In contrast to recent decisions from other circuit courts, the Fourth Circuit found a defendant did not waive its right to arbitrate, despite litigating for more than 6 months and conducting discovery.  Rota-McLarty v. Santander Consumer USA, Inc., __ F.3d __, 2012 WL 5936033 (4th Cir. Nov. 28, 2012).

In this potential class action, the named plaintiff alleged a finance company violated Maryland consumer protection laws.  The finance company answered the complaint (asserting arbitration as an affirmative defense) and participated in discovery, including agreeing to phased discovery, taking and defending multiple depositions, and producing documents.  After six and a half months, the defendant moved to compel individual arbitration.  It explained its delay by pointing to “uncertainty” in the federal law regarding class arbitration, and saying it waited until after Stolt-Nielsen was decided and the district courts began applying it.

The district court found that the defendant’s actions waived its right to arbitrate, but the Fourth Circuit reversed.  It said the dispositive test in the Fourth Circuit is whether the opposing party has suffered actual prejudice (and noted that the reason for delay should not be considered).  It concluded that the plaintiff had not been prejudiced because six and a half months of litigation is “relatively short” and because the mere fact of participating in discovery does not equate to prejudice.

Recent cases shows significant difference among the federal circuit courts in how they are evaluating claims that a party waived its right to arbitrate.  For example:

  • In the Fourth Circuit, 6.5 months and significant discovery is not enough to waive the right to arbitrate.  In the Third Circuit, however, 10 months and no discovery is enough to waive the right to arbitrate, if a dispositive motion was filed.
  • In the Eleventh Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction waives its right to arbitrate.  While in the Fourth Circuit, a litigant who delays moving to compel arbitration until the law develops in a favorable direction does not waive its right to arbitrate.

Because there is so much flux in the law, defendants who want to retain their right to arbitrate should err on the side of caution and make their motion to compel early.

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.