Opinion ID: 705070
Heading Depth: 3
Heading Rank: 2

Heading: Waiver of Right to Pursue Arbitration

Text: 71 The district court held that regardless of whether the leasing companies were DAI's alter egos, DAI had not waived its right to compel arbitration under the franchise agreement. On the one hand, if the leasing companies were not DAI's alter egos, then their pursuit of eviction proceedings against the franchisees could not be imputed to DAI. On the other hand, even if the leasing companies were DAI's alter egos, DAI nevertheless invoked its arbitration rights as soon as it was named a party in the various state court actions commenced by the franchisees. Somewhat opaquely, the court held that DAI cannot be held to have waived a right of arbitration by an after-the-fact holding that it is the alter ego of the leasing companies. We disagree. 72 There is no authority to support the notion that a party is liable for acts of its alter ego only if a court has previously found that an alter-ego relationship exists. As we have explained in the context of contractual liability, it is clear that the consequence of applying the alter ego doctrine is that the corporation and those who have controlled it without regard to its separate entity are treated as but one entity, and ... the acts of one are the acts of all. Fisser v. International Bank, 282 F.2d 231, 234 (2d Cir.1960) (holding parent corporation bound to arbitrate, where its alter-ego instrumentality signed arbitration agreement); see also Interocean Shipping Co. v. National Shipping & Trading Corp., 523 F.2d 527, 539 (2d Cir.1975) (holding that company may be compelled to arbitrate even if not party to agreement containing arbitration clause, where company is alter ego of another party that clearly is subject to arbitration), cert. denied, 423 U.S. 1054, 96 S.Ct. 785, 46 L.Ed.2d 643 (1976). We believe that this principle applies with equal force in the present context. If DAI and its leasing companies should be treated as one and the same, then the initiation of eviction proceedings by the leasing companies must be imputed to DAI. 73 There remain two further questions: (1) whether the district court or the arbitrators should determine the waiver issue, and (2) what standard should be used by the appropriate decisionmaker. As to the first question, we note that the defense of waiver is generally referable to the arbitrators in cases involving petitions to compel under Sec. 4 of the FAA--with one important exception which we shall shortly explain. In World Brilliance Corp. v. Bethlehem Steel Co., 342 F.2d 362 (2d Cir.1965), we squarely held that issues of waiver, like issues of fraud in the inducement of the entire contract, were properly resolved by the arbitrators, not the district court. Id. at 364-65. In reaching this conclusion, we pointed out that Sec. 2 of the FAA makes an arbitration agreement enforceable  'save upon such grounds as exist at law or in equity for the revocation of any contract.'  Id. at 364 (quoting 9 U.S.C. Sec. 2). Waiver, we explained, does not constitute a ground for revocation of a contract within the meaning of Sec. 2, and thus is not a basis for invalidating an arbitration contract. Id. Likewise, we explained that under Sec. 4, a court is required to grant a petition to compel arbitration except where a question of fact exists as to (1) the making of the arbitration agreement or (2) the failure, neglect, or refusal of another [i.e., the respondent to the Sec. 4 petition] to arbitrate. Id. at 364-65 (quoting 9 U.S.C. Sec. 4 (emphasis added)). Because acts by the petitioner constituting waiver of the right to arbitrate did not fall within either of these enumerated categories, a district court cannot refuse to order arbitration under Sec. 4 on a theory of waiver. Id. at 365. We reaffirmed this restrictive interpretation of Sec. 4 in Trafalgar Shipping Co. v. International Milling Co., 401 F.2d 568, 571 (2d Cir.1968), where we held that most questions regarding the defense of laches should be decided by the arbitrators, not the courts. In that case, we repeated that [t]he only issues which the court is authorized to consider on a motion to compel arbitration are ones which pertain to 'the making of the arbitration agreement or the failure, neglect, or refusal to perform the same,'  id. at 571, and that the latter phrase referred to the failure of the respondent in a Sec. 4 action to submit to arbitration, id. at 572. 74 Our decision in World Brilliance did not call into question, however, a parallel line of cases that considers waiver to be an equitable defense to a stay application under Sec. 3 of the FAA, which a court is empowered to consider. Section 3 authorizes a court to stay proceedings pending arbitration, providing the applicant for the stay is not in default in proceeding with such arbitration. 9 U.S.C. Sec. 3. For example, in Kulukundis Shipping Co. v. Amtorg Trading Corp., 126 F.2d 978 (2d Cir.1942), a defendant sought to amend his answer nine months into the litigation and two months before trial, raising for the first time the defense that the case was arbitrable. Id. at 986. We construed the defendant's motion to amend as an application for a Sec. 3 stay of proceedings. Id. at 986 n. 29. We explained that the proviso in Sec. 3--that a stay shall be granted providing the applicant for the stay is not in default in proceeding with such arbitration--referred to a party who, when requested, has refused to go to arbitration or who has refused to proceed with the hearing before the arbitrators once it has commenced. Id. at 989. We also noted with approval that, in other courts, 75 [a] plaintiff who brought suit on a contract, without seeking to avail himself of its arbitration clause, has been held to have waived his rights thereunder, so that he could not subsequently, after a long delay, ask the court, under Section 3, to stay the action pending arbitration. 76 Id. We also indicated our agreement with a Fourth Circuit decision finding waiver of the right to arbitrate by a counterclaim defendant who participated at length in litigation, but on the eve of trial moved for a stay under Sec. 3 of the FAA. Id. (describing Radiator Specialty Co. v. Cannon Mills, Inc., 97 F.2d 318 (4th Cir.1938)). The defendant in Kulukundis did not waive its right to arbitrate, we held, because it had not pursued litigation as extensively as had the parties in these other cases. 126 F.2d at 989. 77 We again equated a waiver of the right to arbitrate with a default in proceeding with such arbitration under Sec. 3 in Robert Lawrence, 271 F.2d at 412; see Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir.1968) (deciding waiver issue where defendant moved for stay). The Court of Appeals for the District of Columbia Circuit apparently took the same view, when it explained that 78 [t]he right to arbitration, like any other contract right, can be waived. A party waives his right to arbitrate when he actively participates in a lawsuit or takes other action inconsistent with that right. Once having waived the right to arbitrate, that party is necessarily in default in proceeding with such arbitration. 79