In Shalaby v. Arctic Sand Technologies, Inc., 2014 WL 7235830 (Dec. 15, 2014), the Massachusetts Superior Court ruled the defendant lost its right to arbitrate claims asserted by a former employer by filing a motion to dismiss the plaintiff’s complaint and engaging in discovery.
On April 8, 2014, the plaintiff filed suit against her former em- ployer and a current and former officer of the employer, seeking declaratory relief pursuant to an existing stock repurchase agree- ment and alleging violations of Chapter 93A and various torts and contract claims. All of plaintiff’s claims arose out of her termina- tion, which she alleged was without factual or legal basis and in violation of her employment agreement. On September 19, 2014, the defendants filed a motion to dismiss the plaintiff’s com- plaint. The Court partially granted defendants’ motion to dismiss, dismissing all claims against the individual defendants and five of the nine claims against the defendant company.
On October 2, 2014, approximately six months after the suit was filed and after having engaged in discovery, including motions to compel, the plaintiff’s former employer moved to compel binding arbitration pursuant to the terms of the employment agreement. The terms of the plaintiff’s employment agreement explicitly stated that disputes arising from her employment shall be resolved by binding arbitration conducted by JAMS under its then-applicable rules. The defendant asserted the Court lacked jurisdiction over the plaintiff’s remaining claims, as each of them fell within the scope of the employment agreement’s mandatory arbitration clause. The Court disagreed, holding the defendant’s litigation conduct waived its right to arbitrate the dispute. The first question before the Court was whether it or an arbitrator was to decide whether the defendant’s litigation conduct waived its right to arbitrate the dispute. Under Massachusetts law, there is a presumption that all questions regarding the waiver of arbitra- tion are to be determined by a court as opposed to an arbitrator. Citing both the Federal Arbitration Act and Massachusetts law, the Court found an arbitration agreement cannot purport to delegate the issue of waiver by litigation conduct to an arbitrator. And, even if it could, the Court found the defendant failed to show there was “clear and unmistakable evidence of such an intent” in either the employment agreement or the then-applicable JAMS rules adopted by the employment agreement.
The second question before the Court was whether defendant did in fact waive its contractual right to arbitrate the dispute by its litigation conduct. Under Massachusetts law, a party may waive its contractual right to arbitrate a dispute by failing to “properly and timely” assert this right. When “dealing with a forfeiture by inaction (as opposed to an explicit waiver), the components of waiver of an arbitration clause are undue delay and a modicum of prejudice to the other side.” There is no bright-line rule and each case is to be judged on its particular facts.
The Court found the defendant had waived its contractual right to arbitrate the plaintiff’s claims by “deliberately waiting six months before seeking to compel arbitration, and by actively litigating the case in Superior Court in the meantime.” The Court explained, choosing to pursue a motion to dismiss, rather than invoking its right to arbitrate, constituted a “deliberate choice [by the defend- ant] to seek an immediate and
total victory in the parties’ dispute,” and showed the defendant preferred to litigate the plaintiff’s claims in court because the defendant hoped to obtain a swift judgment on the merits. The Court found this deliberate choice constituted waiver of the defendant’s contractual right to arbitrate the dispute.
The Court also found that compelling the plaintiff to submit to arbitration at this juncture in the litigation would result in “far more than a modicum of prejudice” to her. The defendant’s deliberate choice to invoke the court’s jurisdiction caused the plaintiff to not only expend significant resources litigating the matter, but also “caused the opportunity for an expeditious alternative to litigation to be lost.” The Shalaby decision illustrates the risk a party takes when deciding to move to dismiss a complaint notwithstanding a contractual right to compel arbitration. Although a motion to dismiss always is tempting for both counsel and client, before taking this risk, counsel should forewarn a client that if the motion is denied, any chance of arbitrating the dispute may be forever lost.