Tyco International Ltd. v. Swartz

United States Court of Appeals
For the First Circuit

No. 04-1848
IN RE TYCO INTERNATIONAL LTD.
SECURITIES LITIGATION,

TYCO INTERNATIONAL LTD.; TYCO INTERNATIONAL (US) INC.,

Plaintiffs, Appellees,

v.

MARK H. SWARTZ,

Defendant, Appellant.

APPEAL FROM THE UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF NEW HAMPSHIRE

[Hon. Paul J. Barbadoro, U.S. District Judge]

Before

Boudin, Chief Judge,

Cyr, Senior Circuit Judge,

and Lipez, Circuit Judge.

Michael J. Grudberg, with whom Stillman & Friedman, P.C. was
on brief for appellant.
Jeremy M. Goldman, with whom David W. Shapiro and Boies,
Schiller & Flexner LLP were on brief for appellees.

September 7, 2005
 CYR, Senior Circuit Judge. Mark H. Swartz appeals from

the district court order which dismissed his motion to stay the

civil actions lodged against him by his former employer, Tyco

International ("Tyco"), as well as his motion to compel arbitration

of the Tyco claims. As we discern no error, the district court

judgment must be affirmed.

I

BACKGROUND

Swartz served as the Chief Financial Officer of Tyco

until September 10, 2002, when he and Tyco entered into the

severance agreement (“Agreement”) which is the subject of this

litigation. The Agreement prescribes that all disputes arising

from or concerning Swartz’s employment at Tyco were to be subject

to binding arbitration, but the Agreement specified neither the

arbitrator nor the governing arbitral rules.

Swartz was indicted in New York state court on September

11, 2002 for abusing his position in order to further his own

financial gain. On October 7, 2002, Tyco submitted a demand for

arbitration against Swartz with the American Arbitration

Association (AAA), seeking $400 million in damages for essentially

the same abuses described in the pending criminal indictment. As

the arbitration clause in the Agreement did not name AAA as the

arbitrator, AAA sought written consent from both parties.

On November 6, 2002, after Swartz had negotiated

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unsuccessfully with Tyco for a postponement of any arbitration

until after his criminal trial, Swartz sent Tyco a letter which

stated, in pertinent part:

. . . Mr. Swartz does not consent to the
AAA’s administration of this matter and does
not agree to participate in the arbitration
filed with the AAA. . . .

. . . Our position . . . is that we have
significant concerns about participating in
any arbitration given the pendency of the
criminal case against Mr. Swartz and its
potential implication of his Fifth Amendment
rights. Nevertheless, we discussed the
possibility of determining whether any
agreement could be reached concerning various
preliminary matters. We did not however,
reach any agreement, including whether to use
the AAA as a forum. . . .

. . . I reiterated my concern that we
would need to seek a stay of any arbitration
at some time in the future, and that we did
not know how the AAA would handle such an
application [for a stay]. I suggested in our
conversation that – prior to agreeing to the
use of the AAA – we wanted to learn more about
the manner in which such an application would
be handled, and I suggested a preliminary
conference with someone from the AAA to
discuss the matter. . . .

. . . [W]e would ask that you reconsider
your position that you will not consent to a
stay of any arbitration pending the resolution
of Mr. Swartz’s criminal case. . . .
Furthermore, we would consider agreeing to a
stay of the arbitration that included a
provision for the ultimate use of the AAA (and
the use of an arbitrator selection process
similar to that outlined in your proposal)
after the criminal matter is resolved. Please
advise me if you are interested in discussing
such a potential agreement.

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During the ensuing five-month period, the parties engaged in no

further correspondence, and the AAA dismissed the Tyco demand for

arbitration on March 21, 2003, for lack of written consent.

On April 1, 2003, Tyco brought the instant civil action

against Swartz in the Southern District of New York, demanding

damages for the identical malfeasance described in its AAA

arbitration demand. Swartz in turn submitted a motion to dismiss

the complaint pursuant to Federal Rules of Civil Procedure 12(b)(1)

and (6), citing the binding arbitration clause in the Agreement.

After the Judicial Panel on Multidistrict Litigation transferred

the case to the District of New Hampshire, the district court

denied the Swartz motions to dismiss, and concluded that Swartz had

“actively resisted arbitration, claiming that it should be delayed

until the criminal charges now pending against him have been

resolved.”

