Johnson Associates Corp. v. HL Operating Corp.

RECOMMENDED FOR FULL-TEXT PUBLICATION
Pursuant to Sixth Circuit Rule 206
File Name: 12a0148p.06

UNITED STATES COURT OF APPEALS
FOR THE SIXTH CIRCUIT
_________________

X
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JOHNSON ASSOCIATES CORPORATION; T.

Plaintiffs-Appellees, --
CHANTAL INTERNATIONAL LIMITED,

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No. 10-6468

,
>
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v.

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Defendant-Appellant. -
HL OPERATING CORP., dba Hartmann,
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Appeal from the United States District Court
for the Middle District of Tennessee at Nashville.
No. 3:09-cv-1206—John T. Nixon, District Judge.
Decided and Filed: May 23, 2012
Before: NORRIS, CLAY, and GRIFFIN, Circuit Judges.

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COUNSEL
ON BRIEF: Samuel L. Felker, Kathryn Hannen Walker, BASS, BERRY & SIMS PLC,
Nashville, Tennessee, for Appellant. Stephen H. Price, Erika R. Barnes, STITES &
HARBISON PLLC, Nashville, Tennessee, for Appellees.
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OPINION
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GRIFFIN, Circuit Judge. Defendant-appellant HL Operating Corporation
(“Hartmann”) appeals from the district court’s order denying its motion to compel
arbitration on the basis that it waived its right to enforce an arbitration clause against
plaintiffs-appellees Johnson Associates Corporation (“Johnson”) and T. Chantal
International Limited (“T. Chantal”) in their suit for breach of contract and unjust
enrichment. We affirm.

1
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 2

I.

This case involves a dispute over Hartmann’s contract with Johnson and T.
Chantal to manufacture Hartmann’s luggage lines. Plaintiffs filed suit against Hartmann
on December 22, 2009, seeking damages for breach of contract based on a “Sourcing
Agreement” between the parties and claiming that Hartmann was unjustly enriched.
Hartmann filed an answer and asserted a counterclaim for breach of contract. A case
management conference was held. Thereafter, the parties engaged in a judicial
settlement conference, held settlement discussions, and exchanged multiple offers from
approximately the middle of April 2010 through the middle of June 2010 with the
assistance of a magistrate judge. These efforts were unsuccessful. On July 1, 2010, the
magistrate judge assisting with the settlement proceedings returned the case file to the
magistrate judge otherwise handling the case because “it now appears that there is very
little chance of resolution at this stage in the proceedings.”

That same day, Hartmann filed a motion to continue the trial and to modify the
case management order, which at the time required the parties to complete written
discovery and fact witness depositions by August 15, 2010. The district court denied
Hartmann’s motion. Hartmann then served plaintiffs with interrogatories, requests for
production of documents, and a request for admissions on July 2, 2010, and July 16,
2010; and plaintiffs served Hartmann with their discovery requests on July 13, 2010. On
July 21, 2010, Hartmann noticed eight depositions; those depositions, however, were
later postponed. The parties then filed a joint motion to modify the case management
order to make the responses to the discovery requests due on August 26, 2010, and the
court entered an order to that effect on August 12, 2010.

On August 23, 2010, just three days before the newly agreed-upon discovery
deadline, Hartmann notified plaintiffs that it intended to exercise its right to arbitrate the
dispute as provided by paragraph 13(a) of the Sourcing Agreement. Hartmann requested
a response by August 24, 2010, and notified plaintiffs that in the event they did not agree
to arbitrate, Hartmann would file a motion to compel arbitration. Hartmann also stated
that “[i]t is our position that no discovery should be had until the Court rules on such a
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 3

motion. Consequently, we will grant you an indefinite extension to respond to any of
our outstanding discovery . . . . We ask that you do the same for Hartmann.” When
plaintiffs failed to respond, Hartmann filed a motion to compel arbitration on August 25,
2010.

On August 26, 2010, plaintiffs served their discovery responses on Hartmann in
accordance with the deadline. They produced 1,151 pages of responsive documents and
provided a 4.11 gigabyte hard drive containing responsive information. Plaintiffs then
continued to seek discovery from Hartmann while the motion to compel arbitration was
pending. On September 1, 2010, plaintiffs’ counsel wrote to Hartmann’s counsel:
“Regardless of its motion to dismiss or stay the litigation pending arbitration, which
Plaintiffs oppose, Hartmann is still required to comply with outstanding court orders
regarding discovery, . . . . Specifically, Plaintiffs intend to continue to take depositions
in this matter.” As a result, when Hartmann served written discovery responses and
documents on September 15, 2010, it stipulated that “it [wa]s doing so under objection
and Hartmann does not agree that its response to these requests constitutes any waiver
of its right to arbitrate this dispute.”

