In Re: Pharmacy Benefit v. ( 2012 )

PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
No. 12-1430
_____________
IN RE: PHARMACY BENEFIT MANAGERS ANTITRUST
LITIGATION
(MDL 1782)
BELLEVUE DRUG CO; ROBERT SCHREIBER INC,
d/b/a BURNS PHARMACY; REHN-HUERBINGER DRUG
CO., d/b/a PARKWAY DRUGS #4, on behalf of themselves
and all others similarly situated; PHARMACY FREEDOM
FUND; NATIONAL COMMUNITY PHARMACISTS
ASSOCIATION
v.
CAREMARKSPCS, f/k/a ADVANCEPCS
(D.C. Civil No. 03-cv-04731)
BELLEVUE DRUG CO.,
ROBERT SCHREIBER, INC., d/b/a BURNS
PHARMACY; REHN-HUERBINGER DRUG CO., d/b/a
PARKWAY DRUGS #4, on behalf of themselves
and all others similarly situated,
Appellants
______________
APPEAL FROM THE UNITED STATES DISTRICT
COURT FOR THE EASTERN DISTRICT OF
PENNSYLVANIA
(D.C. Civil No. 03-cv-04731)
District Judges: Honorable Eduardo C. Robreno
Honorable C. Darnell Jones, II
____________
H. Laddie Montague, Jr., Esq (Argued)
David A. Langer, Esq.
Martin I. Twersky, Esq.
Berger & Montague
1622 Locust Street
Philadelphia, PA 19103
Counsel for Appellants
Michael D. Leffel, Esq. (Argued)
Foley & Lardner
150 East Gilman Street
Suite 5000
Madison, WI 53703
-and-
Robert H. Griffith, Esq.
Foley & Lardner
321 North Clark Street
Suite 2800
Chicago, IL 60654
Counsel for Appellee
____________
Argued: September 10, 2012
____________
Before: SCIRICA, ROTH and BARRY, Circuit Judges
(Opinion Filed: November 15, 2012)
____________
OPINION OF THE COURT
____________
BARRY, Circuit Judge
Plaintiffs Bellevue Drug Co., Robert Schreiber, Inc.,
and Rehn-Heurbinger Drug Co. (collectively “Plaintiffs”)
appeal the District Court’s order granting Defendant
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AdvancePCS’s motion to compel arbitration. Plaintiffs argue
that the District Court erred in ordering them to arbitrate their
antitrust claims because: (1) AdvancePCS waived its right to
arbitrate by actively litigating the case in federal court for
more than ten months prior to demanding arbitration; and (2)
the arbitration clause is unenforceable because it limits the
remedies that Plaintiffs can receive under the Sherman Act,
and contains a fee-shifting provision that deters Plaintiffs
from proceeding in arbitration. Because we agree with
Plaintiffs that AdvancePCS waived its right to arbitrate, we
will reverse the order of the District Court compelling
arbitration, and need not reach those issues addressed to the
clause itself.
I. Background
The factual and procedural background underlying this
case was extensively summarized in this Court’s precedential
decision disposing of an earlier appeal, In re Pharmacy
Benefit Managers Antitrust Litigation, 582 F.3d 432 (3d Cir.
2009). We will not reprise the entire background here, but
will set forth those facts necessary to our analysis of the
waiver issue, and most particularly those facts preceding
AdvancePCS’s motion to compel arbitration.
AdvancePCS is a prescription benefits manager
(“PBM”) for drug benefit plans sponsored by employers,
unions, government agencies, insurance plans and others
(“Plan Sponsors”). PBMs are retained by Plan Sponsors to
efficiently manage their benefit plans and to achieve cost
savings for Plan Sponsors and plan members. PBMs achieve
efficiencies and cost savings in a variety of ways, including
negotiating discounts or rebates from drug manufacturers,
providing mail order prescription service to plan members,
contracting with retail pharmacies for reimbursement when
prescriptions are filled for plan members, and electronic
processing and paying of claims.
Plaintiffs are retail pharmacy businesses that entered
into written Pharmacy Provider Agreements (“the
Agreements” or “PPA”) with AdvancePCS to provide
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prescription drugs and related pharmacy services to persons
covered by drug benefit plans administered by AdvancePCS.
The PPA establishes the terms and conditions under which the
Plaintiffs were to provide prescription drugs and services to
plan members, and sets forth an agreed reimbursement rate
that AdvancePCS will pay to the pharmacies. The PPA also
contains an arbitration clause which provides:
Arbitration. Any and all controversies in
connection with or arising out of this
Agreement will be exclusively settled by
arbitration before a single arbitrator in
accordance with the Rules of the American
Arbitration Association. The arbitrator must
follow the rule of law, and may only award
remedies provided in this Agreement. The
award of the arbitrator will be final and binding
on the parties, and judgment upon such award
may be entered in any court having jurisdiction
thereof. Arbitration under this provision will be
conducted in Scottsdale, Arizona, and Provider
hereby agrees to such jurisdiction, unless
otherwise agreed to by the parties in writing or
mandated by Law, and the expenses of the
arbitration, including attorneys’ fees, will be
paid by the party against whom the award of the
arbitrator is rendered. This Section 9.5 and the
parties’ rights hereunder shall be governed by
the Federal Arbitration Act, 9 U.S.C. §§ 1 et
seq.
