Authored By: Kenneth Neuman and Matthew Smith
That Sixth Circuit law favors arbitration is not newsworthy. A string of cases could be unearthed with just a few minutes of research in which federal courts throughout the Sixth Circuit have echoed the strong presumption in favor of arbitration. But there are limits to the presumptions that tilt in favor of arbitration when its enforcement is challenged. One such limitation is that the right to arbitrate can be impliedly waived. With this limitation in mind, imagine a case where a litigant expressly states in writing to its soon-to-be adversary words to the effect “I do not believe we are required to arbitrate” and offers its adversary to choose either litigation or arbitration. Is that enough to preclude that same litigant from later trying to enforce its contracted-for right to arbitrate? The Sixth Circuit Court of Appeals recently answered this question in the published opinion in Borror Prop. Mgmt., LLC v Oro Karric North, LLC, LLC, 979 F.3d 491 (6th Cir. 2020).
The underlying dispute in Borror Prop. Mgmt. is unremarkable. Oro Karric North, LLC (“Oro”) owned residential apartments, and Borror Property Management, LLC (“Borror”) was Oro’s property management company. Common amongst the terms of Oro and Borror’s management contracts was an arbitration provision which the Sixth Circuit Court of Appeals summarized as follows: “‘If either party shall notify the other that any matter is to be determined by arbitration,’ the parties would proceed to arbitration unless they first resolved the dispute amongst themselves.” For reasons not articulated in the Sixth Circuit’s opinion, Borror ceased managing Oro’s residential apartments properties, prompting Oro to write Borror a demand letter accusing it of being in breach of the parties’ agreements.
But in its letter to Borror, Oro took a position seemingly at odds with the arbitration provision of its management contracts. It wrote that it planned “to proceed directly to litigation in either state or federal court,” and that the management contracts “do not limit litigation exclusively to arbitration.” Oro then asked Borror to notify it within six days if Borror preferred arbitration, or Oro would assume that Borror wanted to proceed with litigation. Not only did Borror opt for litigation, it jumped ahead of Oro and filed a complaint against Oro in the Southern District of Ohio. Notwithstanding its prior either-or approach to litigation or arbitration, Oro did an about-face and moved to compel arbitration. The United States District Court denied Oro’s motion, “holding that Oro had waived its contractual right to arbitration through its pre-litigation conduct.” Oro then appealed.
The sole issue on appeal was whether Oro had waived its “otherwise enforceable right” to arbitration. After noting what the Court described as the “arbitration-friendly framework” it reaffirmed the Sixth Circuit’s prior implied waiver standard: “A party implicitly waives its arbitration right … when (1) the party’s acts are ‘completely inconsistent’ with its arbitration right and (2) the party’s conduct is prejudicial to an opposing party—for example, when the party significantly delays asserting its arbitration right.” In the eyes of the Sixth Circuit, both elements were stumbling blocks for a finding of waiver. The Court was unwilling to afford statements made in pre-litigation demand letters the same weight or significance as statements made after litigation as commenced in pleadings, during discovery, or in open court. As the Court reasoned, such “letters are often more rhetorical art than legal science” and “we cannot know a party’s true intentions in crafting a pre-litigation posturing letter.” Consequently, from Oro’s letter alone the Court found itself unable to divine an intent “completely inconsistent” with its right to arbitrate.
The Sixth Circuit Court of Appeals also found evidence of material prejudice to Borror lacking. It reasoned, “[i]n the arbitration setting, prejudice tends to arise only after the wheels of justice have begun to turn.” But here, the “prejudicial hallmarks” were absent as no substantial delay or expenditure money had occurred in the litigation, and Borror would not lose a tactical or evidentiary advantage in arbitration that it would otherwise have enjoyed in litigation. Rather, Borror had raced Oro to the courthouse one week after receiving Oro’s demand letter, and Oro promptly moved to compel arbitration in its first court filing.
Finally, the Court declined Borror’s invitation to do away with a prejudice requirement under an express – rather than implied – waiver theory. While acknowledging the appeal and potential merit of Borror’s express-versus-implied waiver framework, the Court initially reasoned that “we have never expressly held in this context that a prejudice requirement attaches only to an implied waiver.” But more fundamentally, the Court concluded that Oro had not “expressly disavowed its right to arbitration.” It reasoned that while Oro’s demand letter did indicate its plan to litigate, “plans can change” and “generally speaking, pre-filing threats are not laden with legal implications.” Consequently, “Oro’s abstruse posturing statement is not the kind that should be read as forever relinquishing its arbitration rights.” The ultimate disposition of Borror Prop. Mgmt. may not be surprising given established law favoring arbitration. But the Sixth Circuit Court of Appeals reasoning begs the question of what if any prelitigation conduct could result in an implied waiver of a litigant’s right to arbitration? For now, it appears litigants and their counsel should enjoy substantial leeway in their prelitigation sabre-rattling without fear of waiving a right to arbitrate.