The district court held a hearing on Hartmann’s motion to dismiss or compel
arbitration in mid-November. In an opinion dated November 30, 2010, the court held
that Hartmann had waived its right to compel arbitration because Hartmann “moved for
and was granted an extension of time within which to file an Answer”; “asserted ten
affirmative defenses and a counterclaim”; “engaged in a judicial settlement conference
and informal efforts to resolve the case”; “both unilaterally and jointly with Plaintiffs
moved for adjustments of the Case Management Order”; “served . . . discovery
requests”; and prejudiced Plaintiffs because “[w]hile litigating in this court for most of
a year, Plaintiffs have participated in scheduling, requested discovery materials and
prepared discovery responses” that “[they assert] . . . will not be fully transferrable to an
arbitration process.” Hartmann timely appeals.
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 4

II.

“We review a district court’s denial of a motion to compel arbitration de novo.”
Hurley v. Deutsche Bank Trust Co. Ams., 610 F.3d 334, 338 (6th Cir. 2010) (citing
Albert M. Higley Co. v. N/S Corp., 445 F.3d 861, 863 (6th Cir. 2006)).

III.

Hartmann makes two arguments on appeal. First, Hartmann contends that it
could not have waived its right to arbitration because the Sourcing Agreement contains
an explicit no-waiver provision: “No waiver by either party of any provision of this
Agreement or of any breach or default shall constitute a continuing waiver of such
provision or of any other provisions of this Agreement.” Because Hartmann raised this
issue in its reply to its motion to compel arbitration below, and the district court failed
to address it, Hartmann claims that the district court’s ruling must be vacated and the
matter remanded for further consideration. Plaintiffs, on the other hand, assert that
Hartmann did not properly raise the issue in its reply below, and that even if it did, the
fact that the district court failed to address the argument does not mean that the court
committed any error in making its determination that Hartmann waived its right to
arbitration. We consider each of these arguments in turn.

Plaintiffs argue that Hartmann made only a “vague” reference in passing in its
reply brief, without explanation or legal citation, that it could not waive the specific
arbitration provision as a result of the general no-waiver provision in the Sourcing
Agreement. This vague reference, they contend, was insufficient to raise the issue
before the district court and thus did not preserve it for appeal. We disagree. Because
the issue of waiver was first raised in plaintiffs’ response, Hartmann’s reply was the first
and only opportunity it had to address the issue. Moreover, although Hartmann’s
argument lacked legal citation, it was not vague or made merely in passing. Hartmann
argued that:

In addition to the facts that Plaintiffs have not and will not suffer any
prejudice and that Hartmann has not taken any actions “completely
inconsistent” with arbitration, Hartmann cannot be found to have waived
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 5

its right because the parties expressly agreed that neither party could
waive any provision of the Contract between them. Section 13(e) of the
agreement between the parties states plainly that “[n]o waiver by either
party of any provision of this Agreement or any breach or default shall
constitute continuing waiver of such provision or of any other provisions
of this Agreement.” Docket No. 1-1 at § 13(e). As such, not only did
Plaintiffs expressly agree to arbitrate this dispute, but they also agreed
that the actions they now claim constitute waiver would not in fact act as
a waiver of the arbitration provision.

This was sufficient to preserve the issue for our review.

However, even though the no-waiver clause argument is preserved, Hartmann
wrongly concludes that the district court’s failure to address the issue requires remand.
“[T]he presence of [a] ‘no waiver’ clause does not alter the ordinary analysis undertaken
to determine if a party has waived its right to arbitration.” S & R Co. of Kingston v.
Latona Trucking, Inc., 159 F.3d 80, 86 (2d Cir. 1998), cert. denied, 528 U.S. 1058
(1999). This makes sense because “to allow the ‘no waiver’ clause to preclude a finding
of waiver would permit parties to waste scarce judicial time and effort and hamper
judges’ authority to control the course of the proceedings” and allow parties to “test[]
the water before taking the swim” by delaying assertion of their right to arbitration until
the litigation is nearly complete. Id. (citation and internal quotation marks omitted);
accord Gray Holdco, Inc. v. Cassady, 654 F.3d 444, 452-53 (3d Cir. 2011); Republic
Ins. Co. v. PAICO Receivables, LLC, 383 F.3d 341, 348-49 (5th Cir. 2004). Given that
the alleged no-waiver provision in the Sourcing Agreement was not potentially
determinative, Hartmann’s argument that the district court’s failure to address the issue
requires remand is without merit.

