Implicit Waiver of The Right to Arbitrate by Litigation – A Massachusetts District Court Addresses The Factors

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Complex cases can present difficult legal issues but may also illuminate how courts evaluate questions such as when a party has waived its right to arbitrate. This is true regardless of the type of claims presented because the analytical framework spans diverse areas of law. District Judge Allison D. Burroughs’ recent Memorandum and Order addresses arbitrability issues and waiver of the right to seek arbitration in a  detailed fashion. In re: Intuniv Antitrust Litigation, Case No. 1:16-cv-12653-ADB, (D. Mass.), originally decided Jan. 29, 2021, but filed Feb. 11, 2021.

Judge Burroughs’ opinion arose from an agreement between the brand and generic manufacturers of a drug called Intuniv, an ADHD medication. Defendants Shire LLC and Shire U.S., Inc. (“Shire”) manufacture Intuniv, a brand name for extended release guanfacine hydrochloride. Defendants Actavis LLC and related entities (“Actavis”) and Shire together produce Intuniv’s generic counterpart. The plaintiffs claim they were forced to pay inflated prices for Intuniv because of an anticompetitive agreement to delay competition for brand and generic Intuniv in violation of the Sherman Act.

Important arbitration and waiver issues emerged from this antitrust class action environment. It is those issues that this blog article examines.

Motion to Compel Arbitration

Defendant Shire moved to compel arbitration of direct purchaser plaintiffs Meijer, Inc. and Meijer Distribution, Inc. (collectively “Meijer”), claims against it. Shire maintained that Meijer entered into agreements requiring it to arbitrate its claims against Actavis and that due to equitable estoppel must also arbitrate its related claims against Shire.  In response, Meijer asserted Shire waived any ability it had to arbitrate, that the equitable estoppel argument had to be ruled on by the court and, in any event, was invalid on a number of grounds.

Ultimately, the court concluded that an arbitrator must decide if Shire can compel Meijer to arbitrate the dispute. The ruling was premised on the fact that both the applicable agreements incorporated the American Arbitration Association (“AAA”) Commercial Rules and that those Rules delegate questions of arbitrability to the arbitrator.  See AAA Commercial Rule 7(a) and Awuah v. Coverall N. Am., Inc., 554 F.3d 7, 11 (1st Cir. 2009); Blanton v. Domino’s Pizza Franchising LLC, 962 F.3d 842, 846 (6th Cir. 2020).

The court rejected the argument that because Meijer did not enter into a contract with Shire, it could not have agreed to delegate questions of arbitrability to an arbitrator. Following Henry Schein v. Archer & White Sales, Inc., 139 S. Ct. 524, 531 (2019) and DeAngelis v. Icon Ent. Grp. Inc., 364 F. Supp. 3d 787, 796-97 (S.D. Ohio 2019) the court disagreed. Because a court must respect delegation of questions of arbitrability, the District Court “must defer to the arbitrator.”  Slip Op. at 16.

Waiver of the Right to Seek Arbitration

The court next addressed the reoccurring question of whether Shire, by participating in litigation for  more than three years, waived its right to arbitrate. The initial skirmish was, however, over “who decides” – the court or the arbitrator?

Established First Circuit law indicated that the court should decide – “waiver by conduct, at least where due to litigation-related activity, is presumptively an issue for the court.” Marie v. Allied Home Mortg. Corp., 402 F. 3d 1, 14 (1st Cir. 2005). And, the waiver by litigation question “is a different issue that does not depend on the underlying arbitrability of the dispute.” Op. at 16-17.

The court then turned to the waiver analysis itself, governed by federal law. While the court examined five different factors, it recognized that no single factor takes precedence and that prejudice, while essential to the waiver analysis, had to be established by the party claiming waiver.  See FPE Found. v. Cohen, 801 F. 3d 25, 29 (1st Cir. 2015), and Joca-Roca Real Est., LLC v. Brennan, 772 F.3d 945-49 (1st Cir. 2014).

The court then considered the first waiver factor – participation in litigation in a manner inconsistent with arbitration.  Despite spending over three years in the lawsuit, the court found the relevant period began after Shire became aware of Meijer’s arbitration agreements with Actavis. But, as soon as Shire learned of the agreements, it filed its motion to compel arbitration. Moreover, the court found that Shire “was not obligated to ‘scour materials in the possession of absent class members to preserve undisclosed arbitration rights.’” Slip Op. 20.

As to the second waiver factor – invoking the litigation mechanism – the court again noted that Shire was not aware of the arbitration agreements when initially pursuing litigation. Indeed, the court found “[t]here is no evidence that Shire used the litigation machinery for an improper purpose or held off . . . to gain a strategic advantage. * * *  Nor is there evidence that Shire sought arbitration because it was dissatisfied with how the litigation was proceeding.”  Slip Op. at 21.

The third waiver factor, proximity to trial – which was approaching – weighted toward finding waiver. Yet, the fifth waiver factor, “whether discovery progressed beyond where it would have for an arbitration” (after being tailored by the court), was found to be inconsequential. “. . . Shire was not yet aware of its asserted right when it engaged in discovery.” Slip Op. at 23.

Analysis of the sixth and final waiver factor, prejudice to the party claiming waiver, was nuanced. The court noted there were two categories of potential prejudice – to Meijer and to the rest of the class. As to the first category, “any prejudice is minimal given that Meijer has been actively involved in litigation only since June 2020.” And while other Direct Purchaser plaintiffs “may have to expend additional resources in advancing another proposed class representative if Meijer’s claims are . . . arbitrable, that potential prejudice is insufficient” to find waiver. Slip Op. at 24.

So, after considering the five applicable waiver factors and “resolving any doubt in favor of arbitration” pursuant to FPE Found., 801 F.3d at 29, the court found no waiver of Shire’s right to arbitrate Meijer’s claims. Judge Burroughs’ careful analysis of the waiver factors, based on First Circuit decisions, is instructive for potential litigants. Unfortunately, the waiver tests vary among the federal circuits. We noted this continuing problem in an article advocating more uniform waiver standards. See John Bruce Lewis and Dustin M. Dow, Searching For Clarity Amid Confusion: An Examination of the Standards for Determining Waiver and Revival of the Right to Arbitrate, 67 Kansas Law Review 327, 342-52 (December 2018). Until the U.S. Supreme Court can achieve that uniformity of waiver standards, analytical opinions like the one authored by Judge Burroughs are the best we can get.

Bottom Line:

The District Court found that under AAA rules, an arbitrator should determine whether (1) claims are arbitrable and (2) whether a nonsignatory can rely on such an agreement to compel arbitration based on equitable estoppel.  Finally, the District Court also found that the defendant hadn’t waived its right to seek arbitration by its litigation conduct.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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