Third Circuit Finds Waiver of Right to Arbitrate After Ten Months of Litigation

In its recent opinion in In re: Pharmacy Benefit Managers Antitrust Litigation, the Third Circuit held that a defendant waived its right to arbitration after “actively” and “aggressively” litigating an antitrust dispute for ten months, even though no discovery had taken place. Emphasizing that no one factor is determinative, the Third Circuit’s holding is somewhat of a departure from prior cases finding waiver, which “uniformly featured significant discovery activity in the District Court.”

In August 2003, a group of retail pharmacy businesses filed a putative class action against AdvancePCS, a prescription benefits manager, alleging antitrust violations. The Court denied AdvancePCS’ motion to dismiss, which was supported by a binder of exhibits “as thick as the yellow pages,” and its motion for reconsideration. AdvancePCS answered the complaint, asserting “a host of affirmative defenses,” but making no mention of arbitration. In June 2004, ten months after the complaint, AdvancePCS moved to compel arbitration pursuant to a clause in the parties’ agreement.

On appeal from the District Court’s order compelling arbitration, the Third Circuit applied the six Hoxworth factors to determine whether plaintiffs suffered prejudice and, therefore, AdvancePCS had waived arbitration. With regard to factor one––timeliness––the Court determined that although ten months was “at the low end” of the cases in which it had found waiver, it was “significantly longer” than the cases in which it had found no waiver. In support of waiver, the Court also noted that AdvancePCS had contested the merits of the plaintiffs’ claims (factor two), failed to inform plaintiffs of its intent to pursue arbitration (factor three), engaged in non-merits motion practice (factor four), and acquiesced to the Court’s pretrial orders (factor five).

The Court found, however, that the sixth and final Hoxworth factor––the extent to which the parties have engaged in discovery––cut “significantly against a finding of waiver,” because no discovery had taken place. The Court recognized that although it “arguably placed special emphasis on this factor in the past,” “no one factor is determinative.” Viewing the totality of the factors, the Third Circuit held that plaintiffs were prejudiced by the time and expense litigating in the District Court and that AdvancePCS had waived its right to arbitrate.

This decision represents an important new marker in the Third Circuit’s jurisprudence on waiver of the right to arbitrate, joining the Second and the D.C. Circuits in finding waiver where discovery had not yet taken place. With the Court recognizing that here there was “less overall to support waiver” than in prior cases, this opinion may be viewed as setting a new minimum bar for litigation conduct that may result in a defendant’s waiver of arbitration.

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