Second, Hartmann argues that the district court erred in concluding that
Hartmann waived its right to arbitration based on its participation in the litigation.
Although it has long been settled that a party can waive its contractual right to
arbitration, see Am. Locomotive Co. v. Gyro Process Co., 185 F.2d 316, 318 (6th Cir.
1950), “because of the strong presumption in favor of arbitration, waiver of the right to
arbitration is not to be lightly inferred.” Glazer v. Lehman Bros., Inc., 394 F.3d 444, 450
(6th Cir. 2005). We have explained that “a party may waive an agreement to arbitrate
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 6

by engaging in two courses of conduct: (1) taking actions that are completely
inconsistent with any reliance on an arbitration agreement; and (2) ‘delaying its assertion
to such an extent that the opposing party incurs actual prejudice.’” Hurley, 610 F.3d at
338 (quoting O.J. Distrib., Inc. v. Hornell Brewing Co., 340 F.3d 345, 356 (6th Cir.
2003)); see Gen. Star Nat’l Ins. Co. v. Administratia Asigurarilor de Stat, 289 F.3d 434,
438 (6th Cir. 2002).

In this case, the parties’ arguments focus on our unpublished decision in
Manasher v. NECC Telecomm., 310 F. App’x 804 (6th Cir. 2009). There, we held that
the defendant “waived whatever right to arbitrate it may have had by failing to plead
arbitration as an affirmative defense and by actively participating in litigation for almost
a year without asserting that it had a right to arbitration” because that “conduct was
‘completely inconsistent with [any] reliance [on the right to arbitration]’ and caused the
plaintiffs to suffer prejudice through unnecessary delay and expense.” Id. at 806
(quoting Gen. Star Nat’l Ins., 289 F.3d at 438). Hartmann contends that our
determination in Manasher that a defendant’s failure to raise an arbitration clause in its
answer is inconsistent with its reliance on the right to arbitrate is suspect because a
defendant is not required by Federal Rule of Civil Procedure 8(c) to plead arbitration as
an affirmative defense. Hartmann also asserts that Manasher is distinguishable from the
instant case because that case included motions to certify the class and to amend the
complaint, and none of the litigation activities in this case were as extensive or laborious.
We find Hartmann’s arguments unavailing.

Regardless of whether a defendant is required to raise arbitration as a defense
under Rule 8(c), a defendant’s failure to raise arbitration as an affirmative defense shows
his intent to litigate rather than arbitrate. The filing of an answer is, after all, the main
opportunity for a defendant to give notice of potentially dispositive issues to the
plaintiff; and the intent to invoke an arbitration provision is just such an issue. Indeed,
as a practical matter, an enforceable contractual right to compel arbitration operates as
a quasi-jurisdictional bar to a plaintiff’s claims, providing grounds for dismissal of the
suit. It is therefore unsurprising that defendants routinely raise the right to arbitration
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 7

in their answer, whether it is technically required by Rule 8 or not. See Tenneco Resins,
Inc. v. Davy Int’l, AG, 770 F.2d 416, 420 (5th Cir. 1985) (“Although [defendant] did not
move for a stay pending arbitration until approximately eight months into the litigation,
in its answer to the original complaint, [defendant] did seek to have the action dismissed
because the dispute was covered by a valid and enforceable arbitration clause thereby
putting [plaintiff] on notice as to its desire to arbitrate the matter.”); Hilti, Inc. v. Oldach,
392 F.2d 368, 371 (1st Cir. 1968) (noting that “defendant’s answer, in its special
defense, served notice on plaintiff of the arbitration defense”); see also Gen. Guar. Ins.
Co. v. New Orleans Gen. Agency, Inc., 427 F.2d 924, 929 n.5 (5th Cir. 1970) (“Once the
defendant, by answer, has given notice of insisting on arbitration the burden is heavy on
the party seeking to prove waiver.”).