Swartz neither appealed from the denial of these motions,

nor submitted a timely answer to the Tyco complaint, as required

under Fed. R. Civ. P. 12(a)(4)(A). After noting Swartz's default,

the district court extended the filing deadline until March 15,

2004. Rather than submitting an answer, however, Swartz submitted

a motion to compel arbitration which repeated the contentions

previously rejected by the court in denying his Rule 12(b) motions.

Swartz now appeals from the district court order denying the motion

to compel. In re Tyco Int’l, Ltd., No. 02-1335, 2004 WL 1151541

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(D.N.H. May 24, 2004) (unpublished opinion).1

II

DISCUSSION

Swartz asserts that the district court erred in

determining that he waived the right to arbitrate the parties’

disputes, given that (i) his November 6 letter was not a final

refusal to arbitrate, but simply an interim step in the ongoing

negotiations with Tyco regarding the choice of arbitrator and

arbitral rules, neither of which had been specified in the

Agreement; (ii) at most, the November 6 letter was ambiguous, and

the strong federal policy favoring arbitration therefore requires

that any ambiguity be resolved against waiver; and (iii) in any

event, Tyco sustained no cognizable prejudice from the putative

waiver by Swartz.

The parties acknowledge that all claims in the Tyco

complaint are arbitrable pursuant to their Agreement. A

determination that a party has waived its right to arbitrate is

reviewed de novo, whereas the district court's findings of fact are

subject to "clear error" review. See In re Citigroup, Inc., 376

F.3d 23, 26 (1st Cir. 2004). As federal policy strongly favors

arbitration of disputes, a "[w]aiver is not to be lightly

inferred,” thus reasonable doubts as to whether a party has waived

1
Swartz unsuccessfully moved to stay the district court
proceedings pending this appeal.

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the right to arbitrate should be resolved in favor of arbitration.

Restoration Pres. Masonry, Inc. v. Grove Eur. Ltd., 325 F.3d 54, 61

(1st Cir. 2003). However, “an arbitration provision has to be

invoked in a timely manner or the option is lost.” Rankin v.

Allstate Ins. Co., 336 F.3d 8, 12 (1st Cir. 2003); see Marie v.

Allied Home Mortgage Corp., 402 F.3d 1, 15 (1st Cir. 2005)

(“[U]ndue delay in bringing arbitration . . . is inconsistent with

the desire to arbitrate.”) (emphasis added). Waivers of arbitral

rights need not be express, but may be implied from the particular

circumstances. See Restoration Pres., 325 F.3d at 61 (noting that

“[t]here are no per se rules,” and that belated assertions of a

right to arbitrate must be assessed in “context”); In re

Crysen/Montenay Energy Co., 226 F.3d 160, 163 (2d Cir. 2002)

(noting that there is no "bright line" rule as to waiver);

Cabinetree of Wis., Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388,

390 (7th Cir. 1995).2

2
Accordingly, we have relied upon a nonexclusive list of
circumstances in determining whether an implied waiver of arbitral
rights has occurred:

[1] whether the party has actually
participated in the lawsuit or has taken other
action inconsistent with his right, . . . [2]
whether the litigation machinery has been
substantially invoked and the parties were
well into preparation of a lawsuit by the time
an intention to arbitrate was communicated by
the defendant to the plaintiff, . . . [3]
whether there has been a long delay in seeking
the stay or whether enforcement of arbitration
was brought up when trial was near at hand. .

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 Once Tyco established that Swartz had waived the right to

arbitrate, it also was required to demonstrate a “modicum of

prejudice.” Rankin, 336 F.3d at 12; see Citigroup, 376 F.3d at 26;

Creative Solutions Group, Inc. v. Pentzer Corp., 252 F.3d 28, 32

(1st Cir. 2001). In ascertaining prejudice, “we consider the

larger context of the litigation.” Citigroup, 376 F.3d at 26.

A. Waiver

The district court reasonably concluded – based upon the

totality of the circumstances – that Swartz had waived his arbitral

rights unequivocally. First, the opening paragraph of the November

6, 2002 letter explicitly stated that Swartz “does not consent to

the AAA’s administration of this matter and does not agree to

participate in the arbitration filed with the AAA.” Swartz also

failed to propose an arbitrator who might meet with his approval.

