CTI "vigorously pursued full discovery from ARC"
That's an excerpt from an appeals court opinionfor a 1996-1997 case where COII, Johnston, and Secord were in a dispute with another party called ARC regarding sales to China.
I found it interesting that this quote shows that Johnston seems to understand what discovery is all about.
I'll paste the opinion below. The entire opinion is about 2X too long for an SI post, so I'll cut out a bit of the boring stuff in the middle, as indicated with <snip>
NB:
* this case is not as exciting as the rabbit judgment. If you're looking for a bombshell, it probably isn't here.
* After this appeal court ruling, the case eventually went to an arbitrator. I looked at the docket, and I can't tell for sure, but I got the impression that COII won the dispute in the arbitration.
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PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
AMERICAN RECOVERY CORPORATION,
Plaintiff-Appellee,
v.
COMPUTERIZED THERMAL IMAGING,
INCORPORATED; DAVID B. JOHNSTON,
Defendants-Appellants,
No. 96-1207
and
RICHARD V. SECORD; LOOPER, REED,
MARK, AND MCGRAW, INCORPORATED;
DONALD R. LOOPER; FLUOR-DANIEL,
INCORPORATED,
Defendants.
Appeal from the United States District Court
for the Eastern District of Virginia, at Alexandria.
T. S. Ellis, III, District Judge.
(CA-95-1323-A)
Argued: May 6, 1996
Decided: September 3, 1996
Before MURNAGHAN, WILLIAMS, and MOTZ, Circuit Judges.
_________________________________________________________________
Vacated and remanded by published opinion. Judge Williams wrote
the opinion, in which Judge Murnaghan and Judge Motz joined.
_________________________________________________________________
COUNSEL
ARGUED: Wayne Lee Emery, Warsaw, Virginia, for Appellants.
Lovida Hardin Coleman, Jr., SUTHERLAND, ASBILL & BREN-
NAN, Washington, D.C., for Appellee. ON BRIEF: Jay Y. Mandel,
SUTHERLAND, ASBILL & BRENNAN, Washington, D.C., for
Appellee.
_________________________________________________________________
OPINION
WILLIAMS, Circuit Judge:
Computerized Thermal Imaging, Incorporated, and David B. John-
ston (collectively, CTI) appeal from the district court's denial of their
motion for a stay pending arbitration. Relying on Mediterranean
Enterprises v. Ssangyong, 708 F.2d 1458 (9th Cir. 1983), the district
court held that American Recovery Corporation's (ARC) claims
against CTI neither arose out of nor related to the consulting agree-
ment that contained the arbitration clause upon which CTI based its
motion. Concluding that the district court used the improper legal
standard for determining whether ARC's claims were arbitrable, we
hold that ARC's claims against CTI relate to the consulting agree-
ment. Accordingly, we vacate the district court's order denying CTI's
motion for a stay pending arbitration and remand the case to the dis-
trict court for further proceedings.
I.
CTI was a member of a consortium of business firms that formed
a joint venture for the purpose of installing thermal imaging, hospital
services, and related medical technology in a network among the hos-
pitals and medical centers in the Peoples Republic of China. CTI
retained ARC, a corporation that specializes in facilitating national
and international transactions and joint ventures, to provide assistance
in seeking the services of a professional communications engineering
firm for the project.
ARC and CTI memorialized their compact in a consulting agree-
ment. The agreement provided that ARC would introduce representa-
tives of a professional communications engineering firm to CTI or
another member of the consortium with the ultimate goal of persuad-
ing the engineering firm to provide its services to the consortium in
2
conjunction with the China venture. In addition to the consulting
agreement with CTI, ARC entered into noncircumvention agreements
with two engineering firms, Fluor-Daniel and Parsons Engineering,
which prevented those engineering firms from negotiating with the
consortium except through ARC. In the consulting agreement, CTI
acknowledged the existence of the noncircumvention agreements and
agreed not to enter into any agreements with engineering firms except
in compliance with the consulting agreement and the noncircumven-
tion agreements. Additionally, the consulting agreement contained an
arbitration clause that provided that "[a]ny dispute, controversy, or
claim arising out of or related to this Consulting Agreement shall be
resolved by binding arbitration." (J.A. at 132.)
The consulting agreement was later amended to provide incentives
to ARC to secure funding for the China project through the sale of
medical identification cards. Finding itself in need of additional
financing, CTI requested that ARC enter negotiations with Electronic
Data Systems (EDS) to contribute capital in addition to systems man-
agement and systems integration services for the China project.
Through the efforts of ARC, CTI obtained the capital it sought from
EDS. Although Richard V. Secord, director, president, and one-third
shareholder of ARC, informed ARC that he was negotiating with CTI
for an amendment to the consulting agreement to compensate ARC
for these efforts, ARC alleges that it never received compensation
from CTI.
