United States Court of Appeals

Fifth Circuit



## FILED

September 13, 2004

Charles R. Fulbruge III

Clerk UNITED STATES COURT OF APPEALS

FIFTH CIRCUIT

____________

No. 03-11156

____________

REPUBLIC INSURANCE COMPANY,

Plaintiff - Counter Defendant - Appellant,

versus

PAICO RECEIVABLES LLC,

Defendant - Counter Claimant - Appellee.

Appeal from the United States District Court

For the Northern District of Texas

Before DAVIS, EMILIO M. GARZA, and PRADO, Circuit Judges.

EMILIO M. GARZA, Circuit Judge:

Republic Insurance Company (“Republic”) appeals the district court’s denial of its motion to

compel arbitration of its contract dispute with PAICO Receivables, LLC (“PRLLC”) . Republ i c

claims that the district court incorrectly ruled that it waived it s right to arbitrate its dispute with

PRLLC. We find that Republic substantially invoked the judicial process to the prejudice of PRLLC,

and the district court properly found that Republic had waived its right to arbitrate.

I1 Pan Atlantic and PRLLC used the term “possessio n and control” in the assignment

agreement, and we use that term here for convenience. In the assignment agreement, Pan Atlantic

assigned to PRLLC all righ t , t itle and interest that it had to recover under certain reinsurance

agreements that were either in its “possession or control” or in the “possession or control” of most

third parties. This assignment specifically includes all of Pan At lantic’s reinsurance contracts that

were in the possession or control of Republic.

-2- Republic was party to a reinsurance agreement between a group of insurance companies. This

group included the United Kingdom insurer Pan At lant ic Insurance Company (“Pan Atlantic”).

Arbitration of a dispute between the members of that group resulted in a Settlement Agreement. The

Settlement Agreement defines the rights and obligations of the group members with respect to various

reinsurance agr eements. This Settlement Agreement contains an arbitration clause compelling

arbitration of any disputes bet ween the parties to that agreement. Pan Atlantic subsequently

encountered financial difficult y and entered into provisional liquidation pursuant to United Kingdom

law. As part of this provisional liquidation, Pan Atlantic assigned its rights to recover under certain

reinsurance contracts to PRLLC. This assignment includes Pan Atlantic’s reinsurance agreements

“in the possession or control” of Republic. 1 The assignment agreement expressly st at es t hat Pan

Atlanti c was no t transferring any of its obligations to PRLLC. After this assignment, PRLLC

unsuccessfully sought to enforce Pan Atlantic’s rights under the Settlement Agreement against

Republic.

Republic subsequently filed suit in federal d ist rict court seeking a declaration that the

assignment of Pan Atlantic’s rights under the Settlement Agreement to PRLLC was invalid because

Pan Atlantic did not obtain Republic’s written consent to the assignment. In the alternative, Republic

so ught a declaration that the assignment also transferred Pan Atlantic’s obligations under t he

Settlement Agreement t o PRLLC. Republic did not include an alternative pleading asserting its-3-

arbitration rights under the Settlement Agreement. PRLLC’s answer included counterclaims alleging

that Republic had breached the Settlement Agreement and also that Republic had breached the

fiduciary duties it allegedly owed to PRLLC under that agreement. Republic asserted nine affirmative

defenses in response to PRLLC’s co unt erclaims, but it still did not assert its right to arbitrate

PRLLC’s counterclaims.

The parties then conducted full-fledged discovery, and Republic actively participated in this

process. The discovery enco mpassed all of the claims and counterclaims in the case and was not

limited to the issue of whether Pan Atlantic’s assignment to PRLLC was valid. Republic filed two

separate motions to compel discovery from PRLLC seeking, at least in pa rt, inform ati on that was

only relevant to PRLLC’s counterclaims. In response to Republic’s first motion to compel discovery

PRLLC filed a motion for a protective order. This motion asked the district court to limit the parties’

init ial discovery to the issue of whether PRLLC’s assignment from Pan Atlantic was valid. Republic

opposed this motion, arguing that all of the issues, including PRLLC’s counterclaims, were before

the district court and properly the subject of discovery. The district court granted the majority of

Republic’s first motion to compel discovery and denied PRLLC’s motion for a protective order. The

parties also conducted four depositions as part of the discovery process.

