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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