[author: Liz Kramer]
In answer to the proverbial question ”how much litigation waives the right to arbitrate?,” the Third Circuit has responded that ten months does the trick, if the party seeking arbitration has engaged in significant motion practice, regardless of whether any discovery was exchanged. In re Pharmacy Benefit Managers Antitrust Litig., __ F.3d __, 2012 WL 5519658 (3d Cir. Nov. 15, 2012). This marks a change in the Third Circuit’s case law on waiver, which had previously placed a strong emphasis on the exchange of discovery as the point of no return.
In re Pharmacy involves a class of retail pharmacies that brought suit in federal court alleging the pharmacy benefits manager violated antitrust laws. The defendant/benefits manager responded by first bringing a motion to dismiss, arguing the plaintiffs had no antitrust injury. After that motion was denied, defendant filed its answer without asserting any right to arbitrate. After the defendant obtained new counsel, and the case had been underway for ten months, the defendant filed a motion to compel arbitration. The district court granted the motion to compel and stayed the case, finding that defendant had not waived arbitration. The plaintiffs refused to bring their claims in arbitration and instead dismissed their claims in order to appeal the order compelling arbitration.
The Third Circuit first addressed its jurisdiction over the appeal. The defendant argued the plaintiffs should not be rewarded for dismissing their claims in order to find an “end run” around the rule that a successful motion to compel arbitration is not normally appealable unless the judge simultaneously dismisses the case. However, the Third Circuit found it irrelevant how the claims were dismissed – jurisdiction over the appeal was proper because the plaintiffs’ claims were dismissed (as opposed to just stayed).
Then the Third Circuit reversed the district court, finding that the defendant had waived its right to arbitrate. The court analyzed all six relevant factors from its Hoxworth decision on waiver, but focused heavily on these two acts by the defendant: waiting ten months to bring its motion to compel arbitration without any explanation other than its change of counsel; and making a significant motion to dismiss on the merits. However, another factor, the extent of discovery, cut against waiver because the parties had not engaged in any discovery. Indeed, the Third Circuit acknowledged that its “cases finding waiver have uniformly featured significant discovery activity in the district court.” Even so, the Third Circuit relied on cases from other circuits and the general rule that a defendant cannot “act inconsistently with the right to arbitrate” in finding that the benefits manager had waived its right to arbitrate.
Because the Third Circuit reversed on the question of waiver, it did not address whether the arbitration clause was unenforceable due to its limitation on the remedies available under antitrust laws.