The opinion of the court was delivered by: Robert P. Patterson, Jr., U.S.D.J.
On October 22, 2010, Plaintiff Technology in Partnership, Inc. ("TIP"), a corporation organized to provide computer consulting services, including installation and support to businesses, commenced this action by filing a complaint (the "Complaint") alleging that Defendant Edward M. Rudin ("Rudin") operated for over 12 years an enterprise engaged in the common goal of diverting and stealing funds from TIP in violation of the Civil Racketeering Involved Corruption Act ("RICO"), 18 U.S.C. § 1962, and various state laws. (Compl. ¶ 5.) The Complaint states that TIP was jointly created and capitalized by Rudin and Robert Baker ("Baker"). (Id. ¶¶ 28-29.)
On January 26, 2011, Defendants Rudin, Alyse Rudin, Gloria Rudin, Alyfunkids Inc. d/b/a My Gym Children's Fitness, My Gym Westfield Inc. d/b/a My Gym Children's Fitness Center, My Gym Glen Rock, Inc., and Rudin Appraisals, LLC (collectively, the "Rudin Defendants"), who had not yet filed an Answer to the Complaint, filed a motion to dismiss the Complaint based entirely on statute of limitations grounds. Defendants Alan Zverin, Zverin & Fischer, LLP, and Eisman, Zucker Klein and Rutenberg, LLP (collectively, the "Accountant Defendants"), who had also not yet filed an Answer, moved separately to dismiss the Complaint for failure to state a claim upon which relief may be granted, pursuant to Fed. R. Civ. P. 12(b)(6). On October 4, 2011, the Court granted the Accountant Defendants' motion in its entirety but denied the Rudin Defendants' motion in its entirety on the grounds that the Rudin Defendants had not established that Mr. Baker, who served as president and majority stockholder of TIP, knew or should have known of Defendants' alleged fraudulent actions prior to the date he asserted control of TIP in May 2010. Tech. in P'ship, Inc. v. Rudin, No. 10 CV 8076, 2011 WL 4575237 (S.D.N.Y. Oct. 4, 2011).
The Court's October 4, 2011 Order denying the Rudin Defendants' motion also Ordered the deposition of Robert Baker on the specific issue of "what date he, as director, President, and majority shareholder of TIP knew or should have known of the actions complained of in the civil RICO causes of action." Id. Baker was subsequently deposed on November 3, 2011. On December 16, 2011, the Court endorsed Defendants' letter request for a discovery Order compelling production of:
1. All documents that were in the files Mr. Baker identified at his deposition that were in his home and pertained to the plaintiff, including without limitation, any financial records, tax forms, employment agreements, and limited liability company agreements, FEMA application submitted by Mr. Baker on behalf of the plaintiff, and any other agreements or other documents pertaining to the plaintiff; and
2. All other documents in Mr. Baker's possession or control at any time prior to May 2010 pertaining to the plaintiff, including any such documents in the possession of his accountant or lawyer identified in this deposition. (See Order dated Dec. 16, 2011, Ex. B, ECF No. 43.)
On January 13, 2012, Defendants filed an Answer to the Complaint. On February 8, 2012, approximately 16 months after this action was commenced, Defendants filed a motion to stay the proceedings and compel arbitration. On March 19, 2012, Plaintiff filed opposition papers and cross-moved for Rule 37 sanctions against Defendants, alleging violations of the Court's discovery Orders. On April 23, 2012, Defendants filed a memorandum of law in reply to its motion to compel arbitration and in opposition to Plaintiff's cross-motion for sanctions. On May 7, 2012, Plaintiff filed its reply papers on the motion for sanctions. On June 13, 2012, the Court held oral argument on both motions.
For the following reasons, Defendants' motion to compel arbitration is denied. The Court assumes familiarity with the underlying facts of this case and will recite only the facts pertinent to the motions pending before the Court.
II. Motion to Compel Arbitration
Plaintiff TIP is a closely-held corporation that was formed to provide computer consulting services. (Defs.' Mem. of Law in Supp. of Mot. to Compel Arbitration ("Defs.' Mem.") at 2; Compl. ¶ 28.) TIP was formed on October 3, 1997 as a New Jersey corporation with Robert Baker and Edward Rudin as its sole directors. Upon the formation of TIP, a Shareholder Agreement was entered into between TIP, Baker, and Rudin. (Defs.' Mem. at 2.) Additionally, Rudin entered into an Employment Agreement with TIP. (Id. at 2-3.) Both TIP's Shareholder Agreement and Rudin's Employment Agreement contain the same arbitration clause:
Any controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration in the County of Mercer, State of New Jersey in accordance with the rules then applicable to the American Arbitration Association, and judgment upon any award rendered may be entered in any court of competent jurisdiction. (Id. at 3.)