(App. 381-82.) The PPA also includes a severability clause,
which provides:
Lawful Interpretation. Whenever possible,
each provision of this Agreement will be
interpreted so as to be effective and valid under
applicable Law, but if any provision of this
Agreement should be rendered unenforceable or
invalid under applicable Law, that provision
will be ineffective to the extent of such
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unenforceability or invalidity without
invalidating the remaining provisions of this
Agreement.
(App. 381.)
On August 15, 2003, Plaintiffs filed a putative class
action lawsuit on behalf of themselves and all other similarly-
situated pharmacies that contracted with AdvancePCS to sell
drugs for a prescription drug benefit plan. The complaint
asserted an antitrust claim against AdvancePCS, alleging that
it had engaged in an unlawful conspiracy with its Plan
Sponsors to restrain competition in violation of the Sherman
Act, 15 U.S.C. § 1. In particular, Plaintiffs alleged that
AdvancePCS used the combined economic power of its Plan
Sponsors to reduce the contractual amount it pays to retail
pharmacies below the levels that would prevail in a
competitive marketplace. Plaintiffs also alleged that the
Agreements impose certain limitations on drug refills and co-
payment charges to plan members. The complaint sought
treble damages, injunctive relief, attorneys’ fees, and costs.
The case was initially assigned to Judge Eduardo C. Robreno.
As noted at the outset, for more than ten months
following the filing of the complaint, AdvancePCS actively—
and, indeed, aggressively—litigated the case without
mentioning arbitration, much less filing a motion to compel
arbitration. On September 25, 2003, more than a month after
the complaint was filed, AdvancePCS filed a nineteen-page
motion to dismiss the complaint under Fed. R. Civ. P.
12(b)(6), arguing that Plaintiffs suffered no antitrust injury,
failed to allege a per se price-fixing agreement, and failed to
allege any rule of reason price-fixing agreement. With the
motion, AdvancePCS submitted a binder of allegedly
judicially-noticeable exhibits—as “thick as the yellow pages,”
we are told, including three lengthy government-sponsored
studies of the efficiency enhancing effects of PBMs, as well
as AdvancePCS’s own annual report to the SEC (Form 10-K),
and other materials. Plaintiffs submitted a thirty-one page
response brief, and AdvancePCS filed a seventeen-page reply
brief, expanding upon its earlier presentation as it argued that
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no antitrust injury had been alleged; that no per se price-
fixing agreement had been alleged because the complaint
lacked allegations of horizontal conspiracy, monopsony
power, and supra-competitive output pricing; that Plaintiffs
incorrectly interpreted materials of the U. S. Department of
Justice and Federal Trade Commission (“FTC”); that price-
fixing agreements by sellers should be treated differently; that
Plaintiffs’ authorities on monopsony power were inadequate;
that buyer cartel cases were inapposite; and that the complaint
failed to state a rule of reason antitrust violation.
On February 5, 2004, Judge Robreno held a hearing on
the motion to dismiss, and on March 2, 2004, denied the
motion in a detailed sixteen-page opinion, rejecting each of
AdvancePCS’s substantive antitrust arguments—Plaintiffs,
the Court concluded, had standing and had alleged facts
sufficient to state an antitrust claim. Two weeks later, on
March 16, 2004, AdvancePCS filed a twelve-page motion to
reconsider the denial of its motion to dismiss, or to certify it
for interlocutory appeal pursuant to 28 U.S.C. § 1292(b). The
motion to reconsider again urged dismissal based on the
results of a recent FTC investigation into the acquisition of
AdvancePCS by Caremark, Inc. Plaintiffs filed a fifteen-page
response brief, and AdvancePCS replied.
At the same time in March 2004 as it filed its motion
for reconsideration, AdvancePCS filed an answer to the
complaint, and asserted a host of affirmative defenses,
including failure to state a claim, lack of standing, lack of
antitrust injury, laches, estoppel, waiver, failure to mitigate,
failure to plead with particularity, and failure to join necessary
and indispensable parties. On April 20, 2004, new counsel
for AdvancePCS entered their appearances. A hearing was
subsequently held on the motion for reconsideration, and on
May 14, 2004, the motion was denied. Also on May 14,
2004, Judge Robreno ordered the parties to submit a
discovery plan and a proposed case management order, and
scheduled a pretrial conference for June 15, 2004. On
consent, the conference was rescheduled to July 6, 2004.
