Opinion
SUCV2016-1476 BLS1 137991
08-14-2017
Element Productions, Inc. v. Editbar, LLC et al
Filed August 15, 2017
ORDER ON DEFENDANTS' MOTION TO STAY ACTION AND COMPEL ARBITRATION (Paper No. 37)
Edward P. Leibensperger, Justice
Approximately thirteen months after defendants answered the complaint and asserted counterclaims and a third-party claim, defendants now seek to move this case to arbitration. The issue presented is whether defendants, by their active litigation conduct, waived arbitration. For the reasons described below, I find that arbitration is waived and, thus, this motion is denied.
BACKGROUND
Defendant Mark Hankey was an employee of Element until April 12, 2016. He executed a written employment agreement in 2012 stating that " [a]ny dispute, claim or controversy arising out of or relating to this Agreement or the breach, termination, enforcement, interpretation or validity thereof shall be determined by arbitration in Boston, Massachusetts before one arbitrator. The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules and Procedures . . ."
Plaintiff, Element Productions, Inc., commenced this action on May 9, 2016. Element alleges that in 2015, Hankey began secretly aiding Element's direct competitor, defendant Stir Films, LLC, a start-up video production company set up by defendant, EditBar, LLC. Hankey allegedly disclosed Element's confidential information to Stir Films and worked to assist Stir Films to lure employees from Element to Stir Films. Element alleges that Hankey's conduct was in violation of his employment agreement. Element also alleges that EditBar and Stir Films aided and abetted Hankey's breach of fiduciary duty, tortiously interfered with Element's contract with Hankey, and conspired with Hankey to injure Element, among other claims.
Had Hankey timely moved to compel arbitration of Element's claims such motion would have been allowed. Element does not appear to disagree that its claims against Hankey come within the arbitration provision. Moreover, EditBar and Stir Films contend that they, also, are entitled to arbitration pursuant to the recent decision of the Appeals Court in Silverwood Partners, LLC v. Wellness Partners, LLC, 91 Mass.App.Ct. 856, 80 N.E.3d 355 (2017). In Silverwood, the Court held that a nonsignatory to an arbitration agreement (like EditBar and Stir Films) may compel arbitration when a signatory (Element) raises allegations of substantially interdependent and concerted misconduct by both the nonsignatory and one or more of the signatories (Hankey) to the contract.
Element's argument against enforcement of the agreement to arbitrate is based entirely on the principle of waiver of arbitration by litigation conduct. This principle was recognized by the Supreme Judicial Court in Home Gas Corp. of Massachusetts v. Walter's of Hadley, Inc., 403 Mass. 772, 532 N.E.2d 681 (1989). Where, under the totality of the circumstances, the party moving to arbitrate has acted inconsistently with his arbitration right, such right might be waived. Id. at 775. The facts indicating waiver include whether the party actually participated in the lawsuit and invoked the jurisdiction and machinery of the court by, for example, filing a counterclaim or by litigating discovery disputes. Id. at 776. Delay in demanding arbitration while utilizing court procedures and litigating to obtain court decisions interferes with the court's interest to control the course of proceedings before it. Id. at 778.
Here, the totality of the circumstances show waiver. As mentioned, this case has been actively litigated in court for more than a year. Hankey answered the complaint in June 2016, and asserted counterclaims against Element for violation of the Wage Act, breach of contract, conversion, and defamation. Hankey then initiated a third-party complaint against Eran Lobel, an officer of Element. Hankey then amended his answer, counterclaims, and third-party claim in preparation to litigate the motion to dismiss the counterclaims and third-party claim filed by Element. Such litigation ensued with the parties invoking the court's consideration of the motion that resulted in some of Hankey's claims being dismissed (such as the claim for defamation) and some of his claims surviving. Neither Hankey or the corporate defendants communicated any desire to go to arbitration.
Discovery proceeded apace over the last year. The parties negotiated a protective order and asked the court to endorse the order. Documents were produced and depositions taken. The parties, including the corporate defendants, litigated over discovery requests, requiring the court to resolve the disputes. In January 2017, Hankey submitted a written statement in favor of transferring this case to the Business Litigation Session (BLS) stating that the case warranted substantial case management. The case was accepted into the BLS. In June 2017, the parties appeared in the BLS for a Litigation Control Conference. The parties jointly agreed to a tracking order setting October 31, 2017 as the deadline for completion of discovery.
