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DESIGN BEN. PLANS, INC. v. ENRIGHT

September 27, 1996

DESIGN BENEFIT PLANS, INC., an Illinois corporation, Plaintiff,
v.
JOHN ENRIGHT, individually, and JOHN ENRIGHT, INC., Defendants.



The opinion of the court was delivered by: REINHARD

 INTRODUCTION

 Originally filed in the circuit court of Winnebago County, Illinois, this action was removed to federal court on March 15, 1996 by defendants, John Enright ("Enright") and John Enright, Inc. ("JEI"), based on diversity jurisdiction. Upon removal, defendants filed their answer to the complaint, and JEI, in addition, filed a counterclaim against plaintiff, Design Benefit Plans, Inc. ("DBP"). Shortly thereafter, DBP filed several motions, including the pending motion to compel mediation/arbitration of JEI's counterclaim and stay all proceedings as well as the pending motion to deposit funds into court. *fn1"

 DBP is an Illinois corporation which markets, sells and services health, life and related insurance products of various insurance carriers through agents located in states throughout the country. In August 1988, Enright contracted with DBP to be a sales agent. This agreement was subsequently superseded by an Agent Agreement entered into by JEI and DBP in April 1995. JEI resigned as an agent on August 1, 1995. The Agent Agreement prohibited JEI from recruiting DBP agents for a period of six months after its termination. It is alleged that defendants breached this provision by recruiting several DBP agents during this six-month period. The first amended complaint seeks a declaratory judgment (Count I), money damages for breach of contract (Count II) and money damages and injunctive relief for tortious interference with contractual relations (Count III). JEI's counterclaim relates to unpaid commissions arising from policies sold by JEI during the term of the Agent Agreement.

 CONTENTIONS

 DBP moves to compel mediation and arbitration of JEI's counterclaim pursuant to the Federal Arbitration Act ("FAA"), 9 U.S.C. ยง 4, contending that JEI's counterclaim is subject to a mandatory mediation/arbitration provision contained in the Agent Agreement. DBP moves to stay all proceedings in this action pursuant to section 3 of the FAA pending the resolution of JEI's counterclaim in mediation and arbitration. JEI also moves to deposit certain funds, i.e., the commissions, into the court pending the resolution of JEI's counterclaim. In response, JEI contends that DBP waived any rights it may have had under the mandatory mediation/arbitration provision in the Agent Agreement when it filed suit in state court, relying on Midwest Window Sys., Inc. v. Amcor Indust., Inc., 630 F.2d 535, 537 (7th Cir. 1980). JEI also contends that the mandatory mediation/arbitration provision is unenforceable because it is illusory, relying principally on Hill-Harriss v. Gingiss Int'l, Inc., 1992 U.S. Dist. LEXIS 1182, No. 91 C 6682, 1992 WL 22705 (N.D. Ill. Feb. 5, 1992) (Kocoras, J.). In its reply, DBP contends that JEI misstates the holding of Midwest Window Sys., Inc. and that the portion of the decision relied upon by JEI was used out of context. DBP further contends that it could not have waived mediation/arbitration of the counterclaim because it filed suit over a completely different matter. As to the validity of the mediation/arbitration provision, DBP points out that the February 5, 1992 order in Hill-Harriss was vacated by Judge Kocoras on a motion to reconsider in Hill-Harriss v. Gingiss Int'l, Inc., 1992 U.S. Dist. LEXIS 3548, No. 91 C 6682, 1992 WL 57952 (N.D. Ill. Mar. 20, 1992). *fn2" DBP further contends that the provision is not illusory because there is a mutual obligation to arbitrate at least some claims.

