercial Arbitration Rules.” (Letter Agreement,
11
§ 7.) Pursuant to the AAA Rules, “the arbitrator shall have the power to rule on his or her
own jurisdiction, including any objections with respect to the existence, scope or validity
of the arbitration agreement [and] shall have the power to determine the existence or
validity of a contract of which an arbitration clause forms a part.” (AAA Rules, Ex. F to
Morris Aff. R-7.)
Thus, Mission and TETCO argue, any procedural challenges to
arbitration, in addition to any challenge to the validity of the arbitration clause itself, are
reserved for the arbitrator by the terms of the Letter Agreement.
1.
Expiration of the Arbitration Agreement
Discover argues that Mission and TETCO failed “to submit the matter to binding
arbitration in Texas within 90 days of the mediation” as required by the Letter Agreement
and that therefore the arbitration clause has expired. Mission and TETCO argue that the
timeliness of their arbitration demand must be decided by the arbitrator, rather than by
the Court, and that in any event, they had “submitted” the dispute to arbitration before
the deadline passed, even though no arbitration demand had been filed.
Time-bar defenses to arbitration agreements are typically recognized as
procedural questions that are reserved for arbitrators, rather than courts. Matter of
Arbitration No. AAA13-161-0511 Under Grain Arbitration Rules, 867 F.2d 130, 133 (2d
Cir. 1989) (“[T]he validity of time-bar defenses to the enforcement of arbitration
agreements should generally be determined by the arbitrator rather than the court.”);
accord Gen. Warehousemen and Helpers Union Local 767, Albertson’s Distribution, Inc.,
331 F.3d 485 (5th Cir. 2003) (“Questions of timeliness are ones of procedural, not
substantive, arbitrability,” to be decided by the arbitrator.). Thus, in Howsam, the
Supreme Court concluded that the issue of whether an arbitrator-imposed period of
12
limitations had expired was within “the class of gateway procedural disputes” that should
be determined by an arbitrator in the first instance. Howsam, 537 U.S. at 86.
Discover attempts to distinguish Howsam by arguing that only arbitrator-imposed
time limits should be reserved for arbitrators and that courts should interpret deadlines
contained in an arbitration agreement in the first instance. However, the Second Circuit
has “stated emphatically that any limitations defense—whether stemming from the
arbitration agreement, arbitration association rule, or state statute, is an issue to be
addressed by the arbitrators.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114,
122 (2d Cir. 1991). The cases cited by Discover in support of its position that the Court
should rule on the expiration issue do not require a different outcome, as those cases
addressed either arbitration clauses that were contained in contracts that had expired, see
Dash & Sons, Inc. v. Tops Markets, LLC, 30 A.D.3d 98 (N.Y. App. Div. 2006); Local Union
No. 898 of Int’l Bhd. of Elec. Workers, AFL-CIO v. XL Electric, Inc., No. Civ.A.6:01-CV059-C, 2002 WL 31689677 (N.D. Tex. Nov. 26, 2002), or arbitration clauses that expressly
provided for litigation of a dispute after the arbitration deadline had passed, see LaFurno
v. Virbac Corp., Civil Action No. 11-4774 (SRC), 2012 WL 646029 (D.N.J. Feb. 24, 2012).
Thus, absent language in the arbitration clause suggesting that the parties
intended for a court to decide questions of timeliness, the Court will not address
Discover’s argument that the arbitration clause has expired. Discover points to no such
language in the Letter Agreement, nor does the Court conclude that there is any language
susceptible to such an interpretation in the contract. Therefore, Discover’s time-bar
defense will be reserved for the arbitrator.
13
2.
Waiver
Discover next argues that Mission and TETCO waived their right to arbitrate by
refusing to select an arbitrator and dates for arbitration and by failing to submit an
arbitration demand until after this litigation had commenced.
Mission and TETCO
counter that the issue of waiver should be decided by the arbitrator, and that they did not
waive their right to arbitrate their dispute by failing to file an arbitration demand because
it is Discover that bears the burden of demanding arbitration as Discover is the only party
seeking affirmative relief.
“[T]he presumption is that the arbitrator should decide allegations of waiver . . . .”
Howsam, 537 U.S. at 84 (internal citations and quotation marks omitted); see also
Republic of Ecuador v. Chevron Corp., 638 F.3d 384, 394 (2d Cir. 2011) (“Both waiver and
estoppel generally fall into that latter group of issues presumptively for the arbitrator. . . .
Furthermore, we have noted that ‘defenses to arbitrability such as waiver, estoppel, or
delay’ are ‘questions properly decided by arbitrators.’” (quoting Mulvaney Mech., Inc. v.