Cf. Gulf Guar. Life Ins. Co. v. Conn. Gen. Life Ins. Co., 304 F.3d

476, 485 (5th Cir. 2002) (finding no waiver where each litigant had

proposed a different arbitrator, and thus remained in good faith

. . Other relevant factors are [4] whether the
defendants have invoked the jurisdiction of
the court by filing a counterclaim without
asking for a stay of the proceedings, . . .
[5] whether important intervening steps (e.g.
taking advantage of judicial discovery
procedures not available in arbitration . . .)
had taken place, . . . and [6] whether the
other party was affected, misled, or
prejudiced by the delay.

Citigroup, 376 F.3d at 26 (citations omitted).

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negotiations on that issue).

Bypassing the issue as to whether the Swartz letter could

have rejected the AAA as an arbitrator without identifying the

precise reasons for doing so, Swartz did identify his “concerns”

regarding the pending AAA proceedings: (i) Swartz preferred to

stay arbitration until his criminal trial was concluded; (ii) he

did not know how the AAA would rule on his motion for stay; and

(iii) he intended to seek preliminary input and assurances from the

AAA as to whether it would be disposed to grant his stay motion.

The affidavit of Swartz's counsel, describing the negotiations

preceding the Swartz letter, confirm this same overarching concern.

Swartz insists that, by this language, he intended simply

to sound out Tyco regarding his counterproposal, and did not intend

that the agreement to arbitrate be conditioned upon a stay. The

Swartz contention is undercut, however, by the following statement

in his letter: “[W]e would consider agreeing to a stay of the

arbitration that included a provision for the ultimate use of the

AAA (and the use of an arbitrator-selection process similar to that

outlined in your proposal) after the criminal matter is resolved.”

The letter further states: “[W]e have significant concerns about

participating in any arbitration given the pendency of the criminal

case.” (Emphasis added.) The district court reasonably concluded

from these statements that the only real objection Swartz had to

the AAA arbitration was that it might not come with a guarantee

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that the arbitration would be postponed until after his criminal

trial.

Nothing in the arbitration clause of the Agreement, nor

in the case law, accorded Swartz a unilateral contractual right to

any such indeterminate postponement of arbitration.3 His concerns

relating to the possible effects of the arbitration on the exercise

of his Fifth Amendment rights may or may not be legitimate or well

founded,4 but the appropriate options for Swartz were either to

accept the AAA as arbitrator and file a motion to stay the

proceedings, identify some other bona fide reason for declining to

accept the AAA as the arbitrator, and/or propose another

arbitrator. His letter makes it reasonably clear that he would

have accepted the AAA provided he was assured that it would grant

him a stay.

Moreover, even assuming that the November 6 letter left

some reasonable doubt as to Swartz’s intent, his ensuing conduct

removed it. For more than five months, Swartz did nothing. He

3
Any such stay of arbitration would have entailed considerable
delay in the instant case. The Swartz criminal trial commenced in
September 2003, and he testified in his own defense in February
2004. Subsequently, however, a mistrial was declared, and the
retrial was scheduled to commence in January 2005.
4
On appeal, Swartz has not attempted to demonstrate the merits
of the grounds for seeking a stay, and there exists no controlling
precedent favoring his position. Cf. Vellone v. First Union
Brokerage Servs., Inc., 163 F. Supp. 2d 551, 553 (D. Md. 2001)
(denying a stay of arbitration pending criminal proceedings).
Hence, we need not address that issue.

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contends that his November 6 letter placed the ball in Tyco’s

court, but the letter itself contained a sentence which prescribed

the precise conditions for a Tyco reply: “Please advise me if you

are interested in discussing such a potential agreement,” viz., an

agreement whereby the AAA would be the arbitrator in a proceeding

stayed for an indeterminate time period awaiting resolution of his

criminal case. Tyco’s failure to respond to the Swartz counter-

offer within a reasonable time connoted Tyco's rejection of a term

to which its objection had already been made abundantly clear, thus

placing some onus upon Swartz to go forward. Instead, Swartz

waited until the AAA dismissed the Tyco demand for arbitration,

more than six months after its filing. Further, Swartz does not

contend that he undertook any of the preliminary steps, described

in the November 6 letter, to consult with the AAA regarding the

requirements or prospects for a stay.