Shortly after the negotiation with EDS, Secord resigned as a direc-
tor and officer of ARC and entered into a personal services agreement
with CTI. Pursuant to that agreement, Secord assisted CTI in obtain-
ing a letter of intent from Fluor-Daniel to assist in the China project,
which ARC alleges is in violation of the noncircumvention and con-
sulting agreements.
In July 1995, CTI filed a declaratory judgment action in the United
States District Court for the Southern District of Texas seeking to
have the court declare that Secord's personal services agreement with
CTI did not violate the terms of his stockholder's agreement with
ARC and that CTI owed no compensation to ARC under the consult-
ing agreement. On CTI's motion, that lawsuit was dismissed for lack
of jurisdiction before responsive pleadings were due from ARC. In
3
September 1995, CTI refiled an identical lawsuit in the same district;
ARC successfully moved the district court to dismiss this suit, again
on jurisdictional grounds, before any discovery had taken place.
Later that month, ARC filed a ten-count complaint in the United
States District Court for the Eastern District of Virginia against CTI,
Secord, a law firm that formerly represented ARC (Looper, Reed,
Mark, and McGraw), and Donald R. Looper, the lawyer who negoti-
ated Secord's personal services agreement with CTI. On November
1, CTI filed a notice of arbitration pursuant to the arbitration clause
of the consulting agreement for the three claims 1 ARC asserted
against it: (1) that CTI induced Secord's breach of his fiduciary duty
to ARC; (2) that CTI induced Fluor-Daniel's breach of the noncir-
cumvention agreement; and (3) under a theory of quantum meruit,
that CTI owed ARC compensation for securing financing from EDS
for the China venture. Also on November 1, CTI filed a motion to dis-
miss ARC's Virginia complaint for lack of personal jurisdiction and
improper venue. The district court later denied this motion.
After receiving notice of the arbitration filing on November 10,
ARC informed CTI and the arbitrators of its intent not to participate
in the arbitration proceedings and, on November 22, filed its first dis-
covery requests in the Virginia action. On December 6, CTI answered
ARC's complaint, raising arbitration as an affirmative defense, and
filed a motion pursuant to the Federal Arbitration Act to stay proceed-
ings pending arbitration, see 9 U.S.C.A.S 3 (West 1970) (providing
for a stay of proceedings in the district court upon any issue which
is referable to arbitration under a written arbitration agreement). After
the district court denied the motion to stay, reasoning that ARC's
claims were not within the scope of the arbitration clause, CTI timely
filed this appeal, see 9 U.S.C.A. S 16(a)(1)(A) (West Supp. 1996)
("An appeal may be taken from an order refusing a stay of any action
under section 3 of this title . . . .").
Before us, CTI raises three issues: (1) whether the district court
erred in denying CTI's motion to stay proceedings pending arbitra-
_________________________________________________________________
1 The parties to the lawsuit do not dispute that the other seven claims,
lodged by ARC against Secord, Looper, and the law firm, do not fall
within the scope of the arbitration clause and are thus not arbitrable.
4
tion; (2) if we determine that the district court erred in denying the
stay, whether CTI waived its right to the stay pending arbitration; and
(3) if we determine that the district court erred in denying the stay and
that CTI did not waive its right to that stay, whether we should
remand this case to the district court with the direction to stay the
non-arbitrable claims pending the resolution of the arbitration pro-
ceedings. We address each of CTI's contentions in turn.
II.
CTI contends that the district court erred in denying its motion to
stay proceedings pending arbitration. In contesting the ruling of the
district court, CTI argues that the district court incorrectly concluded
that the claims ARC asserts did not fall within the scope of the arbi-
tration clause of the consulting agreement. We review de novo the
district court's conclusions regarding the arbitrability of the disputes
between ARC and CTI. See Kansas Gas & Elec. Co. v. Westinghouse
Elec. Corp., 861 F.2d 420, 422 (4th Cir. 1988). After briefly review-
ing the governing principles that guide a court in determining whether
a dispute is arbitrable, we find that the district court applied the incor-
rect legal standard in reaching its decision and conclude that each of
ARC's claims falls within the scope of the arbitration clause of the
consulting agreement.
A.
Whether a party has agreed to arbitrate an issue is a matter of con-
tract interpretation: "[A] party cannot be required to submit to arbitra-
tion any dispute which he has not agreed so to submit." United
Steelworkers of America v. Warrior & Gulf Navigation Co., 363 U.S.
