Libel Lawsuit Against Consumer Waives Right to Arbitration of Underlying Dispute

From yesterday's decision in Schumacher Homes of N.C. v. Buchananby Judge Max O. Cogburn Jr. (M.D.N.C.):

This case arises out of a dispute between Plaintiffs and Defendants over Plaintiffs' construction of Defendants' home, which Defendants allege was defective.

Plaintiff Schumacher Homes is "one of the largest residential, custom home builders in the United States" and is licensed as a general contractor in North Carolina…. Defendants Keith and Dianna Buchanan are married residents of McDowell County, North Carolina, who contracted with Plaintiffs to build a home, and now allege that the home Plaintiffs built for them was faulty.

To spread the word of Plaintiffs' alleged faulty construction, Defendants set up the website "schumachervictims.com" and communicated with Plaintiffs' former, existing, and prospective customers. Plaintiff Richards Smothers characterized this as a "smear campaign," but Defendant Keith Buchanan "vehemently den[ied] that [he] has communicated anything other than the truth in [his] representations about Schumacher Homes." In response, Plaintiffs filed suit before this Court seeking damages and injunctive relief, and moved for a Temporary Restraining Order … and Preliminary Injunction, asking this Court to enjoin Defendants from continuing their alleged "smear campaign." In their Complaint, Plaintiffs alleged commercial disparagement, tortious interference with prospective economic advantage and with contract, and other causes of action. This Court granted Plaintiff's motion in part and enjoined Defendants from unsolicited electronic communications with Plaintiffs' customers; however, the Court denied the other preliminary relief sought by Plaintiffs….

But defendants also brought counterclaims related to the alleged defects in the home; plaintiffs moved to compel arbitration, under the arbitration provision of the builder-homeowner contract; and the court denied plaintiffs' motion:

The Court finds that Plaintiffs defaulted on their right to compel arbitration by bringing the claims in their complaint in this tribunal and by seeking, and obtaining, a preliminary injunction against Defendants. Bringing claims before this Court and obtaining a binding legal order constituted substantial use of this Court's "litigation machinery." Permitting Plaintiffs to proceed with their claims against Defendants in this Court while simultaneously litigating against Defendants before an arbitrator, as Plaintiffs seek to do, would constitute further substantial use of this Court's "litigation machinery."

While Plaintiffs contend that these claims are not covered by the arbitration clause and, thus, could not have been brought before an arbitrator and cannot be heard by the arbitrator now, this is belied by the extremely broad language of the arbitration clause itself. The parties' contract provides, in relevant part, that:

[t]he Parties agree that any claim, dispute, or cause of action, of any nature, including but not limited to, those arising under tort, contract, consumer protection or other statute, equity, law, fraud, intentional tort, breach of statute, ordinance, regulation, code, or other law, or by gross or reckless negligence, arising out of or related to, the negotiations of the Contract Documents, the Home, the Project, materials or services provided to the Home or Property, the performance or non-performance of the Contract Documents or interactions of Homeowner(s) and Schumacher or its employees, agents, or subcontractors, shall be subject to final and binding arbitration …

 

As Defendants contend, this covers essentially all conduct "arising out of" the contract as well as conduct merely "related to" it. The clause explicitly extends to "intentional torts." Therefore, the plain language of the contract appears to cover Plaintiffs' allegations that Defendants committed intentional torts such as commercial disparagement, because these intentional torts were "related to" the contract…..

A contracting party waives its right to compel arbitration if that party "so substantially utiliz[es] the litigation machinery that to subsequently permit arbitration would prejudice the party opposing the stay." Waiver requires that the party opposing arbitration encounter "actual prejudice" under the compulsion of arbitration. Delay and the extent of the moving party's trial-oriented activity are two material factors in determining whether actual prejudice against the opposing party has occurred….

