A party to a litigation may lose its right to arbitrate a dispute

A party to a litigation may lose its right to arbitrate a dispute if it delays in demanding arbitration

By John Paul, Brian Kacedon, Cecilia Sanabria, and Ryan McDonnell

Edited by John Paul, Brian Kacedon, and Cecilia Sanabria

Abstract: A defendant waived his right to arbitrate a royalty dispute because he (1) knew about an existing right to compel arbitration, (2) acted inconsistently with that right in a related litigation and (3) prejudiced the party opposing arbitration by delaying in seeking arbitration and causing resources to be spent in litigation before seeking arbitration.

Background

Sgromo owned intellectual property rights to a 3-D vision system for pools and an inflatable landing that attached to a water slide. Sgromo assigned these rights to Scott and Eureka (a company with Scott as a sole member) and remained a consultant who had full authority to enter into license agreements with third parties on behalf of Eureka. Under that authority, Sgromo licensed the intellectual property rights to Bestway.

Less than a year later, Sgromo and Bestway disagreed about the exclusivity of the two license agreements, resulting in Eureka suing Bestway. Before Eureka settled the suit, Sgromo made claims to royalties under the agreement and initiated binding arbitration against Scott.

Bestway agreed to put the royalties due under the agreement in an escrow account pending arbitration.

While Scott and Sgromo attended mediation, communications broke down and Sgromo refused to continue to participate in the process. Bestway terminated both agreements and brought an action to interplead Scott, W&B, Sgromo, and Eureka to determine who owned royalties. W&B and Sgromo refused to answer, and Bestway, Scott, and Eureka asked the court to resolve the royalty dispute on summary judgment.

Sgromo filed a Notice of Arbitration, seeking to dismiss Bestway's suit and have the dispute resolved by arbitration under an existing arbitration agreement between the parties.

Trial Court Decision

The court found Sgromo waived his right to arbitrate based on its litigation conduct, because: (1) Sgromo knew it had a right to compel arbitration; (2) acted inconsistently with that existing right; and (3) prejudiced the parties opposing arbitration with those inconsistent acts.

First, Sgromo's knowledge of an existing right to compel arbitration was evident from the "Demand for Arbitration" form he attached to the Notice he filed with the court. His previous attempt at initiating arbitration with Scott, which Sgromo later abandoned, further proved Sgromo's knowledge.

Second, Sgromo acted inconsistently with his right to compel arbitration. He failed to compel arbitration earlier despite having several chances to do so, refused to participate in the lawsuit by failing to answer the complaint and the pending summary judgment motion, and further abandoned the prior arbitration with Scott.

Third, the court found that compelling arbitration at this point in the proceeding would result in harm to the other parties. Bestway, Scott, and Eureka all spent resources trying to resolve the royalty dispute through litigation, and if the court now decided to compel arbitration at Sgromo's request, those resources would be wasted, and the parties would be no closer to resolving the royalty dispute. Because all three requirements were present, the court found Sgromo waived his right to compel arbitration.

With Sgromo's motion to compel arbitration resolved and no response from Sgromo on Scott's and Eureka's motion for summary judgment, the issues raised by the motion were left undisputed and the court awarded the royalties to Scott.

Strategy and Conclusion

A party to a litigation may lose its right to arbitrate a dispute if it delays in demanding arbitration and prejudices other parties by allowing the litigation to proceed and consume time and other resources. .
The Bestway decision can be found here.

Editors and Authors

The editors and authors are attorneys at Finnegan, Henderson, Farabow, Garrett & Dunner, LLP.

John Paul               john.paul@finnegan.com
Brian Kacedon      brian.kacedon@finnegan.com
Cecilia Sanabria     cecilia.sanabria@finnegan.com
Ryan McDonnell    ryan.mcdonnell@finnegan.com

This article is for informational purposes and does not constitute legal advice. The views expressed do not necessarily reflect the views of LES or Finnegan.