Third Circuit finds that active litigation of claims waives right to arbitrate | Practical Law

Third Circuit finds that active litigation of claims waives right to arbitrate | Practical Law

The United States Court of Appeals for the Third Circuit has reversed an order compelling arbitration, based on a finding that a defendant waived its rights to arbitrate when it actively litigated the case in federal court for more than ten months prior to demanding arbitration.

Third Circuit finds that active litigation of claims waives right to arbitrate

Practical Law Legal Update 7-522-9008 (Approx. 3 pages)

Third Circuit finds that active litigation of claims waives right to arbitrate

by Abby Cohen Smutny (Partner) and Lee A. Steven (Counsel) and Daniel J. Hickman (Associate), White & Case LLP
Published on 06 Dec 2012 • USA (National/Federal)
The United States Court of Appeals for the Third Circuit has reversed an order compelling arbitration, based on a finding that a defendant waived its rights to arbitrate when it actively litigated the case in federal court for more than ten months prior to demanding arbitration.
In In re Pharmacy Benefit Managers Antitrust Litigation, (3rd Cir. Nov. 15, 2012), retail pharmacy businesses brought a class action suit against AdvancePCS, a prescription benefits manager, for conspiracy to restrain competition in violation of the federal anti-trust laws. For more than ten months, AdvancePCS actively litigated the case without raising the parties' arbitration agreement. When AdvancePCS finally filed a motion to compel arbitration, the District Court granted the motion and stayed the litigation. The District Court concluded that the plaintiffs had entered into an enforceable arbitration agreement that encompassed the anti-trust claims and that AdvancePCS had not waived its right to seek arbitration. The plaintiffs appealed to the Third Circuit, arguing that AdvancePCS had waived its right to arbitration by actively litigating the case and remaining silent about the arbitration clause.
The Third Circuit held that it had jurisdiction to hear the appeal because, when a district court compels arbitration and dismisses the federal suit (rather than staying it), it is considered a "final decision" which can be challenged. In order to pursue an appeal of the order compelling arbitration, the plaintiffs had obtained a voluntary dismissal of the stay. The court concluded that, in terms of finality for jurisdictional purposes, it was irrelevant when and how the plaintiffs obtained dismissal of the complaint.
The Third Circuit noted that courts may refuse to enforce an arbitration agreement when a party has waived his right to arbitration by acting inconsistently with the right and there is a sufficient showing of prejudice. The Third Circuit emphasised that it exercises "plenary review" over questions of whether a party waived its right to compel arbitration through its litigation conduct. Courts look to six non-exclusive factors to guide the waiver inquiry:
  • Timeliness, or lack thereof, of the motion to arbitrate.
  • Extent to which the party seeking arbitration has contested the merits of the opposing party's claims.
  • Whether the party seeking arbitration informed its adversary of its intent to pursue arbitration prior to seeking to enjoin the court proceedings.
  • The extent to which a party seeking arbitration engaged in non-merits motion practice.
  • The party's acquiescence to the court's pre-trial orders.
  • The extent to which the parties have engaged in discovery.
Applying these six factors, the Third Circuit concluded that the circumstances of the case militated in favour of finding that AdvancePCS waived its right to arbitration. The court noted that:
  • There was a significantly long delay in AdvancePCS' motion to compel arbitration.
  • AdvancePCS had directly contested the merits with ample briefing and documentation.
  • AdvancePCS gave no prior indication to the plaintiffs of its intent to compel arbitration.
  • AdvancePCS engaged in some non-merits motion practice.
  • AdvancePCS attended and participated in pre-trial hearings.
  • No discovery had taken place.
The Third Circuit held that the District Court was wrong to rely so heavily on the fact that no discovery had yet taken place, because no one factor is determinative. Accordingly, the Third Circuit found that AdvancePCS waived its right to arbitration by actively litigating the case and the court reversed the District Court's order compelling arbitration.
This case demonstrates that inconsistent conduct, such as active litigation of claims, can lead to waiver of an arbitration clause. More generally, the case illustrates the factors courts consider when determining whether there has been a waiver of a right to arbitration.