Five weeks after Judge Robreno’s latest order, and
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after more than ten months of active and wholly unsuccessful
litigation, on June 21, 2004, AdvancePCS filed a motion to
compel arbitration asking the District Court, for the first time,
to enforce the arbitration clause in the PPA and enter an order
compelling arbitration of the case. Plaintiffs opposed the
motion, arguing that AdvancePCS waived any right to
arbitrate by actively litigating the case in federal court for as
long as it did, and that the arbitration agreement was
unenforceable for various reasons.
On August 24, 2004, Judge Robreno granted the
motion to compel arbitration and stayed the District Court
action. He concluded that Plaintiffs had entered into
enforceable arbitration agreements that encompassed the
antitrust claims, and that AdvancePCS had not waived its
right to seek arbitration. Plaintiffs filed a motion for
reconsideration or, in the alternative, for certification of an
interlocutory appeal pursuant to 28 U.S.C. § 1292(b). Judge
Robreno denied reconsideration and certification, and ordered
that the case remain stayed in accordance with the Federal
Arbitration Act (“FAA”).
Plaintiffs, however, did not thereafter initiate
arbitration proceedings. Rather, on May 19, 2006, Plaintiffs
filed a motion to lift the stay and dismiss the complaint. In
the motion, Plaintiffs represented that they did not intend to
arbitrate their claims, and instead wished to dismiss the
complaint so that they could pursue an appeal of the decision
to compel arbitration. While this motion was pending, the
case was transferred by the Judicial Panel on Multidistrict
Litigation to Judge John P. Fullam for consolidated pretrial
proceedings with five other similar antitrust actions against
PBMs.
On December 7, 2006, Judge Fullam convened a status
conference in the MDL proceedings and heard argument on
the motion to lift the stay and dismiss the complaint.
Following the conference, Judge Fullam sua sponte issued an
order vacating Judge Robreno’s order compelling arbitration,
concluding that “the parties never intended this type of
litigation to be submitted to arbitration,” and “that the
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Arbitration Agreement is unenforceable because it violates
public policy.” (App. 309.) Judge Fullam thus denied as moot
the Plaintiffs’ motion to dismiss their complaint to seek
appellate review.
AdvancePCS filed an immediate appeal to this Court
pursuant to 9 U.S.C. § 16(a)(1)(A) & (B). Concluding that
Judge Fullam’s order violated the law of the case doctrine, we
vacated that order, and remanded with directions to reinstate
Judge Robreno’s order compelling arbitration.
On November 5, 2009, following remand, Plaintiffs
renewed their motion to dismiss their complaint to permit an
immediate appeal of Judge Robreno’s reinstated order
compelling arbitration. While this motion was pending, the
case was reassigned to Judge C. Darnell Jones. The parties
were ordered to submit supplemental briefs, and oral
argument was held. On January 27, 2012, Judge Jones
granted Plaintiffs’ motion and dismissed their claims with
prejudice. Plaintiffs appealed.
II. Jurisdiction
AdvancePCS questions our jurisdiction to hear this
appeal. Under the FAA, a party may generally not appeal
from an interlocutory order “compelling arbitration” or
“granting a stay” pending arbitration. 9 U.S.C. § 16(b)(1) &
(b)(3). Thus, Judge Robreno’s order compelling arbitration
was, at least initially, non-reviewable. In an effort to
circumvent the nonappealabilty of Judge Robreno’s order,
Plaintiffs sought several times, and eventually obtained, an
order lifting the stay and dismissing their complaint with
prejudice.
The FAA provides that an “appeal may be taken from
. . . a final decision with respect to an arbitration that is
subject to this title.” Id. § 16(a)(3). Where a district court
compels arbitration and dismisses the federal lawsuit (rather
than staying it), the Supreme Court has held that is a “final
decision with respect to an arbitration,” and an appeal may
then be taken challenging the order compelling arbitration.
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Green Tree Fin. Corp.-Alabama v. Randolph, 531 U.S. 79, 89
(2000). This is true whether the dismissal of the case is with
or without prejudice. Blair v. Scott Specialty Gases, 283 F.3d
595, 600-02 (3d Cir. 2002). The Supreme Court reasoned that
the phrase “final decision with respect to an arbitration” has
the same meaning as “final decision” in other contexts, and
refers to a decision that “‘ends the litigation on the merits and
leaves nothing more for the court to do but execute the
judgment.’” Randolph, 531 U.S. at 86 (quoting Digital
Equip. Corp. v. Desktop Direct, Inc., 511 U.S. 863, 867
(1994) and Coopers & Lybrand v. Livesay, 437 U.S. 463, 467
(1978)). The “judgment” to be executed upon is not the
underlying complaint, but a “new” and “separate” proceeding
in the District Court to enter judgment on the arbitration
award or vacate or modify that award.
