The Sixth Circuit Court of Appeals determined that a court, rather than an arbitrator, has authority to decide whether a party waived its right to arbitrate through pre-litigation conduct allegedly inconsistent with an intent to arbitrate.

In JPD, Inc. v. Chronimed Holdings, Inc., No. 07-4427, 2008 WL 3876343 (6th Cir. Aug. 22, 2008), DiCello owned Northland Pharmacy (Northland), a specialty drugstore which sold drugs for complex illnesses. Chronimed agreed to purchase Northland for $12 million, plus additional cash if the earnings target for the next year was exceeded. Chronimed also agreed to maintain aspects of DiCello’s prior business practices throughout the year to give DiCello a fair chance at earning the extra money.

When Northland did not meet its earnings target, DiCello invoked the arbitration procedure outlined in the parties’ agreement to dispute the earnings calculation. DiCello claimed that Chronimed had failed to keep its promise of maintaining prior business practices and thereby caused Northland’s earnings to fall short of target.

Chronimed responded by letter, disputing DiCello’s allegations. DiCello sued, demanding an accounting and seeking damages. Chronimed moved to compel arbitration. The district court denied the motion, holding that Chronimed waived its right to demand arbitration by sending the response letter to DiCello. Chronimed appealed.

On appeal, the Court first determined that DiCello’s claims fell within the scope of the arbitration agreement. It rejected DiCello’s argument that the arbitration agreement was intended only to cover disputes regarding the earnings calculation and not other contractual disputes, noting that the arbitration agreement also covered "all issues having a bearing on such dispute."

Moreover, the Court found that (1) Chronimed’s response letter to DiCello’s initial complaint was not an act in complete opposition to Chronimed’s reliance on the parties’ arbitration agreement and (2) the waiver determination was for the Court, rather than the arbitrator. See Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207, 217-18 (3d Cir. 2007).

The Court reasoned that parties would not expect arbitrators to resolve issues regarding pre-litigation conduct, because such conduct rarely affects the merits of a dispute. Moreover, according to the Court, "a court is most adept at policing procedure-abusing conduct." Also, the Court found that referring this kind of a claim to an arbitrator would prove "exceptionally inefficient" because such a decision made by an arbitrator would just refer the case back to the court.

On the waiver question, the Court determined that Chronimed’s response letter did not constitute conduct inconsistent with arbitration. As the Court noted, simply identifying a weakness in DiCello’s case did not amount to such conduct.