## Facts

- Cyril Stone, a customer of E.F. Hutton & Company, executed a 1976 customer agreement containing a broad clause requiring arbitration of controversies relating to the account or transactions.
- In 1987, Stone sued Hutton and two brokers in federal court alleging federal securities fraud (§ 10(b)), Florida securities-law violations, and common-law claims (fraud, negligence, breach of fiduciary duty).
- After the suit was filed, Hutton participated extensively in litigation, including taking Stone’s deposition twice (1987 and 1988), participating in additional discovery, and operating under a scheduling order setting discovery and trial deadlines.
- In June 1989—nearly two years after the complaint and after substantial litigation activity—Hutton moved to compel arbitration and to stay the federal action pending arbitration.
- The district court denied the motions, finding Hutton had waived arbitration by substantially invoking the judicial process to Stone’s prejudice.
- Hutton appealed to the Eleventh Circuit.

## Issues

1. Whether Hutton waived its contractual right to compel arbitration by substantially participating in litigation before seeking arbitration.
2. Whether the post-*McMahon* enforceability of predispute arbitration agreements for § 10(b) claims prevents a finding of waiver based on litigation conduct.

## Decision

- The Eleventh Circuit affirmed the denial of Hutton’s motion to compel arbitration and to stay the case.
- The court adopted the district court’s reasoning that Hutton waived arbitration by litigating for an extended period and thereby prejudicing Stone.
- The court treated the arbitration clause as generally enforceable after *McMahon*, but held enforceability did not preclude waiver.

## Legal Principles

- A party may waive an otherwise valid contractual right to arbitrate.
- Waiver occurs when the party seeking arbitration substantially invokes the judicial process and the opposing party suffers prejudice.
- Participation in discovery alone does not automatically establish waiver; the timeliness of the arbitration demand and resulting prejudice are central.
- The federal policy favoring arbitration does not bar waiver where a party’s litigation conduct is inconsistent with an intent to arbitrate.

## Conclusion

Hutton’s nearly two-year delay in demanding arbitration, combined with substantial discovery and trial-directed litigation activity, constituted a substantial invocation of the judicial process that prejudiced Stone; accordingly, Hutton waived its contractual right to arbitrate, and the denial of its motion to compel arbitration was affirmed.


Stone v. E.F. Hutton & Co., 898 F.2d 1542 (11th Cir. 1990)