Commonwealth Equity Services, Inc. v. Messick

REPORTED BARBERA, J. This appeal arises from a complaint filed by appellees, Walter and Elizabeth Messick, alleging that appellants, Commonwealth Equity Services, Inc. (“Commonwealth”) and Michael P. Keating, Sr., fraudulently offered and sold securities. Approximately fifteen months after appellees filed suit, both appellants filed petitions to stay the proceedings and to compel arbitration. Following a hearing, the Circuit Court for Baltimore County issued an order that, among other things, denied appellants’ petitions. Appellants noted this appeal from that order. 1 They raise two issues for our review: I. Whether the circuit court erred in failing to enforce the parties’ agreement to arbitrate.

II

Whether the arbitration agreement is valid and enforceable as to the claims raised by the complaint. For the reasons that follow, we affirm. FACTS AND PROCEEDINGS The case sub judice is among sixteen separate but related lawsuits filed against Keating, eight of which also name Commonwealth as a defendant. Twelve of these cases were consolidated into three groups for the purpose of resolving pretrial motions and scheduling matters.

The Honorable Kathleen Gallogly Cox presided over the pretrial hearings in most of the consolidated cases. ³⁸⁶ On December 1, 2000, appellees filed this action against appellants and eight other defendants, alleging, as relevant to the various defendants, negligence, negligent misrepresentation, and negligent supervision. Commonwealth thereafter filed its answer, asserting seven affirmative defenses. None of them—procedural defenses or defenses on the merits— mentioned the existence and/or applicability of the arbitration agreement between Commonwealth and appellees. 2 One day after filing its answer, Commonwealth served appellees with written interrogatories and a request for production of documents. Appellees responded to the interrogatories on July 9, 2001.

Keating filed an answer on August 9, 2001, asserting twelve affirmative defenses, one of which stated that appellees’ “claims are, or may be, entirely within the scope of written arbitration clauses which are valid and enforceable.” Keating served appellees with written interrogatories and a request for documents on September 18, 2001, and with a second set of document requests on December 13, 2001. Appellees responded to the interrogatories on February 1, 2002. The court issued a scheduling order identifying February 1, 2002 as the discovery completion deadline and February 15, 2002 as the dispositive motion deadline. On February 13, 2002, Commonwealth filed a petition to stay the proceedings ³⁸⁷ and to compel arbitration.

Keating filed a similar petition on February 20, 2002, adopting Commonwealth’s arguments. Appellees filed an opposition to both petitions on February 28, 2002. The parties appeared for a hearing on March 25, 2002, where they presented arguments on appellants’ petitions to compel arbitration. 3 Counsel for appellant Commonwealth argued that the company had not waived its right to arbitration by failing to include arbitration as an affirmative defense in its answer. Counsel acknowledged that appellees had been deposed and that Commonwealth had the transcript of that deposition, but Commonwealth neither noted nor participated in the deposition.

Counsel also acknowledged that Commonwealth had served appellees with written interrogatories and a request for document production. Counsel contended, however, that those two discovery devices would have been allowed had the parties gone to arbitration, according to the National Association of Security Dealers (“NASD”) Code of Arbitration Procedure. Consequently, counsel reasoned, appellees would suffer no prejudice if the matter were to be referred to arbitration. Counsel added that any advantage Commonwealth had gained during discovery was shared by appellees, who participated in the same types of discovery as did Commonwealth.

When asked by the court why Commonwealth delayed filing its petition to compel arbitration, counsel explained that Commonwealth “needed to make sure, Your Honor, that, in fact, these people did sign these documents, and in these cases, Your Honor, these individuals did testify under oath that they signed the [arbitration agreement].” To this the court responded: Here’s my problem conceptually with this. You may not have taken discovery in these cases, but these cases come ³⁸⁸ on the heel of eight or nine that I have already ruled on where the only new discovery in each of them, I would imagine, is taking the deposition of the individual plaintiff because all of the other fact discovery has been done in the cases that precede them. Commonwealth’s counsel replied: “[T]hey are the same, Your Honor. We’re not going to deny that, but in terms of whether or not these cases should be grouped with the other cases, Your Honor, again, the Supreme Court has held that waiver is not to be inferred lightly.” Counsel for appellant Keating argued that Keating did assert arbitration as an affirmative defense in his answer.

