Seventh Circuit Addresses Waiver of Right to Arbitrate
The Seventh Circuit’s decision in Brickstructures, Inc. v. Coaster Dynamix, Inc., No. 19-2187 (March 11, 2020), highlights the challenges that a party faces when appealing a district court’s finding that it has waived the right to arbitrate.
The parties in Brickstructures entered into a joint-venture agreement to create a LEGO-compatible model rollercoaster kit. When the collaboration fell to pieces, Brickstructures sued Coaster Dynamix. Citing the joint-venture agreement’s arbitration clause, Coaster Dynamix moved to dismiss the complaint on the ground that venue was improper; however, it withdrew the motion after receiving a letter from Brickstructures threatening to seek sanctions for advancing a frivolous argument. Coaster Dynamix then filed a motion to compel arbitration. The district court denied the motion, holding that Coaster Dynamics had waived its right to arbitrate by withdrawing its earlier motion to dismiss. Coaster Dynamix immediately appealed.
Before turning to the merits of the appeal, the panel comprising Judges Easterbrook, Rovner, and Scudder addressed appellate jurisdiction under the Federal Arbitration Act (“FAA”), which allows interlocutory appeals from “an order … denying a petition under section 4 of this title to order arbitration to proceed,” 9 U.S.C. § 16(a)(1)(B). The court deemed it irrelevant that Coaster Dynamix had styled its motion to compel arbitration as a challenge to venue rather than as a petition under § 4 of the FAA: “Whatever it was called, Coaster Dynamix’s motion to compel arbitration was in substance a motion under § 4 of the FAA, so we have jurisdiction and can proceed to the merits.”
On the merits, the court had no trouble affirming the district court’s finding of waiver. Noting that a party waives its right to arbitrate by acting in a manner inconsistent with that right, the court held that Coaster Dynamix’s withdrawal of its motion to dismiss for improper venue was “a litigation choice inconsistent with the right to arbitrate.” In reaching this conclusion, the court rejected Coaster Dynamix’s argument that the ultimate finding of waiver is a legal question subject to de novo review. De novo review, the court explained, is appropriate only if there is a contention that the district court misunderstood the applicable law. In all other cases, the appellate court will defer to the district court’s waiver determination, which is “an intensely fact-bound question” subject to review only for clear error. The court also summarily rejected Coaster Dynamix’s argument that it should be allowed to rescind its waiver, emphasizing that whether to allow rescission also rests squarely within the district court’s discretion.
Brickstructures provides a good reminder that a party seeking review of a finding that it waived the right to arbitrate faces an uphill battle. While the FAA allows an immediate appeal, the applicable standard of review means that the district court’s decision will almost always be affirmed.
Under these circumstances, the best bet is to avoid waiver in the first instance. As Brickstructures acknowledges, a motion to compel arbitration need not be “the first thing … file[d] on the docket,” but parties should not adopt a “wait-and-see” approach or otherwise strategically delay asserting the right to arbitrate. If they do, they risk a finding of waiver that is unlikely to be reversed on appeal.