Where a defendant advanced an arbitration demand and, then, voluntarily withdrew the demand, the behavior was inconsistent with the right to arbitrate and, as a result, defendant waived the argument.

The 7th U.S. Circuit Court of Appeals affirmed a decision by U.S. District Judge Joan B. Gottschall.

Brickstructures Inc. is a product design firm that creates LEGO sets. Coaster Dynamix Inc. creates and sells model roller coasters. The two companies partnered to design a roller coaster kit that would be compatible with LEGOs or other plastic bricks, executing a joint venture to memorialize the agreement. The document used by the two companies was a stock contract with many blanks left unfilled.

The collaboration successfully released an initial product. Things went awry during the design of a successor product and the relationship fizzled.

Coaster Dynamix went on to independently launch the Cyclone, a LEGO compatible roller coaster kit, without attributing any credit to Brickstructures. Brickstructures then sued, claiming that Coaster Dynamix breached the joint venture agreement and its fiduciary duties and falsely advertised in violation of the Lanham Act.

Coaster Dynamix moved to dismiss, alleging that the joint venture agreement was not a binding contract. The U.S. District Court initially dismissed the case due to a jurisdictional defect, which Brickstructures cured. Coaster Dynamix then moved to dismiss again, arguing its unenforceable contract point, and adding arguments of improper venue, as the contract required arbitration, and a lack of personal jurisdiction.

Brickstructures attorneys then sent a letter to Coaster Dynamix demanding that Coaster Dynamix withdraw its venue and personal jurisdiction arguments, arguing that they were waived because Coaster Dynamix failed to advance them in the first motion to dismiss.

Coaster Dynamix did so, and the district court then denied the second motion to dismiss, finding that the joint venture was a binding agreement.

One month later, Coaster Dynamix moved to compel arbitration. Brickstructures argued that Coaster Dynamix was playing games and had plainly waived its right to arbitrate. The district court declined to compel arbitration, finding that Coaster Dynamix waived its right to arbitrate by expressly withdrawing the arbitration demand in its second motion to dismiss. Coaster Dynamix then appealed.

The appellate panel began by finding no clear error in the district court’s finding that Coaster Dynamix waived its right to arbitrate. The panel stated that the company expressly invoked the venture agreement’s arbitration provision and urged dismissal of Brickstructures’ suit because arbitration was the exclusive venue before abandoning that argument.

The panel found that this was a litigation choice inconsistent with the right to arbitrate. The panel noted that when a party adopts a wait-and-see approach to enforcing its right to arbitrate, as Coaster Dynamix did, the time and resources of the district court are wasted.

Coaster Dynamix argued that its waiver was not truly voluntary because it was made in response to Brickstructures’ threat to seek sanctions. The panel rejected this argument, stating that Coaster Dynamix’s choice was intentional and voluntary.

The panel noted that Coaster Dynamix could have conducted its own research and determined that its arbitration demand did not warrant sanctions, but instead it chose to withdraw the argument, behavior that was inconsistent with the right to arbitrate.

The panel, therefore, affirmed the district court’s decision.

Brickstructures Inc. v. Coaster Dynamix, Inc.

No. 19-2187

Writing for the court: Judge Michael Y. Scudder Jr.

Concurring: Judges Frank H. Easterbrook and Ilana Diamond Rovner

Released: March 11, 2020