The Shareholder Agreement that was produced to the Court by the Rudin Defendants is not signed by either Baker or Rudin. (Smith Decl., Exs. 3-4.) Rudin's Employment Agreement is signed by Rudin, and Baker's initials appear on only two pages of the document, reflecting assent to certain handwritten modifications. (Smith Decl., Ex. 5.) Although neither agreement was fully executed, both were treated by Baker and Rudin as correctly reflecting their business arrangements. (Defs.' Mem. at 3--4.) Both parties agree that Rudin was in possession of both the Shareholder Agreement and the Employment Agreement before this action was commenced. (Pl.'s Mem. of Law: (1) in Opp'n to the Rudin Defs.' Mot. to Compel Arbitration; and (2) in Supp. of Pl.'s Mot. for Sanctions Pursuant to Fed. R. Civ. P. 37 ("Pl.'s Mem.") at 9; Tr. of Jun. 13, 2012 Oral Arg. ("Tr. 6/13/12") at 13:3-10 ("It was used at a deposition of Mr. Baker that took place before the plaintiff produced any discovery").)
The Federal Arbitration Act (the "Act") requires courts to stay any action where a written arbitration agreement provides for arbitration of the dispute. 9 U.S.C. § 2. Section 2 of the Act provides:
[A] written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.
Id. The Act is an expression of a strong federal policy favoring arbitration as an alternative means of dispute resolution. JLM Indus., Inc. v. Stolt-Nielsen SA, 387 F.3d 163, 171 (2d Cir. 2004) (quoting Hartford Accident & Indem. Co. v. Swiss Reinsurance Am. Corp., 246 F.3d 219, 226 (2d Cir. 2001)). Indeed, waiver of the right to arbitration is "not to be lightly inferred," Cotton v. Slone, 4 F.3d 176, 179 (2d Cir. 1993) (quoting Carcich v. Rederi A/B Nordie, 389 F.2d 692, 696 (2d Cir. 1968), and "any doubts concerning the scope of arbitrable issues should be resolved in favor of arbitration." JLM Indus., 387 F.3d at 171 (quoting Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 24--25 (1983)).
Defendants argue that TIP is obligated to arbitrate the claims in the Complaint pursuant to the broad arbitration clause contained within both the TIP Shareholder Agreement and Rudin's Employment Agreement, which mandates that "[a]ny controversy or claim arising out of or relating to this Agreement or the breach thereof, shall be settled by arbitration." (Defs.' Mem. at 1--2.) Defendants further contend that the claims against the Rudin Defendants other than Edward Rudin are so intertwined with the claims against Rudin that those claims should also be subject to arbitration. (Id. at 15.) Plaintiff, however, argues that Defendants waived their right to arbitration by waiting for over fifteen months after the commencement of this litigation to raise the arbitration issue, thereby causing significant prejudice to Plaintiff. (Pl.'s Mem. at 1.)
1.Right to Arbitration As an initial matter, Plaintiff does not contest the validity or scope of the arbitration clause, nor does it contest that the claims asserted in the Complaint, including the RICO claims, are eligible for arbitration as they apply to Edward Rudin. See, e.g., Shearson/Am. Express, Inc. v. McMahon, 482 U.S. 220, 238 (1987) ("[T]here is nothing in the text of the RICO statute that even arguably evinces congressional intent to exclude civil RICO claims from the dictates of the Arbitration Act."); JLM Indus., 387 F.3d at 174 (discussing the arbitrability of RICO claims). Thus, the resolution of Defendants' motion to compel arbitration will turn on whether or not the affirmative defense of arbitration has been waived.
a. Legal Standard for Waiver
The right to arbitrate is "an affirmative defense that is waived where the party seeking to raise the defense engages in protracted litigation that results in prejudice to the opposing party." Brookridge Funding Corp. v. Nw. Human Res., Inc., 170 F. App'x 170, 171 (2d Cir. 2006) (quoting Cotton, 4 F.3d at 179 (internal quotation marks omitted)). "Waiver of arbitration is not to be lightly inferred." La. Stadium & Exposition Dist. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 626 F.3d 156, 161 (2d Cir. 2010) (quoting PPG Indus., Inc. v. Webster Auto Parts, Inc., 128 F.2d 103, 107 (2d Cir. 1997)). In determining whether a party has waived its right to arbitration by expressing its intent to litigate the dispute in question, the Court considers three factors: "(1) the time elapsed from when litigation ...