Counsel further claimed that, even though Keating had access to appellees’ deposition transcript, Keating had not noted or participated in the deposition. Counsel acknowledged that Keating filed written interrogatories and two requests for production of documents on appellees but that, as of the date of the hearing, he had not yet received any responses to the document requests. There was no prejudice to appellees, argued Keating’s counsel, with regard to discovery. Counsel added that appellees’ answers to interrogatories would be “useless in arbitration or litigation.” The parties presented arguments concerning whether and to what extent decisions in the related cases of Kelly v. Keating, et al. and Kowalski v. Keating, et al. bore on the resolution of appellants’ petitions to compel arbitration.

Counsel for appellees urged Judge Cox not “to look at Commonwealth’s actions in a vacuum.” Counsel pointed to Kelly, the first action appellees’ counsel had filed in this string of cases and which named Keating and Commonwealth as defendants. Commonwealth’s first pleading in Kelly had been a motion to dismiss the lawsuit based on the arbitration agreement. At a hearing before the Honorable Alexander Wright of the Circuit Court for Baltimore County, Kelly had argued against dismissal of the lawsuit on the ground that the arbitration agreement was not signed and was therefore unenforceable. Commonwealth responded that the arbitration agreement need not have been signed by Kelly to be enforceable, ³⁸⁹ because it is Commonwealth’s business practice to include arbitration clauses in new account documents.

Judge Wright agreed with Commonwealth and compelled arbitration in that case. Judge Wright handed down his decision in Kelly on July 23, 1999. Consequently, appellees argued in the instant case that Commonwealth knew as early as the summer of 1999 that it could have compelled arbitration in the remaining consolidated cases, including the instant case, but Commonwealth chose instead to litigate the matters in the Circuit Court for Baltimore County. Appellees asked the court to reject Commonwealth’s explanation that it had delayed filing the petition to compel arbitration in this case until Commonwealth “learned for the first time” that appellees had signed the arbitration agreement, which fact, according to Commonwealth, “was critical to [its] decision as to whether to file a petition to compel arbitration.” Appellees argued that, in view of the ruling in Kelly (which had been rendered more than sixteen months before appellees filed suit in the instant case), appellants could have sought to compel arbitration at the outset of appellees’ suit regardless of whether appellees had acknowledged under oath to signing the forms.

In other words, Kelly made clear that appellants did not need to await the outcome of appellees’ depositions in the instant case to determine the efficacy of arbitration. Appellees also argued that Commonwealth filed petitions to compel arbitration in other related actions, including the instant case, only after Judge Cox issued a ruling in Kowalski that was unfavorable to Commonwealth on the question of successor liability. It was this adverse ruling in the Kowalski case, argued appellees, that prompted Commonwealth and Keating to file their petitions to compel arbitration in the instant case. Appellees noted that fifteen months had elapsed between the filing of their complaint and appellants’ filing of the petitions to compel arbitration.

During that time, the discovery deadline and dispositive motions deadline had passed. ³⁹⁰ Counsel for appellees stated: “Th[is] case has been litigated. All that’s left is trial.” Counsel asserted that appellees would be prejudiced by the delay attendant to having the matter referred to arbitration, given “the tremendous amount of time and money invested” in litigating their claim to that point. Finally, counsel for appellees refuted Commonwealth’s contention that the NASD rules permitted interrogatories. Counsel said: “You’re not allowed to get interrogatories, and deposition is not available unless ... the parties agree or there’s some unusual circumstances where the panel compels it, but it is just generally not available.” On rebuttal, Commonwealth denied that it decided to file its petition to compel arbitration only after receiving an unfavorable ruling in Kowalski.

On this point, the following exchange ensued between Judge Cox and counsel for Commonwealth: THE COURT: [H]ow is it that on the last series of these motions that I am going to hear, we have essentially a new theory, which, if I believed it to be a valid one, would have applied to everything that went before it? [COUNSEL]: Your Honor, these particular cases stand on their own, Your Honor. Your Honor is right. There were other cases where that was not done, but these cases are looked at in a vacuum. These cases are not all consolidated.

Each case stands on its own. [Appellees’ counsel] has not cited any case that says you look at what somebody did in a case two years ago, three years ago, two months ago because it’s not out there. THE COURT: I think, when the cases are consolidated, you can. By written opinion entered on April 1, 2002, the court denied appellants’ petitions to compel arbitration, finding that appellants had waived any right to arbitrate the issues raised in appellees’ complaint. 4 The court wrote: ³⁹¹ Although Commonwealth itself has not affirmatively engaged in discovery in these three cases, it has the benefit of discovery done by other parties, and it certainly has engaged in discovery and motions practice in other related cases. These are simply the last three of the fourteen cases consolidated for purposes of discovery and pretrial motions, so to look to what was done in one case in isolation clearly presents a skewed view of the overall history.