AdvancePCS attempts to distinguish Randolph and
Blair, arguing that those cases involved involuntary
dismissals of the plaintiffs’ claims simultaneous with the
order compelling arbitration, whereas Plaintiffs sought a
voluntary dismissal of their complaint after the fact.
AdvancePCS contends that Plaintiffs are thus seeking an “end
run” around the nonappealability of Judge Robreno’s order.
If Judge Robreno had dismissed Plaintiffs’ claims at the same
time he compelled arbitration, there would be no doubt as to
our jurisdiction under Randolph and Blair.
In essence, though, Judge Jones’ dismissal order
modified Judge Robreno’s order by substituting a dismissal
for the stay, thus putting Plaintiffs in a functionally-identical
position to the plaintiffs in Randolph and Blair. Just as in
those cases, the ultimate dismissal was an order that ended the
litigation on the merits and left nothing more for the District
Court to do but execute the judgment. It is thus a “final
decision with respect to an arbitration” within the meaning of
9 U.S.C. § 16(a)(3). The fact that Plaintiffs obtained the
dismissal in a different manner is irrelevant because, as we
have noted, “[t]he [Randolph] decision draws a distinction
between dismissals and stays, but does not draw any
distinctions within the universe of dismissals.” Blair, 283
F.3d at 602. Accordingly, we have subject matter jurisdiction.
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III. Discussion
Congress enacted the FAA in 1925 to counteract “the
traditional judicial hostility to the enforcement of arbitration
agreements.” Alexander v. Anthony Intern., L.P., 341 F.3d
256, 263 (3d Cir. 2003). “Under the FAA, such agreements
are enforceable to the same extent as other contracts.” Parilla
v. IAP Worldwide Servs., VI, Inc., 368 F.3d 269, 275 (3d Cir.
2004) (internal quotation marks omitted). There is a strong
federal policy in favor of arbitration, and a “party to a valid
and enforceable arbitration agreement is entitled to a stay of
federal court proceedings pending arbitration as well as an
order compelling such arbitration.” Alexander, 341 F.3d at
263; see also Howsam v. Dean Witter Reynolds, Inc., 537
U.S. 79, 83 (2002) (noting that “the Court has also long
recognized and enforced a liberal federal policy favoring
arbitration agreements”). When a federal court addresses a
motion to compel arbitration, it is “limited to a narrow scope
of inquiry.” Gay v. CreditInform, 511 F.3d 369, 386 (3d Cir.
2007) (internal quotation marks omitted). The court may
consider only narrow “gateway matters” that touch on the
question of arbitrability, such as whether an arbitration
agreement applies to a particular controversy, or whether the
parties are bound by the arbitration clause. Certain
Underwriters at Lloyd’s London v. Westchester Fire Ins. Co.,
489 F.3d 580, 585 (3d Cir. 2007). “Thus, only when there is a
question regarding whether the parties should be arbitrating at
all is a question of arbitrability raised for the court to resolve.
In other circumstances, resolution by the arbitrator remains
the presumptive rule.” Id. (internal citation and quotation
marks omitted).
Plaintiffs concede that the PPA contains a broadly-
worded arbitration clause that applies to “[a]ny and all
controversies in connection with or arising out of th[e]
Agreement.” Moreover, Plaintiffs do not seriously dispute
that their antitrust claim against AdvancePCS is a controversy
arising out of the PPA and thus falls within the scope of the
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arbitration clause. 1 Rather, Plaintiffs argue that Judge
Robreno incorrectly decided several questions of arbitrability
and erred in granting the motion to compel arbitration
because: (1) AdvancePCS waived its right to arbitrate; and (2)
the arbitration clause is unenforceable. As noted above, we
agree on the waiver issue and thus do not reach the issue of
enforceability.
Plaintiffs’ primary argument on appeal is that Judge
Robreno erred in compelling arbitration because AdvancePCS
waived its right to arbitrate by actively litigating the case in
federal court for more than ten months while remaining silent
about arbitration. Judge Robreno concluded that the issue of
waiver was for the arbitrator (not the Court) to decide and
that, in any case, Plaintiffs had failed to show prejudice
resulting from AdvancePCS’s delay in asserting the
arbitration clause. We exercise plenary review over the
question of “whether a party through its litigation conduct,
waived its right to compel arbitration.” Gray Holdco, Inc. v.
