Parties should not “use federal court proceedings to test the water before taking a[n arbitration] swim,” the Third Circuit recently cautioned when overturning an Eastern District of Pennsylvania’s decision granting a motion to compel arbitration.  In re Pharmacy Benefit Managers Antitrust Litig. (Case No. 12-1430).

Although the procedural history of the case is convoluted, after ten months of aggressive litigation, including motions to dismiss that raised issues outside the pleadings, the trial court granted the defendants’ motion to compel arbitration pursuant to an arbitration clause in the plaintiffs’ agreements with AdvancePCS.  On appeal the plaintiffs argued that AdvancePCS had waived the right to arbitrate by waiting almost a year to request arbitration.

The Third Circuit explained: “Prejudice is the touchstone for determining whether the right to arbitrate has been waived by litigation conduct.”  The panel considered the Hoxworth factors and concluded that although no discovery had been conducted, the class was prejudiced by the ten months of legal fees, expenses, and time incurred by the plaintiffs.

This decision reflects a recent trend moving away from a strict application of the Hoxworth factors, to a more flexible “totality of the circumstances” analysis.  Typically, the extent to which the parties have engaged in discovery is the pivotal factor in the waiver analysis.  Recently, however, the Second Circuit and DC Circuit  emphasized that a defendant’s non-pursuit of discovery was not dispositive of the waiver issue.   Although courts historically resolve issues regarding waiver in favor of arbitration, these recent decisions show parties with arbitration clauses should tread lightly when deciding whether to litigate before embarking on arbitration.