Unpublished Disposition, 921 F.2d 280 (9th Cir. 1990)

Annotate this Case
US Court of Appeals for the Ninth Circuit - 921 F.2d 280 (9th Cir. 1990)

Justin A. McNAMARA, Plaintiff-Appellee,v.Norman Michael COOLEY, Defendant-Appellant.

No. 89-56320.

United States Court of Appeals, Ninth Circuit.

Submitted Dec. 4, 1990.* Decided Dec. 21, 1990.



In this appeal we are asked to decide whether appellant, an attorney, waived his asserted right to arbitration by litigating in district court for over two years before bringing a motion to compel arbitration. Appellant was sued for fraud, malpractice, securities fraud, RICO, etc., in connection with his alleged mismanagement and investment of appellee's retirement fund. One of the five allegedly fraudulent disbursements involved a loan to Pacific Ventures. The Loan Agreement included an arbitration clause, to which appellant was not a signatory, which provides:

14 ARBITRATION. Should any disputes arise between the parties under this Agreement, the disputing parties shall attempt to resolve said dispute by submitting it to arbitration according to the rules of the American Arbitration Association. In such event, each disputing party shall select one arbitrator. If these arbitrators are not able to resolve the dispute, they shall jointly select an additional arbitrator, and a decision of the majority shall then be final. Each party shall bear the cost of its own arbitrator, and the cost of the additional arbitrator shall be shared equally by the parties.

When appellee sued appellant for damages in state court, appellant removed to federal court. During the two years after removal, appellant filed four motions to dismiss and simultaneously conducted discovery, including at least four motions to compel, six depositions, and twelve records depositions. Appellant requested a stay of discovery in July 1988 pending the hearing on his motion to dismiss the third amended complaint. That motion was denied, but a subsequent motion was granted September 1988. Discovery was stayed for one month, pending the hearing on the motion to dismiss. After the fourth amended complaint was filed, appellant answered, including in his answer the right to arbitration as an affirmative defense. Four and a half months later, appellant finally moved to compel arbitration. The district court denied the motion, finding that the motion came too late. Appellant appeals from that order.

* Denial of a motion to compel arbitration is subject to de novo review, Lorber Indus. of California v. Los Angeles Printworks, 803 F.2d 523, 524 (9th Cir. 1986). The determination of a waiver of arbitration is also subject to de novo review. Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691 (9th Cir. 1986).


Any examination of whether a contractual right to compel arbitration has been waived must be conducted in light of the strong federal policy favoring arbitration for dispute resolution. Fisher v. A.G. Becker Paribas Inc., 791 F.2d 691, 694 (9th Cir. 1986).

The Arbitration Act establishes that, as a matter of federal law, any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the problem at hand is the construction of the contract language itself or an allegation of waiver, delay, or a like defense to arbitrability.

Moses H. Cone Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1, 24-25 (1983). This preference for arbitration is not based solely on concern for judicial efficiency, but is also based on concern for the contractual rights of the parties. Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 756-57 (9th Cir. 1988).

The party arguing for a waiver of arbitration bears a heavy burden to prove that the party moving for arbitration 1) knew of an existing right to compel arbitration; 2) acted inconsistently with that existing right; and 3) prejudiced the party opposing arbitration. Fisher, 791 F.2d at 694.

In this case, the district court found that appellant had waived his right because he brought the motion after nearly all discovery had been completed and only four months remained before trial. Excerpts of Record (E.R.) 3-4.

Appellant claims that the district court erred in its consideration of the motion, and did not properly address the considerations under each of the three factors above.

First, appellant claims that he did not know of his right to compel arbitration, because he was not a signatory to the loan agreement containing the arbitration clause. Appellant would be able to take advantage of that clause only if he were an agent or employee of Pacific Ventures. Letizia v. Prudential Bache Securities, Inc., 802 F.2d 1185, 1187-88 (9th Cir. 1986). Appellant claims that it was not until he deposed the appellee and determined that appellee contended appellant was an agent or employee that appellant had the necessary standing to bring the motion to compel. However, the district court's analysis of this contention is compelling:

It was alleged in the very first complaint that he acted as the agent, servant, an employee, and ... there was never any change in position. There was still--that's still the allegation in the fourth amended complaint. ... If Mr. Cooley has standing now, he had standing then.



* * *

[N]obody knew better than Mr. Cooley what his position was throughout all of this, and merely taking the deposition of the Plaintiff and asking him what he thought of Mr. Cooley's position would hardly give you information that you didn't have and couldn't have used months and months earlier.