Cassady, 654 F.3d 444, 451 (3d Cir. 2011) (internal quotation
marks omitted). To the extent that a district court makes
factual findings in making this determination, we review its
findings for clear error. Id.At the time Judge Robreno issued his order compelling
arbitration, the law was unclear as to whether waiver was an
issue that should be decided by the district court or the
arbitrator. Several years after that order, however, we made
clear that “waiver of the right to arbitrate based on litigation
conduct remains presumptively an issue for the court to
decide.” Ehleiter v. Grapetree Shores, Inc., 482 F.3d 207,
221 (3d Cir. 2007). The only question, then, is whether Judge
1
Plaintiffs do argue that “[t]he express terms of the
[arbitration] clause demonstrate that the parties did not intend
to arbitrate antitrust claims.” (Appellants’ Br. at 48.) To the
extent this is intended as an argument that the antitrust claims
do not fall within the plain language of the arbitration clause,
that argument has been waived because it was not raised
before the District Court. (App. 120-46, arguing only waiver
& unenforceability).
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Robreno erred in finding that Plaintiffs had failed to establish
waiver.
A. Legal Standard for Assessing Waiver
“‘Consistent with the strong preference for arbitration
in federal courts, waiver is not to be lightly inferred,’” and
“‘will normally be found only where the demand for
arbitration came long after the suit commenced and when
both parties had engaged in extensive discovery.’” Nino v.
Jewelry Exch., Inc., 609 F.3d 191, 208 (3d Cir. 2010)
(quoting PaineWebber Inc. v. Faragalli, 61 F.3d 1063, 1068-
69 (3d Cir. 1995)). A court may, however, refuse to enforce
an arbitration agreement where a “party has acted
inconsistently with the right to arbitrate, and we will not
hesitate to hold that the right to arbitrate has been waived
where a sufficient showing of prejudice has been made by the
party seeking to avoid arbitration.” Id. (internal citations and
quotation marks omitted).
“[P]rejudice is the touchstone for determining whether
the right to arbitrate has been waived by litigation conduct.”
Zimmer v. CooperNeff Advisors, Inc., 523 F.3d 224, 231 (3d
Cir. 2008) (internal quotation marks omitted). To aid the
analysis of waiver questions, we have “identified six
nonexclusive factors to guide the prejudice inquiry:”
(1) timeliness or lack thereof of the motion to
arbitrate; (2) extent to which the party seeking
arbitration has contested the merits of the
opposing party’s claims; (3) whether the party
seeking arbitration informed its adversary of its
intent to pursue arbitration prior to seeking to
enjoin the court proceedings; (4) the extent to
which a party seeking arbitration engaged in
non-merits motion practice; (5) the party’s
acquiescence to the court’s pretrial orders; and
(6) the extent to which the parties have engaged
in discovery.
Gray Holdco, 654 F.3d at 451 (citing Hoxworth v. Blinder,
12
Robinson & Co., Inc., 980 F.2d 912, 926-27 (3d Cir. 1992)).
These are known as the Hoxworth factors, and they are
“generally . . . indicative of whether a party opposing
arbitration would suffer prejudice attributable to the other
party’s delay in seeking arbitration.” Id. The factors,
however, are “nonexclusive” and “not all the factors need be
present to justify a finding of waiver.” Nino, 609 F.3d at 209.
Rather, “the waiver determination must be based on the
circumstances and context of the particular case.” Id.(internal quotation marks omitted).
B. Application of the Hoxworth Factors
This first Hoxworth factor to consider is the timeliness
of the motion to arbitrate. In this case, AdvancePCS filed its
motion to compel arbitration on June 21, 2004, over ten
months after Plaintiffs filed their complaint in federal court.
A ten month delay is significantly longer than the cases in
which we have found no waiver, see Palcko v. Airborne
Express, Inc., 372 F.3d 588, 598 (3d Cir. 2004) (38 days);
PaineWebber, 61 F.3d at 1069 (two months); Wood v.
Prudential Ins. Co. of Am., 207 F.3d 674, 680 (3d Cir. 2000)
(one-and-a-half months); Gavlik Constr. Co. v. H.F. Campbell
Co., 526 F.2d 777, 783–84 (3d Cir. 1975) (arbitration motion
made “immediately” after removing case to federal court),
and sits at the low end of the cases in which we have found
waiver, see Gray Holdco, 654 F.3d at 454 (ten months);
Hoxworth, 980 F.2d at 925 (11 months); Nino, 609 F.3d at
210 (15 months); Ehleiter, 482 F.3d at 223 (4 years).
Furthermore, AdvancePCS has not offered any satisfactory
explanation for its delay in asserting arbitration other than the
fact that the motion was made (more than two months, we
note) after it retained new counsel. Gray Holdco, 654 F.3d at
454 (finding significant that the party offered no explanation
for its ten month delay). Therefore, this factor weighs in
favor of finding waiver.
The second Hoxworth factor is the extent to which the
party seeking arbitration has contested the merits of the
opposing party’s claims. In this case, prior to seeking
arbitration, AdvancePCS filed thirty-eight pages of briefing
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on its motion to dismiss for failure to state a claim—a motion
which directly addressed the merits of Plaintiffs antitrust
claims—and supported that briefing with a binder of materials
and studies. After a hearing was held and the motion to
dismiss was denied, AdvancePCS next filed a twelve-page
motion for reconsideration, essentially re-urging dismissal
based on the results of a recent FTC investigation. After
holding a second hearing, the District Court denied the
motion.