Sheet Metal Workers Int’l Ass’n, Local 38, 351 F.3d 43, 46 (2d Cir. 2003))). Discover
argues that because it alleges waiver by litigation conduct, the Court should decide the
issue of waiver in this case, as several other courts in this Circuit have done. See, e.g.,
Apple & Eve, LLC v. Yantai North Andre Juice Co., Ltd., 610 F. Supp. 2d 226, 230–31
(E.D.N.Y. 2009) (“Both the First and Fifth Circuits have explicitly held that despite the
Supreme Court’s statement in Howsam, the specific type of waiver dispute in this case—
one involving an allegation of waiver due to litigation conduct—should be determined by
a judge rather than an arbitrator. . . . . Although the Second Circuit has not ruled on this
specific issue, courts in this Circuit have continued to apply Second Circuit precedent
preceding Howsam to address the waiver issue in cases involving litigation conduct before
14
the Court.” (citing cases)). Cf. Baker & Taylor v. AlphaCraze.Com Corp., 602 F.3d 486
(2d Cir. 2010) (deciding issue of waiver by litigation conduct). Because courts have the
most familiarity with the litigation conduct of the parties in the cases before them, the
Court agrees with the line of cases in this Circuit holding that waiver by litigation conduct
is an issue to be decided by the Court in the first instance.
As a result of the strong policy in favor of arbitration, “waiver of arbitration is not
to be lightly inferred,” and “any doubts concerning whether there has been a waiver are
resolved in favor of arbitration.” PPG Industries, Inc. v. Webster Auto Parts, Inc., 128 F.3d
103, 107 (2d Cir. 1997) (internal quotation marks and citations omitted). “There is no
bright–line rule for determining when a party has waived its right to arbitration: the
determination of waiver depends on the particular facts of each case.” Id. at 107–08.
However, the Second Circuit has recognized three factors which courts should consider
in determining whether a party has waived the right to arbitrate a dispute: “(1) the time
elapsed from commencement of litigation to the request for arbitration, (2) the amount of
litigation (including any substantive motions and discovery), and (3) proof of prejudice.”
Id. at 107.
Here, Mission and TETCO moved to compel arbitration on March 29, 2013, a
year after this suit commenced. However, Mission and TETCO asserted their right to
arbitrate this dispute in their motions to dismiss and to transfer, which were filed less
than three months after the filing of this action.6 At the same time that they moved to
dismiss and to transfer, Mission and TETCO filed suit in Texas to compel arbitration.
6
These motions were originally filed on June 15, 2012, but were denied without
prejudice to renew for failure to comply with the Court’s pre-filing conference
requirement, and were renewed on August 1, 2012.
15
Approximately three months after that, they also filed an arbitration demand. The only
delay that Discover relies on in making its waiver argument is Mission and TETCO’s prelitigation delay in refusing to select an arbitrator and failing to submit an arbitration
demand within the time-period of the arbitration clause and for several months
thereafter.
However, this delay does not relate to Mission and TETCO’s litigation
conduct in this case, and delay alone is insufficient to establish waiver.
See PPG
Industries, Inc. v. Webster Auto Parts, Inc., 128 F.3d 103, 108 (2d Cir. 1997); EZ Pawn
Corp. v. Mancias, 934 S.W.2d 87, 90 (Tex. 1996) (“Delay does not necessarily demonstrate
prejudice.”). As soon as this suit commenced, Mission and TETCO asserted their right to
arbitrate in multiple fora. Additionally, there has not been significant litigation conduct
in this action, such a discovery or motions for summary judgment, beyond the litigation
of the parties’ respective rights to arbitrate in connection with the motion to dismiss and
the motion to compel arbitration. Thus, the time elapsed and the amount of litigation
conducted do not weigh in favor of a finding of waiver.
Furthermore, Discover cannot establish that it was prejudiced as a result of the
alleged delay. “Waiver of the right to compel arbitration due to participation in litigation
may be found only when prejudice to the other party is demonstrated.” Kramer v.
Hammond, 943 F.2d 176, 179 (2d Cir. 1991); see also Perry Homes v. Cull, 258 S.W.3d
580, 595 (Tex. 2008) (“[W]aiver of arbitration requires a showing of prejudice.”). Such
prejudice need not be substantive, and “can be found when a party too long postpones his
invocation of his contractual right to arbitration, and thereby causes unnecessary delay or
expense.” Kramer, 943 F.3d at 179–80 (“[T]he prejudice required for waiver is not
limited to substantive prejudice, but may also be prejudice in terms of either expense or
delay.”); see also Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993) (“Sufficient prejudice to
16
infer waiver has been found when a party seeking to compel arbitration . . . delays
invoking arbitration rights while the adversary incurs unnecessary delay or expense.”) In
evaluating prejudice from undue delay and expense, the Second Circuit has explained
that
[n]o bright line defines this [ ] type of prejudice—neither a particular time
frame nor dollar amount automatically results in such a finding—but it is
instead determined contextually, by examining the extent of the delay, the
degree of litigation that has preceded the invocation of arbitration, the
resulting burdens and expenses, and the other surrounding circumstances.
Kramer, 943 F.3d at 179. In this case, nearly all of the litigation expenses incurred by
Discover have been in relation to Discover’s attempt to block arbitration of this dispute.
