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It may be getting easier to waive arbitration.

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CPR Institutc for Dispute Resolution
Val. 14, NO. 1 J d I l l l X ) 19%
It May Be Getting Easier to Waive Arbitration
By William J. N’issen
Courts usually favor predispute arbitration agreements, but two recent decisions increase the risk that a party
maywaive the right to arbitrate. These
decisions have expanded the type of
conduct that can result in a waiver, and
have lessened the proof that may establish one.
In the past, any party could waive
the right to arbitrate by participating
in a court action. But in order to show
that this activity amounted to
a waiver, the other party had
to show prejudice (for instance, through the expense
and delav of defending
” a the
court action). Both the 2nd
and 7th U.S. Courts of Appeals recently made it easier
to establish a waiver. The 2nd
Circuit held that a court action brought by a party’ssubsidiary may result in a waiver
of the parent’s right to arbitrate. And the 7th Circuit
seemed to do away with the prejudice
requirement: i t ruled that when a
waiver of arbitration is based on a
party’suse of court procedures, a showing of prejudice to the other party is
not necessary.
The 2nd Circuit case involved
Doctor’shsociates, a national franchisor of Subway sandwich shops. Doctor’s
Associates, Inc. u. Distajo, 1995 WL,
540584 (Sept. 12, 1995). Its franchise
agreement provided for arbitration of
all disputes under the contract.
Doctor’sAssociates also required franchisees to sublease their Subway shops
through several real-estate leasing
companies. These companies were
wholly-owned subsidiaries of Doctor’s
Associates. Each sublease provided
that a franchisee’s breach of the franchise agreement was also a breach of
the sublease.
When disputes arose between
Doctor’s Associates and various franchisees, Doctor’sAssociates ordered its
subsidiaries, the leasing companies, to
start eviction proceedings in the state
courts where the franchisees were located. The franchisees responded with
counterclaims and separate suits,
charging Doctor’s Associates with’
fraud and breach of contract.
In a separate federal case against the
franchisees, Doctor’s Associates made
a motion to compel arbitration, which
the district court granted. On appeal,
the 2nd Circuit reversed. Each of the
franchisees was a defendant in a statecourt eviction proceeding brought by
Six months earlier, the 7th Circuit
seemed to cast aside the need to show
prejudice in making a case for waiver.
The 7th Circuit ruled thatwhen a party
has elected to resolve a dispute in
court, that party has presumptively
waived the right to arbitrate, and no
showing of prejudice is necessary,
Cabinetree of Wisconsin, Inc. u. Kraftmaid
Cabinetry, Inc., 50 F.3d 388 (March 3,
1995).The defendant in that case had
participated in a court action for several months and engaged in
discovery before seeking to
arbitrate.
These cases demonstrate
that parties who wish to preserve their rights to arbitrate
must be careful not to waive
those rights through related
litigation. Even litigation by
an affiliate of the party that
signed an arbitration agreement may result in a
waiver-especially if the subject of the dispute could go
to arbitration.
Defendants in a lawsuit must move
swiftly to preserve their rights under
predispute arbitration agreements.
This is particularly important in the
7th Circuit, where mere participation
in the suit, without any showing of
prejudice, can result in a waiver. @
TWO recent decisions
increase the risk that
a party may waive the
right to arbitrate.
WilliamJ. Nissen is a partnu at Sidky &
Austin in Chicago.
one of the leasing companies, the
court noted. These companies were
alter egos of Doctor’s Associates and,
by causing them to bring the statecourt actions, the franchisor had
waived its right to arbitrate. Possible
p r e.j u di c e to the franc h is e e s a 1so
weighed into the court’s decision.
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