Hartmann is, of course, correct that the litigation in Manasher was more
significant than the litigation in this case. In Manasher, the suit proceeded for over a
year before the issue of arbitration was raised, and, during that time, there was a motion
to certify the class and a motion to amend the complaint. Here, in contrast, the case had
progressed only eight months before Hartmann raised its right to arbitration, and the
parties’ prior motions addressed only settlement, scheduling deadlines, and discovery
requests. But the fact that this case involved less litigation than in Manasher is not
dispositive. And, in our view, Hartmann’s actions were also completely inconsistent
with any reliance on its right to arbitrate because Hartmann: failed to raise arbitration
in its answer, see Manasher, 310 F. App’x at 806; asserted a counterclaim for breach of
contract, see, e.g., Crossville Med. Oncology, P.C. v. Glenwood Sys., LLC, 310 F. App’x
858, 859 (6th Cir. 2009) (noting that the defendant “participated in litigation when it
filed an answer and counterclaims”); and actively scheduled and requested discovery,
including depositions, rather than moving to compel arbitration following the end of
formal settlement discussions, cf. Dickinson v. Heinold Sec., Inc., 661 F.2d 638, 641 (7th
Cir. 1981) (noting that the defendant “promptly moved” for arbitration following failure
of settlement).
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 8

Hartmann’s citations to decisions from other jurisdictions do not convince us
otherwise. J. & S. Constr. Co., Inc. v. Travelers Indem. Co., 520 F.2d 809 (1st Cir.
1975), is not helpful to Hartmann because in that case the court based its conclusion that
the defendant did not waive its right to arbitration on the lack of prejudice to the
plaintiff. Id. at 809-10 (“This ruling is supported by the record, there having been no
showing of prejudice.”). Tenneco Resins, Inc. and Hilti, Inc. are similarly off target
because in those cases, unlike here, the right to arbitration was raised in each of the
defendants’ respective answers. See 770 F.2d at 420; 392 F.2d at 371. And Carcich v.
Rederi A/B Nordie, 389 F.2d 692 (2d Cir. 1968), is likewise inapplicable because in that
case arbitration was raised “at an early date and continuously asserted,” while in this
case, it was not raised until eight months into the litigation. Id. at 695. The only case
Hartmann relies on that is arguably close is Am. Dairy Queen Corp. v. Tantillo, 536 F.
Supp. 718 (M.D. La. 1982), and we find that court’s “substantial invocation of the
litigation process” analysis unpersuasive in light of our “completely inconsistent” actions
test. See id. at 722.

We are also unpersuaded by Hartmann’s assertion that it did not act completely
inconsistently with any reliance on its right to arbitration because failing to assert
arbitration as an affirmative defense, participating in only a “minimal” amount of
litigation while mostly attempting to settle the case, and filing an answer and
counterclaim are individually insufficient to support such a finding. Although Hartmann
cites some authority in support of these assertions, see Walker v. J.C. Bradford & Co.,
938 F.2d 575, 578 (5th Cir. 1991) (“Attempts at settlement . . . are not inconsistent with
an inclination to arbitrate and do not preclude the exercise of a right to arbitration.”);
Fisher v. A.G. Becker Paribas, Inc., 791 F.2d 691, 698 (9th Cir. 1986) (“[T]he bare fact
that [a party] failed to raise an affirmative defense is inadequate by itself to support a
claim of waiver of arbitration.”); Crossville Med., 310 F. App’x at 859 (holding that the
mere filing of answer and counterclaims were not inconsistent with defendant’s right to
arbitrate), the problem with Hartmann’s argument is that, regardless of whether each of
these circumstances is insufficient to show that Hartmann acted completely
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 9

inconsistently with its right to arbitration, they may well be sufficient when considered
together.1 We hold that in this case they are.

