The Importance of Careful Pre-Suit Decision Making in Shareholder Disputes: Warrington v. Rocky Patel Premium Cigars, Inc.

In a recent 11th Circuit Court of Appeals decision, Warrington v. Rocky Patel Premium Cigars, Inc., No. 22-12575, 2023 WL 1818920 (11th Cir. Feb. 8, 2023), the court provided valuable lessons for partners, shareholders, and small business owners who may find themselves in disputes. This case serves as a cautionary tale, highlighting the importance of careful strategy and legal counsel when pursuing litigation or arbitration.

The dispute centered on Brad Warrington, a minority shareholder in Rocky Patel Premium Cigars, who wanted to divest from his holdings in the company. The buy-sell agreement between Warrington and Rakesh Patel, the majority shareholder, included an arbitration provision for any disputes arising out of the agreement. However, the case demonstrates how mistakes made during litigation can result in a waiver of the right to arbitration.

After years of disagreement over the value of Warrington’s shares and alleged improprieties by Patel, Warrington found a private buyer and notified Patel of his intention to sell. Patel refused to acknowledge the notice and subsequently sued Warrington in Florida state court, seeking a declaratory judgment and alleging breach of contract, among other claims.

While the state action was pending, Warrington sued Patel in federal court, bringing several counts, including breach of contract and breach of fiduciary duty. Patel moved to dismiss, remand, or stay the federal action, but the district court denied his motion. It wasn’t until June 2022 that Patel moved to stay and compel arbitration under the agreement. However, the district court denied this motion, finding that Patel had waived his right to arbitrate by initially filing in state court and moving to dismiss or remand Warrington’s federal action.

On appeal, the 11th Circuit affirmed the district court’s decision, agreeing that Patel had waived his right to arbitration by substantially invoking the litigation machinery before demanding arbitration. The court emphasized the importance of fair notice to the opposing party and the court of a party’s arbitration rights and its intent to exercise them.

The Warrington case serves as a reminder that partners, shareholders, and small business owners need to be cautious when contemplating litigation in disputes. Mistakes made during the litigation process can lead to a waiver of valuable rights, such as the right to arbitrate, as demonstrated in this case. To avoid making those mistakes and to protect your interests in a dispute, it is crucial to consult with experienced legal counsel.

Lubin Austermuehle firm is well-equipped to help you navigate the complexities of partnership disputes, shareholder disputes, and disputes among owners of small or closely held businesses. We understand the potential pitfalls and can provide strategic advice to help you achieve the best possible outcome. If you find yourself in a similar situation or have questions about your rights in a partnership or shareholder dispute, don’t hesitate to contact our firm for guidance and representation by calling 630-333-0333 or contacting us via our website by clicking here.

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