Although the Discover’s expenses in filing this suit could arguably be characterized as
arising from Mission and TETCO’s failure to file an arbitration demand within ninety
days of mediation, since the commencement of this action, Mission and TETCO have
consistently asserted their rights to arbitrate, and the majority of the motion practice in
this case has been related to issues of arbitrability. Therefore, Discover has not been
prejudiced by the delay in the resolution of this dispute as a result of Mission and
TETCO’s failure to assert their rights to arbitrate, and the Court concludes that no waiver
occurred.
3.
Lack of Consideration
Finally, Discover argues that the parties’ agreement to arbitrate is invalid because
it is not supported by consideration. Specifically, Discover claims that because the
settlement payments were made before the Letter Agreement was executed, the purported
consideration for the agreement is “past consideration,” which is invalid. To the extent
that Discover challenges the validity of the Letter Agreement as a whole, that issue is
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reserved for the arbitrator. “[A] party’s challenge to another provision of the contract, or
to the contract as a whole, does not prevent a court from enforcing a specific agreement
to arbitrate.” Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 130 S. Ct. 2772, 2778
(2010). “As a result, ‘unless the challenge is to the arbitration clause itself, the issue of the
contract’s validity is considered by the arbitrator in the first instance.’” Arrigo v. Blue Fish
Commodities, Inc., 408 F. App’x 480, 482 (2d Cir. 2011) (quoting Buckeye Check Cashing,
Inc. v. Cardegna, 546 U.S. 440, 445–46 (2006)). Thus, the Court will not address any
challenge to the validity of the Letter Agreement as a whole, as that issue is properly
reserved for the arbitrator.
Although a challenge to the validity of an arbitration clause is typically decided by
a court in the first instance, Mission and TETCO argue that the language of the
arbitration clause indicates that the parties intended for the arbitrator to decide this issue.
Specifically, the arbitration clause states that in the event that the parties cannot agree on
the arbitration procedure, “the arbitration will be conducted in accordance with the most
current version of the American Arbitration Association Commercial Arbitration Rules.”
(Letter Agreement § 7.) The AAA Rules provide that “the arbitrator shall have the power
to rule on his or her own jurisdiction, including any objections with respect to the
existence, scope or validity of the arbitration agreement [and] shall have the power to
determine the existence or validity of a contract of which an arbitration clause forms a
part.” (AAA Rules, Ex. F to Morris Aff. R-7.) The Second Circuit, applying the Federal
Arbitration Act, has recognized that when “parties explicitly incorporate rules that
empower an arbitrator to decide issues of arbitrability, the incorporation serves as a clear
and unmistakable evidence of the parties’ intent to delegate such issues to an arbitrator.”
Contec Corp. v. Remote Solution, Co., 398 F.3d 205, 208 (2d Cir. 2005); see also Burlington
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Resources Oil & Gas Co. v. San Juan Basin Royalty Trust, 249 S.W.3d 34, 41 (Tex. App.
2007) (“We are also mindful that, in certain circumstances, the incorporation of AAA
rules may constitute clear and unmistakable evidence of an intent to allow an arbitrator to
decide issues of arbitrability.”). There is no other language in the arbitration clause to
contradict this presumption or to suggest that issues of arbitrability are to be decided by a
court. Therefore, the Court concludes in the context of this commercial arbitration
agreement between sophisticated parties that the incorporation by reference of the AAA
rules evinces a clear and unmistakable intent to reserve challenges to the validity of the
arbitration agreement to the arbitrator in the first instance, and the Court will not address
the merits of Discover’s argument that the arbitration clause is invalid for lack of
consideration.
To the extent that Discover has asserted defenses to arbitration that may properly
be decided by a court in the first instance, this Court has rejected those defenses.
Therefore, the Court grants Mission and TETCO’s motion to compel arbitration and to
dismiss. See Lewis Tree Serv., Inc. v. Lucent Technologies, Inc., 239 F. Supp. 2d 332, 340
(S.D.N.Y. 2002) (“Because all of Ironman’s claims are subject to arbitration, no useful
purpose will be served by granting a stay of Ironman’s claims and thus its action against
the defendants is dismissed.”).
C.
Attorney’s Fees
In the memorandum in support of their motion to compel arbitration, Mission
and TETCO seek recovery of their attorney’s fees and expenses moving to compel
arbitration. (Mem. Supp. [Doc. # 68-1] at 9.) The United States follows the “American
Rule” in that attorney’s fees are not awarded to prevailing parties absent statutory or
contractual authority to do so. See Buckhannon Bd. and Care Home, Inc. v. West Virginia
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Dep’t of Health and Human Servs., 532 U.S. 598, 602 (2001). Mission and TETCO cite no
legal authority for their request for attorney’s fees, and the Letter Agreement expressly
provides that the parties shall bear their own costs in connection with this dispute. (See
Letter Agreement § 9.) Therefore, Mission and TETCO’s request for attorney’s fees and
costs is denied.
III.
Conclusion
For the foregoing reasons, Mission and TETCO’s Motion [Doc. # 68] to Compel
Arbitration and to Dismiss is GRANTED. The Clerk is directed to enter judgment of
dismissal and to close this case.
IT IS SO ORDERED.
/s/
Janet Bond Arterton, U.S.D.J.
Dated at New Haven, Connecticut this 19th day of February, 2014.
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