Republic then filed an amended complaint, which included another alternative pleading asking

the district court to declare that an event of default had occurred under the Settlement Agreement

and to appoint Republic as PRLLC’s attorney-in-fact. The parties filed cross-motions for summary

judgment on all three of the issues contained i n Republic’s first amended complaint. The district

court ruled that Pan Atlantic had validly assigned its rights under the Settl em ent Agreem

ent to

PRLLC; that PRLLC had also assumed Pan Atlantic’s obligations under the Settlement Agreement;-4-

and that Republic was not entitled to be appointed as PRLLC’s attorney-in-fact. The district court’s

order indicates that the only issues remaining in the case were PRLLC’s counterclaims. After the

district court ruled on the summary judgment motions, the parties completed discovery and filed their

required pretrial materials. Republic objected to portions of the depositions that PRLLC designated

in its pretrial materials. Republic also filed an extensive motion in limine in an attemp t to limit the

evidence that PRLLC could present during the trial on the merits of its counterclaims. Republic still

did not indicate that it wished to arbitrate PRLLC’s counterclaims.

Days before the trial was originally scheduled to begin, Republic, for the first time, asserted

its right to arbitrate under the Settlement Agreement by filing its motion to stay the proceedings and

compel arbitration of PRLLC’s counterclaims. The district court denied this mo t io n, ruling that

Republic had waived its right to arbitrate. The district court found that PRLLC wo uld be “sorely

prejudiced” if it compelled arbitration at this late date because “[i]n addition to incurring very

significant legal fees, PRLLC has participated in full-fledged discovery, expert preparation, and trial

preparation.” The district court denied Republic’s motion to reconsider, and this appeal followed.

II

We have jurisdiction over this interlocutory appeal because Republic seeks review of a district

court order refusing to stay the proceedings and compel arbitration when there is a written agreement

to arbi trate. See Green Tree Fin. Corp.-Ala. v. Randolph

, 531 U.S. 79, 86 (2000); 9 U.S.C. § 16

(a)(1)(A), (B). We review whether a party’s conduct amounts to a waiver of arbitration d e novo

, but

we review any factual findings underlying the district court’s waiver determination for c l ear error.

Subw ay Equip. Leasing Corp. v. Forte , 169 F.3d 324, 326 (5th Cir. 1999).

“Waiver will be found when the party seeking arbitration substantially invokes the judicial-5-

process to the detriment or prejudice of the other party.” S ubway

, 169 F.3d at 326 (quoting Miller

Brewing Co. v . Fort Worth Distrib. Co. , 781 F.2d 494, 497 (5th Cir. 1986)). There is a strong

presumption against finding a waiver of arbitration, and the party claiming that the right to arbitrate

has been waived bears a heavy burden. Subway , 169 F.3d at 326.

A

To invoke the judicial process “[t]he party must, at the very least, engage in some overt act

in court that evinces a d esire to resolve the arbitrable dispute through litigation rather than

arbitration.” S ubway

, 169 F.3d at 329. Further, “a party only invokes the judicial pro cess to the

extent it litigates a specific claim it subsequently seeks to arbitrate.” I d

. at 328. The district court

found that Republic invoked the judicial process by waiting to file its motion to compel arbitration

until days before the trial was originally scheduled to begin.

Republic undertook extensive litigation activities before asserting its right to arbitrate under

the Settlement Agreement. It answered PRLLC’s counterclaims; conducted full-fledged discovery,

including four depositions; amended its complaint; and filed the required pretrial materials with the

district court. In addition, before Republic filed its motion to compel arbitration, it filed numerous

other motions, including: two motions to compel discovery, a motion for summary judgment, and a

motion in limine attempting to limit the evidence that PRLLC could produce at trial. Republic thus

demonstrated “a desire to r eso lve the arbitrable dispute through litigation rather than arbitration.”

