United States Court of Appeals
For the First Circuit
No. 03-2221
IN RE CITIGROUP, INC., CAPITAL ACCUMULATION PLAN LITIGATION,
WILLIAM LOMAS, On Behalf of Himself
and All Others Similarly Situated,
Plaintiffs, Appellees,
v.
TRAVELERS PROPERTY CASUALTY CORP.,
Defendant, Appellant.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Robert E. Keeton, U.S. Senior District Judge]
Before
Torruella, Circuit Judge,
Gibson,* Senior Circuit Judge,
and Lynch, Circuit Judge.
Thomas J. Dougherty, with whom Kara E. Fay, Michael D.
Blanchard, Skadden, Arps, Slate, Meagher & Flom LLP, Boston Office,
William P. Frank, Seth M. Schwartz, and Skadden, Arps, Slate,
Meagher & Flom LLP, New York Office, were on brief, for appellant.
Nicholas J. Walsh, with whom Michael A. Collora, David A.
Bunis and Dwyer & Collora, LLP, were on brief, for appellees.
July 16, 2004
*
Hon. John R. Gibson, of the Eighth Circuit, sitting by
designation.
TORRUELLA, Circuit Judge. Defendant-appellant Travelers
Property Casualty Corp. ("Travelers") appeals from the district
court's denial of its motion to partially stay or dismiss the class
action as to certain class members under the Federal Arbitration
Act, 9 U.S.C. § 1-16. The district found Travelers had waived by
its conduct any arbitration rights it had. We have jurisdiction
over this interlocutory appeal under 9 U.S.C. § 16. We affirm.
I.
Plaintiff William Lomas ("Lomas") filed a class action in
Connecticut Superior Court in March 2000 on behalf of all former
Connecticut employees of Salomon Smith Barney, Inc. ("SSB");
Salomon Smith Barney Holdings, Inc.; Travelers Group, Inc.; and all
subsidiaries thereof.1 The case was removed to the United States
District Court for the District of Connecticut, and was
consolidated and transferred, along with eleven other actions, to
the United States District Court for the District of Massachusetts
pursuant to an order of the Judicial Panel on Multidistrict
Litigation ("MDL"). The underlying claims in the consolidated
1
Defendants in this case are Citigroup, Inc.; Travelers Group,
Inc.; Salomon Smith Barney, Inc.; and Salomon Smith Barney
Holdings, Inc. Until 1998, Salomon Smith Barney Holdings, Inc.,
the parent of Salomon Smith Barney, Inc., was a subsidiary of
Travelers Group, Inc. In 1998, Travelers Group, Inc. merged with
Citicorp, Inc. to form Citigroup, Inc., the successor in interest
to Travelers Group.
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cases challenge the legality of the forfeiture provisions of the
Capital Accumulation Plan sponsored by Travelers.2
The district court granted class certification on October
26, 2001. The class was defined as
[a]ll former employees of Citigroup, Salomon
Smith Barney, Travelers Group, Inc. or related
and affiliated companies in Connecticut who
participated in the Capital Accumulation Plan
of Citigroup, Inc., Travelers Group, Inc.,
Travelers, Inc., and/or Primerica Corporation
who resigned or who were terminated on or
after March 13, 1994 and as a consequence lost
the right to receive shares of stock and/or
options and/or other earned income under the
terms of the plan upon termination.
On July 23, 2002, the district court granted Travelers's motion to
amend their answer to assert their right to arbitrate as an
affirmative defense.
The class as certified included employees both who were
subject to arbitration and those who were not. Some members of the
class were excluded from arbitration because they were members of
the National Association of Securities Dealers ("NASD"). That is
because under NASD rules, a claim submitted as a class action
"shall not be eligible for arbitration," nor may a member of NASD
2
The plan provides covered employees with the opportunity to
receive a portion of their earnings in awards of restricted stock
in lieu of commissions. Other employees are required to
participate in the plan and receive the stock as part of their
annual discretionary bonus. The awards are subject to two or three
year vesting periods as well as forfeiture of non-vested stock if
the plan participant terminates his or her employment. The class
action challenges the plan's vesting and forfeiture provisions
under Connecticut law.
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seek to enforce an arbitration agreement against another member who
initiated a class action. See NASD Unif. Code of Arbitration §
10301(d). This meant that neither Lomas himself or those class
members subject to NASD rules could be compelled to arbitrate. But
the former Travelers employees who were within the class were not
NASD members, nor was Travelers. Travelers argued that this group
could be compelled to arbitrate their claims.
On May 5, 2003, Travelers moved pursuant to 9 U.S.C. § 3
to partially stay or dismiss the litigation as to any class members
who had arbitrable claims asserted on their behalf by William
Lomas, the lead plaintiff. The district court held that Travelers
had waived its right to arbitration and denied the motion.3
II.
Travelers challenges the district court's determination
that Travelers waived its right to arbitrate any claims with class
members who were covered by the class action certification. "Under
federal law, such a [waiver] is an issue for the judge . . . and
pertinent fact findings by the judge aside (which would be reviewed
for clear error), our review is plenary." Rankin v. Allstate Ins.