This leaves the second part of the waiver inquiry: prejudice. “Prejudice can be
substantive, such as when a party loses a motion on the merits and then attempts, in
effect, to relitigate the issue by invoking arbitration, or it can be found when a party too
long postpones his invocation of his contractual right to arbitration, and thereby causes
his adversary to incur unnecessary delay or expense.” Kramer v. Hammond, 943 F.2d
176, 179 (2d Cir. 1991); see, e.g., Manasher, 310 F. App’x at 806. Prejudice can also
be found where a party has gained a strategic advantage by obtaining something in
discovery that would be unavailable in arbitration. Stifel, Nicolaus & Co. Inc. v.
Freeman, 924 F.2d 157, 159 (8th Cir. 1991). Here, the district court concluded that
plaintiffs were prejudiced by unnecessary delay and expense because “the right to
arbitrate was not asserted for eight months, during which motions were filed, requests
for discovery materials were made and responses were prepared, and a judicial
settlement conference was held.” It emphasized that “[a] considerable amount of time
and resources has been spent in pursuing this matter in court, and Plaintiffs assert that
the fruits of their efforts will not be fully transferrable to an arbitration process abroad
that may delay resolution of this case even further.” We substantially agree with the
district court.

Hartmann argues that the district court erred by relying on the “time and
resources” spent in litigation to conclude that plaintiffs were prejudiced by Hartmann’s
delayed assertion of its right to arbitration. As support for this argument, Hartmann cites
our statement that “delay alone, regardless of its length is not enough [to establish
prejudice],” Ziegler v. Aukerman, 512 F.3d 777, 786 (6th Cir. 2008) (citation and
internal quotation marks omitted), and the Fifth Circuit’s statement that “pretrial expense
and delay–unfortunately inherent in litigation–without more, do not constitute prejudice

1
Hartmann has also taken at least one of these statements out of context. In Fisher, the Ninth
Circuit’s full statement was: “Absent a showing of prejudice by the Fishers, the bare fact that Becker failed
to raise an affirmative defense is inadequate by itself to support a claim of waiver of arbitration. Rush v.
Oppenheimer & Co., 779 F.2d 885, 889 (2d Cir. 1985).” 791 F.2d at 698 (emphasis added). Thus, the
case does not actually support Hartmann’s contention.
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 10

sufficient to support a finding of waiver.” Leadertex, Inc. v. Morganton Dyeing &
Finishing Corp., 67 F.3d 20, 26 (2d Cir. 1995) However, this is not a case involving
delay alone, or even delay and the inherent pretrial expense referred to in Leadertex.
This is a case where, in addition to an eight-month delay and expenses involved with
numerous scheduling motions and court-supervised settlement discussions, plaintiffs also
engaged in discovery. The combination of all of these factors caused plaintiffs to suffer
“actual prejudice.” Hurley, 610 F.3d at 338.

Hartmann resists this conclusion, pointing to the Fifth Circuit’s statement in
Tenneco Resins that “when only a minimal amount of discovery has been conducted,
which may also be useful for the purpose of arbitration, the court should not ordinarily
infer waiver based upon prejudice to the [opposing party].” 770 F.2d at 421. But that
statement does not describe this case. Here, plaintiffs produced 1,151 pages of
responsive documents and a 4.11 gigabyte hard drive full of responsive information. Cf.
Patten Grading & Paving, Inc. v. Skanska USA Bldg., Inc., 380 F.3d 200, 207 (4th Cir.
2004) (finding no prejudice where the written discovery was “limited”); Leadertex,
67 F.3d at 26 (finding no prejudice where the only documents produced were
unnecessary copies of twenty-three dye orders). Moreover, plaintiffs represented to the
district court that they engaged in more discovery than would be permitted in arbitration;
and, contrary to Hartmann’s contention, the district court implicitly credited that
representation.

Hartmann also intimates that it cannot be responsible for plaintiffs’ discovery
expenses because the metadata on the hard drive provided by plaintiffs shows that the
information was saved on August 24, 2010, one day after Hartmann notified plaintiffs
of its intent to arbitrate. But this does not benefit Hartmann either. If anything, the fact
that the responsive information was saved to the disk only one day after Hartmann
notified plaintiffs of its intent to arbitrate confirms that plaintiffs were prejudiced; after
all, it is exceedingly unlikely that plaintiffs would have gathered all of that responsive
material, or even a substantial portion of it, in the hours between when it received notice
of Hartmann’s intent to arbitrate on August 23, 2010, and its saving of the material to
No. 10-6468 Johnson Assocs. Corp., et al. v. HL Operating Corp. Page 11

the disk on August 24, 2010. Because Hartmann’s actions were completely inconsistent
with any reliance on its right to arbitration, and because Hartmann’s belated assertion
of that right caused plaintiffs actual prejudice in the form of unnecessary delay and
expense, we hold that Hartmann waived its right to arbitration.

IV.

For these reasons, we affirm the judgment of the district court.