Id

. at 329; cf

. Price v. Drexel Burnham Lambert, Inc

., 791 F.2d 1156, 1159, 1162 (5th Cir. 1986)

(holding that the party moving for arbitration had waived that right because it had “initiated extensive

discovery, answered twice, filed motions to dismiss and for summary judgment, filed and obtained

two extensions of pre-trial deadlines, all without demanding arbitration”).-6-

Republic, however, argues that it did not waive its right to arbitrate because its conduct was

reasonable for a plaint iff seeking a judgment declaring that PRLLC, as Pan Atlantic’s assignee, was

not a party to the Settlement Agreement, which contained the arbitration agreement. Republic claims

that, because of the terms of PRLLC’s agreement with Pan Atlantic, Republic was unable to assert

its arbitration rig ht s under the Settlement Agreement until after the district court determined that

PRLLC was bound by the obligations of that agreement. “The propriety and desirability of having

an init ial judicial determination of whether an arbitration contract exists is well recognized.” G en.

Guar. Ins. Co. v. New Orleans Gen . Agency

, I nc.

, 427 F.2d 924, 928 (5th Cir. 1970). PRLLC

concedes that Republic did not waive its arbitration rights by asking the district court to determine

whether Pan Atlantic validly assigned its rights to P RLLC. Instead PRLLC argues that waiver

occurred because Republic invoked the judicial process for all of the issues in this case, including

those subject to arbitration, rather than limit ing its pretrial activity to the threshold question of

whether there was a valid agreement to arbitrat e. “A defendant can waive arbitration by actions

which it takes during determination in the legal forum of the thresho ld issue o f existence of an

arbitration contract, if those actions are sufficiently inconsistent with the right to arbitrate.” I d

. at

929. However, “it loses sight of the purposes and effects of arbitration, and of the desirability of the

init ial judicial determination, to treat the court proceedings as a sort of judicial tightrope which the

party seeking arbitration walks at his peril.” Id

. G eneral Guaranty turned on the fact that the

defendant included an alternative pleading asserting its right to arbitrate under the disputed contract

in its init ial response to the lawsuit. I d

. at 926. The defendant’s timely assertion of its arbitration

rights allowed the district court to dispose of the matters before it in an orderly fashion, preserving

the time and effort of the court and the parties. Id . at 929.2 PRLLC argues that Republic waived its right to arbitrate by invoking the judicial process

with regard to the two alternative pleadings included in Republic’s amended complaint because the

issues addressed in those alternat ive pleadings were properly the subject of arbitration. Republic

argues that it did not waive its right to arbitrate by including these alternative pleadings because it

believed that it could not assert that right without a judicial ruling that Pan Atlantic also assigned its

obligations under the Settlement Agreement, including the obligation to arbitrate disputes, to PRLLC.

Republic also claims that it did not waive its right to arbitrate by asking the district court to declare

that an event of default under the Settlement Agreement h ad o ccurred and to appoint Republic as

PRLLC’s attorney-in-fact because th a t action was permitted by the terms of the Settlement

Agreement. We need not address these issues in light of our conclusion that Republic invoked the

judicial process with regard to PRLLC’s counterclaims, the very issues it now seeks to arbitrate.

-7- In contrast, Republic did not assert its right to arbitrate in a t imely fashion, which prevented

the district court from limit ing the judicial proceedings to the threshold question of whether a valid

agreement to arbitrate exist s. Furt her, Republic chose to oppose actively PRLLC’s motion for a

protective order. In that motio n PRLLC asked the district court to determine the narrow issue of

whether PRLLC’s assignment from Pan Atlantic was valid before full-fledged discovery regarding

the other issues in the case was conducted. Republic argued that a protective order was unnecessary

because all of the issues, including PRLLC’s counterclaims, were properly before the district court.

Rep ublic t hus chose to invoke the judicial process with respect to all of the issues in this case,

includi ng t he issues which it now seeks to arbitrate. Accordingly, the district court finding that

Republic invoked the judicial process by waiting until days before the trial on PRLLC’s counterclaims

was scheduled to begin is not clearly erroneous. 2

B

In addition to the invocation of the judicial process, there must be prejudi ce to the party

opposing arbitration before we will find that the right to arbitrate has been waived. “[F]or purposes

of a waiver of an arbitration agreement: ‘prejudice

. . . refers to the inherent unfairness )) in terms of

delay, expense, or damage to a party’s legal position )) that occurs when the party’s opponent forces-8-

it to litigate an issue and later seeks to arbitrate that same issue.’” Subway

, 169 F.3d at 327 (quoting

Doctor’s Assocs. v. Distajo

, 107 F.3d 126, 134 (2d Cir. 1997)) (omission in original). Ultimately,

however, “[t]he question of what constitutes a waiver of the right of arbitration depends on the facts

of each case.” Tenneco Resins, Inc. v. Davy Int’l, AG , 770 F.2d 416, 420 (5th Cir. 1985).

