Element Productions, Inc. v. EditBar, LLC, et al. (Lawyers Weekly No. 12-122-17)

No. 2016-1476 BLS1
ARBITRATION (Paper No. 37)
Approximately thirteen months after defendants answered the complaint and asserted
counterclaims and a third-party claim, defendants now seek to move this case to arbitration. The
issue presented is whether defendants, by their active litigation conduct, waived arbitration. For
the reasons described below, I find that arbitration is waived and, thus, this motion is denied.
Defendant Mark Hankey was an employee of Element until April 12, 2016. He executed a
written employment agreement in 2012 stating that “[a]ny dispute, claim or controversy arising
out of or relating to this Agreement or the breach, termination, enforcement, interpretation or
validity thereof shall be determined by arbitration in Boston, Massachusetts before one arbitrator.
The arbitration shall be administered by JAMS pursuant to its Comprehensive Arbitration Rules
and Procedures . . . .”
Plaintiff, Element Productions, Inc., commenced this action on May 9, 2016. Element
alleges that in 2015, Hankey began secretly aiding Element’s direct competitor, defendant Stir
Films LLC, a start-up video production company set up by defendant, EditBar, LLC. Hankey
allegedly disclosed Element’s confidential information to Stir Films and worked to assist Stir
Films to lure employees from Element to Stir Films. Element alleges that Hankey’s conduct was
in violation of his employment agreement. Element also alleges that EditBar and Stir Films aided
and abetted Hankey’s breach of fiduciary duty, tortiously interfered with Element’s contract with
Hankey, and conspired with Hankey to injure Element, among other claims.
Had Hankey timely moved to compel arbitration of Element’s claims such motion would
have been allowed. Element does not appear to disagree that its claims against Hankey come
within the arbitration provision. Moreover, EditBar and Stir Films contend that they, also, are
entitled to arbitration pursuant to the recent decision of the Appeals Court in Silverwood
Partners, LLC v. Wellness Partners, LLC, 91 Mass. App. Ct. 856 (2017). In Silverwood, the
Court held that a nonsignatory to an arbitration agreement (like EditBar and Stir Films) may
compel arbitration when a signatory (Element) raises allegations of substantially interdependent
and concerted misconduct by both the nonsignatory and one or more of the signatories (Hankey)
to the contract.
Element’s argument against enforcement of the agreement to arbitrate is based entirely on
the principle of waiver of arbitration by litigation conduct. This principle was recognized by the
Supreme Judicial Court in Home Gas Corp. of Massachusetts v. Walter’s of Hadley, Inc. 403
Mass. 772 (1989). Where, under the totality of the circumstances, the party moving to arbitrate
has acted inconsistently with his arbitration right, such right might be waived. Id. at 775. The
facts indicating waiver include whether the party actually participated in the lawsuit and invoked
the jurisdiction and machinery of the court by, for example, filing a counterclaim or by litigating
discovery disputes. Id. at 776. Delay in demanding arbitration while utilizing court procedures
and litigating to obtain court decisions interferes with the court’s interest to control the course of
proceedings before it. Id. at 778.
Here, the totality of the circumstances show waiver. As mentioned, this case has been
actively litigated in court for more than a year. Hankey answered the complaint in June 2016, and
asserted counterclaims against Element for violation of the Wage Act, breach of contract,
conversion, and defamation. Hankey then initiated a third-party complaint against Eran Lobel, an
officer of Element. Hankey then amended his answer, counterclaims, and third-party claim in
preparation to litigate the motion to dismiss the counterclaims and third-party claim filed by
Element. Such litigation ensued with the parties’ invoking the court’s consideration of the
motion that resulted in some of Hankey’s claims being dismissed (such as the claim for
defamation) and some of his claims surviving. Neither Hankey or the corporate defendants
communicated any desire to go to arbitration.
Discovery proceeded apace over the last year. The parties negotiated a protective order
and asked the court to endorse the order. Documents were produced and depositions taken. The
parties, including the corporate defendants, litigated over discovery requests, requiring the court
to resolve the disputes. In January 2017, Hankey submitted a written statement in favor of
transferring this case to the Business Litigation Session (BLS) stating that the case warranted
substantial case management. The case was accepted into the BLS. In June 2017, the parties
appeared in the BLS for a Litigation Control Conference. The parties jointly agreed to a tracking
order setting October 31, 2017 as the deadline for completion of discovery.