In sum, AdvancePCS directly contested the merits of
Plaintiffs’ case through what was, in essence, two motions to
dismiss, with ample briefing and supporting documentation,
and raised issues outside of the scope of the pleadings. This
is significantly more activity on the merits than in cases in
which we found no waiver, see Palcko, 372 F.3d at 598(motion to dismiss but only for insufficient service of
process); PaineWebber, 61 F.3d at 1069 (no briefing on the
merits); Wood, 207 F.3d at 680 (a motion to dismiss); Gavlik,
526 F.2d at 783-84 (no contest on the merits), and appears to
be at least comparable to (or stronger than) the cases in which
we have found waiver, see Nino, 609 F.3d at 210-11 (no
motions on the merits); Ehleiter, 482 F.3d at 223 (motion for
summary judgment); Hoxworth, 980 F.2d at 925-26 (motion
to dismiss for failure to state a claim, and opposition to
motion for class certification); Gray Holdco, 654 F.3d at 456(motion for preliminary injunction with evidentiary hearing,
and opposition to motions to dismiss). This factor thus
weighs in favor of finding waiver.
The third factor is whether the party seeking arbitration
informed its adversary of its intent to pursue arbitration prior
to filing the motion to compel. Here, AdvancePCS gave no
prior indication to Plaintiffs of its intent to arbitrate, and
arbitration was not raised as a defense in its answer to the
complaint or elsewhere. The facts of this case are thus
stronger than the cases in which we have found no waiver, see
Palcko, 372 F.3d at 598 (requested arbitration from opposing
party before filing motion to compel); PaineWebber, 61 F.3d
at 1065 (objected that claims were subject to arbitration 21
days after the filing of the plaintiff’s state court complaint);
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Wood, 207 F.3d at 680 (raised arbitration in joint discovery
plan before bringing motion to compel), and are comparable
to or stronger than the cases in which we have found waiver,
see Nino, 609 F.3d at 211 (included mandatory arbitration as
one of ten affirmative defenses in its answer); Ehleiter, 482
F.3d at 210-11 (no advanced notice); Gray Holdco, 654 F.3d
at 457 (no advanced notice). This factor, too, weighs in favor
of finding waiver.
The fourth Hoxworth factor is the extent to which the
party seeking arbitration engaged in non-merits motion
practice. AdvancePCS’s non-merits motions dealt mostly
with administrative and scheduling matters, such as motions
for admission pro hac vice, for leave to file a reply brief, and
to continue the pretrial conference. These motions were not
contested. In addition, however, AdvancePCS also filed
(together with its motion for reconsideration) a motion for
certification of an interlocutory appeal pursuant to 28 U.S.C.
§ 1292(b) seeking immediate appellate relief that likely would
not have been available to it in the arbitral forum. These facts
are stronger than the facts in those cases in which we have
found no waiver, see Palcko, 372 F.3d at 598 (no non-merits
motions mentioned); Wood, 207 F.3d at 680 (same); Gavlik,
526 F.2d at 783-84 (same); but see PaineWebber, 61 F.3d at
1069 (motion to dismiss non pros, i.e., for lack of
prosecution), and sit near the low end of what we have found
to support waiver in the past, see Ehleiter, 482 F.3d at 223(motion to implead third party). Admittedly, however, the
cases in which we have found waiver have tended to have
somewhat more significant non-merits motion practice. See
Nino, 609 F.3d at 212 (opposed three motions to compel
discovery); Hoxworth, 980 F.2d at 925-26 (filed motions to
disqualify counsel and stay discovery, and opposed motions to
compel discovery). In any event, this factor is not an absolute
requirement, and we have found waiver even where no
significant non-merits motion practice occurred. See Gray
Holdco, 654 F.3d at 456. Ultimately, however, this factor
weighs slightly in favor of waiver or is (at worst) neutral.
The fifth factor is the party’s acquiescence in a court’s
pretrial orders. Judge Robreno entered orders setting hearings
15
on AdvancePCS’s motion to dismiss and motion for
reconsideration. AdvancePCS attended and participated in
these hearings. It also entered orders setting dates for the
pretrial conference, and instructing the parties to submit a
discovery plan and proposed case management order. Prior to
filing its motion to compel arbitration, AdvancePCS did not
object to any of these orders. Cases in which we have found
no waiver generally were not litigated long enough to feature
any acquiescence in pretrial orders, see PaineWebber, 61 F.3d
at 1065; Gavlik, 526 F.2d at 783–84; but see Wood, 207 F.3d
at 680 (filed a joint discovery plan), and AdvancePCS’s
actions in this case are at the low end of the level of
acquiescence that has supported waiver in our other
precedents, see Gray Holdco, 654 F.3d at 459-60 (attended
three status conferences and a court-ordered mediation
without objection, and filed a Rule 26(f) report); Hoxworth,
980 F.2d at 925 (participated in “numerous” pretrial
proceedings); Nino, 609 F.3d at 212 (participated in ten
pretrial conferences); Ehleiter, 482 F.3d at 223 (“scrupulously
assented” to the trial court’s orders, certified readiness for
trial, and later sought a continuance and proposed new trial
dates). Thus, this factor weighs somewhat in favor of waiver.