Co., 336 F.3d 8, 12 (1st Cir. 2003)(internal citation omitted).
3
The district court also held that the motion to stay should be
denied because it did not provide a precise and clear form of
proposed order specifying the relief sought. Because we agree with
the district court that Travelers waived its right to arbitration,
we do not address that portion of the district court's order.
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Federal policy strongly favors arbitration, see Moses H.
Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24-25
(1983), but parties are not free to invoke arbitration rights at
any time or under any circumstances. A party may waive arbitration
expressly or implicitly. See Restoration Pres. Masonry, Inc. v.
Grove Europe Ltd., 325 F.3d 54, 61 (1st Cir. 2003). In the instant
case, the district court found that Travelers implicitly waived its
right to arbitrate by participating in the litigation, unduly
delaying assertion of its arbitration right, and prejudicing the
plaintiffs.
"If arbitration is invoked in response to a lawsuit, it
must be done early on in the case so resources are not needlessly
deployed." Rankin, 336 F.3d at 13 (citing Menorah Ins. Co., Ltd.
v. INX Reinsurance Corp., 72 F.3d 218, 221 (1st Cir. 1995)).
Travelers argues that it invoked its right to arbitration in a
timely manner, and that when it did so, plaintiffs had not suffered
any prejudice; thus, Travelers argues, it did not implicitly waive
any of its rights as to the arbitrable claims. We disagree.
In this Circuit, no one factor dominates the analytical
framework for determining whether a party has implicitly waived its
right to arbitrate.
In determining whether a party to an
arbitration agreement, usually a defendant,
has waived its arbitration right, federal
courts typically have looked to [1] whether
the party has actually participated in the
lawsuit or has taken other action inconsistent
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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 . . . .
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.
Creative Solutions Group, Inc. v. Pentzer Corp., 252 F.3d 28, 32-33
(1st Cir. 2001)(quoting Jones Motor Co., Inc. v. Chauffeurs,
Teamsters & Helpers Local Union No. 633, 671 F.2d 38, 44 (1st Cir.
1982)). We have emphasized that, to succeed on a claim of waiver,
plaintiffs must show prejudice. See Menorah Ins., 72 F.3d at 221
(quoting Sevinor v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
807 F.2d 16, 18 (1st Cir. 1986)). "Prejudice is relevant to waiver
when it is the product of a defendant's failure to timely invoke
the arbitration procedure." Creative Solutions, 252 F.3d at 33.
When determining whether a defendant prejudicially failed to invoke
arbitration in a timely manner, we consider the larger context of
the litigation. See Restoration Pres. Masonry, 325 F.3d at 61; see
also Navieros Inter-Americanos, S.A. v. M/V Vasilia Express, 120
F.3d 304, 316 (1st Cir. 1997).
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Travelers argues that it timely asserted its right to
arbitration in its motion to amend the complaint on April 17, 2002,
filed six months after the class certification on October 28, 2001.
We disagree. Travelers's April 17, 2002 motion to amend did indeed
articulate its potential intentions to raise the arbitrability of
certain claims as an affirmative defense within the class-certified
action. See Fed. R. Civ. P. 8(c). It was not until Travelers
filed its motion to stay arbitration, however, that Travelers
actually asserted its right to arbitration and to proceedings
extrinsic to the class action. See 9 U.S.C. § 3. Accordingly, in
evaluating the extent of Travelers's delay in initiating
arbitration, we look to the date of the motion to stay on May 5,
2003 rather than the motion to amend on April 17, 2002.
Three full years had elapsed between the filing of the
complaint on March 10, 2000 and the motion to stay. Travelers
argues, however, the claims were not arbitrable until the district
court certified the class in October 2001 because it was prohibited
under NASD rules from compelling arbitration on any pending claim.
See NASD Unif. Code of Arbitration § 10301(d). Even assuming
arguendo that the filing of the complaint did not trigger
Travelers's arbitration rights, the class certification sufficed to
alert Travelers that some of the class members in this action were
covered by the arbitration clause. Thus, Travelers was on
constructive notice that claims were asserted which were subject to
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the arbitration provision for at least eighteen months prior to
filing the motion to stay. There is no excuse for Travelers's
delay in notifying the class members of its intention to seek
arbitration nor for failing to seek arbitration promptly.
"Litigation frequently puts parties to hard choices . . . ."
Navieros, 120 F.3d at 316. Travelers knew its legal rights were
implicated in this class action. "[W]e have . . . recognized that
the very rationale for arbitration may be undercut if a party is
permitted to pursue a claim through the courts and then later claim
a right to arbitration . . . . Accordingly, we have repeatedly held
that a party may, by engaging in litigation, implicitly waive its
contractual right to arbitrate." Id. (citing Menorah Ins., 72 F.3d
at 223)(internal citation omitted). In the context of this case,
the delay of more than three years after the filing of the
complaint and of 18 months after class certification were
sufficient to waive Travelers's right to arbitrate, as long as the
delay was prejudicial to plaintiffs. See Menorah Ins., 72 F.3d at
221-22 (waiver after one year delay).