E.R. at 6, 13. As appellant was in a position to know the facts that would provide the basis for his standing to move to compel, discovery was not necessary to apprise appellant of a right to compel arbitration.

Second, appellant contends that he did nothing incompatible with asserting his right to arbitration. He points out that he asserted the right as an affirmative defense in his answer to the complaint, and that that was the earliest time at which he was required to raise the issue. Motions to dismiss, appellant argues, are not inconsistent with arbitration, because they permit a defendant to test quickly the sufficiency of the plaintiff's claims against him, and perhaps alleviate the need for arbitration.

Appellant's argument has appeal, and several courts have distinguished motions to dismiss from proceedings occurring after an answer has been filed. See, Sweater Bee by Banff v. Manhattan Indus., 754 F.2d 457, 463 (2d Cir.) (" [W]here, as here, a plaintiff files an intricate complaint, setting forth numerous claims outside the scope of, though partially related to, the arbitrable claims, he should not be altogether surprised that a defendant takes the protective step of filing a motion to dismiss, specifically permitted by Fed. R. Civ. P. 12(b) to be filed before answer."), cert. denied, 474 U.S. 819 (1985); Rush v. Oppenheimer & Co., 779 F.2d 885, 888 (2d Cir. 1985).

However, the pre-answer litigation activity here was not limited to a single test of the complaint; appellant made four motions to dismiss. Moreover, while these motions were being heard, appellant brought four motions to compel, noticed at least six depositions, and noticed at least 12 records depositions. The only requests by appellant for a stay of discovery were made pending the district court's determination of the third motion to dismiss.

The four motions to dismiss were, by appellant's own characterization, meant to "tighten up the pleadings," E.R. at 9, and the district court found that after these motions, the allegations of the amended complaint "aren't any different. It's just that some of the pleading has been tightened up because of the teaching that's been going on back and forth between the parties in this room." E.R. 8.

The extent and nature of the pre-answer litigation activity here is clearly inconsistent with appellant's preserving his right to arbitrate. Van Ness Townhouses v. Mar Indus. Corp., 862 F.2d 754, 759 (9th Cir. 1988) (two years of litigation found to be inconsistent with the right to arbitration).

The main case cited by appellant does not dictate a contrary result. In Martin Marietta Aluminum, Inc. v. General Electric Co., 586 F.2d 143 (9th Cir. 1978), this court held that a defendant had not waived arbitration by extensive discovery, primarily because the arbitration provision at issue put the burden on the plaintiff to request arbitration, and because the discovery focused on the arbitrability of the claims at issue.

Here, given the extent of discovery and the repeated motions to dismiss, appellant clearly availed himself of the judicial forum and put the appellee through expensive discovery and a refinement of his pleadings that he would not have had to undergo in arbitration.

As to the third and final element of waiver, appellant contends that appellee was not prejudiced by the delay in asserting the right to arbitrate. Prejudice is a necessary element of determining waiver. Shinto Shipping v. Fibrex & Shipping Co., Inc., 572 F.2d 1328, 1330 (9th Cir. 1978) (not prejudiced by only three depositions; appellee did not seek protective order, although knowing that a motion for arbitration was imminent). As the district court here found, however, appellee was prejudiced:

The plaintiff has been required to deal with discovery and Federal Court discovery procedures which, had it been arbitrated from the beginning, it's doubtful how much of that he would have had to put up with, but nevertheless, all of the parties have gotten their discovery under the Federal system and now, for the Plaintiff to have to back off of that and go into an arbitration regime with the back and forth, first to select the arbitrator and then to go through the rituals and so forth, this Court feels that he should not be required to do that.

If he were going to be required to do that, he should have been required to do it properly, right out of the box. But to wait over two years and to wait until four months before trial, after all the discovery's been completed, after Plaintiff has been required to answer motions to dismiss repeatedly in this court and, finally, having been made to file a fourth amended complaint ... is prejudicial to him.

E.R. 7-8.

The very purpose of an arbitration provision is to avoid costly and time-consuming litigation. Appellee should not have been lured into thinking that his claims could be litigated in court, only to be required, just before trial, to start over in arbitration.



The panel unanimously finds this case suitable for decision without oral argument. Fed. R. App. P. 34(a) and Ninth Circuit Rule 34-4


This disposition is not appropriate for publication and may not be cited to or by the courts of this circuit except as provided by Ninth Circuit Rule 36-3