574, 582 (1960). Nevertheless, the Supreme Court has announced its
"healthy regard for the federal policy favoring arbitration" and has
explained that the Federal Arbitration Act, 9 U.S.C.A. SS 1-16 (West
1970 & Supp. 1996), "establishes that, as a matter of federal law, any
doubts concerning the scope of arbitrable issues should be resolved
in favor of arbitration, whether the problem at hand is the construction
of the contract language itself or an allegation of waiver, delay, or a
like defense to arbitrability." Moses H. Cone Memorial Hosp. v. Mer-
cury Constr. Co., 460 U.S. 1, 24-25 (1983). To that end, "the heavy
presumption of arbitrability requires that when the scope of the arbi-
5
tration clause is open to question, a court must decide the question in
favor of arbitration." Peoples Sec. Life Ins. Co. v. Monumental Life
Ins. Co., 867 F.2d 809, 812 (4th Cir. 1989). Thus, we may not deny
a party's request to arbitrate an issue "unless it may be said with posi-
tive assurance that the arbitration clause is not susceptible of an inter-
pretation that covers the asserted dispute." Warrior & Gulf
Navigation Co., 363 U.S. at 582-83. Having established our principles
for review, we turn to CTI's arguments.
<snip>
Next, ARC argues that by failing to raise arbitration as an affirma-
tive defense in the Eastern District of Virginia until December 6,
1995, ARC experienced sufficient prejudice that CTI should be held
to have waived its right to arbitration. ARC contends that by the time
CTI raised arbitration as a defense, ARC had already expended con-
siderable efforts in serving discovery requests on all parties. ARC
asserts that it was further prejudiced after CTI raised arbitration as an
affirmative defense because CTI "vigorously pursued full discovery
from ARC" after its motion to stay was denied. Appellee's Brief at
15.
We cannot accept ARC's arguments: CTI's conduct in the Eastern
District of Virginia is not legally sufficient to constitute a default of
its arbitration rights under the Federal Arbitration Act. Although CTI
did not raise arbitration as an affirmative defense until after ARC had
served discovery requests, ARC received notice that CTI intended to
pursue arbitration when ARC received a notice on November 10 from
the arbitration authority. By the time it propounded its first discovery
requests on November 22, ARC had known for nearly two weeks that
CTI planned to pursue arbitration of the claims and also that ARC had
not yet filed its answer, the pleading where the affirmative defense of
arbitration must be raised, see Fed. R. Civ. P. 8(c) (providing that
arbitration is required to be raised as an affirmative defense in the
answer). Under these circumstances, we cannot find that CTI waived
its right to arbitration. See Maxum Foundations, Inc., 779 F.2d at 982-
83 (holding that defendant had not waived its right to arbitrate when
it did not raise arbitration as an affirmative defense in its answer, it
delayed three months after the complaint to file a motion to dismiss
because of arbitrability, and it filed the motion to dismiss after discov-
ery had been initiated in the action). Regarding the alleged prejudice
suffered by ARC because of CTI's pursuit of discovery after the dis-
trict court denied its motion to stay pending arbitration, we observe
that a "party seeking arbitration does not lose its contractual right by
prudently pursuing discovery in the face of a court-ordered deadline."
Id. at 982 ("declin[ing] to create a rule that would require a party
seeking arbitration to avoid a finding of default by ignoring court-
13
ordered discovery deadlines and assuming the risk that its motion
under the Federal Arbitration Act will be unsuccessful"). Thus, we
hold that ARC has failed to carry its burden of proving that CTI's
actions constituted a default of its right to arbitrate under the Federal
Arbitration Act. ARC's claims against CTI therefore are subject to
arbitration.
IV.
Finally, ARC and CTI disagree on whether the non-arbitrable
claims remaining before the district court should be stayed pending
the resolution of the arbitration proceedings. CTI contends that we
should stay the entire action before the district court because many of
the issues underlying the arbitrable claims are the same as those
underpinning the non-arbitrable claims, and allowing arbitration to
proceed and staying the district court action would preserve judicial
resources by narrowing the issues eventually set for trial. ARC
responds with the opposite contention: Because a trial would con-
clude before the completion of the arbitration proceedings, the trial
should continue. A trial would narrow the issues and potentially obvi-
ate the need for arbitration, ARC argues.
We believe that the answer to this question lies within the sound
discretion of the district court. Enforcement of agreements to arbitrate
under the Federal Arbitration Act may require piecemeal litigation,
see Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 221 (1985), and
the decision to stay the litigation of non-arbitrable claims or issues is
a matter largely within the district court's discretion to control its
docket, Moses H. Cone Mem. Hosp., 460 U.S. at 20 n.23; Summer
Rain v. Donning Co./Publishers, Inc., 964 F.2d 1455, 1461 (4th Cir.
1992). Therefore, we leave this issue for the district court to resolve
on remand.
V.
In summary, we hold that the district court erred in denying CTI's
motion for a stay pending arbitration because ARC's claims fall
within the scope of the consulting agreement's arbitration clause and
CTI has not waived its rights to arbitration through its utilization of
the litigation machinery. We remand for further proceedings not
14
inconsistent with this opinion and for a determination by the district
court of whether to stay the non-arbitrable claims pending resolution
of the arbitration proceedings.
VACATED AND REMANDED
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