Recently, on June 26, 2017, Hankey filed in court the Rule 9A package for his motion for leave to amend his answer and counterclaims by filing a Second Amended Answer and Counterclaim. Among other things, the proposed amended counterclaim seeks to re-assert a claim for defamation based, in part, on facts allegedly learned in discovery. That motion is still pending, with oral argument set for September 5, 2017.
Then, on July 21, 2017, the corporate defendants served a motion for protective order with respect to ongoing discovery disputes. In August 2017, the corporate defendants filed an emergency motion to impound documents in connection with a motion (not yet filed in court) to compel discovery from Element concerning damages.
Notwithstanding this active practice before this court seeking both affirmative relief and protection from discovery, on July 17, 2017, less than three weeks from Hankey filing his motion to amend his pleadings, Hankey and the corporate defendants served the instant motion to stay the action and to compel arbitration. Until the service of that motion, no reference to the possibility of arbitration was raised by Hankey or the corporate defendants.
DISCUSSION
I find the analysis and conclusion in Shalaby v. Arctic Sand Technologies, Inc., 32 Mass. L. Rptr. 401, 2014 WL 7235830 (2014) (Salinger, J.), to be directly on point and entirely persuasive. No purpose would be served by repeating the analysis. I agree with Judge Salinger that the better reasoned cases, including Marie v. Allied Home Mortgage Corp., 402 F.3d 1 (1st Cir. 2005), hold that whether waiver of arbitration by litigation conduct has occurred is one for the court to decide, not the arbitrator. The court has a direct interest in controlling its judicial procedures and in preventing abusive forum shopping.
There is no argument advanced by defendants that the terms of the arbitration contract reserve the issue of waiver by litigation conduct to the arbitrator.
" Where we are dealing with a forfeiture by inaction (as opposed to an explicit waiver), the components of waiver of an arbitration clause are undue delay and a modicum of prejudice to the other side." Rankin v. Allstate Ins. Co., 336 F.3d 8, 12 (1st Cir. 2003).
I find that defendants' litigation conduct for more than a year as described above is completely inconsistent with Hankey's contractual right to arbitration. The delay in asserting the contractual right to arbitration until now appears to be intentional, as deduced from defendants' affirmative invoking of the court's jurisdiction and their active use of the discovery mechanisms of the court. Moreover, defendants do not attempt to explain or justify their delayed decision to claim arbitration. The undue delay by defendants satisfies the first element of a finding that arbitration has been waived by litigation conduct.
Because there is a strong federal and state policy in favor of arbitration, " 'mere delay in seeking [arbitration] without some resultant prejudice' is insufficient for a finding of conduct-based waiver." Joca-Roca Real Estate, LLC v. Brennan, 772 F.3d 945, 948 (1st Cir. 2014), quoting Creative Solutions Grp., Inc. v. Pentzer Corp., 252 F.3d 28, 32 (1st Cir. 2001). The required showing of prejudice, however, is " tame at best." Id. at 949, quoting Rankin v. Allstate Ins. Co., 336 F.3d at 14. Prejudice may be inferred from the inordinate delay accompanied by sufficient litigation activity. Id. In this case, Element points to its successful motion to dismiss Hankey's defamation claim, Element states that Hankey seeks to reintroduce that claim in a pending motion to amend filed in this court, and would attempt to assert the defamation claim if sent to arbitration. Element argues that it would be unfair for defendants to get a second bite at the (defamation) apple in an arbitration proceeding when this court has already ruled against him. In addition, Element notes extensive efforts regarding discovery and the likelihood that the court will be asked to issue orders for discovery in response to motions from both sides. Element contends that moving the case to arbitration would hamper its efforts to obtain discovery because discovery in arbitration is not as broad as under the Massachusetts Rules of Civil Procedure. Finally, Element points to the litigation timetable negotiated and agreed to by the parties that would be adversely affected by the moving to arbitration. I agree with Element's arguments. These facts are sufficient to show a modicum of prejudice, at least, to Element if this case were stayed and arbitration ordered at this late date. Under the standard for determining whether litigation conduct waives a party's contractual right to arbitration, I find that defendants have waived arbitration.
CONCLUSION
Defendants' motion to stay action and to compel arbitration is DENIED.