Plaintiffs claim prejudice due to the delay for several
reasons. First, plaintiffs argue, and we agree, that if the
arbitrable claims are sent to arbitration they may be subject to
new defenses related to the statute of limitations and the
equitable doctrine of laches; and even if the defenses are not
successful, plaintiffs will have to respond to them. Second, the
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class notice was approved by the court in October 2001 and was sent
immediately thereafter. See Hoxworth v. Blinder, Robinson & Co.,
Inc., 980 F.2d 912, 925-26 (3d Cir. 1992)(finding of waiver where
defendants in three class actions agreed to their consolidation).
Finally, plaintiffs argue that they have structured their
litigation as part of a class action regarding the same cause of
action and not as individual actions focused on individual
recovery. In the consolidated cases, the plaintiff class had
already begun taking depositions and were subjects of motions to
compel and motions to seal. In this case, at least fifteen
depositions relevant to the Connecticut class action have been
taken and at least twelve case management conferences were held.
See Restoration Pres. Masonry, 325 F.3d at 61 (stating that there
was prejudice when at least five depositions and thirteen pre-trial
conferences had been held). We believe that the plaintiffs have
shown prejudice.
Travelers argues that virtually all of the discovery
which has taken place is relevant to the claims by class members
not subject to arbitration. As to class members subject to
arbitration, Travelers argues, discovery amounts only to five
narrowly tailored and court-approved interrogatories. Further,
that discovery was available to plaintiffs in arbitration in any
event, so plaintiffs could not have been prejudiced. We believe,
however, the waiver issue must be viewed through the lens of
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Travelers's behavior and the detriment to the plaintiffs as a
result of that behavior. If those claims were the only claims
involved in the litigation Travelers's argument against a finding
of prejudice would carry more weight. Travelers cannot now, after
failing to invoke its arbitration right, rely solely on the
fortuitous number of interrogatories allegedly related to the class
members subject to arbitration. When a defendant has failed to
timely invoke its rights, and during that delay, the litigation has
proceeded into discovery, it cannot, particularly in the context of
a class action, claim that the class members subject to arbitration
will not suffer prejudice. Moreover, we must evaluate this
argument in the context of the entire litigation, not a part of it.
See id.; Navieros, 120 F.3d at 316. Discovery that implicated the
class has begun: at least twelve sets of document requests have
been served and answered; three sets of interrogatories have been
served and answered; and requests for admissions have been served
and answered. See Restoration Pres. Masonry, 325 F.3d at 61.
As stated above, Travelers took advantage of judicial
resources such as depositions and case management conferences and
availed itself of the uniquely judicial process of MDL
consolidation. See id.; Menorah Ins., 72 F.3d at 222 ("To require
that parties go to arbitration despite their having advanced so far
in the court proceedings before seeking arbitration would often be
unfair, for it would effectively allow a party sensing an adverse
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court decision a second chance in another forum."). Thus,
Travelers's argument that plaintiffs are not prejudiced because
only five interrogatories have been answered which are relevant to
the class members with arbitrable claims is unavailing because it
fails to account for two important factors: the costs already
incurred in discovery to both class members with and without
arbitrable claims and the delay in invoking its arbitration rights;
both of which caused the class members with arbitrable claims
prejudice.4
Other litigation activity points to Travelers's implicit
waiver of their right to arbitration. See Jones Motor Co., 671
F.2d at 44 (listing factors other than time and prejudice when
determining whether a party has waived arbitration). Travelers
invoked the litigation machinery by filing a motion for summary
judgment, which was denied without prejudice by the district court
as premature. See id.; see also Ritzel Communications, Inc. v.
Mid-American Cellular Tel., Co., 989 F.2d 966, 969 (8th Cir.
1993)(filing a dispositive motion invokes the litigation
machinery). Travelers sought to certify questions to the
4
Travelers argues that no trial date has been set and that
plaintiffs' trial strategy cannot therefore be implicated. The
trial date cannot currently be set for this matter by the district
judge. See 28 U.S.C. § 1407(a)(stating that once the MDL procedure
is complete, the matters will be remanded to the transferor courts
and set for trial). Given that this is an MDL litigation, we
believe that this argument cannot be successful when viewed in the
context of the litigation proceedings that have already occurred.
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Connecticut Supreme Court and vigorously opposed class
certification. Travelers also filed a compulsory counterclaim
under Fed. R. Civ. P. 13(a) in this lawsuit. See Jones Motor Co.,
671 F.2d at 44 (one factor in determining waiver is "whether the
defendants have invoked the jurisdiction of the court by filing a
counterclaim without asking for a stay of the proceedings").
Travelers cannot overcome the prejudice suffered by plaintiffs due
to the delay in asserting its right to arbitration. Given the
complexity of the litigation, knowing full well the wide-ranging
implications for all parties involved (across several
jurisdictions), Travelers should have acted in a prompt manner to
assert its right to arbitrate claims in issue.
III.
For the reasons stated above, we affirm the district
court's denial of the motion to stay.
Affirmed.
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