 DISCUSSION

 A. Motion to compel mediation/arbitration and stay proceedings

 The court first considers whether DBP waived the mandatory mediation/arbitration provision in the Agent Agreement. JEI relies exclusively upon the Seventh Circuit's statement that "long ago in this circuit, we held that 'commencement of a suit in court rather than reliance upon arbitration, with answer by the opposing party upon the merits, was a waiver of the right to arbitrate by both parties,'" see Midwest Window, 630 F.2d at 537 (quoting Galion Iron Works & Mfg. Co. v. J.D. Adams Mfg. Co., 128 F.2d 411, 413 (7th Cir. 1942), for the proposition that DBP waived its right to arbitration by filing suit. JEI's reliance upon that portion of Midwest Window is not particularly helpful to the court. One reason is that the quotation is used in a misleading fashion. The Seventh Circuit began its discussion of the waiver doctrine with that rule only to abandon it in the very same decision in favor of a totality of circumstances test. See id. The court rejected the rigidity of the rule pronounced in Galion and held that the central inquiry is whether, under a totality of the circumstances, the defaulting party acted inconsistently with the right to arbitration. Id. While this circuit still applies the totality of circumstances test set forth in Midwest Window, the test has undergone significant changes since 1980, some of which are relevant to this discussion.

 In St. Mary's Medical Ctr. of Evansville, Inc. v. Disco Aluminum Prod. Co., Inc., 969 F.2d 585, 590 (7th Cir. 1992), the Seventh Circuit clarified the role of prejudice in the test, holding that while it is a factor to consider, it was not a prerequisite for finding waiver. The court reiterated that no rigid rule exists as to what constitutes a waiver of the right to arbitrate. Id. at 587-88. In addition, while it recognized the strong federal policy favoring arbitration, embodied in the FAA, it noted that this federal policy is a policy favoring the enforcement of contracts, not a preference for arbitration over litigation Id. at 590. Thus, a court should treat a waiver of the right to arbitrate the same as it treats the waiver of any other contract right. Id. In the Seventh Circuit's most recent pronouncement, Cabinetree of Wisconsin, Inc. v. Kraftmaid Cabinetry, Inc., 50 F.3d 388, 390-91 (7th Cir. 1995), the doctrine was further modified to reduce the significance of a party's invocation of the judicial process. The court held that the invocation of the judicial process merely creates a presumption of waiver which, in a variety of circumstances, may be rebutted or rescinded. Id. at 391.

 Arguably, DBP's conduct does not support even a finding of presumptive waiver. DBP filed suit over defendants' alleged breach of the restrictive covenants contained in the Agent Agreement. The counterclaim, which relates to DBP's withholding of commissions, is separate and distinct from DBP's claims advanced in the first amended complaint. Thus, the matters DBP seeks to arbitrate were not injected into the litigation until JEI filed its counterclaim. Moreover, DBP did not answer the counterclaim; instead, DBP immediately moved to compel mediation/arbitration of JEI's counterclaim and stay proceedings pending resolution of those matters. *fn3" DBP has, at no time during the course of this litigation, acted inconsistently with its right to arbitrate JEI's counterclaim. The circumstances in this case, therefore, do not support a finding of waiver. Cf. Commercial Union Ins. Co. v. Gilbane Bldg. Co., 992 F.2d 386, 390 (1st Cir. 1993) (finding no waiver where plaintiff sought to compel arbitration of defendant's counterclaim which was separate and distinct from the claims in the complaint).

 Even if DBP's act of filing suit somehow created a presumption of waiver in this case, the counterclaim can be seen as an "unexpected development" which justifies granting relief from the initial waiver. Cabinetree, 50 F.3d at 391. JEI's counterclaim significantly altered the nature of this litigation and operated to rejuvenate the right to demand arbitration. See Envirex, Inc. v. K.H. Schussler Fur Umwelttechnik GMBH, 832 F. Supp. 1293, 1296 (E.D. Wis. 1993) (holding that new allegations in amended complaint operated to rejuvenate right to demand arbitration) cited with approval in Cabinetree, 50 F.3d at 391. While in such circumstances prejudice to the party resisting arbitration weighs heavily in this analysis, see Cabinetree, 50 F.3d at 391, JEI has not advanced any claim of prejudice in this case. Thus, even if DBP initially waived its right to arbitration, JEI's counterclaim altered the nature of this litigation to a significant degree so as to justify rescission of DBP's waiver. Accordingly, DBP has not defaulted on its right to compel mediation/arbitration of JEI's counterclaim. *fn4"


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