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Bosc, Inc. v. Board of County Commissioners of the County of Bernalillo

United States Court of Appeals, Tenth Circuit

April 11, 2017

BOSC, INC.; THOMAS WAYNE HAYES, Plaintiffs Counter Defendants -Appellants,

         Appeal from the United States District Court for the District of New Mexico (D.C. No. 1:15-CV-01042-KG-LF)

          Jared M. Burden (Frederic Dorwart, with him on the brief) Frederic Dorwart, Lawyers, Tulsa, Oklahoma, for Plaintiffs Counter Defendants-Appellants.

          Clinton W. Marrs, Marrs Griebel Law, LTD., Albuquerque, New Mexico, for Defendant Counterclaimant-Appellee.

          Before TYMKOVICH, Chief Judge, BALDOCK, and BRISCOE, Circuit Judges.

          BALDOCK, Circuit Judge.

         A New Mexico county board filed a lawsuit in state court against its securities broker and registered agent. The board refrained, however, from serving process while it determined whether arbitration was available. The securities broker and agent nonetheless removed the case to federal court and moved to dismiss the suit. Four days after briefing was complete and about three months after the board had filed suit, the board voluntarily dismissed the case and filed for arbitration. The securities broker and agent then filed this action to enjoin arbitration, arguing the board waived its right to demand arbitration when it filed the state court action. The district court disagreed and instead granted the board's counterclaim to compel arbitration. The broker and registered agent appealed the waiver issue. Exercising jurisdiction under 9 U.S.C. § 16(a)(3), we affirm.


         In 2012 and 2013, BOSC, Inc., a registered securities broker and member of the Financial Industry Regulatory Authority (FINRA), and Thomas Hayes, one of BOSC's registered representatives, recommended and sold certain investments to the Board of County Commissioners of the County of Bernalillo, New Mexico ("the Board"). In July 2015, the Board filed a lawsuit in New Mexico state court against BOSC, Hayes, and others for allegedly selling it unsuitable investments and recommending investments that conflicted with Bernalillo County's liquidity needs, in violation of FINRA Rule 2111. The Board did not, however, serve the petition on any of the defendants. According to the Declaration of Clinton Marrs, the Board's attorney, he refrained from serving the complaint because he had not yet "completed [his] inquiry into whether the Board was required or permitted by contract to arbitrate its claims." R. at 31.

         In September 2015, BOSC and Hayes removed the case to federal court and moved to dismiss under Federal Rule of Civil Procedure 12(b)(6). The Board opposed the motion. In October, four days after briefing on the motion was complete and before the district court ruled on the motion, the Board voluntarily dismissed the case without prejudice because the Board's attorney was "satisfied that the Board could pursue its claims in arbitration." R. at 32. Four days after that, the Board initiated FINRA arbitration. Less than three months had lapsed from the time the Board filed the state court action to when it voluntarily dismissed it.

         In November 2015, BOSC and Hayes filed this federal lawsuit against the Board for preliminary and permanent injunctive relief in an attempt to enjoin the Board from pursuing FINRA arbitration. BOSC and Hayes asserted that the Board waived its right to arbitration when it filed the state court action. The Board answered the complaint and filed a counterclaim for judgment compelling arbitration. In response, BOSC and Hayes asked the district court for the opportunity to conduct discovery regarding the Board's motivation for filing the state court action.

         The district court denied BOSC and Hayes' requests for injunctive relief and instead granted the Board's counterclaim to compel arbitration. The district court applied the factors from Peterson v. Shearson/American Express, Inc., 849 F.2d 464, 467-68 (10th Cir. 1988), to conclude the Board did not waive its option to arbitrate. The district court also denied the discovery request, explaining that the Board's motivation for filing the state court action was irrelevant to the Peterson factors. BOSC and Hayes appealed.


         The parties do not dispute that the FINRA rules apply to them and would ordinarily permit the Board, as BOSC and Hayes' customer, the option to request arbitration. They also agree that the Federal Arbitration Act ("FAA") applies here. The primary issue is whether the Board waived its right to arbitrate. We review the district court's decision rejecting the waiver argument de novo but review the factual findings underlying that decision for clear error. In re Cox Enterprises, Inc. Set-top Cable Television Box Antitrust Litig., 835 F.3d 1195, 1205 (10th Cir. 2016).

         The FAA's primary substantive provision declares that a written agreement to arbitrate "a contract evidencing a transaction involving commerce . . . shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract." 9 U.S.C. § 2. This provision reflects "a liberal federal policy favoring arbitration agreements, " and creates "a body of federal substantive law of arbitrability, applicable to any arbitration agreement within the coverage of the Act." Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24 (1983). "The Arbitration Act 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." Id. at 24-25. Section 3 of the FAA obliges courts to stay litigation on matters the parties have agreed to arbitrate so long as the applicant for the stay is not in default in proceeding with arbitration, while § 4 authorizes a court that otherwise has subject matter jurisdiction to compel arbitration. See 9 U.S.C. §§ 3 & 4.

         We have recognized two forms of waiver, although we have only ever applied the second form: (1) when a party intentionally relinquishes or abandons its right to arbitration; (2) when a party's conduct in litigation forecloses its right to arbitrate. See In re Cox, 835 F.3d at 1205. The second form of waiver-based on a party's conduct-came first in this Circuit. In Reid Burton Construction, Inc. v. Carpenters District Council of Southern Colorado, 614 F.2d 698 (10th Cir. 1980), this Circuit's "leading opinion" on waiver of the right to arbitrate, Hill v. Ricoh Americas Corp., 603 F.3d 766, 772 (10th Cir. 2010), we explained there is "no set rule as to what constitutes a waiver or abandonment of the arbitration agreement; the question depends upon the facts of each case." 614 F.2d at 702. We noted several factors useful in analyzing waiver, which we later summarized in Peterson:

(1) whether the party's actions are inconsistent with the right to arbitrate; (2) whether "the litigation machinery has been substantially invoked" and the parties "were well into preparation of a lawsuit" before the party notified the opposing party of an intent to arbitrate; (3) whether a party either requested arbitration enforcement close to the trial date or delayed for a long period before seeking a stay; (4) whether a defendant seeking arbitration filed a counterclaim without asking for a stay of the proceedings; (5) "whether important intervening steps [e.g., taking advantage of judicial discovery procedures not ...

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