Finally, the dilatory tactics engaged in by Swartz

continued even after Tyco filed its district court complaint in

March 2003. After the district court rejected his Rule 12(b)

motions to dismiss pursuant to the Agreement’s arbitration clause,

Swartz inexplicably elected not to take an interlocutory appeal of

right from that denial. See 9 U.S.C. § 16(a)(1); Fit Tech, Inc. v.

Bally Total Fitness Holding Corp., 374 F.3d 1, 5-6 (1st Cir. 2004);

see also Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993).

Furthermore, following that denial, Swartz failed to submit a

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timely answer to the Tyco complaint. See Fed. R. Civ. P.

12(a)(4)(A). When the court extended the date for filing the

answer, Swartz waited until the new deadline had expired, then

instead of filing an answer, he submitted a motion to compel

arbitration which was substantially identical to the Rule 12(b)

motions which had already been denied by the district court. Thus,

the district court reasonably concluded that Swartz had sought to

accomplish by indirect means what he had failed to manage by

negotiating with Tyco: an indeterminate delay in arbitration

proceedings pending his criminal trial.

B. Prejudice

Next, Swartz suggests that even assuming he waived the

right to arbitrate, Tyco suffered no cognizable prejudice. Quite

to the contrary, the record strongly suggests a deliberate strategy

unilaterally designed to delay the arbitration proceedings, without

either Tyco’s consent or any ruling, either by an arbitrator or a

court, on the merits of a motion to stay. Even as justice delayed

may amount to justice denied, so it is with arbitration. See

Rankin, 336 F.3d at 12. In these circumstances, we require simply

that Tyco demonstrate a “modicum of prejudice,” id., and it cannot

be disputed that Tyco is "out its expenses," in submitting the

doomed AAA demand for arbitration, in filing its district court

complaint, and in defending against not one, but two, motions for

compelled arbitration. See, e.g., Menorah Ins. Co. v. INX Reins.

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Corp., 72 F.3d 218, 222-23 (1st Cir. 1995) (noting that proximate

relationship between party’s intentionally dilatory tactics and

opposing party’s litigation expenses constitutes sufficient

“prejudice” to enforce waiver).

Once again, we emphasize that there is no bright-line

rule for a waiver of arbitral rights, and each case is to be judged

on its particular facts. See Rankin, 336 F.3d at 12. In these

circumstances, however, Swartz should not be allowed to reject the

Tyco demand for arbitration, stand idle, then submit a motion to

compel arbitration after Tyco has been required to commence a court

proceeding following the AAA’s dismissal of its demand for

arbitration. See Lane v. Larus & Brother Co., 243 F.2d 364, 367

(2d Cir. 1957) (“A party cannot raise unjustifiable objections to

a valid demand for arbitration, all the while protesting its

willingness in principle to arbitrate and then, when the other side

has been forced to abandon its demand, seek to defeat a judicial

determination by asking for arbitration after suit has been

commenced.”) (emphasis added); see supra note 4.5 Judicial

5
Although mere delay normally will not be sufficient to
establish prejudice, see Restoration Pres., 325 F.3d at 61, a party
should not be allowed purposefully and unjustifiably to manipulate
the exercise of its arbitral rights simply to gain an unfair
tactical advantage over the opposing party. See Page v. Moseley,
Hallgarten, Estabrook & Weeden, Inc., 806 F.2d 291, 294 n.3 (1st
Cir. 1986) (noting lack of evidence that party invoking arbitration
clause had engaged in “purposeful delay tactic[s]”) (emphasis
added); see also Cabinetree, 50 F.3d at 391 (“There is no plausible
interpretation of the reason for the delay.”); Greene v. Am. Cast
Iron Pipe Co., 871 F. Supp. 1427, 1431 (N.D. Ala. 1994) (finding no

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condonation of such deliberate gamesmanship directly conflicts with

the oft-cited principle that arbitration is “not meant to be

another weapon in the arsenal for imposing delay and costs in the

dispute resolution process.” Menorah Ins., 72 F.3d at 222.

Affirmed.

waiver where “there [was not] any indication in this record that
ACIPCO intentionally delayed the filing of its motion [to compel
arbitration] in order to gain tactical advantage”) (emphasis
added); Hurlbut v. Gantshar, 674 F. Supp. 385, 389 (D. Mass.
1987)(noting that there was no record evidence that party invoking
arbitration clause had engaged in "inexcusable and calculated
dilatory conduct") (emphasis added).

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