The court also pointed out that Commonwealth had not raised arbitration as an affirmative defense at the outset of the instant case, despite Commonwealth’s knowledge of the “potential implications of the arbitration clause” after the rulings in Kelly and Kowalski. Having rejected Commonwealth’s explanation for its delay in filing the petition to compel arbitration, the court determined that “[t]he obvious logical explanation for the decision is that it came in response to the Court’s Reconsideration of Commonwealth’s Motion for Summary Judgment [in Kowalski on the issue of successor liability] for acts of Keating while in the employ of Kava-naugh.” 5 The court concluded that Commonwealth had waived its right to arbitration of appellees’ claims due to its “failure to raise this issue in its answer or in a timely preliminary motion, and as a consequence of its active participation in the litigation process in the series of related cases.” The court likewise denied Keating’s petition to compel arbitration inasmuch as he had adopted Commonwealth’s arguments in support of his request. See swpra note 4. ³⁹² Appellants thereafter noted their appeals. Appellants also filed motions to stay the proceedings pending the outcome of the appeal, which the court granted.

DISCUSSION I. At the outset, we must address whether the circuit court’s order denying appellants’ petitions to compel arbitration constitutes a final judgment. We addressed a similar jurisdictional issue in NRT Mid-Atlantic, Inc. v. Innovative Props., Inc., 144 Md.App. 263 , 797 A.2d 824 (2002). As in the instant case, the appeal in NET was taken from the circuit court’s denial of the petition to compel arbitration filed by one of the parties. We noted preliminarily that the court’s order denying the petition was an interlocutory order that is not among those interlocutory orders that are appealable under Md.Code (1973, 2002 Repl.Vol.), § 12-303 of the Courts & Judicial Proceedings Article (“CJ”).

We also recognized, however, that a court’s order deciding an independent action to compel arbitration under CJ § 3-207 (as opposed to an order deciding a petition filed in a pending lawsuit), disposes of the action in its entirety, regardless of whether the order grants or denies the petition. Once the court orders arbitration, or denies it, there is nothing left for it to do. Accordingly, the court’s order is a final judgment under C J section 12-301 [providing the right of appeal from a final judgment]. NRT, 144 Md.App. at 277 , 797 A.2d 824 .

We observed in NET that the party seeking to compel arbitration could have filed a free-standing action to compel arbitration under CJ § 3-207, but, instead, filed its petition to compel in the pending lawsuit between the parties. Id at 278, 797 A.2d 824 . Yet, we said, the court’s order denying the petition resolved the claim in its entirety, making that order susceptible to • certification by the circuit court as a final judgment under Maryland Rule 2-602(b). 6 Id (citing Town of ³⁹³ Chesapeake Beach v. Pessoa Constr. Co., Inc., 330 Md. 744, 752-54 , 625 A.2d 1014 (1993)).

None of the parties in NRT had asked the circuit court to certify its order denying the claim for arbitration as a final judgment under Rule 2-602(b). Id. Nevertheless, “under Rule 8-602(e)(l), if an appellate court concludes that the order being appealed is one the circuit court properly could have exercised its discretion to certify as final, under Rule 2-602(b), we may exercise our discretion to certify the order as final.” Id. We concluded that the strong legislative policy favoring enforcement of arbitration agreements also “favors treating as final an order denying a petition to compel arbitration” filed in a pending case.

Id. at 279 , 797 A.2d 824 . Furthermore, [a] final resolution of that predicate issue [concerning the proper forum for resolution of the parties’ dispute] will prevent future piecemeal appeals, repeated litigation of the disputed issue ... and needless expense to the parties. In the case of a petition to compel arbitration filed in an already pending action, that finality only can be obtained by permitting an appeal from an order denying such a petition. Id.

In accordance with Maryland Rule 8-602(e)(l), and for the same reasons as those we outlined in NRT , we shall enter a final judgment order in this case on the court’s order denying appellants’ petitions to compel arbitration.