The sixth and final factor is the extent to which the
parties have engaged in discovery. Plaintiffs concede that no
discovery took place, which is identical to those cases in
which no waiver was found. See Palcko, 372 F.3d at 598;
PaineWebber, 61 F.3d at 1069; Wood, 207 F.3d at 680;
Gavlik, 526 F.2d at 784. Our cases finding waiver have
uniformly featured significant discovery activity in the district
court. See Nino, 609 F.3d at 213 (parties engaged in
“significant discovery,” including interrogatories, disclosures,
requests for production and depositions of four witnesses, as
well as “significant discovery related motion practice”);
Ehleiter, 482 F.3d at 224 (parties engaged in “extensive
discovery,” exchanging several sets of interrogatories,
production requests, and expert reports, and deposing
“numerous witnesses”); Hoxworth, 980 F.2d at 925-26(parties engaged in several depositions, answered several
discovery requests, and litigated discovery disputes); Gray
Holdco, 654 F.3d at 460 (parties engaged in discovery related
16
to a preliminary injunction hearing, including eight
depositions, extensive written discovery responses, and the
exchange of over 20,000 pages of documents). Therefore,
this factor cuts significantly against a finding of waiver.
On the whole, there is significantly more to support
waiver here than in our cases in which the argument was
rejected, but less overall to support waiver than in those cases
in which waiver was found. In rejecting Plaintiffs’ waiver
argument, Judge Robreno relied heavily on the fact that no
discovery had taken place. It is true that we have arguably
placed special emphasis on this factor in the past. See, e.g.,
PaineWebber, 61 F.3d at 1068-69 (stating that “waiver will
normally be found only where the demand for arbitration
came long after the suit commenced and when both parties
had engaged in extensive discovery”). We have also
repeatedly stated, however, that the Hoxworth factors are
nonexclusive, and no one factor is determinative of the
prejudice inquiry. See, e.g., Nino, 609 F.3d at 209 (“As is
evident by our repeated characterization of these factors as a
nonexclusive list, not all the factors need be present to justify
a finding of waiver . . . .”). Indeed, our sister circuits have
found waiver even in cases where no discovery has taken
place. 2 See, e.g., La. Stadium & Exposition Dist. v. Merrill
Lynch, Pierce, Fenner & Smith Inc., 626 F.3d 156, 159 (2d
Cir. 2010) (noting that “[n]o discovery took place” in the
eleven months before arbitration was sought, “but the
litigation was hardly dormant”); Khan v. Parsons Global
Servs., Ltd., 521 F.3d 421, 428 (D.C. Cir. 2008) (noting that
the defendant’s non-pursuit of discovery was not dispositive,
especially where discovery would likely focus on matters in
2
Plaintiffs cite South Broward Hosp. Dist. v. Medquist, Inc.,
258 F. App’x. 466, 468 (3d Cir. 2007), noting that the fact
that the parties did not engage in discovery normally
precludes a finding of waiver, but here it is outweighed by
AdvancePCS’s tactical decision to litigate extensively in
federal court, including two motions to dismiss, before
seeking to compel arbitration. Under our Internal Operating
Procedures, we do not cite to our not precedential opinions,
and do not do so here.
17
the defendant’s possession and control).
Moreover, Judge Robreno gave little weight to
AdvancePCS’s motion to dismiss the case (and motion for
reconsideration), concluding that “the Court’s ruling on [those
motions] dealt only with pleading issues of law placing the
parties back at the starting gate of the litigation.” Thus, he
reasoned that “the case stands essentially as it did ten months
ago, i.e., with the pleadings now completed and the matter
ready to proceed to discovery.” While he may be correct that
Plaintiffs’ legal position was not compromised as a result of
AdvancePCS’s motions, in the years since that 2004 ruling we
have reiterated that the prejudice needed to show waiver need
not necessarily be “‘substantive prejudice to the legal position
of the party claiming waiver,’ but also extends to ‘prejudice
resulting from the unnecessary delay and expense incurred by
the plaintiffs as a result of the defendants’ belated invocation
of their right to arbitrate.’” Nino, 609 F.3d at 209 (quoting
Ehleiter, 482 F.3d at 224). For example, we have stated that:
‘[W]here a party fails to demand arbitration
during pretrial proceedings, and, in the
meantime, engages in pretrial activity
inconsistent with an intent to arbitrate, the party
later opposing . . . arbitration may more easily
show that its position has been compromised,
i.e., prejudiced,’ because under these
circumstances we can readily infer that the party
claiming waiver has already invested
considerable time and expense in litigating the
case in court, and would be required to
duplicate its efforts, to at least some degree, if
the case were now to proceed in the arbitral
forum. Prejudice of this sort is not mitigated by
the absence of substantive prejudice to the legal
position of the party claiming waiver.
