Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—C.D. Cal.: Office products dealer waived right to arbitrate fraud claims, (Sep 17, 2014)

By Greg Hammond, J.D.

Witt Company, a dealer of office technology products and related services, waived its right to arbitrate a dispute with its distributor by filing suit for millions of dollars in damages in federal court. In denying the dealer’s motion to compel arbitration, the federal district court in Los Angeles determined that Witt knew of its right to arbitrate, acted inconsistently with that right, and the plaintiff would now be prejudiced by compelling arbitration (RISO, Inc. v. Witt Co., September 16, 2014, Pregerson, D.).

Background. RISO, Inc. is the manufacturer and distributor of various printing and duplicating hardware and supplies. Witt was an authorized dealer of RISO products. In 2011, the two companies entered into an Asset Purchase Agreement, whereby Witt purchased seven of RISO’s markets in California and Arizona. The agreement contained an arbitration provision, stating “any controversy or claims arising out of or relating to this Agreement shall be determined exclusively by binding arbitration.” After the two companies failed to negotiate a new Dealer Agreement, RISO threatened to stop selling its products and services to Witt.

Witt filed a complaint in the federal district court in Oregon, alleging breach of contract and breach of duty of good faith and fair dealing. However, the Oregon court dismissed Witt’s contract claims with prejudice. In response, Witt filed a Demand for Arbitration before the American Arbitration Association, seeking rescission of the Agreement. RISO filed suit in this court, seeking declaratory judgment action that RISO waived its rights to arbitrate its fraudulent inducement claim. Conversely, Witt moved to compel arbitration of RISO’s action and to dismiss the complaint.

Court to decide waiver. In support of its motion to compel arbitration and dismiss RISO’s complaint, Witt argued that the issue of whether it waived its right to arbitrate must be decided by an arbitrator, not by the court. The court preliminarily noted that procedural questions such as allegations of waiver are presumptively for an arbitrator to decide. However, courts, including the Ninth Circuit, have determined that the term “waiver” does not refer to conduct-based waiver, only a defense arising from non-compliance with contractual conditions. Specifically, the court noted that to treat conduct-based waiver as a procedural issue for an arbitrator would create a strange result: “the court would have to compel arbitration without reviewing the parties’ contentions.” Consequently, the court determined that it would decide whether Witt’s litigation in Oregon constituted a waiver of its right to arbitrate.

Waiver of right to arbitrate. To demonstrate waiver of the right to arbitrate, RISO was required to show: (1) knowledge of an existing right to compel arbitration; (2) acts inconsistent with that existing right; and (3) prejudice to the party opposing arbitration resulting from such inconsistent acts. Witt did not dispute that it had knowledge of its right to compel arbitration when it filed its Oregon action. However, the court determined that Witt’s attempt to recover millions of dollars in damages was inconsistent with its obligation to arbitrate all claims other than those for injunctive relief. Lastly, the court concluded that “Witt’s attempt to take two bites at the apple has prejudiced RISO,” which was required to defend itself against Witt’s claims for millions of dollars in damages. Consequently, the court determined that Witt’s litigation in Oregon constituted waiver of the company’s right to arbitrate its fraudulent inducement claims. The motion to compel arbitration was thus denied.

The case number is 13-09351 DDP (JCGx)

Attorneys: Mitchell B. Stein (Thompson Coburn LLP) for RISO, Inc. John F. McGrory, Jr. (Davis Wright Tremaine LLP) for Witt Co.

Companies: RISO, Inc.; Witt Co.

Cases: FranchisingDistribution CaliforniaNews