Three factors are particularly relevant when making a prejudice determination. S ee Price

, 791

F .2d at 1159, 1162 (affirming the district court’s finding that the “‘mounting attorn ey’s fees,’

‘seventeen month delay’ [before asserting the right to arbitrate], and ‘disclosure which has resulted

from the numerous depositions and producti on of do cuments’ constituted prejudice sufficient” to

support the waiver of arbitration). First, while discovery relating to non-arbitrable claims is not

prejudicial, where the pretrial activity was related to all of the parties’ claims, including those that

were conceded to be arbitrable, arbitration would result in prejudice. I d

. at 1159. Second, the time

and expense incurred in defending against a motion for summary judgment could prejudice the party

opp osing arbitration. I

d

. at 1162. Third, a party’s failure to timely assert its right to arbitrate a

dispute is also relevant to the prejudice determination. Id . at 1161.

“While the mere failure to assert the right to demand arbitration does not alone translate into

a waiver of that right, such failure does bear on the question of prejudice, and may, along with other

considerations, require a court to conclude that waiver has occurred.” I d

. (internal citations omitted).

The failure to demand arbitration affects the burden placed upon the party opposing waiver. When

a t imely demand for arbitration was made, “the burden of proving waiver falls even more heavily on

the shoulders of the party seeking to prove waiver.” Tenneco Resins, 770 F.2d at 420 (internal

quo t at io ns omitted). “A demand for arbitration puts a party on notice that arbitration may be

forthcoming, and therefore, affords that party the opportuni ty to avoid compromising its position with-9-

respect to arbitrable and nonarbitrable claims.” P rice

, 791 F.2d at 1161. In contrast, “where a party

fails to demand arbitration

. . ., and, in the meantime engages in pretrial activity inconsistent with an

intent to arbitrate, the party later opposing a motion to compel arbitration may more easily show that

its position has been compromised, i.e., prejudiced.” Id

.

The district court found that PRLLC woul d be “so rely prejudiced” if arbitration was

compelled because it had incurred “very significa nt legal fees” and had also “participated in fullfledged discovery, expert preparation, and trial preparation.” The discovery in t his case was not

limit ed solely to the nonarbitrable claims. The parties also conducted discovery relating to the issues

that Republic now seeks to arbitrate, including PRLLC’s counterclaims. S ee Price

, 791 F.2d at 1159-

60 (finding prejudice resulting from the discovery relating to arbitrable issues). Republic’s delay also

forced PRLLC to incur all of the costs associated with litigating its defenses and counterclaims with

the exception of the trial itself. PRLLC thus bore more costs than was sufficient to cause prejudice

in Price

. S ee Price

, 791 F.2d at 1162 (finding that the time and expense associated with merely

defending against a summary judgment motion was sufficiently prejudicial to waive arbitration).

Republic cites a number of cases where the party seeking arbitration participated in litigation

before seeking ar bit ration without waiving its arbitration rights. In each of these cases the party

asserted its right to arbitrate in a timely fashion, and only a minimal amount of discovery regarding

the arbitrable issues occurred before the right to arbitrate was asserted. See

, e.g.

, Tenneco Resins

,

770 F.2d at 420-21 (holding that arbitration was not waived where the right to arbitrate was asserted

in the original answer to the case and only a minimal amount of discovery actually occurred before

the motion to compel was filed); Texaco Exploration

, 243 F.3d at 912 (holding that arbitration was

not waived by requesting a stay of arbitration pending the litigation of other issues, even when this-10-

delayed and narrowed the scope of the arbitration, where the party seeking arbitration did not indicate

any desire to litigate the issues that were subject to the arbitrati on); C argill Ferrous Int’l v. Sea

Phoenix MV

, 325 F.3d 695, 700-01 (5th Cir. 2003) (holding that arbitration was not waived even

though the parties had conducted full discovery and had a bench trial on the merits after the district

court refused to compel arbitration, when the party seeking arbitration asserted that right in its init ial

answer and file d a mo t io n t o compel arbitration six months later when only a minimal amount of

discovery had occurred). All of these cases are distinguishable because Republic did not assert its

right to arbitrate in a timely manner.