Ehleiter, 482 F.3d at 224 (quoting Hoxworth, 980 F.2d at
926). “In other words, the investment of considerable time
and money litigating a case may amount to sufficient
prejudice to bar a later-asserted right to arbitrate.” Nino, 609
18
F.3d at 209. This is because arbitration is meant to streamline
proceedings, reduce costs, and conserve resources, and none
of these purposes are served “when a party actively litigates a
case for an extended period only to belatedly assert that the
dispute should have been arbitrated, not litigated, in the first
place.” Id. Thus, the mere fact that the motions to dismiss
merely placed the parties “back at the starting gate of the
litigation” is not dispositive.
In sum, aside from the lack of discovery, this case
bears little resemblance to the cases in which we have found
no waiver, and shares substantial similarity to the cases in
which waiver was found. Plaintiffs made a showing on five
of the six Hoxworth factors, and most notably demonstrated a
delay approaching one year during which AdvancePCS
aggressively sought a resolution on the merits. Ehleiter, 482
F.3d at 223 (finding waiver where the defendant “require[ed
plaintiff] to defend his claims on the merits and invit[ed] final
resolution of the case in a judicial forum”). AdvancePCS’s
motions were not based solely on the pleadings, but were
supported with substantial materials and facts outside the
scope of the pleadings. We cannot ignore the time, expense,
and legal fees Plaintiffs invested in defending their claims
against these multiple attacks. Gray Holdco, 654 F.3d at 458-
59 (“[W]e cannot ignore the legal expenses Cassady incurred
while Gray sat on its arbitration rights”). This prejudice to
Plaintiffs is illustrated by the fact that they chose to dismiss
their complaint rather than arbitrate. If AdvancePCS had
moved to compel arbitration immediately after the filing of
the complaint, Plaintiffs would have been spared the time and
expense of litigating for the next ten months because they
would not have proceeded in arbitration and never would
have had to face AdvancePCS’s various motions, including its
comprehensive motion to dismiss.
Judge Robreno issued the order compelling arbitration
almost eight years ago, and did not have the benefit of our
more recent decisions on waiver, such as Gray Holdco and
Nino. Nevertheless, he put undue emphasis on the lack of
discovery and did not conduct a proper “totality of the
circumstances” analysis and weighing of the six Hoxworth
19
factors. The end result, as we stated in Nino, was that he
“gave insufficient consideration . . . to the more practical
question of whether [defendant] has acted inconsistently with
the right to arbitrate.” Nino, 609 F.3d at 209 (internal
quotation marks omitted). A party such as AdvancePCS
“should not be allowed to delay its demand for arbitration and
use federal court proceedings to test the water before taking a
swim,” especially where the only explanation for the change
in strategy from litigation to arbitration is that AdvancePCS
“substituted attorneys.” Gray Holdco, 654 F.3d at 453, 461(internal quotation marks omitted). We acknowledge that
“any doubts concerning the scope of arbitrable issues,”
including waiver, “should be resolved in favor of arbitration,”
id. at 451. Given the extent of AdvancePCS’s litigation in
federal court, however, and the fact that our review is de
novo, 3 we do not doubt that the order compelling arbitration
should be reversed.
IV. Conclusion
For the foregoing reasons, we conclude that
AdvancePCS waived its right to arbitrate, and we thus will
3
AdvancePCS seems to contend that the conclusion that
Plaintiffs had suffered no prejudice is a factual finding that
should be reviewed under the clear error standard.
(Appellee’s Br. at 24.) While a district court’s factual
findings on any one of the individual Hoxworth factors are
reviewed for clear error, the question of whether the factors in
the aggregate amount to prejudice (and therefore waiver) is
properly reviewed de novo. Gray Holdco, 654 F.3d at 451(“We exercise plenary review over . . . [the question of]
whether a party ‘through its litigation conduct, waived its
right to compel arbitration,’” quoting Nino, 609 F.3d at 200(reversing a district court’s finding of no waiver without
mentioning that the court clearly erred); Kawasaki Heavy
Indus., Ltd. v. Bombardier Recreational Prods., Inc., 660 F.3d
988, 994 (7th Cir. 2011) (“While the factual findings that led
to the district court’s conclusion of waiver are reviewed for
clear error, the question of whether [a party’s] conduct
amounts to waiver is reviewed de novo.”).
20
reverse the order of the District Court compelling arbitration.
21