II

A trial court’s finding of whether a party has waived its contractual right to arbitration is generally a factual determination. The Redemptorists v. Coulthard Svcs., Inc., 145 Md. ³⁹⁴ App. 116, 137, 801 A.2d 1104 (2002). We will reverse a trial court’s fact findings only if clearly erroneous. Id.; RTKL Assocs., Inc. v. Four Vills.

Ltd. P'ship, 95 Md.App. 135, 138 , 620 A.2d 351 , cert. denied, 331 Md. 87 , 626 A.2d 371 (1993). By way of background, we observe that the United States Supreme Court has held that any doubt over arbitrability “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.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 25 , 103 S.Ct. 927 , 74 L.Ed.2d 765 (1983). There is a similar legislative policy in Maryland favoring the enforcement of arbitration agreements.

Allstate Ins. Co. v. Stinebaugh, 374 Md. 631, 641 , 824 A.2d 87 (2003). “Although the law [in Maryland] looks with favor upon arbitration as a method of dispute resolution, it does not look with favor upon sending parties to arbitration when there is no agreement to arbitrate.” Town of Chesapeake Beach, 330 Md. at 757 , 625 A.2d 1014 . One factor in determining the existence of an arbitration agreement is whether either party has waived the right to arbitration of any issue covered by the agreement. “A waiver is the intentional relinquishment of a known right, or such conduct as warrants an inference of the relinquishment of such right, and may result from an express agreement or be inferred from the circumstances.” The Redemptorists, 145 Md.App. at 136 , 801 A.2d 1104 . The intent to waive the right to arbitration “ ‘must be clearly established and will not be inferred from equivocal acts or language.’ ” Id.

(quoting Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, Inc., 294 Md. 443, 449 , 450 A.2d 1304 (1982)). Because of the highly factual nature of arbitration cases, there is no “bright-line” test for making waiver determinations. Id. at 137, 801 A.2d 1104 . It is well settled, however, that a party who litigates an issue otherwise subject to arbitration waives the right to arbitration of that issue.

Id.; Stauffer Constr. Co., Inc. v. Board of Educ. of Montgomery ³⁹⁵ County, 54 Md.App. 658, 667 , 460 A.2d 609 , cert. denied, 297 Md. 108 (1983).

III

Appellants contend that the court erred in finding that they had waived their right to arbitration of the claims raised by the complaint, and in thereby denying their respective petitions to compel arbitration. They refute the finding of waiver by asserting that they had refrained from actively litigating in the case sub judice and that appellees would not be prejudiced if the matter were compelled to arbitration. Although appellants filed separate pleadings and discovery requests in this case, the arguments raised in their briefs essentially overlap, so we address them together. A. Appellants’ Conduct in Other Consolidated Cases Appellants argue that the court should not have considered their conduct in the other consolidated cases when determining whether they had waived their right to arbitration in the instant case.

Commonwealth cites three cases in support of this contention: Charles J. Frank, Inc. v. Associated Jewish Charities of Baltimore, Inc., 294 Md. 443 , 450 A.2d 1304 (1982), and two federal cases, MicroStrategy, Inc. v. Lauricia, 268 F.3d 244 (4th Cir.2001) and Lawrence v. Comprehensive Business Svcs. Co., 833 F.2d 1159 (5th Cir.1987). These cases do not assist appellants’ cause. In all three cases, the courts declined to find a waiver of the right to arbitration, despite prior litigation involving the parties at issue.

The decisions, however, turned on the fact that the prior litigation was unrelated to claims raised in the current litigation. See Frank, 294 Md. at 454 , 450 A.2d 1304 (prior litigation of an unrelated claims did not constitute a waiver of the right to arbitrate other claims); MicroStrategy, Inc., 268 F.3d at 250-51 (because prior actions in state and federal court were primarily directed to claims unrelated to those currently asserted in federal court, the expense and effort associated with those claims could not be used to demonstrate a waiver of the employer’s right to arbitrate new claims); ³⁹⁶ Lawrence, 833 F.2d at 1165 (franchiser’s suit in an Illinois small claims court did not amount to a waiver of the franchiser’s right to compel arbitration in a subsequent suit filed by the franchisee in a Texas state court, where the franchisee had failed to allege delay or demonstrate prejudice that would arise from enforcing the arbitration agreement). None of these cases is factually apposite to the ease sub judice. In the instant case, much of the argument at the hearing on the petitions to compel arbitration focused on the extent to which appellants’ conduct in the other consolidated cases bore directly on the