Here, there is plenty of evidence that Plaintiffs' actions prejudiced Defendants. Plaintiffs delayed in seeking binding arbitration for three months after first filing suit in this Court. Of course, delay alone is insufficient to support a finding of actual prejudice, but the delay coupled with the inescapable effects of granting Plaintiffs' motion more than meets the standard for prejudice.

Granting Plaintiffs' motion and allowing the arbitration in this case to proceed simultaneously would be duplicative, wasteful, and inefficient. The arbitration and the litigation in this Court would be essentially identical—both require testimony from the same witnesses, require determination of whether Plaintiffs' construction practices were defective, and require resolution of similar legal issues. For example, as explained in detail above, resolution of the defamation claim requires this Court to determine whether Defendants' online claims were truthful, and in so doing, this Court would have to find whether the house built by Plaintiffs was actually faulty—the exact determination to be made by the arbitral proceeding. Furthermore, Defendants would incur roughly twice the legal costs, witnesses would need to take twice the time and resources to testify, and twice the resources would be expended to apply the same law to the same facts in two different tribunals, which would be unnecessary and inefficient. Besides, avoiding duplicative proceedings would not only be in Defendants' best interest, but would prevent Plaintiffs from expending unnecessary resources on a duplicative proceeding as well.

The Court finds not only that Defendants would be prejudiced, but also that the potential prejudice is driven by Plaintiffs' availment of this Court's "litigation machinery." Plaintiffs failed to demand arbitration in this particular matter for its own claims and instead chose to engage in pretrial activity inconsistent with an intent to arbitrate, i.e. filing this lawsuit.

Plaintiffs signaled their intent to use the litigation machinery for their own arbitrable claims for the entirety of their case, all while attempting to preclude Defendants from doing so in kind. In other words, Plaintiffs sought to pick and choose where and in front of what tribunal its claims would be most successful while attempting to use the Court to force Defendants' claims (and not their own) into arbitration—a practice that would be plainly prejudicial to Defendants, if permitted.

Comments

[Doug Heffernan]

This happens a lot in debt buyer litigation in state court.

A debt buyer, like Midland Funding, will bring an action in a lower state court for debt collection. After the case is filed, the defendant will sometimes hire a consumer attorney that finds federal (fdcpa) law violations. The consumer attorney, with the hope of class action status, will file a fdcpa complaint in federal court.

The debt buyer, like Midland Funding, will invariably seek to compel arbitration, notwithstanding their previous litigation in state court. The debt buyers almost always win any appeal of an order denying the motion to compel arbitration.

https://casetext.com/case/midland-funding-llc-v-briesmeister-1

[ReaderY]

The Supreme Court rec ntly clarified that there is no special federal policy favoring arbitration, it ia merely permitted.

I wonder to what extent this will affect lower court decisions. There have been previous decisions in which the purported federal policy operated as a thumb on the scales, inducing judges to construe in favor of arbitration where the agreement on its terms might not have supported such a construction, to infer the existence of an arbitration agreement based on extrinsic evidence, etc., all based on a belief that the supposed federal policy in favor of arbitration meant they were supposed to find in favor of arbitration if they at all possibly could.

[ReaderY]

The case was Morgan v. Sundance, decided in May. Morgan overturned an 8th Circuit decision that because of the federal policy favoring arbitration, prejudice had to be shown in order for a waiver of arbitration to be valid. The Supreme Court said no prejudice need be shown, waiver of arbitration works like any other waiver, there is no federal policy putting a thumb on the scales in favor of arbitration.

This 4th Circuit decision nonetheless held that prejudice had to be shown to waive arbitration, citing 4th Circuit precedent that appears to have been overridden by Morgan. It found that there was prejudice, so it didn’t make any difference to the ruling. But the opinion bever cites Morgan and doesn’t seem to acknowwledge its existence. And that seems very strange. The issue before the District Court appears to be the exact issue before the Supreme Court decided in Morgan, what legal standard courts should use in determining whether a party has waived its right to arbitrate.