Recently, on June 26, 2017, Hankey filed in court the Rule 9A package for his motion for
leave to amend his answer and counterclaims by filing a Second Amended Answer and
Counterclaim. Among other things, the proposed amended counterclaim seeks to re-assert a
claim for defamation based, in part, on facts allegedly learned in discovery. That motion is still
pending, with oral argument set for September 5, 2017.
Then, on July 21, 2017, the corporate defendants served a motion for protective order
with respect to ongoing discovery disputes. In August 2017, the corporate defendants filed an
emergency motion to impound documents in connection with a motion (not yet filed in court) to
compel discovery from Element concerning damages.
Notwithstanding this active practice before this court seeking both affirmative relief and
protection from discovery, on July 17, 2017, less than three weeks from Hankey filing his motion
to amend his pleadings, Hankey and the corporate defendants served the instant motion to stay
the action and to compel arbitration. Until the service of that motion, no reference to the
possibility of arbitration was raised by Hankey or the corporate defendants.
I find the analysis and conclusion in Shalaby v. Arctic Sand Technologies, Inc., 32 Mass.
L. Reptr. 401, 2014 WL 7235830 (2014) (Salinger, J.), to be directly on point and entirely
persuasive. No purpose would be served by repeating the analysis. I agree with Judge Salinger
that the better reasoned cases, including Marie v. Allied Home Mortgage Corp., 402 F. 3d 1 (1st.
Cir. 2005), hold that whether waiver of arbitration by litigation conduct has occurred is one for
the court to decide, not the arbitrator. The court has a direct interest in controlling its judicial
procedures and in preventing abusive forum shopping.1
1 There is no argument advanced by defendants that the terms of the arbitration contract
reserve the issue of waiver by litigation conduct to the arbitrator.
“Where we are dealing with a forfeiture by inaction (as opposed to an explicit waiver),
the components of waiver of an arbitration clause are undue delay and a modicum of prejudice to
the other side.” Rankin v. Allstate Ins. Co., 336 F. 3d 8, 12 (1st Cir. 2003).
I find that defendants’ litigation conduct for more than a year as described above is
completely inconsistent with Hankey’s contractual right to arbitration. The delay in asserting the
contractual right to arbitration until now appears to be intentional, as deduced from defendants’
affirmative invoking of the court’s jurisdiction and their active use of the discovery mechanisms
of the court. Moreover, defendants do not attempt to explain or justify their delayed decision to
claim arbitration. The undue delay by defendants satisfies the first element of a finding that
arbitration has been waived by litigation conduct.
Because there is a strong federal and state policy in favor of arbitration, “‘mere delay in
seeking [arbitration] without some resultant prejudice’ is insufficient for a finding of conductbased
waiver.” Joca-Roca Real Estate, LLC v. Brennan, 772 F. 3d 945, 948 (1st Cir. 2014),
quoting Creative Solutions Grp., Inc. v. Pentzer Corp., 252 F. 3d 28, 32 (1st Cir. 2001). The
required showing of prejudice, however, is “tame at best.” Id. at 949, quoting Rankin v. Allstate
Ins. Co., 336 F.3d at 14. Prejudice may be inferred from the inordinate delay accompanied by
sufficient litigation activity. Id. In this case, Element points to its successful motion to dismiss
Hankey’s defamation claim. Element states that Hankey seeks to reintroduce that claim in a
pending motion to amend filed in this court, and would attempt to assert the defamation claim if
sent to arbitration. Element argues that it would be unfair for defendants to get a second bite at
the (defamation) apple in an arbitration proceeding when this court has already ruled against him.
In addition, Element notes extensive efforts regarding discovery and the likelihood that the court
will be asked to issue orders for discovery in response to motions from both sides. Element
contends that moving the case to arbitration would hamper its efforts to obtain discovery because
discovery in arbitration is not as broad as under the Massachusetts Rules of Civil Procedure.
Finally, Element points to the litigation timetable negotiated and agreed to by the parties that
would be adversely affected by the moving to arbitration. I agree with Element’s arguments.
These facts are sufficient to show a modicum of prejudice, at least, to Element if this case were
stayed and arbitration ordered at this late date. Under the standard for determining whether
litigation conduct waives a party’s contractual right to arbitration, I find that defendants have
waived arbitration.
Defendants’ motion to stay action and to compel arbitration is DENIED.
By the Court,
Edward P. Leibensperger
Justice of the Superior Court
Date: August 14, 2017

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