A pharmacy benefit manager waived its right to compel arbitration because it litigated for 10 months before asking the district court to enforce the arbitration clause of its contract with the pharmacies for which it worked, the U.S. Court of Appeals for the Third Circuit ruled, reversing the district court.

The pharmacies had made various antitrust claims against the PBM, AdvancePCS, nearly 10 years ago. The case has been consolidated as part of a multidistrict litigation.

“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 10 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,” Senior Judge Maryanne Trump Barry said on behalf of a three-judge panel in In re Pharmacy Benefit Managers Antitrust Litigation. Judge Anthony Scirica and Senior Judge Jane Roth were also on the panel.

“Judge Robreno issued the order compelling arbitration almost eight years ago, and did not have the benefit of our more recent decisions on waiver,” Barry said, referencing the Third Circuit’s 2011 opinion in Gray Holdco v. Cassady and its opinion from the year before in Nino v. Jewelry Exchange. U.S. District Judge Eduardo Robreno of the Eastern District of Pennsylvania was initially assigned to the case, before the multidistrict litigation was consolidated and transferred to former Judge John Fullam, also of the Eastern District.

When Robreno agreed to order arbitration back in 2004, he weighed too heavily the absence of discovery, the Third Circuit ruled.

The court applied the six Hoxworth factors, so named for the Third Circuit’s 1992 opinion in Hoxworth v. Blinder, Robinson & Co., in order to weigh whether or not AdvancePCS had waived its right to enforce the arbitration clause. Nearly all of the factors tilted toward the waiver, with the notable exception that no discovery had been conducted.

Barry opened her discussion of the factors with a quote from the court’s Nino opinion, saying, “‘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.’”

Starting with the first factor, the court found that the timeliness of AdvancePCS’s request for arbitration weighed toward its waiver of that right. Barry noted four cases where courts held there was no waiver and each had moved for arbitration in less than two months from the time the complaint was filed. Waiting 10 months put it in a range of cases in which courts had held that the party had waived its right for arbitration. And, Barry said, AdvancePCS had offered no explanation for the delay except that it made the motion after retaining new counsel.

The second factor likewise tilted toward a waiver because AdvancePCS had strenuously contested the merits of the pharmacies’ claims.

Again, the third factor weighs in favor of a waiver because AdvancePCS gave no notice to the pharmacies before moving for arbitration.

The fourth factor, which evaluates the party’s engagement in “non-merits motion practice,” weighs only slightly in favor of a waiver, according to the opinion.

Similarly, the fifth factor, looking at AdvancePCS’s cooperation with pretrial orders, weighs slightly in favor of finding that the PBM waived its right to request arbitration.

However, contrary to the rest of the test, the court found that the sixth factor, regarding discovery, weighed heavily against a waiver. Barry noted that the other cases in which the Third Circuit has found a waiver had already engaged in significant discovery by the time the arbitration was requested.

“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,” Barry said.

“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. … We have also repeatedly stated, however, that the Hoxworth factors are non-exclusive, and no one factor is determinative of the prejudice inquiry,” she said.

Barry pointed to the Second Circuit and the D.C. Circuit, both of which have found that there was a waiver of arbitration in cases that had had no discovery.

Ultimately, the appeals court found that the tenor of AdvancePCS’s conduct displayed enough evidence to show that it waived its right to seek arbitration even though the heavy weight of discovery wasn’t on the scale.

“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.’” Barry said, quoting from Gray Holdco.

H. Laddie Montague Jr. of Berger & Montague in Philadelphia argued on behalf of the pharmacies and called the opinion a “good expression of fairness.”

Each case asserting a party has waived its right to seek arbitration must be weighed by the court according to its specific circumstances, Montague said, but added that this opinion could be read as a warning to parties that, if they intend to seek arbitration, they must do so early on.

Michael Leffel of Foley & Lardner in Madison, Wis., argued on behalf of AdvancePCS and couldn’t be reached for comment.

Saranac Hale Spencer can be contacted at 215-557-2449 or sspencer@alm.com. Follow her on Twitter @SSpencerTLI.

(Copies of the 21-page opinion in In re Pharmacy Benefit Managers Antitrust Litigation, PICS No. 12-2193, are available from The Legal Intelligencer. Please call the Pennsylvania Instant Case Service at 800-276-PICS to order or for information.) •