The prejudice that PRLLC would suffer if arbitration was compelled is similar to the level of

prejudice present in previous cases where this Court has found that arbitration was waived. S ee

, e.g.

,

Price

, 791 F.2d at 1159. Further, the facts o f t his case are easily distinguished from those cases

where arbitration was not waived. See

, e.g.

, Cargill Ferrous , 325 F.3d at 700-01. Consequently,

the d ist rict court’s finding that PRLLC would suffer prejudice if arbitration was compelled is not

clearly erroneous.

III

Republic also claims that the district court’s waiver ruling is erro neo us because it is

inconsistent with the terms of the Settlement Agreement. The Settlement Agreement includes a “no

waiver” provision that stat es: “The institution and maintenance of an action for judicial relief, the

pursuit of provisional or ancillary remedies or other remedies provided for in this Agreement or the

Related Settlement Documents shall not be deemed a waiver of a party’s right to demand arbitration

or to continue arbitration.” Republic argues that the terms of this provision permit it to seek

provisional relief and self help remedies without waiving its arbitration rights, that its actions in this-11-

case were consistent with that provision, and t herefore, that its actions do not support the district

court’s waiver ruling. We have not previo usly determined whether a contractual “no waiver”

provision prevents a district court from ruling that a party has waived its arbitration right.

The Second Circuit has considered whether a similar “no waiver” provision prevents

district court’s from finding that a party waived its right to arbitrate. See Company of Kingston v.

Latona Trucking Inc , 159 F.3d 80, 85 (2d Cir. 1998). The arbitration clause in Latona Trucking

incorporated a “no waiver” provision that stated: “No judicial proceeding by a party relating to

the subject matter of the arbitration shall be deemed a waiver of the party’s right to arbitrate.” Id

.

This clause was understood to “permit parties to seek provisional remedies or other judicial

proceedings that would not function to displace arbitration on the underlying dispute.” Id

.

(collecting cases with similar interpretations). Latona Trucking held that “the fact that an

arbitration agreement incorporates such a provision would not prevent a court from finding that a

party has waived arbitration by actively participating in protracted litigation of an arbitrable

dispute.” Id . The Second Circuit concluded that allowing a contractual clause to preclude a

finding of waiver would:

permit parties to waste scarce judicial time and effort and hamper

judges’ authority to control the course of proceedings before them

and to correct any abuse of those proceedings and then demand

arbitration. Further, delay in demanding arbitration until after

judicial proceedings are almost complete permits the losing party to

test [ ] the water before taking the swim.

Id . at 86 (quotation omitted, omission in original). The court held “that the presence of [a] ‘no

waiver’ clause does not alter the ordinary analysis undertaken to determine if a party waived its

right to arbitration.” Id

.

While we have not previously addressed the impact of a “no waiver” provision in-12-

arbitration, the district court’s inherent power to control its docket is well settled. See, e.g.

Marinechance Shipping, Ltd. v. Sebastian , 143 F.3d 216, 218 (5th Cir. 1998). Republic’s actions

in this case present the quintessential example of the potential abuses of contractual “no waiver”

clauses described by the Second Circuit. Republic forced PRLLC to litigate the issues presented

in its counterclaims, and then moved to compel arbitration of those issues on the eve of trial.

Republic’s delay forced the district court and PRLLC to expend significant resources preparing

this case for trial. The inclusion of a “no waiver” clause in a contract does not eliminate the

district court’s inherent power to control its docket. In this case the Settlement Agreement’s “no

waiver” clause is not sufficient to overcome the district court’s exercise of its inherent authority in

light of Republic’s extensive use of the judicial process.

IV

The facts support the district court’s finding that Republic invoked the judicial process to

the prejudice of PRLLC. The district court’s ruling that Republic waived its right to arbitrate

under the Settlement Agreement is AFFIRMED.